<PAGE>
As filed with the Securities and Exchange Commission on January 20, 1998
Registration No. 333-_____
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST EFFECTIVE AMENDMENT No. 1 TO
FORM S-1 REGISTRATION STATEMENT AND
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>
<TABLE>
<CAPTION>
====================================================================================================================================
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
Title of Each Class of Securities Amount to be Proposed Maximum Proposed Maximum Amount of
to be Registered Registered Offering Price Per Share (1) Aggregate Offering Price (1) Registration Fee
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value 525,000 shs. (2) $ 4.188 (3) $ 2,198,700 $ 666.21 (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 658,951 shs. (8)(9) $ 4.188 (3) $ 2,759,687 $ 836.19
----------- ---------
TOTAL: $ 7,109,187 $2,154.16 (10)
=========== =========
</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 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.
(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 "Debentures") at a conversion price of
$3.29 per share; (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 200,000 shares issuable upon conversion of
$600,000 aggregate principal amount of the registrant's 8% Convertible
Subordinated Promissory Notes due November 7, 1998, as amended (the
"Notes"), at a conversion price of $3.00 per share; (d) 100,000 shares
issued in connection with an acquisition by the Company (the "Acquisition
Shares") and (e) up to 45,000 shares issuable upon exercise of a warran
at $8.03 per share, issued to a lender in connection with a loan
transaction (the "Creditor's Warrant"). The Debentures, Investor Warrants
and the 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
Debentures and the Notes.
(10) Of the $2,154.16 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 is being
paid with this Registration Statement.
----------
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.
<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.
SUBJECT TO COMPLETION, DATED JANUARY 20, 1998
1,749,951 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 658,951 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) up to 10,000 shares issuable upon the exercise of
warrants until November 7, 2002 (the "Investor Warrants"); (ii) up to 303,951
shares 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 "Debentures"); (iii) up to 200,000 shares 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 "Notes,"
and together with the Debentures, the "Convertible Securities"), (iv) 100,000
shares issued to certain persons in connection with a reverse merger by the
Company (the "WAWD Acquisition"); and (v) up to 45,000 shares upon exercise of a
warrant issued to a lender in connection with a loan transaction ("Creditor's
Warrant"). See "Recent Developments"; "Selling Securityholders"; and "Plan of
Distribution."
This Prospectus also relates to the following securities that
may be sold by certain existing selling securityholders: (i) up to 481,666
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; and (iv) 35,000 shares of
Common Stock held by a private investor who has "piggyback registration rights".
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. See
"Selling Securityholders" and "Plan of Distribution."
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
January 7, 1998, the closing sale price per share of the Common Stock as
reported by NASDAQ was $4.25.
--------------------
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 7.
--------------------------
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.
The date of this Prospectus is January 20, 1998
<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 $30,000, 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 and other information with
the Securities and Exchange Commission (the "Commission"). The Company has filed
a Registration Statement on 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.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 fiscal year ended
December 31, 1996 ("Form 10- K");
(b) Quarterly Reports on Form 10-Q for each of the fiscal
quarters ended March 31, 1997, June 30, 1997 and
September 30, 1997, as amended by Amendment No. 1
on Form 10-Q/A to the Quarterly Report on Form 10-Q
for the fiscal quarter ended September 30, 1997 ("Forms
10-Q");
(c) Current Reports on Form 8-K dated November 13, 1997 and
November 17, 1997;
(d) Proxy Statement for the Company's Annual Meeting of
Stockholders held on August 26, 1997; 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.
2
<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.
The Company
Brake Headquarters U.S.A., Inc. (the "Company") is a
specialized distributor in the automotive aftermarket of a complete line of
brake system products including brake drums and rotors, brake master cylinders,
wheel cylinders, brake pads, brake shoes and brake hoses for virtually all makes
and models of domestic and foreign passenger cars and light trucks from model
year 1976 to the present. The Company also sells a variety of other "undercar"
parts, including ride control products, steering/suspension parts, drive shafts,
shock absorbers and clutches. Through its recent acquisition of WAWD - EAP
Automotive Products, Inc. ("WAWD"), the Company is also a specialized importer
and distributor of high quality European and Asian products for the automotive
aftermarket, including engine parts, hydraulic parts and cooling systems. The
brake line products are sold primarily under the registered trademarks "Brake
Headquarters, U.S.A.(R), and "Brake Headquarters(R)", as well as under the name
"Sanyo Automotive" and WAWD's products are sold primarily under the trademarks
EAP(R), EURASIAN AUTOMOTIVE PRODUCTS(R), WAWD(TM) and WORLDMARK(R).
The Company was incorporated in the State of Delaware on July
13, 1989 as a blind pool which did not conduct business operations until July
1992, when it acquired in a reverse acquisition (the "Reverse Acquisition"), all
of the outstanding capital stock of Sanyo Automotive Parts, Ltd., a New York
corporation ("Sanyo Automotive"), formed in 1976. In connection with the Reverse
Acquisition, the Company changed its name to Sanyo Industries, Inc. In August
1995, the Company, then operating under the name of Sanyo Industries, Inc.,
changed its name to Brake Headquarters U.S.A., Inc. In November 1997, the
Company acquired through a merger, the net assets of WAWD.
The Company is a publicly-owned holding company which conducts
substantially all of its current business operations through both Sanyo
Automotive, doing business under the name Brake Headquarters, and WAWD, Inc. 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.
3
<PAGE>
The Offering
<TABLE>
<CAPTION>
<S> <C>
Common Stock. . . . . . . . . . . 1,749,951 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
at December 22, 1997 (1). . . . . 4,555,515 shares
Common Stock to be Outstanding
Upon Exercise of Outstanding
Options, Warrants and Convertible
Securities (2). . . . . . . . . . 5,680,466 shares
Use of Proceeds . . . . . . . . . Any proceeds received by the Company from time to time upon exercise of the
Class A Warrants, Investor Warrants and Creditor's Warrant will be used 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
- ---------
</TABLE>
- ----------
(1) Based on shares outstanding on December 22, 1997. Does not include (i)
566,000 shares reserved for issuance upon exercise of the Class A Warrants;
(ii) 707,000 shares underlying options granted under the Company's 1994
Stock Option Plan (the "1994 Plan") and 1995 Stock Option Plans (the "1995
Plan", and together with the "1994 Plan", the "Option Plans") as to which
600,000 shares have been reserved for issuance upon exercise of outstanding
options and the balance of the options have been issued subject to increase
in the number of shares available for grant under the 1995 Plan, and
100,000 shares reserved for issuance under the Company's Employee Stock
Bonus Plan; (iii) 10,000 shares reserved for issuance upon exercise of the
Investor Warrants; (iv) 503,951 shares reserved for issuance upon
conversion of the Convertible Securities; (v) 10,000 shares reserved for
issuance upon conversion of the Company's outstanding Class B Preferred
Stock; and (vi) 45,000 shares reserved for issuance upon the exercise of
Creditor's Warrant. See "Selling Stockholders," "Recent Developments" and
"Plan of Distribution."
(2) Gives effect to the exercise of: (i) the 566,000 Class A Warrants offered
hereby; (ii) the Investor Warrants; (iii) the conversion of the Convertible
Securities; and (iv) the Creditor's Warrant; all of which 1,124,951 shares
have been registered for sale as part of this Prospectus, but does not give
effect to the exercise of options to purchase shares of Common Stock
granted under the Option Plans.
4
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
Statement of
Operations Data: Year Ended December 31, Nine months ended September 30,
------------------------------------------------------ -------------------------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Sales $25,094,473 $30,463,730 $32,599,096 $25,194,691 $22,046,355
Income (loss) from operations ( 1,041,037)(1) 566,874 248,048 760,364 567,013
Interest expense ( 520,602) (774,762) (875,305) (656,511) (614,295)
Net income (loss) ( 1,968,909)(1) (179,072) (466,454) 63,353 104,305
Net income (loss) per common and
common equivalent share (2) $ (.92) $ (.06) $ (.13) $ 0.02 $ .02
Balance Sheet Data: As of December 31, As of September 30, 1997
------------------------------------------------------ ------------------------------------
1994 1995 1996 Actual As Adjusted(3)
---- ---- ------- ------ --------------
Working capital $ 3,706,239 $ 3,288,863 $ 9,574,684 $14,475,601 $ 17,086,551
Total assets 11,937,143 15,496,294 21,023,644 19,951,478 22,562,428
Long-term obligations 216,469 630,494 5,850,645 10,191,891 10,191,891
Total stockholders' equity 4,124,961 3,855,804 5,506,395 6,364,250 10,575,200
</TABLE>
Although final results from operations for the year ended December 31,
1997 ("1997") are not yet available, the Company estimates that during the
fourth quarter of 1997 it will incur a loss of approximately $1,000,000 which
will offset the previously reported earnings of $104,305 for the nine months
ended September 30, 1997. The projected loss is a result of the Company's loss
from operations incurred in the fourth quarter, and an increase in its allowance
for doubtful accounts.
- ----------
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 Reverse Acquisition and certain cumulative levels
for the three year period ended December 31, 1994. See "Certain
Relationships and Related Transactions" in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1996 and Note 5 of the Notes to
the Consolidated Financial Statements.
(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 dividends on preferred stock.
(3) Assumes the exercise of the Warrants and the Company's receipt of gross
proceeds of $2,610,950 and the conversion of $1,600,000 of Convertible
Securities.
RECENT DEVELOPMENTS
On November 13, 1997, the Company as guarantor, and its subsidiaries,
ABS Brakes, Inc., Quality First Brake, Inc. and Sanyo Automotive Parts, Ltd., as
borrowers (the "Borrowers") entered into a revolving credit agreement with
National Bank of Canada, acting for itself and other institutional lenders (the
"Lenders"), pursuant to which the Lenders committed to provide a revolving
credit facility of up to $12 million, to be available as revolving credit loans
and letters of credit, to finance working capital requirements of the Borrowers.
