================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------------- FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the period ended March 31, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ____________________ To ____________________ Commission File Number: 1-8984 WEDGESTONE FINANCIAL (Exact Name of Registrant as Specified in its Charter) Massachusetts 04-26950000 (State or other jurisdiction (I.R.S. Employer of incorporation) Identification Number) 5200 N. Irwindale Avenue Suite 168 Irwindale, California 91706 (818) 338-3555 (Address, including zip code and telephone number, including area code of registrant's principal executive offices) --------------------------- Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports and (2) has been subject to filing requirements for the past 90 days. [ X ] Yes [ ] No Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. [ X ] Yes [ ] No Asof May 13, 1997, 21,885,668 shares of beneficial interest were outstanding. The aggregate market value of the shares held by non-affiliates of the registrant on that date was approximately $ 2,089,000 based on the last reported sale price of the shares at that date. ================================================================================ WEDGESTONE FINANCIAL & SUBSIDIARIES TABLE OF CONTENTS Page PART I FINANCIAL INFORMATION Item 1 Financial Statements Consolidated Balance Sheets - March 31, 1997 (unaudited) and December 31, 1996............................2 Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 1997 and 1996..................................... 3 Consolidated Statements of Shareholders' Equity (unaudited) for the Three Months Ended March 31, 1997 and 1996............................... 4 Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 1997 and 1996..................................... 5 Notes to Unaudited Consolidated Financial Statements.................................................. 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations............... 8 PART II OTHER INFORMATION Item 1 Legal Proceedings.......................................... 11 Item 2 Changes in Securities...................................... 11 Item 3 Defaults upon Senior Securities............................ 11 Item 4 Submission of Matters to a Vote of Security Holders........................................... 11 Item 5 Other Information.......................................... 11 Item 6 Exhibits and Reports on Form 8-K........................... 11 Signatures................................................................... 12 -1- WEDGESTONE FINANCIAL AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of March 31, 1997 and December 31, 1996 (Amounts in Thousands - except share data) (Unaudited) ASSETS 1997 1996 -------- -------- Current Assets: Cash $ 1,580 $ 344 Accounts and other receivables - (net of allowances of $342 and $333 in 1997 and 1996, respectively) 6,384 7,282 Inventories 5,014 4,619 Prepaid expenses and other current assets 522 565 Deferred income taxes 348 476 -------- -------- Total Current Assets 13,848 13,286 -------- -------- Notes receivable - net 81 81 Real estate acquired by foreclosure - net 176 1,086 Property, plant and equipment - net 3,293 3,237 Goodwill 119 130 Deferred income taxes 2,196 2,196 Other assets 287 334 -------- -------- 6,152 7,064 -------- -------- Total Assets $ 20,000 $ 20,350 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Revolving credit line and current portion of long-term debt $ 526 $ 1,952 Accounts payable 3,959 3,882 Accrued payroll and related expenses 542 593 Other accrued expenses 1,386 1,535 -------- -------- Total Current Liabilities 6,413 7,962 Long-term debt 6,206 5,269 -------- -------- Total Liabilities 12,619 13,231 Commitments and contingencies Shareholders' Equity: Shares of Beneficial Interest-par value $1.00 per share: authorized - unlimited shares: issued and outstanding - 21,885,668 shares 21,886 21,886 Additional paid-in capital 31,396 31,396 Accumulated deficit (45,901) (46,163) -------- -------- Total Shareholders' Equity 7,381 7,119 -------- -------- Total Liabilities and Shareholders' Equity $ 20,000 $ 20,350 ======== ======== See notes to consolidated financial statements. -2- WEDGESTONE FINANCIAL AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months Ended March 31, 1997 and 1996 (Unaudited) (Amounts in Thousands - except per share data) 1997 1996 -------- -------- Net sales $ 11,556 11,230 Cost of sales 7,807 8,109 -------- -------- Gross profit 3,749 3,121 Selling, general and administrative expenses 3,464 2,749 -------- -------- Operating income 285 372 Goodwill amortization 11 16 Other expense (income) (418) -- Interest expense 285 361 -------- -------- Income (loss) before taxes 