<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

   
                               Amendment No. 1
                                      to
    

                                   FORM 10-K

              [X] Annual Report Pursuant to Section 13 or 15(d) of
               The Securities Exchange Act of 1934 (Fee required)

                 For the Fiscal year ended December 31, 1997 or

              [ ]Transition Report Pursuant to Section 13 or 15(d) of
              The Securities Exchange Act of 1934 (No fee required)

       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, NY 11101
               (Address of Principal Executive Offices)(Zip Code)

                                 (718) 779-4800
              (Registrant's Telephone Number, Including Area Code)

           Securities registered Pursuant to Section 12(b) of the Act:

                                                 Name of Each Exchange on Which
 Title of Each Class                               Each Class is Registered
--------------------                               ------------------------

                                      None

           Securities registered Pursuant to Section 12(g) of the Act:
                          Common Stock $.001 par value
                     Class A Common Stock Purchase Warrants


         Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 past 90 days.  X  Yes     No
                                                              -----   -----

         Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]

         The aggregate market value of the 2,437,689 shares of voting stock held
by non-affiliates computed by reference to the closing price of $3.63 per share,
at which the stock was sold on April 6, 1998, was $8,848,811.

         As of April 6, 1998, the Issuer had 4,563,321 shares of Common Stock,
$.001 par value, outstanding.


<PAGE>



                                     PART I

Item 1.  Description of Business.

Business Development

         Unified Capital, Inc. ("Unified") was incorporated in the State of
Delaware on July 13, 1988 as a blind pool which did not conduct business
operations until July 1992 when it acquired, in a reverse acquisition (the
"Reverse Merger"), all of the outstanding capital stock of Sanyo Automotive
Parts, Ltd. ("Sanyo Automotive"). In connection with the Reverse Merger, Unified
changed its name to Sanyo Industries, Inc. On August 8, 1995, Sanyo Industries,
Inc. changed its name to Brake Headquarters U.S.A., Inc. (the "Company"). The
Company is a publicly-owned holding company, substantially all of its current
business operations are conducted through two of its wholly-owned subsidiaries,
Sanyo Automotive and WAWD, Inc. ("WAWD"). Sanyo Automotive is a New York
corporation formed in 1976, which is currently doing business under the name
Brake Headquarters. WAWD, a California corporation acquired by way of a merger
on November 17, 1997, is an importer and distributor of high-line European and
Asian automotive aftermarket parts. Other operating subsidiaries include Quality
First Brakes, Inc., a wholly-owned Delaware subsidiary of the Company ("Quality
First"), formed in August 1995, which owns Fifteen Inc., Thirty Three Inc. and
Thirty Nine Inc., and are wholesale warehouses for "undercar" parts and ABS
Brakes, Inc. ("ABS"), an assember of domestic brake pads which is a wholly-owned
New York subsidiary acquired in August 1996. All references to business history
herein relate to Sanyo Automotive whose operations pre-date the Company's
formation in 1988.

Business of Issuer

         Sanyo Automotive is a specialized distributor in the automotive
aftermarket of a complete line of brake system products including brake drums
and rotors, brake master cylinders, wheel cylinders, brake pads, brake shoes and
brake hoses for virtually all makes and models of domestic and foreign passenger
cars and light trucks from model year 1976 to the present. The Company also
sells a variety of other "undercar" parts including ride control products,
steering/suspension parts, drive shafts, shock absorbers and clutches. The brake
line products are sold primarily under the registered trademark "Brake
Headquarters, U.S.A.," "Brake Headquarters", as well as under the name "Sanyo
Automotive" and other private labels.

         WAWD is a direct importer of automotive parts. WAWD's primary customers
and channel of distributions of the products sold are to jobbers and the high
line European and Asian installer markets. Products are normally sold in the
manufacturers' packaging and very few parts are sold under the WAWD name. WAWD
maintains coverage for over 30,000 stock keeping units ("SKU's") . The products
carried cover such product lines as filters, clutches, brakes, water pumps,
ignition, wire sets, hoses, belts, exhaust, air conditioning, radiators,
pistons, gaskets, shock absorbers, cables, headlights, brakes, hydraulics,
electrical and rotating electrical parts, and steering and suspension parts. The
product lines covered by WAWD are primarily replacement parts for the import car
market.

         ABS operates a plant for the assembly of domestic brake pads. Quality
First operates three wholesale warehouses. The stores operate in three locations
around New York City and Long Island, New York. Sales are primarily made to
installers within the area, and sell a similar product line to those of Sanyo
Automotive.

Industry Overview

         The replacement parts market depends, in part, upon the age and number
of cars and light trucks on the road and the number of miles driven per year.
The Company expects that this market will continue to grow because of, among
other things, projected increases in the size of the United States' automotive
population, the higher cost of new cars which has resulted in an aging of the
automobile population, and the higher cost of replacement parts as a result of
technological changes in more recent vehicle models. Many of these technological
changes have increased the

                                       -2-

<PAGE>



demand on brake systems by causing more wear and tear. In addition, changing
government standards for automobiles, including pollution level standards and
increased performance demanded by consumers, caused original equipment
manufacturers ("OEMs") to make cars lighter, which, in turn caused OEMs to shift
from two-wheel disc brakes and drum brakes to four-wheel disc brakes which weigh
less than drum brakes. The Company believes that each of such factors has
contributed to a significant increase in the market for brake repairs during the
past decade. The standard to bring a vehicle to a complete stop from 60 MPH has
been reduced in the last few years from 150 feet to 75 feet. In order to meet
this standard a change in the friction material of brakes was necessary and a
shift was made from inexpensive long lasting asbestos brake pads (which raised
environmental concerns) to more expensive, shorter life metallic brake pads
which are more punishing to the brake system. Proper replacement of ignition
parts, shocks, filters, and electrical parts result in better performance, as
well as extending the life of the automobile.

         Management believes based on its experience that the aftermarket
industry performs well under most economic conditions. In an economic recession,
for example, vehicle owners tend to retain and repair their cars rather than
purchase costly new vehicles. Since brakes are a safety-related item, drivers
will not normally neglect brake repairs as they might do with other repairs and
maintenance less directly related to safety.

Business Strategy

         The Company's objective is to become one of the leading parts
distributors for both imported and domestic replacement parts in the United
States. The Company's business strategy is to continue the growth by acquiring
additional complementary businesses. The acquisition of WAWD in November 1997,
expanded the Company's warehouse locations throughout the United States, and
added new product lines for the Company to market to its existing customer base.
The Company is actively seeking strategic relationships with other companies and
merger/acquisition candidates that will enhance the ability of the Company to
bring its product to the market. This may be accomplished through acquisitions
of manufacturing, retail and other wholesale operations. In its base
distribution business, the Company will seek to continue to grow by, among other
things, adding new brake and other undercar part product lines. Management
believes that the Company's continued growth will depend upon, among other
things, its ability to respond to market and other changes in the distribution
process for automotive parts and to maintain state-of-the-art integrated
computerized systems to meet its customers demands.

         While many of the Company's competitors offer undercar parts for most
popular cars, Management believes that no such competitor maintains an inventory
of all brake parts for substantially all cars, as does the Company. Management
also believes that the Company has positioned itself, through investment in
advanced integrated systems, to capitalize on general trends occurring in
distribution.

Marketing and Sales

         Sanyo Automotive sells products primarily under the name "Brake
Headquarters" and certain private manufacturers' labels. Sanyo Automotive
distributes its products through salaried and independent sales agents or
manufacturers' representatives. Products are sold primarily to warehouse
distributors, retail discount chains, foreign and domestic automotive parts
wholesalers, mass merchandisers and undercar installation chains. A network of
approximately 200 sales representatives covers substantially all of the United
States and Canada as well as Mexico, Puerto Rico and Venezuela.

         Marketing efforts are facilitated by the publication of several
catalogs, each of which contains a description of the parts distributed by the
Company. These catalogs are provided to the Company's sales representatives who
use them to fill customers' orders. See "Research and Marketing" below. The
Company also participates in trade shows throughout the United States in order
to gain exposure for its products.




                                       -3-

<PAGE>




         The Company has increased net sales by approximately 70% since 1993,
although growth has slowed in later years. With the acquisition of WAWD, pro
forma combined annualized sales for 1997 would be approximately $68 million.

         WAWD sells products primarily through the use of telemarketers with the
assistance of outside sales personnel. Approximately 40 telemarketers and six
outside salespersons are used to sell its products. WAWD is currently exploring
the use of outside independent sales agents in certain geographical areas where
the company does not have a strong presence with the jobber market. WAWD will
also market its products through the publication of catalogs for the Asian Car
Lines, Brake Catalog, and VW Car Line. Vendors' catalogs are utilized to promote
their product lines which WAWD carries in stock.

         WAWD sells name brand products which are kept in a manufacturer's
original packaging. The products are primarily distributed through two channels
of distribution. The first being the jobber market and the second being the high
line European installer. Approximately 97% of WAWD's sales are generated within
the United States.

         For the year ended December 31, 1996, Autozone, Inc. accounted for
approximately 28% of the Company's revenues before terminating its relationship
with the Company in late 1996. There were no other 10% or greater customers in
1996 or in 1997 and WAWD did not have any 10% or greater customers in 1996 or in
1997.

Management Information Systems

         In July 1996, the Company purchased a new IBM AS/400 computer system
and updated all of its software systems. The Company is currently reviewing
options to integrate WAWD into its current mainframe system, however no
definitive decision has been made at this time. WAWD is currently using an IBM
AS400 computer system. The Company's computer system implements the fulfillment
of customers' purchase orders. Three of the Company's distribution centers are
equipped with an EDI computer link which enables customers to place orders
directly through the Company's computer system. The Company provides EDI
services to its customers through the Advantis system. The Company has a bar
coded inventory system and advanced shipping notice ("ASN") which, upon receipt
of an EDI generated purchase order, generates a computer notice of the items
being shipped, the shipment date and a tracking number. The systems give the
Company the ability to efficiently service customer needs and, the Company
believes, represent some of the most advanced integrated distribution
capabilities in the automotive parts industry. The Company also maintains a web
site on the Internet, which provides Company information and the ability to
communicate domestically and internationally via E-Mail. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" for information concerning the Year 2000 Issue.

Operations / Facilities

         Distribution Operations

         The Company maintains its headquarters office and principal
distribution center at a 94,000 square foot warehouse facility in Long Island
City, New York. This facility consists of two adjoining buildings at which
activities are maintained during two eight-hour shifts per day, usually five
days per week. In June 1995, the Company expanded its Midwest distribution
center in Fairfield, Illinois to approximately 40,000 square feet. The Company
currently operates one shift per day, five days per week, at this facility. The
Company also maintains an approximately 10,000 square foot distribution center
in Portland, Oregon to serve the Company's West Coast customers. At the Oregon
facility, the Company conducts distribution activities generally operating one
shift per day, five days per week.

         An additional six locations were added when the Company acquired by
merger WAWD. These locations include a west coast office located in Fremont, CA
of 10,400 square feet, and warehouse locations include Sunnyvale, CA (19,400
square feet), Los Angeles, CA (51,900 square feet), Houston, TX (10,500 square
feet), Atlanta, GA (58,200 square feet) and Piscataway, NJ (65,800 square feet).

                                       -4-

<PAGE>



         The Company maintains inventories at its distribution centers to
maintain maximum service levels. Orders from the Company's customers are
selected, assembled and packaged from these facilities and shipped. Sanyo
Automotive maintains various levels of inventories with approximately 8,000
SKU's at its New York, Illinois and Oregon warehouses. WAWD maintains various
levels of inventories with approximately 30,000 SKU's at its five warehouse
locations. The Company maintains leased trucks which it uses to make direct
local deliveries to its customers. The Company estimates that about 5% of its
sales are delivered by the Company's trucks and the balance by common carriers,
including Federal Express and UPS. The Company has a dedicated office at each
distribution center to facilitate shipping by Federal Express and UPS.

         Assembly Operations

         The Company, through its subsidiary ABS, occupies 10,000 square feet in
Lindenhurst, NY, where it assembles brake pads for domestic automobiles.

         Undercar Warehouses

         The Company, through its subsidiary Quality First, maintains three
undercar warehouses which are located in the Bronx, Jamaica, and Uniondale, New
York. The stores occupy from 1,200 - 2,000 square feet and are open six days a
week to service jobbers.

Suppliers

         The Company has relationships with many suppliers of parts and
alternate sources of parts are readily available. Therefore, the Company does
not maintain supply contracts with any of its suppliers, because it believes
alternative sources exist for most of the products it distributes. The loss of
any one supplier is not expected to have a material adverse effect on the
Company. The Company generally obtains prices and terms comparable to similarly
situated companies because of its large volume of purchases.

Competition

         Competition within the automotive parts industry is affected
principally by product quality, availability, customer service and price. By
expanding its distribution facilities, the Company anticipates that it will be
able to continue to control costs, while maintaining high standards of quality
for its products. The direct competitors to the Company's distribution
activities include manufacturers, consisting of Brake Parts, Inc., Wagner
Brakes, a subsidiary of Cooper Industries, Inc., EIS Brake Parts Division of
Standard Motor Products, Inc. and the ITT Automotive Aftermarket Division of
ITT/AIMCO. Such manufacturers, who also act as distributors, are not dependent
on relationships with suppliers as is the Company. The Company's direct
competitors who are distributors include Universal Brake Parts, and California
Drum and Rotor.

800 Technical Service Hotline

         The Company has instituted an 800 toll free technical hotline
(800-221-1393 X 106) serviced by professional advisors to respond to inquiries
and problems which may be experienced by the Company's customers.

Research and Marketing

         The Company has established a special in-house Research and Marketing
("R&M") department. The R&M Department was formed to provide up-to-date
information for the Company's catalogs which the Company believes is useful to
its customers. The Company has been advised by certain of its retail chain store
customers that they rely on the Company's catalogs and the R&M Department to
obtain current information in order to update and maintain their own inventory.
The Company's customers are also able to provide the Company with input on their
undercar

                                       -5-

<PAGE>



product needs, enabling the Company to increase sales to such customers. The R&M
Department has also been able to supply management with recommendations for new
additions to its product lines and new products.

Government Regulation

         The Company is subject to various laws and governmental regulations
relating to the operation of its business. However, the Company does not believe
that the cost of compliance with such laws and regulations has a material impact
on its operations.


