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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 March 31, 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 May 20, 1998
-------------------- ---------------------------
Common Stock, $.001 par value 4,563,321
Class A Common Stock Purchase Warrants
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BRAKE HEADQUARTERS, USA
FORM 10-Q
QUARTERLY REPORT
March 31, 1998
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Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements -
Consolidated Balance Sheets - March 31, 1998
(Unaudited) and December 31, 1997 ........................ 3
Consolidated Statements of Income For The
Three Months Period Ended March 31, 1998
and March 31, 1997 (Unaudited)............................ 4
Consolidated Statements of Cash Flows For The
Three Months Period Ended March 31, 1998
and March 31, 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....................... 7-8
PART II - EXHIBITS AND REPORTS ON FORM 8-K........................... 9
Item 3. Other Information......................................... 9
Item 6. Exhibits and Reports on Form 8-K.......................... 9
Signatures................................................ 10
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BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1998
(Unaudited) December 31, 1997
-------------- -----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 258,353 $ 65,410
Accounts receivable, less allowance for doubtful
accounts of $1,188,000 and $1,179,000 10,609,533 8,910,085
Inventory 23,230,866 25,814,917
Prepaid expenses and other current assets 371,345 754,761
------------ ------------
Total current assets 34,470,097 35,545,173
Property and Equipment - net 1,633,046 1,638,749
Other Assets 656,650 674,571
Due from President 60,874 60,874
Deferred Tax Asset 261,000 261,000
------------ ------------
Total Assets $ 37,081,667 $ 38,180,367
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 6,509,370 $ 6,546,436
Accrued expenses and other current liabilities 2,305,995 2,061,752
Current portion of long-term debt 1,673,324 1,673,324
Deferred tax liability 1,145,000 1,526,000
------------ ------------
Total current liabilities 11,633,689 11,807,512
------------ ------------
Long-term Debt 15,590,397 16,239,285
Deferred Credit 3,591,404 3,684,404
------------ ------------
Total liabilities 30,815,490 31,731,201
------------ ------------
Shareholders' Equity:
Series B preferred stock - $.001 par value; authorized,
issued and outstanding 1,000 shares 1 1
Common stock - $.001 par value; authorized 6,000,000
shares, issued and outstanding 4,563,321 shares 4,563 4,563
Additional paid-in capital 17,022,258 17,022,258
Accumulated deficit (10,760,645) (10,577,656)
------------ ------------
Total shareholders' equity 6,266,177 6,449,166
------------ ------------
Total Liabilities and Shareholders' Equity $ 37,081,667 $ 38,180,367
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
3
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BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Sales $ 17,179,005 $ 8,144,874
Less returns and allowances (790,496) (613,454)
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Net sales 16,388,509 7,531,420
Cost of goods sold 11,679,601 5,620,325
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Gross profit 4,708,908 1,911,095
Selling, general and administrative expenses 4,566,872 1,769,619
------------ ------------
Income from operations 142,036 141,476
------------ ------------
Other income (expense):
Other income 12,620 114,846
Interest expense (448,645) (202,083)
------------ ------------
(436,025) (87,237)
------------ ------------
(Loss) income before bebefit (provision) for income taxes (293,989) 54,239
Benefit (provision) for income taxes 111,000 (21,000)
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Net (loss) income $ (182,989) $ 33,239
============ ============
Net (loss) income per basic and diluted share $ (.04) $ .01
============ ============
Weighted average number of common shares outstanding 4,563,321 4,219,284
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASHFLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998 March 31, 1997
------------------ -----------------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $15,036,151 $ 7,822,715
Cash paid to suppliers and employees 13,306,664) (6,932,216)
Interest paid (462,310) (202,083)
Taxes paid (396,172) (28,322)
----------- ------------
Net cash provided by operating activities 871,005 660,094
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Cash flows from investing activities - (33,818)
Capital expenditures (29,174)
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Net cash used in investing activities (29,174) (33,818)
----------- ------------
Cash flows from financing activities:
Proceeds from sale of stock and warrants - 77,200
Repayments of notes payable and long term debt (606,286) (855,442)
Principal payments on long-term debt (42,602) (34,499)
Loans to President - (5,000)
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Net cash used in financing activities (648,888) (817,741)
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Net increase (decrease) in cash 192,943 (191,465)
Cash at beginning of period 65,410 536,928
----------- ------------
Cash at end of period $ 258,353 $ 345,463
=========== ============
Reconciliation of net income to net cash used in operating activities:
Net (loss) income $ (182,989) $ 33,239
Adjustments to reconcile net (loss) income to net cash provided by
(used in) operating activities:
Depreciation and amortization 34,877 24,844
Amortization of deferred credit (93,000)
Amortization of financing costs 25,242
Provision for doubtful accounts 56,085
Gain on sale of marketable securities (12,620)
Changes in assets and liabilities:
Accounts receivable (1,755,533) 309,208
Inventory 2,584,051 1,748,893
Prepaid expenses and other current assets 370,794 21,908
Other assets 17,921 (19,819)
Accounts payable and accrued expenses 207,177 (1,458,179)
Deferred tax Liability (381,000) --
----------- ------------
Net cash provided by operating activities $ 871,005 $ 660,094
=========== ============
Supplemental information of non-cash financing activities:
During the quarter ended March 31, 1997, thirty thousand shares of common stock were issued to a merger
and acquisition firm. The fair value of the common stock issued ($296,250) is currently deferred on the
consolidated balance sheet.