407 (5) Provision (benefit) for income taxes 145 (153) -------- -------- Net income $ 262 $ 148 ======== ======== Net income per share of beneficial interest $ .01 $ .01 ======== ======== Weighted average number of shares outstanding 21,886 21,886 ======== ======== See notes to consolidated financial statements. -3- WEDGESTONE FINANCIAL AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the Three Months Ended March 31, 1997 and 1996 (Unaudited) (Amounts in Thousands) Additional Shares of Beneficial paid-in Accumulated Interest capital deficit Total -------------------- ------- ------- ----- Shares Amount Balance at December 31, 1995 21,886 $ 21,886 $ 31,396 ($47,535) $ 5,747 Net income 148 148 -------- -------- -------- -------- -------- Balance at March 31, 1996 21,886 $ 21,886 $ 31,396 ($47,387) $ 5,895 ======== ======== ======== ======== ======== Balance at December 31, 1996 21,886 $ 21,886 $ 31,396 ($46,163) $ 7,119 Net income 262 262 -------- -------- -------- -------- -------- Balance at March 31, 1997 21,886 $ 21,886 $ 31,396 ($45,901) $ 7,381 ======== ======== ======== ======== ======== <FN> See notes to consolidated financial statements. </FN> -4- WEDGESTONE FINANCIAL AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended March 31, 1997 and 1996 (Unaudited) (Amounts in Thousands) 1997 1996 ------- ------- Cash Flows from Operating Activities: Net income $ 262 $ 148 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 208 222 Gain on sale of real estate (418) -- Loss on disposal of assets -- 3 Deferred income taxes 129 -- Changes in operating assets and liabilities: Accounts and other receivables 898 (393) Inventories (395) (261) Prepaid expenses and other current assets 43 (75) Accounts payable 77 137 Accrued payroll and related expenses (150) (6) Other accrued expenses (51) (224) Other assets 26 -- ------- ------- Net cash provided by (used in) operating activities 630 (449) ------- ------- Cash Flows from Investing Activities: Proceeds from sale of equipment -- 17 Proceeds from sale of real estate 1,328 -- Capital expenditures (233) (183) Investment in real estate -- 5 ------- ------- Net cash provided by (used in) investing activities 1,095 (161) ------- ------- Cash Flows from Financing Activities: Borrowings (repayments) of term debt 731 (123) Net borrowings (repayments) on revolving debt (1,220) 804 ------- ------- Net cash provided by (used in) financing activities (489) 681 ------- ------- Net increase in cash 1,236 71 Cash at beginning of period 344 365 ------- ------- Cash at end of period $ 1,580 $ 436 ======= ======= See notes to consolidated financial statements. -5- WEDGESTONE FINANCIAL AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS For the Three Months Ended March 31, 1996 and 1995 NOTE 1. Background and Basis of Presentation Background - Wedgestone Financial ("Wedgestone" or the "Company") was formed in 1980 as a real estate investment trust ("REIT") and, on August 9, 1991, filed for bankruptcy. Wedgestone's plan of reorganization (the "Plan") became effective on August 3, 1992. Wedgestone operates in two business segments, Automotive Products and Real Estate and Lending activities. The automotive segment manufactures and distributes automotive aftermarket products for the light duty truck market. Its principal products include rear bumpers; tubular products such as grille guards, push bars, and step rails; and various other related aftermarket products. The Company's automotive products are marketed in traditional, original equipment dealer and retail automotive aftermarkets. The automotive segment manufactures and sells its products at two locations in California, and one in Minnesota. Sales are also made from distribution centers in Texas and Utah. Although its primary focus has shifted toward its Automotive Products business segment, Wedgestone's Real Estate and Lending business segment has continued since emerging from bankruptcy in 1992. Wedgestone owns two properties that were acquired by foreclosure. The aggregate value, net of reserves, is approximately $176,000 as of March 31, 1997. Wedgestone has outstanding loans on one property, net of reserves, of approximately $81,000 as of March 31, 1997. Acquisitions - Since May 1992, Wedgestone has acquired three manufacturing operations. On June 15, 1992, Wedgestone acquired St. James Automotive Corp. ("St. James") in exchange for 6,795,220 shares of beneficial interest of Wedgestone and accounted for this acquisition as a purchase. On November 18, 1994, Wedgestone acquired the Automotive Segment of Standun, Inc. ("Standun"), which consisted of the Fey Automotive Products Division ("Fey") and Sigma Plating Co., Inc. ("Sigma") in exchange for 6,795,223 shares of beneficial interest of Wedgestone