SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d)
of The Securities Exchange Act of 1934 (Fee
required)
For the Fiscal year ended December 31, 1996 or
[] Transition Report Pursuant to Section 13 or
15(d) of The Securities Exchange Act of 1934 (No
fee required)
For the transition period from ______________ to _________________
Commission file number 0-28640
BRAKE HEADQUARTERS U.S.A., INC.
(Exact Name of Registrant 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, NY 11101
(Address of Principal Executive Offices) (Zip Code)
(718) 779-4800
(Registrant's Telephone Number, Including Area Code)
Securities registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange on Which
Title of Each Class Each Class is Registered
None
Securities registered Pursuant to Section 12(g) of the Act:
Common Stock $.001 par value
Class A Common Stock Purchase Warrants
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 past 90 days. ___X__ Yes ___ No
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. _____X_______
The aggregate market value of the 1,868,251 shares of voting stock
held by non-affiliates computed by reference to the closing price of $9.50 per
share, at which the stock was sold on March 19, 1997 was $17,748,385.
As of March 19, 1997, the Issuer had 4,248,584 shares of Common Stock,
$.001 par value, outstanding.
PART I
<PAGE>
Item 1. Description of Business.
Business Development
Unified Capital, Inc. ("Unified") 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, Unified
changed its name to Sanyo Industries, Inc. On August 8, 1995, Sanyo Industries,
Inc. changed its name to Brake Headquarters U.S.A., Inc. (the "Company"). The
Company is a publicly-owned holding company, substantially all of its current
business operations are conducted 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., Thirty Three Inc. and Thirty Nine Inc., a
wholesale warehouse for "undercar" parts. ABS Brakes, Inc. ("ABS") a
manufacturer of domestic pads is a wholly-owned New York subsidiary which was
acquired in August 1996. 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.
Business of Issuer
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.," "Brake Headquarters" as well as under the name "Sanyo
Automotive" and other private labels.
Industry Overview
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. 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 and increased performance demanded by
consumers, 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.
Management believes based on its experience 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
will not normally neglect brake repairs as they might 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
2
<PAGE>
parts ("Undercar Warehouses") in major metropolitan areas. 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
and upgrading its information system capabilities. 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.
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.
The Company signed a contract for a new computer system which
Management believes will improve efficiency of operations. The $489,000 cost
of this expenditure will be financed by C.I.T. Financial over a five-year
period and will not significantly affect the cash flows of the Company.
Marketing and Sales
The Company sells products primarily under the name "Brake
Headquarters" 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 approximately
116 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 approximately 80% of its 1996 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, as a result, the Company's
net sales increased by 42%, 21% and 7% in 1994, 1995 and 1996 respectively.
Autozone, Inc. a large retail chain with no relationship to the Company,
accounted for approximately 28% and 17% of net sales in 1996 and 1995
respectively. The Company was informed by Autozone that it was consolidating
the number of vendors it purchased from, and would no longer use the Company
as a prime supplier. The Company added several new retail chains late in 1996
which are anticipated to make up a portion of the loss by this single customer.
Management Information Systems
In July 1996, the Company contracted to purchase a new IBM AS/400
computer system and is currently updating all of its software systems and
installing the hardware. The Company's computer system 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. The
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. The Company also
maintains a web site on the Internet, which provides Company information and the
ability to communicate domestically and internationally via E-Mail.
Operations / Facilities
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.
3
<PAGE>
In June 1995, the Company expanded its Midwest distribution center in
Fairfield, Illinois to approximately 40,000 square feet. The Company currently
operates one shift per day, five days per week, at this facility.
The Company also maintains an approximately 10,000 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 8,000, 3,000 and 2,000 stock keeping units ("SKUs"), respectively.
The Company maintains leased trucks 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. The Company has a dedicated office at each
distribution center to facilitate shipping by Federal Express and UPS.
Manufacturing Operations
The Company through its subsidiary, ABS, occupies 10,000 square feet in
Lindenhurst, NY, where it manufactures pads for domestic automobiles.
Undercar Warehouses
The Company through its subsidiary Quality First Brakes Inc. maintains
3 warehouses which are located in the Bronx, Jamaica, and Uniondale, New York.
The stores occupy from 1,200 - 2,000 square feet and are open 6 days a week to
service jobbers.
Suppliers
The Company has relationships with many suppliers of parts and
alternate sources of parts are readily available. Therefore, the Company does
not maintain supply contracts with any of its suppliers, because it believes
alternative sources exist for most of the products it distributes. The loss of
any one supplier is not expected to have a material adverse effect on the
Company. The Company generally obtains favorable prices and terms because of its
large volume of purchases.
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 maintaining 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 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 Universal Brake Parts, and California Drum
and Rotor.
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.
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
4
<PAGE>
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. 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 March 27, 1997 the Company had 105 employees, including five
executives; three employees in purchasing; twelve administrative personnel;
seven in sales and customer service; sixty-eight employees in warehousing,
shipping and receiving; and ten in the undercar warehouses. The Company also
retains the services, as independent contractors, of 114 independent sales
representatives who are paid solely on a commission basis.
The Company is a party to a collective bargaining agreement relating to
33 of its warehouse employees in New York. The Company signed a collective
bargaining agreement with the union in April 1996 at the Company's Fairfield,
Illinois distribution center. The Company believes that its employee relations
are currently satisfactory.
Item 2. Description of Property.
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 are 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
$312,000 each year pursuant to the lease in 1994, 1995 and 1996. Based 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. Should the bankruptcy trustee decide to terminate this
month-to-month lease and the Company decides to lease another facility, the
Company could incur an increase in lease payments.
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.
The Company occupies approximately 10,000 square feet of public
warehouse space at 230 East Burnside, Portland, Oregon on a yearly basis.
ABS leased approximately 10,000 square feet at 6 Bahama Street in
Lindenhurst, New York. The lease expires on October 31, 2001. An annual rental
of $40,000 is paid.
Quality First maintains 3 stores in the Bronx, Jamaica, and Uniondale,
New York. Each store is between 1,200 - 2,000 square feet. Rent is $1,700,
$2,000, and $900 per month respectively.
Item 3. Legal Proceedings.
5
<PAGE>
The Company is not currently subject to legal proceedings other than
any vendor claims in the ordinary course of business.
Item 4. Submission of Matters to a Vote of Security-Holders.