Trademarks

         The Company offers many of its products under the names "BRAKE
HEADQUARTERS, U.S.A (R)", "EAP(R)", "EURASIAN AUTOMOTIVE PRODUCTS (R) ", and
"WORLDMARK (R)" , for which it has obtained registered trademarks from the
United States Patent and Trademark Office and "WAWD(TM)" for which it has a
pending trademark.

Employees

         As of March 18, 1998, the Company had 268 employees, including five
executives; 16 employees in purchasing; 36 administrative personnel; 48 in sales
and customer service; 152 employees in warehousing, shipping and receiving; and
11 in the undercar warehouses. The Company also retains the services, as
independent contractors, of approximately 200 independent sales representatives
who are paid solely on a commission basis.

         The Company is a party to a collective bargaining agreement relating to
46 of its warehouse employees in New York and Fairfield, Illinois. The Company
believes that its employee relations are currently satisfactory.

Item 2.  Description of Properties.

         Sanyo Automotive leases approximately 94,000 square feet of office, and
warehouse facilities at 33-16 Woodside Avenue, Long Island City, New York.
Approximately 34,000 square feet of this facility are leased from the Company's
President, Joseph Ende, pursuant to a lease dated July 1, 1992. As of August,
1997, Mr. Ende agreed to reduce the annual lease payment to $258,000, for the
remainder of the lease which expires on July 1, 1999. Mr. Ende was paid
$280,500, $312,000, and $312,000 per year pursuant to the lease in 1997, 1996
and 1995, respectively. Based on the Company's review of nearby real estate and
an independent appraisal, the Company believes that the terms of the lease with
Mr. Ende are no less favorable than would otherwise be obtained from
unaffiliated third parties. The remaining 60,000 square feet is leased on a
month-to-month basis at $24,000 per year.

         Sanyo Automotive owns a facility, purchased in April 1995, comprised of
approximately 40,000 square feet on nine acres at Lot #22, Fairfield Industrial
Park, Fairfield, Illinois, which serves as the Company's Midwest Distribution
Center.

         Sanyo Automotive occupies approximately 10,000 square feet of public
warehouse space at 230 East Burnside, Portland, Oregon on a yearly basis.

         ABS leases approximately 10,000 square feet at 6 Bahama Street in
Lindenhurst, New York. The lease expires on October 31, 2001. An annual rental
of $40,000 is paid.

         Quality First maintains three stores in the Bronx, Jamaica, and
Uniondale, New York. Each store is between 1,200 - 2,000 square feet. Rent is
$1,700, $2,000, and $900 per month, respectively.


                                       -6-

<PAGE>



         WAWD subleases 10,400 square feet at 47421 Bayside Parkway, Fremont,
California. The sublease expired on February 28, 1998, and was renewed for an
additional four-month term at $13,416 per month. WAWD leases 19,400 square feet
of warehouse space at 370 Caribbean Drive, Sunnyvale, California. The lease was
renewed for a one-year term, expiring on August 31, 1998. Monthly rent is $6,693
($80,316 annually.) WAWD is currently looking for a facility to service the
Northern California market and would combine the Fremont and Sunnyvale,
California locations. It is anticipated that the combined locations would have a
monthly rent of approximately $21,000.

         WAWD leases 58,200 square feet of warehouse space at 611 Thornton Road,
Lithia Springs, Georgia 30057. Rent is $10,704 per month and expires August 31,
2000 and may be renewed for additional five-year terms.

         WAWD leases 51,900 square feet of warehouse space at 3270 East 26th
Street, Vernon, California 90023. The lease expires December 31, 2002 and has a
base rent of $15,578 per month.

         WAWD leases 10,500 square feet of warehouse space located at 1450 and
1490 North Post Oak Road, Houston, Texas. The lease expires on October 31, 1998
and has a monthly rent of $2,617.

         WAWD leases 65,800 square feet of space at Colonial Drive, Piscataway,
New Jersey. The lease expires on May 31, 1999 and monthly rent is $21,626.


Item 3.  Legal Proceedings.

         The Company is not currently subject to any material legal proceedings
other than claims in the ordinary course of business.


Item 4.  Submission of Matters to a Vote of SecurityHolders.

                                      NONE



                                       -7-

<PAGE>




                                     PART II

 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

(a)      Market Information

         The Common Stock has traded on the NASDAQ SmallCap Market under the
symbol BHQU since June 6, 1996. Until then, the Common Stock traded on the
Over-The-Counter Electronic Bulletin Board (the "OTCBB"). The Company's Class A
Warrants have traded on the NASDAQ SmallCap Market under the symbol BHQUW since
December 23, 1996.

         The following table sets forth the high and low closing prices for the
Common Stock for each quarter, as reported by NASDAQ since June 6, 1996; and the
high and low bid quotes on the OTCBB from January 1, 1996 through June 5, 1996,
as reported by the National Quotation Bureau, Inc. Such quotations represent
prices in dollars between dealers, do not include retail mark-ups, mark-downs or
commissions, and do not necessarily represent actual transactions.


                                          Common Stock             Warrants
                                          ------------             --------
                                       High           Low       High       Low
                                       ----           ---       ----       ---
       1996
       ----                                                                     
First Quarter                          $ 3.50       $ 2.75       --        --
Second Quarter                         $ 5.75       $ 3.00       --        --
Third Quarter                          $ 7.00       $ 5.37       --        --
Fourth Quarter                         $ 8.12       $ 5.25      $ 4.50    $ 4.25

       1997
       ----                                                                     

First Quarter                          $10.25        $7.13       $6.12     $3.50
Second Quarter                         $10.50        $6.38       $7.12     $3.12
Third Quarter                          $ 8.00        $6.63       $4.56     $3.75
Fourth Quarter                         $ 7.38        $5.37       $4.50     $2.37

       1998
       ----                                                                     

First Quarter                          $  5.31      $3.75        $3.13    $ 1.25
(through March 31, 1998)

         As of April 6, 1998, the closing prices of the Common Stock and
Warrants were $3.63 and $1.00, respectively.

(b)      Stockholders of Record

         As of April 6, 1998, there were 517 holders of record of the Common
Stock and 3 holders of the Warrants. The Company reasonably believes that there
are approximately 3,080 beneficial owners, including the beneficial owners of
Common Stock currently held in the name of depository institutions.



                                       -8-

<PAGE>



(c)      Dividend Policy

         To date, no cash dividends have been paid on the Common Stock. On April
30, 1995, a dividend in the amount of $112,730 was declared, but not paid, to
the Company's President on the Preferred Stock issued in connection with the
Reverse Merger. On April 30, 1995, all of the then outstanding shares of
Preferred Stock were converted into Common Stock in accordance with their terms
as a result of the attainment by the Company of certain performance levels.
Fifty thousand dollars ($50,000) of the $112,730 in accrued dividends were
exchanged for the 1,000 shares of Series B Preferred Stock of the Company which
were issued to the Company's President and the balance was credited to the
payment of certain advances made to Mr. Ende by the Company. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

         No cash dividends on the Common Stock are contemplated in the
foreseeable future, and the Company presently intends to retain all of its
earnings for the future operations and growth of the business. Pursuant to the
Company's Credit Agreement with its senior lender, the Company may not declare
or pay any dividends (excluding dividends payable solely in the Company's
capital stock) or any other distribution on the shares of capital stock of the
Company.

Item 6. Selected Financial Data.

         The selected consolidated financial data as of and for the five-year
period ended December 31, 1997 have been derived from the Company's Consolidated
Financial Statements and should be read in conjunction with these statements.
<TABLE>
<CAPTION>

                                                         Year Ended December 31,
                                 ----------------------------------------------------------------------------
                                    1997             1996             1995             1994            1993
                                    ----             ----             ----             ----            ----
<S>                              <C>                <C>            <C>             <C>            <C>        
Statement of Operations Data:
Net sales......................  $30,181,965        $32,599,096    $30,463,730    $25,094,473     $17,717,023
Income (loss) from operations..     (682,554)           240,85l        569,690     (1,041,037)(1)     370,009
Interest expense...............     (991,962)          (875,305)      (774,762)      (520,602)       (314,796)
Net income (loss)..............     (949,330)          (466,454)      (179,072)    (1,968,909)(1)      41,187
Net income (loss) per basic and
   diluted common share (2)....  $      (.22)       $      (.13)   $      (.10)    $     (.92)    $       .00
</TABLE>

<TABLE>
<CAPTION>
                                                              As of December 31,
                                 --------------------------------------------------------------------------
                                    1997             1996             1995         1994            1993
                                    ----             ----             ----         ----            ----
<S>                              <C>             <C>              <C>           <C>              <C>       
Balance Sheet Data:
Working capital................  $23,737,661     $ 9,518,810      $ 3,237,259   $ 3,706,239      $1,823,459
Total assets...................   38,180,367      21,023,644       15,496,294    11,937,143      10,189,885
Long-term debt.................   16,239,285       5,665,870          630,494       216,469         133,927
Total stockholders' equity.....    6,449,166       5,506,395        3,855,804     4,124,961       2,176,102
</TABLE>


(1) After a non-cash compensatory charge of $2,314,000 resulting from the
release of escrow shares, the exercisability of warrants and the conversion of
preferred stock, upon the Company's attainment of the specified 1994 pre-tax
income level under the Company's July 1992 Reverse Merger and certain
cumulative levels for the three-year period ended December 31, 1994.

(2) Net income (loss) per share is computed on the basis described in Note 1 of
Notes to the Consolidated Financial Statements, including, but not limited to,
the adjustment for the $112,730 dividend on preferred stock in 1995.

                                       -9-

<PAGE>





Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.

The following should be read in conjunction with the Consolidated Financial
Statements included elsewhere herein.


Results of Operations

1997 Compared to 1996

         Gross sales for the year ended December 31, 1997 ("1997") decreased by
$2,792,979, or 7.8%, to $33,155,500, as compared to $35,948,479 for the year
ended December 31, 1996 ("1996"). The Company's loss of a major customer,
Autozone, Inc., as described below under 1996 Compared to 1995, resulted in a
decrease in sales of approximately $9.1 million for 1997. The addition of new
customers and expanded sales to current customers, offset, in part, the
reduction in sales. The Company's 1997 gross sales included $4,444,970 of sales
for WAWD from November 17, 1997, the date of acquisition, to December 31, 1997.
WAWD had sales of $44,515,000 and $45,097,000 for the years ended December 31,
1997 and 1996, respectively.

         The Company has agreed to accept the return of merchandise under
certain circumstances. In order to obtain new customers, merchandise is
exchanged, and replaced with current Company merchandise. The merchandise is
brought back to the Company where it is reboxed, relabeled and placed back in
inventory. This is a common occurrence within the industry. As the marketplace
has grown more competitive, the amount of sales returns to the Company has
significantly increased. The merchandise does not deteriorate, and obsolescence
is therefore not a problem. All merchandise which is defective and returned by
customers is returned to or credited by vendors.

         Gross profit for 1997 was $8,944,944 as compared to $8,324,076 for
1996. This represents an increase of $620,868, or 7.5%. Gross profit increased
notwithstanding lower sales as a result of continued cost efficiencies in 1997
and the charge incurred in 1996 of $534,000 relating to returned merchandise
from Autozone, Inc. Gross profit, as a percentage of net sales, for 1997
increased to 29.6%, as compared to 25.5% for 1996 due to the continued emphasis
by the Company purchasing more efficiently in 1997 and the Autozone charge in
1996 (1.6%). Additionally, in 1997, there was an increase in the market share of
more profitable new lines of business, thus adding to the increase in the gross
margin percentage.

         Operating expenses for 1997 were $9,627,498, an increase of $1,544,273,
or 19.1%, from $8,083,225 for 1996. The acquisition of WAWD added additional
operating expenses which accounted for 17.4% of the 19.1% increase, or
$1,406,095. The provision for bad debts was $892,000 in 1997, compared with
$481,000 in 1996. The difference of $411,000 accounted for a 5.8% increase in
operating expenses.

         Most of the Company's payments to vendors are made in United States
dollars and, therefore, the amount of foreign currency is immaterial.

         In 1997, the loss from operations was $682,554 as compared to income of
$240,851 for 1996. This was a decrease of $923,405, or 383%. Income from
operations for 1997 decreased primarily due to the increase in operating
expenses noted above.

         Interest expense for 1997, increased by $116,657 to $991,962 compared
to $875,305 for 1996. The increase was a result of additional borrowing in the
fourth quarter to fund the acquisition of WAWD.

         Other income for 1997 consisted of $100,000 from the sale of certain
intangible assets previously amortized through 1995 and a gain on the sale of
marketable equity securities of $48,000.

                                      -10-

<PAGE>



         For 1997, the Company's net loss was $949,330, or $.22 per share, as
compared to $466,454 or $.13 per share for 1996.

         Excluding the results of WAWD, during the fourth quarter of 1997 the
Company experienced a dramatic decrease in sales levels. In the fourth quarter
of 1997, the Company had net sales of $4,009,821 as compared with $7,404,405
during the fourth quarter of 1996. This decrease was caused by the loss of
Autozone, Inc. The Company had sales to this customer of approximately $3.4
million during the fourth quarter of 1996, as compared with no sales to this
customer in the fourth quarter of 1997. Included within operating expenses for
1997 was an increase in the provision for doubtful accounts of $867,000 during
the fourth quarter. The increase in the provision for doubtful accounts was
primarily a result of the adjustment in the carrying value in two large accounts
receivable balances. The Company incurred additional borrowings during the
fourth quarter of 1997 to support the increase in inventory levels. As a result,
interest expense increased to $290,246 during the fourth quarter of 1997 from
$200,210 during the third quarter of 1997. These combined factors contributed to
the pre tax loss of $1,526,330.

1996 Compared to 1995

         Gross sales for 1996 increased by $3,565,177, or 11.0%, to $35,948,479
compared to $32,383,302 for the year ended December 31, 1995 ("1995"). This
increase was due primarily to increased sales to existing customers, the
Company's introduction of new undercar parts product lines and the continued
expansion of its customer base. Autozone, Inc. a large retail chain, which
became a customer in late 1993, accounted for approximately 28% of the Company's
net sales for 1996. However, in the fourth quarter of 1996 this customer
informed the Company that it was consolidating vendors, and they would no longer
use the Company as a prime supplier. The Company added several new retail chains
late in 1996, which were anticipated to make up a portion of the loss by this
single customer.

