SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 1O
General Form For Registration of Securities
Pursuant to Section 12(b) or 12(g) of
the Securities Exchange Act of 1934
BRAKE HEADQUARTERS U.S.A., INC.
(Name of Small Business Issuer in Its Charter)
Delaware 22-3048534
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
33-16 Woodside Avenue
Long Island City, New York 11101
(Address of Principal Executive Offices) (Zip Code)
(718) 779-4800
Issuer's Telephone Number
Securities to be registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
None
Securities to be registered pursuant to Section 12(g)of the Act:
Common Stock, $.001 par value
(Title of Class)
(Title of Class)
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Item 1. Description of Business
(a) General Development of Business.
Unified Capital, Inc. (the "Company") was incorporated in the State of
Delaware on July 13, 1988 as a blind pool which did not conduct business
operations until July 1992 when it acquired, in a reverse acquisition (the
"Reverse Merger"), all of the outstanding capital stock of Sanyo Automotive
Parts, Ltd. ("Sanyo Automotive"). In connection with the Reverse Merger, the
Company amended its Certificate of Incorporation to change its name to Sanyo
Industries, Inc. On August 8, 1995, the Company changed its name to Brake
Headquarters U.S.A., Inc.. The Company is a publicly-owned holding company that
conducts substantially all of its current business operations through its
wholly-owned subsidiary Sanyo Automotive, a New York corporation formed in 1976,
which is currently doing business under the name Brake Headquarters. Quality
First Brake, Inc., a wholly-owned Delaware subsidiary of the Company ("Quality
First"), was formed in August 1995 and owns Fifteen, Inc., a wholesale warehouse
for "undercar" parts. The Company's other wholly-owned subsidiaries are Brake
Headquarters Corp., an inactive New York corporation formed in January 1996 and
Quality First Brake Corp., a currently inactive Canadian corporation formed in
1993. All references to business history herein relate to Sanyo Automotive whose
operations pre-date the Company's formation in 1988.
(b) Financial Information about Industry Segments.
The Company operates solely in one industry segment - the automotive after
market. All financial information of the Company is contained in Consolidated
Financial Statements included elsewhere in this Prospectus.
(c) Narrative Description of Business.
The Company is a specialized distributor in the automotive aftermarket of a
complete line of brake system products including brake drums and rotors, brake
master cylinders, wheel cylinders, brake pads, brake shoes and brake hoses for
virtually all makes and models of domestic and foreign passenger cars and light
trucks from model year 1976 to the present. The Company also sells a variety of
other "undercar" parts including ride control products, steering/suspension
parts, drive shafts, shock absorbers and clutches. The brake line products are
sold primarily under the registered trademark "Brake Headquarters, U.S.A.," as
well as under the name "Sanyo Automotive" and under private labels.
Industry Overview
According to industry data, the automotive aftermarket industry consists of
approximately 2,600 manufacturers and importers who are in the business of
supplying parts to distributors, wholesalers and retailers throughout the United
States. The size of the domestic automotive aftermarket for replacement hard
parts was approximately $7.35 billion in 1994 and was
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expected to grow by 2.8% during 1995, according to industry data. Undercar parts
continue to be a strong, stable category in the automotive aftermarket and
comprise approximately $3.6 billion of the total replacement hard parts
aftermarket with an expected compound annual growth rate of approximately 3%
through the year 2000, according to industry data.
The undercar replacement parts market depends, in part, upon the age and
number of cars and light trucks on the road and the number of miles driven per
year. The Company expects that this market will continue to grow because of,
among other things, projected increases in the size of the United States'
automotive population, the higher cost of new cars which has resulted in an
aging of the automobile population, and the higher cost of replacement parts as
a result of technological changes in more recent vehicle models. In addition,
many of these technological changes have increased the demand on brake systems
by causing more wear and tear.
In addition, changing government standards for automobiles, including
pollution level standards, increased performance demanded by consumers. These
changes caused original equipment manufacturers ("OEMs") to make cars lighter,
which, in turn caused OEMs to shift from two-wheel disc brakes and drum brakes
to four-wheel disc brakes which weigh less than drum brakes. The Company
believes that each of such factors has contributed to a significant increase in
the market for brake repairs during the past decade. The standard to bring a
vehicle to a complete stop from 60 MPH has been reduced in the last few years
from 150 feet to 75 feet. In order to meet this standard a change in the
friction material of brakes was necessary and a shift was made from inexpensive
long lasting asbestos brake pads (which raised environmental concerns) to more
expensive, shorter life metallic brake pads which are more punishing to the
brake system.
Industry data show that the brake aftermarket industry performs well under
most economic conditions. In an economic recession, for example, vehicle owners
tend to retain and repair their cars rather than purchase costly new vehicles.
Since brakes are a safety-related item, drivers normally neglect brake repairs
to a lesser degree as they might otherwise do with other repairs and maintenance
less directly related to safety.
Business Strategy
- - -----------------
The Company's objective is to become one of the leading undercar parts
distributors in selected markets in the United States, using both a traditional
distribution process and by developing wholesale warehouses for undercar parts
("Undercar Warehouses"). The Company's business strategy is to continue the
growth in its base distribution business by, among other things, adding new
brake and other undercar part product lines (including two new brake product
lines added in the fall of 1995) and upgrading its information system
capabilities. See "Management Information Systems; - Distribution and Assembly
Operations." Management believes that the Company's continued growth will depend
upon, among other things, its ability to respond to market and other changes in
the distribution process for automotive parts and to maintain state-of-the-art
integrated computerized systems to meet its customers demands.
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While many of the Company's competitors offer undercar parts for most
popular cars, Management believes that no such competitor maintains an inventory
of all brake parts for substantially all cars, as does the Company. Management
also believes that the Company has positioned itself, through investment in
advanced integrated systems to capitalize on general trends occurring in
distribution.
Marketing and Sales
- - -------------------
The Company sells products primarily under the name "Brake Headquarters,
U.S.A.," but also under the name "Sanyo Automotive" and certain private
manufacturers' labels. The Company distributes its products through salaried and
independent sales agents or manufacturers' representatives. The Company's
products are sold primarily to warehouse distributors, retail discount chains,
foreign and domestic automotive parts wholesalers, mass merchandisers and
undercar installation chains. The Company maintains a network of over 100 sales
representatives covering substantially all of the United States and most of
Canada as well as Mexico, Puerto Rico, Venezuela and the Virgin Islands. Since
1993, the Company has evolved from 100% reliance on its telemarketing sales
force to having 85% of its 1995 sales generated by representatives in the field.
The Company's marketing efforts are facilitated by the publication of
several catalogs, each of which contains a description of the parts distributed
by the Company. These catalogs are provided to the Company's sales
representatives who use them to fill customers' orders. See "Research And
Marketing" below. The Company also participates in trade shows throughout the
United States in order to gain exposure for its products.
The Company added new large customers and reached certain critical levels
with existing large customers and, as a result, the Company's sales increased by
42% and 21% in 1994 and 1995, respectively. Unless the Company is able to
continue to add new large customers at an increasing rate, it is unlikely that
it will continue to grow at comparable rates to the last two years.
Management Information Systems
- - ------------------------------
The Company maintains a computer system which implements the fulfillment of
customers' purchase orders. All three of the Company's distribution centers are
equipped with an EDI computer link which enables customers to place orders
directly through the Company's computer system. The Company provides EDI
services to its customers through the Advantis system. The Company has a bar
coded inventory system and advanced shipping notice ("ASN") which, upon receipt
of an EDI generated purchase order, generates a computer notice of the items
being shipped, the shipment date and a tracking number. These systems give the
Company the ability to efficiently service customer needs and, the Company
believes, represent some of the most advanced integrated distribution
capabilities in the automotive parts industry.
4
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Distribution and Assembly Operations
- - ------------------------------------
The Company maintains its headquarters office and principal distribution
center at a 94,000 square foot warehouse facility in Long Island City, New York.
This facility consists of two adjoining buildings at which activities are
maintained during two eight-hour shifts per day, usually five days per week.
In June 1995, the Company expanded its Midwest distribution center in
Fairfield, Illinois to approximately 40,000 square feet. The Company currently
operates two shifts per day, five days per week, at this facility.
The Company also maintains an approximately 15,000 square foot distribution
center in Portland, Oregon to serve the Company's West Coast customers. At the
Oregon facility, the Company conducts distribution activities generally
operating one shift per day, five days per week.
The Company maintains inventories at its three distribution centers to
maintain maximum service levels. Orders from the Company's customers are
selected, assembled and packaged from these facilities and shipped. The
Company's distribution centers in New York, Illinois and Oregon currently stock
approximately 6,000, 3,000 and 1,000 stock keeping units ("SKUs"), respectively.
The Company maintains leased trucks at each of its facilities, which it uses to
make direct local deliveries to its customers. The Company estimates that about
5% of its sales are delivered by the Company's trucks and the balance by common
carriers, including Federal Express and UPS.
Suppliers
- - ---------
The Company does not maintain supply contracts with any of its suppliers of
parts and equipment although it believes alternative sources exist for most of
the products it distributes. The Company depends on close relationships with its
suppliers and its ability to purchase products directly from those manufacturers
at favorable prices (including volume discounts) and on favorable terms. The
Company's long-term association with vendors worldwide has enabled the Company
to obtain inventory at competitive prices and, as a result, to provide customers
with quality products at competitive prices. In addition, the Company has
certain products custom designed and manufactured to its specifications by
independent manufacturers.
Competition
- - -----------
Competition within the automotive parts industry is affected principally by
product quality, availability, customer service and price. By expanding its
distribution facilities, the Company anticipates that it will be able to
continue to control costs, while at the same time maintain high standards of
quality for its products. The direct competitors to the Company's distribution
activities include manufacturers, consisting of Brake Parts, Inc., Wagner
Brakes, a subsidiary of Cooper Industries, Inc., EIS Brake Parts Division of
Standard Motor Products, Inc. and the
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ITT Automotive Aftermarket Division of ITT/AIMCO. Such manufacturers, who also
act as distributors, are not dependent on relationships with suppliers as is the
Company. The Company's direct competitors as a distributor include ISW, a
division of APS, Inc., and Reddi Brake Supply Corporation.
800 Technical Service Hotline
- - -----------------------------
The Company has instituted an 800 toll free technical hotline (800-221-1393
X 106) serviced by professional advisors to respond to inquiries and problems
which may be experienced by the Company's customers, including personnel of the
Undercar Warehouses.
Research and Marketing
- - ----------------------
The Company has established a special in-house Research and Marketing
("R&M") department. The R&M Department was formed to provide up-to-date
information for the Company's catalogs which the Company believes is useful and
practical to its customers. The Company has been advised by certain of its
retail chain store customers that they rely on the Company's catalogs and the
R&M Department to obtain current information in order to update and maintain
their own inventory. A distinct part number system was created and publicized
through the catalogs which developed a dependency to form between the Company
and its customers. The Company's customers are also able to provide the Company
with input on their undercar product needs, enabling the Company to increase
sales to such customers. The R&M Department has also been able to supply
management with recommendations for new additions to its product lines and new
products.
Government Regulation
- - ---------------------
The Company is subject to various laws and governmental regulations
relating to the operation of its business. However, the Company does not believe
that the cost of compliance with such laws and regulations has a material impact
on its operations.
Trademarks
- - ----------
The Company offers many of its products under the name "Brake Headquarters,
U.S.A." for which it has obtained a registered trademark from the United States
Patent and Trademark Office.
Employees
- - ---------
As of April 30, 1996, the Company had 111 employees, including five
executives; four employees in purchasing; 18 administrative personnel; six in
sales and customer service; 72 employees in warehousing, shipping and receiving;
and six in Quality First's operations. The Company also retains the services, as
independent contractors, of 114 independent sales representatives who are paid
solely on a commission basis.
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The Company is a party to a collective bargaining agreement relating to 28
of its warehouse employees in New York. In April 1996, the Company signed a
collective bargaining agreement at the Company's Fairfield, Illinois
distribution center, covering 19 employees. The Company believes that its
employee relations are currently satisfactory.
(d) Financial Information about Foreign and Domestic Operations and Export
Sales.
<TABLE>
<CAPTION>
Year
-------------------------------------------------------------
1993 1994 1995
-------- -------- ------
<S> <C> <C> <C>
SALES TO UNAFFILIATED CUSTOMERS:
United States.................................. $16,595,008 $24,802,100 $29,016,025
Canada and Mexico.............................. 250,531 35,490 336,086
South America.................................. 805,273 241,251 1,102,286
Europe......................................... 66,211 15,632 9,333
SALES OR TRANSFERS BETWEEN GEOGRAPHIC
AREAS:
United States.................................. - (251,840) (76,094)
Canada and Mexico.............................. - 251,840 76,094
South America.................................. - - -
Europe......................................... - - -
OPERATING PROFIT OR LOSS:
United States.................................. 370,009 (996,438) 527,874
Canada......................................... - (44,599) 39,000
Mexico and South America....................... (1) (1) (1)
Europe......................................... - - -
IDENTIFIABLE ASSETS:
United States.................................. 8,070,849 11,509,646 15,496,294
Canada......................................... - 427,497 -
South America.................................. - - -
Europe......................................... - - -
<FN>
<F1> The Company does not maintain operations in South America or Mexico and is
unable to determine operating profit or loss in those geographic regions.