The initial loan was used to pay all outstanding indebtedness under a $5,000,000
revolving credit facility and costs of the loan transaction with the lenders.
All obligations of the Borrowers under this facility are secured by security
interests in favor of the Lenders in substantially all of the assets of the
Borrowers.
On November 17, 1997, the Company, through a reverse merger transaction
(the "Merger"), acquired JMCD, Inc., a California corporation ("JMCD"), of which
Messrs. Michael DiAngelo and Jeffrey Chasse (the "Stockholders") were the sole
stockholders. JMCD was formed by the Stockholders for the purpose of acquiring
the assets, subject to the assumption of certain liabilities, of WAWD-EAP
Automotive Products, Inc. ("WAWD"), a wholly-owned subsidiary of Echlin, Inc.
The acquisition of the net assets of WAWD by JMCD was consummated on
5
<PAGE>
November 14, 1997. The purchase price for the assets purchased by JMCD was $8
million, of which $6.5 million in cash was paid to WAWD by the Stockholders and
the balance was paid by delivery of a promissory Note of JMCD for $1,500,000
payable to WAWD, which Note was paid in November 1997. The acquisition of JMCD
by the Company was consummated on November 19, 1997, pursuant to an Agreement
and Plan of Merger (the "Merger Agreement") among the Company, a wholly-owned
subsidiary of the Company ("Merger Sub"), JMCD and the Stockholders. Pursuant to
the Merger Agreement, JMCD is the surviving corporation of the Merger between
Merger Sub and JMCD, pursuant to which JMCD became a wholly-owned subsidiary of
the Company. JMCD has no assets other than those acquired from WAWD, and JMCD is
changing its name to WAWD, Inc.
Pursuant to the terms of the Merger Agreement, the Company paid an
aggregate of $162,000 to the Stockholders and issued 100,000 shares of Common
Stock to them. Each stockholder entered into a three-year employment agreement
with the Company, pursuant to which he (a) is being compensated at the base rate
of $110,000 per annum, increasing to $120,000 per annum in the second and third
years; (b) received five-year options to purchase up to 40,000 shares of Common
Stock at $6.6875 per share; and (c) received seven-year options to purchase up
to 90,000 shares of Common Stock exercisable at $6.6875, which options vest
after six and one-half years, subject to accelerated vesting upon the
achievement of certain performance goals. The Stockholders, JMCD and the Company
also entered into a pledge and escrow agreement, pursuant to which 50,000 of the
shares received by the Stockholders pursuant to the Merger are being held in
escrow for up to 15 months as collateral security for certain indemnification
obligations of the Stockholders under the Merger Agreement.
The acquisition of JMCD was partially financed by the Company with the
proceeds from the sale of the Notes. JMCD financed its acquisition of the assets
of WAWD with the proceeds of a loan advanced pursuant to a $9 million revolving
credit facility (the "Facility") provided by The CIT Group/Credit Finance Inc.
(the "Lender"), which loan was personally guaranteed by the Stockholders.
Simultaneously with the Merger, JMCD and the Lender amended the loan and
security agreement (the "Loan Agreement") between them to (a) increase the
Facility to $12 million; (b) terminate the guaranties of the Stockholders; (c)
reduce the interest rates and fees payable to the Lender; and (d) provide for
revolving credit loans based on up to 80% of the value of accounts receivable
and 45% of the value of inventory deemed "eligible" by the Lender, with an
inventory sublimit of $8 million. All obligations of JMCD under such credit
facility are secured by a security interest in favor of the Lender in
substantially all of the assets of JMCD. In addition, under the terms of the
Loan Agreement, as amended, the Company was required to make and made an
aggregate $500,000 capital contribution to JMCD. As a result of the Merger, the
Company has assumed all of the obligations of JMCD, including, but not limited
to, an aggregate of $8 million of principal indebtedness and various trade
payables and other liabilities.
In connection with the amendment of the Loan Agreement, the Company
issued to the Lender the Creditor's Warrant to acquire up to 45,000 shares of
Common Stock at $8.03 per share expiring on November 19, 2002, unless extended.
The number of shares underlying the Creditor's Warrant and the exercise price of
the Creditor's Warrant are subject to adjustment for stock splits, stock
dividends and similar distributions. The Lender was granted one demand and
certain "piggyback" registration rights. The Lender also has the right to
require the Company to repurchase the Creditor's Warrant for $75,000 (if not
previously exercised) on the termination of the Loan Agreement, if such date is
earlier than November 19, 2000, or otherwise on or after that date.
Notwithstanding the foregoing, if the product of multiplying the (i) difference
between the closing price of the Common Stock and the exercise price of the
shares underlying the Creditor's Warrant by (ii) the number of shares issuable
upon exercise of the Creditor's Warrant (the "Spread") exceeds $75,000, the
Lender must retain the Creditor's Warrant and shall not receive $75,000, but if
the Spread is less than $75,000, the Company may require the Lender to sell the
Creditor's Warrant and receive the proceeds, and the Company will pay the
difference between the proceeds received and $75,000.
WAWD is a specialized importer and distributor throughout the United
States of high quality European and Asian products for the automotive
aftermarket, including engine parts, hydraulic parts and cooling systems. WAWD
6
<PAGE>
has been engaged in such business for more than 35 years and currently maintains
five regional warehouses to facilitate national distribution of its products.
Such warehouses are located in Los Angeles and San Francisco, California;
Atlanta; Georgia, Piscataway, New Jersey, and Houston, Texas.
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. Although the Company has reported profits for the first nine
months of 1997, there can be no assurance that the Company will achieve
profitability in the future or maintain consistent profitability. 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 maintain 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 has reported
higher revenues than the Company for the most recent fiscal years. 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 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 "Recent
Developments" and "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 "Recent
Developments" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Leverage. The Company incurred a substantial amount of indebtedness in
connection with its acquisition of WAWD and its refinancing with its senior
lender in November 1997. The Company remains leveraged and its present debt
service requirements are substantial. 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.
7
<PAGE>
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 such as 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.
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. While
the Company believes that it operates in a recession resistant segment of the
automotive industry, its future performance may nevertheless 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 and 21% in 1995, as compared to the
applicable prior year, as the Company added new large customers. 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. In 1996,
the Company's net sales increased by only 7%. In the fourth quarter of 1996,
Autozone informed the Company that it was concentrating its purchasing
activities in one larger supplier and terminated its relationship with the
Company. While the Company added several new retail chains to make up a portion
of the loss of this single customer, its sales decreased by 13.0% for the nine
months ended September 30, 1997, as compared to the comparable period in 1996.
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 favorable prices and on favorable terms from these manufacturers.
The Company does not maintain supply contracts with any of its suppliers,
although the Company's subsidiary WAWD has supply contracts with Echlin,
Inc., its former parent, and several of its larger vendors. Alternative sources
exist for most of the products the Company purchases, and the loss of any
significant 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, Illinois and California and warehouse employees
of WAWD in California, Georgia, New Jersey and Texas, 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.
8
<PAGE>
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 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 $2 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 50.1% of
the Company's outstanding Common Stock as of December 19, 1997. 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.
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.
9
<PAGE>
The Company's loan agreement with one of its lenders prohibits the payment of
dividends on its outstanding capital stock.
Effect of Outstanding Warrants and Options. As of December 22, 1997,
the Company has outstanding warrants and options to purchase up to an aggregate
of 1,328,000 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 and
the Creditor's Warrant to purchase up to 45,000 shares of Common Stock at
exercise prices ranging from $3.80 to $9.88 (collectively, the "Warrants"); and
options granted under the Option Plans to purchase up to 707,000 shares (subject
to increase in the number of shares available for grant under the 1995 Plan), at
exercise prices ranging from $2.25 to $6.88. In addition, at such date, the
Company had outstanding $1,600,000 aggregate principal amount of Convertible
Securities convertible into an aggregate of up to 503,951 shares of Common Stock
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 4,555,515
shares of Common Stock currently issued and outstanding, approximately 20,000
shares of Common Stock (including the 1,749,951 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.
The Company has granted certain registration rights to the holders of
an aggregate of 2,138,951 shares of Common Stock (including those issuable upon
the exercise of the Warrants and upon conversion of the Convertible Securities)
and has agreed to maintain a current prospectus to permit the exercise of the
566,000 Class A Warrants. 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
substantially below the then current market price of the Company's
10
<PAGE>
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 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
11
<PAGE>
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.
USE OF PROCEEDS
The Company will not receive the proceeds of sales of Common
Stock and Class A Warrants offered hereby. However, upon the full exercise of
the outstanding Class A Warrants, Investor Warrants and Creditor Warrants the
Company will receive aggregate cash proceeds of $2,610,950. The Company will use
the approximately $2,580,950 of net proceeds (net of $30,000 of offering
expenses) 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 no plans, agreements, understandings 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, and the Agent's Warrants and the Investor Warrants, the Company may
use funds to temporarily reduce its credit facilities and otherwise invest in
interest-bearing investments.
SELECTED FINANCIAL DATA
The selected consolidated financial data as of and for the five-year
period ended December 31, 1996 have been derived from the Company's Consolidated
Financial Statements. Such data should be read in conjunction with the
Consolidated Financial Statements and related Notes for the three-year period
ended December 31, 1996 and Management's Discussion and Analysis of Financial
Condition and Results of Operations. The consolidated balance sheet data as of
December 31, 1995 and 1996 and the consolidated statements of operations data
for each of the three years in the period ended December 31, 1996, are audited
and included in this Prospectus. The consolidated balance sheet data as of the
December 31, 1992, 1993 and 1994 and the consolidated statements of operations
data for the years ended December 31, 1992 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
nine months ended September 30, 1996 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 periods include all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the results for such
periods. The results of operations for the nine months ended September 30, 1997
are not necessarily indicative of the results to be expected for the full year.
