<PAGE>
As filed with the Securities and Exchange Commission on June 29, 1998
Registration No. 333-44615
==============================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE EFFECTIVE
AMENDMENT NO. 3
TO
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------------------------
BRAKE HEADQUARTERS U.S.A., INC.
(Name of Registrant as Specified in Its Charter)
---------------------------------
Delaware 22-3048534
----------------------- ----------------
(State or Jurisdiction (I.R.S. Employer
of Incorporation or Identification
Organization) Number)
33-16 Woodside Avenue
Long Island City, New York 11101
(718) 779-4800
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
----------------------------------
Joseph Ende, President
Brake Headquarters U.S.A., Inc.
33-16 Woodside Avenue
Long Island City, New York 11101
(718) 779-4800
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Elliot H. Lutzker, Esq.
Snow Becker Krauss P.C.
605 Third Avenue
New York, New York 10158
Telephone: (212) 687-3860
Fax: (212) 949-7052
Approximate Date of Commencement of Proposed Sale to the Public: As
soon as practicable after the Registration Statement becomes effective.
If the only securities being registered on this Form are being
offered pursuant to dividend or interest reinvestment plans, please check the
following box [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. [X]
If this Form is a post-effective amendment filed pursuant to Rule
462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
<PAGE>
EXPLANATORY NOTE
This Pre-Effective Amendment No.3 to the Brake Headquarters U.S.A., Inc.
Registration Statement on Form S-3 (No. 333-44615) is being filed to remove
from this registration statement an aggregate of 2,270,385 shares of Common
Stock. These shares were included in the last three lines of Common Stock
listed in the Calculation of Registration Fee on p. (ii) and footnotes 13-15
on p. (iii) of Amendment No. 2 filed on June 17, 1998 and will now be included
in a separate Form S-3 Registration Statement.
- --------------------------------------------------------------------------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Title of Each Class of Proposed Maximum Proposed Maximum
Securities to be Registered Amount to be Offering Price Aggregate Offering Amount of
Fee Registered Per Share(1) Price(1) Registration
--------------------------- --------------------- ---------------- ------------------ -------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value 525,000 shs. (2) $4.18(3) $ 2,194,500 $ 665.00(4)
Class A Common Stock
Purchase Warrants 566,000 wts. (2) $3.80 $ 2,150,800 $ 651.76(5)
Common Stock, $.001 par value 566,000 shs. (6)(9) (7) (7) (7)
Common Stock, $.001 par value 722,951 shs. (8)(9) $4.18(3) $ 3,021,935 $ 915.74(10)
Common Stock, $.001 par value 38,615 shs. (11) $3.25(12) $ 125,499 $ 38.03
-------------- ----------- ---------
TOTAL: 1,852,566 shs. $ 7,492,734 $2,270.53(13)
=============== =========== =========
</TABLE>
- ------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933, as amended (the
"Securities Act").
(2) Of these securities, (i) 490,000 shares were issued by the registrant as
the components of 450,000 units in an August 1996 private placement (the
"1996 Placement") and upon exercise in December 1996 by the placement
agent for the 1996 Placement of warrants to purchase up to 40,000 units,
with each unit consisting of one share of Common Stock and two Class A
Common Stock Purchase Warrants, and (ii) 35,000 shares were registered
under the Securities Act on October 4, 1996 as part of the 174,633 shares
registered for selling shareholders.
(3) Pursuant to Rule 457(c) under the Securities Act, the registration fee has
been calculated based upon the average of the bid and asked prices of the
Common Stock on January 7, 1998, as reported by Nasdaq.
ii
<PAGE>
(4) Fee previously paid on October 4, 1996 for 664,633 shares of Common Stock.
(5) Fee previously paid on October 4, 1996 for 980,000 Class A Common Stock
Purchase Warrants.
(6) Issuable upon exercise of the Class A Common Stock Purchase Warrants.
(7) Pursuant to Rule 457(g), no additional registration fee is required for
these shares.
(8) Consists of (a) up to 303,951 shares issuable upon conversion of
$1,000,000 aggregate principal amount of the registrant's 5% Convertible
Subordinated Debentures due November 7, 1998 (the "1997 Debentures") at a
conversion price of $3.29 per share (as adjusted upon the filing of this
Registration Statement pursuant to the terms of the debentures, however,
currently convertible at 82.5% of the average closing bid price); (b) up to
10,000 shares issuable upon exercise of warrants to purchase Common Stock
at $9.88 per share expiring November 7, 2002 (the "Investor Warrants"),
which Investor Warrants were issued to the purchasers of the Debentures;
(c) up to 264,000 shares currently issuable upon conversion of $600,000
aggregate principal amount of the registrant's 8% Convertible Subordinated
Promissory Notes due November 7, 1998, (the "1997 Notes"), at a conversion
price of equal to 70% of the market value at the time of conversion, but
not more than $3.00 per share; (d) 100,000 shares issued in connection with
an acquisition by the Registrant (the "Acquisition Shares") and (e) up to
45,000 shares issuable upon exercise of a warrant at $8.03 per share,
issued to a lender in connection with a loan transaction (the "Creditor's
Warrant"). The 1997 Debentures, Investor Warrants and the 1997 Notes were
issued by the registrant in private placements in November 1997. The
Acquisition Shares and the Creditor's Warrant were also issued in November
1997.
(9) Pursuant to Rule 416 under the Securities Act, this Registration
Statement also covers such indeterminable number of additional shares as
may become issuable as a result of anti-dilution adjustments in
accordance with the terms of the Class A Common Purchase Warrants, the
Investor Warrants, the Creditor's Warrant, the 1997 Notes, the 1997
Debentures, the 1998 Warrants and the 1998 Debentures. In addition, in
the event of an increase in the number of shares issuable upon conversion
of the 1997 Debentures, 1998 Warrants and 1998 Debentures, by reason of the
floating rate conversion price, the number of shares registered shall be
automatically increased to cover additional shares in an indeterminate
amount in accordance with Rule 416(a) under the Securities Act.
(10) Fee previously paid on January 20, 1998 with this Registration Statement.
iii
<PAGE>
(11) Consists of (a) 8,615 additional shares issuable to the holders of the
1997 Debentures described in note (8) above in satisfaction of interest
and penalties upon redemption, and (b) 30,000 shares issued to Walsh
Manning Securities, LLC.
(12) Pursuant to Rule 457(c) under the Securities Act, the registration fee
has been based upon the $3.25 per share closing price of the Common Stock
on May 5, 1998, as reported by Nasdaq.
(13) Of the $2,270.53 total Registration Fee, $1,317.97 was previously paid by
the Company pursuant to the Registration Statement on Form S-1,
Registration No. 333-13533, filed on October 4, 1996, and $836.19 was
paid with this Registration Statement on January 20, 1998 and $116.37
was paid with Amendment No. 1 to this Registration Statement on May 8,
1998.
----------
Pursuant to Rule 429 under the Act, this Registration Statement relates to the
Registration Statement on Form-S-1 (File No. 333-13533), as amended.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
iv
<PAGE>
The Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
PROSPECTUS
- ----------
SUBJECT TO COMPLETION, DATED JUNE 29, 1998
1,852,566 Shares of Common Stock
566,000 Class A Class Common Stock Purchase Warrants
BRAKE HEADQUARTERS U.S.A., INC.
This Prospectus relates to up to 1,852,566 shares of Common Stock,
par value $.001 per share ("Common" Stock), of Brake Headquarters U.S.A., Inc.
(the "Company") that may be sold by certain selling stockholders named herein,
consisting of: (i) 10,000 shares (subject to adjustment) issuable upon the
exercise of warrants until November 7, 2002 (the "Investor Warrants"); (ii)
303,951 shares (subject to adjustment at 82.5% of the average closing bid
price at conversion) issuable upon conversion of up to $1,000,000 aggregate
principal amount of the Company's 5% Convertible Subordinated Debentures due
November 7, 1998 (the "1997 Debentures"), and an additional 8,615 shares
issuable to the holders of the 1997 Debentures upon their redemption; (iii)
264,000 shares (subject to adjustment) issuable upon the conversion of up to
$600,000 aggregate principal amount of the Company's 8% Convertible
Subordinated Promissory Notes due November 7, 1998, as amended (the "1997
Notes"); (iv) 100,000 shares issued to certain persons in connection with an
acquisition by way of merger by the Company (the "WAWD Acquisition"); and (v)
45,000 shares (subject to adjustment) upon exercise of a warrant issued to a
lender in connection with a loan transaction ("Creditor's Warrant").
This Prospectus covers all of the shares of Common Stock that have
been issued or are issuable upon the conversion of the 1997 Debentures and
1997 Notes (collectively, the "Convertible Securities"). Based on the current
trading prices of the Common Stock, the Convertible Securities would convert
into the number of shares of Common Stock set forth above. The foregoing
estimates are for illustrative purposes only. The actual number of shares of
Common Stock issued or issuable upon conversion of the Convertible Securities
are subject to adjustment and could be materially less or more than such
estimated amount, depending upon factors that cannot be predicted by the
Company at this time, including, among others, the future market price of the
Common Stock. See "Risk Factors - Securities Market Factors." There are also
limitations on the number of shares of Common Stock that can be issued upon
conversion at any particular time. To the extent such a conversion would
result in certain holders beneficially owning more than 9.99% of the then
outstanding Common Stock the holder would be limited in the number of shares
of Common Stock which could be converted. See "Recent Developments"; "Selling
Securityholders"; and "Plan of Distribution."
1
<PAGE>
This Prospectus also relates to the following securities that may be
sold by certain existing selling securityholders: (i) up to 490,000 shares of
Common Stock; (ii) up to 566,000 redeemable Class A Common Stock purchase
warrants (the "Class A Warrants"); (iii) 566,000 shares of Common Stock
issuable upon exercise of such Class A Warrants; (iv) 35,000 shares of Common
Stock held by a private investor who has "piggyback registration rights" and
(v) 30,000 shares of Common Stock held by Walsh Manning Securities, LLC. Each
Class A Warrant entitles the holder thereof to purchase one share of Common
Stock at $3.80 per share, subject to adjustment in certain circumstances,
until August 13, 1999.
The Common Stock may be offered from time to time by the selling
stockholders and selling securityholders named herein (collectively, the
"Selling Securityholders") through ordinary brokerage transactions in the
over-the-counter market, in negotiated transactions or otherwise, at market
prices prevailing at the time of sale or at negotiated prices. The Company
will not receive any of the proceeds from the sale of Common Stock and/or
Class A Warrants (collectively, the "Securities") by the Selling
Securityholders. The Class A Warrants, Investor Warrants and Creditor's
Warrants are collectively sometimes referred to herein as the "Warrants." See
"Selling Securityholders" and "Plan of Distribution."
Management of the Company holds an aggregate of approximately 47% of
the Company's issued and outstanding Common Stock. These persons will be able
to control the outcome of all matters requiring a vote, including elections
for the Board of Directors for which the Company's President and Principal
Stockholder currently has the exclusive right to elect a majority of the Board
of Directors.
The Common Stock is traded in the over-the-counter market and is quoted
on the NASDAQ SmallCap Market ("NASDAQ") under the symbol BHQU. On June 26,
1998, the closing sale price per share of the Common Stock as reported by
NASDAQ was $2.00.
--------------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A
HIGH DEGREE OF RISK AND SHOULD NOT BE PURCHASED BY
INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR
ENTIRE INVESTMENT. SEE "RISK FACTORS"
ON PAGE 8.
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Pursuant to Rule 429 under the Act, this Registration Statement relates
to the Company's Registration Statement on Form S-1 (File No. 333-13533), as
amended.
The date of this Prospectus is June __, 1998
2
<PAGE>
The registration of the securities being offered hereby is being
effected pursuant to registration rights granted by the Company to the Selling
Securityholder. In accordance with the terms of the registration rights
granted to the Selling Securityholders, the Company will bear the expenses of
such registration, estimated to be $55,000, except that the Selling
Securityholders will bear the cost of all brokerage commissions and discounts
incurred in connection with the sale of this securities being offered hereby
and their respective legal expenses.
Any brokers, dealers or agents that participate in the distribution
of the securities offered hereby may be deemed to be underwriters under
Section 2(11) of the Securities Act of 1933, as amended, (the "Securities
Act") and any commissions or discounts received by them on the resale of such
Securities may be deemed to be underwriting compensation under the Securities
Act. The sale of Securities by the Selling Securityholders is subject to the
prospectus delivery and other requirements of the Securities Act. See "Plan of
Distribution."
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, files reports, proxy statements, information statement
and other information with the Securities and Exchange Commission (the
"Commission"). The Company has filed a Registration Statement on Form S-3
under the Securities Act with the Commission in Washington, D.C. with respect
to the shares of Common Stock offered hereby. This Prospectus, which is part
of the Registration Statement, does not contain all of the information set
forth in the Registration Statement and the exhibits thereto. For further
information with respect to the Company, reference is made to the Registration
Statement and such exhibits as well as the reports, proxy and information
statements and other information filed under the Exchange Act, which can be
inspected and copied at the Public Reference section of the Commission at Room
1024, Judiciary Plaza, 450 5th Street, N.W., Washington, D.C. 20549 and at the
Commission's regional offices at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Suite 1300, 7 World Trade Center, New York, New York 10048.
Copies of such material can also be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Commission maintains a web site (http://www.sec.gov)
that contains reports, proxy and information statements and other information
regarding registrants that file electronically.
INFORMATION INCORPORATED BY REFERENCE
The following documents filed by the Company with the Securities and
Exchange Commission are incorporated herein by reference:
(a) Annual Report on Form 10-K for the year ended December 31, 1997, as
amended on June __, 1998 ("Form 10-K");
(b) Quarterly Report on Form 10-Q for the Quarter ended March 31, 1998
("Form 10-Q") as amended on June __, 1998;
(c) Information Statement dated April 3, 1998;
(d) Current Report on Form 8-K for November 17, 1997 as amended on
February 2, 1998 and May 22, 1998; and
(e) The description of the Company's Common Stock and Warrants
contained in its Registration Statement on Form S-1 (Commission File No.
333-13533) declared effective on November 12, 1996.
3
<PAGE>
All documents filed by the Company pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act after date of this Prospectus and prior to the
termination of the offering of the Securities offered hereby shall be deemed
to be incorporated by reference herein and to be a part hereof on the date of
filing of such documents. Any statement contained in a document incorporated
or deemed to be incorporated by reference herein shall be deemed to be
modified or superseded for purposes of this prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this prospectus.