</FN>
</TABLE>
Item 2. Financial Information.
Selected Financial Data
- - -----------------------
The selected consolidated financial data as of and for the five-year period
ended December 31, 1995 have been derived from the Company's Consolidated
Financial Statements. This data should be read in conjunction with the
Consolidated Financial Statements and related Notes for the three-year period
ended December 31, 1995 and Management's Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere herein. The consolidated
balance sheet data as of December 31, 1994 and 1995, and the consolidated
statements of
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operations data for each of the three years in the period ended December 31,
1995 and the accountants' reports thereon, are audited and are included
elsewhere in this Registration Statement. The consolidated balance sheet data as
of December 31, 1991, 1992 and 1993 and the consolidated statements of
operations data for the years ended December 31, 1991 and 1992 are derived from
the audited consolidated financial statements of the Company and are not
presented herein. The selected data presented below for, and as of the end of,
the three months ended March 31, 1995 and 1996 are derived from the unaudited
consolidated financial statements of the Company appearing elsewhere in this
Registration Statement. In the opinion of management, the unaudited consolidated
financial statements for the interim periods include all adjustments (consisting
only of normal recurring accruals) necessary for a fair presentation of the
results for such periods. The results of operations for the three months ended
March 31, 1996 are not necessarily indicative of the results to be expected for
the full year.
<TABLE>
Year Ended December 31, 3 months ended March 31,
--------------------------------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA: 1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ------ -----
Net sales $8,868,974 $13,672,234 $17,717,023 $25,094,473 $30,463,730 $6,793,955 $7,833,881
Income (loss) from
operations 298,793 605,845 370,009 (1,041,037)<F1> 566,874 483,283 366,289
Interest expense (307,874) (261,643) (314,796) (520,602) (774,762) (140,955) (266,844)
Net income (loss) 48,409 235,982 41,187 (1,968,909)<F1> (179,072) 221,537 85,445
Net income (loss)
per common and
common
equivalent share(2) $.02 $.05 $.00 $ .92) $(.06) $.08 $.02
BALANCE SHEET DATA:
Working capital $1,336,197 $1,977,053 $1,823,459 $ 3,706,239 $3,288,863 $3,871,117 $7,383,871
Total assets 6,064,582 8,070,849 10,189,885 11,937,143 15,496,294 13,993,432 17,352,543
Long-term obligations 545,639 80,113 133,927 216,469 630,494 483,624 4,454,744
Total stockholders' 941,535 2,174,915 2,176,102 4,124,961 3,855,804 4,346,279 3,991,249
equity
FINANCIAL STATISTICS:
Gross profit as a
percent of sales 27.1 25.1 24.5 26.7 26.4 26.8 26.9
SG&A as a percent
of sales) 23.8 20.6 22.4 20.7<F1> 23.8 19.7 22.2
Operating income
(loss) percent of sales 3.4 4.4 2.1 (4.1)<F1> 1.9 7.1 4.7
<FN>
<F1> After a non-cash compensatory charge of $2,314,000 resulting from the
release of escrow shares, the exercisability of warrants and the conversion
of preferred stock, upon the Company's attainment of the specified 1994
pre-tax income level under the Company's July 1992 Reverse Acquisition. See
"Item 1. "Description of Business - General Development of Business,"
"Certain Transactions" and Note 4 of Notes to the 1995 Consolidated
Financial Statements.
<F2> Net income (loss) per share is computed on the basis described in Note 1 of
Notes to Consolidated Financial Statements included elsewhere herein,
including, but not limited to, the adjustment for dividends on preferred
stock.
</FN>
</TABLE>
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<TABLE>
<CAPTION>
Year Ended December 31, 3 months ended March 31,
---------------------------------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA: 1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ------- -------
Operating cash flow $(77,919) $(667,501) $(1,762,454) $(2,076,201) $(2,704,987) $(689,368) $(814,928)
Capital expenditures 7,984 11,958 135,999 210,014 852,431 383,876 14,016
Depreciation and
amortization 48,324 69,164 78,677 92,245 186,675 27,559 20,392
Number of employees 47 54 62 93 110 91 111
Weighted average
number of shares
outstanding 1,500,000 2,448,827 2,618,321 2,188,414 3,058,968 2,657,577 3,666,464
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with the Consolidated Financial
Statements included elsewhere herein.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 Compared to the Three Months Ended March 31,
- - --------------------------------------------------------------------------------
1995
- - ----
Gross sales for the three months ended March 31, 1996 increased by
$1,362,159, or 19.2%, to $8,446,375 compared to $7,084,216 for the three months
ended March 31, 1995. The increase was due primarily to the increased sales to
existing customers and the Company's introduction of new undercar part product
lines. The Company expanded its customer base during the three months ended
March 31, 1996 to include sales to new customers who were not customers during
the comparable period in 1995. In addition, another large retail chain, which
became a customer in late 1993, accounted for approximately 26% of the Company's
revenues for the three months ended March 31, 1996.
Gross profit for the three months ended March 31, 1996 increased by
$286,466, or 15.8%, to $2,105,198, compared to $1,818,732 for the three months
ended March 31, 1995. Gross profit margin as a percentage of net sales for the
three months ended March 31, 1996 increased to 26.9% from 26.8% for the three
months ended March 31, 1995. There were no significant changes in gross profit
percentage between the periods ended March 31, 1995 and 1996.
Operating expenses for the three months ended March 31, 1996 increased by
$403,460, or 30.2%, to $1,738,909 compared to $1,335,449 for the three months
ended March 31, 1995. These increases were a result of higher costs, associated
with higher increased sales volume, and a continued building of the
infrastructure needed to provide a high level of service to the Company's
customers; offset, in part, by the implementation of certain cost controls. In
April 1995, the Company purchased its Midwest Distribution Center in Fairfield,
Illinois, which it previously rented. In June 1995, the
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Company completed construction to double the size of this facility. In August
1995, the Company acquired an additional five contiguous acres of property for
future expansion of the Midwest Distribution Center.
Income from operations decreased by $116,994, or 24.2%, to $366,289 for the
three months ended March 31, 1996, compared to $483,283 for the three months
ended March 31, 1995 as a result of increased operating expenditures.
Interest expense for the three months ended March 31, 1996, increased by
$125,889, or 89.3% to $266,844, compared to $140,955 for the three months ended
March 31, 1995. The increase was a result of additional borrowings by the
Company in support of the growth in sales and assets.
Net income as a percentage of net sales for the three months ended March
31, 1996 was 1.1% as compared to 3.3% for the three months ended March 31, 1995.
As a result of the foregoing, the Company's net income for the three months
ended March 31, 1996 decreased by $136,092 to $85,445 or $.02 earnings per
share, as compared to $221,537, or $.08 earnings per share, for the three months
ended March 31, 1995.
Year Ended December 31, 1995 Compared to the Year Ended December 31, 1994
- - -------------------------------------------------------------------------
Gross sales for the year ended December 31, 1995 ("1995"), increased by
$6,254,137, or 24.0%, to $32,383,302 compared to $26,129,165 for the year ended
December 31, 1994 ("1994"). This increase was due primarily to increased sales
to existing customers and the Company's introduction of new undercar parts
product lines. In addition, the Company expanded its customer base during 1995.
A large retail chain, which became a customer in late 1993, accounted for
approximately 17% of the Company's net sales for 1995.
Gross profit for 1995, increased by $1,349,646, or 20.1%, to $8,053,798
compared to $6,704,152 for 1994. Gross profit margin for 1995 decreased to 26.4%
compared to 26.7% for 1994. There is no significant difference in gross profit
margin during the two periods.
Operating expenses for 1995 decreased by $258,265, or 3.3%, to $7,486,924,
compared to $7,745,189 for 1994. There was a 39.2% increase in SG&A expenses in
1995, resulting from higher costs associated with increased sales volume, bad
debt expenses of $617,891, and a continued building of the infrastructure needed
to provide a high level of service to the Company's customers, offset, in part,
by the implementation of certain cost controls. An overall decrease resulted in
non-recurring changes from non-cash compensatory charges (as described below)
and settlement of litigation which occurred in 1994. The Company has postponed
raising additional funds through a secondary public offering due to market
conditions. The Company expended costs associated with the offering totalling
$248,000 during 1995.
The Company's attainment of the 1994 pretax income level under its Reverse
Merger Agreement, as amended, resulted in the release of the 125,000 escrowed
shares, exercisability of the Class F
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warrants (relating to 1994 earnings) and conversion of the Series A Preferred
Stock into shares of common stock, all by the Company's President/principal
stockholder which resulted in a non-cash compensatory expense of $2,314,000 for
1994. Without giving effect to the non-cash expense of $2,314,000 for 1994, the
Company would have had net income of $345,091. The non-cash compensatory charges
to operations were offset by an increase in common stock and additional
paid-in-capital.
Income from operations for 1995, increased by $1,607,911 to $566,874,
compared to a loss of $1,041,037 for 1994, as a result of increased sales,
combined with certain cost controls and the elimination of certain non-recurring
charges.
Interest expense for 1995, increased by $254,160, or 48.8% to $774,762
compared to $520,602 for 1994. The increase was a result of additional
borrowings by the Company in support of the growth in sales and assets.
As a result of the foregoing, the Company's net loss for 1995 decreased by
91%, or $1,807,837, to $179,072, or $.06 per share, as compared to $1,968,909,
or $.92 per share for 1994.
Year Ended December 31, 1994 Compared to the Year Ended December 31, 1993
- - -------------------------------------------------------------------------
Gross sales for 1994 increased by $7,474,092, or 40.1%, to $26,129,165
compared to the $18,655,073 reported for the year ended December 31, 1993
("1993"). This increase was due primarily to the continued success of the
Company's operations in the undercar market. The Company participated in trade
shows where its products were received favorably and published several new
catalogs of its products. The Company also continued successfully its other
lines of business where it operates as a distributor for major automotive parts
manufacturers.
As a result of its marketing effort and the favorable acceptance of its
products, the Company obtained several large contracts to sell its products to
major companies in the automotive parts market. No single customer accounted for
more than 10% of the Company's 1994 revenues.
With the increased sales, the Company was able to increase its gross profit
margin to 26.7% of net sales in 1994, which is an increase of 2.2% from 1993.
Selling, general and administrative expenses as a percentage of net sales
decreased from 22.4% in 1993 to 20.7% in 1994, and income from operations
(excluding the noncash compensatory charges and a litigation settlement)
increased from 2.1% of net sales in 1993 to 6.0% in 1994 as a result of
increased sales growth and tighter control of expenses.
The Company's Midwest distribution center commenced operations in January
1994 and almost immediately contributed to the Company's profitability.
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<PAGE>
Interest expense in 1994 was $520,602, an increase of 65.4% over the 1993
expense of $314,796. The increase is attributed to increased borrowings which
were used to help finance the growth of sales.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996
- - -----------------
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 March 31,
1996. The balance due under the Company's loan facilities amounted to
approximately $8,615,000 at March 31, 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
prime (which was 8.25% at March 31, 1996) to .75% above prime. Both lines are
secured by a pledge of substantially all of the Company's assets and one line is
partially guaranteed by the President/majority stockholder. The agreements
contain covenants which require the maintenance of certain amounts of net worth
and certain financial ratios. The Company has maintained compliance with its
loan covenants and maintained good relations with its primary lender for a
period of 17 years.
The Company obtained another $100,000 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. To date, $67,300 has been
funded.
Cash used in operations during the three months ended March 31, 1996 was
$814,928 as compared with $689,368 used in operations during the three months
ended March 31, 1995. This change was due mainly to the increase in accounts
receivable of $2,213,000 offset by the corresponding increase in accounts
payable and accrued expenses of $940,000.
Cash received from customers during the three months ended March 31, 1996
amounted to $5,620,767, an increase of $408,865, or 7.8% over the same period in
1995. At the same time, cash paid to suppliers and employees during the three
months ended March 31, 1996 decreased by $924,653, or 16.8% over the same period
in 1995 to $4,568,378, 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 three months ended March 31, 1996, the Company made a concerted
effort to control the growth of inventory while ensuring sufficient product
availability. As a result, inventory decreased by $212,691, or 2.7% to
$7,660,440 from $7,873,131. Accounts receivable increased by
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<PAGE>
$2,213,114, or 39.4%, from January 1, 1996 to March 31, 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 anticipates signing 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 five-year period and will not significantly
affect the cash flows of the Company.
At December 31, 1995
- - --------------------
During 1995 and 1994 the Company used funds generated from operations, bank
borrowings and proceeds from exercises of warrants to finance working capital
requirements and lease and improve facilities. The Company received
approximately $1,490,000 from the exercise of warrants during 1994.