12
<PAGE>
<TABLE>
<CAPTION>
Statement of Operations
Data: Year Ended December 31
-------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Sales $13,672,234 $17,717,023 $25,094,473 $30,463,730 $32,599,096
Income (loss) from operations 605,845 370,009 (1,041,037)(1) 566,874 248,048
Interest expense (261,643) (314,796) (520,602) (774,762) (875,305)
Net income (loss) 235,982 41,187 (1,968,909)(1) (179,072) (466,454)
Net income (loss) per common
and common equivalent share(2) $ .05 $ .00 $ (.92) $ (.06) $ (.13)
Balance Sheet Data: As of December 31,
-------------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Working capital $1,977,053 $ 1,823,459 $ 3,706,239 $3,288,863 $ 9,574,684
Total assets 8,070,849 10,189,885 11,937,143 15,496,294 21,023,644
Long-term obligations 80,113 133,927 216,469 630,494 5,850,645
Total stockholders' equity 2,174,915 2,176,102 4,124,961 3,855,804 5,506,395
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations Nine months ended September 30
------------------------------
Data: (Unaudited)
1996 1997
---- ----
<S> <C> <C>
Net Sales $25,194,691 $22,046,355
Income (loss) from operations 760,364 567,013
Interest expense (656,511) (614,295)
Net income (loss) 63,353 104,305
Net income (loss) per common
and common equivalent share(2) $ .02 $ .02
As of September 30, 1997
--------------------------------
Balance Sheet Data: (Unaudited)
1996 1997
---- ----
Working capital $ 9,567,871 $14,475,601
Total assets 20,936,960 19,951,478
Long-term obligations 5,964,956 10,191,891
Total stockholders' equity 5,066,500 6,364,250
</TABLE>
- ----------
(1) After a non-cash compensatory charge of $2,314,000 resulting from the
release of escrow shares, the exercisability of warrants and the conversion
of preferred stock, upon the Company's attainment of the specified 1994
pre-tax income level under the Company's July 1992 Reverse Acquisition and
certain cumulative levels for the three-year period ended December 31,
1994. See "Certain Relationships and Related Transactions" in the Form 10-K
and Note 5 of Notes to the Consolidated Financial Statements.
(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 dividends on preferred stock.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Nine Months Ended September 30, 1997 Compared
to Nine Months Ended September 30, 1996 (Unaudited)
Gross sales for the nine months ended September 30, 1997 decreased
$4,003,450, or 14.6%, to $23,374,179, as compared to $27,377,629 for the same
period in 1996. The loss of a major customer, Autozone, Inc., resulted in a
decrease in sales of approximately $6.0 million for the nine months ended
September 30, 1997. Due to the addition of new customers and expanded sales to
current customers, the net reduction in sales was only $4.0 million.
Gross profit for the nine months ended September 30, 1997 was
$5,963,073 as compared to $6,688,635 for the same period in 1996. This
represents a decrease of $725,562, or 10.8%. Gross profit decreased as a result
of lower sales. However, the gross profit margin percentage for the nine months
ended September 30, 1997 increased to 27.0%, as compared to 26.5% for the
same period in 1996.
Operating expenses for the nine months ended September 30, 1997 were
$5,396,060, a decrease of $532,211, or 9%, from $5,928,271 for the same period
in 1996. Payroll expense was reduced in anticipation of lower sales. In
addition, variable expenses of freight and commissions also decreased in
proportion to the reduction in sales.
For the nine months ended September 30, 1997, income from operations
was $567,013 as compared to $760,364 for the same period in 1996. This was a
decrease of $193,351, or 25.4%. Income from operations for the nine months ended
September 30, 1997 decreased due to reduced sales volume.
Other income for the nine months ended September 30, 1997 consisted of
$76,865 from the sale of securities held as investments. The Company received
$100,000 from the sale of certain assets previously written-off. The Company
also realized a gain of $44,222 on foreign currency transactions.
For the nine months ended September 30, 1997, interest expense was
$614,295, a decrease of $42,216, as compared to $656,511 for the same period in
1996. The decrease is attributed to a reduction in the amount of bank borrowings
due to exercise of warrants, collection of accounts receivable and reduction in
inventory levels.
For the nine months ended September 30, 1997, the Company's net income
was $104,305, or $.02 per share, as compared to $63,353 or $.02 per share for
the same period in 1996.
Although final results from operations for the year ended December 31,
1997 ("1997") are not yet available, the Company estimates that during the
fourth quarter of 1997 it will incur a loss of approximately $1,000,000 which
will offset the previously reported earnings of $104,305 for the nine months
ended September 30, 1997. The projected loss is a result of the Company's loss
from operations incurred in the fourth quarter and an increase in its allowance
for doubtful accounts.
1996 Compared to 1995
Gross sales for the year ended December 31, 1996 ("1996"), increased by
$3,565,177, or 11.0%, to $35,948,479 compared to $32,383,302 for the year ended
December 31, 1995 ("1995"). This increase was due primarily to increased sales
to existing customers, the Company's introduction of new undercar parts product
lines and the continued expansion of its customer base. Autozone, Inc. a large
retail chain, which became a customer in late 1993, accounted for approximately
28% of the Company's net sales for 1996. However, in the fourth quarter of 1996
this customer informed the Company that it was consolidating vendors, and they
would no longer use the Company as a prime supplier. The Company added several
new retail chains late in 1996 which are anticipated to make up a portion of the
loss of this single customer.
The Company has agreed to accept the return of merchandise under
certain circumstances. In order to obtain new customers, merchandise is
exchanged, and replaced with current Company merchandise. The merchandise is
brought back to the Company where it is reboxed, relabled and placed back in
inventory. This is a common
14
<PAGE>
occurrence within the industry. As the marketplace has grown more competitive,
the amount of sales returns to the Company has significantly increased. The
merchandise does not deteriorate, and obsolescence is therefore not a problem.
All merchandise which is defective and returned by customers is returned to or
credited by vendors.
Gross profit for 1996, increased by $277,475, or 3.4%, to $8,331,273
compared to $8,053,798 for 1995. Gross profit for 1996 decreased to 25.6%
compared to 26.4% for 1995. The Company accepted the return of merchandise from
Autozone, Inc. and incurred $534,000 of costs for relabling, and freight. This
charge reduced the gross profit percentage by 1.6%.
Operating expenses for 1996 increased by $596,301, or 8.0%, to
$8,083,225, compared to $7,486.914 for 1995. Operating costs increased in
proportion to the increased sales volume.
Most of the Company's payments to vendors are made in United States
dollars and, therefore, the amount of foreign currency is immaterial.
Income from operations for 1996, decreased by $318,826 to $248,048
compared to $566,874 for 1995, primarily as a result of the increase in
operating expenses noted above.
Interest expense for 1996, increased by $100,543, or 13.0% to $875,305
compared to $774,762 for 1995. The increase was a result of additional
borrowings by the Company in support of the growth in sales and assets.
As a result of the foregoing, the Company's net loss for 1996 increased
by $287,382 to $466,454, or $(.13) per share, as compared to $179,072, or
$(.06) per share for 1995.
1995 Compared to 1994
Gross sales for the year ended December 31, 1995 ("1995"), increased by
$6,254,137, or 23.9%, to $32,383,302 compared to $26,129,165 for the year ended
December 31, 1994 ("1994"). This increase was due primarily to increased sales
to existing customers and the Company's introduction of new undercar parts
product lines. In addition, the Company expanded its customer base during 1995.
Autozone, Inc. a large retail chain, which became a customer in late 1993,
accounted for approximately 17% of the Company's net sales for 1995.
Gross profit for 1995, increased by $1,349.646, or 20.1 %, to
$8,053,798 compared to $6,704,152 for 1994. Gross profit for 1995 decreased to
26.4% compared to 26.7% for 1994. There is no significant difference in gross
profit during the two periods.
Operating expenses for 1995 decreased by $258,265, or 3.3%, to
$7,486,924, compared to $7,745,189 for 1994. There was a 39.2% increase in
sales, general and administrative expenses in 1995, resulting from higher costs
associated with increased sales volume, bad debt expenses of $617,891, and a
continued building of the infrastructure needed to provide a high level of
service to the Company's customers, offset, in part, by the implementation of
certain cost controls. An overall decrease resulted in non-recurring changes
from non-cash compensatory charges (as described below) and settlement of
litigation which occurred in 1994. The Company expensed costs associated with a
terminated public offering totaling $248,000 during 1995.
The Company's attainment of the 1994 pretax income level and certain
cumulative levels for the three year period ended December 31, 1994 under a
reverse acquisition agreement, as amended, between the Company and Joseph Ende,
its President, resulted in the release of escrowed shares, exercisability of
Class F warrants (relating to 1994 earnings) and conversion of the Series A
Preferred Stock into shares of Common Stock, all by the Company's
President/principal stockholder, which resulted in a non-cash compensatory
expense of $2,314,000 for 1994. Without giving effect to the non-cash expense of
$2,314 000 for 1994, the Company would have had net income of $345,091.
15
<PAGE>
The non-cash compensatory charges to operations were offset by an increase in
Common Stock and additional paid-in-capital.
Income from operations for 1995, increased by $1,607,911 to $566,874,
compared to a loss of $1,041,037 for 1994, as a result of increased sales,
combined with certain cost controls and the elimination of certain non recurring
charges.
Interest expense for 1995, increased by $254,160, or 48.8% to $774,762
compared to $520,602 for 1994. The increase was a result of additional
borrowings by the Company in support of the growth in sales and assets.
As a result of the foregoing, the Company's net loss for 1995 decreased
by $1,789,837, to $179,072, or $.06 per share, as compared to $ 1,968,909, or
$.92 per share for 1994.
Liquidity and Capital Resources
Nine Months Ended September 30, 1997 Compared
to Nine Months Ended September 30, 1996
The Company has continued to use funds generated from operations and
proceeds from the exercise of the Class A Warrants to finance working capital
requirements.