The Company will provide without charge to each person to whom a
Prospectus is delivered upon written or oral request of such person, a copy of
any documents incorporated herein by reference (other than exhibits to such
documents unless such exhibits are specifically incorporated by reference into
the documents that this Prospectus incorporates). Requests should be directed
to Mr. Marc Ruskin, Chief Financial Officer, Brake Headquarters U.S.A., Inc.,
33-16 Woodside Avenue, Long Island City, New York 11101; telephone:
(718)779-4800.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to
the more detailed information and financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Each prospective investor is
urged to read this Prospectus in its entirety. This Prospectus contains, in
addition to historical information, forward-looking statements that involve a
number of risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements.
Factors that might cause or contribute to such differences include, but are
not limited to, intense competition; the Company's dependence on the
automotive industry, which is cyclical; historical decreases in internal
growth rates; the Company's ability to manage growth; and other risks
discussed under "Risk Factors," as well as those discussed elsewhere herein
and in reports filed by the Company with the Commission from time to time.
4
<PAGE>
The Company
Brake Headquarters U.S.A., Inc. (the "Company")is a publicly-owned
holding company, substantially all of its current business operations are
conducted through two of its wholly-owned subsidiaries, Sanyo Automotive
Parts, Ltd. ("Sanyo Automotive") and WAWD, Inc. ("WAWD"). Sanyo Automotive 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 trademarks "Brake
Headquarters, U.S.A., "Brake Headquarters" and other private labels.
WAWD is a direct importer of automotive parts. WAWD's primary
customers and channel of distribution of the products sold are to jobbers and
high-line European and Asian installer markets. Products are normally sold in
the manufacturers' packaging and very few parts are sold under the WAWD name.
WAWD maintains coverage for over 30,000 stock keeping units ("SKU's"). The
products carried include such product lines as filters, clutches, brakes,
water pumps, ignition, wire sets, hoses, belts, exhaust, air conditioning,
radiators, pistons, gaskets, shock absorbers, cables, headlights, brakes,
hydraulics, electrical and rotating electrical parts, and steering and
suspension parts. The product lines sold by WAWD are primarily replacement
parts for the import car market.
Other operating subsidiaries include ABS Brakes, Inc., which operates
a plant for the assembly of domestic brake pads; and Quality First Brakes,
Inc., which operates a wholesale warehouse in Long Island, New York. Sales are
primarily made to installers within the area, and sell a similar product line
to those of Sanyo Automotive.
The Company was incorporated in the State of Delaware on July 13,
1988 as a blind pool which did not conduct business operations until July
1992, when it acquired in a reverse acquisition (the "Reverse Merger"), all of
the outstanding capital stock of Sanyo Automotive, a New York corporation
formed in 1976. In connection with the Reverse Merger, the Company changed its
name to Sanyo Industries, Inc. and on August 8, 1995, Sanyo Industries, Inc.,
changed its name to Brake Headquarters U.S.A., Inc. In November 1997, the
Company acquired by way of a merger, substantially all of the assets and
certain liabilities of WAWD.
The Company's executive offices are located at 33-16 Woodside Avenue,
Long Island City, New York 11101; and its telephone number is (718) 779-4800.
5
<PAGE>
The Offering
Common Stock........................... 1,852,566 shares of Common Stock
Warrants............................... 566,000 Class A Warrants. The Class
A Warrants are exercisable until
August 13, 1999 at a per share
exercise price of $3.80, and are
subject to redemption by the
Company.
Common Stock outstanding (1)........... 4,563,321 shares
Common Stock to be Outstanding
Upon Exercise of Outstanding
Warrants and Convertible
Securities............................. 8,061,272 shares(2)
Use of Proceeds........................ The Company may receive a range of
net cash proceeds from zero up to
approximately $6,827,100 from time to
time upon exercise of the Warrants.
The amount of proceeds actually
received by the Company will depend
upon the number of Warrants actually
exercised. The Company will use the
net proceeds for repayment of
long-term debt if sufficient funds are
received, and/or for working capital
and general corporate purposes. The
Company will not receive any
proceeds from sales of Common Stock
by the Selling Securityholders. See
"Use of Proceeds."
Risk Factors........................... The securities offered hereby are
speculative and involve a high
degree of risk and should not be
purchased by investors who cannot
afford the loss of their entire
investments. See "Risk Factors."
NASDAQ Symbols
Common Stock........................... BHQU
Class A Warrants....................... BHQUW
- ----------
(1) Based on shares outstanding on June 12, 1998, but does not include any
shares issuable under footnote (2) below.
(2) Gives effect to the issuance of an aggregate of 3,497,951 shares of
Common Stock consisting of (i) 566,000 shares reserved for issuance upon
exercise of the Class A Warrants; (ii) 264,000 shares (subject to
adjustment) reserved for issuance upon conversion and/or redemption of
the 1997 Notes; (iii) an aggregate of 312,566 shares (subject to
adjustment) reserved for issuance upon conversion with interest and/or
upon redemption of the 1997 Debentures; (iv) 576,923 shares (subject to
adjustment) reserved for issuance upon conversion of the $1,500,000
principal amount of 8% Subordinated Convertible Debentures ("1998
Debentures") issued on April 29, 1998, and an additional 27,273 shares
issuable upon conversion of interest due thereon; (v) up to 15,000 shares
(subject to adjustment) reserved for issuance upon exercise of the 1998
Debenture Warrants issued on April 29, 1998; (vi) 1,651,189 shares
(subject to adjustment) reserved for issuance upon exercise of the Warrants
issued in connection with the 1998 Debentures; (vii) 45,000 shares (subject
to adjustment) reserved for issuance upon the exercise of the Creditor's
Warrant; (viii) 10,000 shares reserved for issuance upon exercise of the
Investor Warrants; and (ix) 30,000 shares reserved for Walsh Manning
Securities, LLC. Does not include 100,000 shares reserved for issuance
under the Employee Stock Bonus Plan; 10,000 shares reserved for issuance
upon conversion of the Company's outstanding Class B Preferred Stock;
1,240,000 shares underlying options granted under the Company's 1994 Stock
Option Plan, 1995 Stock Option Plan, or otherwise (collectively, the
"Option Plans"). See "Selling Stockholders," "Recent Developments" and
"Plan of Distribution."
6
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
Statement of Three Months Ended
Operations Data: Year Ended December 31, March 31,
- ------------------------------------------------------------------------------------------------------------ ---------------------
1997 1996 1995 1994 1993 1998 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales...................... $30,181,965 $32,599,096 $30,463,730 $25,094,473 $17,717,023 $16,388,509 $7,531,420
Income (loss) from operations.. (682,554) 240,85l 569,690 (1,041,037)(1) 70,009 142,036 141,476
Interest expense............... (991,962) (875,305) (774,762) (520,602) (314,796) (448,645) (202,083)
Net income (loss).............. (949,330) (466,454) (179,072) (1,968,909)(1) 41,187 (182,989) 33,239
Net income (loss) per basic
and diluted common share (2). $(.22) $ (.13) $ (.10) $ (.92) $ .00 $ (.04) $ .01
Balance Sheet Data: As of December 31, As of March 31, 1998
- ------------------------------------------------------------------------------------------- --------------------------
1997 1996 1995 1994 1993 Actual As Adjusted(3)
---- ---- ---- ---- ---- ------ --------------
Working capital $23,737,661 $ 9,518,810 $3,237,259 $ 3,706,239 $ 1,823,459 $22,836,408 $25,447,358
Total assets 38,180,367 21,023,644 15,496,294 11,937,143 10,189,885 37,081,667 39,692,617
Long-term debt 16,239,285 5,665,870 630,494 216,469 133,927 15,590,397 15,590,397
Total
stockholders'
equity 6,449,166 5,506,395 3,855,804 4,124,961 2,176,102 6,266,177 8,877,127
</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 income level under the July 1992 Reverse Merger and
certain cumulative levels for the three year period ended December
31, 1994.
(2) Net income (loss) per share is computed on the basis described in
Note 1 of Notes to Consolidated Financial Statements including, but
not limited to, the adjustment for the $112,730 dividend on preferred
stock in 1995.
(3) Assumes the exercise of the Warrants and the Company's receipt of net
proceeds of approximately $2,610,950 and the use of such proceeds for
working capital purposes without the repayment of any long-term debt.
See "Use of Proceeds."
7
<PAGE>
RECENT DEVELOPMENTS
On April 29, 1998, the Company completed a private financing of
$1,500,000 principal amount of 8% subordinated convertible debentures due
April 30, 2000 (the "Debentures"). The two foreign investors (the
"Purchasers") also received five-year warrants to purchase an aggregate of
15,000 shares of Common Stock at $3.93 per share. The Debentures are
convertible, commencing the earlier of 60 days from the date of Closing or the
effective date of a Registration Statement other than this one covering the
shares of Common Stock underlying the Debentures and Warrants, at a conversion
rate equal to the greater of (a) the lower of (i) 80% of the Market Price on
the Conversion Date, or (ii) $3.77; or (b)the Floor Price of $2.00 per share.
The Debentures are redeemable, with the consent of the Company's lender, at
any time at 120% of their principal amount plus all accrued interest and are
subject to mandatory redemption by the Company if the Market Price falls below
the Floor Price.
In connection with the above-described financing, the Company also
issued warrants to which the Purchasers have unconditionally and irrevocably
agreed to exercise on or before April 30, 2000 at an exercise price of the
greater of (a) the lower of (i) 80% of the Market Price on the Exercise Date,
or (ii) $3.77; or (b)the Floor Price of $2.00 per share. For all of the above
reasons, the Company believed that this arms length negotiated transaction was
the best alternative for the Company in raising money, although the shares are
issuable at a discount to the market.
RISK FACTORS
In evaluating an investment in the securities offered hereby,
prospective investors should consider carefully, among other things, the
following risk factors, as well as the other information contained in this
Prospectus. This Prospectus contains, in addition to historical information,
forward-looking statements that involve a number of risks and uncertainties.
The Company's actual results may differ materially from the results discussed
in the forward-looking statements. Factors that might cause or contribute to
such differences include, but are not limited to, intense competition; the
Company's dependence on the automotive industry, which is cyclical; historical
decreases in internal growth rates; the Company's ability to manage growth;
and other risks discussed below, as well as those discussed elsewhere herein
and in reports filed by the Company with the Commission from time to time.
Lack of Historical Profitability. Potential investors should be aware
that the Company has not reported a full fiscal year of profitability since
calendar 1993, and there can be no assurance that the Company will achieve
profitability in the future or maintain consistent profitability. During 1997
the Company experienced an overall decrease of 7.8% in gross sales levels. The
Company experienced a 20.1% decrease in gross sales, exclusive of the effects
of its acquisition of WAWD. In 1997, the Company incurred a net loss of
$949,330, including an accounts receivable bad debt provision of $892,000. The
Company's prospects must therefore be evaluated in light of the problems,
expenses, delays and complications associated with operating, managing,
integrating and attempting to achieve profitability based on expanded
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements.
Ability to Manage Growth. The Company acquired WAWD in November 1997
and intends to continue to expand its current level of operations. WAWD
reported gross sales of approximately $44,515,000 and $45,097,000, for the
years ended December 31, 1997 and 1996, respectively. The Company's rapid
growth is expected to place significant demands on the Company's management,
technical, financial and other resources. In addition, successful expansion of
the Company's operations will depend on, among other things, its ability to
attract, hire and retain skilled management and other personnel, secure
adequate sources of products on commercially reasonable terms and successfully
8
<PAGE>
manage growth, none of which can be assured. To manage growth effectively, the
Company will need to improve operational, financial and management information
systems, procedures and controls. There can be no assurance that the Company
will be able to manage its future growth effectively, and failure to do so
could have a material adverse effect on the Company's business, financial
condition and/or operating results. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Integration of Acquisition. The Company has not been able to expand
internally because of its loss of a principal customer, Autozone, Inc.
("Autozone"), which has not been fully replaced. Therefore, a key component of
the Company's future success depends upon its ability to combine the
operations of WAWD into a coherent vertically integrated company. There can be
no assurance that the Company will be able to effectively integrate WAWD with
its own operations, and failure to do so could have a material adverse effect
on the Company's business, financial condition and/or operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Leverage. The Company incurred approximately $7,900,000 of
indebtedness in connection with its acquisition of WAWD and its refinancing
with its senior lender in November 1997 plus an additional $1,500,000 of 1998
Debentures sold in April 1998. The Company remains leveraged and its present
debt service requirements are approximately $130,000 per month, inclusive of
the April 1998 Debenture financing at interest rates ranging from LIBOR plus
2.25% to prime plus 1%. The effect of such leverage may negatively impact,
without limitation, the ability of the Company (i) to obtain additional
financing on favorable terms; (ii) to service existing debt; and (iii) to
comply with financial and other covenants and operating restrictions imposed
under the terms of its existing long-term indebtedness.
The ability of the Company to satisfy such obligations will primarily
depend upon the future financial and operating performance of its operating
subsidiaries and upon the Company's ability to renew or refinance bank
borrowings and/or to raise additional equity capital. The Company's future
performance is dependent upon financial, business and other economic factors
affecting the Company and the automotive aftermarket industry in particular,
many of which are beyond the control of the Company and its subsidiaries. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
Highly Competitive Industry. The automotive aftermarket industry in
general, and the brake parts market in particular, is highly competitive. 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 Plants Division of Standard Motor Products,
Inc.; and the ITT Automotive Aftermarket Division of ITT/AIMCO. Many of the
Company's competitors are larger and have substantially greater financial
resources than the Company and may be able to sell merchandise at lower prices
than the Company. In addition, manufacturers who compete with the Company are
not dependent on relationships with suppliers as is the Company. The Company's
direct competitors who are distributors include Universal Brake Parts and
California Drum and Rotor.
9
<PAGE>
Dependence on Automotive Industry. The Company's business is
dependent upon the automotive industry, which industry is cyclical and has
historically experienced periodic downturns. These downturns are difficult to
predict and have often had a material adverse effect on the undercar parts
industry. Management believes, based on its experience, that it operates in a
recession resistant segment of the automotive industry. This is because
vehicle owners tend to repair automobiles rather than purchase new ones and
drivers will not normally neglect brake repairs. Nevertheless, the Company's
future performance may be adversely affected by automotive industry downturns.