NONE
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
(a) Market Information
The Common Stock has traded on the NASDAQ Small Cap Market under the
symbol BHQU since June 6, 1996. Until then, the Common Stock traded on the
Electronic Bulletin Board maintained by National Association of Securities
Dealers Inc. Prior to August 8, 1995, the Common Stock traded under the symbol
SNYO. The Company's Class A Warrants have traded on the NASDAQ Small Cap Market
under the symbol BHQUW since December 23, 1996.
The following table sets forth the high and low closing prices for the
Common Stock for each quarter, as reported by NASDAQ since June 6, 1996; and the
high and low bid quotes from January 1, 1995 through June 5, 1996, as reported
and 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 1995 one-for-ten reverse split.
<TABLE>
<CAPTION>
Common Stock Warrants
High Low High Low
<S> <C> <C>
1995
First Quarter $ .875 $ .156 -- --
Second Quarter $ .750 $ .281 -- --
Third Quarter $ 3.50 $ .250 -- --
Fourth Quarter $ 5.25 $ 2.75 -- --
1996
First Quarter $ 3.50 $ 2.75 -- --
Second Quarter $ 5.75 $ 3.00 -- --
Third Quarter $ 7.00 $ 5.37 -- --
Fourth Quarter $ 8.12 $ 5.25 $ 4.50 $ 4.25
1997
First Quarter (through $10.50 $ 7.63 $ 6.13 $ 3.50
March 19, 1997)
</TABLE>
As of March 19, 1997, the closing prices of the Common Stock and
Warrants were $9.50 and $6.13, respectively.
(b) Stockholders of Record
As of March 27, 1997, there were 513 holders of record of the Common
Stock and one holder of the 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.
(c) Dividend Policy
6
<PAGE>
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 Preferred Stock issued in connection with the
Reverse Merger. On April 30, 1995, all of the then outstanding shares of
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.
Fifty thousand dollars ($50,000) of the $112,730 in accrued dividends were
exchanged for the 1,000 shares of Series B Preferred Stock which were issued to
the Company's President. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Item 13. "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 6. Selected Financial Data.
The selected consolidated financial data as of and for the five-year
period ended December 31, 1996 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, 1996 and Management's Discussion and Analysis of Financial
Condition and Results of Operations. The consolidated balance sheet data as of
December 31, 1996 and 1995, and the consolidated statements of operations data
for each of the three years in the period ended December 31, 1996 and the
accountants' reports thereon, are audited and are included in this report. The
consolidated balance sheet data as of December 31, 1992, 1993, and 1994, and the
consolidated financial statements of operations data for the years ended
December 31, 1992 and 1993 are derived from the audited consolidated financial
statements of the Company and are not presented herein.
<TABLE>
<CAPTION>
Year Ended December 31
1992 1993 1994 1995 1996
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Net sales ............................. $ 13,672,234 $ 17,717,023 $ 25,094,473 $ 30,463,730 $ 32,599,096
Income (loss) from operations ......... 605,845 370,009 (1,041,037)(1) 566,874 248,048
Interest expense ...................... (261,643) (314,796) (520,602) (774,762) (875,305)
Net income (loss) ..................... 235,982 41,187 (1,968,909)(1) (179,072) (466,454)
Net income (loss) per common
and common equivalent
share (2) ............................ $ .05 $ .00 $ (.92) $ (.06) $ (.13)
</TABLE>
<TABLE>
<CAPTION>
December 31,
1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital ..................... $ 1,977,053 $ 1,823,459 $ 3,706,239 $ 3,288,863 $ 9,574,684
Total assets ...................... 8,070,849 10,189,885 11,937,143 15,496,294 21,023,644
Long-term obligations ............... 80,113 133,927 216,469 630,494 5,850,645
Total stockholders' equity .......... 2,174,915 2,176,102 4,124,961 3,855,804 5,506,395
</TABLE>
(1) 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 and certain
cumulative levels for the three-year period ended December 31, 1994. See
"Certain Relationships and Related Transactions" and Note 5 of Notes to the 1996
Consolidated Financial Statements.
7
<PAGE>
(2) Net income (loss) per share is computed on the basis described in Note 1 of
Notes to the 1996 Consolidated Financial Statements, including, but not limited
to, the adjustment for dividends on preferred stock.
Item 7. 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
1996 vs 1995
Gross sales for the year ended December 31, 1996 ("1996"), increased by
$3,565,177, or 11.0%, to $35,948,479 compared to $32,383,302 for the year ended
December 31, 1995 ("1995"). This increase was due primarily to increased sales
to existing customers, the Company's introduction of new undercar parts product
lines and the continued expansion of its customer base. Autozone, Inc. a large
retail chain, which became a customer in late 1993, accounted for approximately
28% of the Company's net sales for 1996. However, in the fourth quarter of 1996
this customer informed the Company that it was consolidating vendors, and they
would no longer use the Company as a prime supplier. The Company added several
new retail chains late in 1996 which are anticipated to make up a portion of
the loss by this single customer.
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.
Gross profit for 1996, increased by $277,475, or 3.4%, to $8,331,273
compared to $8,053,798 for 1995. Gross profit margin for 1996 decreased to 25.6%
compared to 26.4% for 1995. The Company accepted the return of merchandise from
Autozone, Inc. and incurred $534,000 of costs for relabeling and freight. This
charge reduced the gross margin percentage by 1.6%.
Operating expenses for 1996 increased by $596,301, or 8.0%, to
$8,083,225, compared to $7,486,924 for 1995. Operating costs increased in
proportion to the increased sales volume.
Most of the Company's payments to vendors are made in United States
dollars and, therefore, the amount of foreign currency is immaterial.
Income from operations for 1996, decreased by $318,826 to $248,048,
compared to $566,874 for 1995, primarily as a result of the increase in
operating expenses noted above.
Interest expense for 1996, increased by $100,543, or 13.0% to $875,305
compared to $774,762 for 1995. 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 1996 increased
by $287,382 to $466,454, or $(.13) per share, as compared to $179,072, or $(.06)
per share for 1995.
1995 vs 1994
Gross sales for the year ended December 31, 1995 ("1995"), increased by
$6,254,137, or 23.9%, 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.
Autozone, Inc. 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
8
<PAGE>
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 expensed costs associated with the offering totaling
$248,000 during 1995.
The Company's attainment of the 1994 pretax income level and certain
cumulative levels for the three year period ended December 31, 1994 under
Reverse Merger Agreement, as amended, resulted in the release of the 125,000
escrowed shares, exercisability of the Class F warrants (relating to 1994
earnings) and conversion of the 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 $1,789,837, to $179,072, or $.06 per share, as compared to $1,968,909, or
$.92 per share for 1994.
