<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
FORM 8-K/A
AMENDMENT NO. 3
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) November 17, 1997
-----------------
BRAKE HEADQUARTERS U.S.A., INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 0-28640 22-3048534
- ---------------------------- ---------------- ------------
(State or Other Jurisdiction (Commission File (IRS Employer
of Incorporation) Number) Identification Number)
33-16 Woodside Avenue, Long Island City, N.Y. 11101
---------------------------------------------------
(Address of principal executive offices)(Zip Code)
(718) 779-4800
----------------------------------------------------
(Registrant's telephone number, including area code)
<PAGE>
EXPLANATORY NOTE
This Amendment No. 3 on Form 8-K/A to the Current Report on Form 8-K
("Form 8-K") for November 17, 1997 of Brake Headquarters U.S.A., Inc., a
Delaware Corporation (the " Company") is submitted in response to the
Securities and Exchange Commission's (the "Commission") comments received by
letter dated July 10, 1998. The Pro Forma financial statements previously
filed on February 2, 1998 and May 22, 1998 are included herein, and are amended
to reflect the Commission's comments. Therefore, the Company hereby amends its
Form 8-K in accordance with Rule 12b-15 under the Securities Exchange Act of
1934.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Business Acquired
1 - Independent Auditors' Report, Balance Sheets as of August
31, 1997 and 1996, Statements of Operations and Changes in
Investment of Echlin, Inc., and Statements of Cash Flows for
each of the three years in the period ended August 31, 1997,
and Notes to Financial Statements.
(b) Pro Forma Financial Information
1 - Unaudited Pro Forma Condensed Consolidated Balance Sheet
as of September 30, 1997, Unaudited Pro Forma Condensed
Consolidated Statements of Income for the year ended
December 31, 1996 and for the nine months ended September
30, 1997, and Notes to Unaudited Pro Forma Condensed
Consolidated Financial Statements.
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 hereunto duly
authorized.
BRAKE HEADQUARTERS U.S.A., INC.
Registrant
BY:/S/ Joseph Ende
----------------------------
Joseph Ende, President
<PAGE>
WAWD-EAP AUTOMOTIVE PRODUCTS, INC.
Balance Sheets as of August 31, 1997 and 1996 and Statements of Operations and
Changes in Investment of Echlin, Inc., and of Cash Flows for Each of the Three
Years in the Period Ended August 31, 1997 and Independent Auditors' Report
<PAGE>
INDEPENDENT AUDITORS' REPORT
WAWD-EAP Automotive Products, Inc.:
We have audited the accompanying balance sheets of WAWD-EAP Automotive Products,
Inc. (the "Company") (a wholly owned subsidiary of Echlin, Inc.) as of August
31, 1997 and 1996, and the related statements of operations and changes in
investment of Echlin, Inc. and of cash flows for each of the three years in the
period ended August 31, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements 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 financial statements present fairly, in all material
respects, the financial position of WAWD-EAP Automotive Products, Inc. as of
August 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended August 31, 1997 in conformity
with generally accepted accounting principles.
As discussed in Notes 1 and 2 to the financial statements, the Company was a
wholly owned subsidiary of Echlin, Inc. and received managerial and
administrative support from Echlin, Inc. Certain expenses included in the
financial statements represent allocations of amounts incurred by Echlin, Inc.
As a result, the Company's financial statements may not be indicative of
conditions that would have existed or results that would have occurred had the
Company operated as an unaffiliated entity.
Deloitte & Touche LLP
San Francisco, California
December 23, 1997
<PAGE>
WAWD-EAP AUTOMOTIVE PRODUCTS, INC.
BALANCE SHEETS
AUGUST 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $ 176,403 $ 184,547
Accounts receivable, less allowance for doubtful
accounts of $85,962 and $46,105 4,998,148 4,820,873
Inventory, less allowance of $1,111,943 and $847,755 14,016,106 12,759,709
Prepayments to vendors 1,111,513 1,798,645
Other current assets 406,381 554,710
----------- -----------
Total current assets 20,708,551 20,118,484
PROPERTY AND EQUIPMENT - Net 824,758 1,314,590
OTHER ASSETS 99,422 78,233
GOODWILL, net of accumulated amortization of $166,131
and $94,455 1,483,057 1,524,733
----------- -----------
TOTAL ASSETS $23,115,788 $23,036,040
=========== ===========
LIABILITIES AND SHAREHOLDERS EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,547,297 $ 4,040,636
Due to Echlin, Inc. 3,092,058 1,313,082
Accrued expenses and other current liabilities 693,040 613,801
----------- -----------
Total current liabilities 7,332,395 5,967,519
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS EQUITY - Investment of Echlin, Inc. 15,783,393 17,068,521
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY $23,115,788 $23,036,040
=========== ===========
</TABLE>
-2-
See notes to financial statements.
