<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant To Section 13 or 15[d] Of The
Securities Exchange Act Of 1934
For the quarterly period ended September 30, 1998
or
[ ] Transition Report Pursuant To Section 13 Or 15 (D) Of The
Securities Exchange Act Of 1934
For the transition period from ___________________ to _______________________
Commission file number 0-28640
BRAKE HEADQUARTERS U.S.A., INC
(Exact name of Registrant as Specified in Its Charter)
Delaware 22-3048534
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
33-16 Woodside Avenue, Long Island City, New York 11101
(Address of Principal Executive Offices) (Zip Code)
(718) 779-4800
(Registrant Telephone Number Including Area Code)
Not Applicable
--------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
----- -----
Class Outstanding at November 11, 1998
--------------------- --------------------------------
Common Stock, $.001 par value 7,153,255
Class A Common Stock Purchase Warrants
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BRAKE HEADQUARTERS U.S.A., INC.
FORM 10-Q
QUARTERLY REPORT
September 30, 1998
============================================================================
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements -
Consolidated Balance Sheets - September 30, 1998
(Unaudited) and December 31, 1997 .................... 3
Consolidated Statements of Operations For The
Nine and Three Months Ended September 30, 1998
and September 30, 1997 (Unaudited) ................... 4
Consolidated Statements of Cash Flows For The
Nine Months Ended September 30, 1998
and September 30, 1997 (Unaudited) ................... 5
Notes to Consolidated Financial Statements (Unaudited) 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................. 8-9
PART II - OTHER INFORMATION ..................................
Item 6. Exhibits and Reports on Form 8-K.................... 10
Signatures.......................................... 11
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BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1998
(Unaudited) December 31, 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 294,329 $ 65,410
Accounts receivable, less allowance for doubtful
accounts of $720,000 and $1,179,000 10,425,089 8,910,085
Inventory 22,370,410 25,814,917
Prepaid expenses and other current assets 170,763 754,761
Deferred tax asset 739,000 --
------------ ------------
Total current assets 33,999,591 35,545,173
Property and Equipment - net 1,684,823 1,638,749
Other Assets 1,548,281 674,571
Due from Officer 162,524 60,874
Deferred Tax Asset 90,993 261,000
------------ ------------
Total assets $ 37,486,212 $ 38,180,367
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 7,477,411 $ 6,546,436
Accrued expenses and other current liabilities 584,537 2,061,752
Current portion of long-term debt 12,686,863 1,673,324
Current tax liability 1,415,000 --
Deferred tax liability -- 1,526,000
------------ ------------
Total current liabilities 22,163,811 11,807,512
------------ ------------
Long-term Debt 5,702,404 16,239,285
Deferred Credit 3,405,404 3,684,404
------------ ------------
Total liabilities 31,271,619 31,731,201
------------ ------------
Shareholders' Equity:
Preferred Stock - $.001 par value; authorized
1,000,000 shares, none issued -- --
Series B preferred stock - $.001 par value; authorized,
issued and outstanding 1,000 shares 1 1
Common stock - $.001 par value; authorized 12,000,000
shares, issued and outstanding 5,679,405 and 4,563,321 5,679 4,563
shares
Additional paid-in capital 17,753,582 17,022,258
Accumulated deficit (11,544,669) (10,577,656)
------------ ------------
Total shareholders' equity 6,214,593 6,449,166
------------ ------------
Total Liabilities and Shareholders' Equity $ 37,486,212 $ 38,180,367
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
3
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BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Three Months
ended ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 54,799,005 $ 23,374,179 $ 17,894,677 $ 7,820,373
Less returns and allowances (3,507,799) (1,327,824) (1,399,436) (388,414)
------------ ------------ ------------ ------------
Net sales 51,291,206 22,046,355 16,495,241 7,431,959
Cost of goods sold 36,245,606 16,083,282 11,533,117 5,348,401
------------ ------------ ------------ ------------