Liquidity and Capital Resources
1996 vs 1995
The Company used funds generated from bank borrowings and proceeds from
a private placement and exercise of warrants to finance working capital
requirements during 1996. The Company received net proceeds of approximately
$1,772,000 from its private placement and exercise of warrants during 1996. If
the remaining 780,000 warrants are exercised a total funds of $2,964,000 will be
available to the Company.
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 borrowings of up to $10,000,000 at December 31,
1996. The balance due under the Company's loan facilities amounted to
approximately $9,400,000 at December 31, 1996. The lines of credit and bankers'
acceptances bear interest at rates ranging from 7.44% to 9%. The lines of credit
expire at various dates through February 28, 1998. 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 approximately $600,000. 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, 1996, the Company had no outstanding letters of credit. In
addition, during 1995, the Company obtained a $258,000 short-term loan from an
individual, this loan was converted into 91,300 shares of common stock in
December 1996.
Cash used in operations in 1996 was $2,658,581 which represents a
decrease of $46,406, or 1.7%, from $2,704,987 in 1995. Accounts receivable
and inventory increased in 1996 a total of $4,638,213. This was due to
continued sales growth and the addition of new product lines. These changes
were financed primarily with $1,649,334 of additional borrowings, and
$1,780,920, the proceeds from the private placement and exercise of the
warrants.
Cash received from customers during 1996 amounted to $31,267,820, an
increase of $2,741,686, or 9.6%, over the same period in 1995. At the same time,
cash paid to suppliers and employees during 1996 increased by $3,300,258, or
11.0%, over the same period in 1995 to $39,040,889, as the Company utilized the
proceeds of sales and increased borrowings to pay suppliers and finance its
growth through conservative cash flow management.
The Company signed a contract for a new computer system which
Management believes will improve the efficiency of operations. The $489,000 cost
of this expenditure will be financed by C.I.T. Financial over a five-year period
and will not significantly affect the cash flows of the Company. The Company
believes that the proceeds from the amounts available under existing or new
debt facilities and cash flow
9
<PAGE>
from operations, will be sufficient to satisfy the Company's anticipated
cash requirements for at least the next 12 months.
Item 8. Financial Statements.
The financial statements appear following Item 14 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
On December 28, 1995, the Board of Directors of the Company dismissed
the firm of Goldstein Golub Kessler & Company, P.C. ("GGK") as the Company's
certified public accountants. GGK'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 was 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 GGK.
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. The Board has also voted to retain
Deloitte & Touche for the year end December 31, 1996.
10
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
Set forth below are names, ages and positions of the Company's Executive
Officers and Directors, along with certain information relating to the
business experience of each.
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Joseph Ende 49 Chairman of the Board, President and Chief Executive Officer
Scott Osias 42 Vice President of Sales and Marketing
Marc J. Ruskin 44 Chief Financial Officer
Sandra Ende 44 Secretary and Director
</TABLE>
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. The Company's Placement Agent,
G-V Capital Corp., has the right at its discretion for a three-year period
ending August 13, 1999 to designate either a member of the Board of Directors
or an advisor to 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 24 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 20 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.
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's Officers, Directors and persons who own more that ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, Directors and ten percent shareholders are required by regulation to
furnish the Company with copies of all Section 16(a) forms they file. Based
solely on the Company's copies of such forms received or written representations
from certain reporting persons that no form 5's were required for those persons,
the Company believes that, during the time period of August 1996 through
December 31, 1996, all filings requirements applicable to its Officers,
Directors and greater that ten percent beneficial owners were complied with.
Item 11. Executive Compensation.
11
<PAGE>
The following table sets forth all compensation awarded to, earned by,
or paid for all services rendered to the Company, during the fiscal years ended
December 31, 1996, 1995 and 1994, by the Company's Chief Executive Officer, who
was the Company's only executive officer ("Named Executive Officers") whose
total compensation exceeded $100,000.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Annual Compensation Compensation
Securities
Other Underlying
Name and Annual Options/
Principal Compen- SARs
Position Year Salary($) Bonus($) sation ($) (#)
<S> <C> <C> <C> <C> <C>
Joseph Ende 1996 $156,000 -0-(2) -0- 30,000(1)
Chief Executive 1995 $127,500 -0-(2) -0- 180,000(3)
Officer and Director 1994 $130,000 -0- -0-(4) 120,000(5)
</TABLE>
(1) On November 19, 1996, Mr. Ende was granted a non-qualified stock option
under the Company's 1994 Stock Option Plan to purchase 30,000 shares of Common
Stock at $5.25 per share expiring on November 18, 2001.
(2) The Board of Directors has the discretion to grant Mr. Ende 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, as amended, provided the Company reports operating income, but after
payment of such bonus for the applicable six-month period. No bonus was issued
for the periods ended December 31,1996, and December 31, 1995.
(3) On July 31, 1995, Mr. Ende was granted, 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 expiring on July 30, 2000. See "Employee Stock Option Plan"
below and Item 13. "Certain Relationships and Related Transactions."
(4) Excludes $2,314,000 non-cash compensatory expenses related to the release of
escrow shares, the exercise of warrants, the conversion of preferred stock and
the payment of dividends on preferred stock during 1994, pursuant to the terms
of the Reverse Merger Agreement. See Item 13. "Certain Relationships and Related
Transactions."
(5) The Company canceled 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 $2.50 per share. See "1994 Employee Stock Option Plan, below."
Individualized Option/ Grants in Last Fiscal Year
The following table sets forth the number of stock options granted to
the Named Executive Officers in the Summary Compensation Table during the year
ended December 31, 1996, exercise information and potential realizable value.