<PAGE>
WAWD-EAP AUTOMOTIVE PRODUCTS, INC.
STATEMENTS OF OPERATIONS AND CHANGES IN INVESTMENT OF ECHLIN, INC.
YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
SALES $45,157,344 $45,176,653 $52,228,383
LESS RETURNS AND ALLOWANCES 2,535,310 2,643,957 2,598,088
----------- ----------- -----------
NET SALES 42,622,034 42,532,696 49,630,295
COST OF GOODS SOLD 30,288,825 30,419,329 36,266,632
----------- ----------- -----------
GROSS PROFIT 12,333,209 12,113,367 13,363,663
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (11,766,835) (11,299,068) (12,774,713)
CORPORATE ASSESSMENT FROM
ECHLIN, INC. (1,072,701) (1,291,000) (1,626,800)
----------- ----------- -----------
LOSS FROM OPERATIONS (506,327) (476,701) (1,037,850)
OTHER INCOME (EXPENSE), Net (122,881) (103,619) 23,950
----------- ----------- -----------
LOSS BEFORE INCOME TAX BENEFIT (629,208) (580,320) (1,013,900)
INCOME TAX BENEFIT 424,080 567,931 676,810
----------- ----------- -----------
NET LOSS (205,128) (12,389) (337,090)
INVESTMENT OF ECHLIN, INC., BEGINNING 17,068,521 18,184,910 19,320,136
DISTRIBUTIONS TO ECHLIN, INC. (1,080,000) (1,104,000) (798,136)
----------- ----------- -----------
INVESTMENT OF ECHLIN, INC., ENDING $15,783,393 $17,068,521 $18,184,910
=========== =========== ===========
</TABLE>
See notes to financial statements.
-3-
<PAGE>
WAWD-EAP AUTOMOTIVE PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Cash received from customers $42,852,264 $44,040,519 $53,054,671
Cash paid to suppliers and employees (41,644,877) (42,120,734) (52,622,358)
----------- ----------- -----------
Net cash provided by operating activities 1,207,387 1,919,785 432,313
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (135,531) (348,109) (103,893)
Proceeds from the sale of fixed assets 30,116 43,030
----------- ----------- -----------
Net cash used in investing activities (135,531) (317,993) (60,863)
----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Distributions to Echlin, Inc. (1,080,000) (1,104,000) (798,136)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH (8,144) 497,792 (426,686)
CASH AT BEGINNING OF YEAR 184,547 (313,245) 113,441
----------- ----------- -----------
CASH AT END OF YEAR $ 176,403 $ 184,547 $ (313,245)
----------- ----------- -----------
RECONCILIATION OF NET LOSS
TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net loss $ (205,128) $ (12,389) $ (337,090)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 374,279 353,936 383,237
Provision for doubtful accounts 39,857 746 513,827
Provision for inventory reserve 264,188 257,647 (133,431)
Loss on sale of fixed assets 32,509
Changes in assets and liabilities:
Accounts receivable (217,132) 421,931 969,925
Inventory (1,520,585) 3,409,519 2,695,692
Prepayments and other current assets 835,461 482,809 494,798
Other assets (21,189) (59,611) 5,430
Due to Echlin, Inc. 1,778,976 (3,851,584) 1,400,433
Account payable and accrued expenses (121,340) 884,272 (5,560,508)
----------- ----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES $ 1,207,387 $ 1,919,785 $ 432,313
=========== =========== ===========
</TABLE>
-4-
See notes to financial statements.
<PAGE>
WAWD-EAP AUTOMOTIVE PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Business - WAWD-EAP Automotive Products, Inc. (the "Company") sells
after-market automotive parts to retailers and wholesalers. The Company
operates five wholesale warehouses in New Jersey, Georgia, Texas and
California. The Company was a wholly owned subsidiary of Echlin, Inc.
("Echlin").
Sale of the Company - On November 17, 1997, substantially all of the
Company's net assets were acquired by Brake Headquarters U.S.A., Inc.
