CRAGAR INDUSTRIES INC /DE, 424B4, 1996-12-19

CRAGAR INDUSTRIES INC /DE
424B4, 1996-12-19
MOTOR VEHICLE PARTS & ACCESSORIES

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<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
File #333-13415

PROSPECTUS LOGO

850,000 SHARES OF COMMON STOCK
AND
850,000 COMMON STOCK PURCHASE WARRANTS
PURCHASABLE TOGETHER ON THE BASIS OF ONE SHARE AND ONE WARRANT
------------------------

CRAGAR Industries, Inc. (the "Company") is hereby offering 850,000 shares of
its common stock (the "Common Stock") and warrants to purchase an additional
850,000 shares of Common Stock (the "Warrants"). The Common Stock and the
Warrants offered hereby (sometimes collectively referred to herein as the
"Securities") may only be purchased together in this offering on the basis of
one share of Common Stock and one Warrant. The initial public offering price is
$6.00 per share of Common Stock and $.10 per Warrant. The Common Stock and
Warrants will be immediately separable and will not be listed for trading as
units. Each Warrant is immediately exercisable and entitles the registered
holder to purchase one share of Common Stock at an exercise price of $6.60 and
expires five years following the date of this Prospectus. The outstanding
Warrants may be redeemed by the Company upon 30 days written notice at $.10 per
Warrant, provided that the closing prices of the Common Stock have averaged at
least $9.00 for a period of any 20 trading days ending on the third day prior to
the day on which the Company gives notice. See "Description of Securities."

Prior to this offering, there has not been any public market for the
Securities, and there can be no assurance that any such market will develop or,
if developed, that it will be sustained. The initial public offering prices of
the Securities were determined by negotiations between the Company and Dickinson
& Co. as the representative (the "Representative") of the participating
underwriters (the "Underwriters"). See "Underwriting." The Common Stock and
Warrants have been approved for quotation on the Nasdaq SmallCap Market under
the symbols "CRGR" and "CRGRW," respectively, and for listing on the Boston
Stock Exchange under the symbols "CWH" and "CWHW," respectively. The Securities
will not be listed for trading as units.
------------------------

THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AS WELL
AS IMMEDIATE AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" AND "DILUTION,"
COMMENCING ON PAGES 6 AND 15, RESPECTIVELY.
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
PROCEEDS TO
PRICE TO PUBLIC UNDERWRITING COMPANY(2)
DISCOUNTS AND
COMMISSIONS(1)
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
Per Share(3).............................. $6.00 $.60 $5.40
- -----------------------------------------------------------------------------------------------------------
Per Warrant(3)............................ $.10 $.01 $.09
- -----------------------------------------------------------------------------------------------------------
Total(4).................................. $5,185,000 $518,500 $4,666,500
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>

(1) Excludes a non-accountable expense allowance to the Representative equal to
3% of the offering proceeds and 85,000 warrants (the "Representative's
Warrants") to purchase up to 85,000 shares of Common Stock and 85,000
warrants (the "Underlying Warrants"). The Underlying Warrants will be
substantially identical to the Warrants offered to the public. The
Representative's Warrants, however, will not be subject to redemption nor
exercisable for a period of one year following the effective date of the
Registration Statement of which this Prospectus forms a part. The Company
has agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933. See "Underwriting."

(2) Before deducting expenses of this offering payable by the Company estimated
at $566,500 consisting of the non-accountable expense allowance of $155,500
and other expenses in an aggregate amount of $411,000.

(3) The Common Stock and Warrants offered hereby may only be purchased together
in this offering on the basis of one share of Common Stock and one Warrant.
The Common Stock will be immediately separable and will not be listed for
trading as units.

(4) The Company has granted to the Underwriters the right to purchase, within 45
days from the date of this Prospectus, up to 127,500 additional shares of
Common Stock and 127,500 additional Warrants on the terms set forth above
solely to cover over-allotments, if any. If such option is exercised in
full, the total Price to Public will be $5,962,750, the total Underwriting
Discounts and Commissions will be $596,275, and the total Proceeds to
Company, before the expenses of this offering, will be $5,366,475. See
"Underwriting."

The Common Stock and Warrants are being sold by the Underwriters subject to
prior sale, when, as and if delivered to and accepted by the Underwriters, and
subject to the right to reject any order, in whole or in part, and subject to
certain other conditions. It is expected that delivery of the Common Stock and
Warrants will be made against payment therefor at the offices of Dickinson &
Co., Phoenix, Arizona or through the facilities of the Depository Trust Company
on or about December 23, 1996.
------------------------

DICKINSON & CO. RAS SECURITIES CORP.
The date of this Prospectus is December 18, 1996
<PAGE> 2

[INSERT PICTURES]

FOR CALIFORNIA AND IOWA INVESTORS: FOR CALIFORNIA AND IOWA RESIDENTS THIS
OFFERING IS LIMITED TO INVESTORS WHO MEET THE FOLLOWING SUITABILITY STANDARDS:
(1) A $250,000 LIQUID NET WORTH (NET WORTH EXCLUSIVE OF HOME, HOME FURNISHINGS
AND AUTOMOBILES), PLUS A $65,000 GROSS ANNUAL INCOME; OR (2) A $500,000 LIQUID
NET WORTH.

FOR OHIO INVESTORS: AT DECEMBER 31, 1995 AND SEPTEMBER 30, 1996, THE COMPANY
REPORTED A STOCKHOLDERS' DEFICIT OF $1,604,400 AND $1,148,884, RESPECTIVELY.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AND WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE> 3

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Except as otherwise indicated, the information contained in
this Prospectus reflects a one-for-ten reverse stock split effected in March
1994 and a seven-for-one stock split effected in September 1996, but does not
assume the exercise of the Warrants, the Underwriters' over-allotment option,
the Representative's Warrants, or currently outstanding options or warrants.
Except as otherwise indicated, the information contained in the Prospectus also
assumes conversion of certain of the Company's outstanding notes that will be
automatically converted into 359,722 shares of Common Stock upon the completion
of this offering. In addition to the other information in this Prospectus,
prospective investors should carefully consider the information set forth under
the heading "Risk Factors."

THE COMPANY

CRAGAR Industries, Inc. ("CRAGAR" or the "Company") designs, produces, and
sells high-quality, custom vehicle wheels and wheel accessories. The Company
believes that the CRAGAR name is one of the most widely recognized brand names
in the automotive aftermarket industry. The Company's broad selection of
products is designed to appeal to a wide range of automotive enthusiasts who
desire to modify the styling, design, or performance of their cars, trucks, or
vans. CRAGAR sells its wheel products in the automotive aftermarket through a
national distribution network of value-added resellers, including tire and
automotive performance warehouse distributors and retailers and mail order
houses. Major resellers include Super Shops, J. H. Heafner Company, Inc., and B
& R Wholesale Tire.

Industry analysts estimate that the custom wheel industry has grown at a
rate of 15.5% per year since 1991, from manufacturer sales of approximately $420
million in 1991 to $650 million in 1994. Because custom wheels represent one of
the easiest, least expensive, and quickest ways to dramatically alter the
appearance of a vehicle, the Company believes the custom wheel industry will
continue to grow for the foreseeable future. See "Business -- Industry
Background."

In order to appeal to a broad spectrum of consumers, CRAGAR offers a wide
selection of custom wheels. CRAGAR's products include entry-level custom steel
wheels, wire and spoked wheels that are popular with urban and inner city
consumers, chrome-plated one-piece cast aluminum wheels designed to appeal to
the luxury automobile owner, and race wheels that are used by both amateur and
professional race drivers. The Company's wheels feature classic designs that
have been sold under the CRAGAR name since the 1960s as well as contemporary
designs that reflect continually changing consumer preferences. The Company
sells its products under a variety of brand names, including CRAGAR, CRAGAR
Lite, Keystone Klassic, S/S, Star Wire, TRU-CRUISER, and TRU-SPOKE.

The Company's objective is to become the premier supplier of custom wheels
and wheel accessories in the automotive aftermarket. The Company will seek to
achieve this objective by pursuing the following strategies: (i) increasing its
marketing, advertising, and promotional efforts to further enhance and leverage
the strength of the CRAGAR brand name; (ii) expanding its product distribution
capabilities in underserved markets and broadening its customer base through
aggressive marketing efforts and the establishment of a national accounts
program providing for direct product shipments to mass merchandisers; (iii)
enhancing its existing product line by adapting its wheels and accessories to
fit additional vehicle models, makes, and years and developing new products to
meet changing consumer demands; (iv) pursuing strategic acquisitions and
alliances to capitalize on the substantial fragmentation of the market for
custom wheels and wheel accessories; and (v) improving its operating
efficiencies by enhancing its assembly and materials handling and by outsourcing
certain of its production processes.

The Company was incorporated in Delaware in December 1992. The principal
executive offices of the Company are located at 4636 North 43rd Avenue, Phoenix,
Arizona 85031, and its telephone number is (602) 247-1300.

3
<PAGE> 4

THE OFFERING

Securities Offered......... 850,000 shares of Common Stock and 850,000 Warrants
at a price of $6.00 per share and $.10 per
Warrant. The Securities may only be purchased
together on the basis of one share of Common
Stock and one Warrant. See "Description of
Securities" and "Underwriting."

Common Stock Outstanding

Before Offering(1)....... 1,290,305 shares

After Offering(1)........ 2,140,305 shares

Warrants Offered(2)........ 850,000 Warrants

Exercise Terms........... Each Warrant entitles the holder to purchase one
share of Common Stock for $6.60, subject to
adjustment in certain circumstances.

Expiration Date.......... 60 months from the date of this Prospectus.

Redemption............... Subject to redemption at a price of $.10 per
Warrant on 30 days written notice provided that
the average closing prices of the Common Stock
equals or exceeds $9.00 per share for 20 trading
days ending on the third day prior to the date on
which the Company gives notice of redemption. See
"Description of Securities -- Warrants."

Estimated net
proceeds(3)................ $4,100,000

Use of Proceeds............ Repayment of indebtedness, increased marketing and
promotion, expansion of distribution channels,
product development or acquisition, facilities
improvements and new equipment purchases, and
general corporate purposes. See "Use of
Proceeds."

Risk Factors............... The securities offered hereby involve a high degree
of risk and immediate substantial dilution. See
"Risk Factors" and "Dilution."

Nasdaq SmallCap Market
Symbols.................. Common Stock -- CRGR
Warrants -- CRGRW

Boston Stock Exchange
Symbols.................. Common Stock -- CWH
Warrants -- CWHW
- ---------------
(1) Includes 359,722 shares of Common Stock issuable upon the conversion of
certain of the Company's outstanding notes that will be automatically
converted upon the completion of this offering. Excludes shares of Common
Stock issuable upon the exercise of (i) the 850,000 Warrants offered hereby;
(ii) the Representative's Warrants; (iii) outstanding options and warrants
to purchase up to 340,763 shares of Common Stock; and (iv) the Underwriters'
over-allotment option.

(2) In addition to the Warrants being offered hereby, the Company currently has
outstanding (i) Class A Warrants to purchase up to 122,063 shares of Common
Stock at $1.43 per share; (ii) Class B Warrants to purchase up to 24,500
shares of Common Stock at $.36 per share; and (iii) Class C Warrants to
purchase up to 126,000 shares of Common Stock at $3.25 per share. See
"Certain Transactions" and "Description of Securities."

(3) After deducting underwriting discounts and other expenses of this offering,
including the Representative's non-accountable expense allowance.

4
<PAGE> 5

SUMMARY FINANCIAL INFORMATION

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ---------------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales............................. $20,270,000 $22,936,000 $18,375,000 $16,056,000
----------- ----------- ----------- -----------
Gross profit.......................... 3,103,000 2,646,000 2,564,000 2,082,000
----------- ----------- ----------- -----------
Selling, general and administrative
expenses............................ 3,888,000 2,912,000 2,159,000 1,963,000
Amortization of excess of fair value
of assets acquired over cost........ (738,000) (738,000) (553,000) (553,000)
----------- ----------- ----------- -----------
Income (loss) from operations......... (47,000) 472,000 958,000 673,000
Interest and other expenses, net...... 1,510,000 1,165,000 891,000 582,000
----------- ----------- ----------- -----------
Income (loss) before income taxes and
extraordinary item.................. (1,557,000) (693,000) 67,000 91,000
Extraordinary item.................... 1,107,000 -- -- 330,000
----------- ----------- ----------- -----------
Net earnings (loss)(4)................ $ (450,000) $ (693,000) $ 67,000 $ 418,000
=========== =========== =========== ===========
Income (loss) per common share
equivalent before extraordinary
item................................ $ (1.38) $ (.60) $ .06 $ .07
=========== =========== =========== ===========
Net earnings (loss) per common and
common equivalent share............. $ (0.40) $ (0.60) $ 0.06 $ 0.35
=========== =========== =========== ===========
Net earnings (loss) per common
share -- assuming full dilution..... --(1) --(1) $ 0.05 $ 0.28
=========== ===========
Weighted average common and common
equivalent shares outstanding....... 1,123,655 1,158,200 1,151,640 1,177,953
=========== =========== =========== ===========
Weighted average common shares
outstanding -- assuming full
dilution............................ --(1) --(1) 1,443,306 1,469,619
=========== ===========
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------------
PRO FORMA
DECEMBER ACTUAL AS ADJUSTED(2)
31, 1995 ----------- --------------
----------- (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................................... $ 8,353,000 $ 7,154,000 $ 9,254,000
Total assets....................................... 13,966,000 12,652,000 15,252,000
Long-term debt(3).................................. 10,531,000 8,934,000 5,584,000
Excess of fair value of assets acquired over
cost............................................. 1,475,000 922,000 922,000
Stockholders' equity (deficit)..................... (1,604,000) (1,149,000) 4,801,000
</TABLE>

- ---------------
(1) Amounts are not disclosed as the impact of options, warrants, and the
convertible debt was anti-dilutive.

(2) Adjusted to give effect to (i) the conversion of certain of the Company's
outstanding notes that will be automatically converted into 359,722 shares
of Common Stock upon the completion of this offering, and (ii) the sale by
the Company of the 850,000 shares of Common Stock and the 850,000 Warrants
offered hereby and the application of the estimated net proceeds therefrom.
See "Use of Proceeds."

(3) Does not include excess of fair value of assets acquired over cost. See Note
3 of Notes to Financial Statements. See Notes 9, 10, 11, and 16 of Notes to
Financial Statements for a description of the Company's long-term debt and
lease obligations.

(4) The net loss for the year ended December 31, 1995, was reduced by $319,490
as a result of the reductions in the allowance for doubtful accounts and
inventory obsolescence reserves and the net earnings for the nine months
ended September 30, 1996, was increased by $88,633 as a result of the
reductions in the allowance for doubtful accounts and inventory obsolescence
reserves and $617,000 in gains on sales of assets and early extinguishment
of debt. See "Risk Factors -- History of Previous Losses; Negative
Stockholders' Equity."

5
<PAGE> 6

RISK FACTORS

In addition to the other information in this Prospectus, prospective
investors should carefully consider the following risk factors in evaluating the
Company and its business before purchasing the Securities offered hereby.

HISTORY OF PREVIOUS LOSSES; NEGATIVE STOCKHOLDERS' EQUITY

The Company was incorporated in December 1992 and has incurred significant
losses in each of its completed fiscal years. For the nine months ended
September 30, 1996, the Company achieved profitability with net earnings of
approximately $418,000. However, net earnings for this period included $553,000
from the amortization of negative goodwill related to the Company's initial
acquisition of the Cragar assets, a $330,489 extraordinary gain related to the
forgiveness of certain of the Company's debt, and a one-time gain of
approximately $287,000 related to the sale of polishing assets that the Company
had operated in Mexico as well as other equipment. There can be no assurance
that the Company will be profitable in the future. Net sales for the nine months
ended September 30, 1996 declined to $16.1 million from $18.4 million for the
same period of 1995. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." As of September 30, 1996, the Company had
cumulative losses of $6.0 million and a total stockholders' deficit of
approximately $1.1 million. See "Selected Financial Data" and the Financial
Statements.

COVENANT DEFAULTS; DEPENDENCE ON EXTERNAL FINANCING

The Company has a revolving credit facility (the "Credit Facility") with
Norwest Business Credit, Inc. ("Norwest"). The Credit Facility, which extends
through April 15, 1998, has a maximum commitment of $9.5 million, and is subject
to collateral availability at the time of borrowing, financial covenants, and
other conditions. The Credit Facility requires the maintenance of specified
cumulative net income, net worth, and debt service covenants. As of September
30, 1996, the Company was in default under various covenants of the Credit
Facility, including the debt service covenant. On November 22, 1996, Norwest
granted a waiver with respect to these defaults and modified certain of the
covenants under the Credit Facility. The Company believes that the proceeds from
this offering will enhance the Company's ability to meet its covenants under the
Credit Facility in the future. There can be no assurance, however, that the
Company will be able to satisfy the terms and conditions of the Credit Facility
or that the Credit Facility will be extended beyond its current expiration date.
In addition, there can be no assurance that the proceeds from this offering and
cash flow from operations will be sufficient to fund the Company's existing
operations or to enable the Company to implement fully its business strategies
especially in the event that the Company is required to refinance or replace the
Credit Facility. As a result, the Company may need to raise additional funds
through equity or debt financings. No assurance can be given that such
additional financing will be available on terms acceptable to the Company, if at
all. Further, any such financings may result in further dilution to the
Company's stock and higher interest expense and may not be on terms that are
favorable to the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

RISK OF PRODUCT LIABILITY; WARRANTIES AND RETURNS

The nature of the Company's business exposes it to risk from product
liability claims. The Company is currently one of four defendants in a product
liability lawsuit that is not covered by insurance. Pursuant to the Company's
motion for summary judgment, the Court dismissed the Company from all claims in
this lawsuit. The plaintiff has filed a motion for reconsideration. While the
Company is defending itself vigorously in this matter, there can be no assurance
that the ultimate resolution of this case will not result in a material adverse
effect on the Company's business, financial condition, and results of
operations. The Company currently maintains product liability insurance, with
limits of $1.0 million per occurrence and $2.0 million in the aggregate per
annum. However, such coverage is becoming increasingly expensive and difficult
to obtain. There can be no assurance that the Company will be able to maintain
adequate product liability insurance at commercially reasonable rates or that
the Company's insurance will be adequate to cover future product liability
claims. Any losses that the Company may suffer as a result of claims in excess
of the Company's

6
<PAGE> 7

coverage could have a material adverse effect on the Company's business,
financial condition, and results of operations. In addition, product liability
litigation could adversely affect the reputation and marketability of the
Company's products. See "Business -- Legal Proceedings."

The Company maintains stock adjustment and warranty return policies. The
Company's stock adjustment return policy allows the customer to return certain
resalable merchandise for credit. The Company's warranty return policy allows
customers to return certain defective products that are covered under the
Company's limited warranty. There can be no assurance that future warranty
claims, returns, or stock adjustments will not be materially greater than
anticipated and have a material adverse effect on the Company's business,
financial condition, and results of operations. See "Business -- Product Returns
and Warranties."

NO ASSURANCE OF SUCCESSFUL IMPLEMENTATION OF BUSINESS STRATEGIES

The Company's business strategies include (i) increasing its marketing,
advertising, and promotional efforts to further enhance and leverage the
strength of the CRAGAR brand name; (ii) expanding its product distribution
capabilities in underserved markets and broadening its customer base through
aggressive marketing efforts and the establishment of a national accounts
program providing for direct product shipments to mass merchandisers; (iii)
enhancing its existing product line by adapting its wheels and accessories to
fit additional vehicle models, makes, and years and developing new product lines
to meet changing consumer demands; (iv) pursuing strategic acquisitions and
alliances to capitalize on the substantial fragmentation of the market for
custom wheels and wheel accessories; and (v) improving its operating
efficiencies by enhancing its assembly and materials handling and by outsourcing
certain of its production processes. The Company's inability to achieve any of
these goals could have a material adverse effect on the Company's business,
financial condition, and results of operations. See "Business -- Business
Strategy."

The Company's business is directly impacted by certain external factors,
such as the general demand for aftermarket automotive parts, prices for raw
materials used in producing the Company's products, fluctuations in
discretionary consumer spending, and general economic conditions, including
employment levels, business conditions, interest rates, and tax rates. While the
Company believes that current economic conditions favor growth in the markets it
serves, various factors, including those listed above could lead to decreased
sales and increased operating expenses, as in 1995, when the Company's gross
margins were adversely impacted by increased metal prices. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations." There
can be no assurance that various factors will not adversely effect the Company's
business in the future or prevent the Company from successfully implementing its
business strategies.

NO ASSURANCE OF SUCCESSFUL ACQUISITIONS

The Company intends to consider acquisitions of and alliances with other
companies that could complement the Company's existing business, including
acquisitions of complementary product lines. There can be no assurance that
suitable acquisition or joint venture candidates can be identified, or that, if
identified, adequate and acceptable financing sources will be available to the
Company that would enable it to consummate such transactions. Furthermore, there
can be no assurance that the Company will be able to integrate successfully such
acquired companies or product lines into its existing operations, which could
increase the Company's operating expenses in the short-term and materially and
adversely affect the Company's results of operations. Moreover, any acquisition
by the Company may result in potentially dilutive issuances of equity
securities, the incurrence of additional debt, and amortization of expenses
related to goodwill and intangible assets, all of which could adversely affect
the Company's profitability. Acquisitions involve numerous risks, such as the
diversion of the attention of the Company's management from other business
concerns, the entrance of the Company into markets in which it has had no or
only limited experience, and the potential loss of key employees of the acquired
company, all of which could have a material adverse effect on the Company's
business, financial condition, and results of operations. See
"Business -- Business Strategy."

7
<PAGE> 8

BROAD DISCRETION OF MANAGEMENT WITH REGARD TO USE OF PROCEEDS

The proceeds allocated to each category under "Use of Proceeds" are
estimates only and the Company's management will have broad discretion in the
application of such funds without any action or approval of the Company's
stockholders. See "Use of Proceeds."

SUBSTANTIAL PORTION OF USE OF PROCEEDS TO REPAY DEBT

Proceeds of $1,500,000, or approximately 37% of the proceeds to the Company
from this offering, will be used to repay debt, including $550,000 to repay debt
held by certain insiders of the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Bridge Financing Notes" and "Certain Transactions."