         Gross profit for 1996 increased by $267,462, or 3.3%, to $8,324,076
compared to $8,056,614 for 1995. Gross profit, as a percentage of net sales, for
1996 and 1995 remained constant at 26%. The Company accepted the return of
merchandise from Autozone, Inc. and incurred $534,000 of costs for relabeling,
and freight. This charge reduced the gross profit percentage by 2% in 1996 which
was offset by other cost efficiencies.

         Operating expenses for 1996 increased by $596,301, or 8.0%, to
$8,083,225, compared to $7,486,924 for 1995. Operating costs increased in
proportion to the increased sales volume.

         Income from operations for 1996, decreased by $328,839 to $240,851
compared to $569,690 for 1995, primarily as a result of the increase in
operating expenses noted above.

         Interest expense for 1996, increased by $100,543, or 13.0% to $875,305
compared to $774,762 for 1995. The increase was a result of additional
borrowings in support of the growth in sales and assets.

         As a result of the foregoing, the Company's net loss for 1996 increased
by $287,382 to $466,454, or $.13 per share, as compared to $179,072, or $.10
per share for 1995.

Liquidity and Capital Resources

         The Company has continued to use funds generated from proceeds from the
sale of stock, exercise of warrants, and borrowings to finance working capital
requirements.

         In November 1997, the Company entered into two credit agreements with
institutional lenders which provide for revolving credit and letter of credit
facilities, in an aggregate amount of up to $24 million based on certain
percentages of accounts receivable and inventory. Borrowings under these
facilities currently bear interest at rates ranging from LIBOR plus 2.25% to
prime plus 1% and both facilities expire in November 2000. The Company incurred
approximately $7.9 million of bank indebtedness (total purchase price paid in
cash was $8.4 million) in connection with its acquisition of WAWD which bears
interest at prime plus 1%.

         Cash provided by operations during 1997 was $389,926 as compared to
$2,658,581 used in operations for 1996. This change was due mainly to the
decrease in accounts receivable of $2,285,846, partially offset by an increase
in inventory of $839,388, for 1997. During 1996, inventory and accounts
receivable grew by $4,638,213 and accounts payable and accrued expenses grew by
$1,858,547.

         Cash used in investing activities was $8,912,260 during 1997 compared
with $185,774 in 1996. The change was primarily due to increased capital
expenditures of $279,410, and the acquisition of WAWD for $8,431,400 in 1997.


                                      -11-

<PAGE>




         Cash provided by financing activities was $8,050,816 during 1997
compared with $3,337,607 in 1996. The Company established a line of credit with
a new bank which provided funds of $9,508,322 to replace two existing credit
facilities totaling $9,396,877 which were repaid in November 1997. Additional
borrowings were obtained for the acquisition of WAWD in the amount of
$7,632,000, of this amount, $1,000,000 is in the form of one year 5% debentures
which are convertible into common stock and one year 8% $600,000 promissory
notes.

         Pursuant to the Company's Credit Agreement with National Bank of
Canada, under certain circumstances, certain of the Company's subsidiaries may
not transfer monies to certain other subsidiaries or the Company in the form of
dividends or other distributions.

         At December 31, 1997 the Company had a total of $18,359,000 available
under its combined lines of credit of which $15,540,000 was outstanding. These
funds are available for working capital purposes. The Company does not
anticipate any material capital expenditures within the next year.

         The Company believes that many of its suppliers and customers have year
2000 Issues ("Year 2000 Issue") which could affect the Company. Many older
computer software programs recognize only the last two digits of the year in any
date (e.g., "98" for "1998"). These programs were designed and developed without
considering the impact of the upcoming change in the century. If the software is
not reprogrammed or replaced, many computer applications could fail or create
erroneous results by or at the Year 2000. The Company will commence a program to
pursue compliance by those with whom it electronically interconnects. It is not
possible, however, at present, to quantify the overall cost of resolving this
issue for the Company's suppliers and customers. Sanyo Automotive has been
advised that its own software has been designed and developed with a resolution
to the Year 2000 Issue and as such Sanyo Automotive presently believes that the
cost of fixing the Year 2000 Issue will not have a material effect on the
Company's current financial position, liquidity or results of operations. WAWD
is not currently on the Sanyo Automotive computer system. WAWD will utilize both
internal and external resources to reprogram or replace, and test the software
for Year 2000 modifications. WAWD anticipates completing the Year 2000 project
in mid 1999. It is anticipated the cost to implement a new computer system which
will be Year 2000 compliant will be approximately $600,000. WAWD expects to
finance this program through a three to five year capital lease.

Impact of Recent Accounting Standards Adopted by the Company

         The impact of recent accounting standards is discussed in Notes 1 and 9
of Notes to Consolidated Financial Statements.

Item 8.  Financial Statements and Supplementary Data

         The financial statements appear following Item 14 of this report.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

         None.



                                      -12-

<PAGE>




                                    PART III

Item 10.  Directors and  Executive Officers of the Registrant.

Set forth below are names, ages and positions of the Company's Executive
Officers and Directors, along with certain information relating to the business
experience of each.
<TABLE>
<CAPTION>

         Name                       Age              Position
         ----                       ---              --------  
<S>                                 <C>              <C>                                                                          
Joseph Ende                         50               Chairman of the Board, President and Chief Executive Officer

Scott Osias                         43               Vice President of Sales and Marketing

Marc J. Ruskin                      45               Chief Financial Officer and Director

Sandra Ende                         45               Secretary and Director

Elliot H. Lutzker                   45               Director (1)

Adam E. Budish                      38               Director (1)
-------------------------
</TABLE>

(1) Member of Audit and Compensation Committees.

         All directors hold office until the next annual meeting of shareholders
and the election and qualification of their successors. Directors currently
receive no cash compensation for serving on the Board of Directors. Officers are
elected annually by the Board of Directors and, subject to existing employment
agreements, serve at the discretion of the Board. The Company's Placement Agent,
G-V Capital Corp., has the right at its discretion for a three-year period
ending August 13, 1999 to designate either a member of the Board of Directors or
an advisor to the Board.

         Joseph Ende has been President, Chief Executive Officer and Chairman of
the Board of Directors of the Company since July 9, 1992. He has been the
President and a Director of Sanyo Automotive since its inception in June 1976.
Mr. Ende is the husband of the Company's Secretary, Sandra Ende.

         Scott Osias has been the Vice President of Sales and Marketing of the
Company since October 1992. Mr. Osias has been employed in the retail automotive
industry for 25 years and was the principal owner and operator of Automotive
Discount Centers, a 14 store retail automotive parts store chain in New York
from 1973 to 1988. Prior to joining the Company, from 1988, Mr. Osias was
General Manager of Prime Automotive Warehouse, a warehouse distribution
automotive parts chain.

         Marc J. Ruskin, CPA, has been the Chief Financial Officer of the
Company since August 1995 and a director of the Company since February 1998. He
has 20 years of financial experience, including a combined five years at Ernst &
Young LLP and Deloitte & Touche LLP. From 1993 until he joined the Company, Mr.
Ruskin was Vice President of Finance and Administration for the Nason Group LLC,
a Connecticut company formed to purchase and develop real estate. From 1991 to
1993, Mr. Ruskin was the Chief Financial Officer of REBO Group Incorporated, a
New York based international corporation specializing in the research,
development and production of high definition television. Mr. Ruskin was Vice
President of Finance and Administration of Kaufman Astoria Studios, Inc., a
company specializing in film/television and real estate management, from 1982 to
1991. Mr. Ruskin holds an MBA from the University of Bridgeport.


                                      -13-

<PAGE>



         Sandra Ende has been a Director of the Company since July 1992. She was
employed by Sanyo Automotive from its inception in June 1976 through March 1997,
in various capacities including bookkeeper, Personnel Manager, Director of
Marketing and Office Manager. Ms. Ende is the wife of the Company's President,
Mr. Joseph Ende.

         Elliot H. Lutzker has been a director of the Company since February
1998. Since 1985, Mr. Lutzker has been a partner in the law firm of Snow Becker
Krauss P.C., counsel to the Company. He was formerly an attorney with the
Division of Enforcement of the NorthEast Regional Office of the U.S. Securities
and Exchange Commission.

         Adam E. Budish has been a director of the Company since February 1998.
Mr. Budish has been Vice President- Business Affairs at Reuters Health
Information Inc. (a wholly-owned subsidiary of Reuters PLC) since June 1994.
From January 1994 to June 1994 Mr. Budish was General Counsel to GeoMedica
Networks, which was acquired by Reuters PLC in June 1994. From 1992 to 1994 Mr.
Budish was Legal Counsel, Business Affairs at Rebo Studio, Inc. Mr. Budish has
an M.B.A. from The Wharton School of the University of Pennsylvania, and a J.D.
from George Washington University School of Law.

Section 16(a) Beneficial Ownership Reporting Compliance.

         Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's Officers, Directors and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, Directors and ten percent shareholders are required by regulation to
furnish the Company with copies of all Section 16(a) forms they file. Based
solely on the Company's copies of such forms received or written representations
from certain reporting persons that no form 5's were required for those persons
other than Scott Osias, Vice President of Sales and Marketing, who filed a
timely Form 5. The Company believes that, during the time period of January 1997
through December 31, 1997, all filing requirements applicable to its Officers,
Directors and greater than ten percent beneficial owners were complied with
except as set forth below.

         Joseph Ende, Chairman of the Board, President and Chief Executive
Officer of the Company, filed two late Form 4's in which two transactions were
reported.

         Scott Osias, Vice President of Sales and Marketing of the Company,
filed three late Form 4's in which four transactions were reported.

Item 11. Executive Compensation.

         The following table sets forth all compensation awarded to, earned by,
or paid for all services rendered to the Company, for the year ended December
31, 1997, by Joseph Ende, the Company's Chief Executive Officer, and Marc
Ruskin, Chief Financial Officer, and during the years ended December 31, 1996
and 1995, by Joseph Ende, who was the Company's only executive officer ("Named
Executive Officers") whose total compensation exceeded $100,000 in those years.

                                      -14-

<PAGE>
<TABLE>
<CAPTION>



                                  Summary Compensation Table
                                                                             Long Term
                                           Annual Compensation               Compensation
                                    -------------------------------          -------------
                                                                             Securities
                                                              Other          Underlying
Name and                                                      Annual         Options/
Principal                                                     Compen-         SARs
Position                   Year     Salary       Bonus        sation           (#)
--------                   ----     ------       -----        ------         ----------
<S>                        <C>      <C>          <C> <C>       <C>                 <C>
Joseph Ende,               1997     $156,000     $  -0-(2)     $ -0-              -0-
Chief Executive            1996     $156,000        -0-(2)       -0-          30,000(1)
Officer and Director       1995     $127,500        -0-(2)       -0-         300,000(1)

Marc Ruskin                1997     $ 75,000     $  -0-        $52,000(3)       -0-
Chief Financial Officer
and Director
-------------
</TABLE>

(1) On July 31, 1995, Mr. Ende was granted, non-qualified stock options under
the Company's 1995 Stock Option Plan, to purchase 180,000 shares of Common Stock
at $3.00 per share expiring on July 30, 2000. On December 15, 1995, Mr. Ende was
granted non-qualified stock options under the 1994 Stock Option Plan, to
purchase 120,000 shares of Common Stock at $2.50 per share expiring on December
15, 2000. On November 19, 1996, Mr. Ende was granted a non-qualified stock
option under the Company's 1994 Stock Option Plan to purchase 30,000 shares of
Common Stock at $5.25 per share expiring on November 18, 2001. See "Stock Option
Plans" below.

(2) The Board of Directors has the discretion to grant Mr. Ende a bonus of
$50,000 for each of the six-month periods ending June 30 and December 31 during
the three-year term of his employment agreement entered into on July 31, 1995,
as amended, provided the Company reports operating income, but after payment of
such bonus for the applicable six-month period. No bonus was issued for the
periods ended December 31,1997,1996, and 1995.

(3) Represents the difference between the exercise price and the fair market
value of options (the "spread") on the date of exercise.

Individualized Option/Grants in Last Fiscal Year

         The following table sets forth the number of stock options granted to
the Named Executive Officers in the Summary Compensation Table during the year
ended December 31, 1997, exercise information and potential realizable value.

<TABLE>
<CAPTION>

<S>              <C>                              <C>                       <C>        <C>
         Individual Grants                                                
         -----------------                                                Potential Realizable
         Number of        Percent of                                        Value at Assumed
         Shares Total     Options                                        Annual Rates of Stock
         Underlying       Granted to                                        Price Appreciation
         Options          Employees in      Exercise Expiration              for Option Term
Name     Granted (#)      Fiscal Year       Price ($/sh)      Date          5% ($)    10% ($)
----     -----------      -----------       ------------      ----          ------    -------

None
</TABLE>



                                      -15-

<PAGE>

Aggregated Option/SAR Exercises in Last Fiscal Year
and FY End Option/SAR Values
<TABLE>
<CAPTION>

   (a)               (b)              (c)          (d)                  (e)

                                                                       Value of
                                                 Number of             Unexercised
                                                 Unexercised           In-The-Money
                  Shares                         Options/SARs at       Options/SARs
                  Acquired                       FY-End (#)            at FY-End ($)
                  on Exer-          Value        Exercisable/          Exercisable/
Name              cise (#)          Realized     Unexercisable         Unexercisable
----              --------          --------     ---------------       -------------
<S>                   <C>               <C>     <C>                  <C>                 
Joseph Ende          -0-               -0-      210,000/120,000      $492,300/$285,600(1)
Marc Ruskin        8,000           $52,000        9,500/20,000       $  7,235/$50,600(1)
Scott Osias          -0-               -0-       13,500/33,000       $ 18,255/$ 8,640(1)(2)
</TABLE>

-------------------------

(1) The closing price of the Company's Common Stock on December 31, 1997 was
 $5.38 per share.

(2) Does not include 30,000 options exercisable at $6.75 per share which were
 not in-the-money at December 31, 1997.


