<PAGE> 1
As filed with the Securities and Exchange Commission on November , 1996
Registration No. 333-13415
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CRAGAR INDUSTRIES, INC.
(Name of small business issuer in its charter)
Delaware 3714 86-0721001
-------- ---- ----------
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
----------
4636 N. 43RD AVENUE
PHOENIX, ARIZONA 85031
(602) 247-1300
FAX: (602) 846-9034
(Address and Telephone Number of Principal
Executive Offices and Principal Place of Business)
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MICHAEL L. HARTZMARK
4636 N. 43RD AVENUE
PHOENIX, ARIZONA 85031
(602) 247-1300
(Name, Address and Telephone Number
of Agent For Service)
MATTHEW P. FEENEY COPIES TO: ROBERT S. KANT
STEVEN D. PIDGEON RICHARD B. STAGG
SNELL & WILMER L.L.P. O'CONNOR, CAVANAGH, ANDERSON,
ONE ARIZONA CENTER KILLINGSWORTH & BESHEARS, P.A.
PHOENIX, ARIZONA 85004-0001 ONE EAST CAMELBACK
(602) 382-6000 PHOENIX, ARIZONA 85012
FAX: (602) 382-6070 (602) 263-2400
---------- FAX: (602) 263-2900
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
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If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED OFFERING PRICE(1)(2) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $0.01 par value (3) ........................................ $ 5,685,000.00 $ 1,723.00
Common Stock Purchase Warrants (4) ....................................... 97,750.00 30.00
Common Stock underlying Warrants (5) ..................................... 7,038,000.00 2,133.00
Representative's Warrants to purchase Common Stock and Representative's
Underlying Warrant (6) ................................................... 85.00 (6)
Common Stock and Common Stock Purchase Warrants issuable upon exercise of
Representative's Warrants (7) ............................................ 622,200.00 189.00
Common Stock (8) ......................................................... 612,000.00 186.00
- -----------------------------------------------------------------------------------------------------------------------------
Total .................................................................... $14,055,035.00 (9)
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457.
(2) Pursuant to Rule 416, there are also being registered such additional shares
as may be issuable pursuant to anti-dilution provisions of the Warrants and
Representative's Warrants.
(3) Includes shares of Common Stock that the Underwriters have the option to
purchase to cover over-allotments, if any. (4) Includes Warrants that the
Underwriters have the option to purchase to cover over-allotments, if any.
(5) Consists of shares of Common Stock issuable upon exercise of the Warrants.
(6) To be issued to Dickinson & Co., the Representative of the Underwriters. No
fee pursuant to Rule 457 (g).
(7) Consists of shares of Common Stock and Warrants issuable upon exercise of
the Representative's Warrants.
(8) Consists of shares of Common Stock issuable upon exercise of Warrant
underlying Representative's Warrant.
(9) Registration Fee in the amount of $4,329 was paid in connection with initial
filing. Accordingly, the Company has a credit in the amount of $68.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE> 3
SUBJECT TO COMPLETION, DATED NOVEMBER , 1996
PROSPECTUS
CRAGAR INDUSTRIES, INC.
850,000 Shares of Common Stock
and
850,000 Common Stock Purchase Warrants
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 $7.20 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 bid quotations 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." Application has been made
for approval of the Common Stock and Warrants 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 "____" and "____W,"
respectively. The securities will not be listed for trading as units. In the
event that the Common Stock or Warrants are not accepted for quotation on the
Nasdaq SmallCap Market or for listing on the Boston Stock Exchange, an investor
would likely find it difficult to dispose of the Common Stock or Warrants, or to
obtain current quotations as to their value.
----------
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 ___ AND ___ 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.
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Underwriting Discounts and
Price to Public Commissions(1) Proceeds to Company(2)
<S> <C> <C> <C>
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Per Share(3) ...... $ 6.00 $ .60 $ 5.40
- ------------------------------------------------------------------------------------------------------
Per Warrant(3) .... $ .10 $ .01 $ .09
- ------------------------------------------------------------------------------------------------------
Total(4) .......... $ 5,185,000 $ 518,500 $ 4,666,500
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(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 except that
they 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 on 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 facility of the Depository Trust Company on
or about , 1996.
---------------------------
DICKINSON & CO.
The date of this Prospectus is ____________________, 1996.
<PAGE> 4
[INSERT PICTURES]
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.
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> 5
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 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 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. It will seek to achieve
this objective by pursuing the following business strategies:
3
<PAGE> 6
- 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 carried in
trade publications, racing magazines, and consumer magazines. The
Company also intends to develop distinctive point-of-purchase displays
directed to 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 other high-quality automotive aftermarket
products.
- Expand Product Distribution. The Company intends to expand 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 include major tire distributors that
supply both national and local retail tire stores. Historically, the
Company's distribution efforts have been focused on select domestic
markets which are served by value-added resellers that specialize 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
which 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
select foreign jurisdictions, such as Japan, Mexico, Russia, Australia,
and Germany, where it believes it currently enjoys significant brand
name recognition.
- Enhance Existing Product Lines and Develop New Products. 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 continue to increase its product development efforts
with increased emphasis on products for trucks and sport utility
vehicles ("SUV's"). In this regard, during the past two years the
Company introduced its CRAGAR Lite wheel line, introduced a series of
one-pieced 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,
utilizing a proprietary coating process feature such distinctive wheel
coatings as camouflage, marble and simulated carbon fiber.
- Explore Synergistic Acquisitions or Alliances. The Company believes
that the market for custom wheels and wheel accessories is highly
fragmented. Further, the increase in recent years in the variety of
domestic and imported vehicle makes and models has made it difficult
for many of the Company's competitors to maintain product selection
broad enough to meet customer demands. Accordingly, the Company
believes that the wheel and accessory segments of the automotive
aftermarket present attractive opportunities for consolidation or
strategic alliances, and intends to selectively review these
opportunities following this offering. The Company currently has no
specific agreements or understandings with respect to any acquisitions
or alliances.
4
<PAGE> 7
- Improve Operating Efficiencies. Historically, the Company has
manufactured or assembled a substantial portion of its products, which
has required the Company to maintain, manage, and finance substantial
inventories. The Company intends to improve its assembly and materials
handling operations through plant improvements, the purchase of new
equipment, and the implementation of enhanced inventory management. In
addition, 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 the 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.