VARIABILITY IN OPERATING RESULTS; SEASONALITY

The Company's results of operations have been and will continue to be
subject to substantial variations as a result of a number of factors, any of
which could have a material adverse effect on the Company's business, financial
condition, and results of operations. In particular, the Company's operating
results can vary because of the size and timing of customer orders, delays in
new product enhancements and new product introductions, vendor quality control
and delivery difficulties, market acceptance of new products, product returns,
product rebates and allowances, seasonality in product purchases by distributors
and end users, and pricing trends in the automotive aftermarket industry in
general and in the specific markets in which the Company participates.
Historically, the Company's net sales have been highest in the first and second
quarters of each year. Significant variability in orders during any period may
have an adverse impact on the Company's cash flow or work flow, and any
significant decrease in orders could have a material adverse effect on the
Company's results of operations. The Company believes that any period-to-period
comparisons of its financial results are not necessarily meaningful and should
not be relied upon as an indication of future performance. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

CHANGING CUSTOMER TRENDS; NEED FOR PRODUCT DEVELOPMENT

The Company's success depends, in part, on its ability to correctly and
consistently anticipate, gauge, and respond in a timely manner to changing
consumer preferences. There can be no assurance that the Company's core products
will continue to enjoy acceptance among consumers or that any of the Company's
future product offerings will achieve or maintain market acceptance. The Company
attempts to minimize the risks relating to changing consumer trends by offering
a wide variety of product styles, analyzing consumer purchases, maintaining
active product development efforts, and monitoring the sales performance of its
various product lines. However, any misjudgment by the Company of the market for
a particular product, or its failure to correctly anticipate changing consumer
preferences, could have a material adverse effect on its business, financial
condition, and results of operations. In order to enhance its product
development efforts, the Company plans to supplement its existing product
development staff by hiring one or more new employees with product development
experience and by engaging an outside consultant to assist the Company's product
development staff. See "Business -- Product Development." There can be no
assurance that the Company will be able to attract and retain such additional
personnel or that the costs associated with additional product development
efforts will not have an adverse effect on the Company's business, financial
condition, and results of operations.

DEPENDENCE ON KEY DISTRIBUTORS; IMPLEMENTATION OF NEW DISTRIBUTION CHANNELS

A limited number of customers have accounted for a substantial portion of
the Company's revenue in each year. The financial condition and success of its
current customers and the Company's ability to obtain orders from new customers
are critical to the Company's success. During 1995, the Company's ten largest
customers accounted for a total of approximately 70.4% of its gross sales, with
Super Shops, J. H. Heafner Company, Inc., and B & R Wholesale Tire accounting
for 23.6%, 11.8%, and 9.5% of gross sales, respectively. For the nine months
ended September 30, 1996, the Company's ten largest customers accounted for a
total of approximately 75.5% of gross sales, with Super Shops, J. H. Heafner
Company, Inc., and B & R Wholesale Tire accounting for 26.6%, 12.3%, and 8.6%,
respectively. As a result of the Company's decision not to meet competitors'
pricing on steel wheels, the Company expects sales of steel wheels to J. H.
Heafner Company, Inc. to decrease in the future. The Company does not have any
long-term contractual relationships with any of

8
<PAGE> 9

its major customers. While the Company's business strategy calls for it to
expand its product distribution capabilities to additional markets and to
broaden its customer base so that it can become less dependent on significant
customers, any loss, material reduction, or delay of orders by any of the
Company's major customers, including reductions as a result of market, economic,
or competitive pressures in the automotive aftermarket industry, could adversely
affect the Company's business, financial condition, and results of operations.

DEPENDENCE ON THIRD PARTY SUPPLIERS

The Company's business depends upon the assembly of component parts and the
shipment of finished wheels and wheel accessories from third-party suppliers.
From time to time, the Company has experienced delays in the delivery of
component parts and finished products from vendors. In addition, one of the
Company's significant suppliers is located in China, which from time to time has
been subject to numerous trading restrictions by the United States. The Company
also has suppliers in Indonesia, the Philippines, and Taiwan. The purchase of
materials from foreign suppliers may be adversely affected by political and
economic conditions abroad over which the Company has no control. Although to
date the Company has generally been able to acquire adequate supplies of such
components and finished product in a timely manner, any extended interruption in
supply, significant increase in the price, or reduction in the quality of such
components could have a material adverse effect on the Company's business,
financial condition, and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The Company has
begun to outsource selectively the production of some of its products and may
increase such outsourcing in the future. While the Company anticipates that such
outsourcing programs will stabilize costs and shift certain inventory, warranty,
and other risks to its suppliers, there can be no assurance that the continued
or increased outsourcing of its products will have these desired effects.

HIGHLY COMPETITIVE INDUSTRY

The market for the Company's products is highly competitive. The Company
competes primarily on the basis of product selection (which includes style and
vehicle fit), timely availability of product for delivery, quality, design
innovation, price, payment terms, and service. Many of the Company's competitors
have substantially greater financial, personnel, marketing, and other resources
than the Company. Increased competition could result in price reductions (which
may be in the form of rebates or allowances), reduced margins, and loss of
market share, all of which could have a material adverse effect on the Company's
business, financial condition, and results of operations. See
"Business -- Competition."

REGULATORY COMPLIANCE

The Company is subject to various federal and state governmental
regulations related to occupational safety and health, labor, and wage practices
as well as federal, state, and local governmental regulations relating to the
storage, discharge, handling, emission, generation, manufacture, and disposal of
toxic or other hazardous substances used to produce the Company's products. The
Company believes that it is currently in material compliance with such
regulations. Failure to comply with current or future environmental regulations
could result in the imposition of substantial fines on the Company, suspension
of production, alteration of its production processes, cessation of operations,
or other actions which could materially and adversely affect the Company's
business, financial condition, and results of operations. In the ordinary course
of its business, the Company uses metals, oils, and similar materials, which are
stored on site. The waste created by use of these materials is transported
off-site on a regular basis by a state-registered waste hauler. Although the
Company is not aware of any material claim or investigation with respect to
these activities, there can be no assurance that such a claim may not arise in
the future or that the cost of complying with governmental regulations in the
future will not have a material adverse effect on the Company.

RELIANCE ON INTELLECTUAL PROPERTY

The Company owns the rights to certain trademarks and patents, relies on
trade secrets and proprietary information, technology, and know-how, and seeks
to protect this information through agreements with employees and vendors. There
can be no assurance that the Company's patents will preclude the Company's

9
<PAGE> 10

competitors from designing competitive products, that proprietary information or
confidentiality agreements with employees and others will not be breached, that
the Company's patents will not be infringed, that the Company would have
adequate remedies for any breach or infringement, or that the Company's trade
secrets will not otherwise become known to or independently developed by
competitors. See "Business -- Intellectual Property."

RISKS ASSOCIATED WITH INTERNATIONAL SALES; CURRENCY FLUCTUATIONS

As part of the Company's business strategy, it intends to expand into
selected international markets. In 1995 and during the nine-month period ended
September 30, 1996, the Company derived approximately 5.4% and 6.2%,
respectively, of total gross sales from international markets. The Company's
international sales efforts are subject to the customary risks of doing business
abroad, including exposure to regulatory requirements, political and economic
instability, barriers to trade, trade restrictions (including import quotas),
tariff regulations, foreign taxes, restrictions on transfer of funds, difficulty
in obtaining distribution and support, and export licensing requirements, any of
which could have a material adverse effect on the Company's operations. In
addition, a weakening in the value of foreign currencies relative to the U.S.
dollar and fluctuations in foreign currency exchange rates could have an adverse
impact on the price of the Company's products in its international markets. See
"Business -- Distribution, Sales and Marketing."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of a substantial number of shares of the Common Stock in the public
market following this offering or the prospect of such sales could adversely
affect the market price of the Common Stock. Upon completion of this offering,
the Company will have outstanding 2,140,305 shares of Common Stock (including
359,722 shares of Common Stock issuable upon the conversion of outstanding notes
that are automatically convertible into Common Stock upon the completion of this
offering). Of these shares, the 850,000 shares of Common Stock offered hereby
are immediately eligible for sale in the public market without restriction,
except for shares purchased at any time by any "affiliate" of the Company, as
such term is defined in Rule 144 under the Securities Act of 1933, as amended
(the "Securities Act"). Directors, officers, and certain principal stockholders
of the Company owning a total of 765,711 shares of Common Stock and 133,837
currently outstanding options and warrants will sign lock-up agreements under
which such holders will agree not to offer, sell, or otherwise dispose of any of
their shares of Common Stock that might otherwise be eligible for sale for a
period of 12 months after the date of this Prospectus without the prior written
consent of the Representative. All remaining stockholders of the Company owning
524,594 shares of Common Stock, and holders of 164,926 presently outstanding
options and warrants, have agreed to three-month lock-up periods. Upon the
expiration of the lock-up agreements, these securities will become eligible for
sale in the public market, subject to the provisions of Rule 144. In addition,
the Company intends to file a registration statement under the Securities Act,
after the date of this Prospectus, covering the sale of shares to be issued
pursuant to the Company's 1996 Stock Option and Restricted Stock Plan and the
1996 Non-Employee Directors' Option Plan. See "Description of
Securities -- Shares Eligible for Future Sale."

CONTROL BY EXISTING STOCKHOLDERS

Upon the completion of this offering, the directors, officers, and
principal stockholders of the Company will own approximately 47% of the
Company's outstanding Common Stock as well as options and warrants to purchase
an additional 198,739 shares. As a result, these persons will have a significant
influence on the affairs and management of the Company, as well as on all
matters requiring stockholder approval, including electing and removing members
of the Company's Board of Directors, causing the Company to engage in
transactions with affiliated entities, causing or restricting the sale or merger
of the Company, and changing the Company's dividend policy. Such concentration
of ownership and control could have the effect of delaying, deferring, or
preventing a change in control of the Company even when such a change of control
would be in the best interest of the Company's other stockholders. See
"Management," "Principal Stockholders" and "Description of Capital Stock."

10
<PAGE> 11

EFFECT OF PREFERRED STOCK ON RIGHTS OF COMMON STOCK

The Company's Amended and Restated Certificate of Incorporation authorizes
the Board of Directors of the Company to issue "blank check" Preferred Stock,
the relative rights, powers, preferences, limitations, and restrictions of which
may be fixed or altered from time to time by the Board of Directors.
Accordingly, the Board of Directors is empowered, without stockholder approval,
to issue Preferred Stock with dividend, liquidation, conversion, voting, or
other rights that could adversely affect the voting power and other rights of
the holders of Common Stock. The Preferred Stock could be utilized, under
certain circumstances, as a method of discouraging, delaying, or preventing a
change in control of the Company that stockholders might consider to be in the
Company's best interests. Although the Company has no present intention of
issuing any shares of its authorized Preferred Stock, there can be no assurance
that the Company will not do so in the future. See "Description of Capital
Stock -- Preferred Stock."

DEPENDENCE ON KEY PERSONNEL

The Company's future success depends, in large part, on the efforts and
abilities of its management team, including Michael L. Hartzmark, Ph.D., its
President, Chief Executive Officer, and Treasurer. The loss of the services of
Dr. Hartzmark could have a material adverse effect on the business of the
Company. While Dr. Hartzmark does not have an employment agreement with the
Company, Dr. Hartzmark and his family currently hold over 21.2% of the Company's
Common Stock and will own over 13.0% of the Company's Common Stock immediately
following the offering. See "Principal Stockholders." The successful
implementation of the Company's business strategies depends on the hiring and
retention of additional management, engineering, marketing, product development,
and other personnel. There can be no assurance that the Company will be able to
identify and attract additional qualified management and other personnel when
needed or that the Company will be successful in retaining such additional
management and personnel if added. Moreover, there can be no assurance that the
additional costs associated with the hiring of additional personnel will not
adversely effect the Company's results of operations. The Company does not
maintain key man life insurance on any of its personnel. See "Management."

ARBITRARY DETERMINATION OF OFFERING PRICE; ABSENCE OF PUBLIC MARKET AND POSSIBLE
VOLATILITY OF STOCK PRICE

The initial public offering price of the Common Stock offered hereby will
be determined through negotiations between the Company and the Representative
and may not necessarily bear any relationship to the assets or earnings of the
Company. See "Underwriting." Prior to this offering, there has been no public
market for the Common Stock. There can be no assurance that an active trading
market will develop after completion of this offering or, if developed, that it
will be sustained. There can be no assurance that the market price of the Common
Stock will not decline below the initial offering price. The securities of many
emerging companies have experienced significant price and volume fluctuations
that are, at times, unrelated or disproportionate to the operating performance
of such companies. Such fluctuations may be the result of changes in conditions
affecting the economy in general, analysts' reports, general trends in the
industry, and other events or factors beyond the Company's control. These
conditions may have a material adverse effect on the market price of the Common
Stock.

DILUTION

Purchasers of the Securities offered hereby will incur immediate and
substantial dilution in net tangible book value of the Common Stock of $3.41 per
share, or approximately 57% from the initial public offering price of $6.00 per
share. The exercise of outstanding warrants and options will also have an
additional dilutive effect on the interests of the purchasers of the Securities.
See "Dilution."

EFFECT OF REPRESENTATIVE'S WARRANTS

The Company has agreed to issue to the Representative or its designee
warrants (the "Representative's Warrants") to purchase up to 85,000 shares of
Common Stock and 85,000 Warrants (the "Underlying Warrants"). The terms and
conditions of the Underlying Warrants are substantially identical to those of
the Warrants offered hereby. The Representative's Warrants, however, will not be
redeemable by the Company and are not exercisable until one year after the date
of this Prospectus. The Representative's Warrants will be

11
<PAGE> 12

exercisable for a period of four years commencing one year after the date of
this Prospectus at an exercise price of 125% of the initial public offering
price. The Representative and its designees will have the opportunity to profit
from an increase in the price of the Company's Common Stock during the term of
the Representative's Warrants and are likely to exercise them at a time when the
Company, in all likelihood, would be able to obtain additional capital by
offering shares of its Common Stock on terms more favorable to the Company than
those provided by the exercise of such warrants. In addition, the existence of
such warrants may adversely affect the terms on which the Company can obtain
additional financing. See "Description of Securities" and "Underwriting."

LIMITED LIABILITY OF DIRECTORS

The Company's Certificate of Incorporation provides, with certain
exceptions, that the Company's directors will not be personally liable for
monetary damages for breach of the directors' fiduciary duty of care to the
Company or its stockholders. This provision does not eliminate the duty of care,
and in appropriate circumstances equitable remedies such as an injunction or
other forms of nonmonetary relief would remain available under Delaware law.
This provision also does not affect a director's responsibilities under any
other laws, such as the federal securities laws or state or federal
environmental laws. See "Description of Securities -- Certain Certificate of
Incorporation Provisions."

NO DIVIDENDS

The Company has never paid dividends on its Common Stock and does not
anticipate that it will pay dividends in the foreseeable future. It is
contemplated that any earnings will be used to finance the growth of the
Company's business. In addition, the Company's Credit Facility with Norwest
prohibits the payments of cash dividends without Norwest's consent. See
"Dividend Policy."

LISTING AND MAINTENANCE CRITERIA FOR SECURITIES; PENNY STOCK RULES

The Common Stock and Warrants have been approved for quotation on the
Nasdaq SmallCap Market and for listing on the Boston Stock Exchange upon
completion of this offering. There can be no assurance that the Company in the
future will meet the requirements for continued listing on the Nasdaq SmallCap
Market or the Boston Stock Exchange with respect to the Common Stock or
Warrants. If the Common Stock or the Warrants fail to maintain such listings,
the market value of the Common Stock and Warrants likely would decline and
purchasers in this offering likely would find it more difficult to dispose of,
or to obtain accurate quotations as to the market value of, the Common Stock and
Warrants.

In addition, if the Company fails to maintain Nasdaq SmallCap Market
listing for its securities, and no other exclusion from the definition of a
"penny stock" under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") is available, then any broker engaging in a transaction in the
Company's securities would be required to provide any customer with a risk
disclosure document, disclosure of market quotations, if any, disclosure of the
compensation of the broker-dealer and its salesperson in the transaction, and
monthly account statements showing the market values of the Company's securities
held in the customer's accounts. The bid and offer quotation and compensation
information must be provided prior to effecting the transaction and must be
contained on the customer's confirmation. If brokers become subject to the
"penny stock" rules when engaging in transactions in the Company's securities,
they would become less willing to engage in such transactions, thereby making it
more difficult for purchasers in this offering to dispose of Common Stock and
Warrants. See "Financial Statements."

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

This Prospectus contains forward-looking statements including statements
regarding, among other items, the Company's business strategies, continued
growth in the Company's markets, and anticipated trends in the Company's
business and the industry in which it operates. The words "believe," "expect,"
"anticipate," "intends," "forecast," "project," and similar expressions identify
forward-looking statements. These forward-

12
<PAGE> 13

looking statements are based largely on the Company's expectations and are
subject to a number of risks and uncertainties, certain of which are beyond the
Company's control. Actual results could differ materially from these
forward-looking statements, as a result of the factors described under "Risk
Factors" and elsewhere herein, including among others, regulatory or economic
influences. In light of these risks and uncertainties, there can be no assurance
that the forward-looking information contained in this Prospectus will in fact
transpire or prove to be accurate. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by this section.

13
<PAGE> 14

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 850,000 shares of
Common Stock and the 850,000 Warrants offered hereby are estimated to be
$4,100,000, after deducting underwriting discounts and commissions and estimated
offering expenses. The Company anticipates that the net proceeds will be used
substantially as follows:

<TABLE>
<CAPTION>
PERCENT OF
APPLICATION OF NET PROCEEDS DOLLAR AMOUNT NET PROCEEDS
---------------------------------------------------------- ------------- ------------
<S> <C> <C>
Repay debt(1)............................................. $ 1,500,000 37%
Increase marketing and promotion(2)....................... 1,000,000 24%
Enhance existing products and develop new products(3)..... 600,000 15%
Improve facilities(4)..................................... 250,000 6%
Improve tooling and fixtures(5)........................... 250,000 6%
General corporate purposes................................ 500,000 12%
---------- ---
Total........................................... $ 4,100,000 100%
========== ===
</TABLE>

- ---------------
(1) The Company intends to use $1,500,000 of the net proceeds to repay certain
promissory notes privately issued by the Company on July 1, 1996 (the
"Bridge Notes"). See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital
Resources -- Bridge Financing Notes." The Bridge Notes are due in full on
June 30, 1998 or earlier in certain circumstances, including within 30 days
following this offering. The Bridge Notes bear interest at the rate of 8%
per annum payable on June 30 of each year. The Company used $779,727 of the
proceeds from the issuance of the Bridge Notes to satisfy a $1,110,216
obligation to one of its creditors. See "Certain Transactions."

(2) The Company intends to increase its marketing, advertising, and promotional
efforts, including an increased emphasis on the sponsorship of professional
and amateur drag race events, increased public relation efforts, and the
development of distinctive point-of-purchase displays. In addition, the
Company will pursue licensing arrangements to feature its brand names on
high-quality automotive aftermarket and other products. See
"Business -- Strategy."

(3) The Company intends to adapt its current selection of wheels and accessories
to fit additional vehicle models, makes, and years. In addition, the Company
intends to continue to increase its product development efforts. Such
product development efforts will include the research of new technologies,
such as carbon fiber race wheels, new coating processes, and new bonding
techniques.

(4) The Company intends to upgrade its facilities, improve its manufacturing and
computer systems, improve its material handling operations, and install a
new telephone system.

(5) The Company intends to acquire new machinery and assembly equipment,
machinery to automate certain processes, new tooling and fixtures, and new
bar coding and boxing machinery.

Pending the uses described herein, the net proceeds may be applied to
reduce the debt outstanding under the Credit Facility with Norwest. The
foregoing represents the Company's present intentions with respect to the
allocation of the proceeds of this offering based upon its present plans and
business conditions. However, the occurrence of certain unforeseen events or
changed business conditions could result in the application of the proceeds of
this offering in a manner other than as described in this Prospectus. In this
regard, although the Company is not currently a party to any agreement or
understanding with respect to any prospective acquisition, the Company may use
portions of the net proceeds to finance acquisitions of complementary
businesses, products or technologies, or other assets, if attractive
opportunities arise. See "Risk Factors."

14
<PAGE> 15

DILUTION

Dilution is determined by subtracting net tangible book value per share
after the offering from the amount of cash paid by investors for the shares of
Common Stock. Net tangible book value per share represents the amount of total
tangible assets less total liabilities, divided by the number of shares of
Common Stock issued and outstanding.

The net tangible book value of the Common Stock at September 30, 1996,
assuming conversion on that date of certain of the Company's outstanding notes
that will be automatically converted into 359,722 shares of Common Stock upon
the consummation of this offering, was approximately $1,452,279, or $1.13 per
share. After giving effect to the sale of the 850,000 shares of Common Stock
offered hereby (at the initial public offering price of $6.00 per share, and
after deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company) and the application of the net proceeds
therefrom, and assuming no other changes in the net tangible book value after
September 30, 1996, the Company's pro forma net tangible book value at September
30, 1996 would have been approximately $5,552,279, or $2.59 per share. This
represents an immediate increase in pro forma net tangible book value of $1.46
per share to existing stockholders and an immediate decrease in pro forma net
tangible book value to new investors of $3.41 per share. The following table
illustrates the per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share.............................. $6.00
Net tangible book value per share before this offering............. $1.13
Increase per share attributable to new investors................... $1.46
-----
Net tangible book value per share after this offering................ $2.59
-----
Dilution per share to new investors.................................. $3.41
=====
</TABLE>

The following table summarizes, as of September 30, 1996, the differences
in the total consideration and the average price per share of Common Stock paid
or contributed by existing stockholders and the total consideration and the
average price per share of Common Stock to be paid by investors in this
offering:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)............... 1,290,305 52.0% $ 6,675,245 52.4% $5.17
Exercise of outstanding warrants and
options(2)........................... 340,763 13.7% $ 968,693 7.6% $2.84
New investors(3)....................... 850,000 34.3% $ 5,100,000 40.0% $6.00
--------- ----- ----------- -----
Total........................ 2,481,068 100.0% $12,743,938 100.0%
========= ===== =========== =====
</TABLE>

- ---------------
(1) Assumes conversion of certain of the Company's outstanding notes that are
automatically convertible into 359,722 shares of Common Stock upon
completion of this offering.

(2) Includes the following items: (i) 122,063 shares of Common Stock issuable
upon exercise of Class A Warrants at an exercise price of $1.43 per share;
(ii) 24,500 shares of Common Stock issuable upon exercise of Class B
Warrants at an exercise price of $0.36 per share; (iii) 126,000 shares of
Common Stock issuable upon exercise of Class C Warrants at an exercise price
of $3.25 per share; (iv) 11,900 shares of Common Stock issuable upon
exercise of Non-Employee Director Options at an exercise price of $5.14 per
share; and (v) 56,300 shares of Common Stock issuable upon exercise of
Employee Options and Non-Employee Director Options at an exercise price of
$5.60 per share. See "Description of Securities."

(3) Assumes that neither the 850,000 Warrants offered hereby nor the
Representative's Warrants are exercised.

