U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] 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 001-11801
BRAKE HEADQUARTERS, U.S.A., INC.
----------------------------------
(Exact name of Small Business Issuer as specified in its charter)
Delaware 22-3048534
------------ --------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) identification No.)
33-16 Woodside Avenue
Long Island City, New York
----------------------------
(Address of principal executive offices)
11101
-------
(Zip Code)
(718) 779-4800
----------------
(Registrant telephone number including area code)
Not Applicable
------------------
(Former name, former address and formal fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has 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 for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES _____ NO ____ (Not applicable, as the Registrant has been subject to the
filing requirements since August 5, 1996)
Class Outstanding at July 20, 1996
------- -----------------------------
Common Stock, $0.001 par value 3,418,730
1
<PAGE>
BRAKE HEADQUARTERS, U.S.A., INC.
FORM 10-Q
QUARTERLY REPORT
For the Six Months Ended June 30, 1996
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Page to Page
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements -
Balance Sheets - June 30, 1996
(Unaudited) and December 31, 1995 (Audited)..................3
Statements of Income for the three and
six months ended June 30, 1996 and
June 30, 1995 (Unaudited)....................................4
Statements of Cash Flows for the
six months ended June 30, 1996 and
June 30, 1995 (Unaudited)....................................5
Notes to Consolidated Financial Statements (Unaudited).......6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................8-10
PART II . OTHER INFORMATION............................................11
Item 1. Legal Proceedings............................................11
Item 6. Exhibits and Reports on Form 8-K.............................11
Signatures.............................................................12
2
BRAKE HEADQUARTERS U.S.A. INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
===============================================================================
<TABLE>
<CAPTION>
<S> <C> <C>
June 30,1996
(Unaudited) December 31, 1995
------------- -------------------
ASSETS
- ------
Current Assets:
Cash $ 139,756 17,895
Accounts receivable, less allowance for doubtful
accounts of 77,821 and 287,891 respectively 7,747,297 5,623,117
Inventory 8,154,177 7,873,131
Prepaid expenses and other current assets 277,963 387,767
Due from President 31,878 51,604
Deferred tax asset 345,345 345,345
------------- -------------------
Total current assets 16,696,415 14,298,859
Property and Equipment - net 921,756 921,120
Other Assets 225,561 276,315
------------- -------------------
Total Assets 17,843,732 15,496,294
============= ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable, accrued expenses and other
current liabilities $3,284,079 $2,869,762
Notes and acceptances pa 5,281,456 8,075,196
Current portion of long- 80,700 65,038
------------- -------------------
Total current liabilities 8,646,235 11,009,996
Long-term Debt 5,230,850 630,494
------------- -------------------
Total liabilities 13,877,085 11,640,490
------------- -------------------
Commitments and Contingencies (see notes)
Shareholders' Equity:
Series A preferred stock - $.25 par value; authorized
2,200,000 shares, none issued. - -
Series B preferred stock - $.001 par value; authorized,
isssued and outstanding 1,000 shares 1 -
Common stock - $.001 par value; authorized 6,000,000
and 20,000,000 shares, issued and outstanding
3,418,730 and 3,416,197 shares 3,418 3,416
Additional paid-in capital 13,070,309 13,014,260
Accumulated deficit (9,107,081) (9,161,872)
------------- -------------------
Total shareholders' equity 3,966,647 3,855,804
------------- -------------------
Total Liabilities and Shareholders' Equity $ 17,843,732 $ 15,496,294
============= ===================
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Six Months Three Months
ended ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $18,018,775 $16,112,941 $9,572,400 $9,028,725
Less returns and allowances (1,404,364) (495,901) (791,870) (205,640)
----------- ----------- ---------- ----------
Net sales 16,614,411 15,617,040 8,780,530 8,823,085
Cost of goods sold 12,006,050 11,406,792 6,277,367 6,431,569
----------- ----------- ---------- ----------
Gross profit 4,608,361 4,210,248 2,503,163 2,391,516
Selling, general and administrative expenses 4,050,462 3,018,137 2,311,553 1,682,588
----------- ----------- ---------- ----------
Income from operations 557,899 1,192,111 191,610 708,828
----------- ----------- ---------- ----------
Other income (expense):
Interest expense (478,108) (305,429) (211,264) (164,474)