Executive Officers' Employment Agreements

         On July 31, 1995, the Company entered into a three-year employment
agreement with Joseph Ende, the President and Chief Executive Officer of the
Company. The agreement automatically renews for consecutive one-year periods
unless terminated on thirty days' prior written notice by either party. In 1997,
Mr. Ende received a base annual salary of $156,000. The Board of Directors has
the discretion to grant Mr. Ende a performance bonus of $50,000 for each of the
six-month periods ending June 30 and December 31 during the term of the
agreement, provided the Company reports operating income, but after payment of
such bonus for the applicable six-month period. Such bonus will not accrue in
the event the income level is not met. No bonus was paid or accrued in 1996 or
1997. Under the agreement, Mr. Ende is also entitled to an automobile or a
monthly allowance equal to the cost of leasing such automobile, and health
insurance and other benefits. Mr. Ende has agreed not to compete with the
Company during the term of, and for a one-year period from the date of
termination of, his employment with the Company.

         On April 10, 1997, the Company entered into a three-year employment
agreement with Scott Osias, Vice President of Sales and Marketing. The agreement
automatically renews for one additional three-year term unless terminated on
thirty days' prior written notice by either party. In 1997, Mr. Osias received a
base annual salary of $91,000, with a bonus to be determined by the Board of
Directors. No bonus was paid for 1997. Under the Agreement, Mr. Osias is also
entitled to the use of an automobile, health insurance and other benefits and
five-year options to purchase 30,000 shares of the Company's Common Stock at
$6.75 per share. Mr. Osias has agreed not to compete with the Company during the
term of, and for a six month period from the date of termination of, his
employment with the Company.



                                      -16-

<PAGE>

Officers' Employment Agreements

         On November 17, 1997, the Company entered into three-year employment
agreements with Michael DiAngelo and Jeffrey Chasse, the President and Executive
Vice President, respectively of WAWD, Inc. The agreements automatically renew
for one additional three-year term unless terminated on thirty days' prior
written notice by any party. Messrs. DiAngelo and Chasse each received annual
base salaries of $110,000 for the first year of the agreement and $120,000 for
the second and third years of the agreements plus incentive compensation based
on the performance of WAWD for the years ending December 31, 1999 and 2000.
Messrs. DiAngelo and Chasse were each granted options to purchase 130,000 shares
of the Company's common stock at $6.68 per share and are entitled to the use of
an automobile, health insurance and other benefits. Messrs. DiAngelo and Chasses
have agreed not to compete with the Company during the term of, and for a
one-year period from the date of termination of, their employment with the
Company.

Employee Stock Bonus Plan

         In April 1995, the Company adopted an Employee Stock Bonus Plan which
enables all full-time permanent employees to purchase shares of Common Stock at
85% of its then fair market value through payroll deductions. There are 100,000
shares available for sale under such plan without limitation as to the number of
shares which may be purchased by any employee. These shares may be newly-issued
shares or which may be purchased by the Company in the open market. An aggregate
of 10,638 shares have been purchased under such plan as of December 31, 1997.
100,000 shares of Common Stock reserved and/or issued to date under this plan
are registered for sale on the Company's registration statement on Form S-8,
which became effective when filed with the Commission on September 27, 1996 (the
"S-8").

Stock Option Plans

         1994 Employee Stock Option Plan

         The Company has established the 1994 Employee Stock Option Plan (the
"1994 Plan"). The 1994 Plan is intended to provide the employees, directors,
independent contractors and consultants of the Company with an added incentive
to continue their services to the Company and to induce them to exert their
maximum efforts toward the Company's success. The 1994 Plan provides for the
grant of options to qualified directors, employees (including officers),
independent contractors and consultants of the Company 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 currently administered by the Board of Directors. The Board
determines, among other things, the persons to be granted options under the 1994
Plan, the number of shares subject to each option and the option price. The
shares of Common Stock authorized under the 1994 plan are registered for sale on
the Company's S-8 Registration Statement.

         The 1994 Plan allows the Company to grant incentive stock options
("ISOs"), as defined in Section 422(b) of the Internal Revenue Code of 1986, as
amended (the "Code"), Non-Qualified Stock Options ("NQSOs") not intended to
qualify under Section 422(b) of the Code and Stock Appreciation Rights ("SARs";
collectively, with ISOs and NQSOs referred to as "Options") 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 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 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 (including officers). Options are not transferable, except upon the
death of the optionee.


                                      -17-

<PAGE>



         Since the 1994 Plan's adoption, options to purchase 371,000 shares of
Common Stock have been granted (of which options to purchase 123,000 shares have
been canceled and are available for reissuance under the 1994 Plan), and no SARs
have been granted under the 1994 Plan. Options to purchase 52,000 shares of
Common Stock remain reserved for grant under the 1994 Plan.

         Scott Osias, Vice President of Sales and Marketing, was granted a stock
option under the 1994 Plan to purchase 30,000 shares of Common Stock at $6.75
per share, which option becomes exercisable on a cumulative basis on April 9,
1998 to the extent of 10,000 shares; on April 9, 1999 for an additional 10,000
shares, and on April 9, 2000 an additional 10,000 shares. An additional 9,000
options exercisable at $2.50 per share were granted on November 1, 1994 and
7,500 options were granted on November 19, 1996 and are exercisable at $5.25 per
share.

         In December 1994, the Company canceled options to purchase 120,000
shares of Common Stock exercisable at $20 per share, previously granted to
Joseph Ende under the 1994 Plan, and re-granted such options to Mr. Ende at an
exercise price of $2.50 per share. Such options were re-granted because the
Company's Board of Directors determined that such re-grant would provide a
greater incentive to Mr. Ende. All 120,000 of such options are currently
exercisable. An additional 30,000 options were granted on November 19, 1996 and
are exercisable at $5.25.


         Marc J. Ruskin, Chief Financial Officer, was granted a stock option
under the 1994 Plan to purchase 6,000 shares of Common Stock at $2.25 per share,
which option became exercisable on a cumulative basis on September 5, 1997 to
the extent of 2,000 shares; on September 5, 1998 to the extent of an additional
2,000 shares, and the balance on September 5, 1999 . An additional 24,000
options were granted at $3.00 on May 29, 1996 of which 8,000 options were
exercised in 1997. The options are exercisable at various dates beginning in
November 1996. An additional 7,500 options were granted on November 19,1996 and
are exercisable at $5.25 per share.

         1995 Employee Stock Option Plan

         In July 1995, the Company's Board of Directors adopted the 1995
Employee Stock Option Plan (the "1995 Plan"). The 1995 Plan, as amended,
provides for the grant of ISOs, NQSOs and SARs to purchase an aggregate of
1,500,000 shares of Common Stock. The provisions of the 1995 Plan are otherwise
identical to the above-stated terms of the 1994 Plan.

         Since the adoption of the 1995 Plan, ISOs and NQSOs to purchase 980,000
shares of Common Stock have been granted and options to purchase 520,000 shares
of Common Stock remained available for grant under the 1995 Plan as of April 1,
1998. No SARs have been granted.

         On July 31, 1995, Mr. Ende was granted NQSO's under the 1995 Plan to
purchase 180,000 shares of Common Stock at $3.00 per share terminating on July
30, 2000. The option becomes exercisable on a cumulative basis in one-third
increments on July 31, 1997, 1998 and 1999. The option will become immediately
exercisable, in full, upon a change in control (as defined in the 1995 Plan) of
the Company. On January 13, 1998, Mr. Ende was granted 381,450 NQSO's under the
1995 Plan to purchase Common Stock at an exercise price of $4.38 and 68,550
ISO's at an exercise price of $4.81. The options became exercisable on a
cumulative basis on January 13, 1999, to the extent of one-third of the options;
on January 13, 2000 to the extent of an additional one-third; and the balance on
January 13, 2001.

         On January 13, 1998, Mr. Osias was granted 30,000 ISO's under the 1995
Plan to purchase common stock at an exercise price of $4.38 per share, which
options becomes exercisable on a cumulative basis on January 13, 1999 to the
extent of 10,000 shares, on January 13, 2000 to the extent of an additional
10,000 shares, and the balance on January 13, 2001.


                                      -18-

<PAGE>



         On January 13, 1998, Mr. Ruskin was granted 60,000 ISO's under the 1995
Plan to purchase Common Stock at an exercise price of $4.38, which options
becomes exercisable on a cumulative basis on January 13, 1999 to the extent of
20,000 shares, on January 13, 2000 to the extent of 20,000 shares and the
balance on January 13, 2001.

         On November 17, 1997, Michael DiAngelo and Jeffrey Chasse, President
and Executive Vice President, respectively, of WAWD were each granted NQSO's
under the 1995 Plan to purchase 90,000 shares of Common Stock at $6.68 per share
terminating on November 17, 2004. The options become exercisable on May 17,
2004. However, if certain performance criteria are met 30,000 options will be
exercisable on December 31, 1998, 30,000 on December 31, 1999 and the balance on
December 31, 2000. On November 17, 1997, Messrs. DiAngelo and Chasse were each
also granted NQSO's under the 1995 Plan to purchase 40,000 shares of Common
Stock at $6.68 per share and terminate on November 17, 2002. The options become
exercisable on a cumulative basis on November 17, 1999 to the extent of 20,000
shares and the balance on November 17, 2000.


Compensation Committee Interlocks and Insider Participation

         In February 1998, the Company formed an audit committee and a
compensation committee consisting of Elliot H. Lutzker and Alan E. Budish, the
Company's two non-officer members of the Board of Directors. There are no Board
of Directors interlock relationships with respect to the Company.

Compensation of Directors

         Directors currently receive no cash compensation for serving on Board
of Directors.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

         The following table sets forth information as of the date of this
filing, the number of shares of the Company's outstanding Common Stock, $.001
par value, beneficially owned (as such term is defined in Rule 13d-3 under the
Securities Exchange Act of 1934) by each person known by the Company to be the
beneficial owner of more than 5% of the outstanding shares, by each director, by
each named executive officer, and by all directors and officers as a group:

Name and Address                   Amount and Nature         Percentage
of Beneficial Owner             Beneficial Ownership (1)     of Class (2)
-------------------             ------------------------     ------------

Joseph Ende (3)                     2,276,032(4)                47.7%

Marc J. Ruskin (3)                      9,500(6)                (9)

Scott Osias (3)                        29,500(7)                (9)

Sandra Ende (3)                        53,600(5)                 1.1%

Elliot H. Lutzker                             0                  -0-

Adam E. Budish                                0                  -0-

Officers and Directors
as a Group                          2,368,632(8)                49.2%
(6 Persons)
---------------

                                      -19-

<PAGE>



(1) Unless otherwise noted, the Company believes that all persons named in this
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 date
of this filing upon the exercise of warrants or options. Unless otherwise noted,
each beneficial owner's percentage 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 4,563,321 shares of Common Stock outstanding as of April 6, 1998.


(3) The address of this person is c/o the Company, 33-16 Woodside Avenue, Long
Island City, New York 11101.

(4) Does not include 53,600 shares owned of record by the Joseph and Sandra Ende
Charitable Trust, of which Joseph and Sandra Ende are Trustees, includes 210,000
shares issuable upon the exercise of currently exercisable options, but excludes
an aggregate of 570,000 shares underlying options which are not currently
exercisable or exercisable within the next 60 days.

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 Joseph
Ende. As sole stockholder of the Series B Preferred Stock, which votes as a
separate class, Mr. Ende will have 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 million in net
sales for any fiscal through December 31, 2000.

(5) Includes 53,600 shares owned of record by the Joseph and Sandra Ende
Charitable Trust, of which Joseph and Sandra Ende are Trustees.

(6) Includes 9,500 shares of common stock issuable upon the exercise of
currently exercisable options but does not include 80,000 shares of common stock
issuable upon the exercise of options which are not currently exercisable or
exercisable within the next 60 days.

(7) Includes 23,500 shares of common stock issuable upon the exercise of
currently exercisable options but does not include 53,000 shares of common stock
issuable upon the exercise of options which are not currently exercisable or
exercisable within the next 60 days.

(8) Includes 243,000 shares issuable upon exercise of currently exercisable
stock options, but does not include 703,000 shares of Common Stock which may be
purchased pursuant to stock options which are not currently exercisable.

(9) Less than one percent of the issued and outstanding shares.

Item 13. Certain Relationships and Related Transactions.

         See "Item 2. Description of Property" for a description of a lease
between Mr. Ende and the Company and "Item 11. Executive Compensation" for a
description of stock options granted to members of Management and employment
agreements entered into by certain members of Management.


                                      -20-

<PAGE>




Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

Exhibit No.                Exhibit
-----------                -------
   3.1     Certificate of Incorporation of the Company, as amended and restated.

   3.2     By-laws of the Company.(1)

   4.1     Form of Common Stock Certificate.(1)

   4.2     1994 Employee Stock Option Plan.(2)

   4.3     1995 Employee Stock Option Plan.(5)

   4.4     Form of Stock Option Agreement.(5)

   4.5     Employee Stock Bonus Plan.(5)

   4.6     Form of Class A Stock Purchase Warrant.(7)

   4.7     Placement Agent Agreement dated July 10, 1996, between the Company
           and G-V Capital Corp.(7)

  10.1     Unlimited Guaranty made by Joseph Ende on behalf of Sanyo Automotive
           Parts, Ltd. in favor of Bank Leumi dated April 25, 1990.(2)

  10.2     Lease Agreement between the Company and Joseph Ende dated July 1,
           1992.(2)

  10.3     Loan Agreement between Sanyo Automotive Parts, Ltd. and the City of
           Fairfield dated November9, 1993.(2)

  10.4     Grid Promissory Note in the amount of $2,600,000 made by Sanyo
           Automotive Parts, Ltd. to Bank Leumi Trust Company of New York dated
           April 6, 1994.(2)

  10.5     Employment Agreement between the Company and Scott Osias dated
           November 24, 1994.(4)

  10.6     Grid Promissory Note in the amount of $4,300,000 made by Sanyo
           Automotive Parts, Ltd. to Bank Leumi Trust Company of New York dated
           May 1, 1996.(7)

  10.7     Loan Agreement between Sanyo Automotive Parts, Ltd., The Fairfield
           National Bank and Illinois Development Authority dated January 13,
           1995.(4)

  10.8     Employment Agreement between the Company and Joseph Ende dated July
           31, 1995.(5)

  10.9     Mortgage between Sanyo Automotive Parts, Ltd. and Fairfield National
           Bank dated December 8, 1995.(5)

  10.10    Promissory Note in the principal amount of $390,000 made by Sanyo
           Automotive Parts, Ltd. to Fairfield National Bank dated December 8,
           1995.(5)


                                      -21-

<PAGE>



   10.11   Second Mortgage between Sanyo Automotive Parts, Ltd. and the Illinois
           Development Finance Authority ("IDFA") dated December 7, 1995.(5)

   10.12   Loan Agreement between Sanyo Automotive Parts, Ltd. and IDFA dated
           December 11, 1995.(5)

   10.13   Promissory Note in the principal amount of $240,000 made by Sanyo
           Automotive Parts, Ltd. to IDFA dated December 11, 1995.(5)

   10.14   Absolute, Unconditional and Continuing Guaranty of Payment made by
           Brake Headquarters U.S.A., favor of IDFA dated December 11, 1995.(5)

   10.15   Agreement between Sanyo Automotive Parts, Ltd., ABS Brakes, Inc.,
           Quality First Brakes, Inc., Brake Headquarters U.S.A., Inc. (the
           "Borrowers') and National Bank of Canada, dated November 13, 1997.
           (8)

  *10.16   Employment Agreement between the Company and Michael DiAngelo dated
           November 17, 1997.