Loss of Principal Customer, Decreases in Internal Growth Rates. The
Company's net sales increased by 42% in 1994, 21% in 1995, and 7% in 1996
before a 7% decrease in 1997 (including $4,444,970 of sales by WAWD), as
compared to the applicable prior year. During 1995 and 1996, net sales to
Autozone, which become a customer in 1993, accounted for approximately 17% and
28%, respectively, of the Company's net sales before terminating its
relationship with the Company in the fourth quarter of 1996. There were no
other 10% or greater customers in 1996 or in 1997 and WAWD did not have any
10% or greater customers in 1996 or in 1997. The Company's loss of Autozone
resulted in a decrease in sales of approximately $9.1 million in 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Dependence on Suppliers. The Company depends upon close relationships
with its suppliers of automotive parts and equipment and its ability to
purchase products at prices and on terms comparable to similarly situated
companies. The Company's ability to purchase at comparable prices and terms
was the result of the Company's large volume of purchases from these
manufacturers. The Company does not maintain supply contracts with any of its
suppliers, because it believes alternative sources exist for most of the
products the Company distributes. The loss of any one supplier is not expected
to have a material adverse effect on the Company. However, if a new supplier
is not obtained in a timely manner and upon acceptable terms, then the
Company's operations may be adversely affected.
Regulatory Considerations and Labor Relations. The Company is subject
to federal, state and local laws and regulations concerning workplace safety,
zoning and other matters relating to its business. In addition, the Company's
warehouse employees in New York and Illinois are subject to collective
bargaining agreements. From time to time, the Company has been and may
continue to be subject to disputes with its union, none of which has had to
date a material adverse effect on the Company's operations. Although to date,
the costs and expenses of complying with government regulations have not had a
material effect on the Company, a material increase in the cost of such
compliance could have a material adverse effect on the Company and its
operations.
Possible Need for Additional Financing. To date, the Company's
capital requirements have been significant. The Company anticipates, based on
its currently proposed plans and assumptions relating to its operations, that
cash flow from operations and currently available financing arrangements, will
be sufficient to satisfy its anticipated cash requirements for the next 12
months. In the event that the Company's plans or assumptions change or prove
10
<PAGE>
to be inaccurate, there can be no assurance that additional financing will not
be required. See "Use of Proceeds."
The Company's recent acquisition of WAWD, as well as any other
acquisitions the Company may conclude, may also require additional financing
and/or the issuance of additional equity securities which could result in
further dilution to the public stockholders. The Company incurred indebtedness
in connection with its acquisition of WAWD and will be subject to risks
associated therewith, including the risks of interest rate fluctuations and
insufficiency of cash flow to pay interest and principal. There can be no
assurance that additional funds, whether in the form of debt or equity, will
be available to the Company on commercially reasonable terms or at all.
Dependence on President. The Company's success is dependent upon the
efforts of Joseph Ende, the Company's President and Chief Executive Officer.
In July 1995, the Company entered into a three-year employment agreement with
Mr. Ende, which automatically renews for consecutive one-year periods unless
terminated on 30 days' prior written notice. The loss of Mr. Ende's services
would have a material adverse effect on the Company and its operations. The
Company maintains a key man life insurance of $3 million on Mr. Ende's life,
the proceeds of which are assigned as collateral security for indebtedness
owing to a bank.
Control by President and Principal Stockholder and Effects of Certain
Anti-Takeover Provisions. Joseph Ende beneficially owned approximately 47% of
the Company's outstanding Common Stock as of April 6, 1998. In addition, as
the sole stockholder of the Company's Series B Preferred Stock, which stock
votes as a separate class, Mr. Ende has the exclusive right to elect a
majority of the Company's Board of Directors until the earlier of the (a)
March 31, 2001 redemption date and (b) the date the Company the reports at
least $75 million in revenues for any year through December 31, 2000. THIS
THRESHOLD HAS BEEN ARBITRARILY SELECTED BY THE COMPANY AND IS NOT TO BE
CONSTRUED AS PROJECTIONS OF FUTURE COMPANY OPERATIONS. In the event of any
liquidation, dissolution or winding-up, the holder of shares of the Preferred
Stock will be entitled to an aggregate preference of $50,000, his basis in the
stock; any remaining proceeds of liquidation will be distributed pro rata to
holders of the Common Stock. The above-stated $75 million revenue level will
be determined by the Company and reported on its audited financial statements.
The Series B Preferred Stock could be utilized, under certain circumstances,
as a method of discouraging, delaying or preventing a change in control of the
Company.
The Company is subject to the provisions of Section 203 of the
General Corporation Law of Delaware ("GCL"). In general, Section 203 prohibits
a publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which such person becomes an interested stockholder, unless
(i) the business combination is approved in a prescribed manner or (ii) such
interested stockholder owns at least 85% of the corporation's voting stock
(excluding shares held by certain designated stockholders) upon completion of
the transaction in which such stockholder becomes an interested stockholder.
11
<PAGE>
This effect of such GCL provision could be delayed and make business
combinations more difficult even if the business combination could be
beneficial to the interests of the stockholders. This provision of the GCL
also could limit the price certain investors might be willing to pay in the
future for shares of the Common Stock. Consequently, Mr. Ende has the ability
to direct substantially all of the Company's affairs.
Payment of Dividends. No cash dividends have been paid on the Common
Stock since the Company's inception. On April 30, 1995, the Company declared a
cash dividend of $112,730 on 2,000,000 shares of Class A Preferred Stock of
the Company held by its President, Joseph Ende, which amount represented
accrued cumulative dividends. Of this amount, $50,000 was exchanged for 1,000
shares of Series B preferred Stock of the Company and the balance was credited
to the payment of certain advances made to Mr. Ende by the Company. No cash
dividends are contemplated in the foreseeable future, and the Company
presently intends to retain all of its earnings for the future operations and
growth of its business. The Company's loan agreement with one of its lenders
prohibits the payment of dividends on its outstanding capital stock.
Effect of Outstanding Warrants, Debentures and Options. As of June 1,
1998, the Company had outstanding warrants, debentures, and options to
purchase up to an aggregate of approximately 5,289,951 shares of Common Stock,
including the Class A Warrants to purchase up to 566,000 shares, the Investor
Warrants to purchase up to 10,000 shares, the Creditor's Warrant to purchase
up to 45,000 shares, the 1998 Debenture Warrants to purchase up to 15,000
shares, and the 1998 Warrants to purchase up to 1,651,189 shares at exercise
prices ranging from $2.00 to $9.88 (collectively, the "Warrants"); and options
granted under the Option Plans to purchase up to 1,240,000 shares (plus an
additional 572,000 shares available for grant under the Option Plans), at
exercise prices ranging from $2.25 to $6.88. In addition, at such date, the
Company had outstanding $3,100,000 aggregate principal amount of Convertible
Securities currently convertible into an aggregate of up to approximately
1,180,762 shares of Common Stock (subject to adjustment) and 1,000 shares of
Series B Preferred Stock convertible into 10,000 shares of Common Stock. The
terms upon which the Company will be able to obtain additional equity
financing may be adversely affected since the holders of outstanding Warrants,
options and Convertible Securities can be expected to exercise or convert them
at a time when, in all likelihood, the Company would be able to obtain any
needed capital on terms more favorable to the Company than those provided by
such securities. See "Risk Factors - Shares Eligible for Future Sale,
Registration Rights" and "Recent Developments."
Shares Eligible for Future Sale; Registration Rights. Of the
4,563,321 shares of Common Stock currently issued and outstanding,
approximately 2,200,000 shares of Common Stock (excluding the shares offered
hereby) are "restricted securities," as that term is defined under Rule 144
promulgated under the Securities Act ("Rule 144"), and may not be sold in the
absence of registration under the Securities Act, unless an exemption from
registration is available, including the exemption provided by Rule 144.
12
<PAGE>
The Company has granted certain registration rights to the holders of
an aggregate of approximately 3,993,000 shares of Common Stock (including
those issuable upon the exercise of the Warrants and upon conversion of the
Convertible Securities registered hereby, but excluding shares now saleable
under Rule 144) and has agreed to maintain a current prospectus to permit the
exercise of the Warrants and Convertible Securities. In particular, the
Company has granted shelf-registration rights pursuant to a Registration
Rights Agreement, dated November 7, 1997, with respect to the shares of Common
Stock underlying the Debentures, any such shelf-registration to be
continuously effective until the earlier of (i) all shares of the Registrable
Securities, as defined in the Registration Rights Agreement have been sold or
(ii) the second anniversary of the effective date of this Registration
Statement. No prediction can be made as to the effect, if any, that sales of
shares of Common Stock pursuant to such registration rights, or otherwise, or
even the availability of such shares for sale will have on the market price of
the Common Stock prevailing from time to time. The possibility that
substantial amounts of Common Stock may be sold in the public market may
adversely affect the prevailing market price for the Common Stock and could
impair the Company's ability in the future to raise capital through the sale
of its equity securities.
During the respective terms of the Company's outstanding options and
Warrants, the holders thereof may be able to purchase Common Stock at prices
substantislly below the then current market price of the Company's public
market may adversely affect the prevailing market price for the Common Stock
and could impair the Company's ability in the future to raise capital through
the sale of its equity securities.
During the respective terms of the Company's outstanding options and
Warrants, the holders thereof may be able to purchase Common Stock at prices
substantially below the then current market price of the Company's Common
Stock with a resultant dilution in the interests of the existing shareholders.
In addition, the exercise of outstanding options and Warrants and the
subsequent public sales of Common Stock by holders of such securities pursuant
to a registration statement effected at their demand, under Rule 144 or
otherwise, could have an adverse effect upon the market for and price of the
Company's securities. See "Plan of Distribution"; and "Management" and
"Executive Compensation" in the Company's Form 10-K.
Securities Market Factors. In recent years, the securities markets
have experienced a high level of volume volatility and market prices for many
companies, and particularly small and emerging growth companies have been
subject to wide fluctuations in response to quarterly variations in operating
results. The securities of many of these companies which trade in the
over-the-counter market, have experienced wide price fluctuations, which in
many cases were unrelated to the operating performance of, or announcements
concerning, the issuers of the affected stock. Factors such as the Company's
operating results, the expansion of the Company's operations pursuant to a
recent acquisition announcements by the Company or its competitors concerning
proprietary innovations, new products, government regulations and developments
or disputes relating to proprietary rights and factors affecting the
automobile industry generally may have a significant impact on the market for
13
<PAGE>
the Company's securities. General market price declines or market volatility
in the future could adversely affect the future price of the Company's
securities. See "Price Range of Common Stock" in the Company's Form 10-K.
Possible Delisting of Securities from the Nasdaq Stock Market; Risks
Associated with Low-Priced Stock. The Company's Common Stock became listed on
the Nasdaq SmallCap Market ("NASDAQ") on June 6, 1996. No assurance can be
given that the shares of Common Stock will remain qualified for listing on
NASDAQ. In order to continue to be listed on NASDAQ, the Company must maintain
$2,000,000 in net assets, a $4,000,000 market value of the public float and a
minimum bid price of $1.00. The failure to meet these maintenance criteria may
result in the delisting of the Common Stock from NASDAQ, and the trading of
the Common Stock, if any, would be conducted in the over-the-counter market
through the OTC Electronic Bulletin Board. As a result of such delisting, an
investor may find it more difficult to dispose of, or obtain accurate
quotations as to the market value of, the Company's Common Stock.
Furthermore, if the Common Stock is not listed on NASDAQ or were to
become delisted from trading on NASDAQ and the trading price of the Common
Stock remains below $5.00 per share, trading in the Common Stock would also be
subject to the requirements of certain rules promulgated under the Exchange
Act, which require additional disclosure by broker-dealers in connection with
any trades involving a stock defined as a penny stock (generally, any
non-NASDAQ equity security that has a market price of less than $5.00 per
share, subject to certain exceptions). Such rules require the delivery, prior
to any penny stock transaction, of a disclosure schedule explaining the penny
stock market and the risks associated therewith, and impose various
restrictions on sales practices by broker-dealers who sell penny stocks to
persons other than established customers and accredited investors. For these
types of transactions, the broker-dealer must make a special suitability
determination for the purchaser and receive the purchaser's written consent to
the transaction prior to sale. The additional burdens imposed upon
broker-dealers by such requirements may discourage them from effecting
transactions in the Common Stock, which could severely limit the liquidity of
the Common Stock and the ability of the Selling Securityholders to sell the
Common Stock in the secondary market. See "Plan of Distribution."
FOR ALL OF THE AFORESAID REASONS AND OTHERS SET FORTH HEREIN, THE
PURCHASE OF THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. ANY
PERSON CONSIDERING AN INVESTMENT IN THE SECURITIES OFFERED HEREBY SHOULD BE
AWARE OF THESE AND OTHER FACTORS SET FORTH IN THIS PROSPECTUS. THE SECURITIES
SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO ABSORB A LOSS OF THEIR
INVESTMENT IN THE COMPANY AND HAVE NO NEED FOR A RETURN ON THEIR INVESTMENT.
14
<PAGE>
USE OF PROCEEDS
The Company will not receive the proceeds of sales of Common Stock
and Class A Warrants offered hereby. The Company may receive a range of
aggregate gross cash proceeds from zero up to approximately $2,610,950 from
the exercise of the outstanding Class A Warrants, Investor Warrants and
Creditor's Warrant (the "Warrants"). The amount of proceeds actually received
by the Company will depend upon the number of Warrants actually exercised. The
Company will use the net proceeds (after deduction of $55,000 of offering
expenses) for repayment of long-term debt, if sufficient funds are received,
or otherwise for working capital and general corporate purposes.
The Company may also use a portion of the net proceeds allocated to
working capital to expand its operations by acquiring companies or parts of
companies which the Company believes are compatible with its business. The
Company has had discussions with and/or is currently negotiating to acquire
several companies, however, has no agreements or arrangements with respect to
any such acquisition. There can be no assurance that the Company will be able
to make any such acquisition.
Pending utilization of the net proceeds from the exercise prices of
the Warrants, the Company may use funds to temporarily reduce its credit
facilities and otherwise invest in interest-bearing investments.
15
<PAGE>
SELECTED FINANCIAL DATA
The selected consolidated financial data as of and for the five-year
period ended December 31, 1997 have been derived from the Company's
Consolidated Financial Statements. Such data should be read in conjunction
with the Consolidated Financial Statements and related Notes for the
three-year period ended December 31, 1997 and Management's Discussion and
Analysis of Financial Condition and Results of Operations. The consolidated
balance sheet data as of December 31, 1997 and 1996 and the consolidated
statements of operations data for each of the three years in the period ended
December 31, 1997, are audited and included in this Prospectus. The
consolidated balance sheet data as of the December 31, 1995, 1994 and 1993 and
the consolidated statements of operations data for the years ended December
31, 1994 and 1993 are derived from audited consolidated statements of the
Company which are not presented in this Prospectus. The selected data
presented below for, and as of the end of, the three months ended March 31,
1998 and 1997 are derived from the unaudited consolidated financial statements
of the Company appearing in this Prospectus. In the opinion of management, the
unaudited consolidated financial statements for the interim period include all
adjustments (consisting only of normal recurring accruals) necessary for a
fair presentation of the results for such period. The results of operations
for the three months ended March 31, 1998 are not necessarily indicative of
the results to be expected for the full year.