In November 1997, the Company entered credit agreements with
institutional lenders which provide for revolving credit and letter of credit
facilities for certain subsidiaries of the Company in an aggregate amount up to
$24 million based on certain percentages of accounts receivable and inventory
deemed eligible by such lenders. Borrowings under these facilities currently
bear interest at rates ranging from 8.5% to 9.5% and both facilities expire in
November 2000.
Cash used in operations during the nine months ended September 30, 1997
was $632,382 as compared to $2,797,683 used in operations for the same period in
1996. This change was due mainly to the decrease in accounts receivable and
inventory of $1,155,808, offset by the corresponding decrease in accounts
payable and accrued expenses of $1,862,019, for the period ended September 30,
1997. During the comparable period in 1996, inventory and accounts receivable
grew by $5,169,780 and accounts payable and accrued expenses grew by $2,078,910.
Cash received from customers during the nine months ended September 30,
1997 amounted to $22,417,445, a decrease of $1,282,780, or 5.4%, over the same
period in 1996. At the same time, cash paid to suppliers and employees during
the nine months ended September 30, 1997 decreased by $3,412,319, or 13.2%, over
the same period in 1996, to $22,357,659, as the Company utilized the proceeds of
sales to reduce accounts payable.
During the nine months ended September 30, 1997, the Company made a
concerted effort to reduce inventory levels while ensuring sufficient product
availability. As a result, inventory decreased by $784,718, or 7.4% from
$10,636,820. Accounts receivable decreased by $371,090 or 5.1%, from January 1,
1997 through September 30, 1997. The decrease in accounts receivable was a
result of the reduction in sales volume.
1996 Compared to 1995
The Company used funds generated from bank borrowings and proceeds from
a private placement and exercises of warrants to finance working capital
requirements during 1996. The Company received net proceeds of approximately
$1,772,000 from its private placement and exercise of warrants during 1996. If
the remaining 780,000 warrants are exercised, total funds of $2,964,000 will be
available to the Company.
16
<PAGE>
The Company had agreements with two banks to provide lines of credit,
bankers' acceptances and letter of credit facilities. These facilities provided
for aggregate borrowings of up to $10,000,000 at December 31, 1996. The balance
due under the Company's loan facilities amounted to approximately $9,400,000 at
December 31, 1996. The lines of credit and bankers' acceptances bore interest at
rates ranging from 7.44% to 9%. The lines of credit expire at various dates
through February 21, 1998. In February 1996, the Company refinanced and expanded
by $1,000,000 one of its bank agreements. The new two-year agreement allowed for
borrowings of up to $5,000,000 based upon levels of accounts receivable and
inventory. The notes and acceptances payable are collateralized by substantially
all of the assets of the Company and are partially guaranteed by the Company's
President/principal stockholder. One of the agreements contained covenants which
require the maintenance of certain amounts of net worth and financial ratios. At
December 31, 1996, the Company had no outstanding letters of credit. In
addition, during 1995, the Company obtained a $258,000 short-term loan from an
individual, this loan was converted into 91,300 shares of common stock in
December 1996.
Cash used in operations in 1996 was $2,658,581 which represents a
decrease of $46,406, or 1.7%, from $2,704,987 in 1995. Accounts receivable and
inventory increased a total of $4,638,213 in 1996. This was due to continued
sales growth and the addition of new product lines. These were financed
primarily with $1,649,334 of additional borrowings, and $1,780,920 of proceeds
from the private placement and exercise of the warrants.
Cash received from customers during 1996 amounted to $31,267,820, an
increase of $2,741,686, or 9.6% over the same period in 1995. At the same time,
cash paid to suppliers and employees during 1996 increased by $3,300,258, or
11.0%, over the same period in 1995 to $33,040,889, as the Company utilized the
proceeds of sales and increased borrowings to pay suppliers and finance its
growth through conservative cash flow management.
The Company signed a contract for a new computer system which
management believes will improve efficiency of operations. The $489,000 cost of
this expenditure will be financed by The CIT Group/Credit Finance Inc. over a
five-year period and will not significantly affect the cash flows of the
Company. The Company believes that the proceeds from the amounts available under
existing or new debt facilities and cash flows from operations, will be
sufficient to satisfy the Company's anticipated cash requirements for at least
the next 12 months.
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>
====================================================================================================================================
Securities
Benefi- Percent
Amount and cially of
Nature Owned Class
Beneficial Securities to After After
Name Ownership(1) Be Sold Offering Offering(2)
---- ------------------------- -------------------------- -------- -----------
Shares(3) Warrants(4) Shares(3) Warrants(4)
-------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Lawrence and Helaine Kaplan 120,000(5) 80,000(5) 120,000(5) 80,000(5) -0- -0-
Stanley A. Kaplan 120,000(6) 80,000(6) 120,000(6) 80,000(6) -0- -0-
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Securities
Benefi- Percent
Amount and cially of
Nature Owned Class
Beneficial Securities to After After
Name Ownership(1) Be Sold Offering Offering(2)
---- ------------------------- -------------------------- -------- -----------
Shares(3) Warrants(4) Shares(3) Warrants(4)
--------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
G-V Capital Corp. 120,000(7) 80,000(7) 120,000 80,000 -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-
M.H. 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-
KanKap, Inc. 91,300 -0- 91,300 -0- -0- -0-
Excalibur Limited Partnership 182,371(8) 6,000(9) 182,371(8) 6,000(9) -0- -0-
Gundyco in trust for RRSP550-98866-19 121,580(8) 4,000(9) 121,580(8) 4,000(9) -0- -0-
Alliance Capital Investments Corp. 281,666(10) 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-
</TABLE>
(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.
(2) Based on 4,555,515 shares of Common Stock outstanding as of December 22,
1997.
(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.
18
<PAGE>
(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. If the closing bid price per
share of the Common Stock for 20 consecutive days is $4.94 or less, 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.
(9) Shares issuable 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 Notes. The
Notes are convertible 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) These 50,000 shares are being held in escrow for up to 15 months. 130,000
of shares are issuable upon exercise of options not currently 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.
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
19
<PAGE>
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.
EXPERTS
The consolidated financial statements of the Company as of and for the
years ended December 31, 1995 and 1996, 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
consolidated financial statements of the Company for the year ended December 31,
1994, appearing herein, have been included in reliance upon the report of
Goldstein Golub Kessler & Company, P.C., independent auditors, given upon the
authority of such firm as experts in accounting and auditing.
20
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 and 1994
(Audited)
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
INDEPENDENT AUDITORS' REPORTS F-1, F-2
CONSOLIDATED FINANCIAL STATEMENTS:
BALANCE SHEETS F-3
STATEMENTS OF OPERATIONS F-4
STATEMENTS OF SHAREHOLDERS' EQUITY F-5
STATEMENTS OF CASH FLOWS F-7
NOTES TO FINANCIAL STATEMENTS F-8 - F-16
FINANCIAL STATEMENT SCHEDULE:
SCHEDULE ii: VALUATION AND QUALIFYING ACCOUNTS S-1
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
CONSOLIDATED FINANCIAL STATEMENTS:
BALANCE SHEETS - SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 (Audited) F-17
STATEMENTS OF INCOME F-18
STATEMENTS OF CASH FLOWS F-19
NOTES TO FINANCIAL STATEMENTS F-20 - F-21
</TABLE>
21
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Brake Headquarters U.S.A., Inc.
We have audited the accompanying consolidated balance sheets of Brake
Headquarters U.S.A., Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related statements of operations, shareholders' equity, and cash flows for
the years then ended. Our audits also included the financial statement schedule
for 1996 and 1995 listed in the Index to the consolidated financial
statements.These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to expressan opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Brake Headquarters U.S.A., Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
March 19, 1997
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Brake Headquarters U.S.A., Inc.
We have audited the accompanying consolidated statements of operations,
shareholders' equity, and cash flows of Brake Headquarters U.S.A., Inc.
(formerly Sanyo Industries, Inc.) subsidiaries for the year ended December 31,
1994. Our audit also included the financial statement schedule for the year
ended December 31, 1994 listed in the index to the consolidated financial
statements. These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Brake Headquarters U.S.A., Inc. and subsidiaries for the year ended December 31,
1994 in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedule for the year ended December 31,1994,
when considered in relation to the basic consolidated financialstatements taken
as a whole, presents fairly in all material respects theinformation set forth
therein.
GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
New York, New York
February 8, 1995
F-2
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
DECEMBER 31 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 536,928 $ 17,895
Accounts receivable, less allowance for doubtful
accounts of $372,000 and $288,000 7,252,018 5,623,117
Inventory 10,636,820 7,873,131
Prepaid expenses and other current assets 384,648 387,767
Deferred tax asset 375,000 345,345
------------ ------------
TOTAL CURRENT ASSETS 19,185,414 14,247,255
Property and Equipment - net 1,453,179 921,120
Other Assets 227,189 276,315
Due from President 55,874 51,604
Deferred Tax Asset 101,988 --
------------ ------------
TOTAL ASSETS $ 21,023,644 $ 15,496,294
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,639,419 $ 2,615,397
Accrued expenses and other current liabilities 318,611 254,365
Notes and acceptances payable 4,546,556 8,075,196
Current portion of long-term debt 162,018 65,038
------------ ------------
TOTAL CURRENT LIABILITIES 9,666,604 11,009,996
------------ ------------
Long-term Debt 5,850,645 630,494
------------ ------------
TOTAL LIABILITIES 15,517,249 11,640,490
------------ ------------
Commitments and Contingencies (see notes)
Shareholders' Equity:
Series B preferred stock - $.001 par value; authorized
issued and outstanding 1,000 shares 1 -
Common stock - $.001 par value; authorized 6,000,000
and 20,000,000 shares, issued and outstanding
4,209,384 and 3,416,197 shares 4,209 3,416
Additional paid-in capital 15,130,511 13,014,260
Accumulated deficit (9,628,326) (9,161,872)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 5,506,395 3,855,804
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 21,023,644 $ 15,496,294
============ ============
</TABLE>
See Note to Consolidated Financial Statements
F-3
<PAGE>
<TABLE>
<CAPTION>
Cumulative
Foreign
Currency Total
Accumulated Translation Shareholders'
Deficit Adjustment Equity
-------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1994 $(6,901,161) -- $ 2,235,499
Release of 1994 escrow shares to President -- -- 273,125
Exercisability of Class F warrants -- -- 74,375
Excess common shares issued upon
conversion of preferred stock -- -- 1,966,500
Issuance of common stock in connection
with exercise of Class D warrants -- -- 16,667
Issuance of common stock for cash in connection
with exercise of warrants -- -- 1,489,750
Issuance of common stock for services -- -- 36,000
Net loss (1,968,909) -- (1,968,909)
Foreign currency translation adjustment -- $ 1,954 1,954
----------- ----------- -----------
Balance at December 31, 1994 (8,870,070) 1,954 4,124,961
Conversion of preferred stock -- -- --
Foreign currency translation adjustment -- (1,954) (1,954)
Dividends declared (112,730) -- (112,730)
Issuance of common stock in connection with
exercise of Class F warrants -- -- 16,667
Employee Stock Bonus Plan -- -- 7,932
Return of 1993 Escrow shares to treasury and
retirement of such shares -- -- --
Net loss (179,072) -- (179,072)
----------- ----------- -----------
Balance at December 31, 1995 (9,161,872) -- 3,855,804
Proceeds from private placement -- -- 1,012,394
Exercise of warrants -- -- 760,000
Insurance of Series B Preferred Stock -- -- 50,000
Conversion of note payable -- -- 258,000
Employee Stock Bonus Plan -- -- 8,526
Acquisition of ABS Brakes, Inc. -- -- 28,125
Net loss (466,454) -- (466,454)
----------- ----------- -----------
Balance at December 31, 1996 $(9,628,326) $ -- $ 5,506,395
=========== ========= ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 35,948,479 $ 32,383,302 $ 26,129,165
Less returns and allowances 3,349,383 1,919,572 1,034,692
------------------ ------------------ -------------------
Net sales 32,599,096 30,463,730 25,094,473
Cost of goods sold 24,267,823 22,409,932 18,390,321
----------------- ------------------ -------------------
Gross profit 8,331,273 8,053,798 6,704,152
------------------ ------------------ -------------------
Operating expenses:
Selling, general and administrative 8,083,225 7,238,924 5,198,689
Non-cash compensatory charges - - 2,314,000
Settlement of litigation - - 232,500
Public offering costs - 248,000 -
------------------ ------------------ -------------------
8,083,225 7,486,924 7,745,189
------------------ ------------------ -------------------
Income (loss) from operations 248,048 566,874 (1,041,037)
------------------ ------------------ -------------------
Other income (expense):
Interest expense (875,305) (774,762) (520,602)
Gain (loss) on foreign currency transactions (7,197) 2,816 (12,270)
------------------ ------------------ -------------------
(882,502) (771,946) (532,872)
------------------ ------------------ -------------------
Loss before provision (benefit) for income taxes (634,454) (205,072) (1,573,909)
Provision (benefit) for income taxes (168,000) (26,000) 395,000
------------------ ------------------ -------------------
Net loss $ (466,454) $ (179,072) $ (1,968,909)
================== ------------------ -------------------
Net loss per common and common equivalent share $ (.13) $ (.06) $ (.92)
================== ================== ===================
Weighted average number of common and common
equivalent shares outstanding 3,616,311 3,058,968 2,188,414
================== ================== ===================
</TABLE>
See Note to Consolidated Financial Statements
F-4
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-In
Shares Amount Shares Amount Capital
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 2,000,000 $ 500,000 1,875,500 $ 1,875 $ 8,634,785
Release of 1994 escrow shares to President -- -- -- -- 273,125
Exercisability of Class F warrants -- -- -- -- 74,375
Excess common shares issued upon --
conversion of preferred stock -- -- -- -- 1,966,500
Issuance of common stock in connection
with exercise of Class D warrants -- -- 41,667 42 16,625
Issuance of common stock for cash in connection --
with exercise of warrants -- -- 702,500 702 1,489,048
Issuance of common stock for services -- -- 1,800 2 35,998
Net loss -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- --
--------- --------- --------- ------ -----------
Balance at December 31, 1994 2,000,000 500,000 2,621,467 2,621 12,490,456
Conversion of Series A preferred stock (2,000,000) (500,000) 1,000,000 1,000 499,000
Foreign currency translation adjustment -- -- -- -- --
Dividends declared -- -- -- -- --
Issuance of common stock in connection with
exercise of Class F warrants -- -- 41,666 42 16,625
Employee Stock Bonus Plan -- -- 3,064 3 7,929
Return of 1993 Escrow shares to treasury and
retirement of such shares -- -- (250,000) (250) 250
Net loss -- -- -- -- --
--------- -------- --------- ------ -----------
Balance at December 31, 1995 -- -- 3,416,197 3,416 13,014,260
Proceeds from private placement -- -- 490,000 490 1,011,904
Exercise of warrants -- -- 200,000 200 759,800
Insurance of Series B preferred stock 1,000 1 -- -- 49,999
Conversion of note payable -- -- 91,300 91 257,909
Employee Stock Bonus Plan -- -- 5,637 6 8,520
Acquisition of ABS Brakes, Inc. -- -- 6,250 6 28,119
Net loss -- -- -- -- --
--------- -------- --------- ------ -----------
Balance at December 31, 1996 1,000 $1 4,209,384 $4,209 $15,130,511
========= ======== ========= ====== ===========
</TABLE>
F-5
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 31,267,820 $ 28,526,134 $ 24,081,395
Cash paid to suppliers and employees (33,040,889) (29,740,631) (25,662,239)
Interest paid (854,759) (757,394) (495,357)
Taxes paid (30,753) (733,096) -
-------------- --------------- ---------------
NET CASH USED IN OPERATING ACTIVITIES (2,658,581) (2,704,987) (2,076,201)
-------------- --------------- ---------------
Cash flows from in investing activities:
Capital expenditures (109,399) (852,431) (210,014)
Acquisition of ABS Brakes, Inc. (9,375) - -
-------------- --------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (118,774) (852,431) (210,014)
-------------- --------------- ---------------
Cash flows from financing activities:
Proceeds from sale of stock and warrants 1,780,920 7,932 1,489,750
Net repayments (borrowings) on notes and acceptances payable (3,270,640) 3,020,376 637,416
Proceeds from issuance of long-term debt 4,919,974 630,000 182,757
Principal payments on long-term debt (70,318) (21,032) (32,150)
Principal payments on obligations under capital leases (22,329) - (16,676)
Loans to President (67,000) (72,000) -
-------------- --------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,270,607 3,565,276 2,261,097
-------------- --------------- ---------------
Effect of exchange rate changes on cash - (1,954) 1,954
Cash acquired from ABS Brakes, Inc. acquisition 25,781 - -
-------------- --------------- ---------------
Net increase in cash 519,033 5,904 (23,164)
Cash at beginning of year 17,895 11,991 35,155
-------------- --------------- ---------------
Cash at end of year $ 536,928 $ 17,895 $ 11,991
============== =============== ===============
Reconciliation of net loss to net cash used in operating activities
(net of acquisition):
Net loss $ (466,454) $ (179,072) $ (1,968,909)
Adjustments to reconcile net loss to net cash provided by
used in operating activities:
(Gain) loss on foreign currency transactions - (2,816) 12,270
Depreciation and amortization 73,584 186,675 92,245
Provision for doubtful accounts 480,623 617,891 (60,906)
Deferred income tax benefit (37,000) (154,000) (49,000)
Non-cash compensatory charges - - 2,314,000
Common stock and warrants issued for services - - 36,000
Changes in assets and liabilities:
Accounts receivable (1,989,524) (1,937,596) (596,741)
Inventory (2,648,689) (1,593,795) (707,601)
Prepaid expenses and other current assets 21,206 (354,708) 118,983
Other assets 49,126 (51,766) (30,852)
Account payable and accrued expenses 1,858,547 764,220 (1,235,690)
-------------- --------------- ---------------
NET CASH USED IN OPERATING ACTIVITIES $ (2,658,581) $ (2,704,987) $ (2,076,201)
============== =============== ===============
</TABLE>
See Note to Consolidated Financial Statements
F-7
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. PRINCIPAL BUSINESS ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES
Business activity - Brake Headquarters U.S.A., Inc. and subsidiaries (the
"Company") sells a complete line of brake system parts and accessories primarily
to retailers and other wholesalers. Revenue from the sale of these products is
recorded at the time the products are shipped. During 1995, the Company closed
its Canadian subsidiary and wrote-off substantially all of its remaining assets
and liabilities. This resulted in a net gain of approximately $39,000. The
Company operates three wholesale warehouses for undercar parts within the New
York area, under the name Quality First Brakes Inc. In August 1996, the Company
acquired all the net assets of ABS Brakes, Inc. ("ABS") a manufacturer of
domestic brake pads.
Principles of consolidation - The consolidated financial statements include the
accounts of Brake Headquarters U.S.A., Inc. and its wholly-owned subsidiaries.
All intercompany balances and transactions have been eliminated in
consolidation.
Inventory - Inventory, consisting of brake system finished goods and
accessories, is stated at the lower of cost (first-in, first-out method) or
market.
Depreciation - Depreciation of property and equipment is provided for by the
straight-line method over the estimated useful lives of the related assets (5 to
40 years). Leasehold improvements are amortized over the lesser of the term of
the respective lease or the estimated useful lives of the improvements (5 to 40
years).
Income taxes - The Company recognizes deferred income tax assets and liabilities
for the expected future tax consequences of temporary differences between the
financial reporting basis and the tax basis of assets and liabilities.