The Company's loan agreements provided for aggregate borrowings of up to
$9,000,000 at December 31, 1995. The balance due under these loan facilities
amounted to approximately $7,817,000 at December 31, 1995. The lines of credit
and bankers' acceptances bear interest at rates ranging from 3/4% to 1% per
annum above the bank's prime rate. The lines of credit expire at various dates
through June 30, 1996. In February 1996, the Company refinanced and expanded by
$1,000,000 one of its bank agreements. The Company currently has total available
credit of $10,000,000. The new two-year agreement allows for borrowings of up to
$5,000,000 based upon levels of accounts receivable and inventory. The other
line of credit will be reviewed for renewal. The notes and acceptances payable
are collateralized by substantially all of the assets of the Company and are
partially guaranteed by the Company's President/principal stockholder. One of
the agreements contains covenants which require the maintenance of certain
amounts of net worth and financial ratios. At December 31, 1995, the Company had
outstanding letters of credit of approximately $28,000. In addition, during
1995, the Company obtained a $258,000 short-term loan from an individual which
is due in August 1996, payable in cash or in Common Stock at the option of the
Company. The loan bears interest at 8% per annum.
The Company obtained a $100,000 five-year loan in November 1993, from the
City of Fairfield, Illinois, bearing interest at 5% per annum which was used for
capital equipment and working capital requirements to open the Company's Midwest
Distribution Center in June 1995. On January 13, 1995, the Company exercised an
option to purchase the Midwest Distribution Center for $315,000. The purchase
and related construction costs were financed by first and second mortgages from
a bank. The loan bears interest at the rate of 7.36% per annum and the bank's
prime rate, respectively. In July 1995, the Company purchased an additional five
acres of land adjacent to the foregoing property for $10,000.
Cash used in operations in 1995 was $2,704,987 which represents an increase
of $628,786, or 30.3%, from $2,076,201 in 1994. The increase was primarily due
to an increase in inventory and accounts receivable. They rose by $1,593,795 and
$1,937,596, respectively, both related to continued
13
<PAGE>
sales growth. Accounts payable and accrued expenses decreased by $764,220. These
changes were financed primarily with $3,650,000 of additional borrowings.
Cash received from customers during 1995 amounted to $28,526,134, an
increase of $4,444,739, or 18.5%, over the same period in 1994. At the same
time, cash paid to suppliers and employees during 1995 increased by $4,078,392,
or 15.9%, over the same period in 1994 to $29,740,631, as the Company utilized
the proceeds of sales and increased borrowings to pay suppliers and finance its
growth through conservative cash flow management.
At December 31, 1994
- - --------------------
Net cash used in operations in 1994 was $2,076,201 which represents an
increase of $313,747, or 18%, from $1,762,454 in 1993. The increase was
primarily due to a decrease in accounts payable and accrued expenses of
$1,235,690, as the Company made a concerted effort to take advantage of vendor
discounts. Inventory and accounts receivable rose by $707,601 and $596,741,
respectively, both related to continued sales growth.
These increases were financed primarily with an increase of $1,489,750
obtained from the issuance of common stock, as the result of the exercise of
warrants during 1994. In addition, the Company increased its borrowings under
notes and acceptances payable by $637,416.
The Company has maintained good relations with domestic and foreign
suppliers. The Company has agreements with banks to provide lines of credit,
bankers' acceptances, and letters of credit facilities. These facilities
provided for aggregate borrowings of up to $7,250,000 at December 31, 1994.
The Company's credit facilities with both banks were renewed in December
1994, for an additional year. The total credit available to the Company was
increased by 34%. In addition, both banks reduced the interest rate charged to
the Company by 1/2%. Interest accrues on outstanding principal at rates of 1.0%
to 1.5% above the banks' prime rates per annum. Both lines are secured by the
Company's assets and are guaranteed by the Company's principal stockholder. The
Company has maintained good relations with its primary lender for a period of 17
years. The Company also has a $100,000 low interest 5-year loan from the City of
Fairfield, Illinois, which was used for capital equipment and working capital
requirements for the Company's Midwest Distribution Center.
ITEM 3. PROPERTIES.
The Company leases approximately 94,000 square feet of office, and
warehouse facilities at 33-16 Woodside Avenue, Long Island City, New York.
Approximately 34,000 square feet of this facility is leased from the Company's
President, Joseph Ende, pursuant to a lease dated July 1, 1992 at a current rent
of $312,000 per year. The lease term expires July 1, 1999. Mr. Ende was paid
$302,000, $312,000 and $312,000 pursuant to the lease in 1993, 1994, and 1995,
respectively. Based
14
<PAGE>
on the Company's review of nearby real estate and an independent appraisal, the
Company believes that the terms of the lease with Mr. Ende are no less favorable
than would otherwise be obtained from unaffiliated third parties. The remaining
60,000 square feet is leased from a bankruptcy trustee on a month-to-month basis
at $24,000 per year.
The Company owns a facility, purchased in April 1995, comprised of
approximately 40,000 square feet on nine acres at Lot #22, Fairfield Industrial
Park, Fairfield, Illinois, which serves as the Company's Midwest Distribution
Center. In July 1995, the Company successfully bid for an additional ten
contiguous acres for future expansion of the Midwest Distribution Center.
The Company occupies approximately 10,000 square feet of public warehouse
space at 230 East Burnside, Portland, Oregon on a month-to-month basis.
Item 4. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of the date of this filing,
the number of shares of the Company's outstanding Common Stock, $.001 par value,
beneficially owned (as such term is defined in Rule 13-d3 under the Securities
Exchange Act of 1934) by each person known by the Company to be the beneficial
owner of more than 5% of the outstanding shares, by each director, by each named
executive officer, and by all directors and officers as a group:
<TABLE>
<CAPTION>
Name and Address Amount and Nature Percentage
of Beneficial Owner Beneficial Ownership <F1> of Class <F1><F2>
- - ------------------- -------------------------- ----------------
<S> <C> <C>
Joseph Ende <F3> 2,719,333<F4> 77.8%
Sandra Ende <F3> 30,000<F5> <F9>
Marc J. Ruskin <F3> 0 <F6> <F9>
Scott Osias <F3> 15,000<F7> <F9>
Officers and Directors 2,764,333<F8> 79.0%
as a Group
(4 Persons)
<FN>
<F1> Unless otherwise noted, the Company believes that all persons named in this
table have sole voting and investment power with respect to all shares of
Common Stock beneficially owned by them. A person is deemed to be the
beneficial owner of securities that can be acquired by such person within
60 days from the date of this filing upon the exercise of warrants or
options. Unless otherwise noted, each beneficial owner's percentage
ownership is determined by assuming that options or warrants that are held
by such person (but not those held by any other person) and which are
exercisable within 60 days from the date hereof have been exercised.
15
<PAGE>
<F2> Based on 3,416,197 shares of Common Stock outstanding as of the date of
this filing.
<F3> The address of this person is c/o the Company, 33-16 Woodside Avenue, Long
Island City, New York 11101.
<F4> Includes (i) 15,000 shares owned of record by the Joseph and Sandra Ende
Charitable Trust, of which Joseph and Sandra Ende are Trustees, (ii) 80,000
shares which may be obtained upon the exercise of currently exercisable
stock options, but excludes an aggregate of 220,000 shares underlying
options which are not currently exercisable or exercisable within the next
60 days; and (iii) 386,000 shares pledged to Bank Leumi Trust Company as
security for the repayment of the loan made by such Bank to the holder of
such shares to purchase such shares.
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 Joseph Ende. As sole stockholder of the Series B Preferred Stock,
which will vote as a separate class, Mr. Ende has the exclusive right to
elect a majority of the Company's Board of Directors until the earlier of
the redemption date of March 31, 2001 or the reporting by the Company of at
least $75 million in net sales for any year through December 31, 2000. See
Item 7. "Certain Relationships and Related Transactions."
<F5> Includes 15,000 shares owned of record by the Joseph and Sandra Ende
Charitable Trust, of which Joseph and Sandra Ende are Trustees, but does
not include any other shares beneficially owned by Joseph Ende, Sandra
Ende's husband.
<F6> Does not include 6,000 shares of Common Stock which may be purchased
pursuant to stock options held by Mr. Ruskin which are not currently
exercisable or exercisable within the next 60 days.
<F7> Does not include 9,000 shares of Common Stock which may be purchased
pursuant to stock options held by Mr. Osias which are not currently
exercisable or exercisable within the next 60 days.
<F8> Includes 80,000 shares issuable upon exercise of currently exercisable
stock options, but does not include 235,000 shares of Common Stock which
may be purchased pursuant to stock options which are not currently
exercisable.
<F9> Less than one percent of the issued and outstanding shares.
</FN>
</TABLE>
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
Set forth below are the names, ages and positions of the Company's
executive officers and directors, along with certain information relating to the
business experience of each.
Name Age Position
- - ---- --- --------
Joseph Ende 48 Chairman of the Board, President and Chief Executive Officer
Scott Osias 41 Vice President of Sales and Marketing
Marc J. Ruskin 43 Chief Financial Officer
Sandra Ende 43 Secretary and Director
16
<PAGE>
All directors hold office until the next annual meeting of shareholders and
the election and qualification of their successors. Directors currently receive
no cash compensation for serving on the Board of Directors. Officers are elected
annually by the Board of Directors and, subject to existing employment
agreements, serve at the discretion of the Board.
Joseph Ende has been President, Chief Executive Officer and Chairman of the
Board of Directors of the Company since July 9, 1992. He has been the President
and a Director of Sanyo Automotive since its inception in June 1976. Mr. Ende is
the husband of the Company's Secretary, Sandra Ende.
Scott Osias has been the Vice President of Sales and Marketing of the
Company since October 1992. Mr. Osias has been employed in the retail automotive
industry for 23 years and was the principal owner and operator of Automotive
Discount Centers, a 14 store retail automotive parts store chain in New York
from 1973 to 1988. Prior to joining the Company, from 1988, Mr. Osias was
General Manager of Prime Automotive Warehouse, a warehouse distribution
automotive parts chain.
Marc J. Ruskin, CPA, has been the Chief Financial Officer of the Company
since August 1995. He has 19 years of financial experience, including a combined
five years at Ernst & Young LLP and Deloitte & Touche LLP. From 1993 until he
joined the Company, Mr. Ruskin was Vice President of Finance and Administration
for the Nason Group LLC, a Connecticut company formed to purchase and develop
real estate. From 1991 to 1993, Mr. Ruskin was the Chief Financial Officer of
REBO Group Incorporated, a New York based international corporation specializing
in the research, development and production of high definition television. Mr.
Ruskin was Vice President of Finance and Administration of Kaufman Astoria
Studios, a company specializing in film/television and real estate management,
from 1982 to 1991. Mr. Ruskin holds an MBA from the University of Bridgeport.
Sandra Ende has been a Director of the Company since July 1992. She has
been employed by Sanyo Automotive since its inception in June 1976 in various
capacities including bookkeeper, Personnel Manager, Director of Marketing and
Office Manager. Ms. Ende is the wife of the Company's President, Mr. Joseph
Ende.
ITEM 6. EXECUTIVE COMPENSATION.
The following table sets forth all compensation awarded to, earned by, or
paid for all services rendered to the Company, a small business issuer, during
the years ended December 31, 1995, 1994 and 1993, by the Company's Chief
Executive Officer, who was the Company's only executive officer ("Named
Executive Officers") whose total compensation exceeded $100,000.
17
<PAGE>
Summary Compensation Table
--------------------------
Long-Term
Annual Compensation Compensation
- - --------------------------------------------------------------------------------
Name and Restricted Stock
Principal Salary Bonus Other Annual Award(s)
Position Year ($) ($) Compensation ($) ($)
(a) (b) (c) (d) (e) (f)
- - --------------------------------------------------------------------------------
Joseph Ende, 1995 $127,500 -0-(1) -0- 180,000(2)
Chief Executive
Officer and
Director
1994 $130,000 -0- -0-(3) 120,000(4)
1993 $108,000 $102,745 -0- -0-
(1) Mr. Ende will receive a bonus of $50,000 for each of the six-month periods
ending June 30 and December 31 during the three-year term of his employment
agreement entered into on July 31, 1995, provided the Company reports
operating income before taxes, but after payment of such bonus for the
applicable six-month period. No bonus was issued for the period ended
December 31, 1995.
(2) On July 31, 1995, Mr. Ende was granted, subject to stockholder
ratification, non-qualified stock options under the Company's 1995 Stock
Option Plan, to purchase 180,000 shares of Common Stock at $3.00 per share
terminating on July 30, 2000. See "1995 Employee Stock Option Plan" below
and Item 7. "Certain Relationships and Related Transactions."
(3) Excludes $7,795,839 and $2,314,000 non-cash compensatory expenses related
to the release of escrow shares, the exercise of warrants, the conversion
of the Series A Preferred Stock and the payment of dividends on the Series
A Preferred Stock during 1992 and 1994, respectively, pursuant to the terms
of the Reverse Merger Agreement. See Item 7. "Certain Relationships and
Related Transactions."