Statement of
Operations Data:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales ............................. $30,181,965 $ 32,599,096 $ 30,463,730 $ 25,094,473 $ 17,717,023
Income (loss) from operations ......... (682,554) 240,85l 569,690 (1,041,037)(1) 370,009
Interest expense ...................... (991,962) (875,305) (774,762) (520,602) (314,796)
Net income (loss) ..................... (949,330) (466,454) (179,072) (1,968,909)(1) 41,187
Net income (loss) per basic and
diluted common share (2) ........... $ (.22) $ (.13) $ (.10) $ (.92) $ .00
Balance Sheet Data:
As of December 31,
------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Working capital ..................... $23,737,661 $ 9,518,810 $ 3,237,259 $ 3,706,239 $ 1,823,459
Total assets ........................ 38,180,367 21,023,644 15,496,294 11,937,143 10,189,885
Long-term debt ...................... 16,239,285 5,665,870 630,494 216,469 133,927
Total stockholders' equity .......... 6,449,166 5,506,395 3,855,804 4,124,961 2,176,102
<PAGE>
Statement of
Operations Data:
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
Net sales $ 16,388,509 $ 7,531,420
Income (loss) from operations 142,036 141,476
Interest expense (448,645) (202,083)
Net income (loss) (182,989) 33,239
Net income (loss) per basic and
diluted common share (2) $ (.04) $ (.01)
As of March 31,
-----------------------------
1998 1997
---- ----
Balance Sheet Data:
Working capital ..................... $ 22,836,408 $ 9,693,017
Total assets ........................ 37,081,667 19,082,213
Long-term debt ...................... 15,590,397 5,948,206
Total stockholders' equity .......... 6,266,177 5,913,084
</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 Merger and certain cumulative levels for the three-year
period ended December 31, 1994.
(2) Net income (loss) per share is computed on the basis described in
Note 1 of Notes to Consolidated Financial Statements, including, but
not limited to, the adjustment for the $112,730 dividend on preferred
stock in 1995.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Material Changes in Results of Operations
Three Months Ended March 31, 1998 Compared
to Three Months Ended March 31, 1997
Gross sales in the three months ended March 31, 1998 increased by
$9,034,131, or 110.9%, to $17,179,005 compared to $8,144,874 for the three
months ended March 31, 1997. This increase was primarily due to the sales of
WAWD (a newly acquired subsidiary in November 1997) of $10,318,329. Sales from
the Company, exclusive of the acquisition, decreased by $1,284,198, primarily
due to the loss of a major 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 Company 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 the three months ended March 31, 1998 increased by
$2,797,813, or 146.4% to $4,708,908 compared to $1,911,095 for the three months
ended March 31, 1997. WAWD accounted for $2,724,144 of the increase. Gross
profit margins increased for the first quarter of 1998 to 28.73% compared to
25.37% for the first quarter of 1997, as a result of the higher gross profit
margins from the WAWD sales, and improved efficiencies in purchasing.
Operating expenses during the three months ended March 31, 1998 were
$4,566,872 an increase of $2,797,253 or 158.1% from $1,769,619 for the three
months ended March 31, 1997. WAWD's operating expenses were $2,778,632 for the
period ended March 31, 1998, a net increase of $111,622 or 6.3% which is
primarily due to increased freight and office administration.
Income from operations for the three months ended March 31, 1998 was
$142,036 compared with $141,476 for the same period in 1997. During the three
months ended March 31, 1998, WAWD incurred a loss from operations of $54,488.
Other income for the three months ended March 31, 1997 includes
$100,000 which relates to the sale of certain intangible assets previously
amortized through 1995 by the Company.
Interest expense during the three months ended March 31, 1998 was
$448,645 an increase of $246,562 over the interest expense of $202,083 during
the corresponding period in 1997. The increase is attributed to additional
borrowings in November 1997 used to finance the acquisition of WAWD of
approximately $761,000 on existing credit lines, and $162,265 of additional
interest expense from WAWD for the three months ended March 31, 1998.
As a result of the foregoing, the Company recorded a net loss for the
three months ended March 31, 1998 of $182,989 or $.04 per share, as compared to
net income of $33,239, or $.01 per share, for the three months ended March 31,
1997.
<PAGE>
1997 Compared to 1996
Gross sales for the year ended December 31, 1997 ("1997") decreased
$2,792,979, or 7.8%, to $33,155,500, as compared to $35,948,479 for the year
ended December 31, 1996 ("1996"). The Company's loss of a major customer,
Autozone, Inc., as described below under 1996 Compared to 1995, resulted in a
decrease in sales of approximately $9.1 million for 1997. The addition of new
customers and expanded sales to current customers, offset, in part, the
reduction in sales. The Company's 1997 gross sales included $4,444,970 of
sales for WAWD from November 17, 1997, the date of acquisition, to December
31, 1997. WAWD had sales of $44,515,000 and $45,097,000 for the years ended
December 31, 1997 and 1996, respectively.
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 Company 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 1997 was $8,944,944 as compared to $8,324,076 for
the same period in 1996. This represents an increase of $620,868, or 7.5%.
Gross profit increased notwithstanding lower sales as a result of continued
cost efficiencies in 1997 and the charge incurred in 1996 of $534,000 relating
to returned merchandise from Autozone, Inc. Gross profit, as a percentage of
net sales, for 1997 increased to 29.6%, as compared to 25.5% for 1996 due to
the continued emphasis by the Company purchasing more efficiently in 1997 and
the Autozone charge in 1996 (1.6%). Additionally, in 1997, there was an
increase in the market share of more profitable new lines of business, thus
adding to the increase in the gross margin percentage.
Operating expenses for 1997 were $9,627,498, an increase of
$1,544,273, or 19.1%, from $8,083,225 for 1996. The acquisition of WAWD added
additional operating expenses which accounted for 17.4% of this increase or
$1,406,095. The provision for bad debts was $892,000 in 1997, compared with
$481,000 in 1996. The difference of $411,000 accounted for a 5.8% increase in
operating expenses.
Most of the Company's payments to vendors are made in United States
dollars and, therefore, the amount of foreign currency is immaterial.
In 1997, the loss from operations was $682,554 as compared to income
of $240,851 for 1996. This was a decrease of $923,405, or 383%. Income from
operations for 1997 decreased primarily due to the increase in overhead
expenses noted above.
Interest expense for 1997, increased by $116,657 to $991,962 compared
to $875,305 for 1996. The increase was a result of additional borrowing in the
fourth quarter to fund the acquisition of WAWD.
Other income for 1997 consisted of $100,000 from the sale of certain
intangible assets previously amortized through 1995 and a gain on the sale of
marketable equity securities of $48,000.
For 1997, the Company's net loss was $949,330, or $.22 per share, as
compared to $466,454 or $.13 per share for 1996.
Excluding the results of WAWD, during the fourth quarter of 1997 the
Company experienced a dramatic decrease in sales levels. In the fourth quarter
of 1997, the Company had net sales of $4,009,821 as compared with $7,404,405
during the fourth quarter of 1996. This decrease was caused by the loss of
Autozone, Inc. The Company had sales to this customer of approximately $3.4
million during the fourth quarter of 1996, as compared with no sales to this
customer in the fourth quarter of 1997. Included within
17
<PAGE>
operating expenses for 1997 was an increase in the provision for doubtful
accounts of $867,000 during the fourth quarter. The increase in the provision
for doubtful accounts was primarily a result of the adjustment in the carrying
value in two large accounts receivable balances. The Company incurred
additional borrowings during the fourth quarter of 1997 to support the
increase in inventory levels and for the WAWD acquisition. As a result,
interest expense increased to $290,246 during the fourth quarter of 1997 from
$200,210 during the third quarter of 1997. These combined factors contributed
to the pre-tax loss of $1,526,330 for 1997.
The Company had generated taxable income for each of the three years
prior to the year ended December 31, 1996. The loss for income tax purposes
generated in 1996 was carried back in full to prior years resulting in a
refund of taxes paid to such extent. As such, the Company believed that
positive evidence existed and that it was more likely than not that the
deferred tax asset at December 31, 1996 would be realized and therefore no
valuation allowance was deemed necessary.
1996 Compared to 1995
Gross sales for 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 were anticipated to make up a portion of
the loss by this single customer.
Gross profit for 1996 increased by $267,462, or 3.3%, to $8,324,076
compared to $8,056,614 for 1995. Gross profit, as a percentage of net sales,
for 1996 and 1995 remained constant at 26%. 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 profit percentage by 2% in 1996
which was offset by other cost efficiencies.
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.
Income from operations for 1996, decreased by $328,839 to $240,851
compared to $569,690 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 in support of the growth in sales and assets.
18
<PAGE>
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 $.10 per share for 1995.
Liquidity and Capital Resources
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
The Company has continued to use funds generated from proceeds from
the sale of stock, exercise of warrants, and borrowings to finance working
capital requirements.
Cash provided by operations during the three months ended March 31,
1998 was $871,005 compared to $660,094 used in operations for the same period
in 1997. This change was due mainly to the decrease in inventory of
$2,584,051, which was offset by the corresponding increase in accounts
receivable of $1,755,533.
Cash used in investing activities was $29,174 during the first
quarter of 1998 compared with $38,316 in 1997. The change was primarily due to
capital expenditures.
Cash used in financing activities was $648,888 during the first
quarter of 1998 compared with $812,741 in 1997. The company repaid $606,286 of
its credit line from the proceeds of the reduction in inventory.
At March 31, 1998, the Company had a total of $17,852,262 available
under its combined lines of credit of which $15,149,959 was outstanding. These
funds are available for working capital purposes.
During the three months ended March 31, 1998, the Company made a
concerted effort to reduce inventory while ensuring sufficient product
availability. As a result, inventory decreased by $2,584,051, or 10.0% to
$23,230,866 from $25,814,917. Accounts receivable increased by $1,755,533, or
19.7%, from January 1, 1998 to March 31, 1998.
1997 Compared To 1996
The Company has continued to use funds generated from proceeds from
the sale of stock, exercise of warrants, and borrowings to finance working
capital requirements.
In November 1997, the Company entered into two credit agreements with
institutional lenders which provide for revolving credit and letter of credit
facilities, in an aggregate amount of up to $24 million based on certain
percentages of accounts receivable and inventory. Borrowings under these
facilities currently bear interest at rates ranging from LIBOR plus 2.25% to
prime plus 1% and both facilities expire in November 2000. The Company
incurred approximately $7.9 million of bank indebtedness (total purchase price
paid in cash was $8.4 million) in connection with its acquisition of WAWD
which bears interest at prime plus 1%.
<PAGE>
Cash provided by operations during 1997 was $389,926 as compared to
$2,658,581 used in operations for 1996. This change was due mainly to the
decrease in accounts receivable of $2,285,846, partially offset by an increase
in inventory of $839,388, for 1997. During 1996, inventory and accounts
receivable grew by $4,638,213 and accounts payable and accrued expenses grew
by $1,858,547.
Cash used in investing activities was $8,912,260 during 1997 compared
with $185,774 in 1996. The change was primarily due to increased capital
expenditures of $279,410, and the acquisition of WAWD for $8,431,400 in 1997.
Cash provided by financing activities was $8,050,816 during 1997
compared with $3,337,607 in 1996. The Company established a line of credit
with a new bank which provided funds of $9,508,322 to replace two existing
credit facilities totaling $9,396,877 which were repaid in November 1997.
Additional borrowings were obtained for the acquisition of WAWD in the amount
of $7,632,000, of this amount, $1,000,000 is in the form of one year 5%
debentures which are convertible into common stock and one year 8% $600,000
promissory notes.
Pursuant to the Company's Credit Agreement with National Bank of
Canada, under certain circumstances, certain of the Company's subsidiaries may
not transfer monies to certain other subsidiaries or the Company in the form
of dividends or other distributions.
At December 31, 1997 the Company had a total of $18,359,000 available
under its combined lines of credit of which $15,540,000 was outstanding. These
funds are available for working capital purposes. The Company does not
anticipate any material capital expenditures within the next year.
19
<PAGE>
The Company believes that many of its suppliers and customers have
year 2000 Issues ("Year 2000 Issue") which could affect the Company. Many
older computer software programs recognize only the last two digits of the
year in any date (e.g., "98" for "1998"). These programs were designed and
developed without considering the impact of the upcoming change in the
century. If the software is not reprogrammed or replaced, many computer
applications could fail or create erroneous results by or at the Year 2000.
The Company will commence a program to pursue compliance by those with whom it
electronically interconnects. It is not possible, however, at present, to
quantify the overall cost of resolving this issue for the Company's suppliers
and customers. Sanyo Automotive has been advised that its own software has
been designed and developed with a resolution to the Year 2000 Issue and as
such Sanyo Automotive presently believes that the cost of fixing the Year 2000
Issue will not have a material effect on the Company's current financial
position, liquidity or results of operations. WAWD is not currently on the
Sanyo Automotive computer system. WAWD will utilize both internal and external
resources to reprogram or replace, and test the software for Year 2000
modifications. WAWD anticipates completing the Year 2000 project in mid 1999.
It is anticipated the cost to implement a new computer system which will be
Year 2000 compliant will be approximately $600,000. WAWD expects to finance
this program through a three to five year capital lease.
See "Results of Operations."
20
<PAGE>
SELLING SECURITYHOLDERS
The following table sets forth, with respect to each Selling
Securityholder, based upon information available to the Company as of the date
hereof, the number of shares of Common Stock and Class A Warrants beneficially
owned, the number of shares of Common Stock and Class A Warrants to be sold,
and the number and percentage of outstanding shares of Common Stock
beneficially owned before and after the sale of the shares and Class A
Warrants offered hereby. None of the Selling Securityholders has been an
affiliate of the Company during the preceding three years, except as noted.
Although there can be no assurance that the Selling Securityholders will sell
any or all of the shares of Common Stock and Class A Warrants, the following
table assumes that each of the Selling Securityholders will sell all of the
shares of Common Stock and Class A Warrants offered by this Prospectus.