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
Number of Percent of Value at Assumed
Shares Total Options Annual rates of Stock
Underlying Granted to Price Appreciation
Options Employees in Exercise Expiration for Option Term
Name Granted (#) Fiscal Year Price ($/sh) Date 5% ($) 10% ($)
<S> <C> <C> <C> <C> <C> <C>
Joseph Ende 30,000 33% $ 5.25 11/18/2001 $43,500 $96,000
</TABLE>
12
<PAGE>
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY End Option/SAR Values(1)
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of Value of
Unexercised Unexercised
Shares Options/SARs at In-The-Money
Acquired FY-End (#) Options/SARs
on Exer- Value Exercisable/ at FY-End ($)
Name cise (#) Realized Unexercisable Exercisable
<S> <C> <C> <C> <C>
Joseph Ende -0- -0- 150,000/ 180,000 $742,500
</TABLE>
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 1996,
Mr. Ende received a base annual salary of $156,000. The Board of Directors has
the discretion to grant Mr. Ende a performance bonus of $50,000 for each of the
six-month periods ending June 30 and December 31 during the term of the
agreement, provided the Company reports operating income, 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. Under the agreement, Mr. Ende is also
entitled to an automobile or a monthly allowance equal to the cost of leasing
such automobile, and health and other benefits. 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 1996, Mr. Osias is
receiving a base annual salary of $91,000, 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 8,701 shares have been purchased under such plan as of December 31, 1996. The
100,000 shares of Common Stock reserved and/or issued to date under this plan
are registered for sale on the Company's registration statement on Form S-8,
which became effective when filed with the Commission on September 27, 1996 (the
"S-8").
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
shares of Common Stock authorized under the 1994 plan are registered for sale on
the S-8.
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
13
<PAGE>
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 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
been canceled and are available for reissuance under the 1994 Plan), and no
NQSOs or SARs have been granted under the 1994 Plan. Options to purchase 74,000
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.
<TABLE>
<CAPTION>
# of Options # Options # Options Exercise Expiration
Granted Vested Exercised Price Date
<S> <C> <C> <C> <C> <C>
9,000 0 0 $ 2.50 11/1/99
120,000 120,000 0 2.50 12/15/99
6,000 0 0 2.25 9/4/00
24,000 8,000 0 3.00 5/29/01
45,000 45,000 0 5.25 11/18/01
2,000 2,000 0 3.75 11/18/01
20,000 -- -- 5.625 11/21/01
</TABLE>
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 an additional 2,000 shares. An additional 7,500
options were granted on November 19, 1996 and are exercisable at $5.25 per
share.
In December 1994, the Company canceled 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. All 120,000 of such options are currently
exercisable. An additional 30,000 options were granted on November 19, 1996 and
are exercisable at $5.25.
Marc 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 the balance on September 5, 1999 . An additional 24,000
options were granted at $3.00 on May 29, 1996. The options are exercisable at
various dates beginning in February 1997. An additional 7,500 options were
granted on November 19,1996 and are exercisable at $5.25 per share.
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
14
<PAGE>
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.
<TABLE>
<CAPTION>
# of Options # Options # Options Exercise Expiration
Granted Vested Exercised Price Date
<S> <C> <C> <C> <C> <C>
180,000 0 0 $3.00 7/30/00
</TABLE>
On July 31, 1995, Mr. Ende was granted 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 13. "Certain Relationships and Related Transactions."
Compensation Committee Interlocks and Insider Participation
The Company does not have a compensation committee or another Board
committee performing equivalent functions, and both members of the Board of
Directors, consisting of Joseph Ende and Sandra Ende, participate in
deliberations of the Board of Directors concerning executive compensation. There
are no Board of Directors interlock relationships with respect to the Company.
Compensation of Directors
Directors currently receive no cash compensation for serving on Board of
Directors.
Item 12. 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 (1) of Class (2)
<S> <C> <C>
Joseph Ende (3) 2,515,333(4) 57.2%(1)
Marc J. Ruskin (3) 7,500(6) (9)
Scott Osias (3) 26,500(7) (9)
Sandra Ende (3) 15,000(5) (9)
Officers and Directors
as a Group 2,549,333(8) 57.7%
(4 Persons)
</TABLE>
(1) 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
15
<PAGE>
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.
(2) Based on 4,248,584 shares of Common Stock outstanding as of March 19, 1997.
(3) The address of this person is c/o the Company, 33-16 Woodside Avenue, Long
Island City, New York 11101.
(4) 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) 150,000
shares issuable upon the exercise of currently exercisable options, but excludes
an aggregate of 180,000 shares underlying options which are not currently
exercisable or exercisable within the next 60 days.
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 will have 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 fiscal through December 31, 2000. See Item 13. "Certain
Relationships and Related Transactions".
(5) Includes 15,000 shares owned of record by the Joseph and Sandra Ende
Charitable Trust, of which Joseph and Sandra Ende are Trustees.
(6) Includes 7,500 shares of common stock issuable upon the exercise of
currently exercisable options but does not include 22,000 shares of common stock
issuable upon the exercise of options which are not currently exercisable or
exercisable within the next 60 days.
(7) Includes 11,500 shares of common stock issuable upon the exercise of
currently exercisable options but does not include 5,000 shares of common stock
issuable upon the exercise of options which are not currently exercisable or
exercisable within the next 60 days.
(8) Includes 169,000 shares issuable upon exercise of currently exercisable
stock options, but does not include 195,000 shares of Common Stock which may be
purchased pursuant to stock options which are not currently exercisable.
(9) Less than one percent of the issued and outstanding shares.
Item 13. Certain Relationships and Related Transactions.
In connection with the Reverse Merger, Mr. Ende received 2,000,000
shares of 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 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 pretax operating
income for the years ended December 31, 1992, 1993 and 1994 of at least
$2,125,000.
As of December 31, 1996, Joseph Ende had personally guaranteed payment
of up to an aggregate of $1,000,000 of the Company's indebtedness under one of
its credit facilities. He also personally guarantees another line of credit to
the extent the Company's equity falls below $4,250,000.
In January 1995, Joseph Ende and two non-affiliated persons purchased
all of the Brennan Trusts' shares in the Company, as the Company was without the
funds to do so. Thus, as of January 1995 and at present, management has no
knowledge that Robert E. Brennan, who never attempted to exercise any control
over the Company, or the Brennan Trusts or any of Mr. Brennan's affiliates,
holds any beneficial interest in the Company's securities. See "Principal
Stockholders."
16
<PAGE>
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
(the "Series B Preferred Stock"), all of which shares are held by Joseph Ende.
See Item 12. "Security Ownership of Certain Beneficial Owners and Management."
See "Item 2. Description of Property" for a description of a lease
between Mr. Ende and the Company.
Item 14. Exhibits, List and Reports on Form 8-K.