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.
THE OFFERING
<TABLE>
<S> <C>
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 $7.20, 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 bid price 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
</TABLE>
5
<PAGE> 8
<TABLE>
<S> <C>
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 other 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."
Proposed Nasdaq SmallCap Common Stock - CRGR
Market Symbols............................. Warrants - CRGRW
Proposed Boston Stock Common Stock -
Exchange Symbols........................... Warrants -
</TABLE>
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(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 and the Underlying Warrants; (iii)
outstanding options and warrants to purchase up to 340,063 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.
6
<PAGE> 9
SUMMARY FINANCIAL INFORMATION
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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 $ 20,270,000 $ 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) $ (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 1,123,884 1,158,428 1,151,868 1,178,182
============ ============ ============ ============
Weighted average common shares out-
standing--assuming full dilution --(1) --(1) 1,443,534 1,469,848
============ ============
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 (UNAUDITED)
-------------------------------
PROFORMA
DECEMBER 31, 1995 ACTUAL AS ADJUSTED(2)
BALANCE SHEET DATA:
----------------- -------------------------------
<S> <C> <C> <C>
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) 4,786,000
</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 in to 359,722 shares
of Common Stock upon the completion of the 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.
7
<PAGE> 10
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. At September 30, 1996, the Company
had an accumulated deficit of $6.0 million. 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.
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 a total stockholders' deficit of approximately $1.2
million. See "Selected Financial Data" and the Financial Statements.
COVENANT DEFAULTS; DEPENDENCE ON EXTERNAL FINANCING
The Company maintains 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 under the
Credit Facility, including the debt service covenant. On November 22, 1996,
Norwest granted a waiver with respect to these defaults. 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. However, there can be no
assurance 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, to the extent the Company needs to obtain
alternative financing, 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 fully implement its business strategies and 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, such financings, if available,
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".
8
<PAGE> 11
RISK OF PRODUCT LIABILITY
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. 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
coverage could have a material adverse effect on the Company. In addition,
product liability litigation may have a material adverse effect on the
reputation and marketability of the Company's products. See "Business -- Product
Warranties" and "Business -- Legal Proceedings."
NO ASSURANCE OF SUCCESSFUL IMPLEMENTATION OF BUSINESS STRATEGIES
The Company's business strategies include (i) increasing its marketing
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 to
fit additional vehicle models, makes, and years and developing new products to
meet changing customer demands; (iv) exploring synergistic acquisitions and
alliances; and (v) improving its operating efficiencies by selective strategic
partnering and improvements in its assembly and material handling operations.
The Company's inability to achieve any of these goals could have a material
adverse effect on the Company's operations, financial condition, and results of
operations. See "Business -- Business Strategy."
The Company's business is directly impacted by certain outside factors, such
as general demand for aftermarket automotive parts, prices for raw materials
used in manufacturing the Company's products, fluctuations in discretionary
consumer spending, and general economic conditions, such as employment levels,
business conditions, interest rates, and tax rates. While the Company believes
that current economic conditions favor continued growth in the markets it
serves, negative economic conditions affecting any of these factors 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 such 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 in its market 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
9
<PAGE> 12
would enable it to consummate such transactions. Furthermore, there can be no
assurance that the Company will be able to successfully integrate such acquired
companies or product lines into its existing operations, which could increase
the Company's operating expenses in the short-term and materially 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, risks of
entering into markets in which the Company has had no or only limited direct
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."
VARIABILITY IN OPERATING RESULTS; SEASONALITY
The Company's results of operations have been and will continue to be
subject to substantial variations due to 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 due to 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, 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 business, financial
condition, and results of operations. There can be no assurance that the Company
will be profitable in the future and 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 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 sales of its products. 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 with one or more new
employees with product development experience, including the addition of 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
10
<PAGE> 13
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 Company's ability to obtain orders from
new customers as well as the financial condition and success of its current
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. The Company does not have any long-term contractual
relationships with any of its major customers. While the Company's business
strategy calls for it to expand its product distribution capabilities to
additional markets and broaden its customer base so that it can become less
dependent on such 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 that it obtains from third
party suppliers. From time to time, the Company has experienced delays in the
delivery of supplies from vendors. In addition, one of the Company's significant
suppliers is located in China, which has been subject to numerous trading
restrictions by the United States from time to time. 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 obtain 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,
results of operations, and financial condition. The Company has begun to
selectively outsource 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, quality, design innovation, price,
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, reduced margins, and loss of
market share, all of which could have a material
11
<PAGE> 14
adverse effect on the Company's business, financial condition, and results of
operations. See "Business -- Competition."
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 the 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 upon the completion of the offering). Of
these shares, the 850,000 shares 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 765,711
shares of Common Stock and 133,137 presently 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 twelve months after the effective
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 171,326 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."
REGULATORY COMPLIANCE
The Company is subject to various federal and state government 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 manufacture the Company's products. The
Company believes that it is currently in material compliance with such
regulations. Failure to comply with current or future regulations could result
in the imposition of substantial fines on the Company, suspension of production,
alteration of its manufacturing 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.
12
<PAGE> 15
INTERNATIONAL SALES
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."
CONTROL BY EXISTING STOCKHOLDERS
The directors, officers, and principal stockholders of the Company will
beneficially own approximately 40% of the Company's outstanding voting
securities upon completion of this offering. 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."
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 or 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 a stockholder might consider to be in its 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 and Chief Executive Officer. The unexpected 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.
13
<PAGE> 16
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." Successful implementation of the
Company's business strategy is dependent on the hiring 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
business, financial condition, and results of operations. See "Management."
ABSENCE OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
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. 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. The
exercise of 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 to purchase up to 85,000 shares of Common Stock and 85,000 additional
warrants. The terms and conditions of the Underlying Warrants are identical to
those of the Warrants offered hereby except that the Underlying Warrants
issuable upon the exercise of the Representative's Warrants 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 exercisable for a
period of four years commencing one year after the date of this Prospectus at an
exercise price of 120% 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 such 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."