Gross profit 15,045,600 5,963,073 4,962,124 2,083,558
Selling, general and administrative expenses 14,904,966 5,351,838 4,840,902 1,903,340
------------ ------------ ------------ ------------
Income from operations 140,634 611,235 121,222 180,218
------------ ------------ ------------ ------------
Other income (expense):
Other income (expense) (88,214) 176,865 (50,311) 44,438
Interest expense (1,699,412) (614,295) (376,514) (200,210)
------------ ------------ ------------ ------------
(1,787,626) (437,430) (426,825) (155,772)
------------ ------------ ------------ ------------
(Loss) income before benefit (provision) for income taxes (1,646,992) 173,805 (305,603) 24,446
Benefit (provision) for income taxes 680,000 (69,500) 160,635 (9,752)
------------ ------------ ------------ ------------
Net (loss) income $ (966,992) $ 104,305 $ (144,968) $ 14,694
============ ============ ============ ============
Net (loss) income per basic and diluted share $ (.21) $ 0.02 $ (.03) $ --
============ ============ ============ ============
Weighted average number of common shares outstanding 4,695,430 4,304,428 4,931,033 4,362,622
============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASHFLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 49,586,036 $ 22,417,445
Cash paid to suppliers and employees (47,044,508) (22,361,070)
Interest paid (1,247,316) (629,295)
Taxes paid (859,732) (62,873)
------------ ------------
Net cash (used in) provided by operating activities 434,480 (635,793)
------------ ------------
Cash flows from investing activities:
Capital expenditures (178,686) (137,299)
Loans repayments to Officer (100,000) 195,000
------------ ------------
Net cash provided by (used in) investing activities (278,686) 57,701
------------ ------------
Cash flows from financing activities:
Proceeds from sale of stock and warrants 251,359 457,300
Proceeds from issuance of debt 1,398,000 122,377
Repayments of notes payable and long-term debt (1,576,234) (333,505)
------------ ------------
Net cash provided by financing activities 73,125 246,172
------------ ------------
Net increase (decrease) in cash 228,919 (331,920)
Cash at beginning of period 65,410 536,928
------------ ------------
Cash at end of period $ 294,329 $ 205,008
============ ============
Reconciliation of net (loss) income to net cash provided by (used in)
operating activities:
Net (loss) income $ (966,992) $ 104,305
Adjustments to reconcile net (loss) income to net cash provided by
(used in) operating activities:
Depreciation and amortization 127,212 76,862
Amortization of deferred credit (279,001) --
Amortization of financing costs 394,544 --
Provision for doubtful accounts 530,785 24,069
Gain on sale of subsidiary (94,879) --
Loss on sale of marketable securities 35,281 --
Changes in assets and liabilities: (net of business disposition)
Accounts receivable (1,466,964) 347,021
Inventory 2,694,477 784,718
Prepaid expenses and other current assets 615,424 (173,252)
Other assets (603,025) 58,503
Accounts payable and accrued expenses (552,382) (1,858,019)
------------ ------------
Net cash provided by (used in) operating activities $ 434,480 $ (635,793)
============ ============
</TABLE>
Supplemental information of non-cash financing activities:
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 was $296,250. A non cash expense of $480,000 was
recorded during the nine months ended September 30, 1998 upon the issuance
of convertible subordinated debentures.
See Notes to Consolidated Financial Statements
5
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
Basis of Presentation
The accompanying unaudited consolidated financial statements of Brake
Headquarters U.S.A., Inc. and subsidiaries (the "Company") have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been
included. Operating results for the nine months ended September 30, 1998 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. For further information, refer to the financial
statements and footnotes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997. There has been no
significant changes of accounting policies since December 31, 1997.
Note 2
Debt
The Company was in technical default under one of its credit facilities
which existed at September 30, 1998. The bank has issued a waiver for the
default. The Company has classified $9,712,000 of debt as a current
liability as of September 30, 1998.