(4) The Company cancelled 120,000 options, exercisable at $20 per share,
previously granted to Joseph Ende, and re- granted such options to Mr. Ende
at an exercise price of $2.50 per share. See "1994 Employee Stock Option
Plan, below."
18
<PAGE>
Options/SAR Grants in Last Fiscal Year
--------------------------------------
Potential Realizable
Value at Assumed
Annual Rates of Stock
Individual Grants Price Appreciation
For Option Term
- - --------------------------------------------------------------------------------
Percent of
Number of Total
Securities options/SARs
underlying Granted to Exercise or
options/SARs Employees in Base Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date 5% ($) 10%
(a) (b) (c) (d) (e) (f) (g)
- - --------------------------------------------------------------------------------
Joseph Ende 180,000 96.7% $3.00 12/15/00 $149,400 $329,400
Marc Ruskin 6,000 3.3% $2.25 9/4/00 $3,729 $8,220
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY End Option/SAR Values(1)
---------------------------------------------------
Number of
Securities Value of
Underlying Unexercised in-
Unexercised the-Money
Options/SARs at Options/SARs at
Shares Acquired Fiscal Year-End Fiscal Year-End
Name on Exercise (#) Value Realized (#) Exercisable/ ($) Exercisable/
(a) (b) ($) Unexercisable Unexercisable
(c) (d) (e)
- - --------------------------------------------------------------------------------
Joseph Ende -0-(1) -0- 80,000/40,000 -0-
(1) Does not include the exercise of 41,666 Class F Warrants or the issuance of
1,000,000 shares of Common Stock upon the conversion of the Series A
Preferred Stock by Mr. Ende during 1994 pursuant to the terms of the
Reverse Merger Agreement. See Item 7. "Certain Relationships and Related
Transactions."
Employment Agreements
- - ---------------------
On July 31, 1995, the Company entered into a three-year employment
agreement with Joseph Ende, the President and Chief Executive Officer of the
Company. The agreement automatically renews for consecutive one-year periods
unless terminated on thirty days' prior written notice by either party. In 1995,
Mr. Ende received a base annual salary of $127,500, with a bonus at the
discretion of the Board of Directors. Mr. Ende is also entitled to a performance
bonus of $50,000 for each of the six-month periods ending June 30 and December
31 during the term of the
19
<PAGE>
agreement, provided the Company reports operating income before taxes, but after
payment of such bonus for the applicable six-month period. Such bonus will not
accrue in the event the income level is not met. Mr. Ende has agreed not to
compete with the Company during the term of, and for a one-year period from the
date of termination of, his employment with the Company.
On November 24, 1994, the Company entered into a three-year employment
agreement with Scott Osias, Vice President of Sales and Marketing. The agreement
automatically renews for consecutive one-year periods unless terminated on
thirty days' prior written notice by either party. In 1995, Mr. Osias is
receiving a base annual salary of $52,000, with a bonus to be determined by the
Board of Directors. Mr. Osias has agreed not to compete with the Company during
the term of, and for a one-year period from the date of termination of, his
employment with the Company.
Employee Stock Bonus Plan
- - -------------------------
In April 1995, the Company adopted an Employee Stock Bonus Plan which
enables all full-time permanent employees to purchase shares of Common Stock at
85% of its then fair market value through payroll deductions. There are 100,000
shares available for sale under such plan without limitation as to the number of
shares which may be purchased by any employee. These shares may be newly-issued
shares or which may be purchased by the Company in the open market. An aggregate
of 3,064 shares have been purchased under such plan as of December 31, 1995.
1994 Employee Stock Option Plan
- - -------------------------------
The Company has established the 1994 Employee Stock Option Plan (the "1994
Plan"). The 1994 Plan is intended to provide the employees, directors,
independent contractors and consultants of the Company with an added incentive
to continue their services to the Company and to induce them to exert their
maximum efforts toward the Company's success. The 1994 Plan provides for the
grant of options to qualified directors, employees (including officers),
independent contractors and consultants of the Company to purchase an aggregate
of 300,000 shares of Common Stock. Options to purchase no more than 120,000
shares of Common Stock may be granted to any one person in any two-year period.
The 1994 Plan is currently administered by the Board of Directors. The Board
determines, among other things, the persons to be granted options under the 1994
Plan, the number of shares subject to each option and the option price.
The 1994 Plan allows the Company to grant incentive stock options ("ISOs"),
as defined in Section 422(b) of the Internal Revenue Code of 1986, as amended
(the "Code"), Non-Qualified Stock Options ("NQSOs") not intended to qualify
under Section 422(b) of the Code and Stock Appreciation Rights ("SARs";
collectively, with ISOs and NQSOs referred to as "Options") at any time within
10 years from the date the 1994 Plan was adopted. The exercise price of ISOs may
not be less than the fair market value of the Common Stock on the date of grant,
provided that the
20
<PAGE>
exercise price of ISOs granted to an optionee owning more than 10% of the
outstanding Common Stock may not be less than 110% of the fair market value of
the Common Stock on the date of grant. In addition, the aggregate fair market
value of stock with respect to which ISOs are exercisable for the first time by
an optionee during any calendar year shall not exceed $100,000. Options may not
have a term exceeding ten years, except that ISOs granted to an optionee owning
more than 10% of the outstanding Common Stock may not have a term of more than
five years and ISOs must be granted to, and exercised by, employees of the
Company (including officers). Options are not transferable, except upon the
death of the optionee.
Since the 1994 Plan's adoption, ISOs to purchase 258,000 shares of Common
Stock have been granted (of which options to purchase 123,000 shares have
terminated and are available for reissuance under the 1994 Plan), and no NQSOs
or SARs have been granted under the 1994 Plan. Options to purchase 165,000
shares of Common Stock remain reserved for grant under the 1994 Plan. The
following chart sets forth in further detail, for options outstanding as of the
date hereof, the amount of options granted, the options vested, the exercise
price thereof, the number of options exercised and the expiration dates thereof.
# of Options # of Options # of Options
Granted Vested Exercised Exercise Price Expiration Date
- - --------------------------------------------------------------------------------
9,000 -0- -0- $2.50 11/1/99
120,000 80,000 -0- $2.50 12/15/99
6,000 -0- -0- $2.25 9/4/00
Scott Osias, Vice President of Sales and Marketing, was granted a stock
option under the 1994 Plan to purchase 9,000 shares of Common Stock at $2.50 per
share, which option becomes exercisable on a cumulative basis on January 1, 1997
to the extent of 4,000 shares; on January 1, 1998 for an additional 3,000
shares, and on January 1, 1999 until November 1, 1999 in full.
In December 1994, the Company cancelled options to purchase 120,000 shares
of Common Stock exercisable at $20 per share, previously granted to Joseph Ende
under the 1994 Plan, and re-granted such options to Mr. Ende at an exercise
price of $2.50 per share. Such options were re-granted because the Company's
Board of Directors determined that such re-grant would provide a greater
incentive to Mr. Ende. Of such options, 80,000 are currently exercisable and the
remaining 40,000 are exercisable in two installments in December 1996.
Mark J. Ruskin, Chief Financial Officer, was granted a stock option under
the 1994 Plan to purchase 6,000 shares of Common Stock at $2.25 per share, which
option becomes exercisable on a cumulative basis on September 5, 1997 to the
extent of 2,000 shares; on September 5, 1998 to the extent of an additional
2,000 shares, and on September 5, 1999 until September 4, 2000 in full.
21
<PAGE>
1995 Employee Stock Option Plan
- - -------------------------------
In July 1995, the Company's Board of Directors adopted the 1995 Employee
Stock Option Plan (the "1995 Plan"). The 1995 Plan provides for the grant of
ISOs, NQSOs and SARs to purchase an aggregate of 300,000 shares of Common Stock.
The provisions of the 1995 Plan are otherwise identical to the above-stated
terms of the 1994 Plan.
Since the adoption of the 1995 Plan, no ISOs or SARs have been granted, and
NQSOs to purchase 180,000 shares of Common Stock have been granted to Joseph
Ende. Options to purchase 120,000 shares of Common Stock remain available for
grant under the 1995 Plan. The following chart sets forth in further detail, as
of the date hereof, the amount of the options granted, the options vested, the
exercise price thereof, the number of options exercised and the expiration dates
thereof.
# of Options # of Options # of Options
Granted Vested Exercised Exercise Price Expiration Date
- - --------------------------------------------------------------------------------
180,000 -0- -0- $3.00 7/30/00
On July 31, 1995, Mr. Ende was granted, subject to stockholder
ratification, NQSOs under the 1995 Plan, to purchase 180,000 shares of Common
Stock at $3.00 per share terminating on July 30, 2000. The option becomes
exercisable on a cumulative basis in one-third increments on July 31, 1997, 1998
and 1999. The option will become immediately exercisable, in full, upon a change
in control (as defined in the 1995 Plan) of the Company. See Item 7. "Certain
Relationships and Related Transactions."
Repricing of Options/SARs
-------------------------
Market Exercise Length of
Number of Price of Price of Original
Securities Stock at Stock at Option Term
Underlying Time of Time of Remaining
Options/SARs Repricing or Repricing or New at Date of
Repriced or Amendment Amendment Exercise Repricing or
Name Date Amended (#) ($) ($) Price ($) Amendment
(a) (b) (c) (d) (e) (f) (g)
- - --------------------------------------------------------------------------------
Joseph Ende 12/16/94 120,000 $2.50 $20.00 $2.50 5 years
Compensation Committee Interlocks and Insider Participation
- - -----------------------------------------------------------
The Company presently has no compensation committee or other board
committee performing equivalent functions. The following officers and employees
of the Company participated in
22
<PAGE>
deliberations of the Company's Board of Directors concerning executive officer
compensation: Joseph Ende, President and Chief Executive Officer and Marc
Ruskin, Chief Financial Officer.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In connection with the Reverse Merger, the Company and Mr. Ende entered
into a Reverse Merger Agreement, as amended, which provided for the issuance of
additional shares of Common Stock to Mr. Ende upon the conversion or exercise of
convertible preferred stock and warrants, and the forfeiture to the Company of
certain shares of Common Stock held by Mr. Ende, depending upon whether or not
certain earnings levels were achieved by the Company during each of the three
years (and during the three-year period in the aggregate) ended December 31,
1994. Pursuant to the Reverse Merger Agreement, the Company issued to Mr. Ende
Class D, Class E and Class F warrants to purchase an aggregate of 125,000 shares
of the Common Stock at an exercise price of $.40 per share, provided that the
Company earned pre-tax operating income in the amount of $375,000, $750,000 and
$1,000,000, for the years ended December 31, 1992, 1993 and 1994, respectively.
For the year ended December 31, 1992, the Company earned pre-tax operating
income (exclusive of any noncash compensatory charges against earnings arising
from release of escrowed shares, the conversion of the Series A Preferred Stock
and the exercise of Class D Warrants) of more than $375,000. As a result,
375,000 shares of Common Stock previously issued to Joseph Ende, in connection
with the Reverse Merger were released to him under the terms of the Reverse
Merger Agreement. In addition, Mr. Ende exercised all 41,666 Class D Warrants
(those relating to the 1992 earnings) in consideration for the reduction of the
Company's outstanding note payable to Mr. Ende of $16,667. Total noncash
compensatory charges resulted in a noncash expense to the Company for the year
ended December 31, 1992 of $7,795,839.
The Company earned pre-tax operating income of less than $750,000 for the
year ended December 31, 1993. As a result, Joseph Ende was required under the
Reverse Merger Agreement to return an aggregate of 250,000 shares of escrowed
Common Stock to the treasury of the Company and was unable to exercise Class E
warrants to purchase 41,666 shares of Common Stock. Mr. Ende disputed this
forfeiture of shares, but waived any claims he had against the Company in
exchange for the July 1995 grant, subject to stockholder ratification, of an
option to purchase 180,000 shares of Common Stock under the 1995 Plan. See Item
6. "Executive Compensation - 1995 Employee Stock Option Plan."
The Company earned pre-tax operating income of more than $1,000,000 for the
year ended December 31, 1994. As a result, under the terms of the Reverse Merger
Agreement, an aggregate of 125,000 escrowed shares were released to Mr. Ende and
Mr. Ende exercised all Class F Warrants (those relating to 1994 earnings) in
consideration of payment of $16,667.
23
<PAGE>
In connection with the Reverse Merger, Mr. Ende received 2,000,000 shares
of Series A Preferred Stock of the Company in exchange for existing debt of
$507,500 owed by Sanyo Automotive to Mr. Ende. Under the terms of the Reverse
Merger Agreement, the Series A Preferred Stock was converted into 1,000,000
shares of Common Stock as of April 30, 1995, since the Company had revenues of
at least $25,000,000 for fiscal 1994 and the Company had cumulative pre-tax
operating income for the years ended December 31, 1992, 1993 and 1994 of at
least $2,125,000.