14
<PAGE> 17
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 NASDAQ SECURITIES; PENNY STOCK RULES
Application has been made for quotation of the Common Stock and Warrants on
the Nasdaq Stock Market's 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 Company's securities fail to maintain their listing,
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 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 their shares. 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-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 statement 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.
15
<PAGE> 18
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 estimated underwriting discounts, and commissions and
estimated offering expenses. The Company anticipates that the net proceeds will
be used substantially as follows:
<TABLE>
<CAPTION>
Application of Net Proceeds Dollar Amount Percent of 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 Notes." The Bridge Notes are due in full on June 30, 1998 or earlier
in certain circumstances, including within 30 days following the initial
underwritten public offering of the Company's Common Stock. 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 for its brand names to be
featured on other high-quality automotive aftermarket 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 machining and assembly equipment,
machinery to automate certain processes, new tooling and fixtures, and new
bar coding and boxing machinery.
16
<PAGE> 19
Pending the uses described herein, the net proceeds will 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."
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.
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 estimated 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 $5,537,274, 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 the offering $1.13
Increase per share attributable to new investors $1.46
-----
Net tangible book value per share after the offering $2.59
-----
Dilution per share to new investors $3.41
=====
</TABLE>
17
<PAGE> 20
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 52.1% $5.17
Exercise of outstanding
warrants and options(2) 340,063 13.7% $ 963,125 7.5% $2.83
New investors(3) 850,000 34.3% $ 5,185,000 40.4% $6.10
----------- ----------- ----------- -----------
Total 2,480,368 100.0% $12,823,370 100.0%
=========== =========== =========== ===========
</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 exercisable at $1.43 per
share from Class A Warrants, 118,126 of which were issued on December 31,
1992 and 3,937 of which were issued on December 15, 1994; (ii) 24,500 shares
exercisable at $0.36 per share underlying Class B Warrants issued on
December 15, 1994; (iii) 126,000 shares exercisable at $3.25 per share
underlying Class C Warrants issued on July 1, 1996; (iv) 11,900 shares
exercisable at $5.14 per share underlying Non-Employee Director Options
issued on June 10, 1996; and (v) 55,600 shares exercisable at $5.60 per
share underlying Employee Options and Non-Employee Director Options issued
on November 9, 1996.
(3) Assumes that neither the 850,000 Warrants to be sold in the offering nor the
Representative's Warrants are exercised.
18
<PAGE> 21
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 the 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 1 13
shares authorized; 930,583 issued and
outstanding, actual; 2,140,305 issued and
outstanding, pro forma, as adjusted(1)
Additional paid-in capital 4,862 10,785
Accumulated deficit (6,012) (6,012)
-------- --------
Total stockholders' equity (deficit) (1,149) 4,786
-------- --------
Total capitalization $ 7,785 $ 10,370
======== ========
</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 and the underlying Warrants; (iii)
outstanding options and warrants to purchase up to 340,063 shares of Common
Stock; and (iv) the Underwriters' over-allotment option. See
"Management-Stock Option Plan," "Description of Securities," and
Underwriting."
19
<PAGE> 22
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 as of September 30, 1996, and as adjusted September 30,
1996, 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.
20
<PAGE> 23
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) $ (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 out-
standing--assuming full dilution --(1) --(1) 1,444 1,470
======== ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 (UNAUDITED)
------------------------------
DECEMBER 31,1995 ACTUAL AS ADJUSTED(1)
---------------- ------------------------------
<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(2) 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) 4,786
</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 the 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.
21
<PAGE> 24
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
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 ending
September 30, 1996), J. H. Heafner Company, Inc. (11.8% of gross sales in 1995
and 12.3% for the nine months ending September 30, 1996), and B&R Wholesale Tire
(9.5% of gross sales in 1995 and 8.6% for the nine months ending September 30,
1996). There can be no assurance that the Company will be able to maintain or
continue to increase the level of its sales in the future to these or other
customers.
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 were 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).
22
<PAGE> 25
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>
Year Ended Nine Months
December 31 Ended September 30
------------------------------------------------
STATEMENTS OF OPERATIONS DATA: 1994 1995 1995 1996
------------------------------------------------
<S> <C> <C> <C> <C>
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. 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%. This decrease was attributable to increased
returns, rebates, and allowances during 1996 versus the same period in 1995.
23
<PAGE> 26
In order to increase gross profit, 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." Also, 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.
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 is 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 due, in part, to 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. 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, $157,895 is attributable to the decrease in the
allowance for doubtful accounts and inventory obsolescence reserves. 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.
24
<PAGE> 27
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, which should help 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 year 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 has more favorable terms. In addition, interest expense
decreased in 1995 as a result of a recapitalization in which certain of the
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 $358,187 as a result of the reduction in the allowance
for doubtful accounts and inventory obsolescence reserves.
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 obtained a revolving credit facility ("Credit
Facility") with Norwest Business Credit, Inc. ("Norwest"). The Credit Facility
currently has a maximum commitment of $9,500,000, 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
25
<PAGE> 28
of September 30, 1996, the outstanding balance under the Credit Facility was
$5,411,182, and the remaining amount available to be borrowed thereunder was
approximately $612,474.
The Credit Facility requires the maintenance of certain specified financial
ratios. As of September 30, 1996, the Company was in default under various
covenants under the Credit Facility, including the debt service covenant. On
November 22, 1996, Norwest granted a waiver with respect to these defaults. 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 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 fully repay the Bridge
Notes. See "Use Of Proceeds."
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 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.
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
adversely affected.
26
<PAGE> 29
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 these results are due to 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 enjoy added liquidity by receiving 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.
27
<PAGE> 30
BUSINESS
INTRODUCTION
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.
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.
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 competes,
represented manufacturer sales of approximately $650 million, an annual increase
of 15.5% over the total of $420 million achieved in 1991. The Company estimates
its share of the custom wheel market to be approximately three percent.
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 like the Company's wheels; (ii)
increased average vehicle life, which the Company believes contributes to
greater demand for automotive aftermarket products like 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 strong 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.
28
<PAGE> 31
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
"Business -- 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.