Concentration of credit risk - The Company's customer base consists primarily of
retailers and wholesalers of brake system replacement parts throughout North
America. On a geographic basis, no area has a disproportionate concentration of
credit risk. During the years ended December 31, 1996, 1995 and 1994, less than
10% of the Company's sales were derived from foreign customers. Although the
Company is directly affected by the well-being of the brake system replacement
parts industry, management does not believe significant credit risk exists at
December 31, 1996. The Company performs ongoing credit evaluations of its
customers' financial condition. When amounts on specific accounts receivable are
judged to be uncollectable by management, those amounts are charged to the
allowance for doubtful accounts. During the years ended December 31, 1996 and
1995, the Company had sales to one customer that accounted for 28% and 17%,
respectively, of the Company's net sales. In the fourth quarter of 1996, this
customer informed the Company it was consolidating vendors and therefore would
no longer use the Company as a prime supplier. In the fourth quarter of 1996,
the Company incurred costs of approximately $534,000 relating to the
relabeling and freight costs associated with this customer.
F-8
<PAGE>
Net loss per common and common equivalent share - Net loss per common and
common equivalent share is based on the weighted average number of common and
common equivalent shares (when dilutive) outstanding during the year computed in
accordance with the treasury stock method.
Management estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported periods. Actual results could differ from those estimates.
Disclosure about Fair Value of Financial Instruments - The fair value of the
Company's credit facilities approximate fair value and is estimated based on the
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities.
Public Offering Costs - During 1995 the Company postponed raising additional
funds through a secondary offering due to market conditions. The Company
expensed the costs associated with the postponed offering totaling $248,000
during 1995.
Adoption of Statement of Financial Standard Accounting No. 123 - In 1996, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123"). SFAS 123
encourages, but does not require companies to record at fair value compenstion
cost for stock-based employee compensation plans. The Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Emplyees" and related interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock.
Supplemental cash flow information of non-cash activities - 1996 The President
purchased 1,000 shares of Series B Preferred Stock for $50,000 in exchange for a
reduction in the prior dividend payable to him from the Series A Preferred
Stock. A note payable for $258,000 was converted into 91,300 common shares.
Common stock was issued for the acquisition of ABS Brakes Inc. in the amount of
$28,125. The Company entered into a capital leases for the purchase of computer
equipment totaling $489,804.
1995 and 1994 Common stock was issued in 1995 and 1994 in connection with the
exercise of Class F and D warrants, respectively, by an increase in the amount
due from President of $16,667.
Reclassification - For comparability, certain 1994 amounts have been
reclassified to conform to the current year's financial statement
presentation.
Note 2. ACQUISITION
Effective August 30, 1996, the Company acquired the net assets of ABS Brakes,
Inc. ("ABS") for $37,500 consisting of 6,250 shares of common stock and $9,375
in cash. ABS assembles brake pads for foreign and domestic cars. The fair
value of the net assets acquired approximated the purchase price.
Note 3. NOTES AND ACCEPTANCES PAYABLE
The Company has an agreement with a bank to provide, line of credit, bankers'
acceptances and letters of credit. The maximum availability under these
agreements at December 31, 1996 was $5,000,000. The line of credit and bankers'
acceptances bear interest at prime plus 3/4% per annum (the prime rate was 8
1/4% at December 31, 1996). The line of credit expires in May 1997 and
availability is based upon specified levels of accounts receivable and
inventory. The line of credit and bankers' acceptances payable are
collateralized by substantially all of the assets of the Company and are
partially guaranteed by the Company's President/majority shareholder (the
"President"). During December 1996, the holder of a $258,000 short-term note
converted the note into 91,300 shares of common stock.
The outstanding balances are as follows:
1996 1995
---------- ----------
Lines of credit $3,840,000 $4,030,000
Bankers' acceptances 706,556 3,787,196
Short-term note payable -- 258,000
---------- ----------
$4,546,556 $8,075,196
========== ==========
F-9
<PAGE>
Note 4. LONG-TERM DEBT
Long-term debt consists of the following:
1996 1995
---------- ----------
Note payable - credit facility (a) $4,850,321 $ --
Note payable - economic development loan (b) 43,467 65,532
First mortgage - bank (c) 362,588 390,000
Second mortgage - development loan (d) 225,420 240,000
Note Payable - economic development loan (e) 63,392 --
Capital Lease - (f) 467,475 --
---------- ----------
6,012,662 695,532
Less current portion 162,018 65,038
---------- ----------
$5,850,645 $ 630,494
========== ==========
(a) The credit facility was granted for a 2 year period ending February
1998. Interest, payable monthly, is at prime rate or the bank's money market
rate plus 2 1/4% (the bank's money market rate was 5.633% at December 31,
1996).It is secured by substantially all the assets of the Company. The credit
facility contains covenants, which require the maintenance of certain amounts
of net worth and financial ratios. At December 31, 1996, the Company was in
defaultof several convenants however, the bank has provided the Company a waiver
for these defaults and amended the terms of the agreement.
(b) The economic development loan bears interest at 5% and is payable
in monthly installments of $2,072 through November 1998. The note is
collateralized by certain property and equipment.
(c) The first mortgage dated December 8, 1995, is payable to a
bank,bears interest at 7.36% and is secured by the Company's Illinois facility.
This mortgage is being amortized over a ten year period in monthly principal and
interest installments of $4,602.
(d) The second mortgage, dated December 11, 1995, is payable to the
Illinois Development Finance Authority, bears interest at prime and is secured
by the Company's Illinois facility as well as a second lien on certain
equipment. This mortgage is payable in monthly installments of principal and
interest necessary to fully amortize the loan by January 1, 2005.
(e) The economic development loan bears interest at 5% and is payable
in monthly installment of $1,314 through May 2001. The note is collateralized
by certain property and equipment.
(f) This capital lease is for the purchase of the Company's new
computer system. Monthly payments are approximately $10,000 per month throughMay
2001.
Aggregate maturities of long-term debt are as follows:
Year ending December 31,
1997 $ 162,018
1998 5,025,223
1999 168,353
2000 183,303
2001 155,463
Thereafter 318,303
-----------
$ 6,012,663
===========
F-10
<PAGE>
Note 5. SHAREHOLDERS' EQUITY
Escrow Agreement - Pursuant to a business combination in 1992, the Company and
the President entered into an agreement for the issuance of 750,000 shares of
common stock held in escrow (the "Escrow Shares"). The escrow agreement, as
amended, provided for the Escrow Shares to be released upon the Company's
attainment of certain pre-tax income levels, as defined, for the years ended
December 31, 1992, 1993 and 1994. The President was also issued warrants to
purchase an aggregate of 125,000 shares (41,667 shares per year, warrant
Classes D, E, and F, respectively) of the Company's common stock at $.40 per
share, provided that the Company meets the same respective pre-tax income
levels described above. The attainment of the respective pre-tax income levels,
which result in the release of the Escrow Shares and exercisability of the
warrants, were deemed to be compensatory and resulted in a charge to operations
equal to (1) the fair market value of the Escrow Shares measured as of the
last day of the respective year in which the pre-tax income level was attained,
and (2) the fair market value of the shares to be issued upon the exercise
of the warrants measured as of the last day in the respective year in which
the pre-tax income level was attained less the exercise price to be paid. The
charges related to the release and issuance of these shares are not deductible
for income tax purposes.
During the year ended December 31, 1994, the 41,667 Class D warrants were
exercised by the President; in addition, a total of 375,000 shares were released
from escrow since the Company met the 1992 pre-tax income level. The Company did
not meet the 1993 pre-tax income level, and accordingly, in 1995, 250,000 shares
were returned to the treasury of the Company and the Class E warrants were not
exercisable. Since the Company attained the 1994 pre-tax income levels, as
defined, 125,000 shares were released from escrow to the President and the
41,667 Class F warrants were exercised during 1995.
The President disputed the 1993 forfeiture of shares, but waived any claims
he had against the Company in exchange for the July 1995 grant of a
non-qualified stock option to purchase 180,000 shares of Common Stock under the
1995 Plan.
Common Stock - In August 1995, the Company increased its authorized common stock
to 20,000,000 shares. In March 1996, the Company decreased its authorized common
stock to 6,000,000 shares.
Preferred Stock - On April 30, 1995, the Company declared a dividend of $112,730
on the Series A Preferred Stock for all dividends accumulated for the period
from July 9, 1992 to April 30, 1995. The dividend was unpaid as of December 31,
1995. Since certain cumulative financial operating goals were achieved during
the three-year period ended December 31, 1994, each share of Series A preferred
stock was automatically converted into 1/2 share of common stock on April 30,
1995. The common shares issued upon attainment of such operating goals were
deemed to be compensatory and were measured by the fair market value of the
common shares as of December 31, 1994.
In March 1996, the Company amended its Certificate of Incorporation to authorize
the issuance of 1,000 shares of Series B preferred stock to be held by the
President. The amendment also eliminated all remaining authorized shares of
Series A preferred stock. Dividends payable to the President from the Series A
preferred stock was offset by the purchase of the Series B preferred stock for
$50,000. As the sole shareholder of the Series B preferred stock, which will
vote as a separate class, the President has the exclusive right to elect a
majority of the Company's Board of Directors until the earlier of the redemption
date of March 31, 2001 or the reporting by the Company of at least $75,000,000
in revenue for any year through December 31, 2000. In the event of any
liquidation, dissolution or winding-up, the holder of Series B preferred stock
will be entitled to an aggregate preference of $50,000, his basis in the stock;
any remaining proceeds of liquidation will be distributed pro rata to holders of
the common stock.
Private Placement - In July 1996, the Company signed an agreement with G-V
Capital Corp. (G-V), to raise an estimated $5 million through the issuance
of common stock and warrants. In August 1996, the Company completed raising
additional capital through a private placement by selling 490,000 units at a
purchase price of $2.50 per unit. Each unit consists of one share of common
stock and two Redeemable Common Stock Purchase Warrants each to purchase one
share of common stock of the Company at $3.80 per share until the third
anniversary of the initial closing. The Company has received net proceeds of
approximately $1,772,000 as of December 31, 1996 from the sale of units and
exercise of 200,000 warrants.