Basis of Presentation - The accompanying financial statements have been
prepared from the separate records maintained by the Company. The Company
did not maintain stand-alone corporate, treasury, tax or similar support
functions. The purchase price adjustments from the acquisition of the
Company by Echlin in 1994 have been reflected on a push-down basis in the
accompanying financial statements. Certain expenses included in the
financial statements represent allocations of amounts incurred by Echlin
(see Note 2). As a result, the accompanying financial statements may not be
indicative of the conditions that would have existed or results that would
have occurred if the Company had been operated as an unaffiliated entity.
Inventory, consisting of after-market automotive finished goods, is stated
at the lower of cost (first-in, first-out method) or market.
Depreciation of property and equipment is provided for by the straight-line
method over the estimated useful lives of the related assets (5 to 10
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 10 years).
Goodwill, which resulted from the acquisition of the Company by Echlin, is
being amortized over 40 years.
Foreign currency transaction gains and losses are included in cost of goods
sold.
Revenue Recognition - Revenue from the sale of products is recognized upon
shipment.
Income Taxes - The Company's operations were included in the consolidated
tax returns of Echlin. The Company's income tax benefit was allocated to
the Company by Echlin based on Echlin's ability to utilize the Company's
net operating losses.
Concentration of Credit Risk - The Company's customer base consists
primarily of retailers and wholesalers of after-market automotive
replacement parts throughout North America. On a geographic basis, no area
has a disproportionate concentration of credit risk. During the years ended
August 31, 1997, 1996 and 1995, less than 1% of the Company's sales were
derived from foreign customers. Although the Company is directly affected
by the well-being of the after-market automotive replacement parts
industry, management does not believe significant credit risk exists at
August 31,
-5-
<PAGE>
1997. The Company performs ongoing credit evaluations of its customers'
financial condition. When amounts on specific accounts receivable are
judged to be uncollectable by management, those amounts are charged to the
allowance for doubtful accounts. During the year ended August 31, 1995, the
Company wrote off approximately $900,000 to one customer filing bankruptcy,
which accounted for approximately 2% of the Company's net sales.
Use of 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.
2. RELATED PARTY TRANSACTIONS WITH ECHLIN
Charges from Echlin were included in the Company's statements of operations
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Selling, general and adminstrative expenses:
Employee benefits and related expenses $ 859,056 $ 465,847 $ 433,329
Other 33,990 32,397 34,292
Corporate assessment from Echlin 1,072,701 1,291,000 1,626,800
Income tax benefit (424,080) (567,931) (676,810)
</TABLE>
Employee benefits and related expenses were charged by Echlin based upon
actual employee benefits and other related expenses paid by Echlin. The
corporate assessment from Echlin was allocated to the Company by Echlin
based on the criteria determined by Echlin. Distributions made to Echlin of
$1,080,000, $1,104,000 and $798,136 in the years ended August 31, 1997,
1996 and 1995, respectively, were based upon the investment balance of
Echlin in the Company.
Management of the Company believes that the related party charges from
Echlin are not necessarily indicative of expenses that would have been
incurred by the Company on a stand-alone basis.
3. COMMITMENTS AND CONTINGENCIES
The Company leases warehouse and office space under noncancelable operating
leases. Aggregate future minimum lease payments are as follows:
Year ending August 31, 1997:
1998 $ 723,104
1999 530,618
2000 336,814
2001 214,606
2002 221,044
Thereafter 74,404
----------
Total $2,100,590
==========
Rent expense for the years ended August 31, 1997, 1996 and 1995 was
$769,479, $698,202 and $523,180, respectively.
-6-
<PAGE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at August 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Leasehold improvements $ 235,711 $ 153,684
Machinery and equipment 1,709,086 1,948,342
---------- ----------
Total 1,944,797 2,102,026
Less accumulated depreciation and amortization (1,120,039) (787,436)
---------- ----------
Total property and equipment -- net $ 824,758 $1,314,590
========== ==========
</TABLE>
For the years ended August 31, 1997, 1996 and 1995, depreciation and
amortization expense was $332,603, $312,264 and $338,981, respectively.
******
-7-
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC.