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 has in the past sold its products through distribution centers operated
by its competitors, such as American Racing Equipment, Inc. and Prime
Wheel-Golden Wheel. See "Business -- 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 do they 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 -- 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
The Company's objective is to become the premier supplier of custom wheels
and wheel accessories in the automotive aftermarket. It will seek to achieve
this objective by pursuing the following business strategies:
29
<PAGE> 32
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 carried
in trade publications, racing magazines, and consumer magazines. The Company
also intends to develop distinctive point-of-purchase displays directed to the
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
other high-quality automotive aftermarket products.
Expand Product Distribution
The Company intends to expand 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 include major tire
distributors that supply both national and local retail tire stores.
Historically, the Company's distribution efforts have been focused on select
domestic markets which are served by value-added resellers that specialize 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 which 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 select foreign jurisdictions, such as Japan, Mexico,
Russia, Australia, and Germany, where it believes it currently enjoys
significant brand name recognition.
Enhance Existing Product Lines; Develop New Products
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
continue to increase its product development efforts with increased emphasis on
products for trucks and sport utility vehicles ("SUV's"). In this regard, during
the past two years the Company introduced its CRAGAR Lite wheel line, introduced
a series of one-pieced 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, utilizing a
proprietary coating process feature such distinctive wheel coatings as
camouflage, marble and simulated carbon fiber.
Explore Synergistic Acquisitions or Alliances
The Company believes that the market for custom wheels and wheel accessories
is highly fragmented. Further, the increase in recent years in the variety of
domestic and imported vehicle makes and models has made it difficult for many of
the Company's competitors to maintain product selection broad enough to meet
customer demands. Accordingly, the Company believes that the wheel and accessory
segments of the automotive aftermarket present attractive opportunities for
consolidation or strategic alliances, and
30
<PAGE> 33
intends to selectively review these opportunities following this offering. The
Company currently has no specific agreements or understandings with respect to
any acquisitions or alliances.
Improve Operating Efficiencies
Historically, the Company has manufactured or assembled a substantial
portion of its products, which has required the Company to maintain, manage, and
finance substantial inventories. The Company intends to improve its assembly and
materials handling operations through plant improvements, the purchase of new
equipment, and the implementation of enhanced inventory management. In addition,
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 the 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.
31
<PAGE> 34
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 20.0% 24.2% Steel spokes Urban and inner city
Wheels attached to inner consumers
steel hub and outer
steel rim or felly
Composite, 23.7% 17.8% Inner cast aluminum Nostalgia car and
Legacy, and disc welded to outer current line truck
CRAGAR Lite steel rim owners
Wheels
Steel Wheels 16.8% 16.7% Inner steel disc Low-end consumers
welded to outer of all types of
steel rim vehicles
Race Wheels 16.6% 15.8% Two outer Pro and amateur
aluminum rim race drivers and
halves welded performance car
together with owners
aluminum center or
spacer
Street Steel 8.7% 8.5% Three piece steel Hot rod and race
Wheels and aluminum enthusiasts with cars
center welded to and trucks
outer steel rim
One-piece Cast 7.8% 7.8% Cast one-piece Low and high-end
Aluminum aluminum consumers of all
Wheels with machined, types of vehicles
painted, or chrome
finish
Wheel 4.6% 4.6% Steel and aluminum All types of
Accessories 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.
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<PAGE> 35
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, in 1995 the Company purchased
the exclusive rights to manufacture and market the Keystone Klassic, one of the
most popular wheels in automotive history. The Company believes this product
solidifies CRAGAR's Legacy Line as 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 label.
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 Company's two
highest-end professional race wheels are the Super Race and the Super Star.
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<PAGE> 36
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 aluminum wheels.
One category of onepiece 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 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, steels locks, spinners, beadlock rings,
and trim rings. These are sold both packaged and loose. 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
continue to increase its product development efforts with increased emphasis on
products for trucks and sport utility vehicles ("SUV's"). 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 in the process of test marketing a new
line of custom wheels which, utilizing a coating process licensed to the
Company, feature such distinctive wheel coatings as camouflage, marble, and
simulated carbon fiber.
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<PAGE> 37
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 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 which require factory direct
service. The Company is in the process of establishing a
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<PAGE> 38
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 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 National Hot Rod
Association ("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), 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 CRAGAR's
customers. These individuals approach CRAGAR'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 approximately
70.4% of its gross sales, with three accounting for a total 44.9%. Super Shops,
J. H. Heafner Company, Inc., and B & R Wholesale Tire accounted for 23.6%,
11.8%, and 9.5% of gross sales, respectively, in 1995. For the nine months ended
September 30, 1996, the Company's ten largest customers accounted for
approximately 75.5% of gross sales, including Super Shops at 26.6%, J. H.
Heafner Company, Inc. at 12.3%, and B & R Wholesale Tire at 8.6%. The Company
does not have any long-term contractual relationships with any of its major
customers. 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.
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<PAGE> 39
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 manufacturing
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 selectively outsource the processing, assembly, and
manufacturing of some of its custom wheels, components, and accessories, and
expects to explore the further outsourcing of product manufacturing 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 addition, the Company
intends to improve its own manufacturing operations through plant improvements,
the purchase of new equipment, and the implementation of enhanced inventory
management.
CRAGAR maintains its own in-house testing facility for its wheels. CRAGAR
also utilizes independent test laboratories with all 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, 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, 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, the 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, manufacturing, 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.
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<PAGE> 40
INTELLECTUAL PROPERTY
The Company markets its custom wheels and products under a variety of brand
names designed to capitalize on CRAGAR's reputation. The Company believes that
its trademarks, most importantly CRAGAR, are critical to its business. The
Company 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. However, there can be no
assurance that the proprietary information or confidentiality agreements with
employees and others will not be breached, that the Company would have adequate
remedies for any breach, or that the Company's trade secrets will not otherwise
become known to or independently developed by competitors.
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 "Business - Legal Proceedings."
The Company maintains stock adjustment and warranty return policies. Under
such policies, distributors and consumers of the Company's products meeting
specified conditions may return products to the Company in exchange for credit.
To date, returns of the Company's products pursuant to these policies have not
been material. From time to time, the Company will accept returns of
competitors' products in order to facilitate a new account or strengthen its
relations with existing accounts.