15
<PAGE> 16

DIVIDEND POLICY

The Company has never paid or declared any cash dividends on the Common
Stock and does not intend to pay cash dividends in the foreseeable future. It is
the current policy of the Company's Board of Directors to retain any earnings to
finance the operations of the Company's business. In addition, the Company's
Credit Facility with Norwest prohibits the payment of dividends by the Company
without the prior written consent of Norwest.

CAPITALIZATION

The following table sets forth (i) the actual capitalization of the Company
at September 30, 1996, and (ii) the pro forma capitalization of the Company,
which assumes the conversion of certain of the Company's outstanding notes that
will be automatically converted into 359,722 shares of Common Stock upon the
completion of this offering, as adjusted to give effect to the sale of the
850,000 shares of Common Stock and the 850,000 Warrants offered hereby and the
application of the estimated net proceeds therefrom in the manner described in
"Use of Proceeds."

<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
(UNAUDITED)
-----------------------
PRO FORMA
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS, EXCEPT
FOR SHARE AMOUNTS)
<S> <C> <C>
Long-term debt......................................................... $ 8,934 $ 5,584
Stockholders' equity:
Preferred Stock, $0.01 par value; 200,000 shares authorized; none
issued and outstanding............................................ -- --
Common Stock, $0.01 par value; 5,000,000 shares authorized; 930,583
issued and outstanding, actual; 2,140,305 issued and outstanding,
pro forma, as adjusted(1)......................................... 1 13
Additional paid-in capital............................................. 4,862 10,800
Accumulated deficit.................................................... (6,012) (6,012)
------- -------
Total stockholders' equity (deficit)......................... (1,149) 4,801
------- -------
Total capitalization......................................... $ 7,785 $10,385
======= =======
</TABLE>

- ---------------
(1) Includes 359,722 shares of Common Stock issuable upon the conversion of
certain of the Company's outstanding notes that will be automatically
converted upon the completion of this offering. Excludes shares of Common
Stock issuable upon the exercise of (i) the 850,000 Warrants offered hereby;
(ii) the Representative's Warrants; (iii) outstanding options and warrants
to purchase up to 340,763 shares of Common Stock; and (iv) the Underwriters'
over-allotment option. See "Management -- Option Grants," "Description of
Securities," and "Underwriting."

16
<PAGE> 17

SELECTED FINANCIAL DATA

The following selected statements of operations data for each of the years
in the two-year period ended December 31, 1995, and the balance sheet data as of
December 31, 1995, are derived from the Financial Statements and Notes thereto
included elsewhere herein audited by KPMG Peat Marwick LLP, independent
certified public accountants. The unaudited selected statements of operations
data for the nine-month periods ended September 30, 1995 and 1996, and the
unaudited balance sheet data as of September 30, 1996 and September 30, 1996 as
adjusted, are derived from unaudited financial statements of the Company, which
have been prepared on the same basis as the audited financial statements and, in
the opinion of management, include all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the Company's
financial position and results of operations. The results of operations for any
interim period are not necessarily indicative of results to be expected for a
full fiscal year. The following data is qualified in its entirety by, and should
be read in conjunction with, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements of the Company
and related Notes thereto included elsewhere in this Prospectus.

SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- ---------------------------
1994 1995 1995 1996
------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales...................................... $20,270 $22,936 $18,375 $16,056
------- ------- ------- -------
Gross profit................................... 3,103 2,646 2,564 2,082
------- ------- ------- -------
Selling, general and administrative expenses... 3,888 2,912 2,159 1,963
Amortization of excess of fair value of assets
acquired over cost........................... (738) (738) (553) (553)
------- ------- ------- -------
Income (loss) from operations.................. (47) 472 958 673
Interest and other expenses, net............... 1,510 1,165 891 582
------- ------- ------- -------
Income (loss) before income taxes and
extraordinary item........................... (1,557) (693) 67 91
Provision for income taxes..................... -- -- -- 3
------- ------- ------- -------
Income (loss) before extraordinary item........ (1,557) (693) 67 88
Extraordinary item............................. 1,107 -- -- 330
------- ------- ------- -------
Net earnings (loss)(4)......................... $ (450) $ (693) $ 67 $ 418
======= ======= ======= =======
Income (loss) per common equivalent share
before extraordinary item.................... $ (1.38) $ (.60) $ .06 $ .07
======= ======= ======= =======
Net earnings (loss) per common and common
equivalent share............................. $ (0.40) $ (0.60) $ 0.06 $ 0.35
======= ======= ======= =======
Net earnings (loss) per common
share -- assuming full dilution.............. --(1) --(1) $ 0.05 $ 0.28
======= =======
Weighted average common and common equivalent
shares outstanding........................... 1,124 1,158 1,152 1,178
======= ======= ======= =======
Weighted average common shares outstanding --
assuming full dilution....................... --(1) --(1) 1,443 1,470
======= =======
</TABLE>

17
<PAGE> 18

<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
(UNAUDITED)
--------------------------
DECEMBER 31, PRO FORMA
1995 ACTUAL AS ADJUSTED(2)
------------ ------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................ $ 8,353 $ 7,154 $ 9,254
Total assets........................................... 13,966 12,652 15,252
Long-term debt(3)...................................... 10,531 8,934 5,584
Excess of fair value of assets acquired over cost...... 1,475 922 922
Stockholders' equity (deficit)......................... (1,604) (1,149) 4,801
</TABLE>

- ---------------
(1) Amounts are not disclosed as the impact of options, warrants, and the
convertible debt was anti-dilutive.

(3) Does not include excess of fair value of assets acquired over cost. See Note
3 of Notes to Financial Statements. See Notes 9, 10, 11 and 16 of Notes to
Financial Statements for a description of the Company's long-term debt and
lease obligations.

18
<PAGE> 19

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis provides information regarding the
Company's financial position as of December 31, 1994 and 1995 and September 30,
1995 and 1996, and its results of operations for the years ended December 31,
1994 and 1995 and the nine months ended September 30, 1995 and 1996. This
discussion should be read in conjunction with the preceding "Selected Financial
Data" and the Company's Financial Statements and related Notes thereto and other
financial data appearing elsewhere in this Prospectus. In the opinion of
management, such unaudited interim data reflect all adjustments, consisting only
of normal recurring adjustments, necessary to fairly present the Company's
financial position and results of operations for the periods presented. The
results of operations for any interim period are not necessarily indicative of
results expected for a full fiscal year. For information relating to factors
that could affect future operating results, see "Risk Factors." Any
forward-looking statements included in this Prospectus should be considered in
light of such factors, as well as the information set forth below.

INTRODUCTION

The Company designs, produces, and sells high-quality custom vehicle wheels
and wheel accessories. The Company possesses one of the most widely recognized
brand names in the automotive aftermarket industry. The Company markets a wide
selection of custom wheels and components that are designed to appeal to
automotive enthusiasts who desire to modify the styling, design, or performance
of their cars, trucks, or vans. CRAGAR sells its wheel products in the
automotive aftermarket through a national distribution network of value-added
resellers, including tire and automotive performance warehouse distributors and
retailers and mail order houses.

Traditionally, the Company's ten largest customers have accounted for a
substantial portion of the Company's gross sales. During the nine months ended
September 30, 1996, the Company's ten largest customers accounted for a total of
approximately 75.5% of the Company's gross sales. During 1995 and for the nine
months ended September 30, 1996, the Company's largest customers were Super
Shops (23.6% of gross sales in 1995 and 26.6% for the nine months ended
September 30, 1996), J. H. Heafner Company, Inc. (11.8% of gross sales in 1995
and 12.3% for the nine months ended September 30, 1996), and B&R Wholesale Tire
(9.5% of gross sales in 1995 and 8.6% for the nine months ended September 30,
1996). There can be no assurance that the Company will be able to maintain or
increase the level of its sales in the future to these or other customers. As a
result of the Company's decision not to meet competitors' pricing on steel
wheels, the Company expects sales of steel wheels to J. H. Heafner Company, Inc.
to decrease in the future.

The Company was formed in 1992 to acquire in a leveraged buyout certain
assets, including the accounts receivable, inventory, property, equipment,
patents, trademarks, and copyrights, from the Wheel and Tire Division of Mr.
Gasket Company, Inc., which had filed for reorganization. The fair value of the
net assets acquired exceeded the final purchase price, and, accordingly, the
fair value of the property and equipment, patents, trademarks, and copyrights
acquired was reduced to zero. The remaining balance of $3,687,341 was classified
as excess of fair value of assets acquired over cost (commonly referred to as
negative goodwill) and is being amortized to income over five years using the
straight-line method ($737,468 per annum through December 31, 1997).

19
<PAGE> 20

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the percentage
of net sales represented by certain items included in the Company's Statements
of Operations.

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED SEPTEMBER
DECEMBER 31 30
--------------- -----------------
1994 1995 1995 1996
------ ------ ------- -------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales................................................. 100.0% 100.0% 100.00% 100.00%
Costs of goods sold....................................... 84.7 88.5 86.0 87.0
------ ------ ------- -------
Gross profit.............................................. 15.3 11.5 14.0 13.0
Selling, general and administrative expenses.............. (19.2) (12.7) (11.8) (12.2)
Amortization of excess of fair value of assets acquired
over cost............................................... 3.6 3.2 3.0 3.4
------ ------ ------- -------
Income (loss) from operations............................. (0.3) 2.0 5.2 4.2
Interest and other expenses, net.......................... (7.4) (5.0) (4.8) (3.6)
Extraordinary gain........................................ 5.5 0.0 0.0 2.1
------ ------ ------- -------
Net earnings (loss)....................................... (2.2) (3.0) 0.4 2.7
====== ====== ======= =======
</TABLE>

COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1996 AND NINE MONTHS ENDED
SEPTEMBER 30, 1995

Net sales consist of gross sales less discounts, returns, and allowances.
Net sales for the nine months ended September 30, 1996 were $16,056,074 compared
to $18,374,847 for the same period in 1995, representing a 12.6% decline in
sales. The decrease in net sales was attributable, in part, to the fact that the
Company sold a large amount of excess inventory in 1995 compared to 1996. In
addition, the Company accrued a larger amount of cash rebates and discounts
during the nine months ended September 30, 1996 versus the same period in 1995.
Other factors contributing to the decrease in net sales included the loss of a
significant customer as a result of its acquisition by a wheel distributor that
historically has purchased wheels from one of the Company's competitors, a
reduction in purchases from another customer pending a change in ownership, and
an overall reduction in sales in the performance segment of the automotive
aftermarket.

Gross profit is determined by subtracting cost of goods sold from net
sales. Costs of goods sold consists primarily of the costs of labor, aluminum,
steel, raw materials, overhead, and material processing used in the production
of the Company's products. Gross profit for the nine months ended September 30,
1996 was $2,082,036 versus $2,564,422 for the same period in 1995. As a
percentage of net sales, gross profit decreased in the 1996 period, compared to
the same period in 1995, from 14.0% to 13.0%. The decreases in gross profit both
in absolute dollars and as a percentage of sales reflected the overall decrease
in sales, a change in the Company's product mix toward certain lower margin
items, and increased cash discounts and rebates during 1996 versus the same
period in 1995. Gross profit for the quarter ended September 30, 1996 was
$151,094 versus $571,691 for the same period in 1995. As a percentage of net
sales, gross profit decreased to 4.3% in the third quarter of 1996 as compared
to 12.5% in the same period in 1995. The decreases in gross profit both in
absolute dollars and as a percentage of net sales reflected all of the same
factors that impacted gross profit for the nine month periods, noted above, as
well as increases in freight costs due to freight surcharges and customs duties
during 1996 versus the same period in 1995.

In an effort to increase gross profits, the Company is taking steps to
increase its marketing and promotional efforts to increase sales. In addition,
the Company is focusing on reducing its costs, with particular emphasis on the
selected outsourcing of certain product and component manufacturing. Beginning
in April 1996, the Company began purchasing fully assembled steel wheels through
a formal supply arrangement with one of its vendors. Approximately 16.8% of the
Company's gross sales during the first nine months of 1996 were attributable to
the sale of steel wheels. See "Business -- Products." Late in the second quarter
of 1996, the Company began using machine shops in California to process certain
components that had previously been manufactured in California, shipped to
Phoenix for additional processing, and then shipped back to California for
certain processing. The Company anticipates that the resulting reduction of in-
bound freight costs and the reduction in inventory levels will lead to lower
costs. However, the Company also expects its gross profits and overall results
of operations to vary from period to period based upon a variety of factors
including changes in order levels from customers, the timing of orders, changes
in product mix and other factors.

20
<PAGE> 21

Selling, general, and administrative ("SG&A") expenses consist primarily of
commissions, marketing expenses, promotional programs, salaries and wages,
product development expenses, office expenses, accounting and legal expenses,
and general overhead. These expenses for the nine months ended September 30,
1996 were $1,962,508 compared to $2,159,321 for the same period in 1995. The
9.1% reduction in such expenses was primarily due to the impact of cost saving
efforts implemented by the Company during the fourth quarter of 1995, including
reduced advertising expenses and decreased utilization of employee overtime. The
Company expects that future SG&A expenses will increase in absolute amounts and
possibly in proportion to net sales resulting, in part, from anticipated
increases in costs associated with advertising and marketing promotional
activities, increased product development activities, the hiring of additional
personnel, and compliance with the reporting and other requirements of a public
company.

Interest and other expenses, net, for the nine-month period ended September
30, 1996 were $582,058 compared to $890,703 for the same period in 1995. In
1996, the Company recognized a one-time gain in the amount of approximately
$287,000 in connection with the sale of polishing assets that the Company had
operated in Mexicali, Mexico as well as other equipment. In connection with the
Company's repurchase of a promissory note on July 1, 1996 in the amount of
approximately $1.1 million, the Company recognized an extraordinary gain in the
amount of $330,000. See "Certain Transactions."

Because of its carry-forward losses from previous years, the Company had no
income tax provision in 1995 and had a $3,344 provision for alternative minimum
taxes in the first nine months of 1996.

Net earnings for the nine-month period ended September 30, 1996 were
$417,716 compared to $67,499 for the same period in 1995, an increase of
$350,217. Of this increase, $88,633 was attributable to reductions in the
allowance for doubtful accounts and inventory obsolescence reserves resulting
from the write-off of delinquent accounts, improved aging of accounts
receivable, and the continued disposal of excess inventory. Net earnings for
each of the nine-month periods ended September 30, 1996, and September 30, 1995,
included $553,101 of negative goodwill. See " -- Introduction."

COMPARISON OF THE YEAR ENDED DECEMBER 31, 1995 AND THE YEAR ENDED DECEMBER 31,
1994

Net sales for the year ended December 31, 1995 were $22,935,773 compared to
$20,269,936 for the same period in 1994, an increase of $2,665,837, or 13.2%.
The Company attributes this increase to additional product offerings in 1995
compared to 1994, continued growth of its customer base, and more efficient
distribution of its product to its customers.

Gross profit for the year ended December 31, 1995 was $2,646,426 compared
to $3,103,386 for the same period in 1994, a decrease of $456,960, or 14.7%. As
a percent of sales, gross margin decreased to 11.5% in 1995 from 15.3% in 1994.
In part, this decrease in gross profit was attributable to increased reserves
for accrued rebates, cash discounts, allowances, and returns, and to a program
to reduce excess inventory. In addition, this decrease was attributable to
increases in metal prices. Currently, the Company does not purchase forward
contracts for metals and, therefore, any future increase in metals prices could
adversely affect the Company's gross profit. The Company has entered into a
supply agreement to purchase fully assembled steel wheels, at agreed upon
prices, designed to improve the gross profit for this portion of its business.

SG&A expenses for the year ended December 31, 1995 were $2,912,393 compared
to $3,887,756 for the same period in 1994, a decrease of 25.1%. The Company
attributes this decrease in part to a reduction in the Company's administrative
and sales staffs as well as a reduction in outside sales representatives. In
fiscal 1995, professional and consulting expenses declined approximately
$190,000 compared to fiscal year 1994. In addition, the Company reduced
marketing and promotional expenses in 1995 compared to 1994 by approximately
$126,000. The Company had a write-off for bad debts of approximately $317,000 in
1994 compared to approximately $55,000 in 1995.

Interest and other expenses, net, for the year ended December 31, 1995 were
$1,165,257 compared to $1,509,647 for the same period in 1994, a decrease of
$344,390, or 22.8%. In part, this decrease in 1995 relative to 1994 was
attributable to a reduction in interest expense resulting from the Company's
replacement of its former primary credit facility with the Norwest Credit
Facility, which generally has more favorable terms. In addition, interest
expense decreased in 1995 as a result of a recapitalization in which certain of
the

21
<PAGE> 22

Company's promissory notes were contributed to capital. See "Certain
Transactions." As a result of this recapitalization, the Company realized an
extraordinary gain of $1,107,232 in 1994.

The net loss for the year ended December 31, 1995 was $693,756 compared to
$449,317 for the same period in 1994, a difference of 54.4%. Net loss for each
of these years includes $737,468 of negative goodwill. In addition, the net loss
for 1995 was reduced by $319,490 as a result of the reductions in the allowance
for doubtful accounts and inventory obsolescence reserves resulting from the
write-off of delinquent accounts, improved aging of accounts receivable, and the
continued disposal of excess inventory.

LIQUIDITY AND CAPITAL RESOURCES

The Company historically has financed its activities primarily from cash
flows from operations, credit arrangements with financial institutions,
operating leases for equipment, and loans and equity infusions from its
principal stockholders and investors. See "Certain Transactions." There can be
no assurance that the Company's cash flow will be sufficient to finance its
operations as currently planned or that it will be able to supplement its cash
flow with externally generated funds.

Revolving Credit Facility

In April 1995, the Company entered into a revolving credit facility
("Credit Facility") with Norwest Business Credit, Inc. ("Norwest"). The Credit
Facility currently has a maximum commitment of $9.5 million, subject to certain
restrictions with respect to the collateral borrowing base. The Credit Facility
expires April 15, 1998 and is secured by the Company's accounts receivable,
inventories, intangible assets, and property and equipment. Interest is due
monthly at the prime rate plus 2.25%. As of September 30, 1996, the outstanding
balance under the Credit Facility was approximately $5.4 million, and the
remaining amount available to be borrowed thereunder was approximately $612,000.

The Credit Facility requires the maintenance of certain specified financial
ratios. As of September 30, 1996, the Company was in default under various
covenants of the Credit Facility, including the debt service covenant. On
November 22, 1996, Norwest granted a waiver with respect to these defaults and
modified certain of the covenants under the Credit Facility. See "Risk
Factors -- Covenant Defaults; Dependence on External Financing."

1993 Junior Notes

At September 30, 1996, the Company had outstanding $1,500,000 of
convertible junior investor notes (the "1993 Junior Notes"). The 1993 Junior
Notes are collateralized by accounts receivable, inventories, and property and
equipment, subject to and subordinate to the existing security interests of
Norwest. The 1993 Junior Notes mature in September 1998. The 1993 Junior Notes
bear interest at 8%, which is due annually in September.

On December 15, 1994, the Company issued a $350,000 promissory note (the
"$350,000 Note"), on terms similar to the 1993 Junior Notes, in order to fund
the Company's obligation to one of its creditors. On the consummation of this
offering, the 1993 Junior Notes and the $350,000 Note will automatically convert
into 359,722 shares of the Company's Common Stock. See "Certain Transactions."

Bridge Financing Notes

On July 1, 1996, the Company issued $1,500,000 in aggregate principal
amount of uncollateralized bridge financing notes (the "Bridge Notes"). The
Bridge Notes are due in full on the earlier of June 30, 1998 or 30 days
following the consummation of this offering. The Bridge Notes bear interest at
8% per annum payable on June 30 of each year. See "Certain Transactions." The
Company intends to use a portion of the proceeds of this offering to repay the
Bridge Notes in full. See "Use Of Proceeds."

Cash Flow

At December 31, 1995, the Company had an accumulated deficit of $6,429,645.
During the year ended December 31, 1994, the Company used $1,974,977 in cash
from its operating activities. For the year ended December 31, 1995, the
Company's operating activities provided $527,922 of cash. The Company's
operating activities provided $882,876 of cash for the nine months ended
September 30, 1996.

22
<PAGE> 23

As of September 30, 1996, the Company's average accounts receivable days
outstanding was 80 days as opposed to 87 days at December 31, 1995. Payment
terms for its customers vary from cash on delivery to up to 210 days. The
allowance for doubtful accounts as a percentage of accounts receivable was 2.9%
at December 31, 1995, as compared to 1.0% at September 30, 1996. This decrease
in the allowance reflected the significant reduction (73.4%) in accounts
receivables greater than 60 days past due. The Company had no significant
delinquent accounts outstanding at September 30, 1996. The Company's inventory
turnover ratio approximated 3.1 for the 12 months ended December 31, 1995 and
3.1 for the nine months ended September 30, 1996.

Based on the Company's operating plan, management believes that the
proceeds from this offering and anticipated cash flow from operations will be
sufficient to meet the Company's anticipated operating and capital needs for at
least the next 12 months from the date of this Prospectus. See "Use of
Proceeds." In the future, however, the Company may require additional financing.
No assurance can be given of the Company's ability to obtain such financing on
favorable terms, if at all. If the Company is unable to obtain additional
financing, its ability to meet its current and future revenue growth plans could
be materially and adversely affected.

SEASONALITY

Historically, the Company has experienced higher revenue in the first two
quarters of the year than in the latter half of the year. The Company believes
that this results from seasonal buying patterns resulting, in part, from an
increased demand for certain automotive parts and accessories associated with
more favorable weather conditions, and the fact that many of its ultimate
customers have added liquidity from income tax refunds during the first half of
the year.

INFLATION

Increases in inflation generally result in higher interest rates. Higher
interest rates on the Company's borrowings would decrease the profitability of
the Company. To date, general price inflation has not had a significant impact
on the Company's operations; however, increases in metal prices have from time
to time, and could in the future, adversely affect the Company's gross profit.
See "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Comparison of the Year Ended December 31,
1995 and the Year Ended December 31, 1994."

ACCOUNTING MATTERS

Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
(SFAS No. 121), which the Company will adopt for its fiscal year ending December
31, 1996, requires that long-lived assets and certain identifiable intangibles
to be held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of asset may not be
recoverable. In the opinion of management, the adoption of SFAS No. 121 will not
have any material effect on the Company.

Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123), establishes financial accounting
standards for stock-based employee compensation plans. These plans include all
arrangements by which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities to employees in
amounts based on the price of the employer's stock. Examples include stock
purchase plans, stock options, restricted stock, and stock appreciation rights.
SFAS No. 123 also applies to transactions in which an entity issues its equity
instruments to acquire goods or services from nonemployees. These transactions
must be accounted for, or at least disclosed in the case of options, based on
the fair value of the consideration received or the equity instruments issued,
whichever is the more reliable measure. The Company will adopt the disclosure
requirements of SFAS No. 123 for its fiscal year ending December 31, 1996.