<TABLE>
<CAPTION>
Amount and
Nature Securities Percent
Beneficial Securities to Beneficially of
Ownership(1) Be Sold Owned Class
---------- ------------- After After
Shares(3) Warrants(4) Shares(3) Warrants(4) Offering Offering(2)
--------- ----------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Lawrence and Helaine Kaplan 120,000(5) 80,000 120,000(5) 80,000 -0- -0-
Stanley A. Kaplan 120,000(6) 80,000 120,000(6) 80,000 -0- -0-
G-V Capital Corp. 120,000(7) 80,000(7) 120,000(7) 80,000(7) -0- -0-
Quad Capital Partners 60,000 40,000 60,000 40,000 -0- -0-
OK Associates Pension Trust 30,000 20,000 30,000 20,000 -0- -0-
Michael Miller 60,000 40,000 60,000 40,000 -0- -0-
Manhattan Group Funding 30,000 20,000 30,000 20,000 -0- -0-
Universal Partners L.P. 60,000 40,000 60,000 40,000 -0- -0-
Kenneth Orr 120,000 80,000 120,000 80,000 -0- -0-
Murat and Ender Agirnasli 30,000 20,000 30,000 20,000 -0- -0-
Kenneth J. Koock 30,000 20,000 30,000 20,000 -0- -0-
MH Meyerson & Co., Inc. 30,000(7) 20,000(7) 30,000(7) 20,000(7) -0- -0-
ASN Voice & Data Corp. 15,000 10,000 15,000 10,000 -0- -0-
Interpacific Capital Corp. 180,000 120,000 180,000 120,000 -0- -0-
Jeanette Flam and Barry Gresser 60,000 40,000 60,000 40,000 -0- -0-
Plane Tree Corp. NV 30,000 20,000 30,000 20,000 -0- -0-
Theo Muller 120,000 80,000 120,000 80,000 -0- -0-
Jerry Kaplan 15,000 10,000 15,000 10,000 -0- -0-
William Orzolek 35,000 -0- 35,000 -0- -0- -0-
Excalibur Limited Partnership 194,114(8)(9) -0- 194,114(8)(9) -0- -0- -0-
Gundyco in trust for RRSP550-9886-19 128,452(8)(9) -0- 128,452(8)(9) -0- -0- -0-
Alliance Capital Investments Corp. 281,666 160,000 281,666(10) 160,000 -0- -0-
George M. Greco, Jr 16,666(10) -0- 16,666(10) -0- -0- -0-
Frank Skelly 41,666(10) -0- 41,666(10) -0- -0- -0-
Craig Gross 41,666(10) -0- 41,666(10) -0- -0- -0-
Baystate Development Trust 41,666(10) -0- 41,666(10) -0- -0- -0-
Stephen C. Schoffman 16,666(10) -0- 16,666(10) -0- -0- -0-
Jeffrey Chasse 50,000(11) -0- 50,000(11) -0- -0- -0-
Michael DiAngelo 50,000(11) -0- 50,000(11) -0- -0- -0-
The CIT Group/Credit Finance, Inc. 45,000(12) -0- 45,000(12) -0- -0- -0-
Walsh Manning Securities, LLC 30,000(13) -0- 30,000(13) -0- -0- -0-
--------- -------
</TABLE>
<PAGE>
- ------------
(1) Unless otherwise noted, the Company believes that all persons named in
the table have sole voting and investment power with respect to all
shares of Common Stock beneficially owned by them. A person is deemed
to be the beneficial owner of securities that can be acquired by such
person within 60 days from the effective date of this Prospectus upon
the exercise of warrants or options. Unless otherwise noted, each
Selling Securityholder's beneficial 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.
Beneficial ownership is based upon the conversion of all the
Convertible Securities based on current market prices for all of such
Securities which are either currently convertible or convertible
within the next 60 days. The actual number of shares of Common Stock
issued or issuable upon the conversion of the Convertible Securities
is subject to adjustment and could be materially less or more than
such estimated amount depending on factors that cannot be predicted
by the Company at this time, including, among others, the future
market price of the Common Stock, However, the holders of the
Convertible Securities have agreed contractually not to convert the
Convertible Securities to the extent that such a conversion would
result in such holder beneficially owning more than 9.99% of the then
outstanding Common Stock unless at such time the Company shall be in
default under any provision of the Certificate of Incorporation or
under the securities purchase agreements, between the Company and the
holders of such Convertible Securities.
(2) Based on 4,563,321 shares of Common Stock outstanding as of June 12,
1998.
(3) Includes shares of Common Stock underlying the Class A Warrants which
may already have been exercised.
(4) Includes Class A Warrants which may already have been exercised.
(5) Does not include any portion of the shares of Common Stock and Class
A Warrants held by: (a) G-V Capital Corp., of which Mr. Lawrence
Kaplan is an officer, director and stockholder, or (b) OK Associates
Pension Trust, of which Mr. Kaplan is a trustee; or (c) Quad Capital
Partners, of which Mr. Kaplan is a partner.
(6) Does not include any portion of the shares of Common Stock and Class
A Warrants held by Quad Capital Partners, of which Mr. Stanley Kaplan
is a partner.
(7) Does not include any shares that may be held by such Selling
Securityholder, a NASD member firm, in its firm trading account.
(8) Shares issuable upon conversion of the Debentures determined based on
a conversion price of $3.29 per share. The Debentures provide that
the principal amount thereof is convertible in increments of $50,000
into shares of Common Stock at a conversion price equal to the lesser
of (a) $8.56 per share and (b) the higher of (i) $3.29 per share and
(ii) 82.5% of the average closing bid price per share for the five
trading days immediately preceding the conversion date (which is the
current conversion rate). If the closing bid price per share of the
Common Stock for 20 consecutive days is $4.94 or less (which has
occurred), then, the conversion price is to be adjusted to $4.94 per
share. Thereafter, each time the closing bid price per share of the
Common Stock for 20 consecutive days is 75% or less of the last
readjusted maximum conversion price, such last readjusted conversion
price will be further adjusted. The conversion price is also subject
adjustment to avoid dilution in the event of a subdivision or
combination of the outstanding shares of Common Stock. Also includes
8,615 shares issuable in satisfaction of interest and penalties.
(9) Includes 6,000 shares issuable to Excalibur Limited Partnership and
4,000 shares issuable to Gundyco In Trust For RRSP550-9886-19 upon
exercise of the Investor Warrants. The exercise price of, and the
number of shares underlying, the Investor Warrants are subject to
adjustment to avoid dilution in the event of a subdivision or
combination of the outstanding shares of Common Stock.
(10) Shares issuable upon conversion of the Notes based upon a conversion
price of $3.00 per share, except that as to Alliance Capital
Investments Corp. ("AICI"), only 41,666 of the shares listed for AICI
underlie the
21
<PAGE>
Notes. The Notes are convertible (in November 1998) into shares of
Common Stock at a conversion price equal 70% of the average closing
sale price of the Common Stock for the five business days immediately
preceding the date on which a holder of a Note gives notice of
conversion to the Company, subject to a maximum conversion price of
$3.00 per share.
(11) Does not include 130,000 shares issuable upon exercise of options not
currently
22
<PAGE>
exercisable, but subject to vesting upon the attainment of certain
performance levels. See "Recent Developments."
(12) Shares issuable upon exercise of the Creditor's Warrant. The exercise
price of, and the number of shares underlying, the Creditor's Warrant
are subject to adjustment to avoid dilution in the event of stock
splits, stock dividends and similar distributions.
(13) Includes 30,000 shares issuable to this entity, as Placement Agent,
but does not include any portion of the shares of Common Stock
beneficially owned by Frank Skelly and Craig Gross, principals of
Walsh Manning Securities, LLC.
Beneficial ownership is based upon the conversion of all the
Convertible Securities based on current market prices for all of such
Securities which are either currently convertible or convertible
within the next 60 days. The actual number of shares of Common Stock
issued or issuable upon the conversion of the Convertible Securities
is subject to adjustment and could be materially less or more than
such estimated amount depending on factors that cannot be predicted
by the Company at this time, including, among others, the future
market price of the Common Stock. However, the holders of the
Convertible Securities have agreed contractually not to convert the
Convertible Securities to the extent that such a conversion would
result in such holder beneficially owning more than 9.99% of the then
outstanding Common Stock unless at such time the Company shall be in
default under any provision of the Certificate of Incorporation or
under the securities purchase agreements, between the Company and the
holders of such Convertible Securities.
23
<PAGE>
PLAN OF DISTRIBUTION
The shares of Common Stock and Class A Warrants (collectively the
"Securities") offered hereby are being offered by the Selling Securityholders
for their own account and not for the account of the Company. The Selling
Securityholders may continue to sell the Securities directly to purchasers or,
alternatively, may offer the Securities from time to time through other
agents, brokers, dealers or underwriters, who may receive compensation in the
form of concessions or commissions from the Selling Securityholders. Sales of
the Securities may be made in one or more transactions on NASDAQ, in privately
negotiated transactions or otherwise, and such sales may be made at the market
price prevailing at the time of sale, a price related to such prevailing
market price or a negotiated price. Sales of Securities are subject to the
prospectus delivery and other requirements of the Securities Act.
Under the Exchange Act and the regulations thereunder, any person
engaged in a distribution of the Common Stock of the Company offered by this
Prospectus may not simultaneously engage in market-making activities with
respect to the Common Stock of the Company during the applicable "cooling off"
period (nine business days) prior to the commencement of such distribution. In
addition, and without limiting the foregoing, the Selling Securityholders will
be subject to applicable provisions of the Exchange Act and the regulations
thereunder, including, without limitation, Rule 102 of Regulation M, which
provisions may limit the timing of purchases and sales of the Securities by
the Selling Securityholders. To the extent required, the Company will use its
best efforts to file, during any period in which offers or sales are being
made, one or more amendments or supplements to this Prospectus or a new
registration statement with respect to the Common Stock and Class A Warrants
to describe any material information with respect to the plan of distribution
not previously disclosed in this Prospectus, including the name or names of
any additional underwriters, dealers or agents, if any, the purchase price
paid by the underwriter for Securities purchased from a Selling
Securityholder, and any discounts, commissions or concessions allowed or
reallowed or paid to dealers.
COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company, the Company has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
LEGAL MATTERS
The legality of the Securities offered hereby will be passed upon for
the Company by Snow Becker Krauss P.C., 605 Third Avenue, New York, New York
10158. Snow Becker Krauss P.C. holds an option to purchase 20,000 shares of
Common Stock and Elliot H. Lutzker, a member of Snow Becker Krauss P.C.,
serves on the Company's Board of Directors.
EXPERTS
The consolidated financial statements of the Company as of December
31, 1997 and 1996 and for each of the three years in the period ended December
31, 1997 appearing herein, have been included in reliance upon the report of
Deloitte & Touche LLP, independent auditors, given upon the authority of such
firm as experts in accounting and auditing.
The financial statements of WAWD-EAP Automotive Products, Inc. (a
wholly-owned subsidiary of Echlin, Inc.) as of August 31, 1997 and 1996 and for
each of the three years in the period ended August 31, 1997, incorporated by
reference herein, have been included in reliance upon the report of Deloitte &
Touche LLP, independent auditors, given upon the authority of such firm as
experts in accounting and auditing.