As of December 31, 1995, Joseph Ende had personally guaranteed payment of
up to an aggregate of $9,000,000 of the Company's indebtedness under its credit
facilities. In February 1996, the bank limited Mr. Ende's guarantee to
$1,000,000. See Item 6. "Executive Compensation - Employment Agreements" for a
description of the terms of current Employment Agreements between the Company
and Joseph Ende, President, and Scott Osias, Vice President of Sales and
Marketing.
In January 1995, Joseph Ende purchased 386,000 shares of Common Stock and
two non-affiliated persons purchased 75,000 and 131,330 shares, respectively,
from the Brennan Trusts as described under Item 9. "Market Price of and
Dividends on the Registrant's Common Equity and Related Stockholder Matters."
In March 1996, the Company amended its Certificate of Incorporation to
authorize 1,000 shares of Series B Preferred Stock, $.001 par value per share,
all of which shares are held by Joseph Ende. See Item 4. "Security Ownership of
Certain Beneficial Owners and Management."
See "Item 3. Properties" for a description of a lease between Mr. Ende and
the Company.
ITEM 8. LEGAL PROCEEDINGS.
On December 28, 1995, the Company filed a complaint against 18, Inc.,
Twenty, Inc., Twenty-One, Inc., Thirty, Inc., Forty, Inc., Dori Avishay and
Israel Goldman in the Supreme Court of the State of New York, County of Queens,
claiming that the defendants owe the Company $985,943.91, including interest,
for goods sold and delivered and account stated, and demanding punitive damages
in the amount of $1,000,000. The defendants have answered the complaint, denied
the allegations and counterclaimed against the Company, as well as Joseph Ende,
the Company's President for fraud in the amount of $5 million of damages and $20
million of punitive damages. The Company believes the counterclaim is without
merit and intends to vigorously defend this lawsuit.
The Teamsters Union representing employees at the Company's Long Island
City, New York warehouse has made a claim for approximately $64,000 in unpaid
health benefits, interest and audit expenses. The Company is disputing this
claim.
24
<PAGE>
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
(a) Market Information
The Common Stock is traded in the over-the-counter market under the symbol
BHQU. Until August 8, 1995, the Common Stock traded under the symbol SNYO.
Quotations of the prices of stock trades are available on the Electronic
Bulletin Board maintained by the National Association of Securities Dealers,
Inc. The Company has applied to have the Common Stock listed on NASDAQ, and is
awaiting determination.
The following table sets forth the high and low bid and asked quotations
for the Common Stock for each quarter of the last two fiscal years and the
subsequent interim period, as reported by the National Quotation Bureau, Inc.
Such quotations represent prices in dollars between dealers, do not include
retail mark-ups, mark-downs or commissions, and do not necessarily represent
actual transactions. All prices have been adjusted to reflect the Company's 1993
one-for- two reverse split and its 1995 one-for-ten reverse split.
Bid Prices Asked Prices
High Low High Low
---- --- ---- ---
1994
----
First Quarter $20.00 $10.00 $55.00 $40.00
Second Quarter $30.00 $20.00 $45.00 $25.00
Third Quarter $20.00 $ 1.25 $35.00 $ 5.00
Fourth Quarter $ 3.75 $ 7.50 $ 7.50 $ 2.50
1995
----
First Quarter $ 8.13 $ 1.56 $10.60 $ 2.50
Second Quarter $ 7.50 $ 2.50 $ 8.13 $ 3.43
Third Quarter $ 3.50 $ 2.50 $ 4.00 $ 3.75
Fourth Quarter $ 5.25 $ 2.75 $ 6.00 $ 3.38
1996
----
First Quarter $ 3.50 $ 2.75 $ 4.00 $ 3.38
Second Quarter $ 3.50 $ 3.38 $ 4.00 $ 4.00
(Through April 30, 1996)
25
<PAGE>
As of April 24, 1996, the closing bid and asked prices of the Common Stock
were $3.50 and $4.00 per share, respectively.
On December 21, 1992, the United States Securities and Exchange Commission
(the "Commission") suspended trading in the Company's securities from December
21, 1992 through January 5, 1993. The Commission advised the Company that it
initiated this suspension because it appeared to the Commission that there was a
lack of current and accurate information concerning the identity of (i) persons
who may have acquired undisclosed control of the Company and (ii) persons having
beneficial ownership of the Company's securities. The Company was advised after
December 21, 1992, that at the time of the Reverse Merger, the beneficiaries of
certain trusts, which had beneficial ownership of approximately 23% of the
Company's Common Stock through the potential exercise of Class A, Class B and
Class C Warrants, were the three sons of Robert E. Brennan, the former President
of First Jersey Securities, Inc. (the "Brennan Trusts") and that Mr. Brennan's
beneficial ownership of the Common Stock on a fully diluted basis was
approximately 38% of the Common Stock. On January 8, 1993, trading in the
Company's securities was resumed.
During 1993 and 1994, the Company's President and Principal Stockholder did
not sell any shares of Common Stock and there were no developments or changes in
the Company's operations which would have accounted for the substantial decrease
in the market price of the Common Stock as disclosed under the above table.
However, certain broker-dealers, which were active market makers in the Common
Stock and which were alleged by the Commission to be under the control of Robert
E. Brennan, were investigated by the Commission for, among other things, trading
in the Company's securities and ultimately ceased doing business.
At such time, Management of the Company believed that the continued
beneficial ownership of the Common Stock by the Brennan Trusts had resulted in
the Company's failure to obtain a listing of the Common Stock on NASDAQ and
other adverse effects on the Company and its operations. Management further
believed that it was in the best interests of the Company to repurchase such
shares from the Brennan Trusts. The Company's lender would not lend the Company
the funds necessary to purchase shares of Common Stock from the Brennan Trusts,
but agreed to loan the money to Mr. Ende personally to purchase the shares. In
January 1995, Joseph Ende purchased 386,000 shares of Common Stock using the
proceeds of such bank loan, and William Orzolek and Robert W. Green, two
non-affiliated persons, purchased 75,000 and 131,330 shares, respectively, from
the Brennan Trusts.
(b) Stockholders of Record
-----------------------
As of May 22, 1996, there were 518 holders of record of the Common Stock
and 1 holder of record of the Series B Preferred Stock. The Company reasonably
believes that there are in excess of 5,000 beneficial owners, including the
beneficial owners of Common Stock currently held in the name of depository
institutions.
26
<PAGE>
(c) Dividend Policy
----------------
To date, no cash dividends have been paid on the Common Stock. On April 30,
1995, a dividend in the amount of $112,730 was declared, but not paid, to the
Company's President on the Series A Preferred Stock issued in connection with
the Reverse Merger. On April 30, 1995, all of the then outstanding shares of
Series A Preferred Stock were converted into Common Stock in accordance with
their terms as a result of the attainment by the Company of certain performance
levels. Of the $112,730 in accrued dividends, $50,000 was exchanged for the
1,000 shares of Series B Preferred Stock issued to the Company's President. See
Item 2. "Financial Information Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Item 7. "Certain Relationships and
Related Transactions."
No cash dividends on the Common Stock are contemplated in the foreseeable
future, and the Company presently intends to retain all of its earnings for the
future operations and growth of the business. In addition, the Company's loan
agreement with its senior lender prohibits the payment of dividends if such
payment would result in a breach of the loan agreement.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
(a) 1. Between February 7, 1996 and May 10, 1996, an aggregate of 3,064 shares
of Common Stock were purchased by and issued to employees of the Company
pursuant to the Company's Employee Stock Bonus Plan.
2. On March 28, 1996, 1,000 shares of Series B Preferred Stock were issued
to Joseph Ende in consideration for services rendered.
3. On January 5, 1996, an aggregate of 538 shares of Common Stock were
issued to two employees of the Company in consideration for services rendered.
4. On November 8, 1995, an aggregate of 2,366 shares of Common Stock were
purchased by and issued to 18 employees of the Company pursuant to the Company's
Employee Stock Bonus Plan.
5. On September 5, 1995, the Company granted to Marc J. Ruskin options to
purchase 6,000 shares of Common Stock at an exercise price of $2.25 per share
for services rendered.
6. On July 31, 1995, the Company granted to Joseph Ende, subject to
stockholder ratification, options to purchase 180,000 shares of Common Stock at
an exercise price of $.30 per share.
27
<PAGE>
7. On May 19, 1995, 1,000,000 shares of Common Stock were issued to Joseph
Ende upon conversion of 2,000,000 shares of Preferred Stock issued to Mr. Ende
in connection with the acquisition of Sanyo Automotive.
8. On May 19, 1995, 41,666 shares of Common Stock were issued to Joseph
Ende upon the exercise of all of the Company's Class F Warrants for an aggregate
consideration of $16,667.
9. On December 16, 1994, the Company regranted to Joseph Ende options to
purchase 120,000 shares of Common Stock at an exercise price of $2.50 per share.
10. On December 7, 1994, the Company granted to Gregory Farrell options to
purchase 3,000 shares of Common Stock at an exercise price of $2.50 per share,
which options have been terminated.
11. On November 21, 1994, the Company granted to Scott Osias options to
purchase 9,000 shares of Common Stock at an exercise price of $2.50 per share.
12. On October 25, 1994, 41,666 shares of Common Stock were issued to
Joseph Ende upon the exercise of all of the Company's Class D Warrants for an
aggregate consideration of $16,667.
13. On October 25, 1994, 1,100 shares of Common Stock were issued to Ilan
Pacholder in consideration for services rendered.
14. On March 30, 1994, 348,750 shares of Common Stock were issued to
certain warrantholders upon the exercise of the Company's Class A Warrants, at
an exercise price of $1.80 per share, as follows:
Number of Warrants
Name Exercised Number of Shares
- - --------------------------------------------------------------------------------
The Christopher Trust 2,241,100 112,055
REB Trust 1,841,100 92,055
KAB Trust 1,841,100 92,055
Ruth Greer 100,000 5,000
Alvin Abrams 951,700 47,585
15. On March 30, 1994, 348,750 shares of Common Stock were issued to
certain warrantholders upon the exercise of the Company's Class B Warrants, at
an exercise price of $2.40 per share, as follows:
28
<PAGE>
Number of Warrants
Name Exercised Number of Shares
- - --------------------------------------------------------------------------------
The Christopher Trust 2,241,100 112,055
REB Trust 1,841,100 92,055
KAB Trust 1,841,100 92,055
Ruth Greer 100,000 5,000
Estelle Abrams 951,700 47,585
16. On March 30, 1994, 5,000 shares of Common Stock were issued to Ruth
Greer upon the exercise of 100,000 of the Company's Class C Warrants, at an
exercise price of $5.00 per share.
17. On January 1, 1994, 700 shares of Common Stock were issued to Morton
Haft in consideration for services rendered.
18. On May 23, 1993, 100 shares of Common Stock were issued to each of five
employees of the Company in consideration for services rendered, for an
aggregate of 500 shares issued.
(b) There were no underwriters with respect to any of the above transactions.
The persons or the class of persons to whom the securities were sold are as
indicated under each numbered item.
(c) The Company received aggregate consideration for the above securities as
indicated under each numbered item.
(d) The exemption for the issuance of the 1,000,000 shares of Common Stock upon
conversion of shares of Preferred Stock is claimed under Section 3(a)(9) of the
Securities Act; the exemption for the grant and exercise of all warrants and
options listed above is claimed under Section 4(2) of the Securities Act; and
the exemption for the issuance of the shares in subsections a(1), a(2), (a)(3),
(a)(4), (a)(12), (a)(16) and (a)(17), respectively, is claimed under Section
4(2) of the Securities Act.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
Common Stock
- - ------------
The holders of shares of Common Stock are entitled to one vote for each
share held of record on all matters to be voted on by stockholders. The holders
of shares of Common Stock do not have cumulative voting rights for the election
of directors and, accordingly, the holders of the Common Stock voting for the
election of directors are able to elect less than the majority of all directors.
There are no preemptive, subscription, conversion or redemption rights
pertaining to
29
<PAGE>
the shares of Common Stock. Holders of shares of Common Stock are entitled to
receive dividends when, as and if declared by the Board of Directors from funds
legally available therefor, and to share ratably in the assets of the Company
available upon liquidation, dissolution or winding up of the Company, subject to
any superior rights of the holders of the Series B Preferred Stock. All of the
3,416,197 shares of Common Stock outstanding as of April 26, 1996, are duly
authorized, validly issued, fully paid and non-assessable.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Except to the extent hereinafter set forth, there is no statute, charter
provision, by-law, contract or other arrangement under which any controlling
person, director or officer of Brake Headquarters U.S.A., Inc., a Delaware
corporation (the "Company") is insured or indemnified in an manner against
liability which he may incur in his capacity as such.
Article SEVENTH of the Company's Certificate of Incorporation and Article
VI of the Company's By-laws provide for the indemnification of officers and
directors to the fullest extent allowed by the Delaware General Corporation Law
(the "DGCL").