<TABLE>
<CAPTION>
Exhibit No. Exhibit
<S> <C>
3.1 Certificate of Incorporation of the Company, as amended and restated.
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)
4.6 Form of Class A Stock Purchase Warrant. (7)
4.7 Placement Agent Agreement dated July 10, 1996, between the Company and G-V Capital Corp. (7)
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 $4,300,000 made by Sanyo Automotive Parts, Ltd. to
Bank Leumi Trust Company of New York dated May 1, 1996. (7)
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)
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)
17
<PAGE>
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., 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)
16.1 Letter re. change in Certifying Accountant. (6)
*21.1 Subsidiaries of the Company.
*23.1 Consent of Goldstein Golub Kessler & Company, P.C.
*23.2 Consent of Deloitte & Touche L.L.P.
*27.1 Financial Data Schedule.
* Filed with this report
</TABLE>
(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.
(6) Incorporated by reference from the Company's Form 8-K/A No. 1 for
December 28, 1995.
(7) Incorporated by reference from the Company's Registration Statement
on Form S-1 (No. 333-13533).
Report on Form 8-K
None
18
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------
------------------------------------------------------------
Independent Auditors' Reports F-1 - F-2
Consolidated Financial Statements:
Balance Sheets F-3
Statements of Operations F-4
Statements of Shareholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7 - F-14
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts S-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Brake Headquarters U.S.A., Inc.
We have audited the accompanying consolidated balance sheets of Brake
Headquarters U.S.A., Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related statements of operations, shareholders' equity, and cash flows for
the years then ended. Our audits also included the financial statement schedule
for 1996 and 1995 listed in the Index to the consolidated financial statements.
These consolidated financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule based
on our audits.
We conducted our audits 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 audits provide 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, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
March 19, 1997
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. Our audit also included
the financial statement schedule for the year ended December 31, 1994 listed
in the index to the consolidated financial statements. These consolidated
financial statements and financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and financial statement schedule 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. Also, in our
opinion, such financial statement schedule for the year ended December 31,
1994, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
New York, New York
February 8, 1995
F-2
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
DECEMBER 31 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 536,928 $ 17,895
Accounts receivable, less allowance for doubtful
accounts of $372,000 and $288,000 7,252,018 5,623,117
Inventory 10,636,820 7,873,131
Prepaid expenses and other current assets 384,648 387,767
Deferred tax asset 375,000 345,345
------------ ------------
TOTAL CURRENT ASSETS 19,185,414 14,247,255
Property and Equipment - net 1,453,179 921,120
Other Assets 227,189 276,315
Due from President 55,874 51,604
Deferred Tax Asset 101,988 --
------------ ------------
TOTAL ASSETS $ 21,023,644 $ 15,496,294
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,639,419 $ 2,615,397
Accrued expenses and other current liabilities 318,611 254,365
Notes and acceptances payable 4,546,556 8,075,196
Current portion of long-term debt 162,018 65,038
------------ ------------
TOTAL CURRENT LIABILITIES 9,666,604 11,009,996
------------ ------------
Long-term Debt 5,850,645 630,494
------------ ------------
TOTAL LIABILITIES 15,517,249 11,640,490
------------ ------------
Commitments and Contingencies (see notes)
Shareholders' Equity:
Series B preferred stock - $.001 par value; authorized
issued and outstanding 1,000 shares 1 -
Common stock - $.001 par value; authorized 6,000,000
and 20,000,000 shares, issued and outstanding
4,209,384 and 3,416,197 shares 4,209 3,416
Additional paid-in capital 15,130,511 13,014,260
Accumulated deficit (9,628,326) (9,161,872)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 5,506,395 3,855,804
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 21,023,644 $ 15,496,294
============ ============
</TABLE>
See Note to Consolidated Financial Statements
F-3
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 35,948,479 $ 32,383,302 $ 26,129,165
Less returns and allowances 3,349,383 1,919,572 1,034,692
------------------ ------------------ -------------------
Net sales 32,599,096 30,463,730 25,094,473
Cost of goods sold 24,267,823 22,409,932 18,390,321
----------------- ------------------ -------------------
Gross profit 8,331,273 8,053,798 6,704,152
------------------ ------------------ -------------------
Operating expenses:
Selling, general and administrative 8,083,225 7,238,924 5,198,689
Non-cash compensatory charges - - 2,314,000
Settlement of litigation - - 232,500
Public offering costs - 248,000 -
------------------ ------------------ -------------------
8,083,225 7,486,924 7,745,189
------------------ ------------------ -------------------
Income (loss) from operations 248,048 566,874 (1,041,037)
------------------ ------------------ -------------------
Other income (expense):
Interest expense (875,305) (774,762) (520,602)
Gain (loss) on foreign currency transactions (7,197) 2,816 (12,270)
------------------ ------------------ -------------------
(882,502) (771,946) (532,872)
------------------ ------------------ -------------------
Loss before provision (benefit) for income taxes (634,454) (205,072) (1,573,909)
Provision (benefit) for income taxes (168,000) (26,000) 395,000
------------------ ------------------ -------------------
Net loss $ (466,454) $ (179,072) $ (1,968,909)
================== ------------------ -------------------
Net loss per common and common equivalent share $ (.13) $ (.06) $ (.92)
================== ================== ===================
Weighted average number of common and common
equivalent shares outstanding 3,616,311 3,058,968 2,188,414
================== ================== ===================
</TABLE>
See Note to Consolidated Financial Statements
F-4
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-In
Shares Amount Shares Amount Capital
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 2,000,000 $ 500,000 1,875,500 $ 1,875 $ 8,634,785
Release of 1994 escrow shares to President -- -- -- -- 273,125
Exercisability of Class F warrants -- -- -- -- 74,375
Excess common shares issued upon --
conversion of preferred stock -- -- -- -- 1,966,500
Issuance of common stock in connection
with exercise of Class D warrants -- -- 41,667 42 16,625
Issuance of common stock for cash in connection --
with exercise of warrants -- -- 702,500 702 1,489,048
Issuance of common stock for services -- -- 1,800 2 35,998
Net loss -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- --
Balance at December 31, 1994 2,000,000 500,000 2,621,467 2,621 12,490,456
Conversion of Series A preferred stock (2,000,000) (500,000) 1,000,000 1,000 499,000
Foreign currency translation adjustment -- -- -- -- --
Dividends declared -- -- -- -- --