  *10.17   Employment Agreement between the company and Jeffrey Chasse dated
           November 17, 1997.

  *10.18   Lease Agreement between WAWD, Inc. and the Prudential Insurance
           Company of America dated as of August 31, 1995.

  *10.19   Lease Agreement between WAWD, Inc. and Yvonne Dubbers-Albrecht et al,
           dated September 1, 1995.

  *10.20   Lease Agreement, as amended, between WAWD, Inc. and H. Harding Brown,
           Stephen H. Anthony, David J. Fischman and Daniel J. Coughlin, dated
           September 8, 1993.

  *10.21   Loan and Security Agreement, dated November 24, 1997, between WAWD,
           Inc. and CIT Group/Credit Finance, Inc.

   10.22   Agreement and Plan of Merger, dated November 17, 1997 among the
           Company, WAWD, Inc. and JMCD, Inc. (9)

   21.1    Subsidiaries of the Company.

  *23.1    Consent of Deloitte & Touche LLP.

  *27.1    Financial Data schedule. 

   ------------------- 
   * Filed with this report

   (1)     Incorporated by reference from the Company's Registration Statement
           on Form S-18, No. 33-30933-NY.

   (2)     Incorporated by reference from the Company's Annual Report on Form
           10-KSB for the year ended December 31, 1993.

   (3)     Incorporated by reference from the Company's Current Report on Form
           8-K dated July 21, 1992 and as amended by Form 8 dated August 19,
           1992 and September 21, 1992.


                                      -22-

<PAGE>



   (4)     Incorporated by reference from the Company's Annual Report on Form
           10-KSB for the year ended December 31, 1994.

   (5)     Incorporated by reference from the Company's Annual Report on Form
           10-KSB for the year ended December 31, 1995.

   (6)     Incorporated by reference from the Company's Form 8-K/A No.1 for
           December 28, 1995.

   (7)     Incorporated by reference from the Company's Registration Statement
           on Form S-1 (No. 333-13533).

   (8)     Incorporated by reference from the Company's Form 8-K for November
           13, 1997.

   (9)     Incorporated by reference from the Company's Form 8-K for November
           17, 1997.


Reports on Form 8-K

         A Current Report on Form 8-K was filed on November 26, 1997, pursuant
to Item 5, to present information concerning certain credit agreements.

         A Current Report on Form 8-K was filed on December 2, 1997, pursuant to
Item 5, to present information on the Company's acquisition of WAWD, Inc.

         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.

                                      -23-

<PAGE>

               BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                 YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997

Independent Auditors' Report ...............................           F-1
Consolidated Financial Statements:
 Balance Sheets ............................................           F-2
 Statements of Operations ..................................           F-3
 Statements of Shareholders' Equity ........................           F-4
 Statements of Cash Flows ..................................           F-5
 Notes to Financial Statements .............................         F-6-F-14
 
                  THREE MONTHS ENDED MARCH 31, 1998 AND 1997

 Balance Sheets ............................................           F-15
 Statements of Operations ..................................           F-16
 Statements of Cash Flows ..................................           F-17
 Notes to  Financial Statements ............................           F-18





<PAGE>

                         INDEPENDENT AUDITORS' REPORT


Board of Directors
Brake Headquarters U.S.A., Inc.

We have audited the accompanying consolidated balance sheets of Brake
Headquarters U.S.A., Inc. and subsidiaries as of December 31, 1997 and 1996,
and the related statements of operations, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997. Our audits
also included the financial statement schedule listed in the index to the
consolidated financial statements. These consolidated financial statements and
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Brake Headquarters U.S.A., Inc.
and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.


DELOITTE & TOUCHE LLP


Stamford, Connecticut
March 20, 1998

                                      F-1
<PAGE>

               BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS




<TABLE>
<CAPTION>
                                                                                          December 31
                                                                               ----------------------------------
                                                                                     1997               1996
                                                                               ----------------   ---------------
<S>                                                                            <C>                <C>
                                   ASSETS
Current Assets:
 Cash ......................................................................    $      65,410      $    536,928
 Accounts receivable, less allowance for doubtful accounts of $1,179,000
   and $372,000 ............................................................        8,910,085         7,252,018
 Inventory .................................................................       25,814,917        10,636,820
 Prepaid expenses and other current assets .................................          754,761           384,648
 Deferred tax asset ........................................................               --           375,000
                                                                                -------------      ------------
    Total current assets ...................................................       35,545,173        19,185,414
Property and Equipment -- net ..............................................        1,638,749         1,453,179
Other Assets ...............................................................          674,571           227,189
Due from President .........................................................           60,874            55,874
Deferred Tax Asset .........................................................          261,000           101,988
                                                                                -------------      ------------
    Total Assets ...........................................................    $  38,180,367      $ 21,023,644
                                                                                =============      ============
                      LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
 Accounts payable ..........................................................    $   6,546,436      $  4,639,419
 Accrued expenses and other current liabilities ............................        2,061,752           503,386
 Current portion of long-term debt .........................................        1,673,324         4,708,574
 Deferred tax liability ....................................................        1,526,000                --
                                                                                -------------      ------------
    Total current liabilities ..............................................       11,807,512         9,851,379
                                                                                -------------      ------------
Long-term Debt .............................................................       16,239,285         5,665,870
Deferred Credit ............................................................        3,684,404                --
                                                                                -------------      ------------
    Total liabilities ......................................................       31,731,201        15,517,249
                                                                                -------------      ------------
Shareholders' Equity:
 Series B preferred stock -- $.001 par value; authorized, issued and
   outstanding 1,000 shares ................................................                1                 1
 Common stock -- $.001 par value; authorized 6,000,000 and 20,000,000
   shares, issued and outstanding 4,563,321 and 4,209,384 shares ...........            4,563             4,209
 Additional paid-in capital ................................................       17,022,258        15,130,511
 Accumulated deficit .......................................................      (10,577,656)       (9,628,326)
                                                                                -------------      ------------
    Total shareholders' equity .............................................        6,449,166         5,506,395
                                                                                -------------      ------------
    Total Liabilities and Shareholders' Equity .............................    $  38,180,367      $ 21,023,644
                                                                                =============      ============
</TABLE>

                 See Notes to Consolidated Financial Statements

                                      F-2
<PAGE>

               BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS




<TABLE>
<CAPTION>
                                                                        Year ended December 31,
                                                            ------------------------------------------------
                                                                 1997             1996             1995
                                                            --------------   --------------   --------------
<S>                                                         <C>              <C>              <C>
Sales ...................................................    $ 33,155,500     $ 35,948,479     $ 32,383,302
 Less returns and allowances ............................       2,973,535        3,349,383        1,919,572
                                                             ------------     ------------     ------------
Net sales ...............................................      30,181,965       32,599,096       30,463,730
Cost of goods sold ......................................      21,237,021       24,275,020       22,407,116
                                                             ------------     ------------     ------------
Gross profit ............................................       8,944,944        8,324,076        8,056,614
Selling, general and administrative expenses ............      (9,627,498)      (8,083,225)      (7,486,924)
                                                             ------------     ------------     ------------
(Loss) income from operations ...........................        (682,554)         240,851          569,690
                                                             ------------     ------------     ------------
Other income (expense):
 Interest expense .......................................        (991,962)        (875,305)        (774,762)
 Other income ...........................................         148,186               --               --
                                                             ------------     ------------     ------------
    Total other income (expense) ........................        (843,776)        (875,305)        (774,762)
                                                             ------------     ------------     ------------
Loss before benefit for income taxes ....................      (1,526,330)        (634,454)        (205,072)
Benefit for income taxes ................................         577,000          168,000           26,000
                                                             ------------     ------------     ------------
Net loss ................................................    $   (949,330)    $   (466,454)    $   (179,072)
                                                             ------------     ------------     ------------
Net loss per basic and diluted common share .............    $       (.22)    $       (.13)    $       (.10)
                                                             ============     ============     ============
Weighted average number of common shares outstanding.....       4,379,941        3,616,311        3,058,968
                                                             ============     ============     ============
</TABLE>


                 See Notes to Consolidated Financial Statements

                                      F-3
<PAGE>

               BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY




<TABLE>
<CAPTION>

                                                  Preferred Stock                Common Stock
                                                Shares          Amount         Shares       Amount
                                           ---------------  -------------  -------------  ----------
<S>                                        <C>              <C>            <C>            <C>
Balance at January 1, 1995 ..............      2,000,000     $   500,000     2,621,467      $2,621
Conversion of Series A preferred
 stock ..................................     (2,000,000)       (500,000)    1,000,000       1,000
Foreign currency translation
 adjustment .............................             --              --            --          --
Dividends declared ......................             --              --            --          --
Issuance of common stock in
 connection with exercise of
 Class F warrants .......................             --              --        41,666          42
Employee Stock Bonus Plan ...............             --              --         3,064           3
Return of 1993 Escrow shares to
 treasury and retirement of such
 shares .................................             --              --      (250,000)       (250)
Net loss ................................             --              --            --          --
                                              ----------     -----------     ---------      ------
Balance at December 31, 1995 ............             --              --     3,416,197       3,416
                                              ==========     ===========     =========      ======
Proceeds from private placement .........             --              --       490,000         490
Exercise warrants .......................             --              --       200,000         200
Issuance of Series B preferred stock               1,000               1            --          --
Conversion of note payable ..............             --              --        91,300          91
Employee Stock Bonus Plan ...............             --              --         5,637           6
Acquisition of ABS ......................             --              --         6,250           6
Net loss ................................             --              --            --          --
                                              ----------     -----------     ---------      ------
Balance at December 31, 1996 ............          1,000               1     4,209,384       4,209
                                              ==========     ===========     =========      ======
Exercise of warrants ....................             --              --       214,000         214
Exercise of stock options ...............             --              --         8,000           8
Employee Stock Bonus Plan ...............             --              --         1,937           2
Acquisition of WAWD .....................             --              --       130,000         130
Fair value of warrants issued in
 connention with debt ...................             --              --            --          --
Net loss ................................             --              --            --          --
                                              ----------     -----------     ---------      ------
Balance at December 31, 1997 ............          1,000     $         1     4,563,321      $4,563
                                              ==========     ===========     =========      ======
</TABLE>



<PAGE>
<TABLE>
<CAPTION>

                                                                               Cumulative
                                                                                Foreign
                                             Additional                         Currency         Total
                                               Paid-in        Accumulated     Translation    Shareholders'
                                               Capital          Deficit        Adjustment       Equity
                                           --------------  ----------------  -------------  --------------
<S>                                        <C>             <C>               <C>            <C>
Balance at January 1, 1995 ..............   $12,490,456     $  (8,870,070)     $   1,954      $4,124,961
Conversion of Series A preferred
 stock ..................................       499,000                --             --              --
Foreign currency translation
 adjustment .............................            --                --         (1,954)         (1,954)
Dividends declared ......................            --          (112,730)            --        (112,730)
Issuance of common stock in
 connection with exercise of
 Class F warrants .......................        16,625                --             --          16,667
Employee Stock Bonus Plan ...............         7,929                --             --           7,932
Return of 1993 Escrow shares to
 treasury and retirement of such
 shares .................................           250                --             --              --
Net loss ................................            --          (179,072)            --        (179,072)
                                            -----------     -------------      ---------      ----------
Balance at December 31, 1995 ............    13,014,260        (9,161,872)            --       3,855,804
                                            ===========     =============      =========      ==========
Proceeds from private placement .........     1,011,904                --             --       1,012,394
Exercise warrants .......................       759,800                --             --         760,000
Issuance of Series B preferred stock             49,999                --             --          50,000
Conversion of note payable ..............       257,909                --             --         258,000
Employee Stock Bonus Plan ...............         8,520                --             --           8,526
Acquisition of ABS ......................        28,119                --             --          28,125
Net loss ................................            --          (466,454)            --        (466,454)
                                            -----------     -------------      ---------      ----------
Balance at December 31, 1996 ............    15,130,511        (9,628,326)            --       5,506,395
                                            ===========     =============      =========      ==========
Exercise of warrants ....................       812,986                --             --         813,200
Exercise of stock options ...............        23,992                --             --          24,000
Employee Stock Bonus Plan ...............        13,649                --             --          13,651
Acquisition of WAWD .....................       961,120                --             --         961,250
Fair value of warrants issued in
 connention with debt ...................        80,000                --             --          80,000
Net loss ................................            --          (949,330)            --        (949,330)
                                            -----------     -------------      ---------      ----------
Balance at December 31, 1997 ............   $17,022,258     $ (10,577,656)     $      --      $6,449,166
                                            ===========     =============      =========      ==========
</TABLE>


