U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15[d] OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to _______________________
Commission file number 0-26840
BRAKE HEADQUARTERS U.S.A., INC.
(Exact name of Small Business Issuer as specified in its charter)
___Delaware_____ 22-3048534
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) identification No.)
33-16 Woodside Avenue
Long Island City, New York
(Address of principal executive offices)
11101
(Zip Code)
(718) 779-4800
(Registrant telephone number including area code)
Not Applicable
(Former name, former address and formal fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES __X_ NO ____
____Class_____ Outstanding at Nov. 1, 1996
Common Stock, $0.001 par value 3,868,730
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC.
FORM 10-Q
QUARTERLY REPORT
For the nine months ended September 30, 1996
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Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements -
Balance Sheets - September 30, 1996
(Unaudited) and December 31, 1995 ................................... 3
Statements of Income for the
Three and Nine Months Ended September 30, 1996
and September 30, 1995 (Unaudited)................................... 4
Statements of Cash Flows for the
Nine Months ended September 30, 1996 and
September 30, 1995 (Unaudited)....................................... 5
Notes to Consolidated Financial Statements (Unaudited).... 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 8-10
PART II - OTHER INFORMATION........................................... 11
Item 1. Legal Proceedings .................................................... 11
Item 6. Exhibits and Reports on Form 8-K..................................... 11
Signatures...................................................................... 12
</TABLE>
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BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
--------------------- --------------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash ................................................................... $ 129,672 $ 17,895
Accounts receivable, less allowance for doubtful
accounts of $80,000 and $288,000 .................................... 7,856,721 5,623,117
Inventory .............................................................. 10,560,684 7,873,131
Prepaid expenses and other current assets .............................. 535,079 387,767
Due from President ..................................................... 45,874 51,604
Deferred tax asset ..................................................... 345,345 345,345
----------- ------------
TOTAL CURRENT ASSETS ........................................... 19,473,375 14,298,859
Property and Equipment - net ................................................ 1,238,505 921,120
Other Assets ................................................................ 225,080 276,315
------------ ------------
TOTAL ASSETS ................................................... $ 20,936,960 $ 15,496,294
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable, accrued expenses and other
current liabilities ................................................. $ 4,898,672 $ 2,869,762
Notes and acceptances payable .......................................... 4,912,548 8,075,196
Current portion of long-term debt ...................................... 94,284 65,038
------------ ------------
TOTAL CURRENT LIABILITIES ...................................... 9,905,504 11,009,996
Long-term Debt .............................................................. 5,964,956 630,494
------------ ------------
TOTAL LIABILITIES .............................................. 15,870,460 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
3,868,730 and 3,416,197 shares ....................................... 3,869 3,416
Additional paid-in capital ............................................. 14,101,349 13,014,260
Accumulated deficit .................................................... (9,038,719) (9,161,872)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY ..................................... 5,066,500 3,855,804
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..................... $ 20,936,960 $ 15,496,294
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
3
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BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Sales $ 27,377,629 $ 24,738,145 $ 9,358,854 $ 8,625,204
Less returns and allowances (2,182,938) (1,232,665) (778,574) (736,764)
------------------ ---------------- ------------- ------------
Net sales 25,194,691 23,505,480 8,580,280 7,888,440
Cost of goods sold 18,506,056 17,325,013 6,500,006 5,918,221
------------------ ---------------- ------------- ------------
Gross profit 6,688,635 6,180,467 2,080,274 1,970,219
Selling, general and administrative expenses 5,928,271 4,616,972 1,880,509 1,598,835
------------------ ---------------- ------------- ------------
Income from operations 760,364 1,563,495 199,765 371,384
------------------ ---------------- ------------- ------------
Other income (expense):
Interest expense (656,511) (590,981) (178,403) (285,552)
Gain (loss) on foreign currency transactions 0 8,591 0 (386)
------------------- --------------- -------------- ------------
(656,511) (582,390) (178,403) (285,938)
------------------- --------------- -------------- ------------