and the assumption of approximately $1,104,000 of outstanding debt due to a related party of Wedgestone, and certain other liabilities. The shareholders of Standun owned, directly or indirectly, approximately 48% of Wedgestone prior to the acquisition and, as a result, this acquisition was accounted for as a "put-together" which is similar to the pooling of interest method of accounting. As a result of the acquisition, Standun owned 31% of the outstanding shares of beneficial interest of Wedgestone. On January 9, 1995, Wedgestone acquired substantially all of the assets of Hercules Bumpers, Inc. ("Hercules"). The purchase price for the assets acquired was the assumption of certain debt and other liabilities approximating $5.1 million. In addition, certain debt was guaranteed jointly and severally by Charles W. Brady ("Brady"), the former principal shareholder of Hercules, and Chattahoochee Leasing Corporation ("CLC"), a corporation controlled by Brady. In exchange for this guarantee, Brady received a promissory note in the amount of $300,000 and 1,200,000 shares of beneficial interest of Wedgestone. In consideration for an agreement to pay a liability of Hercules, CLC received a promissory note for $100,000 which was secured by 100,000 shares of beneficial interest of Wedgestone. In June, 1995, the Company exercised its right under the CLC Agreement and acquired the note by issuing these shares to CLC. (See Note 3 - - Sale of Subsidiary.) Basis of Presentation and Principles of Consolidation The consolidated financial statements include the accounts of Wedgestone and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. The financial statements included in this Form 10-Q have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed, or omitted, pursuant to such rules and regulations. These financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the fiscal year. In the opinion of management, the information contained herein reflects -6- all adjustments necessary to make the results of operations for the interim periods a fair statement of such operations. Income Per Share of Beneficial Interest - Income per share of beneficial interest is calculated based on weighted average outstanding shares of beneficial interest. NOTE 2. Inventories Inventories consist of the following: (In Thousands) March 31, December 31, 1997 1996 ---- ---- Finished goods $ 2,567 $ 2,474 Work in progress 1,453 1,239 Raw materials 1,134 1,025 ------- ------- 5,154 4,738 Less allowances (140) (119) ------- ------- $ 5,014 $ 4,619 ======= ======= NOTE 3. Sale of Subsidiary On March 5, 1996, Hercules closed its manufacturing plant in Pelham, Georgia. The market for the bumpers produced in the Pelham facility significantly changed during 1995. Historically, a significant percentage of Hercules business was for sales to dealers of domestic original equipment manufacturers. A new program implemented by one of these manufacturers in late 1994 made it extremely difficult for Hercules to remain competitive in this market segment. Hercules incurred a net loss of $125,000 in 1995 and continued to incur losses in 1996 through the date of sale totaling $966,000. As a result, management determined that closing the Pelham facility was appropriate. On April 18, 1996, the Board of Directors authorized and completed the sale of the Company's stock ownership in Hercules to MBC Corporation for $1.00 and the assumption of certain debt and other liabilities approximating $4.5 million, pursuant to a Stock Purchase Agreement. -7- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Background On June 15, 1992, Wedgestone acquired St. James Automotive Corp. This subsidiary manufactures and sells tubular products for the light-duty truck market such as grille guards, push bars and step bars. On November 18, 1994, Wedgestone acquired the Automotive segment of Standun, Inc. ("Standun) which consisted of Sigma and the Fey Automotive Products division. The assets of the Fey division, which included the stock of Sigma, were merged into Wedgestone's wholly owned subsidiary Fey Automotive Products, Inc. In conjunction with the acquisition of the Automotive Segment of Standun, Wedgestone placed St. James, Fey and Sigma under the common ownership of its wholly owned subsidiary, Wedgestone Automotive. Collectively, these companies comprise the Automotive Products business segment which, unless the context requires otherwise, will be hereinafter referred to as Wedgestone Automotive. On January 5, 1995, Wedgestone Automotive, through its wholly owned subsidiary Hercules Automotive Products, Inc. acquired substantially all of the assets of Hercules Bumpers, Inc., a Georgia company. This acquisition was intended to provide access to a new business segment