24
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
Independent Auditors' Report ............................... F-1
Consolidated Financial Statements:
Balance Sheets ............................................ F-2
Statements of Operations .................................. F-3
Statements of Shareholders' Equity ........................ F-4
Statements of Cash Flows .................................. F-5
Notes to Financial Statements ............................. F-6-F-14
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Balance Sheets ............................................ F-15
Statements of Operations .................................. F-16
Statements of Cash Flows .................................. F-17
Notes to Financial Statements ............................ F-18
<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, 1997 and 1996,
and the related statements of operations, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997. Our audits
also included the financial statement schedule 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 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 20, 1998
F-1
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
----------------------------------
1997 1996
---------------- ---------------
<S> <C> <C>
ASSETS
Current Assets:
Cash ...................................................................... $ 65,410 $ 536,928
Accounts receivable, less allowance for doubtful accounts of $1,179,000
and $372,000 ............................................................ 8,910,085 7,252,018
Inventory ................................................................. 25,814,917 10,636,820
Prepaid expenses and other current assets ................................. 754,761 384,648
Deferred tax asset ........................................................ -- 375,000
------------- ------------
Total current assets ................................................... 35,545,173 19,185,414
Property and Equipment -- net .............................................. 1,638,749 1,453,179
Other Assets ............................................................... 674,571 227,189
Due from President ......................................................... 60,874 55,874
Deferred Tax Asset ......................................................... 261,000 101,988
------------- ------------
Total Assets ........................................................... $ 38,180,367 $ 21,023,644
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable .......................................................... $ 6,546,436 $ 4,639,419
Accrued expenses and other current liabilities ............................ 2,061,752 503,386
Current portion of long-term debt ......................................... 1,673,324 4,708,574
Deferred tax liability .................................................... 1,526,000 --
------------- ------------
Total current liabilities .............................................. 11,807,512 9,851,379
------------- ------------
Long-term Debt ............................................................. 16,239,285 5,665,870
Deferred Credit ............................................................ 3,684,404 --
------------- ------------
Total liabilities ...................................................... 31,731,201 15,517,249
------------- ------------
Shareholders' Equity:
Series B preferred stock -- $.001 par value; authorized, issued and
outstanding 1,000 shares ................................................ 1 1
Common stock -- $.001 par value; authorized 6,000,000 and 20,000,000
shares, issued and outstanding 4,563,321 and 4,209,384 shares ........... 4,563 4,209
Additional paid-in capital ................................................ 17,022,258 15,130,511
Accumulated deficit ....................................................... (10,577,656) (9,628,326)
------------- ------------
Total shareholders' equity ............................................. 6,449,166 5,506,395
------------- ------------
Total Liabilities and Shareholders' Equity ............................. $ 38,180,367 $ 21,023,644
============= ============
</TABLE>
See Notes to Consolidated Financial Statements
F-2
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Sales ................................................... $ 33,155,500 $ 35,948,479 $ 32,383,302
Less returns and allowances ............................ 2,973,535 3,349,383 1,919,572
------------ ------------ ------------
Net sales ............................................... 30,181,965 32,599,096 30,463,730
Cost of goods sold ...................................... 21,237,021 24,275,020 22,407,116
------------ ------------ ------------
Gross profit ............................................ 8,944,944 8,324,076 8,056,614
Selling, general and administrative expenses ............ (9,627,498) (8,083,225) (7,486,924)
------------ ------------ ------------
(Loss) income from operations ........................... (682,554) 240,851 569,690
------------ ------------ ------------
Other income (expense):
Interest expense ....................................... (991,962) (875,305) (774,762)
Other income ........................................... 148,186 -- --
------------ ------------ ------------
Total other income (expense) ........................ (843,776) (875,305) (774,762)
------------ ------------ ------------
Loss before benefit for income taxes .................... (1,526,330) (634,454) (205,072)
Benefit for income taxes ................................ 577,000 168,000 26,000
------------ ------------ ------------
Net loss ................................................ $ (949,330) $ (466,454) $ (179,072)
------------ ------------ ------------
Net loss per basic and diluted common share ............. $ (.22) $ (.13) $ (.10)
============ ============ ============
Weighted average number of common shares outstanding..... 4,379,941 3,616,311 3,058,968
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock
Shares Amount Shares Amount
--------------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 .............. 2,000,000 $ 500,000 2,621,467 $2,621
Conversion of Series A preferred
stock .................................. (2,000,000) (500,000) 1,000,000 1,000
Foreign currency translation
adjustment ............................. -- -- -- --
Dividends declared ...................... -- -- -- --
Issuance of common stock in
connection with exercise of
Class F warrants ....................... -- -- 41,666 42
Employee Stock Bonus Plan ............... -- -- 3,064 3
Return of 1993 Escrow shares to
treasury and retirement of such
shares ................................. -- -- (250,000) (250)
Net loss ................................ -- -- -- --
---------- ----------- --------- ------
Balance at December 31, 1995 ............ -- -- 3,416,197 3,416
========== =========== ========= ======
Proceeds from private placement ......... -- -- 490,000 490
Exercise warrants ....................... -- -- 200,000 200
Issuance of Series B preferred stock 1,000 1 -- --
Conversion of note payable .............. -- -- 91,300 91
Employee Stock Bonus Plan ............... -- -- 5,637 6
Acquisition of ABS ...................... -- -- 6,250 6
Net loss ................................ -- -- -- --
---------- ----------- --------- ------
Balance at December 31, 1996 ............ 1,000 1 4,209,384 4,209
========== =========== ========= ======
Exercise of warrants .................... -- -- 214,000 214
Exercise of stock options ............... -- -- 8,000 8
Employee Stock Bonus Plan ............... -- -- 1,937 2
Acquisition of WAWD ..................... -- -- 130,000 130
Fair value of warrants issued in
connention with debt ................... -- -- -- --
Net loss ................................ -- -- -- --
---------- ----------- --------- ------
Balance at December 31, 1997 ............ 1,000 $ 1 4,563,321 $4,563
========== =========== ========= ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Cumulative
Foreign
Additional Currency Total
Paid-in Accumulated Translation Shareholders'
Capital Deficit Adjustment Equity
-------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 .............. $12,490,456 $ (8,870,070) $ 1,954 $4,124,961
Conversion of Series A preferred
stock .................................. 499,000 -- -- --
Foreign currency translation
adjustment ............................. -- -- (1,954) (1,954)
Dividends declared ...................... -- (112,730) -- (112,730)
Issuance of common stock in
connection with exercise of
Class F warrants ....................... 16,625 -- -- 16,667
Employee Stock Bonus Plan ............... 7,929 -- -- 7,932
Return of 1993 Escrow shares to
treasury and retirement of such
shares ................................. 250 -- -- --
Net loss ................................ -- (179,072) -- (179,072)
----------- ------------- --------- ----------
Balance at December 31, 1995 ............ 13,014,260 (9,161,872) -- 3,855,804
=========== ============= ========= ==========
Proceeds from private placement ......... 1,011,904 -- -- 1,012,394
Exercise warrants ....................... 759,800 -- -- 760,000
Issuance of Series B preferred stock 49,999 -- -- 50,000
Conversion of note payable .............. 257,909 -- -- 258,000
Employee Stock Bonus Plan ............... 8,520 -- -- 8,526
Acquisition of ABS ...................... 28,119 -- -- 28,125
Net loss ................................ -- (466,454) -- (466,454)
----------- ------------- --------- ----------
Balance at December 31, 1996 ............ 15,130,511 (9,628,326) -- 5,506,395
=========== ============= ========= ==========
Exercise of warrants .................... 812,986 -- -- 813,200
Exercise of stock options ............... 23,992 -- -- 24,000
Employee Stock Bonus Plan ............... 13,649 -- -- 13,651
Acquisition of WAWD ..................... 961,120 -- -- 961,250
Fair value of warrants issued in
connention with debt ................... 80,000 -- -- 80,000
Net loss ................................ -- (949,330) -- (949,330)
----------- ------------- --------- ----------
Balance at December 31, 1997 ............ $17,022,258 $ (10,577,656) $ -- $6,449,166
=========== ============= ========= ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers .................................. $ 28,759,780 $ 31,267,820 $ 28,526,134
Cash paid to suppliers and employees .......................... (27,274,386) (33,040,889) (29,740,631)
Interest paid ................................................. (967,109) (854,759) (757,394)
Taxes paid .................................................... (128,359) (30,753) (733,096)
------------- ------------- -------------
Net cash provided by (used in) operating
activities ............................................ 389,926 (2,658,581) (2,704,987)
------------- ------------- -------------
Cash flows from investing activities:
Capital expenditures .......................................... (279,410) (109,399) (852,431)
Purchases of marketable securities ............................ (413,768) -- --
Proceeds from sales of marketable securities .................. 217,318 -- --
Acquisition of ABS ............................................ -- (9,375) --
Acquisition of WAWD ........................................... (8,431,400) -- --
Loans to President ............................................ (5,000) (67,000) (72,000)
------------- ------------- -------------
Net cash used in investing activities ................... (8,912,260) (185,774) (924,431)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from sale of stock and warrants ...................... 930,851 1,780,920 7,932
Borrowings .................................................... 17,071,054 4,919,974 3,650,376
Principal payments on long-term debt .......................... (9,532,889) (3,363,287) (21,032)
Financing costs ............................................... (418,200) -- --
------------- ------------- -------------
Net cash provided by financing activities ............... 8,050,816 3,337,607 3,637,276
------------- ------------- -------------
Effect of exchange rate changes on cash ........................ -- -- (1,954)
Cash acquired from ABS aquisition .............................. -- 25,781 --
------------- ------------- -------------
Net (decrease) increase in cash ................................ (471,518) 519,033 5,904
Cash at beginning of year ...................................... 536,928 17,895 11,991
------------- ------------- -------------
Cash at end of year ............................................ $ 65,410 $ 536,928 $ 17,895
============= ============= =============
Reconciliation of net loss to net cash used in operating
activities:
Net loss ...................................................... $ (949,330) $ (466,454) $ (179,072)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization .............................. 93,840 73,584 186,675
Amortization of deferred credit ............................ (47,700) -- --
Amortization of financing costs ............................ 37,390 -- --
Provision for doubtful accounts ............................ 892,069 480,623 617,891
Gain on sale of marketable securities ....................... (49,426) -- --
Deferred income tax benefit ................................ (1,086,000) (37,000) (154,000)
Changes in assets and liabilities (net of business
acquisitions):
Accounts receivable ...................................... 2,285,846 (1,989,524) (1,937,596)
Inventory ................................................ (839,388) (2,648,689) (1,593,795)
Prepaid expenses and other current assets ................ 149,887 21,206 (354,728)
Other assets ............................................. (66,572) 49,126 (51,766)
Accounts payable and accrued expenses .................... (30,690) 1,858,547 761,404
------------- ------------- -------------
Net cash provided by (used in) operating
activities ............................................ $ 389,926 $ (2,658,581) $ (2,704,987)
============= ============= =============
Supplemental cash flow information:
Businesses acquired:
Fair value of assets acquired ............................... $ 19,448,815 $ 37,500
------------- -------------
Cash paid ................................................... 8,431,400 9,375
Common stock issued ......................................... 961,250 28,125
------------- -------------
Total purchase price .................................... $ 9,392,650 $ 37,500
------------- -------------
Liabilities assumed ......................................... $ 6,324,065 $ --
Negative goodwill (classified as a deferred credit) ......... $ 3,732,100 $ --
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<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"). The Company is a publicly-owned holding company, substantially all
of its current business operations are conducted through two of its
wholly-owned subsidiaries, Sanyo Automotive Parts, Ltd. ("Sanyo") and WAWD,
Inc. ("WAWD"). Sanyo is a New York corporation formed in 1976, which is
currently doing business under the name Brake Headquarters. WAWD, a California
corporation acquired by way of a merger on November 17, 1997, is an importer
and distributor of high-line European and Asian automotive aftermarket parts.
Other operating subsidiaries include Quality First Brakes, Inc., a wholly-owned
Delaware subsidiary of the Company ("Quality First"), formed in August 1995,
which owns Fifteen Inc., Thirty Three Inc. and Thirty Nine Inc., and are
wholesale warehouses for "undercar" parts; ABS Brakes, Inc. ("ABS"), an
assembler of domestic brake pads is a wholly-owned New York subsidiary acquired
in August 1996.
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 -- Finished goods inventory, consisting of brake systems, engine
parts, 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
(10 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, wholesalers and installers of automotive replacement
parts throughout North America. On a geographic basis, no area has a
disproportionate concentration of credit risk. During the years ended December
31, 1997, 1996 and 1995, 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 replacement parts industry, management does not believe significant
credit risk exists at December 31, 1997. 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 year ended
December 31, 1997, no single customer accounted for more than 10% of net sales.
During the years ended December 31, 1996 and 1995, the Company had sales to one
customer that accounted for approximately 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 $284,000 relating to the relabeling and freight
costs associated with the loss of this customer.
Financing Costs -- During the year ended December 31, 1997, the Company
incurred $418,000 of costs in connection with debt financings (see Note 3).
These costs are being amortized over the terms of the respective financings.
Adoption of Statement of Financial Accounting Standards No. 128 -- During
1997, the Company adopted Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings Per Share". SFAS 128 replaces the presentation of
primary earnings per share with a presentation of basic earnings per share. It
also requires dual presentation of basic and diluted earnings per share on the
face of the income statement. Diluted earnings per share is computed by
dividing net income by the weighted average number of common shares outstanding
(including shares held in escrow, see Note 2 ) and dilutive common equivalent
shares (common stock options) outstanding. The net loss used in the
determination of the loss per share in 1995 has been adjusted for the $112,730
preferred stock dividend.
F-6
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 1. PRINCIPAL BUSINESS ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES
-- (Continued)
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.
Supplemental cash flow information of non-cash activities --
1997
Common stock was issued in connection with the acquisition of WAWD in the
amount of $961,250.
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 in the
amount of $28,125. The Company entered into capital leases for the purchase of
computer equipment totaling $282,700.
1995
Common stock was issued in connection with the exercise of Class F and D
warrants, respectively, by an increase in the amount due from President of
$16,667.
Reclassifications -- Certain reclassifications were made to the prior
years' financial statements to conform with the current year presentation.
Note 2. ACQUISITIONS
In November 1997, in a series of transactions, the Company acquired by
way of merger substantially all of the assets and certain liabilities of WAWD,
a wholly-owned subsidiary of Echlin, Inc., for a total purchase price
(including acquisition costs) of $8,431,400 in cash and 130,000 shares of the
Company's common stock valued at $961,250. Fifty thousand of the shares issued
are being held in escrow for up to 15 months as security for certain
indemnification obligations. The shares held in escrow retain all voting and
dividend rights and are included in common shares outstanding at December 31,
1997. The Company has accounted for the acquisition of WAWD under the purchase
method of accounting and the results of operations of WAWD have been included
in the 1997 statement of operations since its date of acquisition. The excess
of the estimated fair market value of the net assets acquired over the
purchase price was first utilized to reduce long-term assets acquired with the
remaining excess of $3,732,100 recorded as a deferred credit (negative
goodwill), which is being amortized over a 10 year period. Amortization of the
deferred credit was $47,700 during the year ended December 31, 1997, which is
included in selling, general and administrative expenses.
The Company signed an agreement with a consultant providing for common
stock to be issued as a retainer, and a fee to be paid based upon the
completion of a merger, acquisition or joint venture. A total of 30,000 shares
of common stock were issued in March 1997. The Company has recorded the fair
value of the common stock issued ($292,500) and the fee (which is in dispute)
as costs of the WAWD acquisition.
Effective August 30, 1996, the Company acquired the net assets of ABS for
$37,500 consisting of 6,250 shares of common stock and $9,375 in cash. The fair
value of the net assets acquired approximated the purchase price.
F-7
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 2. ACQUISITIONS -- (Continued)
The following summarized, unaudited pro forma results of operations assume
the WAWD acquisition occurred at the beginning of the respective year.
1997 1996
-------------- --------------
Net sales ...................... $67,921,337 $74,957,575
Net loss ....................... $ (919,491) $ (336,725)
Net loss per basic and
diluted common share .......... $ (.21) $ (.09)
Note 3. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Line of credit (a) ................................ $ 9,508,322 $4,546,556
Note payable -- credit facility (b) ............... -- 4,850,321
Line of credit -- WAWD (c) ........................ 6,032,732 --
Convertible subordinated debentures (d) ........... 930,000 --
Promissory notes (e) .............................. 600,000 --
Mortgages -- Fairfield, IL. facility (f) .......... 611,060 694,867
Capital lease (g) ................................. 230,495 282,700
----------- ----------
17,912,609 10,374,444
Less current portion ........................... 1,673,324 4,708,574
----------- ----------
$16,239,285 $5,665,870
=========== ==========
</TABLE>
(a) In November 1997, the Company entered into an agreement with a bank to
provide a three year line of credit of $12 million. The maximum
availability under this agreement at December 31, 1997 was $10,329,000.
At the Company's option, the line of credit bears interest at prime or 2
1/4% over LIBOR. The line of credit availability is based upon specified
levels of accounts receivable and inventory. The line of credit is
collateralized by substantially all of the assets of the Company (except
for the assets of WAWD). Proceeds from the line of credit were used to
repay the previous line of credit and the note payable -- credit
facility.
The agreement contains certain restrictive covenants with respect to,
among others, (i) mergers and acquisitions, (ii) capital expenditures,
(iii) dividends, and (iv) additional indebtedness. In addition, the line
of credit agreement requires that the Company satisfy certain financial
covenants. As a result of the Company's results of operations for 1997,
the Company failed to satisfy certain financial covenants set forth in
the credit agreement as of December 31, 1997. However, the bank provided
the Company a waiver of these defaults and has amended the terms of the
agreement through the remaining term of the agreement. Based upon
projected operating results for the year ended December 31, 1998,
management believes that the Company will be in compliance with all
amended covenants. Therefore, the line of credit agreement has been
classified as long-term at December 31, 1997.
(b) The credit facility had interest, payable monthly, at the prime rate or
the bank's money market rate plus 2 1/4%. The credit facility was
secured by substantially all the assets of the Company and was repaid in
1997.