EMPLOYEES
As of September 30, 1996, the Company had 95 employees, a majority of whom
were full-time employees, and 6 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 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
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<PAGE> 41
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, on September 30, 1996,
the Company filed a Motion For Summary Judgment asking the Court to dismiss the
Company as a defendant in the action. 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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<PAGE> 42
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, and Director
Michael Miller 38 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 at 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
and had operating responsibility for CRAGAR from 1988 to 1992. He joined Mr.
Gasket from the consulting practice of Deloitte & Touche after completing a
restructuring project at CRAGAR Industries. Mr. Miller has a B.S. in Business
Administration from the University at Albany and a Master of Business
Administration from Rochester Institute of Technology.
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<PAGE> 43
Mr. Barrett joined CRAGAR 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. He has had 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 at 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 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 all major retailers (e.g., 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 work in
association with Chapman Associates. He is also interim CEO at 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 was brought back 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
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<PAGE> 44
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
shareholders 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
Tony Cortes, 34, joined CRAGAR in 1982 as an assembly worker and has served
as Production Manager since June 1993.
Kent Rogers, 46, serves as the Director of Material Control and Information
Services. Mr. Rogers joined CRAGAR in August 1994 and has over 19 years of
experience in utilizing all 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, where he
evaluated, recommended, trained, and implemented various financial accounting,
distribution, plant maintenance, and manufacturing control software systems.
From 1979 to 1985, Mr. Rogers worked at 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.
David Bratset, 49, serves as the Director of Administrative Services. Mr.
Bratset joined CRAGAR in September 1995. He has had a varied background, mostly
focused on finance, accounting, and human resources. From 1994 to 1995, Mr.
Bratset was Business Manager at 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 at 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
42
<PAGE> 45
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 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 purchase 9,800 shares of the Company's Common Stock to those persons
who were directors of the Company as of May 31, 1996. 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. Mr. Scaravilli and Ms. Froimson are not currently
directors of the Company, but were directors on May 31, 1996. 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
and which shall vest after each such full year of service; provided, however,
that the aggregate number of options granted by the Company under the Directors'
Plan may not exceed 35,000.
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., President, Chief Executive Officer, and Director 1995 $96,000
1994 $96,000
1993 $72,000
</TABLE>
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<PAGE> 46
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 shareholders at the Company's annual meeting of shareholders in June
1996. The Board of Directors approved an amendment to the Employee Option Plan
on September 27, 1996, and the Company's shareholders 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, officers, directors, and consultants 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 key
employees, officers, directors, and consultants of the Company. 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 key employees, officers, directors, and consultants of the Company to
whom stock options are granted (provided that incentive stock options only be
granted to employees of the Company), 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 and generally expire three months after the termination of
an optionee's service to the Company. In general, if an optionee is permanently
disabled or dies during his or her service to the Company, such option may be
exercised up to 12 months following such disability or death.
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 exceed five years.
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<PAGE> 47
OPTION GRANTS
The Company did not grant stock options or stock appreciation rights during
the year ended December 31, 1995.
See "Management-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.
On November 9, 1996, pursuant to the Employee Option Plan, the Company
issued an aggregate amount of 53,500 options to certain of the Company's
employees. Each option is exercisable at $5.60 to purchase one share of Common
Stock.
45
<PAGE> 48
CERTAIN TRANSACTIONS
On December 15, 1994, Mr. 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 -- Overview." 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) 3,937
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 (i)
24,500 Class B Warrants, each warrant entitling the holder to purchase one share
of Common Stock at $0.36 per share, and (ii) 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
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<PAGE> 49
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 one-fifth beneficial interest.
On June 20, 1996, Mr. Lee Hartzmark, father of Michael L. Hartzmark, entered
into an agreement with Performance Industries (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 balances
of $1,066,098 and $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 - Directors' Compensation" for information regarding option
grants made on June 10, 1996 and November 9, 1996 to certain of the Company's
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).
Management believes that the foregoing transactions were consummated on
terms at least as favorable as could have been obtained in arms-length
transactions.
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<PAGE> 50
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of November 21, 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 BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OFFERING OFFERING
- --------------------------------------- OWNED(2) -------- --------
------------
<S> <C> <C> <C>
Michael L. Hartzmark, Ph. D.(4) 87,135 6.72% 4.06%
Mark Schwartz(5) 118,748 9.05% 5.49%
Sidney Dworkin(6) 319,591 24.09% 14.68%
Lee & Dolores Hartzmark(7) 120,882 9.27% 5.61%
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 525,474 39.30% 24.73%
as a group (seven persons)
</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 and
8,400 shares purchasable upon exercise of Class C warrants.
(6) Mr. Dworkin is deemed to be beneficial owner of a one-fifth 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, and 184,722 shares of Common
Stock issuable upon the conversion of notes that will be automatically
converted upon the completion of this offering.
(7) Each of Lee Hartzmark and Dolores Hartzmark may be deemed a beneficial
owner of the other's shares of Common Stock. Mr. and Mrs. Hartzmark are
deemed to be beneficial owners of a one-fifth interest in CN Partners. As a
result, their interest includes 13,125 shares purchasable upon exercise of
Class A 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> 51
(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 conversation 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 one-fifth interest in CN Partners. As a result,
Mr. 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
conversation 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 conversation of notes that will be
automatically converted upon the completion of this offering.
(11) Mr. Richter is deemed to be beneficial owner of a one-fifth 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 conversation 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 conversation 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 one-fifth 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 conversation of notes that will be automatically
converted upon the completion of this offering.
49
<PAGE> 52
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 the Delaware General Corporation Law. The
following description of the Company's capital stock, which is complete in all
material respects, 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 shareholders 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 not complete and 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
$7.20, subject to adjustment in certain circumstances, for 60 months from the
date of this Prospectus, 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
bid quotations of the Common Stock have averaged
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<PAGE> 53
at least $9.00 per share for a period of any 20 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, reorganizations, stock
dividends, stock splits, and recapitalizations. Holders of Warrants have no
voting, dividend, or other rights as shareholders 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 funds (in cash or by check or bank draft payable to
the order of the Company). 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 effective date of the Registration Statement of
which this Prospectus forms a part. 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
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<PAGE> 54
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 shareholders 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 - Directors Compensation" for information regarding
option grants made as of June 10, 1996 to certain of the Company's existing and
former directors. On November 9, 1996, pursuant to the Employee Option Plan, the
Company issued options to purchase up to 53,500 shares of Common Stock at $5.60
per share. See "Management - Option Grants." As of the date of this Prospectus,
none of the holders of such options has exercised his options.