Income before provision for income taxes 103,853 981,105 21,362 85,446
Provision for income taxes 40,500 399,000 12,600 50,000
------------------- --------------- -------------- ------------
Net income $ 63,353 $ 582,105 $ 8,762 $ 35,446
=================== =============== ============== =============
Net income per common and ------------------- --------------- --------------- ------------
common equivalent share $ 0.02 $0.17 $ - $ 0.01
=================== =============== =============== ============
Weighted average number of common and
common equivalent shares outstanding 3,989,730 3,412,850 4,370,610 3,413,133
=================== =============== ============== ===========
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
PERIOD ENDED
SEPTEMBER 30,
1996 1995
-----------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 23,700,225 $ 21,007,178
Cash paid to suppliers and employees (25,764,248) (21,774,985)
Interest paid (656,512) (587,623)
Taxes paid (71,418) (412,000)
-------------- ------------
NET CASH USED IN OPERATING ACTIVITIES (2,791,953) (1,767,430)
--------------- ------------
Cash flows used in investing activity-capital expenditures (384,862) (863,730)
--------------- ------------
Cash flows from financing activities:
Proceeds from purchase of stock 1,087,532 16,667
Net borrowings (repayments) under notes and acceptances payable (3,162,648) 2,183,968
Proceeds from issuance of long-term debt 5,377,777 642,000
Principal payments on long-term debt (14,069) (21,401)
Principal payments on obligations under capital leases - (7,243)
Deferred offering costs - (118,150)
---------------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,288,592 2,695,841
---------------- ------------
Net increase in cash 111,777 64,681
Cash at beginning of period 17,895 11,991
---------------- ------------
Cash at end of period $ 129,672 $ 76,672
================ ============
Reconciliation of net loss to net cash used in operating activities:
Net income $ 63,553 $ 582,105
Adjustments to reconcile net income to net cash
used in operating activities:
(Gain) on foreign currency transactions - (8,591)
Depreciation and amortization 77,088 79,742
Increase in deferred income tax asset - (30,000)
Provisions for doubtful accounts 248,623 75,000
Changes in assets and liabilities:
Accounts receivable (2,482,227) (2,573,305)
Inventory (2,687,553) (870,948)
Prepaid expenses and other current assets (147,312) 50
Due from President 5,730
Other assets 51,235 17,641
Account payable and accrued expenses 2,078,910 960,876
--------------- -----------
NET CASH USED IN OPERATING ACTIVITIES $ (2,791,953) $ (1,767,430)
=============== =============
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.
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements of Brake
Headquarters U.S.A., Inc. and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q. Accordingly, they do not
include all of the footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results for the nine
months ended September 30, 1996 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1996. For further
information, refer to the financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-KSB for the year ended December 31, 1995.
There has been no significant changes of accounting policies since December 31,
1995.
Earnings per common and common equivalent share are based on the weighted number
of common and common equivalent shares (when dilutive) outstanding during the
period computed in accordance with the treasury stock method. Net income used in
the determination of earnings per share has been adjusted for preferred dividend
requirements.
NOTE 2
NOTES AND ACCEPTANCES PAYABLE:
In February 1996, the Company refinanced one of its bank agreements with a two
year agreement with a bank that allows for borrowings of an additional
$1,000,000. The Company has combined lines of credit totaling $10,000,000. The
Company's second line of credit was renewed until May 1, 1997. The notes and
acceptances payable are collateralized by substantially all the assets of the
Company. The President/majority shareholder has guaranteed a portion of one of
the bank facilities when equity falls below $4,250,000. The second loan provides
for a guarantee of $1,000,000. The Company was in technical default of several
financial ratios on one of its current loans, however the bank has provided the
Company a waiver for these technical defaults.
In January 1996, the Company obtained a $69,700 loan from the City of Fairfield,
Illinois at a rate of 5% per annum, for the purpose of purchasing equipment for
the Fairfield, Illinois distribution center.
6
<PAGE>
NOTE 3
STOCKHOLDERS' EQUITY
COMMON STOCK - In August 1996 the Company completed raising additional capital
through a private placement. The Company sold 450,000 units at a purchase price
of $2.50 per unit. Each unit consists of one share of common stock and two
Redeemable Common Stock Purchase Warrants each to purchase one share of common
stock of the Company at $3.80 per share until the third anniversary of the
initial closing. The Company also granted options and warrants to purchase an
additional 40,000 units to the placement agent issuable under the same terms
noted above.
In March 1996, the Company decreased its shares of authorized common stock to
6,000,000 shares from 20,000,000 and also eliminated all remaining authorized
shares of Series A preferred stock.