23
<PAGE> 24

BUSINESS

INTRODUCTION

The Company designs, produces, and sells high-quality, custom vehicle
wheels and wheel accessories. The Company believes that the CRAGAR name is one
of the most widely recognized brand names in the automotive aftermarket
industry. The Company's broad selection of products is designed to appeal to a
wide range of automotive enthusiasts who desire to modify the styling, design,
or performance of their cars, trucks, or vans. The Company sells its wheel
products in the automotive aftermarket through a national distribution network
of value-added resellers, including tire and automotive performance warehouse
distributors and retailers, and mail order houses. Major resellers include Super
Shops, J. H. Heafner Company, Inc., and B & R Wholesale Tire.

In order to appeal to a broad spectrum of consumers, the Company offers a
wide selection of custom wheels. CRAGAR's products include entry-level custom
steel wheels, wire and spoked wheels that are popular with urban and inner city
consumers, chrome plated, one-piece cast aluminum wheels designed to appeal to
the luxury automobile owner, and race wheels that are used by both amateur and
professional race drivers. The Company's wheels feature classic designs that
have been sold under the CRAGAR name since the 1960s as well as contemporary
designs that reflect continually changing consumer preferences. The Company
sells its products under a variety of brand names, including CRAGAR, CRAGAR
Lite, Keystone Klassic, S/S, Star Wire, TRU-CRUISER, and TRU-SPOKE.

INDUSTRY BACKGROUND

Size and Growth of Industry

The automotive wheel industry is generally divided into two segments,
original equipment wheels and custom aftermarket wheels, which together
accounted for approximately $2.0 billion in manufacturer sales during 1994. Of
this amount, the custom wheel segment, in which the Company operates,
represented manufacturer sales of approximately $650 million, an annual increase
of 15.5% over the total of $420 million achieved in 1991.

The Company attributes the continuing growth in the custom wheel segment of
the automotive wheel industry to several factors, including (i) increased sales
of domestic cars, sport utility vehicles, and light trucks, which have resulted
in greater numbers of vehicles in use and, consequently, more potential
consumers of automotive aftermarket products such as the Company's wheels; (ii)
increased average vehicle life, which the Company believes contributes to
greater demand for automotive aftermarket products, such as custom wheels, as
vehicle owners seek to enhance the appearance of older vehicles; and (iii)
increased sales of custom wheels through tire dealers, performance retailers,
and other specialty automotive outlets. The Company believes that the desire of
many vehicle owners for individuality in the appearance and styling of their
vehicles will lead to continued growth in the custom wheel market, since the
installation of custom wheels represents one of the easiest, least expensive,
and quickest ways for such owners to dramatically alter their vehicles'
appearance.

Product Offerings

The custom wheel market is generally divided into six product categories:
one-piece aluminum wheels (representing 36% of the market); performance racing
wheels (20%); two-piece aluminum wheels (16%); steel wheels (14%); wire wheels
(10%); and composite wheels (4%). These product categories are differentiated by
the material content of the wheel, the level of technology necessary to produce
the wheel, price, target customer, styling attributes, and applications. See
" -- Products." While the Company offers products in each of these product
categories, the Company believes that the market for one and two-piece aluminum
wheels has grown substantially relative to the other categories of wheels and
will continue to do so in the future.

24
<PAGE> 25

Product Distribution

Custom wheel manufacturers and assemblers may sell their products to
wholesalers (such as large warehouse distribution centers), directly to product
retailers (such as tire and auto parts dealers and performance automotive
centers), or directly to the public via mail order, sales outlets, or direct
telemarketing. A number of the Company's competitors have taken a step toward
vertical integration by establishing company-owned warehouse distribution
centers that can sell their products to retailers or directly to the public. To
spread the overhead costs associated with establishing these company-owned
distribution centers, such centers often carry competitors' products. The
Company sells its products through distribution centers operated by its
competitors, such as American Racing Equipment, Inc. and Prime Wheel-Golden
Wheel. See " -- Distribution, Sales, and Marketing -- Product Distribution."

Fragmented Nature of Industry

The Company believes that the custom wheel industry is highly fragmented,
with only a few companies holding market share in excess of 10%. Like the
Company, most of its competitors do not manufacture their own wheels, but
purchase the wheel components from third parties for later assembly and sale to
the public. Unlike the Company, however, most of its competitors do not offer a
full line of custom wheel products nor have an established brand identity. The
Company believes that the fragmented nature of the custom wheel market offers an
opportunity for certain competitors, such as the Company, to act as market
consolidators through the acquisition of other custom wheel companies or product
lines that can complement their existing operations. See " -- Business
Strategy."

The industry data presented herein is derived from information obtained
from the Specialty Equipment Market Association and Lang Market Resources, Inc.

BUSINESS STRATEGY

Increase Marketing Efforts

The Company intends to increase its marketing, advertising, and promotional
efforts to further enhance and leverage the strength of the CRAGAR brand name.
Promotional efforts will include an increased emphasis on the Company's
relationships with drag race drivers and teams and on the sponsorship of
professional and amateur drag race events sanctioned by the National Hot Rod
Association ("NHRA"). Additionally, public relations campaigns will be conducted
in trade publications, racing magazines, and consumer magazines. The Company
also intends to develop distinctive point-of-purchase displays directed to end
consumers. As a means to leverage the strength of its brand names, the Company
will pursue licensing arrangements for its brand names to be featured on
high-quality automotive aftermarket and other products.

Expand Product Distribution

The Company intends to expand its product distribution capabilities in
underserved markets, such as California, southern Florida, New England, and the
northwestern United States, and to broaden its customer base to include major
tire distributors that supply both national and local retail tire stores.
Historically, the Company has focused its distribution efforts on selected
domestic markets, which are served by value-added resellers specializing in
selling high-performance automotive aftermarket parts and accessories. The
Company also is exploring implementation of a national accounts program in which
it would sell products directly to mass merchandisers that require factory
direct service. The Company is in the process of establishing a redistribution
arrangement necessary to serve these national account prospects as well as
certain local and regional areas not serviced by its current warehouse
distributors. In addition, CRAGAR will seek to develop and enhance relationships
with distributors in selected foreign countries, such as Japan, Mexico, Russia,
Australia, and Germany, where it believes it currently enjoys significant brand
name recognition.

25
<PAGE> 26

Enhance Existing Product Lines; Develop New Products

The Company plans to enhance its existing product lines by adapting its
wheels and accessories to fit additional vehicle models, makes, and years and to
develop new product lines to meet changing consumer demands. In addition, the
Company intends to continue to increase its product development efforts with
increased emphasis on products for trucks and sport utility vehicles. In this
regard, during the past two years the Company introduced its CRAGAR Lite wheel
line, introduced a series of one-piece aluminum wheels, and significantly
broadened its TRU-SPOKE line with three new wheel designs and a new line of
accessories. The Company also is test marketing a new line of custom wheels that
feature distinctive wheel coatings, such as camouflage, marble, and simulated
carbon fiber.

Pursue Strategic Acquisitions and Alliances

The Company plans to pursue strategic acquisitions and alliances to
capitalize on the substantial fragmentation of the market for custom wheels and
wheel accessories and the difficulty of market participants in maintaining
product selection broad enough to meet customer demands resulting from the
increase in the variety of domestic and imported vehicle makes and models.
Acquisition or alliance candidates will be selected based on their potential to
broaden the Company's product lines or enlarge its product offerings, expand the
geographical scope of its distribution network into new or underserved markets,
enhance the Company's marketing, distribution or product development
capabilities, or reduce unit costs. The Company currently has no specific
agreements or understandings with respect to any acquisitions or alliances.

Improve Operating Efficiencies

The Company intends to improve its operating efficiencies by enhancing its
assembly and materials handling through plant upgrades, the purchase of new
equipment, and the implementation of more sophisticated inventory management and
by outsourcing certain of its production processes. The Company has begun to
selectively outsource the processing, assembly, and manufacturing of some of its
custom wheels, components, and accessories, and expects to explore further
outsourcing in the future. The Company believes that the outsourcing of selected
products and processing operations will enable it to devote a greater percentage
of its resources to product design, marketing, and distribution, and to shift
certain inventory, warranty, and other risks to its suppliers.

PRODUCTS

CRAGAR offers a large variety of custom wheels, which can be divided into
six general categories: (i) wire or spoked wheels; (ii) composite wheels, known
as Legacy and CRAGAR Lite wheels; (iii) steel wheels; (iv) race wheels; (v)
street steel wheels; and (vi) one-piece cast aluminum wheels. In addition, the
Company offers a full line of wheel accessories, including lug nuts, spacers,
bolts, washers, spinners, and hubcaps.

26
<PAGE> 27

The following table provides sales and other information about the
Company's major product lines:

<TABLE>
<CAPTION>
% OF 1996 % OF 1995 TYPE OF
PRODUCT LINE GROSS SALES* GROSS SALES CONSTRUCTION CUSTOMER NICHE
- -------------------------- ------------ ----------- -------------------- ---------------------
<S> <C> <C> <C> <C>
Wire or Spoked Wheels..... 20.0% 24.2% Steel spokes Urban and inner city
attached to inner consumers
steel hub and outer
steel rim or felly
Composite, Legacy, and
CRAGAR Lite Wheels...... 23.7% 17.8% Inner cast aluminum Nostalgia car and
disc welded to outer current line truck
steel rim owners
Steel Wheels.............. 16.8% 16.7% Inner steel disc Low-end consumers of
welded to outer all types of vehicles
steel rim
Race Wheels............... 16.6% 15.8% Two outer aluminum Pro and amateur race
rim halves welded drivers and
together with performance car
aluminum center or owners
spacer
Street Steel Wheels....... 8.7% 8.5% Three piece steel Hot rod and race
and aluminum center enthusiasts with cars
welded to outer and trucks
steel rim
One-piece Cast Aluminum
Wheels.................. 7.8% 7.8% Cast one-piece Low and high-end
aluminum with consumers of all
machined, painted, types of vehicles
or chrome finish
Wheel Accessories......... 4.6% 4.6% Steel and aluminum All types of
hub caps, lug nuts, consumers and
spinners, locks, vehicles
spacers
Miscellaneous............. 1.8% 4.6% Excess wheels and N/A
accessories
</TABLE>

- ---------------
* For nine months ended September 30, 1996, unaudited.

Wire or Spoked Wheels

CRAGAR offers a complete line of chrome plated wire or spoked wheels. The
Company sells most of these products under the TRU-SPOKE brand name, although it
offers a spoked wheel product using patented technology, called the Star Wire,
which is sold under the CRAGAR brand name. Wire wheels are high-end, niche
products that are sold to a limited group of vehicle owners. Recently, CRAGAR
introduced a new look for the TRU-SPOKE brand name, incorporating a new
decorative medallion and spinner and several new wheel styles, including wheels
with diamond spokes, a wheel with 102 spokes, a wheel with sixteen 5/8-inch
(fat) spokes, and a lower priced wheel with 13 pairs of spokes. From time to
time, CRAGAR also supplies other companies with wire wheels under private label.

Composite, Legacy, and CRAGAR Lite Wheels

Composite wheels consist of a chrome plated die cast aluminum center welded
to a chrome plated rolled steel outer rim. CRAGAR patented the process of
attaching the aluminum center to the steel rim in 1964. In addition to the
Company's popular S/S and SS/T composite wheels, the Company in 1995 purchased
the exclusive rights to manufacture and market the Keystone Klassic, one of the
most popular wheels in

27
<PAGE> 28

automotive history. The Company believes this product solidifies CRAGAR's Legacy
Line to include the most popular nostalgia wheels in the market. The Company
recently introduced 16 and 17 inch versions of its S/S wheel.

Another addition, introduced in 1995, was the Company's development (with
patent pending technology) of the CRAGAR Lite wheel line using a new
light-weight steel rim. While over 30% lighter than conventional rims, these
light-weight rims are stronger than conventional rims because the rims are made
of high-strength alloy steel. The CRAGAR Lite rim improves ride stability,
reduces wheel vibrations, lessens wear on the suspension, and enhances fuel
economy. The Company currently has two CRAGAR Lite styles, both used for
front-wheel drive vehicles. The Company recently has introduced new sizes and
bolt circle configurations of its CRAGAR Lite wheels.

Steel Wheels

CRAGAR steel wheels have been sold for over 30 years. While aluminum has
slowly been replacing steel as the major wheel material, the Company continues
to sell large quantities of steel wheels, which represent a less costly option
for many consumers. The Company currently has a supply arrangement to purchase
fully assembled steel wheels. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." From time to time, CRAGAR also
supplies other companies with steel wheels for resale under private labels.

Race Wheels

CRAGAR race wheels are higher-priced, three-piece, lightweight, polished
aluminum wheels. These wheels are used by professional drag racers, who are
sometimes provided CRAGAR wheels without charge in return for their promotion of
CRAGAR and for displaying a CRAGAR sticker on their cars. The Super Race and the
Super Star are the Company's two highest-end professional race wheels.

The Company also sells race wheels to amateur racers, professional racers,
and individuals who want the look of the race wheel for street use. The race
wheels for this product category are the Dragstar and the Super Lite II. In
addition, the Company has introduced a series of race wheels with billet centers
for street use.

Street Steel Wheels

The Company sells chrome plated steel, look-alike versions of its race
wheels. The Street Star is a lower-priced copy of the Dragstar, and the Street
Lite is a copy of the SuperLite II.

One-Piece Cast Aluminum Wheels

The Company currently offers several styles of one-piece cast aluminum
wheels. One category of one-piece cast aluminum wheels consists of high-end,
chrome-plated or silver-painted wheels with innovative styling. The styles are
designed for CRAGAR's "muscle car" or "hot rod" niche, including classic
Mustangs, Camaros, Firebirds, and Monte Carlos. In addition, these wheels are
also popular with owners of high-end European and Japanese cars. These wheels
are currently purchased from manufacturers in the Philippines and the United
States.

Another category of one-piece cast aluminum wheels consists of the Hammer,
Star, Blade, and Modular styles. These styles have been on the market for many
years and are available from almost all of the Company's domestic and foreign
competitors. These wheels have become "commodity" items and provide relatively
small gross margins. These wheels are currently purchased from manufacturers in
China and the United States.

Wheel Accessories

The Company offers a large and varied line of accessories, including
hubcaps, medallions, lug nuts, washers, steel locks, spinners, beadlock rings,
and trim rings. Accessories are sold both packaged and loose.

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<PAGE> 29

The packaging is either in boxes or shrink wrap with paper board. Most of these
accessories are sourced from the Far East.

PRODUCT DEVELOPMENT

The Company currently offers a broad spectrum of products that are designed
to fit a wide variety of automobiles, vans, and trucks. The Company plans to
leverage these product lines by adapting its wheels and accessories to fit
additional vehicle models, makes, and years. In addition, the Company intends to
increase its product development efforts with increased emphasis on products for
trucks and sport utility vehicles. In this regard, during the past two years the
Company introduced its CRAGAR Lite Wheel line and significantly broadened its
TRU-SPOKE line with three new wheel designs and a new line of accessories. The
Company is test marketing a new line of custom wheels that feature distinctive
wheel coatings, such as camouflage, marble, and simulated carbon fiber.

To enhance its product development efforts, the Company plans to engage an
experienced outside consultant to assist the Company's current in-house product
development staff. In addition, the Company plans to supplement its existing
product development staff with the addition of one or more new employees with
product development experience.

DISTRIBUTION, SALES AND MARKETING

Product Distribution

The Company currently sells its products through the following distribution
channels:

Warehouse Distributors. The Company sells its products to warehouse
distributors that sell to tire dealers, automotive performance retailers,
service stations, and specialty boutiques. These customers include J. H.
Heafner Company, Inc., B & R Wholesale Tire and Wheel, and Keystone
Automotive Warehouse. Automotive aftermarket warehouse distributors often
stock a full selection of high-quality merchandise. The Company believes
that warehouse distributors will continue to be an important factor in the
Company's penetration of new geographic areas. Sales to warehouse
distributors accounted for 46.2% and 38.1%, respectively, of the Company's
gross sales in 1995 and in the nine months ended September 30, 1996.

Tire Dealers and Automotive Performance Retailers. The Company sells
its custom wheels and other products to major tire and automotive
performance retailers, including Discount Tire and Super Shops, which
specialize in selling high-performance aftermarket automotive parts and
accessories throughout the United States. The Company believes that tire
dealers have experienced success with "combination" sales of tires with
custom wheels and that automotive performance retailers serve as an
important link to automotive enthusiasts. Tire dealers and automotive
performance retailers, two traditionally separate channels, are beginning
to overlap in their product coverages. Gross sales to tire dealers and
automotive performance retailers accounted for 36.1% and 39.6%,
respectively, of the Company's gross sales in 1995 and in the nine months
ended September 30, 1996.

Mail Order Outlets. The Company sells its products to mail order
catalog houses, including Atech Motorsports, Buckeye Sales, and ASAP, for
resale to the public. The Company believes that inclusion of its products
in large mail-order catalogs will continue to be a significant factor in
promoting the brand-name recognition of the Company's products and
increasing direct sales to consumers. Sales to mail order outlets accounted
for 12.1% and 14.2%, respectively, of the Company's gross sales in 1995 and
in the nine months ended September 30, 1996.

International Distributors. The Company sells to exporters and
directly to distributors in select foreign countries. International sales
accounted for approximately 5.4% and 6.2%, respectively, of the Company's
gross sales in 1995 and in the nine months ended September 30, 1996.

The Company intends to increase its distribution capabilities in
underserved markets, such as California, southern Florida, New England, and the
northwestern United States and to broaden its customer base to

29
<PAGE> 30

include more major tire distributors that supply both national and local retail
tire stores. The Company is also exploring implementation of a national accounts
program in which it would sell products directly to mass merchandisers that
require factory direct service. The Company is in the process of establishing a
redistribution arrangement necessary to serve these national account prospects
as well as certain local and regional areas not currently serviced by its
current warehouse distributors. In addition, CRAGAR will seek to develop and
enhance relationships with distributors in select foreign jurisdictions, such as
Japan, Mexico, Russia, Australia and Germany, where it believes it currently
enjoys significant brand-name recognition.

Sales and Marketing

As of September 30, 1996, the Company employed six individuals in its sales
and marketing department and retained four independent representative agencies.
The Company's sales and marketing employees are responsible for implementing
marketing plans and sales programs, providing technical advice and customer
service, handling customer inquiries, following up on shipments to customers,
informing customers of special promotions, coordinating the Company's trade
shows, and providing other types of customer service. The Company plans to hire
an executive to coordinate the Company's marketing efforts.

As one of its marketing programs, the Company is a sponsor for all
professional and amateur drag race events sanctioned by the NHRA. The Company
sponsors cars carrying the CRAGAR logo in all three professional categories,
including the Top Fuel, Funny Car, and Pro Stock divisions. Among the many well-
known drivers and teams that CRAGAR has relationships with include Kenny
Bernstein (1996 Top Fuel Champion), Warren Johnson (multi-year Pro Stock
Champion) and Larry Dixon (1995 Rookie of the Year); team owners such as Joe
Gibbs (former NFL Super Bowl coach), and Don "The Snake" Prudhomme (legendary
driver and former champion); and teams with major sponsors, such as McDonald's,
Budweiser, Miller Genuine Draft, Skoal Bandit, ProLong, GM Performance Parts,
and Mac Tools.

Outside sales representatives typically interface directly with the
Company's customers. These individuals approach the Company's customers on a
frequent basis to solicit orders. These sales representatives either earn a
commission on each sale or receive a flat monthly retainer. Sales
representatives work with a particular internal salesperson and together deal
with each customer in order to facilitate high levels of service.

In 1995, the Company's ten largest customers accounted for a total of
approximately 70.4% of its gross sales, with Super Shops, J. H. Heafner Company,
Inc., and B & R Wholesale Tire accounting for 23.6%, 11.8%, and 9.5% of gross
sales, respectively. For the nine months ended September 30, 1996, the Company's
ten largest customers accounted for a total of approximately 75.5% of gross
sales, with Super Shops accounting for 26.6%, J. H. Heafner Company, Inc. 12.3%,
and B & R Wholesale Tire 8.6%. The Company does not have any long-term
contractual relationships with any of its major customers. As a result of the
Company's decision not to meet competitors' pricing on steel wheels, the Company
expects sales of steel wheels to J. H. Heafner Company, Inc. to decrease in the
future. See "Risk Factors -- Dependence on Key Customers."

The Company's standard payment terms generally provide for payment by its
customers no later than the 25th day of the month following the month of the
invoice, with a 2% discount offered for payments made by the 10th day of the
month. Certain customers receive longer terms, and at certain times of the year
terms are offered which have in the past extended to as much as 210 days from
the date of invoice.

PRODUCTION

The Company assembles most of its products at its facility in Phoenix,
Arizona. While outside vendors manufacture most of the component parts used in
the Company's products, the Company undertakes certain basic production
operations, including bending spokes on presses; de-flashing various components;
piercing rims, hubs, and fellies for wire and spoked wheels; dimpling rims for
wire wheels; and machining a variety of components. In recent periods, the
Company has begun to outsource selectively the processing, assembly, and
manufacture of some of its custom wheels, components, and accessories, and
expects to explore the further outsourcing of product production in the future.
The Company believes that the outsourcing of selected products and processing
operations will enable it to devote a greater percentage of its resources to
product design, marketing, and distribution and to shift certain inventory,
warranty, and other risks to its suppliers. In

30
<PAGE> 31

addition, the Company intends to improve its own production operations through
plant improvements, the purchase of new equipment, and the implementation of
enhanced inventory management.

The Company maintains its own in-house testing facility for its wheels. The
Company also utilizes independent test laboratories for all its wheels, which
certify their results relating to load ratings, cornering fatigue, and radial
fatigue.

COMPETITION

The market for the Company's products is highly competitive and fragmented
with over 100 domestic and foreign sellers of custom wheels. Competition is
based primarily on product selection (including style and vehicle fit), product
availability, quality, design innovation, price, payment terms, and service.
Competition in the custom wheel market is intense, and the Company believes that
several major wheel manufacturers, such as American Racing Equipment, Inc.,
Prime Wheel-Golden Wheel, Progressive Custom Wheels, Inc., Ultra Custom Wheel
Co., and Superior Industries International, as well as suppliers to major
automobile manufacturers, pose significant competition because of their
substantial resources.