The DGCL provides, in part, that no director shall be personally liable to
a corporation or its stockholders for monetary damages for any breach of
fiduciary duty by such director as a director, except:
(i) for breach of the director's duty of loyalty to the corporation or its
stockholders;
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
(iii) pursuant to Section 174 of the DGCL; or
(iv) for any transaction from which the director derived an improper
personal benefit.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's financial statements are included in a separate section of
this registration statement following Item 15.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On June 8, 1994, the Board of Directors of the Company dismissed Borek
Stockel & Marden ("BS&M") as the Company's certified public accountants. The
Board of Directors took such action following the indictment (concerning matters
unrelated to the Company) of the partner of BS&M
30
<PAGE>
who handled the Company's accounts. During the two years and the interim period
preceding such termination, (a) the auditors' report on the financial statements
of the Company did not contain an adverse opinion or a disclaimer of opinion,
and were not qualified or modified as to uncertainty, audit scope or accounting
principles and (b) there were no disagreements with BS&M as to auditing
principles or practices, financial statements and disclosure or auditing scope
or procedure.
The Board of Directors of the Company then voted to retain the firm of
Goldstein Golub Kessler & Company, P.C. ("GG&K"). Prior to its appointment, the
Company did not consult with GG&K regarding the application of any accounting
principle, the type of opinion that would be rendered on the Company's financial
statements, or any matter that was the subject of disagreement.
On December 28, 1995, the Board of Directors of the Company dismissed GG&K
as the Company's certified public accountants. GG&K's report on the financial
statements for the year ended December 31, 1994 did not contain an adverse
opinion or a disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles. Through December 28, 1995,
there were no disagreements on any matter of auditing principles or practices,
financial statements and disclosure, or auditing scope or procedure with GG&K.
The Board of Directors then voted to retain the firm of Deloitte & Touche
LLP ("D&T") to audit the Company's financial statements for the year ended
December 31, 1995. Neither the Company nor anyone on its behalf consulted with
D&T on any accounting principle, the type of opinion that would be rendered on
the Company's financial statements, or any matter that was the subject of
disagreement prior to its engagement.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
Index to Consolidated Financial Statements and Exhibits Page No.
------------------------------------------------------- --------
Independent Auditors' Reports.........................................F-1 to F-3
Balance Sheets as of
December 31, 1995 and 1994..................................................F-4
Statements of Operations for the
years ended December 31, 1995, 1994 and 1993................................F-5
Statements of Shareholders' Equity
for the years ended December 31, 1995, 1994 and 1993........................F-6
Statements of Cash Flows for the
years ended December 31, 1995, 1994 and 1993................................F-7
Notes to Financial Statements........................................F-8 to F-15
31
<PAGE>
Balance Sheets as of March 31, 1996 (Unaudited)
and December 31, 1995 (Audited)............................................F-16
Statements of Income for the three months ended
March 31, 1996 and March 31, 1995 (Unaudited)..............................F-17
Statements of Cash Flows for the three months ended
March 31, 1996 and March 31, 1995 (Unaudited)..............................F-18
Notes to Financial Statements (Unaudited)...........................F-19 to F-20
32
<PAGE>
Exhibit No. Exhibit
3.1 Certificate of Incorporation of the Company,
as amended and restated.(5)
3.2 By-laws of the Company.(1)
4.1 Form of Common Stock Certificate.(1)
4.2 1994 Employee Stock Option Plan.(2)
4.3 1995 Employee Stock Option Plan.(5)
4.4 Form of Stock Option Agreement.(5)
4.5 Employee Stock Bonus Plan.(5)
10.1 Unlimited Guaranty made by Joseph Ende on behalf of Sanyo Automotive
Parts, Ltd. in favor of Bank Leumi dated April 25, 1990.(2)
10.2 Lease Agreement between the Company and Joseph Ende
dated July 1, 1992.(2)
10.3 Loan Agreement between Sanyo Automotive Parts, Ltd. and the
City of Fairfield dated November 9, 1993.(2)
10.4 Grid Promissory Note in the amount of $2,600,000 made by Sanyo
Automotive Parts, Ltd. to Bank Leumi Trust Company of New York
dated April 6, 1994.(2)
10.5 Employment Agreement between the Company and Scott Osias
dated November 24, 1994.(4)
10.6 Grid Promissory Note in the amount of $3,300,000 made by Sanyo
Automotive Parts, Ltd. to Bank Leumi Trust Company of New York
dated December 8, 1994.(4)
10.7 Amendment dated April 17, 1995 to Agreement and Plan of
Reorganization by and among Unified Capital, Inc.
(now know as Sanyo Industries, Inc.), Sanyo Automotive Parts, Ltd.
and Joseph Ende dated July 9, 1992.(4)
10.8 Loan Agreement between Sanyo Automotive Parts, Ltd., The Fairfield
National Bank and Illinois Development Authority dated
January 13, 1995.(4)
33
<PAGE>
10.9 Employment Agreement between the Company and Joseph Ende dated
July 31, 1995.(5)
10.10 Promissory Note in the principal amount of $258,000 made by Brake
Headquarters U.S.A., Inc. to Dean Petkanas dated
November 17, 1995.(5)
10.11 Mortgage between Sanyo Automotive Parts, Ltd. and Fairfield National
Bank dated December 8, 1995.(5)
10.12 Promissory Note in the principal amount of $390,000 made by Sanyo
Automotive Parts, Ltd. to Fairfield National Bank dated
December 8, 1995.(5)
10.13 Second Mortgage between Sanyo Automotive Parts, Ltd. and the
Illinois Development Finance Authority ("IDFA") dated
December 7, 1995.(5)
10.14 Loan Agreement between Sanyo Automotive Parts, Ltd. and IDFA dated
December 11, 1995.(5)
10.15 Promissory Note in the principal amount of $240,000 made by Sanyo
Automotive Parts, Ltd. to IDFA dated December 11, 1995.(5)
10.16 Absolute, Unconditional and Continuing Guaranty of Payment made by
Brake Headquarters U.S.A., Inc. in favor of IDFA dated
December 11, 1995.(5)
10.17 Loan Agreement between Sanyo Automotive Parts, Ltd. and the Chase
Manhattan Bank, N.A. dated February 22, 1996.(5)
10.18 Note in the principal amount of $5,000,000 made by Sanyo Automotive
Parts, Ltd., to the Chase Manhattan Bank, N.A. dated
February 22, 1996.(5)
10.19 Security Agreement between Sanyo Automotive, Ltd. and the Chase
Manhattan Bank, N.A. dated February 22, 1996.(5)
10.20 Corporate Guaranty made by Brake Headquarters U.S.A., Inc. in favor
of the Chase Manhattan Bank, N.A. dated February 22, 1996.(5)
10.21 Individual Guaranty made by Joseph Ende on behalf of Sanyo
Automotive Parts, Ltd. in favor of the Chase Manhattan Bank, N.A.
dated February 22, 1996.(5)
21.1 Subsidiaries of the Company.(5)
34
<PAGE>
(1) Incorporated by reference from the Company's Registration Statement on Form
S-18, No. 33- 30933-NY.
(2) Incorporated by reference from the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1993.
(3) Incorporated by reference from the Company's Current Report on Form 8-K
dated July 21, 1992 and as amended by Form 8 dated August 19, 1992 and
September 21, 1992.
(4) Incorporated by reference from the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1994.
(5) Incorporated by reference from the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1995.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, as amended, the registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
BRAKE HEADQUARTERS U.S.A., INC.
Dated: June 4, 1996 By: /s/ Joseph Ende
--------------------------
Joseph Ende
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Marc J. Ruskin
--------------------------
Marc J. Ruskin
Chief Financial Officer
(Principal FinancialOfficer)
36
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Brake Headquarters U.S.A., Inc.
We have audited the accompanying consolidated balance sheet of Brake
Headquarters U.S.A., Inc. and subsidiaries as of December 31, 1995, and the
related statements of operations, shareholders' equity, and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Brake Headquarters U.S.A., Inc. and
subsidiaries as of December 31, 1995, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
As discussed in Note 6 to the consolidated financial statements, the Company
commenced an action against a former customer to collect approximately $971,000
of accounts receivable. The defendant has filed a counterclaim against the
Company and the Company's President seeking compensatory and punitive damages.
The Company intends to vigorously pursue its claim against the defendant and has
denied the defendant's counterclaims. The ultimate outcome of such litigation
cannot presently be determined. Accordingly, no provision for any liability that
may result upon resolution of the counterclaim has been made in the accompanying
consolidated financial statements.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
April 8, 1996
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Brake Headquarters U.S.A., Inc.
We have audited the accompanying consolidated statements of operations,
shareholders' equity, and cash flows of Brake Headquarters U.S.A., Inc. and
subsidiaries for the year ended December 31, 1994. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Brake Headquarters U.S.A., Inc. and subsidiaries for the year ended December 31,
1994 in conformity with generally accepted accounting principles.
GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
New York, New York
February 8, 1995
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Brake Headquarters U.S.A., Inc.
We have audited the accompanying consolidated statements of operations,
shareholders' equity, and cash flows of Brake Headquarters U.S.A., Inc. and
subsidiaries for the year ended December 31, 1993. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Brake Headquarters U.S.A., Inc. and subsidiaries for the year ended December 31,
1993 in conformity with generally accepted accounting principles.