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."
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<PAGE> 55
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 beach 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, 9,800 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 one percent 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 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
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<PAGE> 56
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 765,711
shares of Common Stock and 133,137 presently 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 twelve months after the effective 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 171,326
presently outstanding warrants and options have agreed to three month lock-up
periods. Upon expiration of the lock-up agreements, the 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 the Company's initial
underwritten public offering of Common Stock, 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 affect 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.
54
<PAGE> 57
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 of Number of
Common Stock Warrants to
Underwriter to be Purchased be Purchased
- ----------- --------------- ------------
<S> <C> <C>
Dickinson & Co....................................................................
------- -------
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 $ per share of Common Stock and $ 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 or
its designees' expenses on a non-accountable basis in the amount of 3% of the
gross proceeds received from the sale of the Securities. Any such expenses in
excess of the expense allowance will be borne by the Representative of 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
55
<PAGE> 58
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 identical to
those of the Warrants offered hereby except that the Underlying Warrants
included in the Representative's Warrants will not be subject to redemption by
the Company and are not exercisable until one year after the date of this
Prospectus. The Representative's Warrants will be exercisable for a four year
term, commencing one year after the effective date of the Registration Statement
of which this Prospectus forms a part, at an exercise price equal to 120% 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 and persons who are both officers or
partners of the Underwriters. The number of shares of Common Stock and
Underlying Warrants covered by the Representative's Warrants and the exercise
price are subject to adjustment upon certain events to prevent dilution. The
Underlying 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 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 Underwriters or the holders of not less than a majority
of the Common Stock issued or issuable upon exercise of the Representative's
Warrants may require the Company to effect one registration under the Securities
Act with respect to the Common Stock underlying the Representative's Warrants
and the Underlying Warrants, and the Company is required to use its 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
effective date of the Registration Statement of which this Prospectus forms a
part, the holders of the Representative's Warrants and the underlying Common
Stock are entitled to notice of such registration and may elect to include the
Common Stock underlying the Representative's Warrants held by them in such
registration. The Company's out-of-pocket expenses associated with any
registration initiated upon the request of the Underwriters or the holders of
the Common Stock issued or issuable upon exercise of the Representative's
Warrants will be reimbursed by the holders whose shares are included in such
registration. The registration of securities pursuant to the registration rights
applicable to the Representative's Warrants may impede future financing.
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 party, the Representative has the right to
56
<PAGE> 59
designate a person to serve on or as advisor to the Board of Directors of the
Company, subject to approval by the Board.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act.
The Representative of the Underwriters 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.
LEGAL OPINIONS
The validity of the Units 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
57
<PAGE> 60
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 audited financial statements audited by independent certified
public accountants following the end of each fiscal year.
58
<PAGE> 61
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> 62
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> 63
CRAGAR INDUSTRIES, INC.
Balance Sheets
December 31, 1995 and September 30, 1996
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
ASSETS 1995 1996
------------ -------------
(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>
F-3
<PAGE> 64
See accompanying notes to the financial statements.
F-4
<PAGE> 65
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 1,123,884 1,158,428 1,151,868 1,178,182
============ ============ ============ ============
</TABLE>
F-5
<PAGE> 66
<TABLE>
<S> <C> <C> <C> <C>
Earnings (loss) per
common shares --
assuming full
dilution $ .05 .28
============ ============
Weighted average
common shares
outstanding--
assuming full
dilution 1,443,534 1,469,848
============ ============
</TABLE>
See accompanying notes to the financial statements.
F-6
<PAGE> 67
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 29,166 42 41,625 -- 41,667
for cash
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 26,410 37 175,208 -- 175,245
stock
Contribution
of
subordinated
investor -- -- 3,358,323 -- 3,358,323
debt
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
---------- ---------- ---------- ---------- ----------
</TABLE>
F-7
<PAGE> 68
<TABLE>
<S> <C> <C> <C> <C> <C>
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-8
<PAGE> 69
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
----------- ----------- ----------- -----------
</TABLE>
F-9
<PAGE> 70
<TABLE>
<S> <C> <C> <C> <C>
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-10
<PAGE> 71
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
</TABLE>
F-11
<PAGE> 72
<TABLE>
<S> <C> <C> <C> <C>
equipment -- 240,370 240,370 --
</TABLE>
See accompanying notes to the financial statements.
F-12
<PAGE> 73
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, develops, assembles and
distributes 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.
F-13
<PAGE> 74
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements, Continued
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.
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.
F-14
<PAGE> 75
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements, Continued
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.
(4) INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
---------- ----------
(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>
F-15
<PAGE> 76
w CRAGAR INDUSTRIES, INC.
Notes to Financial Statements, Continued
(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 service 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
---------- ----------
(UNAUDITED)
<S> <C> <C>
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-16
<PAGE> 77
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>
F-17
<PAGE> 78
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements, Continued
(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.
As of September 30, 1996, the Company was in violation with 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.
F-18
<PAGE> 79
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements, Continued
(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, no stated repayment terms. 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>
F-19
<PAGE> 80
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements, Continued
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
had an outstanding balance of $1,066,098 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 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.
F-20
<PAGE> 81
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements, Continued
(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 6%, 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 1, 1995, the outstanding indebtedness under the subordinated
investor notes (not including the junior investor notes) was contributed to
the capital of the Company in the amount of $3,358,323. No securities of
the Company or any other consideration was issued or delivered to the
original investors in connection with the contribution.
F-21
<PAGE> 82
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements, Continued
(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.
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.
F-22
<PAGE> 83
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements, Continued
(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 carry
forwards may be eliminated or significantly reduced.
F-23
<PAGE> 84
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.