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET
The following are the unaudited pro forma condensed consolidated balance sheets
of the Company at September 30, 1997 and the unaudited pro forma consolidated
statements of income of the Company for the year ended December 31, 1996 and the
nine months ended September 30, 1997 (the "Pro Forma Financial Statements"). The
pro forma statements of income are based on the historical results of the
Company and give effect to (i) the acquisition by way of a merger of
substantially all of the assets and certain liabilities of WAWD-EAP Automotive
Products, Inc. ("WAWD") on November 17, 1997 and (ii) borrowings to finance the
WAWD acquisition (collectively, the "Transactions") as if the Transactions had
occurred on January 1, 1996. The pro forma balance sheet gives effect to the
Transactions as if they had occurred on September 30, 1997. The Pro Forma
Financial Statements do not purport to be indicative of the Company's financial
position or results of operations that would actually have been obtained had the
Transactions been completed as of the dates or for the periods presented, or to
project the Company's financial position or results of operations at any future
date or for any future period. The pro forma adjustments are based upon
available information and upon certain assumptions that the Company believes are
reasonable. In the opinion of management, all adjustments necessary to present
fairly such Pro Forma Financial Statements have been made.
The acquisition of WAWD has been accounted for under the purchase method of
accounting. The total purchase price was allocated to the assets and liabilities
acquired based upon their relative fair values at the closing date.
8
<PAGE>
BRAKE HEADQUARTERS USA, INC. AND SUBSIDIARIES
Unaudited Pro Forma Condensed Consolidated Balance Sheet
<TABLE>
<CAPTION>
Brake
Headquarters WAWD Pro Forma
9/30/97 8/31/97 Adjustments Consolidated
-------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Current assets $ 17,870,938 $ 20,708,551 $ 758,500 (a) $ 39,161,586
(176,403)(b)
Property and equipment, net 1,513,616 824,758 (824,758)(c) 1,513,616
Other assets 464,936 99,422 (99,422)(b) 774,936
310,000 (e)
Goodwill, net 1,483,057 (1,483,057)(b)
Deferred tax asset 101,988 101,988
-------------- ------------- ------------- -------------
Total Assets $ 19,951,478 $ 23,115,788 $ (1,515,140) $ 41,552,126
============== ============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 3,395,337 $ 7,332,395 $ (3,232,164)(c) $ 12,322,731
1,520,000 (d)
3,307,163 (c)
Long-term debt 10,191,891 7,900,000 (d) 18,091,891
Deferred credit 3,732,104 (c) 3,732,104
Shareholders' equity 6,364,250 15,783,393 (15,783,393)(b) 7,405,400
668,650 (c)
292,500 (c)
80,000 (f)
-------------- ------------- ------------- -------------
Total liabilities and shareholders' equity $ 19,951,478 $ 23,115,788 $ (1,515,140) $ 41,552,126
============== ============= ============= =============
</TABLE>
See notes to unaudited pro forma condensed consolidated balance sheet
9
<PAGE>
BRAKE HEADQUARTERS USA, INC. AND SUBSIDIARIES
Unaudited Pro Forma Condensed Consolidated Statements Of Income
For The Nine Months Ended September 30, 1997
<TABLE>
<CAPTION>
Brake Pro Forma
Headquarters WAWD Adjustments Consolidated
------------- --------------- ----------- ----------------
<S> <C> <C> <C> <C>
Sales $ 23,374,179 $34,675,400 $ 58,049,579
Less returns and allowances (1,327,824) (1,931,310) (3,259,134)
------------- ------------ ----------- --------------
Net sales 22,046,355 32,744,090 54,790,445
Cost of goods sold 16,083,282 23,091,730 39,175,012
------------- ------------ ----------- --------------
Gross profit 5,963,073 9,652,360 15,615,433
Selling, general and administrative expenses 5,396,060 9,069,316 $ (280,000) (a) 13,886,917
(53,757) (b)
(244,702) (b)
Corporate Assessment from Echlin, Inc. 816,703 (653,000) (e) 163,703
------------- ------------ ----------- --------------
Income from operations 567,013 (233,659) 1,231,459 1,564,813
------------- ------------ ----------- --------------
Other income (expense):
Other income 221,087 221,087
Interest expense (614,295) (687,750) (c) (1,302,045)
Other expense (52,780) (52,780)
------------- ------------ ----------- --------------
(393,208) (52,780) (687,750) (1,133,738)
------------- ------------ ----------- --------------
Income (loss) before income taxes 173,805 (286,439) 543,709 431,075
(Provision) benefit for income taxes (69,500) 108,800 (211,700) (d) (172,400)
------------- ------------ ----------- --------------
Net income (loss) $ 104,305 $ (177,639) $ 332,009 $ 258,675
============= =============== =========== ==============
Net income per common share (f) $ .02 $ .06
============= ==============
Weighted average number
of Common Shares outstanding 4,304,428 4,473,690
============= ==============
</TABLE>
The Company incurred a net loss of $949,330 for the year ended
December 31, 1997 which included the results of operations of WAWD from
November 17, 1997 (date of acquisition) through December 31, 1997.