</TABLE>
See Notes to Consolidated Financial Statements
5
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BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
Basis of Presentation
The accompanying unaudited consolidated financial statements of Brake
Headquarters U.S.A., Inc. and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q. Accordingly, they do not
include all of the footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results for the three
months ended March 31, 1998 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1998. For further information,
refer to the financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997. There
has been no significant changes of accounting policies since December 31, 1997.
Note 2
Long-term Debt
The Company was in technical default under its credit facilities at
December 31, 1997 and March 31, 1998. The bank has issued a waiver of the
default and amended the terms of the agreements through the remaining term of
the agreement.
Note 3
Stockholders' Equity
In April 1998, the Company increased the authorized shares from
6,000,000 to 12,000,000 shares. Additionally, the Board of Directors and the
shareholders of the Company authorized 1,000,000 shares of preferred stock in
one or more series at the discretion of the Board of Directors.
On April 29, 1998, the Company completed a private financing of
$1,500,000 principal amount of 8% subordinated convertible debentures due April
30, 2000 (the "Debentures"). The two foreign investors (the "Purchasers") also
received five-year warrants to purchase an aggregate of 15,000 shares of Common
Stock at $3.93 per share. The Debentures are convertible, commencing the earlier
of 60 days from the date of closing or the effective date of a Registration
Statement covering the shares of Common Stock underlying the Debentures and
Warrants, at a conversion rate equal to the effective date of a Registration
Statement covering the shares of Common Stock underlying the Debentures and
Warrants, at a conversion rate equal to the greater of (a) the lower of (i) 80%
of the Market Price on the Conversion Date, or (ii) $3.77; or (b) the Floor
Price of $2.00 per share. The Debentures are redeemable, with the consent of the
Company's lender, at any time at 120% of their principal amount plus all accrued
Price falls below the Floor Price.
The Company and the Purchasers have agreed to sell and purchase,
respectively, up to an additional $4 million principal amount of Debentures
during the next 12 months provided certain market conditions are met. The
Company also granted the Purchasers a Right of First Refusal for a 120 day
period ending after the later of the Effective date of the Registration
Statement or the latest Closing Date of the sale of additional Debentures.
The Company agreed to repay $500,000 from the 5% Convertible
Subordinated Debentures issued in November 1997, and it's waiting approval from
its senior lender.
6
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Note 4
Commitments
In May 1998, the Company entered into a 5 year agreement to lease new
facilities in its San Francisco warehouse and offices. The monthly lease payment
is $22,204 plus annual increases.
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 included elsewhere herein.
Material Changes in Results of Operations
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Gross sales in the three months ended March 31, 1998 increased by
$9,034,131, or 110.9%, to $17,179,005 compared to $8,144,874 for the three
months ended March 31, 1997. This increase was primarily due to the sales of
WAWD (a newly acquired subsidiary in November 1997) of $10,318,329. Sales from
the Company prior to the acquisition decreased by $1,284,198, primarily due to
the loss of a major customer.