On April 29, 1998, the Company completed a private financing of
$1,500,000 principal amount of 8% subordinated convertible debentures due
April 30, 2000 (the "Debentures"). The two foreign investors (the
"Purchasers") also received five-year warrants to purchase an aggregate of
15,000 shares of Common Stock exercisable at $3.93 per share. The Debentures
are convertible, commencing the earlier of 60 days from the date of closing
or the effective date of a Registration Statement covering the shares of
Common Stock underlying the Debentures and Warrants, at a conversion rate
equal to the greater of (a) the lower of (i) 80% of the Market Price on the
Conversion Date, or (ii) $3.77; or (b) the Floor Price of $2.00 per share.
The Debentures are redeemable, with the consent of one of the Company's
lenders, at any time at 120% of their principal amount plus all accrued
interest and are also subject to redemption by the Company if the market
price falls below the Floor Price. In the event the Company fails to redeem
, the Purchasers may convert all or any part of the Debentures without there
being a Floor Price.
The Company and the Purchasers have agreed to sell and purchase,
respectively, up to an additional $4 million principal amount of Debentures
during the next 12 months provided certain market conditions are met. The
Company also granted the Purchasers a Right of First Refusal on any
transaction for the sale of common stock or securities convertible into
common stock.
In addition, an aggregate of $200,00 of 5% convertable debentures dated
November 7, 1997 were converted into 911,807 shares of common stock as of
September 30, 1998. Of this amount, Mr. Joseph Ende the Company's Chief
Executive Officer converted $50,000 of such debentures.
6
<PAGE>
Note 3
Stockholders' Equity
In April 1998, the Company increased the authorized shares of common
stock from 6,000,000 to 12,000,000 shares. Additionally, the Board of
Directors and the shareholders of the Company authorized 1,000,000 shares of
preferred stock, $.001 par value, in one or more series at the discretion of
the Board of Directors.
Note 4
Commitments
In May 1998, the Company entered into a 5 year agreement to lease new
facilities at its San Francisco, CA. location. The monthly lease payment is
$22,204 plus annual increases, which is comparable to the prior lease.
Note 5
Other Income Expense
The Company has recorded additional interest expense during the second
quarter of 1998 of $480,000 relating to private placements. The Company also
recorded a gain from the sale of a subsidiary of approximately $95,000. The
Company has accepted notes receivable and a personal guarantee for the sale.
The Company has received a security interest in substantially all assets of
the purchaser. A reserve of $150,000 has been recorded against certain fixed
assets, which may have to be written-off. A decline in the value of
marketable securities held by the Company was recorded totaling $35,000 in
the September 30, 1998 quarter.
Note 6
Related Party Transactions
On September 14, 1998, Mr. Joseph Ende, the Company's Chief Executive
Officer, entered into agreements with two debentureholders (the
"Debentureholders") to purchase an aggregate of $850,000 of the Company's 5%
Convertible Debentures dated Nobemeber 7, 1997 (the "Debentures) prior to
November 2, 1998. The Debentures matured on November 7, 1998 and are convertible
into Common Stock at the rate of 82.5% of the average closing price of the
Company's common Stock for the five trading days preceding conversion. As of
November 13, 1998, Mr. Ende has purchased $660,000 of the Debentures and
$100,000 were converted into 614,375 shares of Common Stock. The shares of
Common Stock underlying the Debentures are registered for resale as part of an
effective Registration Statement.
7
<PAGE>
Item 2. Management's Discussion and Analysis Of Financial Condition And
Results Of Operations
The following should be read in conjunction with the Company's audited
consolidated financial statements for the year ended December 31, 1997 and
the related notes.