The level and source of the Company's competition varies based on product
category. Cast aluminum wheels comprise the largest portion of the custom wheel
market. There are numerous competitors in the cast wheel market, including
American Racing Equipment, Inc., Prime Wheel-Golden Wheel, Progressive Custom
Wheels, Inc., Ultra Custom Wheel Co., Superior Industries International, and
certain smaller domestic companies as well as numerous foreign manufacturers.
Most of these companies also make composite wheels. In race wheels, the Company
has two major competitors, Weld Racing, Inc. and Center Line Performance Wheels.
The largest wire wheel competitors include Roadster Wheels, Inc., Crown Wire
Wheel Co., and Dayton Wheel Products, Inc. In steel wheels, competitors include
Mangels Wheels, Unique Wheel, Inc., American Racing Equipment, Inc., and
Greenball Corp.

FACILITIES

The Company's executive offices, product development, sales, accounting,
computer, production, and distribution facilities are currently housed in a
leased industrial building. The 167,000 square foot facility is located in
Phoenix, Arizona. The lease expires in June 2003, and the Company has a right of
first refusal to purchase the property. The Company believes that the facility
is adequate for its current operations and those contemplated by the Company in
the foreseeable future.

INTELLECTUAL PROPERTY

The Company markets its custom wheels and products under a variety of brand
names designed to capitalize on its reputation. The Company believes that its
trademarks, most importantly CRAGAR, are critical to its business. The Company
also owns the rights to certain design and other patents and also relies on
trade secrets and proprietary know-how, which it seeks to protect, in part,
through confidentiality and proprietary information agreements. The Company has
also entered into agreements with its vendors to restrict the use of technology
provided by the Company. There can be no assurance, however, that the Company's
patents will preclude the Company's competitors from designing competitive
products, that the proprietary information or confidentiality agreements with
employees and others will not be breached, that the Company's patents will not
be infringed, that the Company would have adequate remedies for any breach or
infringement, or that the Company's trade secrets will not otherwise become
known to or independently developed by competitors.

CRAGAR(R), Keystone(R) Klassic(R), Legacy(TM), CRAGAR LITE(TM), Star
Wire(TM), TRU-CRUISER(TM), Street Pro(R), S/S(R), The Wheel People(TM), and
TRU-SPOKE(R) are trademarks of the Company. This Prospectus also contains
trademarks of companies other than the Company.

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<PAGE> 32

PRODUCT RETURNS AND WARRANTIES

Historically, the Company's wheels have been sold with a limited one-year
warranty from the date of purchase. The Company's warranties generally provide
that, in the case of defects in material or workmanship, the Company, at its
option, will either replace or repair the defective product without charge. The
Company currently maintains product liability insurance for its products, with
limits of $1.0 million per occurrence and $2.0 million in the aggregate, per
annum. Such coverage is becoming increasingly expensive. There can be no
assurance that the Company's insurance will be adequate to cover future product
liability claims or that the Company will be able to maintain adequate liability
insurance at commercially reasonable rates. See "-- Legal Proceedings."

The Company maintains stock adjustment and warranty return policies. The
Company's stock adjustment return policy allows the customer to return certain
factory-fresh, resalable merchandise to the Company for credit. The Company's
warranty return policy allows customers to return certain defective products
that are covered under the Company's limited warranty. In both cases, customers
are only allowed to return a specified percentage, usually less than 2%, of the
previous year's purchases. Should this specified percentage be exceeded, the
Company at its discretion can either reject the return request or accept the
return request and charge a 15% handling fee. Historically, the Company's stock
adjustment returns and warranty returns have represented approximately 2% and
1.5% of annual net sales, respectively. On a quarterly basis, the Company
recognizes a provision for stock adjustments and warranty returns in arriving at
net sales. The provision is based on a historical 12 month moving average of
actual return activity. For the nine months ended September 30, 1996, stock
adjustment returns were approximately $405,000 compared to approximately
$582,000 for the nine months ended September 30, 1995. Warranty returns were
approximately $276,000 and approximately $151,000 for the nine months ended
September 30, 1996 and September 30, 1995, respectively.

EMPLOYEES

As of September 30, 1996, the Company had 95 employees, a majority of whom
were full-time employees, and six independent contractors. Employment levels
vary during the course of a year due to the seasonality of the Company's
business. See "Risk Factors -- Variability in Operating Results; Seasonality."
The Company considers its employee relations to be good. None of the Company's
employees are represented by unions.

LEGAL PROCEEDINGS

The Company is one of four defendants in an action in the United States
District Court for the Eastern District of Michigan, entitled Patricia Ellerholz
v. Goodyear Tire & Rubber Co., instituted on December 20, 1995. Ms. Ellerholz
alleges, among other things, that her husband, Brian Ellerholz, was killed on
January 8, 1993 while attempting to disassemble a two-piece drag racing wheel.
The plaintiff in this case is seeking damages of $5.5 million plus an
unspecified amount of punitive damages. Any losses to the Company resulting from
this case will not be covered by product liability insurance. The Company
believes that the wheel was manufactured and sold by another party and that the
Company is not a "successor corporation" to the entity that manufactured and
sold the wheel. Accordingly, the Company has filed a motion for summary judgment
asking the Court to dismiss the Company as a defendant in the action. On
November 27, 1996, the Court granted the Company's motion for summary judgment
and dismissed the Company from all claims. The plaintiff has filed a motion for
reconsideration. While the Company is defending itself vigorously in this
matter, there can be no assurance that the ultimate resolution of this case will
not result in a material adverse effect on the Company's financial condition.

The Company also is involved in routine litigation incidental to the
conduct of its business. Except for the matter referred to in the preceding
paragraph, there are currently no material pending proceedings to which the
Company is a party or to which any of its property is subject.

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MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executives officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
Michael L. Hartzmark, Ph.D................ 40 President, Chief Executive Officer,
Treasurer, and Director
Michael Miller............................ 38 Secretary and Chief Operating Officer
Anthony W. Barrett........................ 48 Vice President of Sales Operations
Sidney Dworkin(1)(2)...................... 75 Director
Mark Schwartz(1)(2)....................... 46 Director
Donald McIntyre(1)(2)..................... 72 Director
Ed Faber(1)............................... 63 Director
</TABLE>

- ---------------
(1) Member of Audit Committee

(2) Member of Compensation Committee

Dr. Hartzmark joined the Company as a full-time employee in May 1993 and
has served as its President and Chief Executive Officer since June 4, 1993 and
as a director since January 1, 1993. Prior to joining the Company, Dr. Hartzmark
was an economic consultant (as President of EconOhio Corporation) and a
financial consultant (as President of MDA Financial, Inc.). EconOhio wrote
business plans for and provided advice to a variety of companies. MDA provided
financial consulting services to small and medium-size companies, as well as
assistance to oil and gas and real estate limited partnerships. From 1987 to
1989, Dr. Hartzmark was Senior Economist at Lexecon Inc. a Chicago-based
economics and law consulting firm. Dr. Hartzmark was the John M. Olin Visiting
Scholar at the University of Chicago and an Assistant Professor at the
University of Michigan. He has also worked for the Treasury Department and the
Commodity Futures Trading Commission. Dr. Hartzmark earned his M.A. and Ph.D.
degrees in economics at the University of Chicago. He holds a B.A. in economics
from the University of Michigan.

Mr. Miller joined the Company as a full-time employee in November 1996
after serving as a consultant to the Company for three months. He has over 16
years of experience with manufacturing companies working either as a senior
executive or consultant. From 1992 to 1996, Mr. Miller was employed by Form
Rite, a $110 million supplier of fluid handling systems to Ford, GM, Chrysler,
Mercedes, Nissan, and TRW. He assisted with the sale of the company to Siebe
plc., a large British firm. Prior to the sale, he had worldwide responsibility
for sales and engineering efforts. Mr. Miller was Vice President of Operations
for Mr. Gasket Company, Inc. and had operating responsibility for the Wheel and
Tire Division from 1988 to 1992. He joined Mr. Gasket from the consulting
practice of Deloitte & Touche after completing a restructuring project of the
Wheel and Tire Division. Mr. Miller has a B.S. in Business Administration from
the University of Albany and a Master of Business Administration from Rochester
Institute of Technology.

Mr. Barrett joined the Company in August 1995. In addition to serving as
Vice President of Sales Operations, Mr. Barrett also serves as the Company's
principal financial and accounting officer. He has over 25 years of experience
in manufacturing and extensive experience in finance and accounting, operations,
sales, marketing and production. From 1980 to 1993, Mr. Barrett served as Vice
President -- Finance, Vice President -- Retail Operations and Vice
President -- Canadian Operations at F.E. Myers, a manufacturer and assembler of
pumps. His responsibilities included overseeing finance, production, operations,
and sales. Prior to 1980, Mr. Barrett worked for 10 years for ITT. Mr. Barrett
holds a B.A. from Malone College.

Mr. Dworkin has served as a director of the Company since December 1994.
Mr. Dworkin served as President and Chairman of the Board of Revco Drugstore
Company, Inc. until October 1987. Mr. Dworkin currently serves on the Boards of
approximately ten companies, including a number of large public corporations.
These include General Computer Corporation, which was sold in 1995 (where he was
Chairman of the Board), Comtrex Systems, Inc. (where he was Chairman of the
Board), Northern International Technologies, CCA Industries, Interactive
Technologies, Inc. (a manufacturer of pet supplies), Marbledge

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<PAGE> 34

Group, Inc., Powerhorse, Overdrive Systems, Inc., and Neutrogena (prior to its
sale). He is also owner and Chairman of the Board of Advanced Modular Company, a
privately held manufacturer of modular buildings. His experiences range across a
multitude of industries including, among others, pharmaceuticals, computer
hardware and software, modular housing, and consumer products.

Mr. Schwartz has served as a director of the Company since January 1993.
Mr. Schwartz is President of G&S Metal Products, Inc., one of the largest
producers of consumer metal products in the United States. The company's
headquarters in Cleveland, Ohio include a major manufacturing facility. G&S
Metal Products sells its products to many major retailers (including K-Mart,
Target, and WalMart), many through private label programs. Mr. Schwartz is also
President of G&S Machine Tools, Inc. and Vice President of Porcelen, Inc. Mr.
Schwartz has extensive export and import experience.

Mr. McIntyre has served as a director of the Company since June 1996. Mr.
McIntyre is currently active nationally in merger and acquisition field in
association with Chapman Associates. He is also interim CEO of Capital Electric
Group. From 1964 to 1981, he was Chairman of the Board, President, and CEO of
Custom Products Corporation, a multi-plant manufacturing and distribution
company. Mr. McIntyre currently serves on the boards of several companies,
including Capital Electric Group, the Joray Corporation, and Watkins Shepard
Inc. Mr. McIntyre holds a B.S. from Iowa State University and attended
post-graduate courses at Michigan State University and Drake.

Mr. Faber has served as a director of the Company since November 1996. Mr.
Faber currently consults with small, emerging companies on a variety of
corporate matters, including turnaround strategies. From 1991 to 1992 he served
as President and Chief Executive Officer of SuperCuts, Inc., where he was
responsible for organizing and executing a successful initial public stock
offering. From 1990 until the company was sold in 1991, Mr. Faber served as Vice
Chairman and Chief Executive Officer of Dataphaz. In 1976, Mr. Faber was the
founding President of Computerland Corporation. He retired from Computerland
Corporation in 1983, but rejoined that company in 1985 to serve as Chairman and
Chief Executive Officer until 1987 when the company was sold. He remained as
Vice Chairman until 1990. Mr. Faber currently serves on the Boards of Integrated
Circuits Engineering Corp. and Cotelligent Systems. Mr. Faber holds a degree in
Industrial and Labor Relations from Cornell University and was an officer in the
United States Marine Corps.

Directors are elected annually to serve until the next annual meeting of
stockholders and until their successors are elected and qualified. Executive
officers are elected annually by, and serve at the discretion of, the Board of
Directors.

KEY EMPLOYEES

The Company has identified Tony Cortes, Kent Rogers, and David Bratset as
key employees.

Tony Cortes, age 34, joined CRAGAR in 1982 as an assembly worker and has
served as Production Manager since June 1993.

Kent Rogers, age 46, serves as the Director of Material Control and
Information Services. Mr. Rogers joined the Company in August 1994 and has over
19 years of experience in utilizing various types of computer hardware platforms
and a variety of integrated computer software packages. As Director of
Management Information Systems at Syntellect, Inc. from 1989 to 1994, Mr. Rogers
created the Information Systems Department for a $50 million interactive voice
response products manufacturer. He also directed Syntellect's Customer Support
Department. From 1987 to 1988, Mr. Rogers was a District Industry Specialist for
Unisys, assisting the company in the sales and implementation of its financial,
purchasing, order entry, inventory control, and manufacturing control products.
From 1985 to 1987, Mr. Rogers was an independent systems consultant, in which
capacity he evaluated, recommended, trained, and implemented various financial
accounting, distribution, plant maintenance, and manufacturing control software
systems. From 1979 to 1985, Mr. Rogers worked for Hewlett Packard as a Senior
Systems Engineer, installing and implementing the company's software packages.
Mr. Rogers holds a B.S. degree in Computer Science from Angelo State University.

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<PAGE> 35

David Bratset, age 49, serves as the Director of Administrative Services.
Mr. Bratset joined the Company in September 1995. He has had a varied
background, focused primarily on finance, accounting, and human resources. From
1994 to 1995, Mr. Bratset was Business Manager for Christensen & Associates, an
investor relations consulting firm, with a full range of responsibilities,
including management of accounting, human resources, management information
systems, and administrative services. From 1992 to 1993, Mr. Bratset was the
Controller of Dynamic Information Corporation, From 1978 to 1992, Mr. Bratset
was Vice President of Administration at the Thunder Group. From 1969 to 1978,
Mr. Bratset was Corporate Headquarters Manager at Zytron Corporation. Mr.
Bratset holds a B.A. in Business Administration/Accounting from the University
of California, Berkeley.

BOARD COMMITTEES

The Compensation Committee consists of Messrs. Dworkin, Schwartz, and
McIntyre. The Compensation Committee establishes salaries, incentives, and other
forms of compensation for officers and other employees, administers incentive
compensation and benefit plans, including the Company's 1996 Stock Option and
Restricted Stock Plan and the Company's 1996 Non-Employee Directors' Option
Plan, and recommends policies relating to such plans.

The Audit Committee consists of Messrs. Dworkin, Schwartz, McIntyre, and
Faber. The Audit Committee will meet periodically with management and the
Company's independent auditors and will review the results and scope of the
audit and other services provided by the Company's independent auditors, the
Company's internal auditing procedures, and the adequacy of internal controls.

DIRECTORS' COMPENSATION AND NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN

The Company pays all non-employee directors $1,000 for attendance at the
Company's quarterly meetings of directors, which it plans to increase to $1,500
after the completion of this offering. The Company also pays all non-employee
directors $250 for any committee meetings attended. In addition, directors may
be reimbursed for certain expenses in connection with attendance at board and
committee meetings.

On June 10, 1996, pursuant to the Company's Non-Employee Directors' Stock
Option Plan (the "Directors' Plan"), the Company granted options to current and
former members of the Board of Directors to purchase 9,800 shares of the
Company's Common Stock. All options were granted with an exercise price of $5.14
per share. Pursuant to the terms of the Directors' Plan, Mark Schwartz received
2,800 options; Sidney Dworkin, Victor Scaravilli, and Phyllis Froimson each
received 2,100 options; and Donald McIntyre received 700 options. All option
grants vested immediately with the exception of Mr. McIntyre's options which
will vest one year from the date of grant. On November 9, 1996, pursuant to the
Directors' Plan, Ed Faber received 700 options. The options vest one year from
the date of grant and have an exercise price of $5.60 per share. In addition,
the Company's Board of Directors granted James Schoke, a former director of the
Company, an option to purchase 2,100 shares of the Company's Common Stock at an
exercise price of $5.14 per share and an option to purchase 2,100 shares of
Common Stock at $5.60 per share, effective as of June 10, 1996 and November 9,
1996, respectively. The option grants to Mr. Schoke were in recognition of Mr.
Schoke's service to the Company as a Board member and were on substantially the
same terms as the option grants under the Directors' Plan. The Directors' Plan
currently provides that each non-employee director will be granted options to
purchase 700 shares of Common Stock at fair market value on the date of grant on
the date of his or her initial election and on the date of each reelection to
the Board of Directors of the Company, which grants vest after each such full
year of service, except that the aggregate number of options granted by the
Company under the Directors' Plan may not exceed 35,000.

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<PAGE> 36

EXECUTIVE COMPENSATION

The following table summarizes all compensation paid or accrued by the
Company for services rendered during the year ended December 31, 1995 by the
Company's President and Chief Executive Officer. No other executive officer of
the Company had compensation in excess of $100,000 for the periods indicated.

<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
----------------
NAME AND PRINCIPAL POSITION YEAR SALARY
- --------------------------------------------------------------------------- ---- -------
<S> <C> <C>
Michael L. Hartzmark, Ph.D. 1995 $96,000
President, Chief Executive Officer, Treasurer, and Director 1994 $96,000
1993 $72,000
</TABLE>

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During the year ended December 31, 1995, the Company's Board of Directors
established the levels of compensation for certain of the Company's executive
officers without the involvement of the Compensation Committee, as the
Compensation Committee had not yet been formed during that period. Dr.
Hartzmark, the Company's President and Chief Executive Officer, participated in
the deliberations regarding executive compensation that occurred during 1995.
The current members of the Company's Compensation Committee, who joined the
Compensation Committee effective as of September 27, 1996, are Messrs. Dworkin,
Schwartz, and McIntyre. None of these individuals were at any time during 1995
an officer or employee of the Company.

EMPLOYEE STOCK OPTION PLAN

The Company's 1996 Stock Option and Restricted Stock Plan (the "Employee
Option Plan") was adopted by the Board of Directors in May 1996 and was approved
by the stockholders at the Company's annual meeting of stockholders in June
1996. The Board of Directors approved an amendment to the Employee Option Plan
on September 27, 1996, and the Company's stockholders approved the amendment
effective as of that same date. The purpose of the Employee Option Plan is to
attract and retain qualified personnel, provide additional incentives to
employees of the Company, and promote the success of the Company's business.
Pursuant to the Employee Option Plan, the Company may grant incentive and
nonstatutory (nonqualified) stock options to persons who are regularly employed
by the Company in a managerial, professional or technical capacity on a full
time salaried basis. A total of 210,000 shares of Common Stock have been
reserved for issuance under the Employee Option Plan.

The Compensation Committee has been delegated the authority by the Board to
select the employees of the Company to whom stock options are granted, to
interpret and adopt rules for the operation of the Employee Option Plan, and to
specify other terms of stock options. Subject to the limitations set forth in
the Employee Option Plan, the Compensation Committee has the authority to
designate the number of shares to be covered by each option, determine whether
an option is to be an incentive stock option or a nonstatutory option, establish
vesting schedules, specify the type of consideration to be paid to the Company
upon exercise and, subject to certain restrictions, specify other terms of the
options.

The maximum term of options granted under the Employee Option Plan is ten
years. The aggregate fair market value of the stock with respect to which
incentive stock options are first exercisable in any calendar year may not
exceed $100,000 per incidence. Options granted under the Employee Option Plan
are nontransferable (with certain exceptions) and generally expire six months
after the termination of an optionee's service to the Company except in limited
circumstances in which the option will terminate immediately upon such
termination of service.

The exercise price of incentive stock options must equal the fair market
value of the Common Stock on the date of grant. The exercise price of incentive
stock options granted to any person who at the time of grant owns stock
possessing more than 10% of the total combined voting power of all classes of
stock must be at least 110% of the fair market value of such stock on the date
of grant and the term of those options cannot

36
<PAGE> 37

exceed five years. The exercise price for an option that is not an incentive
stock option must not be less than 85% of the fair market value of such stock on
the date of grant.

On November 9, 1996, pursuant to the Employee Option Plan, the Company
issued an aggregate of 53,500 options to certain of the Company's employees,
including 20,000 to Michael L. Hartzmark, 6,500 to Anthony W. Barrett, and 8,000
to Michael Miller. Each option is exercisable at $5.60 to purchase one share of
Common Stock.

OPTION GRANTS

The Company did not grant stock options or stock appreciation rights during
the year ended December 31, 1995.

See "-- Directors' Compensation and Non-Employee Directors' Stock Option
Plan" for information regarding option grants made as of June 10, 1996 and
November 9, 1996 to certain of the Company's current and former directors.

See "-- Employee Stock Option Plan" for information regarding option grants
made as of November 9, 1996 to certain of the Company's employees.

37
<PAGE> 38

CERTAIN TRANSACTIONS

On December 15, 1994, Sidney Dworkin, a director and principal stockholder
of the Company, invested $500,000 in the Company in order to, among other
things, fund the Company's $360,000 installment due under a promissory note to
Performance Industries, Inc. (formerly Mr. Gasket) ("Performance"). This payment
related to debt owed by the Company to Mr. Gasket as a result of the Company's
acquisition of the CRAGAR brand name and certain other assets from Mr. Gasket.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Introduction." Of Mr. Dworkin's $500,000 investment, $150,000 was
made as a contribution to capital and the remaining $350,000 was made as a loan
to the Company. In consideration of the $150,000 capital contribution, Mr.
Dworkin received (i) 29,167 shares of Common Stock, (ii) 3,938 Class A Warrants,
each warrant entitling the holder to purchase one share of Common Stock at
$1.43, and (iii) a promissory note in the principal amount of $108,333 (the
"$108,333 Note"). The $108,333 Note bears interest at a rate of 15% per annum,
payable annually in five installments commencing January 1, 1995. In
consideration of the $350,000 loan to the Company, Mr. Dworkin received (a)
24,500 Class B Warrants, each warrant entitling the holder to purchase one share
of Common Stock at $0.36 per share, and (b) a promissory note in the principal
amount of $350,000 (the "$350,000 Note"). The $350,000 Note, which initially had
an interest rate of 1.5% per month through June 30, 1995, and 2% per month
thereafter until the outstanding principal balance is paid in full, was amended
by the parties on October 12, 1995, so that the Note currently bears interest at
8% per annum and matures on January 1, 1997. Pursuant to an amendment executed
by the parties on September 30, 1996 (as described below), the $350,000 Note
will automatically convert into 68,056 shares of Common Stock upon the
completion of this offering.