In March 1996, the Company amended its Certificate of Incorporation to authorize
the issuance of 1,000 shares of Series B preferred stock to be held by the
President. As the sole shareholder of the Series B preferred stock, which will
vote as a separate class, the President has the exclusive right to elect a
majority of the Company's Board of Directors until the earlier of the redemption
dates of March 31, 2001 or the reporting by the Company of at least $75,000,000
in revenue for any year through December 31, 2000. In the event of any
liquidation, dissolution or winding-up, the holder of the Series B preferred
stock will be entitled to an aggregate preference of $50,000, his basis in the
stock; any remaining proceeds of liquidation will be distributed pro rata to
holders of the common stock.
In March 1996, the President purchased the 1,000 shares of Series B preferred
stock for $50,000.
NOTE 4
COMMITMENTS AND CONTINGENCIES
In June 1996, the Company settled an action against a former customer to collect
$971,000 of accounts receivable. Inventory totaling approximately $459,000, was
returned to the Company. The Company was required to pay the customer $85,000.
As a result of the above settlement and available reserves, the Company recorded
an expense of a $212,000 in the financial statements for six months ended June
30, 1996. Mutual releases were exchanged for all claims and counter claims.
In July 1996, the Company entered into an agreement to purchase a new computer
system for approximately $475,000 which is financed over a five year period. As
of September 30, 1996 the Company has borrowed $305,030. Monthly payments on the
outstanding balance are $6,406.
The securities issued in the private placement have been registered with the
Securities and Exchange Commission on a registration statement on Form S-1.
Effective August 30, 1996, the Company acquired the net assets of ABS Brakes
Inc. (ABS) for common stock and cash. ABS assembles brake pads for foreign and
domestic cars. The fair value of the net assets acquired approximated the
purchase price.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with the Company's
consolidated financial statements and the related notes included elsewhere
herein.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 1996 Compared to Three and Nine Months
Ended September 30, 1995
Gross sales in the three months ended September 30, 1996 increased by $733,380,
or 8.5%, to $9,358,584 compared to $8,625,204 for the three months ended
September 30, 1995. Gross sales for the nine months ended September 30, 1995
increased by $2,639,484, or 10.7 %, to $27,377,629 compared to $24,738,145 for
the corresponding period in 1995. These increases were due primarily to the
continued expansion of product lines which includes brake rotors and drums, disc
pads and shoes, wheel cylinders, brake hoses and other hydraulics with current
customers and a successful program for obtaining new customers. In addition,
Autozone, Inc., a large retail chain which became a customer in late 1993,
accounted for approximately 26% of the Company's revenues for the nine months
ended September 30, 1996, compared to 16% of the Company's revenues for the
nine months ended September 30, 1995.
Gross profit in the three months ended September 30, 1996 increased by $110,055,
or 5.6% to $2,080,274 compared to $1,970,219 for the three months ended
September 30, 1995. Gross profit for the nine months ended September 30, 1996
was $6,688,635 versus $6,180,467 for the same period in 1995. This represents an
increase of $508,168 or 8.2%. The Company attributes the improved gross profit
to the success of its products and marketing efforts, as well as to improvements
made in its procurement operation.
The Company has agreed to accept the return of merchandise under certain
circumstances. In order to obtain new customers, merchandise is exchanged, and
replaced with current Brake Headquarters merchandise. The merchandise is brought
back to the Company where it is reboxed, relabeled and placed back in inventory.
This is a common occurrence within the industry. As the marketplace has grown
more competitive, the amount of sales returns to the Company has significantly
increased. The merchandise does not deteriorate, and obsolescence is therefore
not a problem. All merchandise which is defective and returned by customers is
returned to or credited by vendors.
Operating expenses during the three months ended September 30, 1996 were
$1,877,809 an increase of $278,974 or 17.5% from $1,598,835 for the three months
ended September 30, 1995. Operating expenses for the first nine months of 1996
were $5,928,271, an increase of $1,311,299, or 28.4% from the $4,616,972 for the
same period in 1995. These increases were a result of increased sales, and a
continued building of the infrastructure needed to provide excellent service to
the Company's customers.
Income from operations for the three months ended September 30, 1996 was
$202,465 versus $371,384 for the same period in 1995. This represents a decrease
of $168,919 or 45.5%. For the nine months ended September 30, 1996, income from
operations was $760,364 versus $1,563,495 for the nine months of 1995. This was
a decrease of $803,131 or 51.4%. Included within operating expenses in the three
months ended September 30, 1996 is an expense of approximately $212,000 from the
settlement of a lawsuit with a former customer.
Interest expense during the three months ended September 30, 1996 was $178,403,
a decrease of $107,149 over the interest expense of $285,552 during the
corresponding period in 1995. This is primarily due to a decrease in interest
rates. For the nine months ended September 30, 1996, interest expense was
$656,511, an increase of $65,530 compared to $590,981 for the nine months of
1995. The increase is attributed to increased financing provided by the
Company's banks in support of the growth in sales and assets.