Material Changes in Results of Operations
Nine and Three Months Ended September 30, 1998 Compared to Nine and Three
Months Ended September 30, 1997
Gross sales for the three months ended September 30, 1998 increased by
$10,074,304, or 128.8%, to $17,894,677 compared to $7,820,373 for the three
months ended September 30, 1997. WAWD, which was acquired in November 1997,
accounted for $9,796,286 of this increase. The increase for the three months
ended September 30, 1998, exclusive of WAWD, of $278,018, or 3.6% was
attributable to the addition of new customers during the third quarter.
Gross sales for the nine months ended September 30, 1998 increased by
$31,424,826, or 134.4%, to $54,799,005 compared to $23,374,179 for the
corresponding period in 1997. The increase for the nine months ended
September 30, 1998 was primarily attributable to WAWD sales of $30,814,437
with the Company's existing operations reflecting an increase of $610,389,
or 2.6% for the period.
Gross profit in the three months ended September 30, 1998 increased by
$2,878,566, or 138.2%, to $4,962,124 compared to $ 2,083,558 for the three
months ended September 30, 1997. Gross profit of $2,622,685 was attributable
to WAWD . The increase, net of WAWD of $255,881 or 12.3% was attributable to
the increase of gross profit margins. Gross profit for the nine months ended
September 30, 1998 was $15,045,600 versus $5,963,073 for the same period in
1997. This represents an increase of $9,082,527 or 152.3%. WAWD contributed
$8,377,259 to this total. The net increase of $705,268 is due to the
increased gross profit percentage. Gross profit increased as a result of
improved efficiencies in purchasing. Gross profit percentages increased from
27.0% for the nine months ended September 30, 1997 to 29.3% for the nine
months ended September 30, 1998.
Operating expenses during the three months ended September 30, 1998
were $4,840,902, an increase of $2,937,562 or 154.3% from $1,903,340 for the
three months ended September 30, 1997. WAWD accounted for $2,559,372 of this
increase or 87.1%. Operating expenses excluding WAWD increased $378,190
which represented 12.9% of the increase. Operating expenses for the first
nine months of 1998 were $14,904,966, an increase of $9,553,128, or 178.5%
from $5,351,838 for the same period in 1997. Increases in commissions to
sales representatives, freight costs, bad debts, and salaries accounted for
a majority of these increases. Operating expenses as a percentage of net
sales have increased to 29.1% from 24.3% for the nine months ended September
30, 1998 compared with September 30, 1997.
The Company recognized a profit from operations for the three months
ended September 30, 1998 of $121,222 versus income of $180,218 for the same
period in 1997. This represents a decrease of $58,996 or 32.7%. For the nine
months ended September 30, 1998, income from operations was $140,634 versus
$611,235 for the nine months of 1997. This was a decrease of $470,601 or
77.0%. Income from operations for the nine and three months ended September 30,
1998 decreased due to increased costs in operating expenses, including bad debt
expenses, freight, commissions, and salaries.
Other income (expense) primarily consisted of income of $95,000 from
the sale of one of its subsidiaries, Quality First Brakes Inc., and a
reserve of $150,000 for the write-down of certain fixed assets, for the nine
months ended September 30,1998.
Interest expense during the three months ended September 30, 1998 was
$376,514, an increase of $176,304 over the interest expense of $200,210
during the corresponding period in 1997. Interest for WAWD for the three
month period was $154,627. For the nine months ended September 30, 1998,
interest expense was
8
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$1,699,412, an increase of $1,085,117 compared to $614,295 for the first
nine months of 1997 for which WAWD represented $470,895 of this increase.
The increase is attributed to the recording of $480,000 for the issuance of
subordinated debt and to an increase in the amount of bank borrowings
outstanding.
As a result of the foregoing, the Company recorded a net loss for the
three months ended September 30, 1998 of $144,968 or $.03 per share, as
compared to net income of $14,694, or $.00 per share for the three months
ended September 30, 1997. For the nine months ended September 30, 1998, the
Company's net loss was $966,992 or $.21 per share, as compared to net income
of $104,305 or $.02 per share for the same period in 1997.