Issuance of common stock in connection with
exercise of Class F warrants -- -- 41,666 42 16,625
Employee Stock Bonus Plan -- -- 3,064 3 7,929
Return of 1993 Escrow shares to treasury and
retirement of such shares -- -- (250,000) (250) 250
Net loss -- -- -- -- --
Balance at December 31, 1995 -- -- 3,416,197 3,416 13,014,260
Proceeds from private placement -- -- 490,000 490 1,011,904
Exercise of warrants -- -- 200,000 200 759,800
Insurance of Series B preferred stock 1,000 1 -- -- 49,999
Conversion of note payable -- -- 91,300 91 257,909
Employee Stock Bonus Plan -- -- 5,637 6 8,520
Acquisition of ABS Brakes, Inc. -- -- 6,250 6 28,119
Net loss -- -- -- -- --
Balance at December 31, 1996 1,000 $1 4,209,384 $4,209 $15,130,511
</TABLE>
<TABLE>
<CAPTION>
Cumulative
Foreign
Currency Total
Accumulated Translation Shareholders'
Deficit Adjustment Equity
-------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1994 $(6,901,161) -- $ 2,235,499
Release of 1994 escrow shares to President -- -- 273,125
Exercisability of Class F warrants -- -- 74,375
Excess common shares issued upon
conversion of preferred stock -- -- 1,966,500
Issuance of common stock in connection
with exercise of Class D warrants -- -- 16,667
Issuance of common stock for cash in connection
with exercise of warrants -- -- 1,489,750
Issuance of common stock for services -- -- 36,000
Net loss (1,968,909) -- (1,968,909)
Foreign currency translation adjustment -- $ 1,954 1,954
Balance at December 31, 1994 (8,870,070) 1,954 4,124,961
Conversion of preferred stock -- -- --
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 -- -- 16,667
Employee Stock Bonus Plan -- -- 7,932
Return of 1993 Escrow shares to treasury and
retirement of such shares -- -- --
Net loss (179,072) -- (179,072)
Balance at December 31, 1995 (9,161,872) -- 3,855,804
Proceeds from private placement -- -- 1,012,394
Exercise of warrants -- -- 760,000
Insurance of Series B Preferred Stock -- -- 50,000
Conversion of note payable -- -- 258,000
Employee Stock Bonus Plan -- -- 8,526
Acquisition of ABS Brakes, Inc. -- -- 28,125
Net loss (466,454) -- (466,454)
Balance at December 31, 1996 $(9,628,326) $ -- $ 5,506,395
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 30,886,195 $ 28,526,134 $ 24,081,395
Cash paid to suppliers and employees (32,598,512) (29,740,631) (25,662,239)
Interest paid (915,511) (757,394) (495,357)
Taxes paid (30,753) (733,096) -
---------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (2,658,581) (2,704,987) (2,076,201)
---------------------------------------------------------
Cash flows from in investing activities:
Capital expenditures (109,399) (852,431) (210,014)
Acquisition of ABS Brakes, Inc. (9,375) - -
---------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (118,774) (852,431) (210,014)
---------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of stock and warrants 1,780,920 7,932 1,489,750
Net repayments (borrowings) on notes and acceptances payable (3,270,640) 3,020,376 637,416
Proceeds from issuance of long-term debt 4,919,974 630,000 182,757
Principal payments on long-term debt (70,318) (21,032) (32,150)
Principal payments on obligations under capital leases (22,329) - (16,676)
Loans to President (67,000) (72,000) -
---------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,270,607 3,565,276 2,261,097
---------------------------------------------------------
Effect of exchange rate changes on cash
Cash acquired from ABS Brakes, Inc. acquisition 25,781 (1,954) 1,954
---------------------------------------------------------
Net increase in cash 519,033 5,904 (23,164)
Cash at beginning of year 17,895 11,991 35,155
---------------------------------------------------------
Cash at end of year $ 536,928 $ 17,895 $ 11,991
=========================================================
Reconciliation of net loss to net cash used in operating activities
(net of acquisition):
Net loss $ (466,454) $ (179,072) $ (1,968,909)
Adjustments to reconcile net loss to net cash provided by
used in operating activities:
(Gain) loss on foreign currency transactions - (2,816) 12,270
Depreciation and amortization 73,584 186,675 92,245
Provision for doubtful accounts 480,623 617,891 (60,906)
Deferred income tax benefit (37,000) (154,000) (49,000)
Non-cash compensatory charges - - 2,314,000
Common stock and warrants issued for services - 36,000
Changes in assets and liabilities:
Accounts receivable (1,989,524) (1,937,596) (596,741)
Inventory (2,648,689) (1,593,795) (707,601)
Prepaid expenses and other current assets 21,206 (354,708) 118,983
Other assets 49,126 (51,766) (30,852)
Account payable and accrued expenses 1,858,547 764,220 (1,235,690)
---------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES $ (2,658,581) $ (2,704,987) $ (2,076,201)
=========================================================
</TABLE>
See Note to Consolidated Financial Statements
F-6
<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. 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. The
Company operates three wholesale warehouses for undercar parts within the New
York area, under the name Quality First Brakes Inc. In August 1996, the Company
acquired all the net assets of ABS Brakes, Inc. ("ABS") a manufacturer of
domestic brake pads.
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, 1996, 1995 and 1994, 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, 1996. The Company performs ongoing credit evaluations of its
customers' financial condition. When amounts on specific accounts receivable
are judged to be uncollectable by management, those amounts are charged to the
allowance for doubtful accounts. During the years ended December 31, 1996 and
1995, the Company had sales to one customer that accounted for 28% and 17%,
respectively, of the Company's net sales. In the fourth quarter of 1996, this
customer informed the Company it was consolidating vendors and therefore would
no longer use the Company as a prime supplier. In the fourth quarter of 1996,
the Company incurred costs of approximately $534,000 relating to the relabeling
and freight costs associated with this customer.
F-7
<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.
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.
Disclosure about Fair Value of Financial Instruments - The fair value of the
Company's credit facilities approximate fair value and is estimated based on the
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities.
Public Offering Costs - During 1995 the Company postponed raising additional
funds through a secondary offering due to market conditions. The Company
expensed the costs associated with the postponed offering totaling $248,000
during 1995.
Adoption of Statement of Financial Standard Accounting No. 123 - In 1996, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123"). SFAS 123
encourages, but does not require companies to record at fair value compenstion
cost for stock-based employee compensation plans. The Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Emplyees" and related interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock.
Supplemental cash flow information of non-cash activities -
1996
The President purchased 1,000 shares of Series B Preferred Stock for $50,000 in
exchange for a reduction in the prior dividend payable to him from the Series A
Preferred Stock. A note payable for $258,000 was converted into 91,300 common
shares. Common stock was issued for the acquisition of ABS Brakes Inc. in the
amount of $28,125. The Company entered into a capital leases for the purchase
of computer equipment totaling $489,804.