Gain (loss) on foreign currency transactions - 8,977 - (1,390)
----------- ----------- ---------- ----------
(478,108) (296,452) (211,264) (165,864)
----------- ----------- ---------- ----------
Income (loss) before provision for income taxes 79,791 895,659 (19,654) 542,964
Provision for income taxes 25,000 349,000 11,000 217,842
----------- ----------- ---------- ----------
Net income (loss) $ 54,791 $ 546,659 $ (30,654) $ 325,122
=========== =========== =========== ==========
Net income per common and common equivalent 0.02 0.18 (.001) 0.10
==== ==== ===== ====
Weighted average number of common and
common equivalent shares outstanding 3,687,054 2,990,991 3,687,054 3,324,244
========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30,1996 June 30,1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 14,233,857 $ 12,637,038
Cash paid to suppliers and employees (15,436,384) (12,953,487)
Interest paid (418,010) (305,429)
Taxes paid (57,606) (267,284)
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NET CASH USED IN OPERATING ACTIVITIES (1,678,143) (889,162)
------------- -------------
Cash flows used in investing activity-capital expenditures (48,053) (574,036)
------------- -------------
Cash flows from financing activities:
Net borrowings (repayments) under notes and acceptances
payable (2,793,740) 1,146,547
Proceeds from issuance of long-term debt 4,615,388 461,040
Principal payments on long-term debt - (58,442)
Proceeds from common stock issuance 6,052
Loans to President 20,357
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,848,057 1,549,145
Net increase in cash 121,861 85,947
Cash at beginning of period 17,895 11,991
------------- -------------
Cash at end of period $ 139,756 $ 97,938
============= =============
Reconciliation of net loss to net cash used in operating activities:
Net income $ 54,791 $ 546,659
Adjustments to reconcile net income to net cash used in operating
activities:
(Gain) on foreign currency transactions - (8,977)
Depreciation and amortization 47,417 80,248
Provision for doubtful accounts 236,374
Changes in assets and liabilities:
Accounts receivable (2,360,554) (2,980,002)
Inventory (281,046) 230,785
Prepaid expenses and other current assets 109,804 105,834
Other assets 50,754 27,615
Accounts payable and accrued expenses 464,317 1,108,676
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES $ (1,678,143) $ (889,162)
============= =============
</TABLE>
SUPPLEMENTAL INFORMATION OF NON-CASH FINANCING ACTIVITIES:
The President purchased 1,000 shares of Series B stock for $50,000 which was
paid for by a reduction in dividends payable to him.
See Notes to Consolidated Financial Statments
5
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements of Brake
Headquarters U.S.A., Inc. and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q. Accordingly, they do not
include all of the footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results for the six months
ended June 30, 1996 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1996. For further information, refer
to the financial statements and footnotes thereto included in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1995. There has
been no significant changes of accounting policies since December 31, 1995.
Earnings per common and common equivalent share is based on the weighted number
of common and common equivalent shares (when dilutive) outstanding during the
year computed in accordance with the treasury stock method. Net income used in
the determination of earnings per share has been adjusted for preferred dividend
requirements.
NOTE 2
NOTES AND ACCEPTANCES PAYABLE:
In February 1996, the Company refinanced one of its bank agreements with a new
two year agreement with a new bank that allows for borrowings of an additional
$1,000,000. The Company has combined lines of credit totaling $10,000,000. The
Company's second line of credit was renewed until May 1, 1997. The notes and
acceptances payable are collateralized by substantially all the assets of the
Company. The President/majority shareholder has guaranteed a portion of one of
the bank facilities when equity falls below $4,250,000. The second loan provides
for a guarantee of $1,000,000. The Company was in technical default of several
financial ratios on one of its current loans, however the bank has provided the
Company a waver for these technical defaults and revised certain ratios on a
going forward basis.
In January 1996, the Company obtained a $69,700 loan from the City of Fairfield,
Illinois at a rate of 5% per annum, for the purpose of purchasing equipment for
the Fairfield, Illinois distribution center.
6
<PAGE>
NOTE 3
STOCKHOLDERS' EQUITY
COMMON STOCK - In March 1996, the Company decreased its shares of authorized
common stock to 6,000,000 shares from 20,000,000 and also eliminated all
remaining authorized shares of Series A preferred stock.