Certain changes were made as of September 30, 1997 to reflect
information that was obtained during the course of the audit of the Company's
consolidated financial statements for the year ended December 31, 1997.
See notes to unaudited pro forma condensed consolidated statements of income.
10
<PAGE>
BRAKE HEADQUARTERS USA, INC. AND SUBSIDIARIES
Unaudited Pro Forma Condensed Consolidated Statements Of Income
For The Year Ended December 31, 1996
<TABLE>
<CAPTION>
Brake Pro Forma
Headquarters WAWD Adjustments Consolidated
------------ ------------- ------------ -------------
<S> <C> <C> <C>
Sales $ 35,948,479 $ 45,097,043 $ 81,045,522
Less returns and allowances (3,349,383) (2,738,564) (6,087,947)
------------- ------------- ----------- -------------
Net sales 32,599,096 42,358,479 74,957,575
Cost of goods sold 24,275,020 30,424,146 54,699,166
------------- ------------- ----------- -------------
Gross profit 8,324,076 11,934,333 20,258,409
Selling, general and administrative expenses 8,083,225 11,456,645 $ (373,000)(a) 7,315,218
(71,676)(b)
(323,331)(b)
Corporate Assessment from Echlin, Inc. 1,217,000 (967,000)(e) 250,000
------------- ------------- ----------- -------------
Income (loss) from operations 240,851 (739,312) 1,735,007 1,236,546
------------- ------------- ----------- -------------
Other income (expense):
Interest expense (875,305) (997,800)(c) (1,873,105)
Other expense (37,366) (37,366)
------------- ------------- ----------- -------------
(875,305) (37,366) (997,800) (1,910,471)
------------- ------------- ----------- -------------
Income (loss) before income taxes (634,454) (776,678) 737,207 (673,925)
Benefit (provision) for income taxes 168,000 295,000 (207,000)(d) 256,000
------------- ------------- ----------- -------------
Net income (loss) $ (466,454) $ (481,678) $ 530,207 $ (417,925)
============ ============= ========= =============
Net loss per common share (f) $ (.13) $ (.11)
============= =============
Weighted average number of
Common Shares outstanding 3,616,311 3,746,311
============= =============
</TABLE>
Certain changes were made as of December 31, 1996 to reflect
information that was obtained during the course of the audit of the Company's
consolidated financial statements for the year ended December 31, 1997.
See notes to unaudited pro forma condensed consolidated statements of income.
11
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
On November 17, 1997, in a series of transactions, the Company acquired by way
of merger substantially all of the assets and certain liabilities of WAWD-EAP
Automotive Products, Inc. ("WAWD") for a total purchase price (including
acquisition costs) of $8,341,400 in cash, and 130,000 shares of the Company's
common stock valued at $961,250. Fifty Thousand of the shares issued were held
in escrow for up to 15 months as security for certain indemnification
obligations. The shares held in escrow retain all voting and dividend rights and
are included in pro forma common shares outstanding for all periods presented.
In May 1998 the escrowed shares were released upon mutual agreement of the
parties. The Company has accounted for the acquisition of WAWD under the
purchase method of accounting. The Company's historical balance sheet at
September 30, 1997 and the results of operations for the year ended December 31,
1996 and for the nine months ended September 30, 1997 do not include WAWD as
the acquisition was completed subsequent to September 30, 1997. The excess of
the estimated fair market value of the net assets acquired over the purchase
price was first utilized to reduce long-term assets acquired with the remaining
excess of $3,732,100 recorded as a deferred credit (negative goodwill), which is
being amortized over a 10 year period.
WAWD has an August 31 fiscal year end. The unaudited pro forma consolidated
statements of income for the year ended December 31, 1996 and the nine months
ended September 30, 1997 reflect the results of operations as though the
acquisition of WAWD had occurred on January 1, 1996. Accordingly, WAWD's results
of operations were adjusted to conform to the Company's year end. The unaudited
pro forma condensed consolidated balance sheet reflects the acquisition of WAWD
as though the acquisition occurred on September 30, 1997.