F-24
<PAGE> 85
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements, Continued
(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 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>
YEARS ENDING CAPITAL OPERATING
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
leases obligations 61,573
--------
Capital leases obligations,
excluding current portion $177,341
========
</TABLE>
F-25
<PAGE> 86
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements, Continued
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%
============ ============ ============
PERCENT OF PERCENT OF PERCENT OF
ACCOUNTS ACCOUNTS ACCOUNTS
RECEIVABLE RECEIVABLE RECEIVABLE
------------ ------------ ------------
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>
F-26
<PAGE> 87
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements, Continued
(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-27
<PAGE> 88
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 2,100 options under the
nonemployee director plan and 53,500 options under the restricted stock
plan.
F-28
<PAGE> 89
No dealer, salesman, or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer contained herein, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company, or by any of the Underwriters. This Prospectus does
not constitute an offer of any securities other than those to which it relates
or an offer to sell, or a solicitation of an offer to buy those to which it
relates in any state to any person to whom it is not lawful to make such offer
in such state. The delivery of this Prospectus at any time does not imply that
the information herein is correct as of any date subsequent to its date.
----------
TABLE OF CONTENTS
Page
----
Prospectus Summary...................................
Risk Factors.........................................
Use of Proceeds......................................
Dividend Policy......................................
Dilution.............................................
Capitalization.......................................
Selected Financial Data..............................
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.........................................
Business.............................................
Management...........................................
Certain Transactions.................................
Principal Stockholders...............................
Description of Securities............................
Underwriting.........................................
Legal Opinions.......................................
Experts..............................................
Available Information................................
Index to Financial Statements........................
Until , 1996, (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.
================================================================================
================================================================================
CRAGAR INDUSTRIES, INC.
850,000 SHARES OF COMMON STOCK
AND
850,000 WARRANTS
----------
PROSPECTUS
----------
DICKINSON & CO.
, 1996
================================================================================
<PAGE> 90
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Bylaws provide that the corporation shall to the fullest
extent authorized by the Delaware General Corporation Law, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the corporation to provide broader
indemnification rights than such law permitted the corporation to provide prior
to such amendment), indemnify and hold harmless any person who was or is a
party, or is threatened to be made a party to or is otherwise involved in any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative by reason of the fact that such person
is or was a director or officer of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, including
service with respect to an employee benefit plan (hereinafter an "Indemnitee")
against expenses, liabilities and losses (including attorneys' fees, judgments,
fines, excise taxes or penalties paid in connection with the Employee Retirement
Income Security Act of 1974, as amended, and amounts paid in settlement)
reasonably incurred or suffered by such Indemnitee in connection therewith;
provided, however, that except as provided in this Section with respect to
proceedings to enforce rights to indemnification, the corporation shall
indemnify any such Indemnitee in connection with a proceeding (or part thereof)
initiated by such Indemnitee only if such proceeding or part thereof was
authorized by the board of directors of this corporation.
The right to indemnification conferred in the Company's Bylaws includes
the right to be paid by the corporation the expenses (including attorneys' fees)
incurred in defending any such proceeding in advance of its final disposition;
provided, however, that, if the Delaware General Corporation Law requires, an
advancement of expenses incurred by an Indemnitee in his capacity as a director
or officer (and not in any other capacity in which service was or is rendered by
such Indemnitee, including, without limitation, service to an employee benefit
plan) shall be made only upon delivery to the corporation of an undertaking, by
or on behalf of such Indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is not
further right to appeal that such Indemnitee is not entitled to be indemnified
for such expenses under this section or otherwise. The rights to indemnification
and to the advancement of expenses conferred in this Section shall be contract
rights and such rights shall continue as to an Indemnitee who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
Indemnitee's heirs, executors and administrators.
If a claim under the two preceding paragraphs of this Section is not
paid in full by the corporation within sixty (60) days after a written claim has
been received by the corporation, except in the case of a claim for an
advancement of expenses, in which case the applicable period shall be twenty
(20) days, the Indemnitee may at any time thereafter bring suit against the
corporation to recover the unpaid amount of the claim. If successful in whole or
in part in any such suit, or in a suit brought by the corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the Indemnitee
shall be entitled to be paid also the expense of prosecuting or defending such
suit. In (i) any suit brought by the Indemnitee to enforce a right to
indemnification hereunder (but not in a suit brought by the Indemnitee to
enforce a right to an advancement of expenses) and (ii) in any suit brought by
the corporation to recover an advancement of expenses pursuant to the terms of
an undertaking, the corporation shall be
II-1
<PAGE> 91
entitled to recover such expenses upon a final adjudication that the Indemnitee
has not met any applicable standard for indemnification set forth in the
Delaware General Corporation Law. Neither the failure of the corporation
(including its board of directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the Indemnitee is proper in the circumstances
because the Indemnitee has met the applicable standard of conduct set forth in
the Delaware General Corporation Law, nor an actual determination by the
corporation (including its board of directors, independent legal counsel, or its
stockholders) that the Indemnitee has not met such applicable standard of
conduct shall create a presumption that the Indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
Indemnitee, be a defense to such suit. In any suit brought by the Indemnitee to
enforce a right to indemnification or to an advancement of expenses hereunder,
or brought by the corporation to recover an advancement of expenses pursuant to
the terms of an undertaking, the burden of proving that the Indemnitee is not
entitled to be indemnified, or to such advancement of expenses under this
Section or otherwise shall be on the corporation.
The Delaware General Corporation Law provides that indemnification is
permissible only when the director, officer, employee, or agent acted in good
faith and in a manner reasonable believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the conduct was unlawful. The
Delaware General Corporation Law also precludes indemnification in respect of
any claim, issue, or matter as to which an officer, director, employee, or agent
shall have been adjudged to be liable to the Company unless and only to the
extent that the Court of Chancery or the court in which such action or suit was
brought shall determine that, despite such adjudication of liability but in view
of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee $ 4,261
Nasdaq and Boston Stock Exchange Filing Fees 7,291
NASD Fee 1,929
Printing Expenses 75,000
Legal Fees and Expenses 150,000
Accounting Fees and Expenses 95,000
Blue Sky Filing Fees and Expenses 25,000
Warrant Agent, Transfer Agent and Registrar Fees 3,000
Representative's Non-accountable Expense Allowance 155,550
Miscellaneous 49,469
--------
Total $566,500*
========
</TABLE>
- ----------
* Estimated
II-2
<PAGE> 92
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Since September 30, 1993, the Company has sold the following unregistered
securities:
1. On September 30, 1993, the Company privately sold for cash
$1,500,000 principal amount of 6% convertible subordinated secured promissory
notes (the "1993 Junior Notes") to certain accredited and sophisticated
investors. On September 30, 1995, the 1993 Junior Notes were amended to increase
the annual interest rate from 6% to 8% and the conversion ratio from 1% per
$100,000 principal amount of the 1993 Junior Notes to 1 1/3% per $100,000
principal amount of the 1993 Junior Notes. The purchasers of the 1993 Junior
Notes were David Atkins; CN Partners, L.P.; Phyllis Cohen; Anthony Dalessio;
Irving Davies; Sidney Dworkin; Edward R. Falkner; Julius Kramer; MDA Financial,
Inc.; Kenneth Reichle; Gerald Richter; James Schoke; Elayne Schoke; and Donald
Shapiro.