In March 1996, the Company amended its Certificate of Incorporation to authorize
the issuance of 1,000 shares of Series B preferred stock to be held by the
President. As the sole shareholder of the Series B preferred stock, which will
vote as a separate class, the President has the exclusive right to elect a
majority of the Company's Board of Directors until the earlier of the redemption
dates of March 31, 2001 or the reporting by the Company of at least $75,000,000
in revenue for any year through December 31, 2000. In the event of any
liquidation, dissolution or winding-up, the holder of the Series B preferred
stock will be entitled to an aggregate preference of $50,000, his basis in the
stock; any remaining proceeds of liquidation will be distributed pro rata to
holders of the common stock.
In March 1996, the President purchased the 1,000 shares of Series B preferred
stock. The $50,000 purchase price was funded by a reduction of the $112,730
dividend payable to him.
In August 1996 the Company completed the initial phase of raising additional
capital through a private placement. The Company sold 450,000 units at a
purchase price of $2.50 per unit. Each unit consists of one share of common
stock and two Redeemable Common Stock Purchase Warrants each to purchase one
share of common stock of the Company at $3.80 per share until the third
anniversary of the initial closing.
NOTE 4
COMMITMENTS AND CONTINGENCIES
In June 1996, the Company settled an action against a former customer to collect
$971,000 of accounts receivable. Inventory totaling approximately $459,000, was
returned to the Company. The Company was required to pay the customer $85,000.
As a result of the above settlement and available reserves the Company recorded
an expense of a $212,000 in the financial statements for six months ended June
30, 1996. Mutual releases were exchanged for all claims and counter claims.
In July 1996, the Company entered into an agreement to purchase a new computer
system for approximately $475,000 which is financed over a five year period.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with the Company's
consolidated financial statements and the related notes included elsewhere
herein.
MARERIAL CHANGES IN RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE AND SIX MONTHS ENDED
JUNE 30, 1995
Gross sales in the three months ended June 30, 1996 increased by $543,675, or
6.0 %, to $9,572,400 compared to $9,028,725 for the three months ended June 30,
1995. Gross sales for the six months ended June 30, 1995 increased by
$1,905,834, or 11.8 %, to $18,018,775 compared to $16,112,941 for the
corresponding period in 1995. These increases were due primarily to the
continued expansion of product lines which includes brake rotors and drums, disc
pads and shoes, wheel cylinders, brake hoses and other hydraulics with current
customers and a successful program for obtaining new customers.
Gross profit in the three months ended June 30, 1996 increased by $111,647, or
4.7% to $2,503,163 compared to $2,391,516 for the three months ended June 30,
1995. Gross profit for the six months ended June 30, 1996 was $4,608,361 versus
$4,210,248 for the same period in 1995. This represents an increase of $398,113
or 9.5%. The Company attributes the improved gross profit to the success of its
products and marketing efforts, as well as to improvements made in its
procurement operation.
Operating expenses during the three months ended June 30, 1996 were $2,311,553
an increase of $628,965 or 37.4% from $1,682,588 for the three months ended June
30, 1995. Operating expenses for the first six months of 1996 were $4,050,462,
an increase of $1,032,325, or 34.2% from the $3,018,137 for the same period in
1995. These increases were a result of increased sales, and a continued building
of the infrastructure needed to provide excellent service to the Company's
customers.
Income from operations for the three months ended June 30, 1996 was $191,610
versus $708,828 for the same period in 1995. This represents a decrease of
$517,218 or 73.0%. For the six months ended June 30, 1996, income from
operations was $557,899 versus $1,192,111 for the six months of 1995. This was a
decrease of $634,212 or 53.2%. Included within operating expenses in the three
months ended June 30, 1996 is an expense of approximately $212,000 from the
settlement of a lawsuit with a former customer.
Interest expense during the three months ended June 30, 1996 was $211,264, an
increase of $46,790 over the interest expense of $164,474 during the
corresponding period in 1995. For the six months ended June 30, 1996, interest
expense was $478,108, an increase of $172,679 compared to $305,429 for the six
months of 1995. The increase is attributed to increased financing provided by
the Company's banks in support of the growth in sales and assets.
8
<PAGE>
As a result of the foregoing, the Company recorded a net loss for the three
months ended June 30, 1996 of $30,654 or $.001 per share, as compared to net
income of $325,122, or $.10 per share for the three months ended June 30, 1995.