for Wedgestone Automotive. The segment, known as dealer direct, involves the sale of rear step bumpers for light-duty trucks to new vehicle dealers as an alternative to the factory supplied bumper. Hercules Bumpers, Inc., was the largest domestic supplier in this dealer direct segment offering dealers a line of specialty bumpers. During 1995, a major OE manufacturer initiated a program to secure a greater portion of rear step bumper sales. The program, which involved severe price competition and program buying, eroded a substantial portion of Hercules' sales base and placed Hercules in a loss position for the fourth quarter of 1995. In response to the likely prospect of continued losses, Wedgestone Automotive ceased manufacturing operations at Hercules on March 5, 1996. In a further decision to exit this segment, Wedgestone Automotive sold its ownership in Hercules to MBC Corporation for $1.00 and the assumption of certain debt and other liabilities approximating $4.5 million pursuant to a Stock Purchase Agreement. The Pelham manufacturing plant along with its inventory and accounts receivable constituted all of the material assets of Hercules. Liquidity and Capital Resources To date, Wedgestone has financed its business activities through cash flows from operations. Additional debt has been incurred primarily for working capital and acquisitions. For the period ended March 31, 1997, cash flows from operations totaling $181,000 were supplemented by a reduction in trade receivables and other current assets totaling $898,000 and $43,000, respectively, and other assets totaling $26,000. These funds were used to acquire $395,000 in additional inventories and repay $123,000 in unsecured creditor advances, resulting in net cash provided by operations totaling $630,000 for the first quarter of 1997 compared to cash consumed by operations totaling $449,000 for this same period in 1996. Net cash flows from operations were further supplemented during the quarter by net proceeds from the sale of real estate totaling $1,328,000 and additional borrowings on long-term debt totaling $731,000. During 1997, the Company invested $233,000 in new equipment and made payments on revolving debt totaling $1,220,000 resulting in a net increase in cash for the three months ended March 31, 1997 totaling $1,236,000 compared to $71,000 for the same period in 1996. In November 1994 Wedgestone entered into a three-year, $7.5 million credit facility, which provided for a revolving credit line and term loan with CIT / Credit Finance ("CIT"), and was collateralized by substantially all of the assets of the Company. On March 18, 1997, the Company amended and restated the agreement with CIT resulting in a five-year $10 million credit facility providing a revolving credit line and term loan under terms substantially similar to the original agreement. The amended and restated agreement provides for borrowings based on a percentage of inventory and receivables and includes an equipment term loan, at the lender's prime rate plus 1.375% (11% at March 31, 1997). -8- In connection with the acquisition of Hercules on January 9, 1995, a wholly-owned subsidiary of Wedgestone assumed certain debt consisting of a term loan of $4.0 million, and an industrial revenue bond of $285,000 due March 1, 1999. On March 5, 1996, the Company closed the Hercules facility in Pelham, Georgia, as a result of unfavorable market conditions. On April 18, 1996, the Company sold its stock ownership in Hercules to MBC Corporation for $1.00 and the assumption of certain debt and other liabilities, including the outstanding borrowings on the term loan and industrial revenue bond. The total debt and liabilities assumed by MBC Corporation approximated $4.5 million. The Company continues to actively seek acquisition opportunities in the Automotive Products Business Segment. While there are no specific opportunities identified at this time, to the extent that Wedgestone expands its operations and makes additional acquisitions, it will need to obtain additional funding from institutional lenders and other sources. Wedgestone's ability to use equity in obtaining funding may be limited by its desire to preserve certain tax attributes including its net operating loss carry forwards. Results Of Operations Current Year Performance: 1997 Compared to 1996 Net sales increased $326,000 to $11,556,000 for the three months ended March 31, 1997 compared to $11,230,000 for the same period in 1996. This reflects a $1,447,000 decrease in the sales of Hercules products as a result of the closure of the Hercules' plant in 1996, offset by a $1,773,000 or 18% increase in the sales of products manufactured in the Company's St. James and Fey subsidiaries. Contributing to the overall