At December 31, 1996, the Company was in default of several of the
covenants of the note-payable -- credit facility, however, the bank
provided the Company with a waiver through June 30,
F-8
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 3. LONG-TERM DEBT -- (Continued)
1997 of these defaults and amended the terms of the agreement. Based upon
projected operating results for the year ended December 31, 1997,
management believed that the Company would be in compliance with all
amended covenants. Therefore, the note-payable-credit facility was
classified as long-term at December 31, 1996.
(c) In November 1997, WAWD entered into an agreement with a financial
institution to provide a three year line of credit of $12 million. The
maximum availability under this agreement at December 31, 1997 was
$8,030,000. The line of credit bears interest at prime plus 1%. The line
of credit is based upon specific levels of accounts receivable and
inventory and is collateralized by substantially all the assets of WAWD.
(d) In November 1997, the Company issued $1 million, 5% convertible
subordinated debentures (the "Debentures"). The Debentures are due
November 7, 1998. Interest is payable in either cash or common stock, at
the Company's option. The Debentures are convertible into common stock
equal to the lesser of $8.56 per share or a price determined based upon
a market value formula. The Debentures are redeemable by the Company at
120% of the principal amount, provided that a notice of conversion has
not occurred. The Debentureholders also received warrants to purchase
10,000 shares of common stock exercisable for five years at $9.88 per
share. The fair value of the warrants ($80,000) at the date of issuance
was recorded as paid-in capital with a corresponding reduction in the
carrying value of the Debentures. The discount on the Debentures is
being amortized as additional interest expense over the term of the
Debentures. Such amortization was $10,000 in 1997.
(e) In November 1997, the Company issued one year, $600,000, 8%,
subordinated promissory notes.
(f) In a series of mortgages due through 2005, the Company financed its
Fairfield, Illinois facility. Interest rates range from 5% to prime.
(g) The capital lease is for the purchase of the Company's computer system.
Payments are approximately $7,000 per month through May 2001. The prime
rate and LIBOR were 8.5% and 6.0%, respectively, at December 31, 1997.
Annual maturities of long-term debt are as follows:
Year ending December 31,
1998 ................. $ 1,673,324
1999 ................. 132,138
2000 ................. 15,684,605
2001 ................. 110,827
2002 ................. 69,040
Thereafter ........... 242,675
-----------
$17,912,609
===========
Note 4. SHAREHOLDERS' EQUITY
Escrow Agreement -- Pursuant to a July 1992 agreement between the Company
and the Company's President, in 1995, 250,000 shares held by the Company's
President were returned to the treasury of the Company. Since the Company
attained the 1994 pre-tax income levels, as defined, 125,000 shares were
released from an escrow account to the President and 41,666 Class F warrants
were exercised during 1995. The President disputed a prior 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 at $3.00 per share expiring on July 20, 2000 under the 1995 Plan.
F-9
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 4. SHAREHOLDERS' EQUITY -- (Continued)
Preferred Stock -- In March 1996, the Company amended its Certificate of
Incorporation to authorize the issuance of 1,000 shares of Series B preferred
stock to be held by the President. The amendment also eliminated all remaining
authorized shares of Series A preferred stock. Dividends payable to the
President from the Series A preferred stock were offset in part, 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.
In March 1998, the Board of Directors and the Shareholders of the Company,
authorized 1,000,000 shares of preferred stock, in one or more series as the
Board of Directors determines without further shareholder approval.
Common Stock -- In February 1998, the Company increased its authorized
shares of common stock to 12,000,000 from 6,000,000 which was previously
changed from 20,000,000 in March 1996.
Private Placement -- In July 1996, the Company signed an agreement with a
consultant 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
$2,586,000 as of December 31, 1997 from the sale of units and exercise of
414,000 warrants.
Stock Options
In connection with the WAWD line of credit, (see Note 3), the Company
granted the bank a warrant to acquire 45,000 shares of the Company's common
stock at an exercise price of $8.03 per share, which expires in November 2002.
The bank has an option to require the Company to repurchase the warrant for up
to $75,000, based upon a formula, if not previously exercised before the
termination of the loan agreement. The $75,000 cost to repurchase the warrant
has been capitalized as a deferred financing cost included in other assets and
is being amortized as additional interest expense over the term of the line of
credit.
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.
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 371,000 options to purchase shares have been granted (123,000 have expired
or been canceled); no SARs have been granted.
F-10
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 4. SHAREHOLDERS' EQUITY -- (Continued)
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 1,500,000
(increased in March 1998) shares of common stock. The provisions of the 1995
Plan are identical to the above-stated terms of the 1994 Plan.
During 1997 under the 1995 Plan, the Company granted to certain officers
of WAWD five-year options to purchase 80,000 shares of common stock at $6.6875
per share and also granted seven-year options to purchase 180,000 shares of
common stock at $6.6875 per share, which options vest after six and one-half
years, subject to accelerated vesting upon the achievement of certain
performance goals.
Since the adoption of the 1995 Plan, through December 31, 1997 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, were
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.
A summary of stock option transactions under employee stock option plans
for each of the three years in the period ended December 31, 1997 are as
follows:
Weighted Average
Options Exercise Price
----------- -----------------
Outstanding January 1, 1995 ........... 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
Granted .............................. 302,000 6.69
Exercised ............................ (8,000) 3.00
-------
Outstanding December 31, 1997 ......... 700,000 4.72
=======
Exercisable:
December 31, 1996 .................... 175,000 3.24
=======
December 31, 1997 .................... 253,000 3.36
=======
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 1997, 1996 and
1995, 1,937, 5,637 and 3,064 shares, respectively, were issued from the 100,000
shares available for sale under the plan.
F-11
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 4. SHAREHOLDERS' EQUITY -- (Continued)
The following tables summarize information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options Granted Options Exercisable
---------------------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------------- ------------- ----------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C>
$2.25 - $3.00 331,000 2.4 years $ 2.79 186,000 $ 2.66
3.75 - 5.63 67,000 3.9 years 5.32 67,000 5.32
6.69 - 6.75 302,000 6.0 years 6.69 -- --
------- ----------- ------ ------- ------
700,000 4.1 years $ 4.72 253,000 $ 3.36
======= =========== ====== ======= ======
</TABLE>
The estimated fair value of options granted during 1997 and 1996 was $5.42
and $4.13 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 stock option and stock purchase plan. Had compensation cost for the
Company's stock option and 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, 1997 and 1996 would have been increased to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Net loss applicable to common shareholders
As reported .............................. $ (949,330) $ (466,454) $ (291,802)
Pro forma ................................ (1,215,430) (563,298) (317,905)
Net loss per basic and diluted common share
As reported .............................. $ (.22) $ (.13) $ (.10)
Pro forma ................................ (.28) (.16) (.10)
</TABLE>
The fair value of options granted under the Company's fixed stock option
plans during 1997 and 1996 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 92% for 1997 and 125%
for 1996, risk free interest rate of approximately 6%, and expected lives of
option grants of approximately five 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.
Note 5. INCOME TAXES
Provision (benefit) for income taxes consists of the following:
1997 1996 1995
------------- -------------- -------------
Federal:
Current .......... $ 353,000 $ (176,000) $ 81,000
Deferred ......... (849,000) (34,000) (123,000)
---------- ---------- ----------
(496,000) (210,000) (42,000)
---------- ---------- ----------
State and Local:
Current .......... 156,000 45,000 47,000
Deferred ......... (237,000) (3,000) (31,000)
---------- ---------- ----------
(81,000) 42,000 16,000
---------- ---------- ----------
$ (577,000) $ (168,000) $ (26,000)
========== ========== ==========
F-12
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 5. INCOME TAXES -- (Continued)
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:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------- ------
<S> <C> <C> <C>
Statutory federal income tax rate ............................. (34.0)% (34.0)% (34.0)%
State and local income taxes, net of federal benefit .......... ( 4.2) 4.8 7.7
Permanent and other differences ............................... .4 2.8 13.6
----- ----- -----
(37.8)% (26.4)% (12.7)%
===== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax (liability) asset consist of the following:
1997 1996
------------ --------
Inventory .................................. $ (1,463,000) $272,000
Accounts receivable ........................ (67,000) 103,000
Depreciation ............................... (13,000) 15,000
Accruals not currently deductible .......... 203,000 58,000
Other ...................................... 75,000 29,000
------------ --------
$ (1,265,000) $477,000
============ ========
The Company has generated taxable income for each of the three years prior
to the year ended December 31, 1996. The loss for income tax purposes generated
in 1996 was carried back in full to prior years resulting in a refund of taxes
paid to such extent. As such, the Company believed that positive evidence
existed and that it was more likely than not that the deferred tax asset at
December 31, 1996 would be realized and therefore no valuation allowance was
deemed necessary.
Note 6. OTHER INCOME
During 1997, the Company received $100,000 from the sale of certain fully
amortized intangible assets. Additionally, the Company recorded a gain on the
sale of marketable equity securities in the amount of $48,000. Such amounts are
reported as other income in the year ended December 31, 1997. As of December
31, 1997, the Company had marketable equity securities of $246,000 (cost
approximates market value) which are included in other current assets.
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,
1998 .............................................. $1,275,033
1999 .............................................. 715,746
2000 .............................................. 390,390
2001 .............................................. 245,536
2002 .............................................. 201,229
Thereafter .......................................... 1,200
----------
$2,829,134
==========
Rent expense for the years ended December 31, 1997, 1996 and 1995 amounted
to $495,000, $440,000 and $354,000, respectively, which includes $280,500,
$312,000 and $312,000, respectively, which was paid to the Company's President.
F-13
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 7. COMMITMENTS AND CONTINGENCIES -- (Continued)
In November 1997, in connection with the WAWD acquisition (see Note 3),
the Company entered into three-year employment agreements with two officers of
WAWD providing for annual compensation of $110,000 for the first year and
increasing to $120,000 for the second and third years plus incentive
compensation based on the performance of WAWD for the years ending December 31,
1999 and 2000.
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.
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, 1997, 1996 and 1995.
Note 8. SAVINGS PLAN
The Company established in November 1996 a tax deferred saving plan
("401(k) Plan") for all employees who meet certain eligibility requirements.
The Company did not make any contributions to this plan in 1997 and 1996.
Note 9. ADOPTION OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 130, "Reporting
Comprehensive Income", which requires a statement of comprehensive income to be
included in the financial statements for fiscal years beginning after December
15, 1997. The Company is presently designing such statement and accordingly,
will include such statement beginning with the first quarter of 1998.
In addition, in June 1997, the FASB issued SFAS 131, "Disclosures About
Segments of an Enterprise and Related Information". SFAS 131 requires
disclosures of certain information about operating segments and about products
and services, the geographic areas in which a company operates and their major
customers. The Company is presently in the process of evaluating the effect
this new standard will have on disclosures in the Company's financial
statements and the required information will be reflected in the year ended
December 31, 1998 financial statements.
Note 10. FOURTH QUARTER ADJUSTMENTS
Excluding the results of WAWD, during the fourth quarter of 1997 the
Company experienced a dramatic decrease in sales levels. In the fourth quarter
of 1997, the Company had net sales of $4,009,821 as compared with $7,404,405
during the fourth quarter of 1996. This decrease was caused by the loss of
Autozone, Inc. The Company had sales to this customer of approximately $3.4
million during the fourth quarter of 1996, as compared with no sales to this
customer in the fourth quarter of 1997. Included within operating expenses for
1997 was an increase in the provision for doubtful accounts of $867,000 during
the fourth quarter. The increase in the provision for doubtful accounts was
primarily a result of the adjustment in the carrying value in two large
accounts receivable balances. The Company incurred additional borrowings during
the fourth quarter of 1997 to support the increase in inventory levels. As a
result, interest expense increased to $290,246 during the fourth quarter of
1997 from $200,210 during the third quarter of 1997. These combined factors
contributed to the pre tax loss of $1,526,330.
F-14
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1998
(Unaudited) December 31, 1997
-------------- -----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 258,353 $ 65,410
Accounts receivable, less allowance for doubtful
accounts of $1,188,000 and $1,179,000 10,609,533 8,910,085
Inventory 23,230,866 25,814,917
Prepaid expenses and other current assets 371,345 754,761
------------ ------------
Total current assets 34,470,097 35,545,173
Property and Equipment - net 1,633,046 1,638,749
Other Assets 656,650 674,571
Due from President 60,874 60,874
Deferred Tax Asset 261,000 261,000
------------ ------------
Total Assets $ 37,081,667 $ 38,180,367
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 6,509,370 $ 6,546,436
Accrued expenses and other current liabilities 2,305,995 2,061,752
Current portion of long-term debt 1,673,324 1,673,324
Deferred tax liability 1,145,000 1,526,000
------------ ------------
Total current liabilities 11,633,689 11,807,512
------------ ------------
Long-term Debt 15,590,397 16,239,285
Deferred Credit 3,591,404 3,684,404
------------ ------------
Total liabilities 30,815,490 31,731,201
------------ ------------
Shareholders' Equity:
Series B preferred stock - $.001 par value; authorized,
issued and outstanding 1,000 shares 1 1
Common stock - $.001 par value; authorized 6,000,000
shares, issued and outstanding 4,563,321 shares 4,563 4,563
Additional paid-in capital 17,022,258 17,022,258
Accumulated deficit (10,760,645) (10,577,656)
------------ ------------
Total shareholders' equity 6,266,177 6,449,166
------------ ------------
Total Liabilities and Shareholders' Equity $ 37,081,667 $ 38,180,367
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-15
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Sales $ 17,179,005 $ 8,144,874
Less returns and allowances (790,496) (613,454)
------------ ------------
Net sales 16,388,509 7,531,420
Cost of goods sold 11,679,601 5,620,325
------------ ------------
Gross profit 4,708,908 1,911,095
Selling, general and administrative expenses 4,566,872 1,769,619
------------ ------------
Income from operations 142,036 141,476
------------ ------------
Other income (expense):
Other income 12,620 114,846
Interest expense (448,645) (202,083)
------------ ------------
(436,025) (87,237)
------------ ------------
(Loss) income before benefit (provision) for income taxes (293,989) 54,239
Benefit (provision) for income taxes 111,000 (21,000)
------------ ------------
Net (loss) income $ (182,989) $ 33,239
============ ============
Net (loss) income per basic and diluted share $ (.04) $ .01
============ ============
Weighted average number of common shares outstanding 4,563,321 4,219,284
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-16
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASHFLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998 March 31, 1997
------------------ -----------------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $15,036,151 $ 7,822,715
Cash paid to suppliers and employees 13,306,664) (6,932,216)
Interest paid (462,310) (202,083)
Taxes paid (396,172) (28,322)
----------- ------------
Net cash provided by operating activities 871,005 660,094
----------- ------------
Cash flows from investing activities:
Capital expenditures (29,174) (33,818)
Loans to President - (5,000)
----------- ------------
Net cash used in investing activities (29,174) (38,818)
----------- ------------
Cash flows from financing activities:
Proceeds from sale of stock and warrants -- 77,200
Repayments of notes payable and long term debt (606,286) (855,442)
Principal payments on long-term debt (42,602) (34,499)
----------- ------------
Net cash used in financing activities (648,888) (812,741)
----------- ------------
Net increase (decrease) in cash 192,943 (191,465)
Cash at beginning of period 65,410 536,928
----------- ------------
Cash at end of period $ 258,353 $ 345,463
=========== ============
Reconciliation of net income to net cash used in operating activities:
Net (loss) income $ (182,989) $ 33,239
Adjustments to reconcile net (loss) income to net cash provided by
(used in) operating activities:
Depreciation and amortization 34,877 24,844
Amortization of deferred credit (93,000) --
Amortization of financing costs 25,242 --
Provision for doubtful accounts 56,085 --
Gain on sale of marketable securities (12,620) --
Changes in assets and liabilities:
Accounts receivable (1,755,533) 309,208
Inventory 2,584,051 1,748,893
Prepaid expenses and other current assets 370,794 21,908
Other assets 17,921 (19,819)
Accounts payable and accrued expenses 207,177 (1,458,179)
Deferred tax Liability (381,000) --
----------- ------------
Net cash provided by operating activities $ 871,005 $ 660,094
=========== ============
Supplemental information of non-cash financing activities:
During the quarter ended March 31, 1997, thirty thousand shares of common stock were issued to a merger
and acquisition firm. The fair value of the common stock issued was $296,250.