                 See Notes to Consolidated Financial Statements

                                      F-4
<PAGE>

               BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                  Year ended December 31,
                                                                   ------------------------------------------------------
                                                                         1997               1996               1995
                                                                   ----------------   ----------------   ----------------
<S>                                                                <C>                <C>                <C>
Cash flows from operating activities:
 Cash received from customers ..................................    $  28,759,780      $  31,267,820      $  28,526,134
 Cash paid to suppliers and employees ..........................      (27,274,386)       (33,040,889)       (29,740,631)
 Interest paid .................................................         (967,109)          (854,759)          (757,394)
 Taxes paid ....................................................         (128,359)           (30,753)          (733,096)
                                                                    -------------      -------------      -------------
       Net cash provided by (used in) operating
         activities ............................................          389,926         (2,658,581)        (2,704,987)
                                                                    -------------      -------------      -------------
Cash flows from investing activities:
 Capital expenditures ..........................................         (279,410)          (109,399)          (852,431)
 Purchases of marketable securities ............................         (413,768)                --                 --
 Proceeds from sales of marketable securities ..................          217,318                 --                 --
 Acquisition of ABS ............................................               --             (9,375)                --
 Acquisition of WAWD ...........................................       (8,431,400)                --                 --
 Loans to President ............................................           (5,000)           (67,000)           (72,000)
                                                                    -------------      -------------      -------------
       Net cash used in investing activities ...................       (8,912,260)          (185,774)          (924,431)
                                                                    -------------      -------------      -------------
Cash flows from financing activities:
 Proceeds from sale of stock and warrants ......................          930,851          1,780,920              7,932
 Borrowings ....................................................       17,071,054          4,919,974          3,650,376
 Principal payments on long-term debt ..........................       (9,532,889)        (3,363,287)           (21,032)
 Financing costs ...............................................         (418,200)                --                 --
                                                                    -------------      -------------      -------------
       Net cash provided by financing activities ...............        8,050,816          3,337,607          3,637,276
                                                                    -------------      -------------      -------------
Effect of exchange rate changes on cash ........................               --                 --             (1,954)
Cash acquired from ABS aquisition ..............................               --             25,781                 --
                                                                    -------------      -------------      -------------
Net (decrease) increase in cash ................................         (471,518)           519,033              5,904
Cash at beginning of year ......................................          536,928             17,895             11,991
                                                                    -------------      -------------      -------------
Cash at end of year ............................................    $      65,410      $     536,928      $      17,895
                                                                    =============      =============      =============
Reconciliation of net loss to net cash used in operating
 activities:
 Net loss ......................................................    $    (949,330)     $    (466,454)     $    (179,072)
 Adjustments to reconcile net loss to net cash provided by
   (used in) operating activities:
    Depreciation and amortization ..............................           93,840             73,584            186,675
    Amortization of deferred credit ............................          (47,700)                --                 --
    Amortization of financing costs ............................           37,390                 --                 --
    Provision for doubtful accounts ............................          892,069            480,623            617,891
   Gain on sale of marketable securities .......................          (49,426)                --                 --
    Deferred income tax benefit ................................       (1,086,000)           (37,000)          (154,000)
    Changes in assets and liabilities (net of business
      acquisitions):
      Accounts receivable ......................................        2,285,846         (1,989,524)        (1,937,596)
      Inventory ................................................         (839,388)        (2,648,689)        (1,593,795)
      Prepaid expenses and other current assets ................          149,887             21,206           (354,728)
      Other assets .............................................          (66,572)            49,126            (51,766)
      Accounts payable and accrued expenses ....................          (30,690)         1,858,547            761,404
                                                                    -------------      -------------      -------------
       Net cash provided by (used in) operating
         activities ............................................    $     389,926      $  (2,658,581)     $  (2,704,987)
                                                                    =============      =============      =============
Supplemental cash flow information:
 Businesses acquired:
   Fair value of assets acquired ...............................    $  19,448,815      $      37,500
                                                                    -------------      -------------
   Cash paid ...................................................        8,431,400              9,375
   Common stock issued .........................................          961,250             28,125
                                                                    -------------      -------------
       Total purchase price ....................................    $   9,392,650      $      37,500
                                                                    -------------      -------------
   Liabilities assumed .........................................    $   6,324,065      $          --
   Negative goodwill (classified as a deferred credit) .........    $   3,732,100      $          --
</TABLE>
                See Notes to Consolidated Financial Statements

                                      F-5
<PAGE>

               BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. PRINCIPAL BUSINESS ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES

     Business activity -- Brake Headquarters U.S.A., Inc. and subsidiaries (the
"Company"). The Company is a publicly-owned holding company, substantially all
of its current business operations are conducted through two of its
wholly-owned subsidiaries, Sanyo Automotive Parts, Ltd. ("Sanyo") and WAWD,
Inc. ("WAWD"). Sanyo is a New York corporation formed in 1976, which is
currently doing business under the name Brake Headquarters. WAWD, a California
corporation acquired by way of a merger on November 17, 1997, is an importer
and distributor of high-line European and Asian automotive aftermarket parts.
Other operating subsidiaries include Quality First Brakes, Inc., a wholly-owned
Delaware subsidiary of the Company ("Quality First"), formed in August 1995,
which owns Fifteen Inc., Thirty Three Inc. and Thirty Nine Inc., and are
wholesale warehouses for "undercar" parts; ABS Brakes, Inc. ("ABS"), an
assembler of domestic brake pads is a wholly-owned New York subsidiary acquired
in August 1996.

     Principles of consolidation -- The consolidated financial statements
include the accounts of Brake Headquarters U.S.A., Inc. and its wholly-owned
subsidiaries. All intercompany balances and transactions have been eliminated
in consolidation.

     Inventory -- Finished goods inventory, consisting of brake systems, engine
parts, and accessories, is stated at the lower of cost (first-in, first-out
method) or market.

     Depreciation -- Depreciation of property and equipment is provided for by
the straight-line method over the estimated useful lives of the related assets
(5 to 40 years). Leasehold improvements are amortized over the lesser of the
term of the respective lease or the estimated useful lives of the improvements
(10 to 40 years).

     Income taxes -- The Company recognizes deferred income tax assets and
liabilities for the expected future tax consequences of temporary differences
between the financial reporting basis and the tax basis of assets and
liabilities.

     Concentration of credit risk -- The Company's customer base consists
primarily of retailers, wholesalers and installers of automotive replacement
parts throughout North America. On a geographic basis, no area has a
disproportionate concentration of credit risk. During the years ended December
31, 1997, 1996 and 1995, less than 10% of the Company's sales were derived from
foreign customers. Although the Company is directly affected by the well-being
of the replacement parts industry, management does not believe significant
credit risk exists at December 31, 1997. The Company performs ongoing credit
evaluations of its customers' financial condition. When amounts on specific
accounts receivable are judged to be uncollectable by management, those amounts
are charged to the allowance for doubtful accounts. During the year ended
December 31, 1997, no single customer accounted for more than 10% of net sales.
During the years ended December 31, 1996 and 1995, the Company had sales to one
customer that accounted for approximately 28% and 17%, respectively, of the
Company's net sales. In the fourth quarter of 1996, this customer informed the
Company it was consolidating vendors and therefore would no longer use the
Company as a prime supplier. In the fourth quarter of 1996, the Company
incurred costs of approximately $284,000 relating to the relabeling and freight
costs associated with the loss of this customer.

     Financing Costs -- During the year ended December 31, 1997, the Company
incurred $418,000 of costs in connection with debt financings (see Note 3).
These costs are being amortized over the terms of the respective financings.

     Adoption of Statement of Financial Accounting Standards No. 128 -- During
1997, the Company adopted Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings Per Share". SFAS 128 replaces the presentation of
primary earnings per share with a presentation of basic earnings per share. It
also requires dual presentation of basic and diluted earnings per share on the
face of the income statement. Diluted earnings per share is computed by
dividing net income by the weighted average number of common shares outstanding
(including shares held in escrow, see Note 2 ) and dilutive common equivalent
shares (common stock options) outstanding. The net loss used in the
determination of the loss per share in 1995 has been adjusted for the $112,730
preferred stock dividend.


                                      F-6
<PAGE>

               BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
 
 
Note 1. PRINCIPAL BUSINESS ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES
 -- (Continued)
 
     Management estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported periods. Actual results could differ from those estimates.


     Disclosure about Fair Value of Financial Instruments -- The fair value of
the Company's credit facilities approximate fair value and is estimated based
on the quoted market prices for the same or similar issues or on the current
rates offered to the Company for debt of the same remaining maturities.


     Supplemental cash flow information of non-cash activities --

1997


     Common stock was issued in connection with the acquisition of WAWD in the
amount of $961,250.


1996


     The President purchased 1,000 shares of Series B Preferred Stock for
$50,000 in exchange for a reduction in the prior dividend payable to him from
the Series A Preferred Stock. A note payable for $258,000 was converted into
91,300 common shares. Common stock was issued for the acquisition of ABS in the
amount of $28,125. The Company entered into capital leases for the purchase of
computer equipment totaling $282,700.


1995


     Common stock was issued in connection with the exercise of Class F and D
warrants, respectively, by an increase in the amount due from President of
$16,667.


     Reclassifications -- Certain reclassifications were made to the prior
years' financial statements to conform with the current year presentation.


Note 2. ACQUISITIONS


     In November 1997, in a series of transactions, the Company acquired by
way of merger substantially all of the assets and certain liabilities of WAWD,
a wholly-owned subsidiary of Echlin, Inc., for a total purchase price
(including acquisition costs) of $8,431,400 in cash and 130,000 shares of the
Company's common stock valued at $961,250. Fifty thousand of the shares issued
are being held in escrow for up to 15 months as security for certain
indemnification obligations. The shares held in escrow retain all voting and
dividend rights and are included in common shares outstanding at December 31,
1997. The Company has accounted for the acquisition of WAWD under the purchase
method of accounting and the results of operations of WAWD have been included
in the 1997 statement of operations since its date of acquisition. The excess
of the estimated fair market value of the net assets acquired over the
purchase price was first utilized to reduce long-term assets acquired with the
remaining excess of $3,732,100 recorded as a deferred credit (negative
goodwill), which is being amortized over a 10 year period. Amortization of the
deferred credit was $47,700 during the year ended December 31, 1997, which is
included in selling, general and administrative expenses.


     The Company signed an agreement with a consultant providing for common
stock to be issued as a retainer, and a fee to be paid based upon the
completion of a merger, acquisition or joint venture. A total of 30,000 shares
of common stock were issued in March 1997. The Company has recorded the fair
value of the common stock issued ($292,500) and the fee (which is in dispute)
as costs of the WAWD acquisition.


     Effective August 30, 1996, the Company acquired the net assets of ABS for
$37,500 consisting of 6,250 shares of common stock and $9,375 in cash. The fair
value of the net assets acquired approximated the purchase price.


                                      F-7
<PAGE>
               BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
 
Note 2. ACQUISITIONS  -- (Continued)
 
     The following summarized, unaudited pro forma results of operations assume
the WAWD acquisition occurred at the beginning of the respective year.



                                               1997             1996
                                          --------------   --------------
       Net sales ......................    $67,921,337      $74,957,575
       Net loss .......................    $  (919,491)     $  (336,725)
       Net loss per basic and
        diluted common share ..........    $      (.21)     $      (.09)
 

Note 3. LONG-TERM DEBT


     Long-term debt consists of the following:




<TABLE>
<CAPTION>
                                                                  1997            1996
                                                             -------------   -------------
<S>                                                          <C>             <C>
       Line of credit (a) ................................   $ 9,508,322     $4,546,556
       Note payable -- credit facility (b) ...............            --      4,850,321
       Line of credit -- WAWD (c) ........................     6,032,732             --
       Convertible subordinated debentures (d) ...........       930,000             --
       Promissory notes (e) ..............................       600,000             --
       Mortgages -- Fairfield, IL. facility (f) ..........       611,060        694,867
       Capital lease (g) .................................       230,495        282,700
                                                             -----------     ----------
                                                              17,912,609     10,374,444
          Less current portion ...........................     1,673,324      4,708,574
                                                             -----------     ----------
                                                             $16,239,285     $5,665,870
                                                             ===========     ==========
 
</TABLE>

   (a) In November 1997, the Company entered into an agreement with a bank to
       provide a three year line of credit of $12 million. The maximum
       availability under this agreement at December 31, 1997 was $10,329,000.
       At the Company's option, the line of credit bears interest at prime or 2
       1/4% over LIBOR. The line of credit availability is based upon specified
       levels of accounts receivable and inventory. The line of credit is
       collateralized by substantially all of the assets of the Company (except
       for the assets of WAWD). Proceeds from the line of credit were used to
       repay the previous line of credit and the note payable -- credit
       facility.

           The agreement contains certain restrictive covenants with respect to,
       among others, (i) mergers and acquisitions, (ii) capital expenditures,
       (iii) dividends, and (iv) additional indebtedness. In addition, the line
       of credit agreement requires that the Company satisfy certain financial
       covenants. As a result of the Company's results of operations for 1997,
       the Company failed to satisfy certain financial covenants set forth in
       the credit agreement as of December 31, 1997. However, the bank provided
       the Company a waiver of these defaults and has amended the terms of the
       agreement through the remaining term of the agreement. Based upon
       projected operating results for the year ended December 31, 1998,
       management believes that the Company will be in compliance with all
       amended covenants. Therefore, the line of credit agreement has been
       classified as long-term at December 31, 1997.


   (b) The credit facility had interest, payable monthly, at the prime rate or
       the bank's money market rate plus 2 1/4%. The credit facility was
       secured by substantially all the assets of the Company and was repaid in
       1997.

           At December 31, 1996, the Company was in default of several of the
       covenants of the note-payable -- credit facility, however, the bank
       provided the Company with a waiver through June 30,

                                      F-8
<PAGE>

               BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
 
 
Note 3. LONG-TERM DEBT  -- (Continued)
 
    1997 of these defaults and amended the terms of the agreement. Based upon
       projected operating results for the year ended December 31, 1997,
       management believed that the Company would be in compliance with all
       amended covenants. Therefore, the note-payable-credit facility was
       classified as long-term at December 31, 1996.


   (c) In November 1997, WAWD entered into an agreement with a financial
       institution to provide a three year line of credit of $12 million. The
       maximum availability under this agreement at December 31, 1997 was
       $8,030,000. The line of credit bears interest at prime plus 1%. The line
       of credit is based upon specific levels of accounts receivable and
       inventory and is collateralized by substantially all the assets of WAWD.
        


   (d) In November 1997, the Company issued $1 million, 5% convertible
       subordinated debentures (the "Debentures"). The Debentures are due
       November 7, 1998. Interest is payable in either cash or common stock, at
       the Company's option. The Debentures are convertible into common stock
       equal to the lesser of $8.56 per share or a price determined based upon
       a market value formula. The Debentures are redeemable by the Company at
       120% of the principal amount, provided that a notice of conversion has
       not occurred. The Debentureholders also received warrants to purchase
       10,000 shares of common stock exercisable for five years at $9.88 per
       share. The fair value of the warrants ($80,000) at the date of issuance
       was recorded as paid-in capital with a corresponding reduction in the
       carrying value of the Debentures. The discount on the Debentures is
       being amortized as additional interest expense over the term of the
       Debentures. Such amortization was $10,000 in 1997.