12
<PAGE>
Dated: May 20, 1998
NOTES TO CONSOLIDATED BALANCE SHEET
The accompanying pro forma condensed consolidated balance sheet as of September
30, 1997 has been prepared as if the acquisition of WAWD had occurred on
September 30, 1997 and reflects the following adjustments:
(a) The adjustment to cash is comprised of:
Proceeds from the loan from The CIT Group $ 7,900,000
Proceeds from the convertible subordinated debentures 1,000,000
Proceeds from subordinated promissory notes 600,000
Purchase price paid to Echlin, Inc. (7,900,000)
Purchase price paid to stockholders (162,000)
Fees and expenses relating to the acquisition of
WAWD and issuance of debt (679,500)
---------
$ 758,500
=========
(b) Reflects the elimination of assets and liabilities of WAWD that will be
retained by Echlin, Inc. and therefore are excluded from the acquisition as
follows:
Cash $ 176,403
Other assets 99,422
Goodwill, net 1,483,057
Current liabilities (3,232,164)
Shareholder's equity (15,783,393)
(c) Reflects management's allocation of the purchase price in accordance with
the purchase method of accounting as follows:
Purchase price:
Cash purchase price paid to stockholders $ 162,000
Fair value of common stock
issued to stockholders 668,650
Purchase price paid to Echlin, Inc. 7,900,000
Fees and expenses 369,500
Fair value of common stock issued to consultant 292,500
----------
$9,392,650
==========
13
<PAGE>
The purchase price is allocated as follows to assets and liabilities
acquired:
<TABLE>
<CAPTION>
Historical Fair
Cost Value Adjustment
---- ----- ----------
<S> <C> <C> <C>
Accounts receivable $ 4,998,148 $ 4,998,148 $ --
Inventory 14,016,106 14,016,106 --
Other current assets 1,517,894 1,517,894 --
Property and equipment 824,758 -- (824,758)
Current liabilities (4,100,231) (7,407,394) (3,307,163)
Deferred credit -- (3,732,104) (3,732,104)
------------ ------------ -----------
$ 17,256,675 $ 9,392,650 $(7,864,025)
============ ============ ===========
</TABLE>
The $3,307,163 represents a deferred tax liability established for the
temporary difference between the financial statement basis and the tax basis of
the allocation of the purchase price of WAWD.
(d) Reflects the financing of the WAWD acquisition as follows:
Long - term debt:
Loan from The CIT Group $7,900,000
==========
Short - term debt:
Convertible subordinated debentures, net of discount $ 920,000
Subordinated promissory notes 600,000
----------
$1,520,000
===========
(e) Reflects deferred financing costs of $ 310,000. These costs will be
amortized over the terms of the related financings.
(f) Reflects the fair value of the warrants issued ($80,000) in connection with
the convertible subordinated debentures.
14
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NOTES TO CONSOLIDATED STATEMENTS OF INCOME
The accompanying pro forma condensed consolidated statements of income for the
year ended December 31, 1996 and for the nine months ended September 30, 1997
have been prepared by combining the historical results of the Company and WAWD
for such respective periods and reflect the following adjustments:
(a) Reflects the amortization of the deferred credit (negative goodwill)
of $ 3,732,104 over 10 years.
(b) Reflects the elimination of amortization of WAWD goodwill and
depreciation of fixed assets.
(c) Reflects the interest expense related to the financing of the WAWD
acquisition as follows:
Year End Nine Months Ended
December 31, 1996 September 30, 1997
----------------- ------------------
Loan from The CIT Group of
$7,400,000 at 9.5% $703,000 $527,250
Issuance of 5% $1,000,000
convertible subordinated
debentures plus amortization 130,000 37,500
of $80,000 discount
Issuance of 8% $600,000
subordinated promissory notes 48,000 36,000
Amortization of deferred
financing costs 116,000 87,000
-------- --------
$997,000 $687,750
======== ========
Loan of $7.4 million reflects the borrowing of $7.9 million less the
$500,000 equity contribution to WAWD which repaid a portion of the
loan balance as a condition of financing.
(d) For pro forma purposes, the income tax provision was calculated to
arrive at a consolidated benefit of 38% of pretax loss for the year
ended December 31, 1996 or a provision of 40% of pretax income for the
nine months ended September 30, 1997.
(e) Reflects the elimination of that portion of the corporate assessment
from Echlin Inc. which will not be incurred subsequent to the
acquisition.
(f) Net income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding
(including shares held in escrow) and dilutive common equivalent
shares outstanding.
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