The Company has agreed to accept the return of merchandise under
certain circumstances. In order to obtain new customers, merchandise is
exchanged, and replaced with current Company merchandise. The merchandise is
brought back to the Company where it is reboxed, relabeled and placed back in
inventory. This is a common occurrence within the industry. As the marketplace
has grown more competitive, the amount of sales returns to the Company has
significantly increased. The merchandise does not deteriorate, and obsolescence
is therefore not a problem. All merchandise which is defective and returned by
customers is returned to or credited by vendors.
Gross profit for the three months ended March 31, 1998 increased by
$2,797,813, or 146.4% to $4,708,908 compared to $1,911,095 for the three months
ended March 31, 1997. WAWD accounted for $2,724,144 of the increase. Gross
profit margins increased for the first quarter of 1998 to 28.73% compared to
25.37% for the first quarter of 1997, as a result of the higher gross profit
margins from the WAWD sales, and improved efficiencies in purchasing.
Operating expenses during the three months ended March 31, 1998 were
$4,566,872 an increase of $2,797,253 or 158.1% from $1,769,619 for the three
months ended March 31, 1997. WAWD's operating expenses were $2,778,632 for the
period ended March 31, 1998, a net increase of $111,622 or 6.3% which is
primarily due to increased freight and office administration.
Income from operations for the three months ended March 31, 1998 was
$142,036 compared with $141,476 for the same period in 1997. During the three
months ended March 31, 1998, WAWD incurred a loss from operations of $54,488.
7
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Other income for the three months ended March 31, 1997 includes
$100,000 which relates to the sale of certain intangible assets previously
amortized through 1995 by the Company.
Interest expense during the three months ended March 31, 1998 was
$448,645 an increase of $246,562 over the interest expense of $202,083 during
the corresponding period in 1997. The increase is attributed to additional
borrowings in November 1997 used to finance the acquisition of WAWD of
approximately $761,000 on existing credit lines, and $162,265 of additional
interest expense from WAWD for the three months ended March 31, 1998.
As a result of the foregoing, the Company recorded a net loss for the
three months ended March 31, 1998 of $182,989 or $.04 per share, as compared to
net income of $33,239, or $.01 per share for the three months ended March 31,
1997.
Liquidity and Capital Resources
The Company has continued to use funds generated from proceeds from the
sale of stock, exercise of warrants and bank borrowings to finance working
capital requirements.
In November 1997, the Company entered into two credit agreements with
institutional lenders which provide for revolving credit and letter of credit
facilities, in an aggregate amount of up to $24 million based on certain
percentages of accounts receivable and inventory. Borrowings under these
facilities currently bear interest at rates ranging from LIBOR plus 2.25% to
prime plus 1% and both facilities expire in November 2000. The Company incurred
approximately $7.9 million of bank indebtedness (total purchase price paid in
cash was $8.4 million) in connection with its acquisition of WAWD which bears
interest at prime plus 1%.
Cash provided by operations during the three months ended March 31,
1998 was $871,005 as compared with $ 660,094 used in operations during the three
months ended March 31, 1997. This change was due mainly to the decrease in
inventory of $2,584,051 which was offset by the increase in accounts receivable
of $1,755,533.
Cash used in investing activities was $29,174 during the first quarter
of 1998 compared with $33,818 in 1997. The change was primarily due to capital
expenditures.
Cash used in financing activities was $648,888 during the first
quarter of 1998 compared with $817,741 in 1997. The Company repaid $606,286 of
its credit line form the proceeds of the reduction in inventory.
March 31, 1998 the Company had a total of $17,852,262 available under
its combined lines of credit which $15,149,959 was outstanding. These funds are
available for working capital purposes.
During the three months ended March 31, 1998, the Company made a
concerted effort to reduce inventory while ensuring sufficient product
availability. As a result, inventory decreased by $2,584,051, or 10.0% to
$23,230,866 from $25,814,917. Accounts receivable increased by $1,755,533, or
19.7%, from January 1, 1998 to March 31, 1998.
8
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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] Amendment No. 1 to the Current Report on Form 8-K which was filed on
December 2, 1997 was filed on February 2, 1998 to present the financial
statements of WAWD-EAP Automotive Products, Inc. for the three-year
period ended August 31, 1997, and the required pro forma financial
information.
9
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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: May 20, 1998
/s/ Marc J. Ruskin
------------------------------------
Marc J. Ruskin, Chief Financial Officer
10