In connection with the original capitalization of the Company, the Company
issued promissory notes (the "1992 Notes") to certain investors (the "1992 Note
Holders"). On December 14, 1994, as part of a plan of recapitalization (the
"Recapitalization"), all but one of the 1992 Note Holders entered into an
agreement with the Company to forgive all interest accrued on the 1992 Notes
through December 31, 1994. In addition, all of the 1992 Note Holders agreed on
January 31, 1995 to contribute to the capital of the Company the indebtedness
owed pursuant to the 1992 Notes. Certain principal stockholders who were also
1992 Note Holders that participated in the Recapitalization included (with
amount contributed in parenthesis): Michael L. Hartzmark, President, Director,
and Chief Executive Officer of the Company ($180,555); Dolores Hartzmark,
principal stockholder and mother of Michael L. Hartzmark ($361,110); Debra
Jacobs, principal stockholder and sister of Michael L. Hartzmark and daughter of
Dolores Hartzmark ($180,555); Sidney Dworkin, Director ($216,666); Elliot
Dworkin, son of Sidney Dworkin ($72,222); Mark Schwartz, Director ($361,110);
Harry Schwartz, principal stockholder and father of Mark Schwartz ($361,110);
and Edward R. Falkner ($144,444), Irving Davies ($144,444), James Schoke
($144,444), and Gerald Richter ($216,666). In addition, Mr. Dworkin, in
connection with the Recapitalization, contributed to the capital of the Company
the indebtedness owed pursuant to the $108,333 Note. Certain stockholders who
are not principal stockholders of the Company also participated in the
Recapitalization and contributed $866,664 as a group.

On September 30, 1995, the Company entered into a First Note Amendment with
the holders of the 1993 Junior Notes. Pursuant to this Amendment, the Company
agreed to increase the interest rate on the 1993 Junior Notes from 6% to 8% per
annum. Also pursuant to this Amendment, the Company agreed to issue shares of
its Common Stock to holders of the 1993 Junior Notes, and the holders of the
1993 Junior Notes agreed to accept such Common Stock, in lieu of interest that
had accrued on the 1993 Junior Notes. Pursuant to this agreement, holders of the
1993 Junior Notes received 2,153 shares of the Company's Common Stock for every
$100,000 of interest payable. Among the holders of 1993 Junior Notes were the
following (with shares issued in parenthesis): Sidney Dworkin (10,245); Gerald
Richter (931); Edward R. Falkner (931), Elayne Schoke (931), James Schoke
(1,863), and Irving Davies (2,794), all of whom are principal stockholders of
the Company; and CN Partners (4,058) in which Lee Hartzmark, Harry Schwartz,
Gerald Richter, Edward R. Falkner, and Sidney Dworkin each have a 20% beneficial
interest.

On June 20, 1996, Mr. Lee Hartzmark, father of Michael L. Hartzmark,
entered into an agreement with Performance (formerly Mr. Gasket, the seller of
the Cragar assets) whereby he was assigned the rights to an unsecured promissory
note and a non-compete agreement between Performance and the Company. The
unsecured promissory note and non-compete agreement had outstanding principal
balances of $1,066,098 and

38
<PAGE> 39

$44,118, respectively, at June 20, 1996. Mr. Hartzmark paid Performance $700,000
in consideration of the assignment. On July 1, 1996, the Company privately sold
Bridge Notes totaling $1,500,000 (as described above). A portion of the proceeds
from the Bridge Notes were used to pay the unsecured promissory note and
non-compete agreement obligations held by Mr. Hartzmark for $700,000, plus
$79,727 for interest and service charges related to the assignment.

On July 1, 1996, the Company obtained bridge financing totaling $1,500,000
(the "Bridge Financing"). Each lender that participated in the Bridge Financing
(collectively, the "Lenders") received from the Company, as consideration, (i)
the Company's promissory note in the principal amount of the Lender's investment
(the "Bridge Note"), and (ii) 8,400 Class C Warrants for each $100,000 the
Lender invested in connection with the Bridge Financing. Each Class C Warrant
entitles the holder to purchase one share of the Company's Common Stock at an
exercise price of $3.25 per share. The Bridge Notes are due in full on the
earlier of June 30, 1998 or 30 days following this offering. Among the officers,
directors, and principal stockholders that participated in the Bridge Financing
are the following (with amount invested in parenthesis): Mark Schwartz,
($100,000); Irving Davies ($150,000); Edward R. Falkner ($200,000); and Harry
Schwartz ($100,000).

See "Management -- Option Grants" for information regarding option grants
made on June 10, 1996 and November 9, 1996 to certain of the Company's employees
and existing and former directors.

On September 30, 1996, the Company entered into a Second Note Amendment
with the holders of the 1993 Junior Notes and entered into a First Note
Amendment with Mr. Sidney Dworkin, the holder of the $350,000 Note. Pursuant to
both of these Amendments, provisions were added to the 1993 Junior Notes and the
$350,000 Note which provide that, upon the closing of the offering, (i) the
outstanding principal and interest under the 1993 Junior Notes will convert into
291,666 shares of the Company's Common Stock (19,444 shares per $100,000
principal amount) and (ii) the outstanding principal and interest under the
$350,000 Note will convert into 68,056 shares of the Company's Common Stock
(19,444 shares per $100,000 principal amount).

Lee Hartzmark, the father of Michael L. Hartzmark, President of the
Company, is a Senior Vice President with Fahnestock & Co., Inc., which is
anticipated to serve as a selected dealer in connection with this offering.

Management believes that the foregoing transactions were consummated on
terms at least as favorable as could have been obtained in arms-length
transactions. All ongoing and future transactions between the Company and its
officers, directors, and 5% shareholders will be on terms no less favorable than
could be obtained from independent, third parties and will be approved by a
majority of the independent, disinterested directors of the Company.

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<PAGE> 40

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 16, 1996 by (i) each
person who is known by the Company to be the beneficial owner of more than 5% of
the Common Stock, (ii) each of the Company's directors, (iii) the executive
officer named in the Compensation Table, and (iv) all directors and executive
officers of the Company as a group. Except as otherwise indicated, the Company
believes that the beneficial owners of the Common Stock listed below, based on
information furnished by such owners, have sole investment and voting power with
respect to such shares, subject to community property laws where applicable.

<TABLE>
<CAPTION>
NUMBER PERCENT OF TOTAL(3)
SHARES ---------------------
NAME AND ADDRESS BENEFICIALLY BEFORE AFTER
OF BENEFICIAL OWNER(1) OWNED(2) OFFERING OFFERING
- --------------------------------------------------------------- ------------ -------- --------
<S> <C> <C> <C>
Michael L. Hartzmark, Ph.D.(4)................................. 87,135 6.72% 4.06%
Mark Schwartz(5)............................................... 118,748 9.25% 5.62%
Sidney Dworkin(6).............................................. 319,591 24.21% 14.77%
Dolores Hartzmark(7)........................................... 110,348 8.47% 5.12%
Debra Jacobs(8)................................................ 87,135 6.72% 4.06%
Edward R. Falkner(9)........................................... 82,126 6.26% 3.80%
Irving Davies(10).............................................. 88,700 6.78% 4.11%
Gerald Richter(11)............................................. 87,396 6.73% 4.07%
James & Elayne Schoke(12)...................................... 76,100 5.87% 3.55%
Harry Schwartz(13)............................................. 129,282 9.86% 5.98%
All executive officers and directors as a group (seven
persons)..................................................... 525,474 39.30% 24.73%
</TABLE>

- ---------------
(1) Unless otherwise noted, the address of each of the listed stockholders is
4636 N. 43rd Avenue, Phoenix, Arizona 85031.

(2) A person is deemed to be the beneficial owner of securities that can be
acquired within 60 days from the date set forth above through the exercise
of any option or warrant.

(3) In calculating percentage ownership, all shares of Common Stock that the
named stockholder has the right to acquire upon exercise of any option or
warrant are deemed to be outstanding for the purpose of computing the
percentage of Common Stock owned by such stockholder, but are not deemed
outstanding for the purpose of computing the percentage of Common Stock
owned by any other stockholder. Shares and percentages beneficially owned
are based upon 1,290,305 shares outstanding before this offering, which
assumes conversion of all convertible notes that will be automatically
converted into 359,722 shares of Common Stock upon the completion of this
offering. Accordingly, shares and percentages beneficially owned after the
offering are based on 2,140,305 shares.

(4) Dr. Hartzmark is deemed to be beneficial owner of MDA Financial, Inc. As a
result, Dr. Hartzmark's beneficial interest includes 6,563 shares
purchasable upon exercise of Class A Warrants and convertible notes that
will automatically convert into 29,167 shares of Common Stock upon the
completion of this offering.

(5) Includes 13,125 shares purchasable upon exercise of Class A Warrants, 8,400
shares purchasable upon exercise of Class C warrants, and 2,800 shares
purchasable upon exercise of options.

(6) Mr. Dworkin is deemed to be beneficial owner of a 20% interest in CN
Partners. As a result, Mr. Dworkin's beneficial interest includes 11,813
shares purchasable upon exercise of Class A warrants, 24,500 shares
purchasable upon exercise of Class B warrants, 184,722 shares of Common
Stock issuable upon the conversion of notes that will be automatically
converted upon the completion of this offering, and 2,100 shares
purchasable upon exercise of options.

(7) Includes 13,125 shares purchasable upon exercise of Class A Warrants. Total
does not include 10,737 shares of Common Stock beneficially owned by Lee
Hartzmark, husband of Dolores Hartzmark, through his 20% interest in CN
Partners. Dolores Hartzmark does not share voting or investment power with
respect to such shares and disclaims beneficial ownership thereof. Lee
Hartzmark does not share voting or investment power with respect to the
shares or warrants held by Dolores Hartzmark and disclaims beneficial
ownership thereof.

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<PAGE> 41

(8) Ms. Jacobs is deemed to be beneficial owner of MDA Financial, Inc. As a
result, Ms. Jacobs's beneficial interest includes 6,563 shares purchasable
upon exercise of Class A Warrants and 29,167 shares of Common Stock
issuable upon the conversion of notes that will be automatically converted
upon the completion of this offering.

(9) Dr. Falkner is deemed to be beneficial owner of The Edward Falkner Trust
and beneficial owner of a 20% interest in CN Partners. As a result, Dr.
Falkner's beneficial interest includes 5,250 shares purchasable upon
exercise of Class A Warrants, 16,800 shares purchasable upon exercise of
Class C Warrants, and 19,444 shares of Common Stock issuable upon the
conversion of notes that will be automatically converted upon the
completion of this offering.

(10) Includes 5,250 shares purchasable upon exercise of Class A Warrants, 12,600
shares purchasable upon exercise of Class C Warrants, and 29,167 shares of
Common Stock issuable upon the conversion of notes that will be
automatically converted upon the completion of this offering.

(11) Mr. Richter is deemed to be beneficial owner of a 20% interest in CN
Partners. As a result, Mr. Richter's beneficial interest includes 7,875
shares purchasable upon exercise of Class A Warrants and 19,444 shares of
Common Stock issuable upon the conversion of notes that will be
automatically converted upon the completion of this offering.

(12) Each of James Schoke and Elayne Schoke may be deemed a beneficial owner of
the other's shares of Common Stock. As a result, their interest includes
5,250 shares purchasable upon exercise of Class A Warrants and 29,167
shares of Common Stock issuable upon the conversion of notes that will be
automatically converted upon the completion of this offering.

(13) Mr. Schwartz is deemed to be the beneficial owner of a 20% interest in CN
Partners. As a result, Mr. Schwartz's beneficial interest includes 13,125
shares purchasable upon exercise of Class A Warrants, 8,400 shares
purchasable upon exercise of Class C Warrants, and 9,722 shares of Common
Stock issuable upon the conversion of notes that will be automatically
converted upon the completion of this offering.

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<PAGE> 42

DESCRIPTION OF SECURITIES

The Company is a Delaware corporation and its affairs are governed by its
Amended and Restated Certificate of Incorporation ("Certificate of
Incorporation") and Bylaws and by the Delaware General Corporation Law. The
following description of the Company's capital stock is qualified in all
respects by reference to the Company's Certificate of Incorporation and Bylaws,
which have been filed as exhibits to the Registration Statement of which this
Prospectus forms a part.

The authorized capital stock of the Company consists of 5,000,000 shares of
Common Stock, $0.01 par value, and 200,000 shares of Preferred Stock, $0.01 par
value. The Common Stock and Warrants offered hereby may only be purchased
together in this offering on the basis of one share of Common Stock and one
Warrant. The Common Stock and Warrants will be immediately separable and will
not be listed for trading as units.

COMMON STOCK

The holders of outstanding shares of Common Stock are entitled to receive
dividends out of assets legally available thereof at such times and in such
amounts as the Board of Directors may, from time to time, determine, subject to
any preferences which may be granted to the holders of Preferred Stock. Holders
of Common Stock are entitled to one vote per share on all matters on which the
holders of Common Stock are entitled to vote. The Common Stock is not entitled
to preemptive rights and is not subject to redemption or conversion. Upon
liquidation, dissolution, or winding-up of the Company, the assets (if any)
legally available for distribution to stockholders are distributable ratably
among the holders of the Common Stock after payment of all debt and liabilities
of the Company and the liquidated preference of any outstanding class or series
of Preferred Stock. All outstanding shares of Common Stock are, and the shares
of Common Stock to be issued pursuant to this offering will be, when issued and
delivered, validly issued, fully paid, and nonassessable. The rights,
preferences, and privileges of holders of Common Stock will be subject to the
preferential rights of any outstanding series of Preferred Stock that the
Company may issue in the future.

COMMON STOCK PURCHASE WARRANTS

In connection with this offering, the Company will issue 850,000 Warrants.
The Warrants are subject to the terms and conditions of a Warrant Agreement
between the Company and American Stock Transfer & Trust Company, as Warrant
Agent. The following description of the Warrants is qualified in all respects by
the Warrant Agreement, which is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. The shares of the Company's
Common Stock underlying the Warrants, when issued upon exercise thereof and
payment of the purchase price, will be fully paid and nonassessable.

Each Warrant entitles the holder to purchase one share of Common Stock at
any time during the five years following the date of this Prospectus for $6.60,
subject to adjustment in certain circumstances, unless earlier redeemed, at
which time the Warrants will expire. The Warrants are redeemable in whole and
not in part by the Company upon 30 days notice at a price of $.10 per Warrant,
provided that the closing prices of the Common Stock have averaged at least
$9.00 per share for a period of any 20 consecutive trading days ending on the
third day prior to the day on which the Company mails the notice of redemption
to the Warrant holders. In the event the Company gives notice of its intention
to redeem the Warrants, a holder would be forced to either exercise his Warrant
within 30 days of the notice of redemption or accept the redemption price. The
holders of the Warrants will have exercise rights until the close of business on
the date fixed for the redemption thereof. The number and kind of securities or
other property for which the Warrants are exercisable are subject to adjustment
upon the occurrence of certain events, including mergers, stock dividends, stock
splits, and reclassifications. Holders of Warrants have no voting, dividend, or
other rights as stockholders of the Company with respect to the shares
underlying the Warrants, unless and until the Warrants are exercised.

The Warrants may be exercised by filling out and signing the appropriate
form on the Warrants and mailing or delivering the Warrants to the Warrant Agent
in time to reach the Warrant Agent by the expiration date, accompanied by
payment in full of the exercise price for the Warrants being exercised in United
States

42
<PAGE> 43

funds (in cash or by certified check or bank draft payable to the Warrant
Agent). Common Stock certificates will be issued as soon as practicable after
exercise and payment of the exercise price as described above.

REPRESENTATIVE'S WARRANTS

The Company has agreed, upon completion of this offering, to sell to the
Representative for $.001 per warrant, the Representative's Warrants to purchase
85,000 shares of Common Stock and 85,000 Underlying Warrants. The
Representative's Warrants will be exercisable for a period of four years
commencing one year after the date of this Prospectus. In addition, the Company
will provide certain demand and piggyback registration rights in connection with
the Representative's Warrants. See "Underwriting."

EXISTING WARRANTS

Class A Warrants

In connection with the original capitalization of the Company in 1992, the
Company issued 118,123 Class A Warrants. Each Class A Warrant entitles the
holder to purchase one share of the Common Stock at a price of $1.43 and is
exercisable at any time on or before December 31, 1999. In addition, on December
15, 1994, the Company issued 3,938 Class A Warrants. See "Certain Transactions."
As of the date of this Prospectus, none of the holders of the Class A Warrants
has exercised his Class A Warrants. The Class A Warrants contain provisions that
protect the holders against dilution by adjustment of the exercise price and the
number of shares of Common Stock subject to the Class A Warrants in certain
events, such as stock dividends and distributions, stock splits,
recapitalizations, mergers, or consolidations. Holders of Class A Warrants do
not possess any rights as stockholders of the Company prior to exercise.

Class B Warrants

On December 15, 1994, the Company issued 24,500 Class B Warrants. See
"Certain Transactions." Each Class B Warrant entitles the holder to purchase one
share of the Common Stock at a price of $0.36 and is exercisable at any time on
or before December 31, 1999. As of the date of this Prospectus, none of the
holders of the Class B Warrants has exercised his Class B Warrants. The Class B
Warrants contain provisions that protect the holders against dilution by
adjustment of the exercise price and the number of shares of Common Stock
subject to the Class B Warrants in certain events, such as stock dividends and
distributions, stock splits, recapitalizations, mergers, or consolidations.
Holders of Class B Warrants do not possess any rights as stockholders of the
Company prior to exercise.

Class C Warrants

On July 1, 1996, the Company issued 126,000 Class C Warrants. See "Certain
Transactions." Each Class C Warrant entitles the holder to purchase one share of
Common Stock at a price of $3.25 per share, exercisable before June 30, 2001.
See "Certain Transactions." As of the date of this Prospectus, none of the
holders of the Class C Warrants has exercised his Class C Warrants. The Class C
Warrants contain provisions that protect the holders against dilution by
adjustment of the exercise price and the number of shares of Common Stock
subject to the Class C Warrants in certain events, such as stock dividends and
distributions, stock splits, recapitalizations, mergers, or consolidations.
Holders of Class C Warrants do not possess any rights as stockholders of the
Company prior to exercise. Holders of Class C Warrants have been granted certain
registration rights. See "Shares Eligible For Future Sale -- Registration
Rights."

OPTIONS

See "Management -- Option Grants" for information regarding option grants
made as of June 10, 1996 and November 9, 1996, to certain of the Company's
employees and existing and former directors. As of the date of this Prospectus,
none of the holders of such options has exercised his options.

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<PAGE> 44

PREFERRED STOCK

The Board of Directors may, without further action of the stockholders of
the Company, issue shares of Preferred Stock in one or more series and fix or
alter the rights or preferences thereof, including the voting rights, redemption
provisions (including sinking fund provisions), dividend rights, dividend rates,
liquidation preferences, conversion rights, and any other rights, preferences,
privileges, and restrictions of any wholly unissued series of Preferred Stock.
The rights of holders of Common Stock will be subject to, and may be adversely
affected by, the rights of holders of any Preferred Stock that may be issued in
the future. No shares of Preferred Stock are outstanding, and the Company has no
present plans to issue any such shares. The issuance of shares of Preferred
Stock could adversely affect the voting power of holders of Common Stock and
could have the effect of delaying, deferring, or preventing a change in control
of the Company or other corporate action.

DEBT SECURITIES

For a discussion of the Company's outstanding debt securities, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

CERTAIN CERTIFICATE OF INCORPORATION PROVISIONS

The Company's Certificate of Incorporation provides that the Company's
directors will not be personally liable for monetary damages for breach of the
directors' fiduciary duty of care to the Company or its stockholders, except for
liability (i) for any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or which involved
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the Delaware General Corporation Law, or (iv) for any transaction from which the
director derived any improper personal benefit. This provision in the
Certificate of Incorporation does not eliminate the duty of care, and in
appropriate circumstances equitable remedies such as an injunction or other
forms of nonmonetary relief would remain available under Delaware law. This
provision also does not affect a director's responsibilities under any other
laws, such as the federal securities laws or state or federal environmental
laws.

TRANSFER AGENT, REGISTRAR AND WARRANT AGENT

The stock transfer agent and registrar for the Common Stock is American
Stock Transfer Company.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have 2,140,305 shares of
Common Stock outstanding, assuming conversion of outstanding notes which are
automatically convertible into 359,722 shares of Common Stock and excluding
exercise of currently outstanding options and warrants. In addition, the Company
will have outstanding 122,063 Class A Warrants, 24,500 Class B Warrants, 126,000
Class C Warrants, 10,500 Non-Employee Director Options, 53,500 Employee Options,
and 4,200 other options. Of the outstanding shares of Common Stock, the 850,000
shares of Common Stock to be sold in this offering will be freely transferable
without restriction or further registration under the Securities Act, except
that any shares purchased by affiliates of the Company will be subject to the
limitations of Rule 144 under the Securities Act. In addition, the 850,000
Warrants to be sold in this offering will be freely transferable without
restriction or further registration under the Securities Act, except that any
Warrants purchased by affiliates of the Company will be subject to the
limitations of Rule 144 under the Securities Act. The remaining 1,290,305
outstanding shares of Common Stock and all of the outstanding warrants and
options will be "restricted securities" upon the completion of this offering as
that term is defined in Rule 144 under the Securities Act.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
for at least two years, including persons who may be deemed "affiliates" of the
Company, would be entitled to sell within any three-month period a number of
securities that does not exceed the greater of 1% of the number of shares of
Common Stock then outstanding or the average weekly trading volume of the Common
Stock during the four calendar weeks preceding the date an

44
<PAGE> 45

order to sell is placed with respect to such sale. Sales under Rule 144 are also
subject to certain manner of sale provisions and notice requirements, and to the
availability of current public information about the Company. In addition, a
person who is not deemed to have been an affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the
securities proposed to be sold for at least three years, would be entitled to
sell such securities under Rule 144(k) without regard to the requirements
described above. The Company is unable to estimate the number of securities that
may be sold under Rule 144 since this will depend on the market price for the
Common Stock of the Company, the personal circumstances of the sellers, and
other factors.

Directors, officers, and certain principal stockholders owning a total of
765,711 shares of Common Stock and 133,837 currently outstanding options will
sign lock-up agreements under which such holders will agree not to offer, sell,
or otherwise dispose of any of their shares of Common Stock that might otherwise
be eligible for sale for a period of 12 months after the date of this Prospectus
without the written consent of the Representative. All remaining stockholders of
the Company owning 524,594 shares of Common Stock, and holders of 164,926
presently outstanding warrants and options, have agreed to three-month lock-up
periods. Upon expiration of the lock-up agreements, such securities will be
available for sale in the public market subject to compliance with the
limitations of Rule 144.

Prior to this offering, there has been no public market for the Common
Stock or Warrants. The Company can make no predictions as to the effect, if any,
that sales of shares of Common Stock or Warrants or the availability of Common
Stock or Warrants for sale will have on the market price prevailing from time to
time. Nevertheless, sales of substantial amounts of the Common Stock or Warrants
in the public market could adversely affect the market price of the Common Stock
or Warrants and could impair the Company's future ability to raise capital
through an offering of its equity securities.

REGISTRATION RIGHTS

The holders of the Class C Warrants have been granted certain rights with
respect to the registration under the Securities Act of the Class C Warrants or
the shares of Common Stock issued upon exercise of the Class C Warrants.
Beginning 12 months after the completion of this offering, the Company must,
within six months of receipt of requests for registration from holders of at
least 63,000 shares of Common Stock (or warrants to acquire 63,000 shares of
Common Stock), use its best efforts to effect the registration under the
Securities Act of such securities. See "Underwriting" for a description of
certain registration rights to be granted to the holders of the Representative's
Warrants.