BOREK, STOCKEL & MARDEN
Port Chester, New York
May 30, 1996
F-3
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS
1995 1994
---- ----
Current Assets:
Cash $ 17,895 $ 11,991
Accounts receivable, less allowance for doubtful
accounts of $287,891 and $75,000 5,623,117 4,309,862
Inventory 7,873,131 6,439,616
Prepaid expenses and other current assets 387,767 417,805
Due from President 51,604 -
Deferred tax asset 345,345 122,678
---------------------------
Total current assets 14,298,859 11,301,952
Property and Equipment - net 921,120 324,769
Other Assets 276,315 310,422
---------------------------
Total Assets $ 15,496,294 $11,937,143
===========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable, accrued expenses and
other current liabilities $ 2,869,762 $ 2,156,690
Notes and acceptances payable 8,075,196 5,054,820
Current portion of long-term debt 65,038 57,667
Income taxes payable - 326,536
---------------------------
Total current liabilities 11,009,996 7,595,713
Note Payable - Shareholder - 37,063
Long-term Debt 630,494 179,406
---------------------------
Total liabilities 11,640,490 7,812,182
---------------------------
Commitments and Contingencies (see notes)
Shareholders' Equity:
Series A preferred stock - $.25 par value;
authorized 2,200,000 shares, 2,000,000 shares
issued in 1994 - 500,000
Common stock - $.001 par value; authorized 20,000,000
shares, issued and outstanding 3,416,197 and
2,621,467 shares 3,416 2,622
Additional paid-in capital 13,014,260 12,490,455
Accumulated deficit (9,161,872) (8,870,070)
Cumulative foreign currency translation adjustment - 1,954
---------------------------
Total shareholders' equity 3,855,804 4,124,961
---------------------------
Total Liabilities and Shareholders' Equity $ 15,496,294 $11,937,143
===========================
F-4
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994 1993
- - ----------------------- ---- ---- ----
<S> <C> <C> <C>
Sales $ 32,383,302 $ 26,129,165 $ 18,655,073
Less returns and allowances 1,919,572 1,034,692 938,050
--------- --------- -------
Net sales 30,463,730 25,094,473 17,717,023
Cost of goods sold 22,409,932 18,390,321 13,385,242
---------- ---------- ----------
Gross profit 8,053,798 6,704,152 4,331,781
--------- --------- ---------
Operating expenses:
Selling, general and administrative 7,238,924 5,198,689 3,961,772
Non-cash compensatory charges - 2,314,000 -
Settlement of litigation - 232,500 -
Public offering costs 248,000 - -
------- --------- ---------
7,486,924 7,745,189 3,961,772
--------- --------- ---------
Income (loss) from operations 566,874 (1,041,037) 370,009
------- ---------- -------
Other income (expense):
Interest expense (774,762) (520,602) (314,796)
Gain (loss) on foreign currency transactions 2,816 (12,270) 3,431
----- ------- -----
(771,946) (532,872) (311,365)
-------- -------- --------
Income (loss) before provision (benefit) for
income taxes (205,072) (1,573,909) 58,644
Provision (benefit) for income taxes (26,000) 395,000 17,457
------- ------- ------
Net income (loss) $ (179,072) $ (1,968,909) 41,187
============== ============== ======
Net loss per common and common equivalent share $ (0.06) $ (0.92) $ (0.00)
============== ============== ==============
Weighted average number of common and common
equivalent shares outstanding 3,058,968 2,188,414 2,618,321
========= ========= =========
</TABLE>
F-5
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Cumulative
Foreign Total
Additional Currency Share-
Preferred Stock Common Stock Paid-In Accumulated Translation -holders'
Shares Amount Shares Amount Capital Deficit Adjustment Equity
------ ------ ------ ------ ------- ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993 2,000,000 500,000 $ 1,875,500 1,875 8,634,785 (6,942,348) - 2,194,312
Net income - - - - - 41,187 - 41,187
Balance at December 31, 1993 2,000,000 500,000 1,875,500 1,875 8,634,785 (6,901,161) - 2,235,499
Release of 1994 escrow
shares to President - - - - 273,125 - - 273,125
Exercisability of Class F
warrants - - - - 74,375 - - 74,375
Escess common shares issued
upon conversion of preferred
stock - - - - 1,966,500 - - 1,966,500
Issuance of common stock in
connection with exercise of
Class D warrants - - 41,667 42 16,625 - - 16,667
Issuance of common stock for
cash in connection with
exercise of warrants - - 702,500 702 1,489,048 - - 1,489,750
Issuance of common stock for
services - - 1,800 2 35,998 - - 36,000
Net loss - - - - - (1,968,909) - (1,968,909)
Foreign currency translation
adjustment - - - - - - 1,954 1,954
- - ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 2,000,000 500,000 2,621,467 2,621 12,490,456 (8,870,070) 1,954 4,124,961
Conversion of preferred stock (2,000,000)(500,000) 1,000,000 1,000 499,000 - - -
Foreign currency translation
adjustment - - - - - - (1,954) (1,954)
Dividends declared - - - - - (112,730) - (112,730)
Issuance of common stock in
connection with exercise of
Class F warrants - - 41,666 42 16,625 - - 16,667
Employee Stock Bonus Plan - - 3,064 3 7,929 - - 7,932
Return of 1993 Escrow shares to
treasury and retirement of
such shares - - (250,000) (250) 250 - - -
Net loss - - - - - (179,072) - (179,072)
- - -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 -0- -0- 3,416,197 3,416 13,014,260 (9,161,872) -0- 3,855,804
====================================================================================================================================
F-6
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 28,526,134 $ 24,081,395 $ 16,477,707
Cash paid to suppliers and employees (29,740,631) (25,662,239) (17,600,199)
Interest paid (757,394) (495,357) (302,378)
Taxes paid (733,096) - (337,584)
-------- --------
Net cash used in operating activities (2,704,987) (2,076,201) (1,762,454)
---------- ---------- ----------
Cash flows used in investing activity-capitalexpenditures (852,431) (210,014) (135,999)
-------- -------- --------
Cash flows from financing activities:
Proceeds from common stock issuance 7,932 1,489,750 -
Net borrowings under notes and acceptances payable 3,020,376 637,416 1,899,791
Proceeds from issuance of long-term debt 630,000 182,757 86,466
Principal payments on long-term debt (21,032) (32,150) -
Principal payments on obligations under capital leases - (16,676) (50,468)
Loans to President (72,000) - (17,936)
------- -------
Net cash provided by financing activities 3,565,276 2,261,097 1,917,853
--------- --------- ---------
Effect of exchange rate changes on cash (1,954) 1,954 -
------ -----
Net increase (decrease) in cash 5,904 (23,164) 19,400
Cash at beginning of year 11,991 35,155 15,755
------ ------ ------
Cash at end of year $ 17,895 $ 11,991 $ 35,155
============== ============= ============
Reconciliation of net loss to net cash used in operating activities:
Net income (loss) $ (179,072) $ (1,968,909) $ 41,187
Adjustments to reconcile net loss to net cash used in
operating activities:
(Gain) loss on foreign currency transactions (2,816) 12,270 (22,042)
Depreciation and amortization 186,675 92,245 78,677
Provision for doubtful accounts 617,891 (60,906) 26,113
Deferred income tax benefit (154,000) (49,000) (23,059)
Non-cash compensatory charges - 2,314,000 -
Common stock issued for services - 36,000 -
Changes in assets and liabilities:
Accounts receivable (1,937,596) (596,741) (1,265,428)
Inventory (1,593,795) (707,601) (472,786)
Prepaid expenses and other current assets 28,438 (207,553) (133,838)
Other assets (51,766) (30,852) (151,273)
Accounts payable and accrued expenses 764,220 (1,235,690) 338,273
Income taxes payable (383,166) 326,536 (178,278)
-------- ------- --------
Net cash used in operating activities $ (2,704,987) $ (2,076,201) $ (1,762,454)
============== ============= ============
</TABLE>
Supplemental schedule of non-cash financing activities:
Common stock was issued in 1995 and 1994 in connection with the exercise of
Class F and D warrants, respectively, by an increase in the amount, due
from President of $16,667.
F-7
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. PRINCIPAL BUSINESS ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY - Brake Headquarters U.S.A., Inc. (formerly Sanyo Industries,
Inc.) and subsidiaries (the "Company") sells a complete line of brake system
parts and accessories primarily to retailers and other wholesalers. Revenue from
the sale of these products is recorded at the time the products are shipped.
During 1995, the Company closed its Canadian subsidiary and wrote-off
substantially all of its remaining assets and liabilities. This resulted in a
net gain of approximately $39,000.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of Brake Headquarters U.S.A., Inc. and its wholly-owned subsidiaries.
All intercompany balances and transactions have been eliminated in
consolidation.
INVENTORY - Inventory, consisting of brake system finished goods and
accessories, is stated at the lower of cost (first-in, first-out method) or
market.
DEPRECIATION - Depreciation of property and equipment is provided for by the
straight-line method over the estimated useful lives of the related assets (5 to
40 years). Leasehold improvements are amortized over the lesser of the term of
the respective lease or the estimated useful lives of the improvements (5 to 40
years).
INCOME TAXES - The Company recognizes deferred income tax assets and liabilities
for the expected future tax consequences of temporary differences between the
financial reporting basis and the tax basis of assets and liabilities.
CONCENTRATION OF CREDIT RISK - The Company's customer base consists primarily of
retailers and wholesalers of brake system replacement parts throughout North
America. On a geographic basis, no area has a disproportionate concentration of
credit risk. During the years ended December 31, 1995, 1994 and 1993, less than
10% of the Company's sales were derived from foreign customers. Although the
Company is directly affected by the well-being of the brake system replacement
parts industry, management does not believe significant credit risk exists at
December 31, 1995. During the year ended December 31, 1995, the Company had
sales to one customer that accounted for 17% of the Company's net sales. As of
December 31, 1995, the Company has an accounts receivable of approximately
$971,000 from a former customer. See Note 6.
STOCK SPLIT - In August 1995, the Company effected a 1 for 10 reverse split of
its common stock. In February 1993, the Company effected a 1 for 2 reverse split
of its common stock. All references in the accompanying consolidated financial
statements to the number of common shares and per share amounts have been
retroactively restated to reflect the reverse splits.
F-8
<PAGE>
Net loss per common and common equivalent share - Net loss per common and common
equivalent share is based on the weighted average number of common and common
equivalent shares (when dilutive) outstanding during the year computed in
accordance with the treasury stock method. Net loss used in the determination of
loss per share has been adjusted for preferred dividend requirements.
Contingently returnable shares are not considered outstanding for loss per share
unless all conditions for release have been attained.
MANAGEMENT ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported periods. Actual results could differ from those estimates.
PUBLIC OFFERING COSTS - The Company has postponed raising additional funds
through a secondary offering due to market conditions. The Company expensed
costs associated with the offering totaling $248,000 during 1995.
STOCK OPTIONS - In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," which will be effective for the Company beginning
January 1, 1996. SFAS No. 123 requires expanded disclosures of stock-based
compensation arrangements with employees and encourages (but does not require)
compensation cost to be measured based on the fair value of the equity
instrument awarded. Companies are permitted, however, to continue to apply APB
Opinion No. 25, which recognizes compensation cost based on the intrinsic value
of the equity instrument awarded. The Company will continue to apply APB Opinion
No. 25 to its stock based compensation awards to employees and will disclose the
required pro forma effect on net income and earnings per share.
Note 2. NOTES AND ACCEPTANCES PAYABLE
The Company has agreements with two banks to provide lines of credit, bankers'
acceptances and letters of credit. The maximum availability under these
agreements at December 31, 1995 was $9,000,000. The lines of credit and bankers'
acceptances bear interest at rates ranging from 3/4-1% per annum above the
bank's prime rate (8 1/2 % at December 31, 1995). The lines of credit expire at
various dates through June 30, 1996. In February 1996, the Company refinanced
and expanded by $1,000,000 one of its bank agreements. The Company currently has
total available credit of $10,000,000. The new 2 year agreement allows for
borrowings of up to $5,000,000 based upon levels of accounts receivable and
inventory. The other line of credit will be reviewed for renewal. The notes and
acceptances payable are collateralized by substantially all of the assets of the
Company and are partially guaranteed by the Company's President/majority
shareholder (the "President"). One of the agreements contains covenants which
require the maintenance of certain amounts of net worth and financial ratios. At
December 31, 1995, the Company had outstanding letters of credit of
approximately $28,000. In addition, during 1995, the Company obtained a $258,000
short-term loan from an individual which is due in August 1996, payable in cash
or in common stock at the option of the Company. The loan bears interest at 8%
per annum.
F-9
The outstanding balances are as follows:
1995 1994
---- ----
Lines of credit $4,030,000 $3,252,678
Bankers' acceptances 3,787,196 1,802,142
Short-term note payable 258,000 -
---------- ----------
$8,075,196 $5,054,820
========== ==========
Note 3. LONG-TERM DEBT
Long-term debt consists of the following:
1995 1994
---- ----
Note payable - economic development loan (a) $ 65,532 $ 86,564
First mortgage - bank (b) 390,000 -
Second mortgage - State Finance Authority (c) 240,000 -
Notes payable - business improvement loans (d) - 150,509
--------- ---------
695,532 237,073
Less current portion 65,038 57,667
--------- ---------
$ 630,494 $ 179,406
========= =========
(a) The economic development loan bears interest at 5% per annum and is payable
in monthly installments of $2,072 through November 1998. The note is
collateralized by certain property and equipment.
(b) The first mortgage, dated December 8, 1995, is payable to a bank, bears
interest at 7.36% per annum and is secured by the Company's Illinois
facility. This mortgage is being amortized over a ten year period in
monthly principal and interest installments of $4,602.
(c) The second mortgage, dated December 11, 1995, is payable to the Illinois
Development Finance Authority, bears interest at prime and is secured by
the Company's Illinois facility as well as a second lien on certain
equipment. This mortgage is payable in monthly installments of principal
and interest necessary to fully amortize the loan by January 1, 2005.
(d) Six business improvement loans from a Canadian bank bearing interest at the
rate of prime plus 1% (9.25% at December 31, 1994). Each note was payable
in 60 monthly installments ranging from $136 to $1,916. The notes were
repaid by the transfer of certain machinery and equipment to the lender.
F-10
<PAGE>
Aggregate maturities of long-term debt are as follows:
Year ending December 31,
1996 $ 65,038
1997 69,712
1998 70,556
1999 54,493
2000 59,000
Thereafter 376,733
----------
$ 695,532
Note 4. SHAREHOLDERS' EQUITY
Escrow Agreement - Pursuant to a business combination in 1992, the Company and
the President entered into an agreement for the issuance of 750,000 shares of
common stock held in escrow (the "Escrow Shares"). The escrow agreement, as
amended, provided for the Escrow Shares to be released upon the Company's
attainment of certain pre-tax income levels, as defined, for the years ended
December 31, 1992, 1993 and 1994. The President was also issued warrants to
purchase an aggregate of 125,000 shares (41,667 shares per year, warrant Classes
D, E, and F, respectively) of the Company's common stock at $.40 per share,
provided that the Company meets the same respective pre-tax income levels
described above. The attainment of the respective pre-tax income levels, which
result in the release of the Escrow Shares and exercisability of the warrants,
were deemed to be compensatory and resulted in a charge to operations equal to
(1) the fair market value of the Escrow Shares measured as of the last day in
the respective year in which the pre-tax income level was attained, and (2) the
fair market value of the shares to be issued upon the exercise of the warrants
measured as of the last day in the respective year in which the pre-tax income
level was attained less the exercise price to be paid. The charges related to
the release and issuance of these shares are not deductible for income tax
purposes.
During the year ended December 31, 1994, the 41,667 Class D warrants were
exercised by the President; in addition, a total of 375,000 shares were released
from escrow since the Company met the 1992 pre-tax income level. The Company did
not meet the 1993 pre-tax income level, and accordingly, 250,000 shares were
returned to the treasury of the Company and the Class E warrants were not
exercisable. Since the Company attained the 1994 pre-tax income levels, as
defined, 125,000 shares were released from escrow to the President and the
41,667 Class F warrants were exercised during 1995.
The President disputed the 1993 forfeiture of shares, but waived any claims he
had against the Company in exchange for the July 1995 grant of a non-qualified
stock option to purchase 180,000 shares of Common Stock under the 1995 Plan.