Liquidity and Capital Resources
The Company has continued to use funds generated from proceeds from the
sale of stock, the exercise of warrants and bank borrowings to finance
working capital requirements.
Cash provided by operations during the nine months ended September 30,
1998 was $434,480 as compared with $635,793 used in operations during the
nine months ended September 30, 1997. This change was due mainly to a loss
from operations, an increase in accounts receivable totaling $1,466,694
which was offset by a decrease in inventory of $2,694,477 for the period ended
September 30, 1998. During the comparable period in 1997,inventory and accounts
receivable provided cash of $1,131,739, however was primarily offset by a
decrease in accounts payable and accrued expense of $1,858,019.
During the nine months ended September 30, 1998, the Company made a
concerted effort to reduce inventory levels while ensuring the sufficient
product availability. As a result, inventory (net of disposition) decreased
by $2,694,477, or 10.4% from $25,814,917. Accounts receivable (net of
disposition) increased by $1,466,964 or 16.5%, from January 1, 1998 to
September 30, 1998. The increase in accounts receivable was a result of
extended credit terms, and increased sales.
Cash used in investing activities was $278,686 for the period ended
September 30, 1998 compared with $57,701. This change was primarily due to the
$195,000 repayment of loans to an officer in 1997, compared to a $10,000,000
loan in 1988.
Cash provided by financing activities was $73,125 during the period
ended September 30, 1998 compared with cash provided by of $246,172 in 1997. The
Company repaid approximately $1,576,000 of its credit line from the proceeds
of the reduction in inventory. The Company also completed an offering in
April 1998 of $1,398,000 net proceeds of subordinated convertible debt.
At September 30, 1998, the Company had a total of $959,000 available
under its combined lines of credit of which $14,945,000 was outstanding.
These funds are available for working capital purposes.
Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
In 1996, the Company initiated a conversion from existing accounting
software to programs that are year 2000 compliant. Management has determined
that the year 2000 issue will not pose significant operational problems for its
computer systems. As a result, all costs associated with this conversion are
being expensed over the period of a five year lease for the software.
The Company intends to implement a program to poll third party
suppliers, vendors and customers of the procedures they are implementing to
ensure their readiness for year 2000 issues. It is not possible, however, at
present, to quantify the overall cost of resolving this issue for the Company's
suppliers and customers. There can be no guarantee that the systems of other
companies on which the Company relies upon will be timely converted, and would
not have an adverse effect on the Company's systems. Sanyo Automotive has been
advised that its own software has been designed and developed with a resolution
to the Year 2000 Issue and as such Sanyo Automotive presently believes that the
cost of fixing the Year 2000 Issue will not have a material effect on the
Company's current financial position, liquidity or results of operations. The
Company has already expanded approximately $400,000 to upgrade its current
system to be year 2000 compliant. The Company estimates an additional cost of
approximately $200,000 is necessary to complete the installation of its current
system which will be financed over a three year period of time. WAWD is not
currently on the Sanyo Automotive computer system. WAWD will utilize both
internal and external resources to reprogram or replace, and test the software
for Year 2000 modifications. WAWD anticipates completing the Year 2000 project
in mid 1999. It is anticipated the cost to implement a new computer system which
will be Year 2000 complaint will be approximately an additional $600,000, none
of which has been expended to date. WAWD expects to finance this program
through a three to five year capital lease.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
9
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PART II - EXHIBITS AND REPORTS ON FORM 8-K
Item 6. Exhibits and Reports on Form 8-K
[a] Financial Data Schedule
[b] A report on Form 8-K was filed on July 15, 1998, amending item 7 of the
Company's current report on Form 8-K for November 17, 1997.
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BRAKE HEADQUARTERS U.S.A., INC.
/s/ Joseph Ende
----------------------------------------
Joseph Ende, Chief Executive Officer
DATE: November 16, 1998
/s/ Marc J. Ruskin
----------------------------------------
Marc J. Ruskin, Chief Financial Officer