The Company generally is required to bear all costs incurred in connection
with any such registrations, other than underwriting discounts and commissions.
The foregoing registration rights could result in substantial future expense to
the Company and could adversely affect any future equity or debt offerings of
the Company.

45
<PAGE> 46

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their Representative, Dickinson & Co., have
severally agreed to purchase from the Company the following respective numbers
of shares of Common Stock and Warrants at the public offering price, less the
underwriting discounts and commissions, set forth on the cover page of this
Prospectus.

<TABLE>
<CAPTION>
NUMBER OF
SHARES NUMBER OF
OF COMMON STOCK WARRANTS TO BE
UNDERWRITER TO BE PURCHASED PURCHASED
------------------------------------------------------- --------------- --------------
<S> <C> <C>
Dickinson & Co......................................... 680,000 680,000
RAS Securities Corp.................................... 170,000 170,000
------- -------
Total........................................ 850,000 850,000
======= =======
</TABLE>

The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all Securities offered hereby if any are purchased.

The Company has been advised by the Underwriters that the Underwriters
propose to offer the Securities to the public at the public offering price set
forth on the cover page of this Prospectus, and to certain dealers at such price
less a concession not in excess of $.30 per share of Common Stock and $.00 per
Warrant. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $.05 per share of Common Stock and $.00 per Warrant. After the
initial public offering, the public offering price, concessions, and other
selling terms may be changed by the Representative.

The Company has agreed to pay underwriting discounts and commissions in the
aggregate of 10% of the initial public offering price of the Securities offered
hereby. The Company also has agreed to reimburse the Representative's expenses
on a non-accountable basis in the amount of 3% of the gross proceeds received
from the sale of the Securities including any Securities sold to cover
over-allotments, if any. Any such expenses in excess of the expense allowance
will be borne by the Underwriters. To date, the Company has advanced the
Representative $25,000 with respect to non-accountable expenses.

The Company has granted to the Underwriters an option, exercisable not
later than 45 days after the date of this Prospectus, to purchase up to 127,500
additional shares of Common Stock and 127,500 additional Warrants at the public
offering price, less the underwriting discounts and commissions, set forth on
the cover page of this Prospectus. The Underwriters may exercise such option
only to cover over-allotments, if any. To the extent that the Underwriters
exercise such option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage thereof that the number of Securities
to be purchased by it shown in the above table bears to 850,000, unless the
Underwriters agree otherwise in writing, and the Company will be obligated,
pursuant to the option, to sell such Securities to the Underwriters. If
purchased, the Underwriters will offer for sale such additional shares of Common
Stock and Warrants on the same terms as those on which the 850,000 shares of
Common Stock and 850,000 Warrants are being offered.

The Company has agreed, upon completion of this offering, to sell to the
Representative or its designees, for $.001 per warrant, Representative's
Warrants to purchase 85,000 shares of Common Stock and 85,000 Underlying
Warrants. The terms and conditions of the Underlying Warrants are substantially
identical to those of the Warrants offered hereby. The Representative's Warrants
will be exercisable for a four year term, commencing one year after the date of
this Prospectus, at an exercise price equal to 125% of the initial public
offering price of the Securities offered hereby. The Representative's Warrants
will be restricted from sale, transfer, assignment, or hypothecation except to
the Underwriters, members of the selling group, and persons who are officers or
partners of the Underwriters or members of the selling group, and except in
certain other limited circumstances.

The Representative's Warrants will give the holders an opportunity to
profit from a rise in the market price of the Company's Common Stock to the
extent that the market price exceeds the exercise price of the Representative's
Warrants. Any profit realized by the Underwriters upon the sale of the
Representative's

46
<PAGE> 47

Warrants or the securities issuable thereunder may be deemed to be additional
underwriting compensation. If the Representative's Warrants are exercised, the
interest of the Company's stockholders will be diluted. It may be more difficult
for the Company to raise additional capital while the Representative's Warrants
are outstanding, and the holders of the Representative's Warrants may be
expected to exercise them when the Company, in all likelihood, would be able to
obtain needed additional capital by a new offering of securities on terms more
favorable than those provided for by the Representative's Warrants.

The Company has granted to the holders of the Representative's Warrants and
the underlying securities certain rights with respect to registration under the
Securities Act of the securities underlying the Representative's Warrants. For a
period of four years commencing one year following the date of this Prospectus,
either the Representative or the holders of not less than a majority of the
Common Stock issued or issuable upon exercise of the Representative's Warrants
and Underlying Warrants may require the Company to effect one registration under
the Securities Act with respect to the Common Stock underlying the
Representative's Warrants, the Underlying Warrants, and the Common Stock
underlying the Underlying Warrants, and the Company is required to use its
reasonable best efforts to effect such registration. In addition, subject to
certain limitations, in the event the Company proposes to register any of its
securities under the Securities Act during the four-year period commencing one
year after the date of this Prospectus, the holders of the Representative's
Warrants, the Underlying Warrants, and the Common Stock underlying the
Representative's Warrants and the Underlying Warrants are entitled to notice of
such registration and may elect to include proposed dispositions of the Common
Stock underlying the Representative's Warrants, the Underlying Warrants, and the
Common Stock underlying the Underlying Warrants in such registration. The
registration of securities pursuant to the registration rights applicable to the
Representative's Warrants may impede future financing.

Directors, officers, and certain principal stockholders of the Company
owning a total of 765,711 shares of Common Stock and 133,837 currently
outstanding options and warrants will sign lock-up agreements under which such
holders will agree not to offer, sell, or otherwise dispose of any of their
shares of Common Stock that might otherwise be eligible for sale for a period of
12 months after the date of this Prospectus without the prior written consent of
the Representative. See "Description of Securities -- Shares Eligible for Future
Sale."

Pursuant to the Underwriting Agreement, for a period of five years from the
effective date of the Registration Statement of which this Prospectus forms a
part, the Representative has the right to designate a person to serve as a
non-voting advisor to the Board of Directors of the Company.

The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers, and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.

The Representative has advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.

Prior to this offering, there has been no public market for the Company's
Common Stock or the Warrants. The initial public offering price for the
Securities has been determined by negotiations between the Company and the
Representative of the Underwriters. Among the factors considered in such
negotiations were prevailing market conditions, the history and prospects of the
Company, the present state of the Company's development, the industry in which
it competes, an assessment of the Company's management, the market price for
securities of comparable companies at the time of the offering, and other
factors deemed relevant.

47
<PAGE> 48

LEGAL OPINIONS

The validity of the Common Stock and Warrants offered hereby will be passed
upon for the Company by Snell & Wilmer L.L.P., Phoenix, Arizona and for the
Underwriters by O'Connor, Cavanagh, Anderson, Killingsworth & Beshears, P.A.,
Phoenix, Arizona.

EXPERTS

The financial statements of Cragar Industries, Inc., as of December 31,
1995 and for each of the years in the two-year period ended December 31, 1995,
have been included herein and in the registration statement, in reliance on the
report of KPMG Peat Marwick L.L.P., independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form SB-2 (herein, together with all
amendments and exhibits, referred to as the "Registration Statement") under the
Securities Act with respect to the securities being offered pursuant to this
Prospectus. This Prospectus does not contain all information set forth in the
Registration Statement and exhibits and schedules thereto, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. The Registration Statement may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 25049 and at the regional office of the Commission located at
5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036-3648. Copies
of such material can be obtained at prescribed rates from the Public Reference
Room of the Commission at 450 Fifth Street, N.W., Washington, D.C. 25049. The
Commission maintains a Web site (http://www.sec.gov) that contains reports,
proxy, and information statements and other information regarding registrants,
such as the Company, that file electronically with the Commission. Statements
contained in this Prospectus concerning the provisions of any documents are not
necessarily complete and in each instance, reference is made to the copy of such
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference.

The Company will be subject to the informational requirements of the
Exchange Act and in accordance therewith will file reports and other information
with the Commission. The Company intends to furnish to its stockholders annual
reports containing financial statements audited by independent certified public
accountants following the end of each fiscal year.

48
<PAGE> 49

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Balance Sheets at December 31, 1995 and at September 30, 1996 (unaudited)............. F-3
Statements of Operations for the years ended December 31, 1994 and 1995 and for the
nine-month periods ended September 30, 1995 (unaudited) and September 30, 1996
(unaudited)......................................................................... F-4
Statements of Stockholders' Deficit for the years ended December 31, 1994 and 1995,
and for the nine-month period ended September 30, 1996 (unaudited).................. F-5
Statements of Cash Flows for the years ended December 31, 1994 and 1995, and for the
nine-month periods ended September 30, 1995 (unaudited) and September 30, 1996
(unaudited)......................................................................... F-6
Notes to Financial Statements......................................................... F-8
</TABLE>

F-1
<PAGE> 50

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
CRAGAR Industries, Inc.:

We have audited the accompanying balance sheet of CRAGAR Industries, Inc.
as of December 31, 1995, and the related statements of operations, stockholders'
deficit, and cash flows for each of the years in the two-year period ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, the financial statements referred to above present fairly,
in all material respects, the financial position of CRAGAR Industries, Inc. as
of December 31, 1995, and the results of its operations and its cash flows for
each of the years in the two-year period ended December 31, 1995 in conformity
with generally accepted accounting principles.

KPMG Peat Marwick LLP

Phoenix, Arizona
January 12, 1996, except for Note 9
which is as of May 25, 1996

F-2
<PAGE> 51

CRAGAR INDUSTRIES, INC.

BALANCE SHEETS
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996

<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
DECEMBER 31, -------------
ASSETS 1995
------------ (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................... $ -- $ --
Accounts receivable, less allowance for doubtful accounts of
$150,626 in 1995 and $45,863 in 1996......................... 4,994,488 4,453,402
Inventories, net................................................ 7,380,142 6,894,467
Current portion of non-trade receivables........................ 87,500 --
Prepaid expenses................................................ 29,753 169,423
----------- -----------
Total current assets......................................... 12,491,883 11,517,292
----------- -----------
Property and equipment, net....................................... 1,047,090 878,157
Non-trade receivables, less current portion....................... 102,619 --
Other assets, net................................................. 324,305 256,758
----------- -----------
$ 13,965,897 $ 12,652,207
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable................................................ $ 2,515,208 $ 2,511,708
Accrued expenses................................................ 924,861 1,218,244
Accrued interest................................................ 124,044 215,308
Current portion of capital lease obligations.................... 61,573 66,574
Current portion of long-term debt............................... 512,748 351,806
----------- -----------
Total current liabilities.................................... 4,138,434 4,363,640
----------- -----------
Note payable...................................................... 7,300,895 5,411,182
Capital lease obligations, excluding current portion.............. 177,341 126,560
Long-term debt, less current portion.............................. 978,690 1,477,873
Subordinated investor debt, less current portion.................. 1,500,000 1,500,000
Excess of fair value of assets acquired over cost................. 1,474,937 921,836
----------- -----------
Total liabilities............................................ 15,570,297 13,801,091
----------- -----------
Stockholders' deficit:
Preferred stock, par value $.01; authorized 200,000 shares, no
shares issued and outstanding................................ -- --
Common stock, par value $.01; authorized 5,000,000 shares,
930,583 shares at December 31, 1995 and 930,583 shares
(unaudited) at September 30, 1996 issued and outstanding..... 1,329 1,329
Additional paid-in capital...................................... 4,823,916 4,861,716
Accumulated deficit............................................. (6,429,645) (6,011,929)
----------- -----------
Total stockholders' deficit.................................. (1,604,400) (1,148,884)
----------- -----------
Commitments, contingencies and subsequent events..................
----------- -----------
$ 13,965,897 $ 12,652,207
=========== ===========
</TABLE>

See accompanying notes to the financial statements.

F-3
<PAGE> 52

CRAGAR INDUSTRIES, INC.

STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND SEPTEMBER 30, 1996

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED
--------------------------- SEPTEMBER 30,
1994 1995 ---------------------------
----------- ----------- 1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales............................. $20,269,936 $22,935,773 $18,374,847 $16,056,074
Costs of goods sold................... 17,166,550 20,289,347 15,810,425 13,974,038
----------- ----------- ----------- -----------
Gross profit........................ 3,103,386 2,646,426 2,564,422 2,082,036
----------- ----------- ----------- -----------
Selling, general and administrative
expenses............................ 3,887,756 2,912,393 2,159,321 1,962,508
Amortization of excess of fair value
of assets acquired over cost........ (737,468) (737,468) (553,101) (553,101)
----------- ----------- ----------- -----------
Income (loss) from operations....... (46,902) 471,501 958,202 672,629
----------- ----------- ----------- -----------
Non-operating expenses, net:
Interest expense, net............... 1,396,677 1,164,510 734,215 737,085
Other, net.......................... 112,970 747 156,488 (155,027)
----------- ----------- ----------- -----------
Total non-operating expenses..... 1,509,647 1,165,257 890,703 582,058
----------- ----------- ----------- -----------
Earnings (loss) before income
taxes and extraordinary item... (1,556,549) (693,756) 67,499 90,571
Income taxes.......................... -- -- -- 3,344
----------- ----------- ----------- -----------
Income (loss) before extraordinary
item................................ (1,556,549) (693,756) 67,499 87,227
Extraordinary item:
Gain on forgiveness of debt......... 1,107,232 -- -- 330,489
----------- ----------- ----------- -----------
Net earnings (loss).............. $ (449,317) $ (693,756) $ 67,499 $ 417,716
=========== =========== =========== ===========
Income (loss) per common equivalent
share before extraordinary item..... $ (1.38) $ (.60) $ .06 $ .07
=========== =========== =========== ===========
Earnings (loss) per common and common
equivalent share.................... $ (.40) $ (.60) $ .06 $ .35
=========== =========== =========== ===========
Weighted average common and common
equivalent shares outstanding....... 1,123,655 1,158,200 1,151,640 1,177,953
=========== =========== =========== ===========
Earnings (loss) per common shares --
assuming full dilution.............. $ .05 $ .28
=========== ===========
Weighted average common shares
outstanding -- assuming full
dilution............................ 1,443,306 1,469,619
=========== ===========
</TABLE>

See accompanying notes to the financial statements.

F-4
<PAGE> 53

CRAGAR INDUSTRIES, INC.

STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1994 AND 1995
AND NINE MONTHS ENDED SEPTEMBER 30, 1996

<TABLE>
<CAPTION>
COMMON STOCK
----------------------- ADDITIONAL
NUMBER OF PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT DEFICIT
---------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances at January 1,
1994...................... 8,750,070 $ 12,500 $1,237,510 $(5,286,572) $ (4,036,562)
One-for-ten reverse stock
split..................... (7,875,063) (11,250) 11,250 -- --
Issuance of common stock
for cash.................. 29,166 42 41,625 -- 41,667
Net loss for the year....... -- -- -- (449,317) (449,317)
--------- -------- --------- ---------- ----------
Balances at December 31,
1994...................... 904,173 1,292 1,290,385 (5,735,889) (4,444,212)
Issuance of common stock.... 26,410 37 175,208 -- 175,245
Contribution of subordinated
investor debt............. -- -- 3,358,323 -- 3,358,323
Net loss for the year....... -- -- -- (693,756) (693,756)
--------- -------- --------- ---------- ----------
Balances at December 31,
1995...................... 930,583 1,329 4,823,916 (6,429,645) (1,604,400)
Issuance of common stock
warrants (unaudited)...... -- -- 37,800 -- 37,800
Net earnings (unaudited).... -- -- -- 417,716 417,716
--------- -------- --------- ---------- ----------
Balances at September 30,
1996 (unaudited).......... 930,583 $ 1,329 $4,861,716 $(6,011,929) $ (1,148,884)
========= ======== ========= ========== ==========
</TABLE>

See accompanying notes to the financial statements.

F-5
<PAGE> 54

CRAGAR INDUSTRIES, INC.

STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND SEPTEMBER 30, 1996

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, NINE MONTHS
-------------------------- ENDED SEPTEMBER 30,
1994 1995 --------------------------
----------- ---------- 1995 1996
---------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss).................... $ (449,317) $ (693,756) $ 67,499 $ 417,716
Adjustments to reconcile net earnings
(loss) to net cash provided by (used
in) operating activities:
Provision for losses on accounts
receivable........................ 129,086 (232,960) (101,611) (104,763)
Provision for obsolete and
slow-moving inventory............. (112,137) (125,227) 126,110 (53,132)
Gain on sale of property and
equipment......................... (155,417) -- -- (287,000)
Depreciation and amortization of
property and equipment............ 144,737 264,554 158,347 223,059
Amortization of intangibles......... 268,630 161,131 129,808 95,337
Amortization of excess fair value of
assets acquired over cost......... (737,468) (737,468) (553,101) (553,101)
Extraordinary gain on restructuring
of debt........................... (1,107,232) -- -- (330,489)
Increase (decrease) in cash
resulting from changes in:
Accounts receivable............... (1,423,470) 1,073,704 762,979 645,849
Inventories....................... 490,835 (114,248) (619,127) 538,807
Non-trade receivables............. (281,300) 91,181 68,386 54,906
Prepaid expenses.................. 100,154 (5,755) (43,371) (139,670)
Other assets...................... (26,433) (95,700) (95,700) (27,790)
Accounts payable and accrued
expenses....................... 637,355 872,632 503,616 311,883
Accrued interest.................. 547,000 69,834 47,018 91,264
----------- ---------- --------- ---------
Net cash provided by (used in)
operating activities......... (1,974,977) 527,922 450,853 882,876
----------- ---------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment.... (272,075) (179,296) (131,502) (54,127)
Proceeds from the sale of property and
equipment........................... 155,417 -- -- 350,000
----------- ---------- --------- ---------
Net cash provided by (used in)
investing activities......... (116,658) (179,296) (131,502) 295,873
----------- ---------- --------- ---------
</TABLE>

Continued

F-6
<PAGE> 55

CRAGAR INDUSTRIES, INC.

STATEMENTS OF CASH FLOWS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND SEPTEMBER 30, 1996

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, NINE MONTHS ENDED
------------------------- SEPTEMBER 30,
1994 1995 --------------------------
---------- ---------- 1995 1996
---------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Net borrowings (repayments) on note
payable............................. $1,789,647 $ 46,515 $ (64,318) $(1,889,713)
Proceeds from issuance of long-term
debt................................ 350,000 22,034 22,034 1,462,200
Issuance of warrants................... -- -- -- 37,800
Repayments of long-term debt........... (348,191) (507,207) (382,500) (743,256)
Repayments of capital lease
obligations......................... -- (59,406) (44,005) (45,780)
Proceeds from issuance of subordinated
investor debt....................... 108,333 -- -- --
Proceeds from issuance of common
stock............................... 41,667 -- -- --
---------- ---------- ---------- -----------
Net cash provided by (used in)
financing activities.............. 1,941,456 (498,064) (468,789) (1,178,749)
---------- ---------- ---------- -----------
Increase (decrease) in cash......... (150,179) (149,438) (149,438) --
Cash and cash equivalents at beginning of
period................................. 299,617 149,438 149,438 --
---------- ---------- ---------- -----------
Cash and cash equivalents at end of
period................................. $ 149,438 $ -- $ -- $ --
========== ========== ========== ===========
Supplemental disclosure of cash flow
information:
Cash paid for interest................. $ 831,987 $ 977,894 $ 687,197 $ 627,085
Cash paid for income taxes............. -- -- -- 31,171
Noncash financing and investing
activities:
Sale of asset reducing accounts
payable............................. -- -- -- 130,000
Contribution of subordinated investor
debt................................ -- 3,358,323 3,358,323 --
Issuance of common stock in exchange
for accrued interest................ -- 175,245 175,245 --
Capital lease obligations incurred for
new equipment....................... -- 240,370 240,370 --
</TABLE>

See accompanying notes to the financial statements.

F-7
<PAGE> 56

CRAGAR INDUSTRIES, INC.

NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED)
AND SEPTEMBER 30, 1996 (UNAUDITED)

(1) DESCRIPTION OF BUSINESS

CRAGAR Industries, Inc. (the Company) designs, produces and sells
composite, aluminum, steel and wire custom wheels and wheel accessories. It
markets and sells to automotive aftermarket distributors and dealers throughout
the United States, Canada, Mexico, Australia and other international markets.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash Equivalents

All short-term investments purchased with an original maturity of three
months or less are considered to be cash equivalents. Cash and cash equivalents
include cash on hand and amounts on deposit with financial institutions.

Inventories

Inventories consist of raw materials and partially and fully assembled
custom specialty wheels. Inventories are stated at the lower of cost or market.
Cost is determined using the average cost method. Market is based upon current
sales price less distribution and selling costs. Provisions are made currently
for obsolete and slow-moving inventory.

Property and Equipment

Property and equipment are stated at cost. Major improvements and
betterments are capitalized; maintenance repairs and minor replacements are
expensed as incurred. Depreciation on furniture, fixtures and equipment is
provided using the straight-line method over the economic lives of the assets
ranging from three to seven years. Leasehold improvements and equipment held
under capital leases are amortized over the shorter of the underlying lease
terms or the asset lives.

Amortization of Organization Costs

Organization costs are being amortized using the straight-line method over
five years.

Amortization of Loan Costs

Loan costs are being amortized using the interest method over the term of
the loan agreement.

Income Taxes

The Company uses the asset and liability method of accounting for income
taxes pursuant to Statement of Financial Accounting Standards No. 109. Under the
asset and liability method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.

F-8
<PAGE> 57

CRAGAR INDUSTRIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Revenue Recognition

Revenue from product sales is recognized upon shipment to the customer.
Provisions are made currently for estimated product returns.

Product Warranties

Costs estimated to be incurred with respect to product warranties are
provided for at the time of sale based upon estimates derived from experience
factors.

Earnings (Loss) Per Share

Earnings (loss) per share is based upon the weighted average number of
common shares outstanding plus common stock equivalents after giving effect to a
one-for-ten reverse stock split on March 26, 1994 and the 7-for-1 stock split
(note 14). Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin No. 83 (SAB 83), common stock and common stock equivalents issued
during the 12-month period prior to the Company's proposed initial public
offering have been included in the calculation as if they were outstanding for
all periods presented (even if antidilutive, using the treasury stock method at
an anticipated public offering price of $6.00 per share). A total of 35,371
common equivalent shares have been used in the primary and fully-diluted
earnings per share calculations pursuant to SAB 83. The fully diluted earnings
per share also gives effect to the conversion of the $1,500,000 convertible debt
and has not been presented for the 12 months ended December 31, 1994 and 1995
because it would be antidilutive.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Unaudited Interim Financial Information

The unaudited interim financial statements as of September 30, 1996 and for
the nine-month periods ended September 30, 1995 and 1996 reflect, in the opinion
of management, all adjustments (which include only normal recurring adjustments)
necessary to fairly present the results of operations, changes in cash flows,
and financial position as of and for the periods presented. The results for the
interim periods presented are not necessarily indicative of results to be
expected for the full year.