F-11
<PAGE>
On March 30, 1994, Class A, B and C warrants were exercised and converted into
common stock as follows:
Exercise
Price Number of
Per Warrants
Class Warrant Exercised Amount
------- --------- ------
A $.09 6,975,000 $627,750
B .12 6,975,000 837,000
C .25 100,000 25,000
--------- --------
14,050,000 $1,489,750
========== ==========
Since each warrant was convertible into one-twentieth share of common stock, the
number of common shares outstanding was increased by 702,500 shares of common
stock and additional paid-in-capital was increased by $702 and $1,489,048,
respectively.
COMMON STOCK - In August 1995, the Company increased its authorized common stock
(post split) to 20,000,000 shares. In March 1996, the Company decreased its
authorized common stock to 6,000,000 shares.
PREFERRED STOCK - Each share of Series A preferred stock, all of which was owned
by the President, carried a cumulative dividend of $.02 per share payable
annually. As of December 31, 1994, the Company was in arrears on the preferred
stock dividends in the amount of $99,397. On April 30, 1995, the Company
declared a dividend of $112,730 for all dividends accumulated for the period
from July 9, 1992 to April 30, 1995. The dividends were unpaid as of December
31, 1995. Since certain cumulative financial operating goals were achieved
during the three-year period ended December 31, 1994, each share of Series A
preferred stock was automatically converted into 1/2 shares of common stock on
April 30, 1995. The excess common shares issued (the "Excess Common Shares")
upon attainment of such operating goals were deemed to be compensatory and were
measured by the fair market value of the Excess Common Shares as of December 31,
1994.
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
date 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 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. The amendment also eliminated all remaining authorized shares
of Series A preferred stock.
1994 EMPLOYEE STOCK OPTION PLAN
During 1994, the Company established the 1994 Employee Stock Option Plan (the
"1994 Plan"). The 1994 Plan provides for the grant of options to employees and
other parties to purchase an aggregate of 300,000 shares of common stock.
Options to purchase no more than 120,000 shares of common stock may be granted
to any one person in any two-year period. The 1994 Plan is administered by the
Board of Directors.
F-12
<PAGE>
The 1994 Plan allows the Company to grant incentive stock options ("ISOs"),
non-qualified stock options ("NQSOs") and stock appreciation rights ("SARs") at
any time within 10 years from the date the 1994 Plan was adopted. The exercise
price of ISOs may not be less than the fair market value of the common stock on
the date of the grant, provided that the exercise price of ISOs granted to an
optionee owning more than 10% of the outstanding common stock may not be less
than 110% of the fair market value of the common stock on the date of grant. In
addition, the aggregate fair market value of common stock with respect to which
ISOs are exercisable for the first time by an optionee during any calendar year
shall not exceed $100,000. Options may not have a term exceeding ten years,
except that ISOs granted to an optionee owning more than 10% of the outstanding
common stock may not have a term of more than five years and ISOs must be
granted to and exercised by employees of the Company. Since the adoption of the
1994 Plan, an aggregate of 258,000 ISOs have been granted (of which options to
purchase, 120,000 have terminated); no NQSOs or SARs have been granted.
1995 EMPLOYEE STOCK OPTION PLAN
In July 1995, the Company established the 1995 Employee Stock Option Plan (the
"1995 Plan"). The 1995 Plan provides for the grant of options to employees and
other parties of ISOs, NQSOs and SARs to purchase an aggregate of 300,000 shares
of common stock. The provisions of the 1995 Plan are identical to the
above-stated terms of the 1994 Plan.
Since the adoption of the 1995 Plan, no ISOs or SARs have been granted. NQSOs to
purchase 180,000 shares of common stock at $3.00 per share, the fair market
value on the date of grant, have been granted to the President. The options
terminate in July 2000 and are exercisable on a cumulative basis in one-third
increments on July 31, 1997, 1998 and 1999. The option becomes immediately
exercisable upon a change in control of the Company. Options to purchase 120,000
shares of common stock remain available for grant under the 1995 Plan.
A summary of stock option transactions under employee option plans for each of
the three years in the period ended December 31, 1995 are as follows:
Options Option Price
------- ------------
Outstanding January 1, 1993
Granted - -
Canceled - -
Outstanding December 31, 1993
Granted 252,000 $2.50 - $20.00
Canceled (120,000) $20.00
---------
-
Outstanding December 31, 1994 132,000 $ 2.50
Granted 186,000 $2.25 - $3.00
Canceled (3,000) $ 2.50
---------
Outstanding December 31, 1995 315,000 $2.25 - $3.00
=========
Exercisable:
December 31, 1994 - -
December 31, 1995 80,000 $ 2.50
=======
F-13
<PAGE>
In December 1994, the Company canceled options to purchase 120,000 shares of
common stock exercisable at $20 per share, previously granted to the President
under the 1994 Plan, and re-granted such options at an exercisable price of
$2.50 per share.
EMPLOYEE STOCK BONUS PLAN
In April 1995, the Company adopted the Employee Stock Bonus Plan which enables
all full-time employees to purchase shares of common stock at 85% of the then
fair market value through payroll deductions. During 1995, 3,064 shares were
issued from the 100,000 shares available for sale under the plan.
Note 5. INCOME TAXES
Provision (benefit) for income taxes consists of the following:
1995 1994 1993
---- ---- ----
Federal:
Current $ 81,000 $326,000 $ 25,431
Deferred (123,000) (33,000) (18,238)
--------- -------- ----------
(42,000) 293,000 7,193
--------- -------- ----------
State and Local:
Current 47,000 118,000 15,085
Deferred (31,000) (16,000) (4,821)
--------- --------- ----------
16,000 102,000 10,264
--------- --------- ----------
$26,000 $395,000 $ 17,457
========= ========= ==========
The total provision (benefit) for income taxes differs from that amount which
would be computed by applying the U.S. federal tax rate to the loss before
income taxes. The reasons for these differences are as follows:
1995 1994 1993
---- ---- ----
Statutory federal income tax rate (34.0)% (34.0)% 34.0%
Effect of income taxed at reduced
federal statutory rates - - (19.0)
State and local income taxes, net of
federal benefit 7.7 4.3 13.0
Nondeductible compensatory charges - 50.0 -
Permanent and other differences 13.6 4.8 1.8
---- --- ---
(12.7)% 25.1 % 29.8%
===== ==== ====
The temporary differences which give rise to the deferred tax asset of $348,614
and $122,678 at December 31, 1995 and 1994 consist primarily of approximately
$390,000 and $171,000 of costs which were charged to operations for financial
statement purposes, but were required to be capitalized as inventory for income
tax purposes and the allowance for doubtful accounts of $288,000 and $75,000
which represents an amount not deductible for income tax purposes until the
related asset is written-off.
F-14
<PAGE>
The exercise of non-qualified stock options under the Company's stock option
plans give rise to compensation which is includable in the taxable income of the
recipients and deductible by the Company for federal and state income tax
purposes. Utilization of such deductions will increase additional paid-in
capital.
Note 6. COMMITMENTS AND CONTINGENCIES
The Company leases warehouse and office space under noncancelable operating
leases. Aggregate future minimum lease payments are as follows:
Year ending December 31,
1996 $ 376,000
1997 370,000
1998 361,000
1999 184,000
2000 22,000
Thereafter 7,000
-----
$1,320.000
Rent expense for the years ended December 31, 1995, 1994 and 1993 amounted to
approximately $354,000, $361,000 and $304,000, respectively, which includes
$312,000 in 1995 and 1994 and $302,000 in 1993 which is paid to the Company's
President.
In May 1995, the Company settled various litigation/claims for $232,500 which
has been reflected in the 1994 consolidated financial statements.
In July 1995, the Company entered into a three-year employment agreement with
the President providing for a minimum annual salary of $156,000, with a bonus at
the discretion of the Board of Directors, determined based upon the
profitability of the Company. No bonus was issued for the period ended December
31, 1995.
In December 1995, the Company commenced an action against a former customer to
collect $971,000 of accounts receivable. The defendant has filed a counterclaim
against the Company and the Company's President seeking compensatory and
punitive damages of $25 million. The Company believes its claim is meritorious
and believes the counter claim against the Company is without merit and will not
have a material impact on the consolidated financial condition of the Company.
F-15
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1996
(Unaudited) December 31, 1995
----------- -----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 31,900 $ 17,895
Accounts receivable, less allowance
for doubtful accounts
of $287,891 7,836,231 5,623,117
Inventory 7,660,440 7,873,131
Prepaid expenses and other current assets 359,902 387,767
Due from President 56,603 51,604
Deferred tax asset 345,345 345,345
------- -------
Total current assets 16,290,421 14,298,859
Property and Equipment - net 914,744 921,120
Other Assets 147,378 276,315
------- -------
Total Assets $ 17,352,543 $ 15,496,294
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable, accrued expenses and
other current liabilities $ 3,738,627 $ 2,869,762
Notes and acceptances payable 5,080,823 8,075,196
Current portion of long-term debt 87,100 65,038
------ ------
Total current liabilities 8,906,550 11,009,996
Long-term Debt 4,454,744 630,494
--------- -------
Total liabilities 13,361,294 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
3,416,197 shares. 3,416 3,416
Additional paid-in capital 13,064,259 13,014,260
Accumulated deficit (9,076,427) (9,161,872)
---------- ----------
Total shareholders' equity 3,991,249 3,855,804
--------- ---------
Total Liabilities and Shareholders'
Equity $ 17,352,543 $ 15,496,294
=============== ==============
</TABLE>
See Notes to consolidated Financial Statements
F-16
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1996 March 31, 1995
-------------- --------------
<S> <C> <C>
Sales $ 8,446,375 $ 7,084,216
Less returns and allowances (612,494) (290,261)
-------- --------
Net sales 7,833,881 6,793,955
Cost of goods sold 5,728,683 4,975,223
--------- ---------
Gross profit 2,105,198 1,818,732
--------- ---------
Operating expenses:
Selling, general and administrative 1,738,909 1,335,449
--------- ---------
Income from operations 366,289 483,283
------- -------
Other income (expense):
Interest expense (266,844) (140,955)
Gain on foreign currency transactions - 10,367
-------- ------
Income before provision for income taxes 99,445 352,695
Provision for income taxes 14,000 131,158
------ -------
Net income $ 85,445 $ 221,537
============== =============
Net income per common and common
equivalent share $ 0.02 $ 0.08
============== =============
Weighted average number of common and
common equivalent shares outstanding 3,666,464 2,657,577
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
F-17
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1996 March 31, 1995
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 5,620,767 $ 5,211,902
Cash paid to suppliers and employees (4,568,378) (5,493,031)
Interest paid (233,573) (140,955)
Taxes paid (3,888) (267,284)
------ --------
Net cash used in operating activities (814,928) (689,368)
-------- --------
Cash flows used in investing activity-capital expenditures (14,016) (383,876)
------- --------
Cash flows from financing activities:
Net borrowings (repayments) under notes and
acceptances payable (2,959,241) 764,867
Proceeds from issuance of long-term debt 3,824,250 333,884
Principal payments on long-term debt (22,060) (2,629)
------- ------
Net cash provided by financing activities 842,949 1,096,122
------- ---------
Net increase in cash 14,005 22,878
Cash at beginning of period 17,895 11,991
------ ------
Cash at end of period $ 31,900 $ 34,869
============== =============
Reconciliation of net loss to net cash used in
operating activities:
Net income $ 85,445 $ 221,537
Adjustments to reconcile net loss to
net cash used in operating activities:
(Gain) on foreign currency transactions - (10,367)
Depreciation and amortization 20,392 27,559
Changes in assets and liabilities:
Accounts receivable (2,213,114) (1,582,053)
Inventory 212,691 (117,217)
Prepaid expenses and other current assets 27,865 (10,525)
Other assets 128,937 32,772
Due from President (4,999)
Accounts payable and accrued expenses 940,452 748,976
------- -------
Net cash used in operating activities $ (802,331) $ (689,368)
============== =============
</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 Statements
F-18
<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 three
months ended March 31, 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. Contingently returnable shares are not considered oustanding for
earnings per share unless all conditions for release have been attained.
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 totalling $10,000,000. The
Company's second line of credit will be reviewed for renewal. 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. No guarantees exist on the new two year agreement.
In January 1996, the Company obtained another $100,000 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. As of April 30, 1996,
the Company has borrowed $67,300.
F-19
<PAGE>
Note 3
Stockholders' Equity
- - --------------------
Common Stock - In March 1996, the Company decreased its shares of authorized
common stock to 6,000,000 shares.
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 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. The amendment also eliminated all remaining authorized shares
of Series A preferred stock.
In March 1996, the President purchased 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.
Note 4
Contingencies and Commitments
- - -----------------------------
In December 1995, the Company commenced an action against a former customer to
collect $971,000 of accounts receivable. The defendant has filed a counterclaim
against the Company and the Company's President seeking compensatory and
punitive damages of $25 million. The Company believes its claim is meritorious
and believes the counter claim against the Company is without merit and will
vigorously defend this lawsuit.
The Company intends to enter into an agreement to purchase a new computer system
for approximately $475,000 which will be financed over a five year period.
F-20
<PAGE>