For the six months ended June 30, 1996, the Company's net income was $54,791 or
$.02 per share, as compared to $546,659 or $.018 per share for the same period
in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has continued to use funds generated from operations and
bank borrowings to support operations, finance working capital requirements and
lease and improve facilities.
The Company has agreements with two banks to provide lines of credit,
bankers' acceptances, and letters of credit facilities. These facilities
currently provide for aggregate borrowing of up to $10,000,000 at June 30, 1996.
The balance due under these two loan facilities amounted to $ 9,598,774 at June
30, 1996. The lines of credit expire at various dates through February 1998, at
which time they will be reviewed for renewal. Interest accrues on the
outstanding principal balances at rates from 7.44%-9.0%. Both lines are secured
by a pledge of substantially all of the Company's assets and both lines are
partially guaranteed by the President/majority shareholder if equity is below
$4,250,000. The agreements contain covenants which require the maintenance of
certain amounts of net worth and certain financial ratios. The Company has
maintained compliance or obtained waivers relating to its loan covenants.
In January 1996, the Company obtained a $69,700 five year loan from the
City of Fairfield, Illinois bearing interest at 5% per annum to be used to
purchase equipment for its Fairfield distribution center.
Cash used in operations during the six months ended June 30, 1996 was
$1,678,143 as compared with $ 889,162 used in operations during the six months
ended June 30, 1995. This change was due mainly to the increase in accounts
receivable of $2,360,554 offset by the corresponding increase in accounts
payable and accrued expenses of $ 464,317 .
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Cash received from customers during the six months ended June 30, 1996 amounted
to $ 14,233,857, an increase of $1,596,819, or 12.6% over the same period in
1995. At the same time, cash paid to suppliers and employees during the six
months ended June 30, 1996 increased by $ 2,482,897 or 19.2 % over the same
period in 1995 to $ 15,436,384 , as the Company utilized the proceeds of sales
and increased borrowing to pay suppliers and finance its growth through
conservative cash flow management.
During the six months ended June 30, 1996, the Company made a concerted effort
to control the growth of inventory while ensuring sufficient product
availability. As a result, inventory increases by $281,046, or 3.6%, to
$8,154,177 from $7,873,131. Accounts receivable increased by $2,124,180, or
39.8%, from January 1, 1996 to June 30 1996. The increase in accounts receivable
was a result of the corresponding growth in sales and extended terms given to
certain customers because of market conditions.
The Company signed a contract for a new computer system which
management believes will improve the efficiency of operations. The cost of this
expenditure will be financed over a 5 year period and will not significantly
affect the cash flows of the Company.
10
<PAGE>
PART II OTHER INFORMATION
ITEM 1
Legal Proceedings
(a) In June 1996, the Company settled an action against a former customer to
collect $971,000 of accounts receivable. Inventory totaling approximately
$459,000, was returned to the Company. The Company was required to pay the
customer $85,000. As a result of the above settlement and available
reserves the Company recorded an expense of a $212,000 in the financial
statments for six months ended June 30, 1996. Mutual releases were
exchanged for all claims and counter claims.
ITEM 6
Exhibits and Reports on Form 8-K
[a] None
[b] No reports on Form 8-K were filed during the quarter ended June 30, 1996.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BRAKE HEADQUARTERS, USA
------------------------------------
Joseph Ende, Chief Executive Officer
DATE: August 19, 1996
---------------------------------------
Marc J. Ruskin, Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 139,756
<SECURITIES> 0
<RECEIVABLES> 7,825,118
<ALLOWANCES> 77,821
<INVENTORY> 8,154,177
<CURRENT-ASSETS> 16,696,415
<PP&E> 1,300,403
<DEPRECIATION> (378,467)
<TOTAL-ASSETS> 17,843,732
<CURRENT-LIABILITIES> 8,646,235
<BONDS> 5,230,850
<COMMON> 3,418
0
0
<OTHER-SE> 3,963,228
<TOTAL-LIABILITY-AND-EQUITY> 3,966,647
<SALES> 18,018,775
<TOTAL-REVENUES> 16,614,411
<CGS> 12,006,050
<TOTAL-COSTS> 4,050,462
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 478,108
<INCOME-PRETAX> 79,791
<INCOME-TAX> 25,000
<INCOME-CONTINUING> 54,791
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54,791
<EPS-PRIMARY> .02
<EPS-DILUTED> 0
</TABLE>