</TABLE>
See Notes to Consolidated Financial Statements
F-17
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
Basis of Presentation
The accompanying unaudited consolidated financial statements of Brake
Headquarters U.S.A., Inc. and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q. Accordingly, they do not
include all of the footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results for the three
months ended March 31, 1998 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1998. For further information,
refer to the financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997. There
has been no significant changes of accounting policies since December 31, 1997.
Note 2
Long-term Debt
The Company was in technical default under its credit facilities at
December 31, 1997 and March 31, 1998. The bank has issued a waiver of the
default and amended the terms of the agreements through the remaining term of
the agreement.
Note 3
Stockholders' Equity
In April 1998, the Company increased the authorized shares from
6,000,000 to 12,000,000 shares. Additionally, the Board of Directors and the
shareholders of the Company authorized 1,000,000 shares of preferred stock in
one or more series at the discretion of the Board of Directors.
On April 29, 1998, the Company completed a private financing of
$1,500,000 principal amount of 8% subordinated convertible debentures due April
30, 2000 (the "Debentures"). The two foreign investors (the "Purchasers") also
received five-year warrants to purchase an aggregate of 15,000 shares of Common
Stock at $3.93 per share. The Debentures are convertible, commencing the earlier
of 60 days from the date of closing or the effective date of a Registration
Statement covering the shares of Common Stock underlying the Debentures and
Warrants, at a conversion rate equal to the greater of (a) the lower of (i) 80%
of the Market Price on the Conversion Date, or (ii) $3.77; or (b) the Floor
Price of $2.00 per share. The Debentures are redeemable, with the consent of the
Company's lender, at any time at 120% of their principal amount plus all accrued
Price falls below the Floor Price.
The Company and the Purchasers have agreed to sell and purchase,
respectively, up to an additional $4 million principal amount of Debentures
during the next 12 months provided certain market conditions are met. The
Company also granted the Purchasers a Right of First Refusal for a 120 day
period ending after the later of the effective date of the Registration
Statement or the latest closing date of the sale of additional Debentures.
The Company agreed to repay $500,000 of the 5% Convertible
Subordinated Debentures issued in November 1997, and the Company is waiting for
approval from its senior lender.
Note 4
Commitments
In May 1998, the Company entered into a 5 year agreement to lease new
facilities in its San Francisco warehouse and offices. The monthly lease payment
is $22,204 plus annual increases.
F-18
<PAGE>
================================================================================
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representations must
not be relied upon as having been authorized by the Company. This Prospectus
does not constitute an offer to sell or the solicitation of an offer to buy
any security other than the shares offered by this Prospectus, or an offer to
sell or a solicitation of an offer to buy any security by any person in any
jurisdiction in which such offer or solicitation would be unlawful. Neither
the delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, imply that the information in this Prospectus is correct as of
by any time subsequent to the date of this Prospectus.
--------------
TABLE OF CONTENTS
Page
----
AVAILABLE INFORMATION......................................................3
INFORMATION INCORPORATED BY REFERENCE......................................3
PROSPECTUS SUMMARY.........................................................4
SUMMARY FINANCIAL DATA.....................................................7
RECENT DEVELOPMENTS........................................................8
RISK FACTORS...............................................................8
USE OF PROCEEDS...........................................................15
SELECTED FINANCIAL DATA...................................................16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................17
SELLING SECURITYHOLDERS...................................................21
PLAN OF DISTRIBUTION......................................................24
COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES...................................24
LEGAL MATTERS.............................................................24
EXPERTS .................................................................24
FINANCIAL STATEMENTS.....................................................F-1
================================================================================
<PAGE>
1,852,566 SHARES OF
COMMON STOCK
566,000 CLASS A WARRANTS
------------------
BRAKE HEADQUARTERS U.S.A., INC.
------------------------------------
PROSPECTUS
------------------------------------
June __, 1998
=============================================================================
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
Expenses payable in connection with the issuance and
distribution of the securities being registered (estimated, except in the case
of the registration fee) are as follows:
Amount
----------
SEC Registration Fee $2,270.53
Printing 1,000.00
Legal Fees and Expenses 40,000.00
Accounting Fees 5,000.00
Transfer Agent's and Registrars 2,000.00
Fees
Miscellaneous 4,729.47
----------
TOTAL $55,000.00
==========
The above fees will be paid by the Company.
Item 15. Indemnification of Officers and Directors
Except to the extent hereinafter set forth, there is no statute,
charter provision, by-law, contract or other arrangement under which any
controlling person, director or officer of the registrant (the "Company") is
insured or indemnified in an manner against liability which he may incur in
his capacity as such.
The Placement Agent Agreement dated July 10, 1996 by and between the
Company and G-V Capital Corp. (the "Placement Agent") contains provisions
under which the Company has agreed to indemnify the Placement Agent (including
officers and directors of the Company and the Placement Agent and any person
who may be deemed to control the Placement Agent or the Company) against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended (the "Securities Act").
Pursuant to the terms of a Private Placement Subscription Agreement
("PPSA") dated November 7, 1997, among the Company, Excalibur Limited
II-1
<PAGE>
Partnership ("Excalibur") and Gundyco in trust for RRSP550-98866-19
("Gundyco," and together with Excalibur, "the Holders"), the Company issued 5%
convertible subordinated debentures and warrants to the Holders. The PPSA
provided the Holders with registration rights for the Common Stock underlying
the Debentures and Warrants. Under the provisions of a registration rights
agreement dated November 7, 1997, among the Company and the Holders, the
Company has agreed to indemnify the Holders (including officers, directors,
members, partners and each person deemed to control the Holders), against
certain liabilities, including liabilities under the Securities Act.
The common stock purchase warrant ("Warrant") dated November 19, 1997
issued by the Company to The CIT Group/Credit Finance, Inc. ("CIT") contains
provisions under which the Company has agreed to indemnify CIT (or other
holders of the Creditor's Warrant) against certain liabilities, including
liabilities under the Securities Act.
Article Seventh of the Company's certificate of incorporation and
Article VI of the Company's by-laws provide for the indemnification of
officers and directors to the fullest extent allowed by Section 145 of the
Delaware General Corporation Law (the "GCL").
The GCL provides, in part, that no director shall be personally
liable to a corporation or its stockholders for monetary damages for any
breach of fiduciary duty by such director as a director, except:
(i) for breach of the director's duty of loyalty to the corporation or
its stockholders;
(ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
(iii) pursuant to Section 174 of the GCL; or
(iv) for any transaction from which the director derived an improper
personal benefit.
The Company will, to the full extent permitted by the GCL, as amended
from time to time, indemnify all persons indemnifiable pursuant thereto.
Item 16. Exhibits
(a) Exhibits
II-2
<PAGE>
Exhibit No.
3.1 Certificate of Incorporation of the Company, as amended and restated,
filed April 28, 1998.
5.1 Opinion of Snow Becker Krauss P.C. regarding legality of securities being
registered.*
23.1 Consent of Snow Becker Krauss P.C. (included in Exhibit 5.1).*
23.2 Consent of Deloitte & Touche LLP.*
23.3 Consent of Deloitte & Touche LLP.*
- ------------
*Filed Herewith
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent no
more than 20 percent change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective registration
statement.
II-3
<PAGE>
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement.
(2) For the purpose of determining any liability
under the Securities Act of 1933, each post-effective amendment
shall be deemed a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed the initial bona fide offering
thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of this offering.
For the purpose of determining any liability under the
Securities Act of 1933, each filing of registrant's annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant
to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated
by reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer, or controlling person of the registrant in the successful defense of
any action, suit, or proceeding) is asserted by such director, officer, or
controlling persons in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
as amended, the registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements of filing on Form S-3 and has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, in the City of New York, State of New York, on the 29th day of
June 1998.
BRAKE HEADQUARTERS U.S.A., INC.
By: /s/ Joseph Ende
-----------------------------------
Joseph Ende, President
POWER OF ATTORNEY
Each of the undersigned hereby constitutes and appoints Marc
J. Ruskin as their true and lawful attorney-in-fact, with full power of
substitution and resubstitution for them in their name, place and stead, in
any and all capacities, to sign any and all amendments (including
post-effective amendments to this Registration Statement, and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming
all that each such attorney-in-fact or agent or substitute lawfully does or
causes to be done by virture hereof.
Pursuant to the requirements of the Securities Act of 1933,
as amended, this Registration Statement on Form S-3 has been signed below by
the following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Joseph Ende Chairman of the Board of Directors, June 29, 1998
- ------------------------------- President and Chief Executive
Joseph Ende Officer (Principal Executive Officer)
/s/ Marc J. Ruskin Chief Financial Officer (Principal June 29, 1998
- ------------------------------- Financial and Accounting Officer)
Marc J. Ruskin and Director
/s/ * Secretary and Director June 29, 1998
- -------------------------------
Sandra Ende
/s/ * Director June 29, 1998
- -------------------------------
Adam E. Budish
/s/ Elliot H. Lutzker Director June 29, 1998
- -------------------------------
Elliot H. Lutzker
*/s/ Marc J. Ruskin
- -----------------------------------
Marc J. Ruskin as attorney-in-fact
for each of the above-named persons
</TABLE>
II-5
<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
- ------------------------------- ----------- ---------- --------- ----------
Allowance for Doubtful Accounts:
<S> <C> <C> <C> <C>
Year ended December 31, 1997 $ 372,000 $ 893,000 $ 86,000 (A) $1,179,000
Year ended December 31, 1996 $ 288,000 $ 480,000 $ 396,000 (A) $ 372,000
Year ended December 31, 1995 $ 75,000 $ 618,000 $ 405,000 (A) $ 288,000
</TABLE>
(A) Represents amounts written off. Normal recurring credits and returns are
charged against sales.
S-1
<PAGE>
EXHIBIT INDEX
Exhibit No.
- -----------
5.1 Opinion of Snow Becker Krauss P.C. regarding legality of securities being
registered.
23.1 Consent of Snow Becker Krauss P.C. (included in Exhibit 5.1).
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Deloitte & Touche LLP.
- ------------
<PAGE>
Exhibit 5.1
June 24, 1998
Brake Headquarters U.S.A., Inc.
33-16 Woodside Avenue
Long Island City, New York 11101
Ladies and Gentlemen:
You have requested our opinion with respect to the offer and sale by
the Selling Securityholders of Brake Headquarters U.S.A., Inc., a Delaware
corporation (the "Company"), pursuant to a Registration Statement (the
"Registration Statement") on Form S-3 under the Securities Act of 1933, as
amended (the "Act"), of up to 1,852,566 shares (the "Shares") of Common Stock,
par value $.001 per share, of the Company and 566,000 Class A Common Stock
Purchase Warrants (the "Class A Warrants").
We have examined original, or copies certified or otherwise
identified to our satisfaction, of such documents and corporate and public
records as we deem necessary as a basis for the opinion hereinafter expressed.
With respect to such examination, we have assumed the genuineness of all
signatures appearing on all documents presented to us as originals, and the
conformity to the originals of all documents presented to us as conformed or
reproduced copies. Where factual matters relevant to such opinion were not
independently established, we have relied upon certificates of executive
officers and responsible employees and agents of the Company.
Based on the foregoing, it is our opinion that 625,000 of the Shares
included in the Registration Statement have been duly authorized and issued
and are fully paid and nonassessable; that the 1,227,566 Shares underlying
warrants and convertible securities referred to in the Registration have been
duly authorized and when paid for and issued as contemplated by such warrants
and convertible securities will be duly and validly issued and fully paid and
nonassessable and that the Class A Warrants have been duly authorized and
issued.
We hereby consent to the use of this opinion as Exhibit 5.1 to the
Registration Statement, and to the use of our name as your counsel in
connection with the Registration Statement and in the Prospectus forming a
part thereof. In giving this consent, we do not thereby concede that we come
within the categories of persons whose consent is required by the Act or the
General Rules and Regulations promulgated thereunder.
Very truly yours,
/s/ SNOW BECKER KRAUSS P.C.
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 to the Registration Statement
No. 333-44615 of Brake Headquarters U.S.A., Inc. on Form S-3 of our report
dated March 20, 1998 on the financial statements of Brake Headquarters U.S.A.,
Inc., appearing in the Prospectus, which is part of this Registration
Statement, and of our report dated March 20, 1998 relating to the financial
statement schedule appearing elsewhere in this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
June 29, 1998
<PAGE>
Exhibit 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 to the Registration Statement
No. 333-44615 of Brake Headquarters U.S.A., Inc. on Form S-3 of our report
dated December 23, 1997 on the financial statements of WAWD-EAP Automotive
Products, Inc. incorporated by reference in the Prospectus, which is part of
this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
San Francisco, California
June 29, 1998