1995 and 1994
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.
Reclassification - For comparability, certain 1994 amounts have been
reclassified to conform to the current year's financial statement
presentation.
Note 2. ACQUISITION
Effective August 30, 1996, the Company acquired the net assets of ABS Brakes,
Inc. ("ABS") for $37,500 consisting of 6,250 shares of common stock and $9,375
in cash. ABS assembles brake pads for foreign and domestic cars. The fair
value of the net assets acquired approximated the purchase price.
Note 3. NOTES AND ACCEPTANCES PAYABLE
The Company has an agreement with a bank to provide, line of credit, bankers'
acceptances and letters of credit. The maximum availability under these
agreements at December 31, 1996 was $5,000,000. The line of credit and
bankers' acceptances bear interest at prime plus 3/4% per annum (the prime
rate was 8 1/4% at December 31, 1996). The line of credit expires in May 1997
and availability is based upon specified levels of accounts receivable and
inventory. The line of credit and bankers' 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"). During December 1996, the holder of a $258,000 short-term note
converted the note into 91,300 shares of common stock.
The outstanding balances are as follows:
1996 1995
Lines of credit $3,840,000 $4,030,000
Bankers' acceptances 706,556 3,787,196
Short-term note payable -- 258,000
---------- ----------
$4,546,556 $8,075,196
========== ==========
Note 4. LONG-TERM DEBT
F-8
<PAGE>
Long-term debt consists of the following:
1996 1995
Note payable - credit facility (a) $4,850,321 $ --
Note payable - economic development loan (b) 43,467 65,532
First mortgage - bank (c) 362,588 390,000
Second mortgage - development loan (d) 225,420 240,000
Note Payable - economic development loan (e) 63,392 --
Capital Lease - (f) 467,475 --
---------- ----------
6,012,662 695,532
Less current portion 162,018 65,038
---------- ----------
$5,850,645 $ 630,494
========== ==========
(a) The credit facility was granted for a 2 year period ending February
1998. Interest, payable monthly, is at prime rate or the bank's money market
rate plus 2 1/4% (the bank's money market rate was 5.633% at December 31, 1996).
It is secured by substantially all the assets of the Company. The credit
facility contains covenants, which require the maintenance of certain amounts of
net worth and financial ratios. At December 31, 1996, the Company was in default
of several convenants however, the bank has provided the Company a waiver for
these defaults and amended the terms of the agreement.
(b) The economic development loan bears interest at 5% and is payable
in monthly installments of $2,072 through November 1998. The note is
collateralized by certain property and equipment.
(c) The first mortgage dated December 8, 1995, is payable to a bank,
bears interest at 7.36% 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.
(d) 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.
(e) The economic development loan bears interest at 5% and is payable
in monthly installment of $1,314 through May 2001. The note is collateralized
by certain property and equipment.
(f) This capital lease is for the purchase of the Company's new
computer system. Monthly payments are approximately $10,000 per month through
May 2001.
Aggregate maturities of long-term debt are as follows:
Year ending December 31,
1997 $ 162,018
1998 5,025,223
1999 168,353
2000 183,303
2001 155,463
Thereafter 318,303
-----------
$ 6,012,663
===========
F-9
<PAGE>
Note 5. 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 of 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.
Common Stock - In August 1995, the Company increased its authorized common stock
to 20,000,000 shares. In March 1996, the Company decreased its authorized common
stock to 6,000,000 shares.
Preferred Stock - On April 30, 1995, the Company declared a dividend of $112,730
on the Series A Preferred Stock for all dividends accumulated for the period
from July 9, 1992 to April 30, 1995. The dividend was 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 share of common stock on April 30,
1995. The common shares issued upon attainment of such operating goals were
deemed to be compensatory and were measured by the fair market value of the
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. The amendment also eliminated all remaining authorized shares
of Series A preferred stock. Dividends payable to the President from the Series
A preferred stock was offset by the purchase of the Series B preferred stock
for $50,000. 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.
Private Placement - In July 1996, the Company signed an agreement with G-V
Capital Corp. (G-V), to raise an estimated $5 million through the issuance
of common stock and warrants. In August 1996, the Company completed raising
additional capital through a private placement by selling 490,000 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 has received net proceeds of
approximately $1,772,000 as of December 31, 1996 from the sale of units and
exercise of 200,000 warrants.
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.
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.
F-10
<PAGE>
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
349,000 ISOs have been granted (of which options to purchase, 123,000 have
expired); 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. In 1995,
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, 1996 are as follows:
Weighted Average
Options Exercise Price
Outstanding January 1, 1994 -- --
Granted 252,000 $10.83
Canceled (120,000) 20.00
Outstanding December 31, 1994 132,000 2.50
Granted 186,000 2.98
Canceled (3,000) 2.50
Outstanding December 31, 1995 315,000 2.78
Granted 91,000 4.71
Outstanding December 31, 1996 406,000 3.21
Exercisable:
December 31, 1995 80,000 2.50
December 31, 1996 175,000 3.24
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.
F-11
<PAGE>
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 1996 and 1995, 5,637 and
3,064 shares, respectively, were issued from the 100,000 shares available for
sale under the plan.
The following tables summarize information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Options Granted Options Exercised
Weighted Weighted Weighted
Range of Number Average Average Average
Exercise Prices Outstanding Remaining Exercise Exercisable Number
Life Price Price
<S> <C> <C> <C> <C> <C>
$ 2.25 - $ 3.00 315,000 2.7 years $2.78 128,000 $2.53
3.75 - 5.63 67,000 4.9 years 4.71 47,000 5.19
------- --------- ----- ------- ------
406,000 3.2 years $3.21 175,000 $3.24
======= ========= ===== ======= ======
</TABLE>
The estimated fair value of options granted during 1996 and 1995 were $4.13 per
share and $2.56 per share, respectively. The Company applies Accounting
Principles Board Opinion No. 25 and related Interpretations in accounting for
its stock option and purchase plans. No compensation cost has been recognized
for the Company's fixed stock option plans and stock purchase plans. Had
compensation cost for the Company's stock option plans and its stock purchase
plans been determined based on the fair value at the option grant dates for
awards in accordance with the accounting provisions of SFAS 123, the Company's
net loss and loss per share for the years ended December 31, 1996 and 1995 would
have been increased to the pro forma amounts indicated below:
1996 1995
Net loss applicable to common shareholders
As reported $(466,454) $(179,072)
Pro forma (563,298) (205,175)
Net loss per common share and common equivalent share
As reported $(.13) $(.06)
Pro forma (.10) (.07)
The fair value of options granted under the Company's fixed stock option plans
during 1996 and 1995 was estimated on the dates of grant using the Black-Scholes
options-pricing model with the following weighted-average assumptions used: -
expected volatility of approximately 125.28%, risk free interest rate of
approximately 6%, and expected lives of option grants of approximately four
years. Pro forma compensation cost related to shares purchased under the
Employee Stock Purchase Plan is measured based on the discount from market
value. The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future pro forma effects. SFAS 123 does not apply to awards prior
to 1995, and additional awards in future years are anticipated.