   (e) In November 1997, the Company issued one year, $600,000, 8%,
       subordinated promissory notes.


   (f) In a series of mortgages due through 2005, the Company financed its
       Fairfield, Illinois facility. Interest rates range from 5% to prime.


   (g) The capital lease is for the purchase of the Company's computer system.
       Payments are approximately $7,000 per month through May 2001. The prime
       rate and LIBOR were 8.5% and 6.0%, respectively, at December 31, 1997.


Annual maturities of long-term debt are as follows:




                Year ending December 31,                
                  1998 .................   $ 1,673,324
                  1999 .................       132,138
                  2000 .................    15,684,605
                  2001 .................       110,827
                  2002 .................        69,040
                  Thereafter ...........       242,675
                                           -----------
                                           $17,912,609
                                           ===========

Note 4. SHAREHOLDERS' EQUITY


     Escrow Agreement -- Pursuant to a July 1992 agreement between the Company
and the Company's President, in 1995, 250,000 shares held by the Company's
President were returned to the treasury of the Company. Since the Company
attained the 1994 pre-tax income levels, as defined, 125,000 shares were
released from an escrow account to the President and 41,666 Class F warrants
were exercised during 1995. The President disputed a prior forfeiture of
shares, but waived any claims he had against the Company in exchange for the
July 1995 grant of a non-qualified stock option to purchase 180,000 shares of
Common Stock at $3.00 per share expiring on July 20, 2000 under the 1995 Plan.


                                       F-9
<PAGE>

               BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
 
 
Note 4. SHAREHOLDERS' EQUITY  -- (Continued)
 
     Preferred Stock -- In March 1996, the Company amended its Certificate of
Incorporation to authorize the issuance of 1,000 shares of Series B preferred
stock to be held by the President. The amendment also eliminated all remaining
authorized shares of Series A preferred stock. Dividends payable to the
President from the Series A preferred stock were offset in part, by the
purchase of the Series B preferred stock for $50,000. As the sole shareholder
of the Series B preferred stock, which will vote as a separate class, the
President has the exclusive right to elect a majority of the Company's Board of
Directors until the earlier of the redemption date of March 31, 2001 or the
reporting by the Company of at least $75,000,000 in revenue for any year
through December 31, 2000. In the event of any liquidation, dissolution or
winding-up, the holder of Series B preferred stock will be entitled to an
aggregate preference of $50,000, his basis in the stock; any remaining proceeds
of liquidation will be distributed pro rata to holders of the common stock.

     In March 1998, the Board of Directors and the Shareholders of the Company,
authorized 1,000,000 shares of preferred stock, in one or more series as the
Board of Directors determines without further shareholder approval.

     Common Stock -- In February 1998, the Company increased its authorized
shares of common stock to 12,000,000 from 6,000,000 which was previously
changed from 20,000,000 in March 1996.

     Private Placement -- In July 1996, the Company signed an agreement with a
consultant to raise an estimated $5 million through the issuance of common
stock and warrants. In August 1996, the Company completed raising additional
capital through a private placement by selling 490,000 units at a purchase
price of $2.50 per unit. Each unit consists of one share of common stock and
two Redeemable Common Stock Purchase Warrants each to purchase one share of
common stock of the Company at $3.80 per share until the third anniversary of
the initial closing. The Company has received net proceeds of approximately
$2,586,000 as of December 31, 1997 from the sale of units and exercise of
414,000 warrants.

Stock Options

     In connection with the WAWD line of credit, (see Note 3), the Company
granted the bank a warrant to acquire 45,000 shares of the Company's common
stock at an exercise price of $8.03 per share, which expires in November 2002.
The bank has an option to require the Company to repurchase the warrant for up
to $75,000, based upon a formula, if not previously exercised before the
termination of the loan agreement. The $75,000 cost to repurchase the warrant
has been capitalized as a deferred financing cost included in other assets and
is being amortized as additional interest expense over the term of the line of
credit.

1994 Employee Stock Option Plan

     During 1994, the Company established the 1994 Employee Stock Option Plan
(the "1994 Plan"). The 1994 Plan provides for the grant of options to employees
and other parties to purchase an aggregate of 300,000 shares of common stock.
Options to purchase no more than 120,000 shares of common stock may be granted
to any one person in any two-year period. The 1994 Plan is administered by the
Board of Directors.

     The 1994 Plan allows the Company to grant incentive stock options
("ISOs"), non-qualified stock options ("NQSOs") and stock appreciation rights
("SARs") at any time within 10 years from the date the 1994 Plan was adopted.
The exercise price of ISOs may not be less than the fair market value of the
common stock on the date of the grant, provided that the exercise price of ISOs
granted to an optionee owning more than 10% of the outstanding common stock may
not be less than 110% of the fair market value of the common stock on the date
of grant. In addition, the aggregate fair market value of common stock with
respect to which ISOs are exercisable for the first time by an optionee during
any calendar year shall not exceed $100,000.

     Options may not have a term exceeding ten years, except that ISOs granted
to an optionee owning more than 10% of the outstanding common stock may not
have a term of more than five years and ISOs must be granted to and exercised
by employees of the Company. Since the adoption of the 1994 Plan, an aggregate
of 371,000 options to purchase shares have been granted (123,000 have expired
or been canceled); no SARs have been granted.


                                      F-10
<PAGE>

               BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
 
 
Note 4. SHAREHOLDERS' EQUITY  -- (Continued)
 
1995 Employee Stock Option Plan

     In July 1995, the Company established the 1995 Employee Stock Option Plan
(the "1995 Plan"). The 1995 Plan provides for the grant of options to employees
and other parties of ISOs, NQSOs and SARs to purchase an aggregate of 1,500,000
(increased in March 1998) shares of common stock. The provisions of the 1995
Plan are identical to the above-stated terms of the 1994 Plan.

     During 1997 under the 1995 Plan, the Company granted to certain officers
of WAWD five-year options to purchase 80,000 shares of common stock at $6.6875
per share and also granted seven-year options to purchase 180,000 shares of
common stock at $6.6875 per share, which options vest after six and one-half
years, subject to accelerated vesting upon the achievement of certain
performance goals.

     Since the adoption of the 1995 Plan, through December 31, 1997 no ISOs or
SARs have been granted. In 1995, NQSOs to purchase 180,000 shares of common
stock at $3.00 per share, the fair market value on the date of grant, were
granted to the President. The options terminate in July 2000 and are
exercisable on a cumulative basis in one-third increments on July 31, 1997,
1998 and 1999. The option becomes immediately exercisable upon a change in
control of the Company.

     A summary of stock option transactions under employee stock option plans
for each of the three years in the period ended December 31, 1997 are as
follows:



                                                         Weighted Average
                                            Options       Exercise Price
                                          -----------   -----------------
Outstanding January 1, 1995 ...........     132,000          $ 2.50
 Granted ..............................     186,000            2.98
 Canceled .............................      (3,000)           2.50
                                            -------        
Outstanding December 31, 1995 .........     315,000            2.78
 Granted ..............................      91,000            4.71
                                            -------        
Outstanding December 31, 1996 .........     406,000            3.21
 Granted ..............................     302,000            6.69
 Exercised ............................      (8,000)           3.00
                                            -------        
Outstanding December 31, 1997 .........     700,000            4.72
                                            =======        
Exercisable:                                               
 December 31, 1996 ....................     175,000            3.24
                                            =======        
 December 31, 1997 ....................     253,000            3.36
                                            =======  

Employee Stock Bonus Plan

     In April 1995, the Company adopted the Employee Stock Bonus Plan which
enables all full-time employees to purchase shares of common stock at 85% of
the then fair market value through payroll deductions. During 1997, 1996 and
1995, 1,937, 5,637 and 3,064 shares, respectively, were issued from the 100,000
shares available for sale under the plan.


                                      F-11
<PAGE>
               BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
 
 
Note 4. SHAREHOLDERS' EQUITY  -- (Continued)
 
     The following tables summarize information about stock options outstanding
at December 31, 1997:

<TABLE>
<CAPTION>
                                    Options Granted                   Options Exercisable
                        ----------------------------------------   -------------------------
                                          Weighted     Weighted                     Weighted
                                          Average       Average                     Average
       Range of             Number       Remaining     Exercise        Number       Exercise
   Exercise Prices       Outstanding        Life         Price      Exercisable      Price
---------------------   -------------   -----------   ----------   -------------   ---------
<S>                     <C>             <C>           <C>          <C>             <C>
    $2.25 - $3.00          331,000      2.4 years     $ 2.79          186,000      $ 2.66
     3.75 - 5.63            67,000      3.9 years       5.32           67,000        5.32
     6.69 - 6.75           302,000      6.0 years       6.69               --          --
                           -------      -----------   ------          -------      ------
                           700,000      4.1 years     $ 4.72          253,000      $ 3.36
                           =======      ===========   ======          =======      ======
</TABLE>

     The estimated fair value of options granted during 1997 and 1996 was $5.42
and $4.13 per share, respectively. The Company applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its stock
option and purchase plans. No compensation cost has been recognized for the
Company's stock option and stock purchase plan. Had compensation cost for the
Company's stock option and stock purchase plans been determined based on the
fair value at the option grant dates for awards in accordance with the
accounting provisions of SFAS 123, the Company's net loss and loss per share
for the years ended December 31, 1997 and 1996 would have been increased to the
pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                   1997             1996             1995
                                              --------------   --------------   --------------
<S>                                           <C>              <C>              <C>
Net loss applicable to common shareholders
 As reported ..............................    $   (949,330)     $ (466,454)      $ (291,802)
 Pro forma ................................      (1,215,430)       (563,298)        (317,905)
Net loss per basic and diluted common share
 As reported ..............................    $       (.22)     $     (.13)      $     (.10)
 Pro forma ................................            (.28)           (.16)            (.10)
</TABLE>

     The fair value of options granted under the Company's fixed stock option
plans during 1997 and 1996 was estimated on the dates of grant using the
Black-Scholes options-pricing model with the following weighted-average
assumptions used: expected volatility of approximately 92% for 1997 and 125%
for 1996, risk free interest rate of approximately 6%, and expected lives of
option grants of approximately five years. Pro forma compensation cost related
to shares purchased under the Employee Stock Purchase Plan is measured based on
the discount from market value. The effects of applying SFAS 123 in this pro
forma disclosure are not indicative of future pro forma effects. SFAS 123 does
not apply to awards prior to 1995, and additional awards in future years are
anticipated.

Note 5. INCOME TAXES


     Provision (benefit) for income taxes consists of the following:


                           1997            1996             1995
                      -------------   --------------   -------------
Federal:
 Current ..........    $  353,000       $ (176,000)     $   81,000
 Deferred .........      (849,000)         (34,000)       (123,000)
                       ----------       ----------      ----------
                         (496,000)        (210,000)        (42,000)
                       ----------       ----------      ----------
State and Local:
 Current ..........       156,000           45,000          47,000
 Deferred .........      (237,000)          (3,000)        (31,000)
                       ----------       ----------      ----------
                          (81,000)          42,000          16,000
                       ----------       ----------      ----------
                       $ (577,000)      $ (168,000)     $  (26,000)
                       ==========       ==========      ==========

                                      F-12
<PAGE>

               BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
 
 
Note 5. INCOME TAXES  -- (Continued)
 
     The total provision (benefit) for income taxes differs from that amount
which would be computed by applying the U.S. federal tax rate to the loss
before income taxes. The reasons for these differences are as follows:



<TABLE>
<CAPTION>
                                                                   1997            1996            1995
                                                                  ------          -------         ------
<S>                                                               <C>             <C>             <C>
Statutory federal income tax rate .............................   (34.0)%         (34.0)%         (34.0)%
State and local income taxes, net of federal benefit ..........   ( 4.2)            4.8             7.7
Permanent and other differences ...............................      .4             2.8            13.6
                                                                  -----           -----           -----
                                                                  (37.8)%         (26.4)%         (12.7)%
                                                                  =====           =====           =====
</TABLE>

     The tax effects of temporary differences that give rise to significant
portions of deferred tax (liability) asset consist of the following:



                                                     1997             1996
                                                 ------------      --------  
Inventory ..................................     $ (1,463,000)     $272,000
Accounts receivable ........................          (67,000)      103,000
Depreciation ...............................          (13,000)       15,000
Accruals not currently deductible ..........          203,000        58,000
Other ......................................           75,000        29,000
                                                 ------------      --------
                                                 $ (1,265,000)     $477,000
                                                 ============      ========

     The Company has generated taxable income for each of the three years prior
to the year ended December 31, 1996. The loss for income tax purposes generated
in 1996 was carried back in full to prior years resulting in a refund of taxes
paid to such extent. As such, the Company believed that positive evidence
existed and that it was more likely than not that the deferred tax asset at
December 31, 1996 would be realized and therefore no valuation allowance was
deemed necessary.

Note 6. OTHER INCOME

     During 1997, the Company received $100,000 from the sale of certain fully
amortized intangible assets. Additionally, the Company recorded a gain on the
sale of marketable equity securities in the amount of $48,000. Such amounts are
reported as other income in the year ended December 31, 1997. As of December
31, 1997, the Company had marketable equity securities of $246,000 (cost
approximates market value) which are included in other current assets.

Note 7. COMMITMENTS AND CONTINGENCIES

     The Company leases warehouse and office space under noncancelable
operating leases. Aggregate future minimum lease payments are as follows:



Year ending December 31,
    1998 ..............................................    $1,275,033
    1999 ..............................................       715,746
    2000 ..............................................       390,390
    2001 ..............................................       245,536
    2002 ..............................................       201,229
  Thereafter ..........................................         1,200
                                                           ----------
                                                           $2,829,134
                                                           ==========
 

     Rent expense for the years ended December 31, 1997, 1996 and 1995 amounted
to $495,000, $440,000 and $354,000, respectively, which includes $280,500,
$312,000 and $312,000, respectively, which was paid to the Company's President.
 


                                      F-13
<PAGE>

               BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
 
 
Note 7. COMMITMENTS AND CONTINGENCIES  -- (Continued)
 
     In November 1997, in connection with the WAWD acquisition (see Note 3),
the Company entered into three-year employment agreements with two officers of
WAWD providing for annual compensation of $110,000 for the first year and
increasing to $120,000 for the second and third years plus incentive
compensation based on the performance of WAWD for the years ending December 31,
1999 and 2000.