(3) ACQUISITION OF ASSETS

The Company acquired the accounts receivable, inventories, property and
equipment, patents, trademarks and copyrights of the wheel and tire group of Mr.
Gasket Company, Inc. in a leveraged buyout on December 31, 1992. The acquisition
was accounted for as a purchase and, accordingly, the purchase price of
$10,602,097 was allocated to the assets acquired based upon their fair values at
the date of acquisition. The fair value of the net assets acquired exceeded the
purchase price and, accordingly, the fair values of the property and equipment,
patents, trademarks and copyrights acquired were reduced to zero. The remaining
balance of $3,687,341 ("bargain purchase element") was classified as excess of
fair value of assets acquired over cost, and is being amortized to income over
five years using the straight-line method. The unamortized balance at December
31, 1995 was $1,474,937 and was $921,836 (unaudited) at September 30, 1996.

F-9
<PAGE> 58

CRAGAR INDUSTRIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(4) INVENTORIES

Inventories consist of:

<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
DECEMBER 31, -------------
1995
------------ (UNAUDITED)
<S> <C> <C>
Raw materials and supplies................................. $5,451,092 $ 4,147,122
Work-in-process............................................ 395,761 940,378
Finished goods............................................. 2,311,925 2,532,471
---------- ----------
8,158,778 7,619,971
Less allowance for obsolete and slow-moving inventory...... 778,636 725,504
---------- ----------
$7,380,142 $ 6,894,467
========== ==========
</TABLE>

(5) NON-TRADE RECEIVABLES

In February 1994, the Company established a services agreement with a
subcontractor in Mexico to provide plating services on a selection of the
Company's whole wheels, wheel components and accessories. Pursuant to the
services agreement, the Company advanced to the subcontractor $65,000 cash and
$240,300 of equipment to cover the costs and equipment requirements to
appropriately modify the subcontractor's plating line. The receivable of
$190,119 at December 31, 1995 was being paid via a $.25 to $.50 per unit
discount on the plating fees paid to the subcontractor as provided in the
services agreement.

In July 1996, the Company terminated the services agreement with the
subcontractor in Mexico, and sold certain assets maintained in Mexico to a third
party for approximately $350,000 (unaudited). The assets had no book value at
the time of sale. In connection with the sale, the Company also wrote-off the
related non-trade receivable. The effect of this transaction resulted in a net
gain on the sale of approximately $287,000, which is included in other, net
non-operating income in the accompanying statement of operations for the nine
months ended September 30, 1996.

(6) PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
(UNAUDITED)
Equipment.................................................. $ 953,130 $ 993,626
Leasehold improvements..................................... 522,908 536,537
Furniture and fixtures..................................... 37,081 37,081
---------- ----------
1,513,119 1,567,244
Less accumulated depreciation and amortization............. 466,029 689,087
---------- ----------
Property and equipment, net.............................. $1,047,090 $ 878,157
========== ==========
</TABLE>

F-10
<PAGE> 59

CRAGAR INDUSTRIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(7) OTHER ASSETS

Other assets consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
<S> <C> <C>
Organization costs, net of accumulated amortization of
$280,892 at December 31, 1995 and $351,115 (unaudited) at
September 30, 1996....................................... $187,260 $ 117,037
Deferred loan costs, net of accumulated amortization of
$23,750 at December 31, 1995 and $48,864 (unaudited) at
September 30, 1996....................................... 71,250 53,636
Deposits and other......................................... 65,795 86,085
-------- --------
Total other assets............................... $324,305 $ 256,758
======== ========
</TABLE>

(8) ACCRUED EXPENSES

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
<S> <C> <C>
Accrual for stock adjustments, rebates, cash discounts,
advertising and warranty................................. $641,933 $ 777,645
Payroll and related benefits............................... 94,600 227,232
Real estate, personal property and other taxes............. 114,594 107,037
Professional fees.......................................... 58,510 51,229
Other...................................................... 15,224 55,101
-------- ----------
$924,861 $ 1,218,244
======== ==========
</TABLE>

(9) NOTE PAYABLE

Effective April 14, 1995, the Company entered into a credit agreement with
a new finance company. The maximum amount of credit available to the Company
under the new facility is $9,500,000, subject to certain restrictions with
respect to the collateral borrowing base. The loan is collateralized under a
security agreement, which includes accounts receivable, inventories, intangible
assets, and property and equipment. The loan bears interest based upon the prime
rate plus 1.25% (see amendment below). The loan agreement expires three years
from the effective date and contains no automatic renewal options. The balance
outstanding on this facility at December 31, 1995 was $7,300,895 and at
September 30, 1996 was $5,411,182 (unaudited). The Company had $372,446 and
$612,474 (unaudited) available on the line of credit at December 31, 1995 and
September 30, 1996, respectively.

As of December 31, 1995, the Company was in violation of certain financial
covenants required under the credit agreement. The Company obtained a first
amendment to the credit agreement from the finance company, dated May 25, 1996,
which waived the Company's loan covenant violations as of December 31, 1995, as
well as restated the financial covenants for the remaining duration of the
credit agreement. Certain other modifications were also included in the
amendment, including a change to the interest rate. Effective December 1, 1995,
the loan bears interest at prime plus 2.25% (10.75% at December 31, 1995) and
may decrease to prime plus 1.25% if certain thresholds of net earnings and
adjusted net worth are met for the year ending December 31, 1996.

F-11
<PAGE> 60

CRAGAR INDUSTRIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

As of September 30, 1996, the Company was in violation of certain of the
amended financial covenants (unaudited). On November 22, 1996, the financial
covenants were modified whereby the Company was in compliance. Management
expects that the Company will remain in compliance with the restated covenants
for the remainder of fiscal 1996.

(10) LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
<S> <C> <C>
Unsecured promissory note bearing interest at 8%, payable in eight
monthly installments of $60,000 including interest, totaling
$480,000 annually, with a final payment of $34,367 including
interest payable in May 1998. On December 15, 1994, $360,000 of the
principal payment due in December 1994 was forgiven. The principal
forgiveness resulted in an extraordinary gain net of tax of
$153,902 for the year ended December 31, 1994...................... $1,066,098 $ --
Unsecured promissory notes to investors (bridge notes) bearing
interest at 8% per annum, due the earlier of June 30, 1998 or 30
days following an initial public offering. Common stock purchase
warrants issued to investors to purchase 126,000 common shares
valued at $.30 per warrant, amortized to interest expense through
June 30, 1998...................................................... -- 1,500,000
Unsecured promissory note to a stockholder bearing interest at 8% per
annum, due in full on January 1, 1997, amended to allow for the
conversion into 68,056 (unaudited) shares of common stock.......... 350,000 350,000
Noninterest bearing $130,000 noncompete agreement with interest
imputed at 9%, payable in monthly installments of $2,500, maturing
January 1998....................................................... 56,798 --
Promissory note, bearing interest at 9%, payable in monthly
installments of $777, maturing June 1998, secured by equipment..... 18,542 13,542
---------- ----------
Total long-term debt....................................... 1,491,438 1,863,542
Less current portion................................................. 512,748 351,806
Less unamortized value assigned to warrants (note 12)................ -- 33,863
---------- ----------
Long-term debt, less current portion....................... $ 978,690 $ 1,477,873
========== ==========
</TABLE>

The annual maturities of long-term debt after December 31, 1995 are as
follows:

<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-----------------------------------------------------------------
<S> <C>
1996........................................................... $ 512,748
1997........................................................... 866,373
1998........................................................... 112,317
1999........................................................... --
----------
Total annual maturities of long-term debt.............. $1,491,438
==========
</TABLE>

On June 20, 1996, a stockholder of the Company entered into an agreement
with a creditor of the Company, whereby the stockholder was assigned the rights
to an unsecured promissory note and a non-compete agreement between the creditor
and the Company (unaudited). The unsecured promissory note and noncompete
agreement had outstanding principal balances of $1,066,098 and $44,118,
respectively, at June 20, 1996. The stockholder paid the creditor $700,000 in
consideration of said assignment.

In July 1996, the Company obtained bridge notes from unrelated parties
totaling $1,500,000 (unaudited). The holders of the bridge notes were also
granted warrants to purchase 126,000 shares of common stock at an

F-12
<PAGE> 61

CRAGAR INDUSTRIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

exercise price of $3.25 a share. The Company valued the warrants at $3.55 a
share. A portion of the bridge note proceeds were used to pay the aforementioned
unsecured promissory note and non-compete agreement obligation held by a
stockholder for $700,000, plus $79,727 for interest and service charges related
to the assignment. The Company recognized a $330,489 extraordinary gain on the
transaction during the nine months ended September 30, 1996.

(11) SUBORDINATED INVESTOR DEBT

Subordinated investor debt consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
<S> <C> <C>
Investor notes payable ("junior investor notes"), collateralized by a
security interest in accounts receivable, inventories, and property
and equipment, subject to and subordinate to the existing security
interests of the finance company described in note 9. The notes
bear interest at 8%, payable annually starting September 1994, with
principal due in September 1995. This note was amended during 1995
to extend the principal due as of September 1995 to September 1998.
The note holders have the right to convert their notes into 291,666
shares of $.01 par value common stock of the Company............... $1,500,000 $ 1,500,000
---------- ----------
Total subordinated investor debt........................... 1,500,000 1,500,000
Less current portion................................................. -- --
---------- ----------
Subordinated investor debt, less current portion........... $1,500,000 $ 1,500,000
========== ==========
</TABLE>

The annual maturities of subordinated investor debt after December 31, 1995
is as follows:

<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-----------------------------------------------------------------
<S> <C>
1996............................................................. $ --
1997............................................................. --
1998............................................................. 1,500,000
----------
Total annual maturities of subordinated investor
debt................................................. $1,500,000
==========
</TABLE>

Total interest expense on subordinated investor debt was $577,500 and
$116,177 for the years ended December 31, 1994 and 1995, respectively, $65,429
(unaudited) and $90,000 (unaudited) for the nine months ended September 30, 1995
and 1996, respectively.

On January 31, 1995, other subordinated investor notes (not including the
junior investor notes) in the amount of $3,358,323 were contributed to the
capital of the Company. No securities of the Company or any other consideration
was issued or delivered to the original investors in connection with the
contribution.

(12) OUTSTANDING WARRANTS

At December 31, 1995, the Company has outstanding Class A warrants to
purchase 122,062.5 shares of the Company's common stock at $1.43 per share. The
warrants became exercisable on or after January 1, 1993 and expire December 31,
1999. The Company also has outstanding Class B warrants to purchase 24,500
shares of the Company's common stock at $.36 per share. These warrants become
exercisable on or after December 15, 1994 and expire December 31, 1999. In the
opinion of management, the exercise price of the warrants approximated their
fair value at the date of grant; therefore, no debt discount was recorded at the
date of grant.

F-13
<PAGE> 62

CRAGAR INDUSTRIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

During the nine months ended September 30, 1996, in connection with
obtaining bridge financing, the Company issued warrants to purchase 126,000
shares of common stock at an exercise price of $3.25 per share (unaudited).
Because the estimated fair value of such warrants exceeded the exercise price by
$.30 per share, the Company recorded additional paid-in capital and a debt
discount of $37,800. The debt discount is being amortized to interest expense
over the term of the related financing.

(13) PREFERRED STOCK

On March 26, 1994, the Company authorized 200,000 shares of preferred
stock, $.01 par value, of which no shares were issued and outstanding at
December 31, 1995 or at September 30, 1996 (unaudited).

(14) COMMON STOCK

On December 15, 1994, the Company issued 29,166 shares of common stock at
$1.43 per share for $41,667 cash.

On September 30, 1995, the Company issued 26,410 shares of common stock at
$6.64 per share in exchange for accrued interest on the junior investor notes as
of September 30, 1995, in the amount of $175,245.

On September 27, 1996, the Company's Board of Directors approved a 7-for-1
stock split and increased the authorized number of shares of common stock from
700,000 to 5,000,000 (unaudited) shares. All share and per share amounts have
been restated to reflect the effect of the stock split.

(15) INCOME TAXES

The Company had no current or deferred income taxes for the years ended
December 31, 1994 and 1995. The reconciliation of the expected income tax
expense (benefit) calculated at the U.S. federal statutory rate of 35% to the
actual income tax benefit per the financial statements for the years ended
December 31, 1994 and 1995 is as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
--------- ---------
<S> <C> <C>
Computed "expected" tax benefit.............................. $(529,227) $(235,877)
Gain on forgiveness of debt.................................. 387,531 --
Change in the valuation allowance for deferred tax assets.... 159,000 216,000
State and local income taxes, net of federal income tax
benefit.................................................... (15,100) (30,800)
Other, net................................................... (2,204) 50,677
-------- --------
$ -- $ --
======== ========
</TABLE>

The Company has net operating loss carryforwards at December 31, 1995 of
approximately $2,151,000 for federal income tax purposes, which begin to expire
in 2010. In the event of a change in ownership pursuant to Internal Revenue
Service regulations, utilization of the net operating loss carryforwards may be
eliminated or significantly reduced.

F-14
<PAGE> 63

CRAGAR INDUSTRIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1994 and 1995 are presented below:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful
accounts....................................................... $ 229,000 $ 60,000
Inventories, principally due to allowance for obsolete and
slow-moving inventory.......................................... 1,059,000 593,000
Differences in basis of assets upon acquisition, principally
property and equipment and accounts receivable................. 1,219,000 806,000
Net operating loss carryovers..................................... 57,000 860,000
Rebates and sales discounts accrual............................... -- 133,000
Other............................................................. 35,000 74,000
----------- -----------
Total gross deferred tax assets........................... 2,599,000 2,526,000
Less valuation allowance............................................ (2,297,000) (2,513,000)
----------- -----------
Net deferred tax assets................................... 302,000 13,000
----------- -----------
Deferred tax liabilities:
Property and equipment, principally due to differences in
depreciation................................................... 302,000 13,000
----------- -----------
Total gross deferred liabilities.......................... 302,000 13,000
----------- -----------
Net deferred income taxes................................. $ -- $ --
=========== ===========
</TABLE>

The valuation allowance for deferred tax assets as of December 31, 1994 and
1995 was $2,297,000 and $2,513,000, respectively. The net change in the total
valuation allowance for the years ended December 31, 1994 and 1995 was an
increase of $159,000 and $216,000, respectively. In assessing the realizability
of deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon generation of
future taxable income during the periods in which those temporary differences
become deductible.

(16) LEASES

The Company is obligated under various capital leases for certain equipment
that expire at various dates during the next three years. The gross amount of
equipment and related accumulated amortization (included in property and
equipment, net) recorded under capital leases is as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1994 1995 1996
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Equipment............................................ $ 94,625 $334,996 $ 334,996
Less accumulated amortization........................ (22,696) (49,633) (87,862)
-------- --------- ---------
$ 71,929 $285,363 $ 247,134
======== ========= =========
</TABLE>

Amortization of equipment held under capital leases is included with
depreciation expense.

The Company also leases office and warehouse facilities and various
equipment items under operating leases. The Company is responsible for all
occupancy costs, including insurance and utility costs. Minimum

F-15
<PAGE> 64

CRAGAR INDUSTRIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

future rental commitments for all noncancelable operating leases having original
or remaining lease terms in excess of one year and future minimum capital lease
payments as of December 31, 1995 are:

<TABLE>
<CAPTION>
CAPITAL OPERATING
YEARS ENDING DECEMBER 31, LEASES LEASES
----------------------------------------------------- -------- ----------
<S> <C> <C>
1996............................................... $ 99,162 $ 319,952
1997............................................... 95,295 327,213
1998............................................... 112,997 327,213
1999............................................... -- 321,977
2000............................................... -- 336,255
Thereafter...................................... -- 814,604
-------- ----------
Total minimum lease payments............... 307,454 $2,447,214
==========
Less amount representing interest (at rates ranging
from 9% to 19.05%)................................. 68,540
--------
Present value of minimum capital lease payments...... 238,914
Less current portion of capital lease obligations.... 61,573
--------
Capital lease obligations, excluding current
portion............................................ $177,341
========
</TABLE>

No renewal options are provided for in the operating lease agreements. In
the normal course of business, operating leases are generally renewed or
replaced by other leases. Total rental expense under operating leases with a
term in excess of one month was $527,325 and $414,131 for the years ended
December 31, 1994 and 1995, respectively, and $293,544 (unaudited) and $291,105
(unaudited) for the nine-month periods ended September 30, 1995 and 1996.

(17) MAJOR CUSTOMERS

The Company sold a substantial portion of its product to two customers in
1994, to two customers in 1995, and to two (unaudited) customers for the period
ended September 30, 1996. Sales amounts for 1994, 1995 and 1996 (unaudited) and
the related accounts receivable at December 31, 1994, 1995 and September 30,
1996 (unaudited) for these customers are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
SEPTEMBER 30, 1996
1994 1995 (UNAUDITED)
-------- -------- ------------------
PERCENT PERCENT PERCENT
OF SALES OF SALES OF SALES
-------- -------- ------------------
<S> <C> <C> <C>
Sales to major customers:
Super Shops.................................... 30.0% 23.6% 26.6%
Heafner Tire................................... 1.9 11.8 12.3
Keystone Automotive............................ 9.8 3.7 4.0
---- ---- ----
41.7% 39.1% 42.9%
==== ==== ====
</TABLE>

F-16
<PAGE> 65

CRAGAR INDUSTRIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
PERCENT OF PERCENT OF PERCENT OF
ACCOUNTS ACCOUNTS ACCOUNTS
RECEIVABLE RECEIVABLE RECEIVABLE
----------- ----------- -------------
<S> <C> <C> <C>
Accounts receivable from major customers:
Super Shops.................................... 46.4% 29.4% 43.5%
Heafner Tire................................... .4 8.6 4.7
Keystone Automotive............................ 14.5 10.8 8.3
---- ---- ----
61.3% 48.8% 56.5%
==== ==== ====
</TABLE>

(18) FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK

Statement of Financial Accounting Standard No. 107 "Disclosure about Fair
Value of Financial Instruments" requires disclosure of the fair value of certain
financial instruments. The following methods and assumptions were used by the
Company in estimating fair value disclosures for the financial instruments:

Limitations -- Fair value estimates are made at a specific point in
time and are based on relevant market information and information about the
financial instrument; they are subjective in nature and involve
uncertainties, matters of judgment and, therefore, cannot be determined
with precision. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular instrument. Changes in assumptions could
significantly affect these estimates.

Since the fair value is estimated as of December 31, 1995, the amounts
that will actually be realized or paid in settlement of the instruments
could be significantly different.

Current assets and current liabilities -- The amounts reported in the
balance sheet approximates fair value due to the short maturities of these
instruments.

Long-term debt and investor subordinated debt -- The terms of the
Company's long-term debt and subordinated debt approximate the terms in the
market place at which they could be replaced. Therefore, the fair value
approximates the carrying value of these financial instruments.

Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and trade accounts
receivable. The Company places its cash with high credit quality financial
institutions and generally limits the amount of credit exposure to the amount of
FDIC coverage. As described in note 1, the Company sells its products to
automotive aftermarket distributors and dealers throughout the United States,
Canada, Mexico, Australia and other international markets. The Company performs
ongoing credit evaluations of its customers' financial condition but does not
require collateral to support customer receivables. The Company establishes an
allowance for doubtful accounts based upon factors surrounding the credit risk
of specific customers, historical trends and other information.

As of December 31, 1995, the Company had concentrations of credit risk
consisting of cash balances of approximately $50,517 over the FDIC coverage at
one financial institution.

(19) LITIGATION AND CLAIMS

The Company is one of four defendants in a wrongful death lawsuit. The
plaintiff is seeking damages of $5,500,000 plus an unspecified amount of
punitive damages. The Company is defending itself vigorously in this matter. Any
costs to the Company resulting from this case will not be covered by product
liability insurance. Management of the Company is unable to determine the
ultimate loss that might result from this case and, accordingly, no provision
has been made in the accompanying financial statements for losses, if any, that
might result from this matter.

F-17
<PAGE> 66

CRAGAR INDUSTRIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The Company is involved in other claims arising in the normal course of
operations. Management believes the outcome of these matters will not have a
material adverse effect on the financial position of the Company, therefore, no
provision has been made in the accompanying financial statements for losses, if
any, that might result from these matters.

(20) SUBSEQUENT EVENTS (UNAUDITED)

Subsequent to December 31, 1995, the Company's Board of Directors and
stockholders formally approved the Company's stock option and restricted stock
plan and nonemployee director plan (plans), which permit the granting of options
to eligible employees and directors to purchase shares of the Company's common
stock. The plans reserve 245,000 shares of the Company's common stock for grant.
The plans provide that the options may be either incentive or nonincentive stock
options. The exercise price for the incentive stock options shall not be less
than 100% of the fair market value of the stock at the date of grant and 85% of
the fair market value with respect to the nonincentive stock options. Options
granted under the plans must be exercised in whole or in part within 10 years of
the date of grant. The Company may also issue stock appreciation rights or
restricted stock under provisions of the plans with similar terms to the
incentive and nonincentive stock options. As of September 30, 1996, the Company
granted 11,900 options under the nonemployee director plan at an exercise price
of $5.14 a share and no options were granted under the restricted stock plan. On
November 9, 1996, the Company granted 53,500 options under the restricted stock
and option plan, 700 options under the Directors' Plan, and 2,100 other options
at an exercise price of $5.60 per share.

F-18
<PAGE> 67

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

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
THE OFFERING DESCRIBED HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION TO ANY PERSON TO
WHOM SUCH OFFER WOULD BE UNLAWFUL OR AN OFFERING OF ANY SECURITIES OTHER THAN
THE REGISTERED SECURITIES TO WHICH IT RELATES. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER AT ANY TIME SHALL IMPLY THAT THE
INFORMATION PROVIDED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 14
Dilution.............................. 15
Dividend Policy....................... 16
Capitalization........................ 16
Selected Financial Data............... 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 24
Management............................ 33
Certain Transactions.................. 38
Principal Stockholders................ 40
Description of Securities............. 42
Underwriting.......................... 46
Legal Opinions........................ 48
Experts............................... 48
Available Information................. 48
Index to Financial Statements......... F-1
</TABLE>

UNTIL JANUARY 12, 1997, (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS.
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LOGO

850,000 SHARES OF
COMMON STOCK

AND

850,000 WARRANTS
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PROSPECTUS
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DICKINSON & CO.

RAS SECURITIES CORP.
December 18, 1996
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