F-12
<PAGE>
Note 6. INCOME TAXES
Provision (benefit) for income taxes consists of the following:
1996 1995 1994
Federal:
Current $(176,000) $ 81,000 $ 326,000
Deferred (34,000) (123,000) (33,000)
--------- --------- ---------
(210,000) (42,000) 293,000
--------- --------- ---------
State and Local:
Current 45,000 47,000 118,000
Deferred (3,000) (31,000) (16,000)
---------- --------- ---------
42,000 16,000 102,000
---------- --------- ---------
$(168,000) $ (26,000) $ 395,000
========== ========= =========
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:
1996 1995 1994
Statutory federal income tax rate (34.0)% (34.0)% (34.0)%
State and local income taxes, net of
federal benefit 4.8 7.7 4.3
Nondeductible compensatory charges -- 50.0
Permanent and other differences 2.8 13.6 4.8
----- ----- ----
(26.4)% (12.7)% 25.1%
===== ===== ====
The tax effects of temporary differences that give rise to significant portions
of deferred tax asset consist of the following:
1996 1995
Inventory allowances and capitalization $272,000 $183,000
Bad debt allowance 103,000 158,700
Depreciation 15,000 3,300
Accruals not currently deductible 58,000 --
Other 28,988 345
-------- -------
$476,988 $345,345
======== ========
F-13
<PAGE>
Note 7. 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,
1997 $ 479,944
1998 $ 476,172
1999 $ 277,537
2000 $ 107,782
2001 $ 42,505
Thereafter $ 15,600
_________
$1,399,540
Rent expense for the years ended December 31, 1996, 1995 and 1994 amounted to
approximately $440,000, $354,000 and $361,000 respectively which includes
$312,000 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 paid for the years ended December 31,
1996 and 1995.
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. As a result of the above settlement and available
reserves, the Company recorded an expense of a $212,000 in 1996. Mutual releases
were exchanged for all claims and counter claims.
Note 8. SAVINGS PLAN
The Company established in November 1996 a tax deferred saving plan ("401(k)
Plan") for all employee's who meet certain eligibility requirements. The Company
did not make any contributions to this plan in 1996.
Note 9. ADOPTION OF NEW ACCOUNTING STANDARD
The Company will adopt the provisions of the Statement of Financial Accounting
Standard No. 128 "Earnings Per Share" in the fourth quarter of 1997. The
standard specifies the computation, presentation and disclosures requirements
for earnings per share. As required by the Standard, the Company will restate
all prior period earnings per share data presented. The adoption of this new
standard is not expected to have a material effect on the Company's consolidated
financial statements.
F-14
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Balance at Charged to Balance at
Beginning Costs and End of
Description of Period Expenses Deduction Period
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year ended December 31, 1996 $288,000 $480,623 $396,623(A) $372,000
Year ended December 31, 1995 $75,000 $617,891 $404,891(A) $288,000
Year ended December 31, 1994 $135,906 $(60,906) - $75,000
</TABLE>
(A) Represents amounts written off. Normal recurring credits and returns are
charged against sales.
S-1
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated:
April 3, 1997 BRAKE HEADQUARTERS U.S.A., INC.
By: /s/ Joseph Ende
Joseph Ende, President
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Joseph Ende Chairman of the Board of Directors, April 3, 1997
Joseph Ende President, Chief Executive Officer,
(Principal Executive Officer)
/s/ Marc J. Ruskin Chief Financial Officer (Principal April 3, 1997
Marc J. Ruskin Financial Officer)
/s/ Sandra Ende Director April 3, 1997
Sandra Ende
</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
Sanyo Automotive Parts, Ltd.
Quality First Brakes, Inc.
ABS Brakes, Inc.
Brake Headquarters Corp.
Quality First Brake Corp.
<PAGE>
EXHIBIT 23.1
(Logo)
GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
Certified Public Accountants and Consultants
(Logo)
NEXIA INTERNATIONAL
INDEPENDENT AUDITOR'S CONSENT
To the Board of Directors
Brake Headquarters U.S.A., Inc.
We hereby consent to the incorporation by reference in the registration
statement of Brake Headquarters, Inc. on Form S-8 (Registration No. 333-12821),
of our report dated February 8, 1995, on the consolidated statements of
operations, shareholders' equity and cash flows of Brake Headquarters, U.S.A.,
Inc. and Subsidiaries (formerly Sanyo Industries, Inc.) for the year ended
December 31, 1994, which report appears in the December 31, 1996 annual report
on Form 10-K of Brake Headquarters, U.S.A., Inc.
/s/ Goldstein Golub Kessler & Company, P.C.
GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
New York, New York
April 3, 1997
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
Board of Directors
Brake Headquarters U.S.A., Inc.
We consent to the incorporation by reference in Registration Statement
No. 333-12821 of Brake Headquarters U.S.A., Inc. on Form S-8 of our report
dated March 19, 1997, appearing in this Annual Report on Form 10-K of Brake
Headquarters U.S.A., Inc. for the year ended December 31, 1996.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
April 3, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 7,252,018
<ASSETS-OTHER> 227,189
<OTHER-ITEMS-ASSETS> 13,544,437
<TOTAL-ASSETS> 21,023,644
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 5,850,645
<OTHER-ITEMS-LIABILITIES> 9,666,604
<TOTAL-LIABILITIES> 15,517,249
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 15,130,511
<SHARES-COMMON-STOCK> 4,208
<SHARES-COMMON-PRIOR> 3,416
<ACCUMULATED-NII-CURRENT> (9,688,326)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 5,506,395
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (466,454)
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 793,187
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 875,305
<GROSS-EXPENSE> 8,083,225
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> (.13)
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