F-11
<PAGE>
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
349,000 ISOs have been granted (of which options to purchase, 123,000 have
expired); no NQSOs or SARs have been granted.
1995 Employee Stock Option Plan
In July 1995, the Company established the 1995 Employee Stock Option Plan (the
"1995 Plan"). The 1995 Plan provides for the grant of options to employees and
other parties of ISOs, NQSOs and SARs to purchase an aggregate of 300,000 shares
of common stock. The provisions of the 1995 Plan are identical to the
above-stated terms of the 1994 Plan.
Since the adoption of the 1995 Plan, no ISOs or SARs have been granted. In 1995,
NQSOs to purchase 180,000 shares of common stock at $3.00 per share, the fair
market value on the date of grant, have been granted to the President. The
options terminate in July 2000 and are exercisable on a cumulative basis in
one-third increments on July 31, 1997, 1998 and 1999. The option becomes
immediately exercisable upon a change in control of the Company. Options to
purchase 120,000 shares of common stock remain available for grant under the
1995 Plan.
F-12
<PAGE>
A summary of stock option transactions under employee option plans for each of
the three years in the period ended December 31, 1996 are as follows:
Weighted Average
Options Exercise Price
--------- ----------------
Outstanding January 1, 1994 -- --
Granted 252,000 $10.83
Canceled (120,000) 20.00
--------
Outstanding December 31, 1994 132,000 2.50
Granted 186,000 2.98
Canceled (3,000) 2.50
--------
Outstanding December 31, 1995 315,000 2.78
Granted 91,000 4.71
--------
Outstanding December 31, 1996 406,000 3.21
========
Exercisable:
December 31, 1995 80,000 2.50
========
December 31, 1996 175,000 3.24
========
In December 1994, the Company canceled options to purchase 120,000 shares of
common stock exercisable at $20 per share, previously granted to the President
under the 1994 Plan, and re-granted such options at an exercisable price of
$2.50 per share.
F-13
<PAGE>
Employee Stock Bonus Plan
In April 1995, the Company adopted the Employee Stock Bonus Plan which
enables all full-time employees to purchase shares of common stock at 85% of the
then fair market value through payroll deductions. During 1996 and 1995, 5,637
and 3,064 shares, respectively, were issued from the 100,000 shares available
for sale under the plan.
The following tables summarize information about stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Exercised
Options Granted --------------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number
Exercise Prices Outstanding Life Price Exercisable Price
- --------------- ----------- --------------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
$2.25 - $3.00 315,000 2.7 years $2.78 128,000 $2.53
3.75 - 5.63 67,000 4.9 years 4.71 47,000 5.19
------- --------- ----- ------- ------
406,000 3.2 years $3.21 175,000 $3.24
======= ========= ===== ======= ======
</TABLE>
The estimated fair value of options granted during 1996 and 1995 were
$4.13 per share and $2.56 per share, respectively. The Company applies
Accounting Principles Board Opinion No. 25 and related Interpretations in
accounting for its stock option and purchase plans. No compensation cost has
been recognized for the Company's fixed stock option plans and stock purchase
plans. Had compensation cost for the Company's stock option plans and its stock
purchase plans been determined based on the fair value at the option grant dates
for awards in accordance with the accounting provisions of SFAS 123, the
Company's net loss and loss per share for the years ended December 31, 1996 and
1995 would have been increased to the pro forma amounts indicated below:
1996 1995
--------- ---------
Net loss applicable to common shareholders
As reported $(466,454) $(179,072)
Pro forma (563,298) (205,175)
Net loss per common share and common equivalent share
As reported $(.13) $(.06)
Pro forma (.16) (.07)
The fair value of options granted under the Company's fixed stock
option plans during 1996 and 1995 was estimated on the dates of grant using the
Black-Scholes options-pricing model with the following weighted-average
assumptions used: - expected volatility of approximately 125.28%, risk free
interest rate of approximately 6%, and expected lives of option grants of
approximately four years. Pro forma compensation cost related to shares
purchased under the Employee Stock Purchase Plan is measured based on the
discount from market value. The effects of applying SFAS 123 in this pro forma
disclosure are not indicative of future pro forma effects. SFAS 123 does not
apply to awards prior to 1995, and additional awards in future years are
anticipated.
F-14
<PAGE>
Note 6. INCOME TAXES
Provision (benefit) for income taxes consists of the following:
1996 1995 1994
---------- --------- ---------
Federal:
Current $(176,000) $ 81,000 $ 326,000
Deferred (34,000) (123,000) (33,000)
--------- --------- ---------
(210,000) (42,000) 293,000
--------- --------- ---------
State and Local:
Current 45,000 47,000 118,000
Deferred (3,000) (31,000) (16,000)
---------- --------- ---------
42,000 16,000 102,000
---------- --------- ---------
$(168,000) $ (26,000) $ 395,000
========== ========= =========
The total provision (benefit) for income taxes differs from that amount which
would be computed by applying the U.S. federal tax rate to the loss before
income taxes. The reasons for these differences are as follows:
1996 1995 1994
------ ------ ------
Statutory federal income tax rate (34.0)% (34.0)% (34.0)%
State and local income taxes, net of
federal benefit 4.8 7.7 4.3
Nondeductible compensatory charges -- 50.0
Permanent and other differences 2.8 13.6 4.8
----- ----- ----
(26.4)% (12.7)% 25.1%
===== ===== ====
The tax effects of temporary differences that give rise to significant portions
of deferred tax asset consist of the following:
1996 1995
-------- --------
Inventory allowances and capitalization $272,000 $183,000
Bad debt allowance 103,000 158,700
Depreciation 15,000 3,300
Accruals not currently deductible 58,000 --
Other 28,988 345
-------- -------
$476,988 $345,345
======== ========
F-15
<PAGE>
Note 7. COMMITMENTS AND CONTINGENCIES
The Company leases warehouse and office space under noncancelable
operating leases. Aggregate future minimum lease payments are as follows:
Year ending December 31,
1997 $ 479,944
1998 $ 476,172
1999 $ 277,537
2000 $ 107,782
2001 $ 42,505
Thereafter $ 15,600
----------
$1,399,540
Rent expense for the years ended December 31, 1996, 1995 and 1994
amounted to approximately $440,000, $354,000 and $361,000 respectively which
includes $312,000 which is paid to the Company's President.
In May 1995, the Company settled various litigation/claims for $232,500
which has been reflected in the 1994 consolidated financial statements.
In July 1995, the Company entered into a three-year employment
agreement with the President providing for a minimum annual salary of $156,000,
with a bonus at the discretion of the Board of Directors, determined based upon
the profitability of the Company. No bonus was paid for the years ended December
31, 1996 and 1995.
In June 1996, the Company settled an action against a former customer
to collect $971,000 of accounts receivable. Inventory totaling approximately
$459,000, was returned to the Company. As a result of the above settlement and
available reserves, the Company recorded an expense of a $212,000 in 1996.
Mutual releases were exchanged for all claims and counter claims.
Note 8. SAVINGS PLAN
The Company established in November 1996 a tax deferred saving plan
("401(k) Plan") for all employee's who meet certain eligibility requirements.
The Company did not make any contributions to this plan in 1996.
Note 9. ADOPTION OF NEW ACCOUNTING STANDARD
The Company will adopt the provisions of the Statement of Financial
Accounting Standard No. 128 "Earnings Per Share" in the fourth quarter of 1997.
The standard specifies the computation, presentation and disclosures
requirements for earnings per share. As required by the Standard, the Company
will restate all prior period earnings per share data presented. The adoption of
this new standard is not expected to have a material effect on the Company's
consolidated financial statements.
F-16
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Balance at Charged to Balance at
Beginning Costs and End of
Description of Period Expenses Deduction Period
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year ended December 31, 1996 $288,000 $480,623 $396,623(A) $372,000
Year ended December 31, 1995 $75,000 $617,891 $404,891(A) $288,000
Year ended December 31, 1994 $135,906 $(60,906) - $75,000
</TABLE>
(A) Represents amounts written off. Normal recurring credits and returns are
charged against sales.