As a result of the foregoing, the Company recorded a net profit for the three
months ended September 30, 1996 of $8,562 or $.0 per share, as compared to net
income of $35,446, or $.01 per share for the three months ended September 30,
1995. For the nine months ended September 30, 1996, the Company's net income was
$63,353 or $.02 per share, as compared to $582,105 or $.17 per share for the
same period in 1995.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has continued to use funds generated from operations and
bank borrowings to support operations, finance working capital requirements and
lease and improve facilities.
The Company has agreements with two banks to provide lines of credit,
bankers' acceptances, and letters of credit facilities. These facilities
currently provide for aggregate borrowing of up to $10,000,000 at September 30,
1996. The balance due under these two loan facilities amounted to $ 9,192,868 at
September 30, 1996. The lines of credit expire at various dates through February
1998, at which time they will be reviewed for renewal. Interest accrues on the
outstanding principal balances at rates from 7.44%-9%. Both lines are secured by
a pledge of substantially all of the Company's assets and both lines are
partially guaranteed by the President/majority shareholder if equity is below
$4,250,000. The agreements contain covenants which require the maintenance of
certain amounts of net worth and certain financial ratios. The Company has
maintained compliance or obtained waivers relating to its loan covenants.
The covenants in the Company's loan agreement with The Chase Manhattan
Bank N.A. include: (i) a ratio of indebtedness to tangible net worth of not more
than 3:1 through and including December 31, 1996 and not more than 2.5:1.0
thereafter; (ii) tangible net worth of not less than $4,250,000, (iii) interest
coverage of not less than 225%; and (iv) a ratio of current assets (less prepaid
expenses) to current liabilities of not less than 1:25:1.00. The Company was in
technical default of number (i), (ii) and (iii) above, as of September 30, 1966,
which default the bank waived while the parties continue to negotiate revisions
on a going forward basis.
In January 1996, the Company obtained a $69,700 five year loan from the
City of Fairfield, Illinois bearing interest at 5% per annum to be used to
purchase equipment for its Fairfield distribution center.
Cash used in operations during the nine months ended September 30, 1996
was $2,791,953 as compared with $1,767,430 used in operations during the nine
months ended September 30, 1995. This change was due mainly to the increase in
accounts receivable of $2,482,227 offset by the increase in accounts payable and
accrued expenses of $2,078,910.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Cash received from customers during the nine months ended September 30,
1996 amounted to $23,700,225, an increase of $2,693,047, or 12.9% over the same
period in 1995. At the same time, cash paid to suppliers and employees during
the nine months ended September 30, 1996 increased by $3,989,263 or 18.3% over
the same period in 1995 to $25,764,248, 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 nine months ended September 30, 1996, the Company increased
inventory to fill a new order placed by our largest customer. As a result,
inventory increased by $2,687,553 or 34.1%, to $10,560,684 from $7,873,131.
Accounts receivable (net of reserves) increased by $2,025,604, or 34.3%, from
January 1, 1996 to September 30, 1996. The increase in accounts receivable was a
result of the corresponding growth in sales and extended terms given to certain
customers because of market conditions.
The Company signed a contract for a new computer system which
Management believes will improve the efficiency of operations. The $475,000 cost
of this expenditure will be financed by C.I.T. Financial over a 5 year period
and will not significantly affect the cash flows of the Company.
As of September 30, 1996, the company had available approximately
$807,000 through its various lines of credit. This would fund the Company's
requirements for cash needs through December 31, 1997. It is expected that cash
requirements for large capital purchases will be funded and secured by
separately financed transactions, as was recently accomplished for the new
computer system described above, although the Company has no commitments for any
other material capital expenditures.
10
<PAGE>
PART II OTHER INFORMATION
ITEM 1
Legal Proceedings
The Company is not currently subject to any legal proceedings other
than any vendor claims in the ordinary course of business.
ITEM 6
Exhibits and Reports on Form 8-K
[a] None
[b] No reports on Form 8-K were filed during the quarter ended September
30, 1996.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BRAKE HEADQUARTERS, U.S.A., INC.
/s/ Joseph Ende
Joseph Ende, Chief Executive Officer
DATE: November 15, 1996
/s/ Marc J. Ruskin
Marc J. Ruskin, Chief Financial Officer
12