growth in net sales is a combined $2,042,000 or 23% increase in the Company's traditional and retail market segments offset by a $269,000 or 31% decline in the Company's original equipment segment. The Company continues to pursue the OE segment of the light-duty truck aftermarket and considers this segment to be an important component of future growth. Gross margins increased $628,000 or 20% to $3,749,000 or 32% of sales in 1997 compared to $3,121,000 or 28% of sales in 1996 which included $158,000 in gross margin losses on the sales of Hercules' products. Sales and marketing costs increased by $317,000 or 20% to $1,912,000 or 17% of sales in 1997 compared to $1,595,000 or 14% of sales in 1996. The majority of this increase is selling costs incurred to enhance and maintain the higher sales volumes achieved in 1997. $200,000 or 63% of the increase is due to additional advertising and promotional costs incurred by the Company to further penetrate the traditional and retail market segments. The Company believes that further expenditures in this area are required to maintain the market growth achieved and expand these markets further. Administrative costs increased by $398,000 or 34% to $1,552,000 in 1997 compared to $1,154,000 in 1996. This reflects a decrease of $136,000 in administrative costs attributable to Hercules operations and an increase of $514,000 in all other administrative costs. Product design and development costs account for $253,000 of this increase. Included in these costs are salaries, benefits and overhead costs for additions to the Company's engineering staff. The Company believes that its future competitive position in the automotive aftermarket will require significant increases in engineering and development costs over the next several years. Legal, accounting, insurance and other administrative costs make up the balance of this increase. Other income for the three months ended March 31, 1997 consists of the gain on the sale of the Company's 21 acres of land known as the College Point property. -9- Interest expense decreased $76,000 or 21% to $285,000 in 1997 compared to $361,000 in 1996. This decrease is attributable to the decrease in debt associated with Hercules. Income taxes in 1996 reflect a $151,000 adjustment to the Company's valuation reserve. The adjustment was due to management's expectations of the Company's enhanced ability to utilize its net operating loss carry forwards due to its more recent earnings performance. There was no similar adjustment made for the three months ended March 31, 1997. Forward Looking Information Information contained in this Form 10-Q contains "forward-looking statements" within the meaning of the private Securities Litigation Reform Act of 1995, which can be identified by the use of forward-looking terminology such as "may", "will", "expect", "plan", "anticipate", "estimate or "continue" or the negative thereof or other variations thereon or comparable terminology. There are certain important factors that could cause results to differ materially from those anticipated by some of these forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainty. The factors, among others, that could cause actual results to differ materially include: pricing and merchandising policies from the major automotive manufacturers; the Company's ability to execute its business plan; the acceptance of the Company's merchandising strategies by its target customers; competitive pressures on sales and pricing; and increases in other costs which cannot be recovered through improved pricing of merchandise. -10- PART II OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities None. Item 3. Defaults upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K None. -11- PART II SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Wedgestone Financial Date: May 14, 1996 By: /s/ Jeffrey S. Goldstein -------------------------- President and Chief Accounting Officer (Principal Executive and Financial Officer) The name "Wedgestone Financial" (Formerly Wedgestone Realty Investors Trust) is the designation of the Trustees under a Declaration of Trust dated March 12, 1980, as amended, and in accordance with such Declaration of Trust notice is hereby given that all persons dealing with Wedgestone Financial by so acting acknowledge and agree that such persons must look solely to the Trust property for the enforcement of any claims against Wedgestone Financial and that neither Trustees, Officers, employees, agents nor shareholders assume any personal liability for claims against the Trust or obligations entered into on behalf of Wedgestone Financial, and that respective properties shall not be subject to claims of any other person in respect of any such liability. -12-