S-1
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 205,008 $ 536,928
Accounts receivable, less allowance for doubtful
accounts of $244,000 and $372,000 6,880,928 7,252,018
Inventory 9,852,102 10,636,820
Prepaid expenses and other current assets 557,900 384,648
Deferred tax asset 375,000 375,000
------------ ------------
Total Current Assets 17,870,938 19,185,414
Property and Equipment - net 1,513,616 1,453,179
Other Assets 168,686 227,189
Due from President -- 55,874
Deferred Acquisition Costs 296,250 --
Deferred Tax Asset 101,988 101,988
------------ ------------
Total Assets $ 19,951,478 $ 21,023,644
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,940,438 $ 4,639,419
Accrued expenses and other current liabilities 159,573 318,611
Notes and acceptances payable -- 4,546,556
Due to President 139,126 --
Current portion of long-term debt 156,200 162,018
------------ ------------
Total Current Liabilities 3,395,337 9,666,604
Long-term Debt 10,191,891 5,850,645
------------ ------------
Total Liabilities 13,587,228 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
shares, issued and outstanding 4,362,730 and
4,209,384 shares 4,362 4,209
Additional paid-in capital 15,883,908 15,130,511
Accumulated deficit (9,524,021) (9,628,326)
------------ ------------
Total Shareholders' Equity 6,364,250 5,506,395
------------ ------------
Total Liabilities and Shareholders' Equity $ 19,951,478 $ 21,023,644
============ ============
</TABLE>
See notes to Consolidated Financial Statements
F-17
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Nine Months Three Months
ended ended
September 30, September 30,
------------------------------------ ------------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 23,374,179 $ 27,377,629 $ 7,820,373 $ 9,358,854
Less returns and allowances (1,327,824) (2,182,938) (388,414) (778,574)
------------ ------------ ------------ ------------
Net Sales 22,046,355 25,194,691 7,431,959 8,580,280
Cost Of Goods Sold 16,083,282 18,506,056 5,348,401 6,500,006
------------ ------------ ------------ ------------
Gross Profit 5,963,073 6,688,635 2,083,558 2,080,274
Selling, General and 5,396,060 5,928,271 1,904,577 1,877,809
Adminisrative Expenses
------------ ------------ ------------ ------------
Income From Operations 567,013 760,364 178,981 202,465
------------ ------------ ------------ ------------
Other Income (expense):
Other Income 176,865 -- 44,438 --
Interest expense (614,295) (656,511) (200,210) (178,403)
Gain on foreign currency transactions 44,222 -- 1,237 --
------------ ------------ ------------ ------------
(393,208) (656,511) (154,535) (178,403)
------------ ------------ ------------ ------------
Income Before Provision For Income Taxes 173,805 103,853 24,446 24,062
Provision For Income Taxes 69,500 40,500 9,752 15,500
------------ ------------ ------------ ------------
Net income $ 104,305 $ 63,353 $ 14,694 $ 8,562
============ ============ ============ ============
Net Income Per Common and
Common Equivalent Share $ .02 $ 0.02 $ -- $ --
============ ============ ============ ============
Weighted Average Number Of Common and
Common Equivalent Shares Outstanding 4,304,428 3,472,546 4,362,622 3,585,246
============ ============ ============ ============
</TABLE>
See notes to Consolidated Financial Statements
F-18
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 22,417,445 $ 23,700,225
Cash paid to suppliers and employees (22,361,070) (25,769,978)
Interest paid (629,295) (656,512)
Taxes paid (62,873) (71,418)
------------ ------------
Net cash used in operating activities (635,793) (2,797,683)
------------ ------------
Cash flows used in investing activities-capital expenditures (137,299) (384,862)
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants 457,300 --
Proceeds from sale of stock -- 1,087,532
Net repayments under notes and acceptances payable (216,081) (3,162,648)
Proceeds from issuance of long-term debt 122,377 5,377,777
Principal payments of long-term debt (117,424) (14,069)
Advances from President 195,000 5,730
------------ ------------
Net cash provided by financing activities 441,072 3,294,322
------------ ------------
Net (decrease) increase in cash (331,920) 111,777
Cash at beginning of period 536,928 17,895
------------ ------------
Cash at end of period $ 205,008 $ 129,672
============ ============
Reconciliation of net income to net cash used in operating
activities
Net income $ 104,305 $ 63,553
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 76,862 77,088
Provisions for doubtful accounts 24,069 248,623
Changes in assets and liabilities:
Accounts receivable 347,021
Inventory 784,718 (2,687,553)
Prepaid expenses and other current assets (173,252) (147,312)
Other assets 58,503 51,235
Accounts payable and accrued expenses (1,858,019) 2,078,910
------------ ------------
Net cash used in operating activities $ (635,793) $ (2,797,683)
============ ============
</TABLE>
Supplemental information of non-cash financing activities:
During the nine months ended September 30, 1996, the President purchased
1,000 shares of Series B perferred stock for $50,000 which was paid for by
a reduction in dividends payable to him. During the nine months ended
September 30, 1997, thirty thousand shares of common stock were issued to
a merger and acquisition firm. The fair value of the common stock issued
($296,250) is currently deferred on the consolidated balance sheet.
See notes to Consolidated Financial Statements
F-19
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
(Unaudited)
Note 1
Basis of Presentation
The accompanying unaudited consolidated financial statements of
Brake Headquarters U.S.A., Inc. and subsidiaries (the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly, they
do not include all of the footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results for the nine
months ended September 30, 1997 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1997. 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, 1996.
There has been no significant changes of accounting policies since December 31,
1996.
Net income per common and common equivalent share is based on the
weighted average number of common and common equivalent shares (when dilutive)
outstanding during the period, computed in accordance with the treasury stock
method.
Note 2
Long-term Debt
The Company refinanced its bank credit facility of $10,000,000 with
an expanded long-term credit facility of $12,000,000 in November 1997. This new
three year credit facility will expire in November 2000. Substantially all
assets are pledged as security. Interest is payable monthly at the prime rate,
(8.50%).
The accompanying September 30, 1997 Consolidated Balance Sheet
reflects the terms of the new credit facility.
Note 3
Shareholders' Equity
The Company has received $457,300 from the exercise of warrants and
options during the nine months ended September 30, 1997. In October 1997, the
Company received an additional $380,000 from the exercise of an additional
100,000 warrants.
The Company signed a two year agreement with Capital Advisors &
Consultants, Ltd. The agreement provides 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 market value of the
common stock issued ($296,250) as a deferred asset as of September 30, 1997.
Note 4 - Adoption of SFAS 128
The Company will adopt the statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128") in the fourth quarter of
1997, as required. The Company will continue to apply APB Opinion No. 15,
F-20
<PAGE>
"Earnings Per Share" until the adoption of SFAS 128. The new standard specifies
the computation, presentation and disclosure requirements for earnings per
share. The pro forma earnings per common share computed under the provisions of
SFAS 128 for the quarter ended September 30, 1997 are $ .00 basic earnings per
common share and $ .00 diluted earnings per common share as compared to $ (.00)
basic earnings per share and $ (.00) diluted earning per share for the quarter
ended September 30, 1996. The pro forma earnings per common share computed under
the provisions of SFAS 128 for the nine months ended September 30, 1997 are $
.02 basic earning per common share and $ .02 diluted earnings per common share,
as compared to $ .02 basic earnings per common share and $ .01 diluted earnings
per common share for the nine months ended September 30, 1996.
Note 5
Other Income
The Company received $100,000 from the sale of certain assets
previously written-off. Additionally, the Company recorded $44,222 as a gain on
foreign currency transactions and a gain on sale of securities in the amount of
$76,865. Such amounts are reported as other income for the period ended
September 30, 1997.
Recently Issued Financial Accounting Standards
In June of 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 of 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 evaluting 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 6
Subsequent Events
The Company entered into a letter of intent to purchase the net
assets of a distributor of automotive parts products. The purchase price may be
adjusted as additional information is obtained. The consummation of this
transaction is subject to various conditions, including the negotiation and
execution of a definitive agreement. The Company intends to finance the purchase
with bank financing.
F-21
<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............................................ 2
Information Incorporated
By Reference................................................... 2
Prospectus Summary............................................... 3
Risk Factors..................................................... 7
Use of Proceeds.................................................. 12
Selected Financial Data.......................................... 12
Management's Discussion and
Analysis of Financial Condition
And Results of Operations...................................... 14
Selling Securityholders.......................................... 17
Plan of Distribution............................................. 19
Indemnification.................................................. 20
Legal Matters.................................................... 20
Experts.......................................................... 20
Index to Financial Statements.................................... 21
Financial Statements............................................. F-1
================================================================================
================================================================================
1,749,951 SHARES OF
COMMON STOCK
566,000 CLASS A WARRANTS
------------------
BRAKE HEADQUARTERS U.S.A., INC.
------------------------------------
PROSPECTUS
------------------------------------
___________, 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 $836.19
Printing 1,000.00
Legal Fees and Expenses 20,000.00
Accounting Fees 5,000.00
Transfer Agent's and Registrars 2,000.00
Fees
Miscellaneous 1,163.81
----------
TOTAL $30,000.00
==========
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
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.
II-1
<PAGE>
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
Exhibit No.
5.1 Opinion of Snow Becker Krauss P.C. regarding legality of securities being
registered. *
23.1 Consent of Goldstein Golub Kessler & Company, P.C.*
23.2 Consent of Deloitte & Touche LLP*
23.3 Consent of Snow Becker Krauss P.C. (included in Exhibit 5).*
24 Power of Attorney (included in the signature page).*
- ------------
*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.
II-2
<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 by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination
of this offering.
(4) 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-3
<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 20th day of January 1998.
BRAKE HEADQUARTERS U.S.A., INC.
By: /s/ Joseph Ende
-----------------------------------
Joseph Ende, President
Each of the undersigned hereby constitutes and appoints Marc
J. Ruskin, as his true and lawful attorney-in-fact, with full power of
substitution and resubstitution for him and in his 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 virtue 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, January 20, 1998
- ------------------------------- President and Chief Executive
Joseph Ende Officer (Principal Executive Officer)
/s/ Marc J. Ruskin Chief Financial Officer (Principal January 20, 1998
- ------------------------------- Financial and Accounting Officer)
Marc J. Ruskin
/s/ Sandra Ende Director January 20, 1998
- -------------------------------
Sandra Ende
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
Exhibit No.
5.1 Opinion of Snow Becker Krauss P.C. regarding legality of securities being
registered. *
23.1 Consent of Goldstein Golub Kessler & Company, P.C.*
23.2 Consent of Deloitte & Touche LLP*
23.3 Consent of Snow Becker Krauss P.C. (included in Exhibit 5).*
24 Power of Attorney (included in the signature page).*
- ------------
*Filed Herewith
<PAGE>
Exhibit 5.1
January 16, 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 1,749,951 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 a 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 1,124,951 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 23.1
INDEPENDENT AUDITOR'S CONSENT
We hereby consent to the use in this Prospectus constituting part of
the Registration Statement on Form S-3 of our report dated February 8, 1995 on
the consolidated statements of operations, shareholders' equity and cash flows
of Brake Headquarters U.S.A., Inc. and Subsidiaries (formerly Sanyo Industries,
Inc.) for the year ended December 31, 1994, which appears in such Prospectus. We
also consent to the reference of our firm under the caption "Experts" contained
in such Registration Statement.
GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
New York, New York
January 19, 1998
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Brake Headquarters
U.S.A., Inc. on Form S-3 of our report dated March 19, 1997, appearing in the
Prospectus, which is part of this Registration Statement, and of our report
dated March 19, 1997 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
January 19, 1998