     In June 1996, the Company settled an action against a former customer to
collect $971,000 of accounts receivable. Inventory totaling approximately
$459,000, was returned to the Company. As a result of the above settlement and
available reserves, the Company recorded an expense of a $212,000 in 1996.
Mutual releases were exchanged for all claims and counter claims.

     In July 1995, the Company entered into a three-year employment agreement
with the President providing for a minimum annual salary of $156,000, with a
bonus at the discretion of the Board of Directors, determined based upon the
profitability of the Company. No bonus was paid for the years ended December
31, 1997, 1996 and 1995.

Note 8. SAVINGS PLAN

     The Company established in November 1996 a tax deferred saving plan
("401(k) Plan") for all employees who meet certain eligibility requirements.
The Company did not make any contributions to this plan in 1997 and 1996.

Note 9. ADOPTION OF NEW ACCOUNTING STANDARDS

     In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 130, "Reporting
Comprehensive Income", which requires a statement of comprehensive income to be
included in the financial statements for fiscal years beginning after December
15, 1997. The Company is presently designing such statement and accordingly,
will include such statement beginning with the first quarter of 1998.

     In addition, in June 1997, the FASB issued SFAS 131, "Disclosures About
Segments of an Enterprise and Related Information". SFAS 131 requires
disclosures of certain information about operating segments and about products
and services, the geographic areas in which a company operates and their major
customers. The Company is presently in the process of evaluating the effect
this new standard will have on disclosures in the Company's financial
statements and the required information will be reflected in the year ended
December 31, 1998 financial statements.

Note 10. FOURTH QUARTER ADJUSTMENTS

     Excluding the results of WAWD, during the fourth quarter of 1997 the
Company experienced a dramatic decrease in sales levels. In the fourth quarter
of 1997, the Company had net sales of $4,009,821 as compared with $7,404,405
during the fourth quarter of 1996. This decrease was caused by the loss of
Autozone, Inc. The Company had sales to this customer of approximately $3.4
million during the fourth quarter of 1996, as compared with no sales to this
customer in the fourth quarter of 1997. Included within operating expenses for
1997 was an increase in the provision for doubtful accounts of $867,000 during
the fourth quarter. The increase in the provision for doubtful accounts was
primarily a result of the adjustment in the carrying value in two large
accounts receivable balances. The Company incurred additional borrowings during
the fourth quarter of 1997 to support the increase in inventory levels. As a
result, interest expense increased to $290,246 during the fourth quarter of
1997 from $200,210 during the third quarter of 1997. These combined factors
contributed to the pre tax loss of $1,526,330.


                                      F-14


<PAGE>

                BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                      March 31, 1998
                                                                       (Unaudited)           December 31, 1997
                                                                      --------------         -----------------
<S>                                                                    <C>                    <C>
ASSETS

Current Assets:
     Cash                                                              $    258,353            $     65,410
     Accounts receivable, less allowance for doubtful
        accounts of $1,188,000 and $1,179,000                            10,609,533               8,910,085
     Inventory                                                           23,230,866              25,814,917
     Prepaid expenses and other current assets                              371,345                 754,761
                                                                       ------------            ------------
           Total current assets                                          34,470,097              35,545,173

Property and Equipment - net                                              1,633,046               1,638,749
Other Assets                                                                656,650                 674,571
Due from President                                                           60,874                  60,874
Deferred Tax Asset                                                          261,000                 261,000
                                                                       ------------            ------------
           Total Assets                                                $ 37,081,667            $ 38,180,367
                                                                       ============            ============

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:
     Accounts payable                                                  $  6,509,370            $  6,546,436
     Accrued expenses and other current liabilities                       2,305,995               2,061,752
     Current portion of long-term debt                                    1,673,324               1,673,324
     Deferred tax liability                                               1,145,000               1,526,000
                                                                       ------------            ------------
           Total current liabilities                                     11,633,689              11,807,512
                                                                       ------------            ------------

Long-term Debt                                                           15,590,397              16,239,285
Deferred Credit                                                           3,591,404               3,684,404
                                                                       ------------            ------------
           Total liabilities                                             30,815,490              31,731,201
                                                                       ------------            ------------

Shareholders' Equity:
     Series B preferred stock - $.001 par value; authorized,
         issued and outstanding 1,000 shares                                      1                       1
     Common stock - $.001 par value; authorized 6,000,000
        shares, issued and outstanding 4,563,321 shares                       4,563                   4,563
     Additional paid-in capital                                          17,022,258              17,022,258
     Accumulated deficit                                                (10,760,645)            (10,577,656)
                                                                       ------------            ------------
           Total shareholders' equity                                     6,266,177               6,449,166
                                                                       ------------            ------------

           Total Liabilities and Shareholders' Equity                  $ 37,081,667            $ 38,180,367
                                                                       ============            ============
</TABLE>
                                See Notes to Consolidated Financial Statements

                                     F-15
<PAGE>

                BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                              Three Months Ended
                                                                   March 31, 1998           March 31, 1997
                                                                   --------------           --------------
<S>                                                                 <C>                     <C>         
Sales                                                               $ 17,179,005            $  8,144,874
   Less returns and allowances                                          (790,496)               (613,454)
                                                                    ------------            ------------
Net sales                                                             16,388,509               7,531,420
Cost of goods sold                                                    11,679,601               5,620,325
                                                                    ------------            ------------

Gross profit                                                           4,708,908               1,911,095

 Selling, general and administrative expenses                          4,566,872               1,769,619
                                                                    ------------            ------------

Income from operations                                                   142,036                 141,476
                                                                    ------------            ------------

Other income (expense):
    Other income                                                          12,620                 114,846
    Interest expense                                                    (448,645)               (202,083)
                                                                    ------------            ------------
                                                                        (436,025)                (87,237)
                                                                    ------------            ------------


(Loss) income before benefit (provision) for income taxes               (293,989)                 54,239


Benefit (provision) for income taxes                                     111,000                 (21,000)
                                                                    ------------            ------------

Net (loss) income                                                   $   (182,989)           $     33,239
                                                                    ============            ============

Net (loss) income per basic and diluted share                       $       (.04)           $        .01
                                                                    ============            ============


Weighted average number of common shares outstanding                   4,563,321               4,219,284
                                                                    ============            ============
</TABLE>

                                  See Notes to Consolidated Financial Statements

                                     F-16
<PAGE>

                BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASHFLOWS

                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                                      Three Months Ended
                                                                                March 31, 1998      March 31, 1997
                                                                              ------------------  -----------------
<S>                                                                           <C>                 <C>
Cash flows from operating activities:
    Cash received from customers                                                 $15,036,151          $ 7,822,715
    Cash paid to suppliers and employees                                          13,306,664)          (6,932,216)
    Interest paid                                                                   (462,310)            (202,083)
    Taxes paid                                                                      (396,172)             (28,322)
                                                                                  -----------         ------------
             Net cash provided by operating activities                               871,005              660,094
                                                                                  -----------         ------------

Cash flows from investing activities:
    Capital expenditures                                                             (29,174)             (33,818)
    Loans to President                                                                     -               (5,000)
                                                                                  -----------         ------------
             Net cash used in investing activities                                   (29,174)             (38,818)
                                                                                  -----------         ------------

Cash flows from financing activities:
    Proceeds from sale of stock and warrants                                              --               77,200
    Repayments of notes payable and long term debt                                  (606,286)            (855,442)
    Principal payments on long-term debt                                             (42,602)             (34,499)
                                                                                  -----------         ------------
             Net cash used in financing activities                                  (648,888)            (812,741)
                                                                                  -----------         ------------

Net increase (decrease) in cash                                                      192,943             (191,465)
Cash at  beginning of period                                                          65,410              536,928
                                                                                  -----------         ------------
Cash at end of period                                                              $ 258,353            $ 345,463
                                                                                  ===========         ============
Reconciliation of net income to net cash used in operating activities:
    Net (loss) income                                                             $ (182,989)            $ 33,239
    Adjustments to reconcile net (loss) income to net cash provided by
    (used in) operating activities:
     Depreciation and amortization                                                    34,877               24,844
     Amortization of deferred credit                                                 (93,000)                  --
     Amortization of financing costs                                                  25,242                   --
     Provision for doubtful accounts                                                  56,085                   --
     Gain on sale of marketable securities                                           (12,620)                  --
     Changes in assets and liabilities:
           Accounts receivable                                                    (1,755,533)             309,208
           Inventory                                                               2,584,051            1,748,893
           Prepaid expenses and other current assets                                 370,794               21,908
           Other assets                                                               17,921              (19,819)
           Accounts payable and accrued expenses                                     207,177           (1,458,179)
           Deferred tax Liability                                                   (381,000)                  --
                                                                                  -----------         ------------

             Net cash provided by operating activities                             $ 871,005            $ 660,094
                                                                                  ===========         ============


Supplemental information of non-cash financing activities:
 
    During the quarter ended March 31, 1997, thirty thousand shares of common stock were issued to a merger
    and acquisition firm. The fair value of the common stock issued was $296,250.
</TABLE>

                See Notes to Consolidated Financial Statements

                                     F-17





<PAGE>

                BRAKE HEADQUARTERS U.S.A., INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1

Basis of Presentation

           The accompanying unaudited consolidated financial statements of Brake
Headquarters U.S.A., Inc. and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q. Accordingly, they do not
include all of the footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results for the three
months ended March 31, 1998 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1998. For further information,
refer to the financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997. There
has been no significant changes of accounting policies since December 31, 1997.

Note 2

Long-term Debt

         The Company was in technical default under its credit facilities at
December 31, 1997 and March 31, 1998. The bank has issued a waiver of the
default and amended the terms of the agreements through the remaining term of
the agreement.


Note 3

Stockholders' Equity

         In April 1998, the Company increased the authorized shares from
6,000,000 to 12,000,000 shares. Additionally, the Board of Directors and the
shareholders of the Company authorized 1,000,000 shares of preferred stock in
one or more series at the discretion of the Board of Directors.

         On April 29, 1998, the Company completed a private financing of
$1,500,000 principal amount of 8% subordinated convertible debentures due April
30, 2000 (the "Debentures"). The two foreign investors (the "Purchasers") also
received five-year warrants to purchase an aggregate of 15,000 shares of Common
Stock at $3.93 per share. The Debentures are convertible, commencing the earlier
of 60 days from the date of closing or the effective date of a Registration
Statement covering the shares of Common Stock underlying the Debentures and
Warrants, at a conversion rate equal to the greater of (a) the lower of (i) 80%
of the Market Price on the Conversion Date, or (ii) $3.77; or (b) the Floor
Price of $2.00 per share. The Debentures are redeemable, with the consent of the
Company's lender, at any time at 120% of their principal amount plus all accrued
Price falls below the Floor Price.

         The Company and the Purchasers have agreed to sell and purchase,
respectively, up to an additional $4 million principal amount of Debentures
during the next 12 months provided certain market conditions are met. The
Company also granted the Purchasers a Right of First Refusal for a 120 day
period ending after the later of the effective date of the Registration
Statement or the latest closing date of the sale of additional Debentures.

         The Company agreed to repay $500,000 of the 5% Convertible
Subordinated Debentures issued in November 1997, and the Company is waiting for
approval from its senior lender.


Note 4

Commitments

           In May 1998, the Company entered into a 5 year agreement to lease new
facilities in its San Francisco warehouse and offices. The monthly lease payment
is $22,204 plus annual increases.

                                     F-18

<PAGE>

<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, 1997                    $ 372,000         $ 893,000        $  86,000 (A)     $1,179,000

Year ended December 31, 1996                    $ 288,000         $ 480,000        $ 396,000 (A)     $  372,000

Year ended December 31, 1995                    $  75,000         $ 618,000        $ 405,000 (A)     $  288,000
</TABLE>



(A) Represents amounts written off. Normal recurring credits and returns are
charged against sales.

                                                                             S-1
<PAGE>






                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 159d) of the Securities
Exchange Act of 1934, the Registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

Dated:
         April     , 1998              BRAKE HEADQUARTERS U.S.A., INC.



                                       By: /s/ Joseph Ende
                                           ---------------------------
                                           Joseph Ende, President

         In accordance with the Exchange Act, this Report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated:
<TABLE>
<CAPTION>
      Signature                                    Title                                     Date
      ---------                                    -----                                     ---- 
<S>                                   <C>                                               <C>    
/s/ Joseph Ende                        Chairman of the Board of Directors,              April  __, 1998
-----------------------------------    President, Chief Executive Officer 
Joseph Ende                            (Principal Executive Officer)      
                                       

/s/ Marc J. Ruskin                     Chief Financial Officer                          April  __, 1998
-----------------------------------    (Principal Financial Officer)                      
Marc J. Ruskin                         and Director                  
                                       

/s/ Sandra Ende                        Director                                         April  __, 1998
-----------------------------------
Sandra Ende


/s/ Elliot H. Lutzker                  Director                                         April  __, 1998
-----------------------------------
Elliot H. Lutzker


/s/ Adam E. Budish                     Director                                         April  __, 1998
-----------------------------------
Adam E. Budish
</TABLE>


                                      -24-


<PAGE>
<TABLE>
<CAPTION>
                                                   EXHIBIT INDEX
<S>              <C>    
10.16             Employment Agreement between the Company and Michael DiAngelo dated November 17, 1997.

10.17             Employment Agreement between the Company and Jeffrey Chasse dated November 17, 1997.

10.18             Lease Agreement between WAWD - EAP Automotive Products, Inc. and The Prudential Insurance Company of America dated
                  as of August 31, 1995.

10.19             Lease Agreement between WAWD - EAP Automotive Products, Inc. and Yvonne Dubbers-Albrecht et al, dated September 1,
                  1995.

10.20             Lease Agreement, as amended,  between Import Parts America, Inc. and H. Harding Brown, Stephen H. Anthony,
                  David J. Fischman and Daniel J. Coughlin, dated September 8, 1993.

10.21             Loan and Security Agreement, dated November 14, 1997, between JMCD, Incorporated and The CIT
                  Group/Credit Finance, Inc.

23.1              Consent of Deloitte & Touche, LLP.

27.1              Financial Data schedule.

</TABLE>



                                      -25-