2. On December 15, 1994, the Company issued to Mr. Sidney Dworkin
29,167 shares of Common Stock, 3,937.5 Class A Warrants, and a promissory note
in the principal amount of $108,333 (the "$108,333 Note") in exchange for
$150,000 cash. Each Class A Warrant entitles the holder to purchase one share of
Common Stock at $1.43, exercisable at any time before December 31, 1999. The
$108,333 Note had an interest rate of 15% per annum, payable annually in five
installments commencing January 1, 1995. On January 31, 1995, Mr. Dworkin
contributed the $108,333 Note to the capital of the Company.
3. On December 15, 1994, the Company issued to Mr. Sidney Dworkin
24,500 Class B Warrants and a promissory note in the principal amount of
$350,000 (the "$350,000 Note") in exchange for $350,000 cash. Each Class B
Warrant entitles the holder to purchase one share of Common Stock at $0.36,
exercisable at any time on or before December 31, 1999. The $350,000 Note bears
interest at a rate of 8% per annum, payable monthly through January 1, 1997. The
$350,000 Note is automatically convertible upon the closing of this offering
into 68,056 shares of the Company's Common Stock.
4. On September 30, 1995, the Company agreed to issue shares of its
Common Stock to the holders of the 1993 Junior Notes, and the holders of the
1993 Junior Notes agreed to accept such Common Stock, in lieu of paying interest
that had accrued on the 1993 Junior Notes. Pursuant to that agreement, each
holder of the 1993 Junior Notes received 15,070 shares of the Company's Common
Stock for every $100,000 of interest payable. In aggregate, 26,409 shares of
Common Stock were issued for $175,245. The holders of the 1993 Junior Notes were
the same accredited and sophisticated investors as set forth above in paragraph
1.
5. On June 10, 1996, pursuant to the Company's Non-Employee Directors'
Stock Option 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. The options
were issued to Mark Schwartz, Sidney Dworkin, Donald McIntyre, Phyllis Froimson,
and Victor Scaravilli. Also, effective June 10, 1996, 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.
6. On July 1, 1996, the Company sold securities totaling $1,500,000 to
certain accredited and sophisticated investors. In consideration thereof, each
investor received from the Company (i) the Company's promissory note in the
principal amount of the investor's individual investment (the "Bridge
II-3
<PAGE> 93
Note"), and (ii) Class C Warrants, in the amount of 8,400 warrants for each
$100,000 the investor individually invested. Each Class C Warrant entitles the
holder to purchase one share of the Company's Common Stock at $3.25, exercisable
at any time before June 30, 2001. The Bridge Notes will be automatically
converted upon the closing of this Offering into approximately 19,444 shares of
Common Stock for each $100,000 of principal amount of the Notes. These Bridge
Notes and Class C Warrants were sold to the following investors: Hymie Akst;
Michael Bushey; Central Fill Pharmacy; Inc.; Irving Davies; Melvin Gershman,
IRA; Edward R. Falkner; Marvin Kogod; Marc Loveman, IRA; Beno Michel; Kenneth M.
Reichle, Jr.; Robert M. Rosin; Royal Bank of Scotland; RFD Associates, Ltd.;
Harry Schwartz; Mark Schwartz; Paul T. Sciarrino; Wesley Wood.
7. On November 9, 1996, pursuant to the Company's Employee Stock Option
Plan, the Company granted options to current employees to purchase 53,500 shares
of the Company's Common Stock. All options were granted with an exercise price
of $5.60 per share. The options were issued to Michael L. Hartzmark, David
Bratset, Tony Barrett, Ed Chavez, Tony Cortes, Bob Deyoung, Michael Miller, and
Kent Rogers. 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 $5.60 per share.
Each transaction described above was deemed exempt from registration
under the Securities Act pursuant to Section 4(2) of the Act regarding
transactions not involving any public offering.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
1.1 Deleted
1.2 Form of Underwriting Agreement, dated _______, 1996, by and
between Registrant and Dickinson & Co.
3.1 Second Amended and Restated Certificate of Incorporation of
the Registrant filed with State of Delaware on October 1,
1996*
3.2 Amended and Restated Bylaws of the Registrant*
4.1 Second Amended and Restated Certificate of Incorporation of
the Registrant (filed as Exhibit 3.1)*
4.2 Form of Certificate representing Common Stock*
4.3 Form of Warrant Agreement*
4.4 Form of Warrant Certificate (attached as Exhibit A to Form of
Warrant Agreement filed as Exhibit 4.3)*
II-4
<PAGE> 94
4.5 Deleted
4.6 Deleted
4.7 Form of 1993 Convertible Subordinated Secured Note of the
Registrant, dated September 30, 1993*
4.7(a) Form of First Note Amendment to 1993 Convertible Subordinated
Secured Note of the Registrant, dated September 30, 1995*
4.7(b) Form of Second Note Amendment to 1993 Convertible Subordinated
Secured Note of the Registrant*
4.8 $350,000 Promissory Note of the Registrant, dated December 15,
1994, issued to Sidney Dworkin*
4.8(a) Agreement between Registrant and Sidney Dworkin, dated October
12, 1995, amending the terms and conditions of the $350,000
Promissory Note*
4.8(b) First Note Amendment to the $350,000 Promissory Note of the
Registrant issued to Sidney Dworkin*
4.9 Form of 1996 Unsecured Promissory Bridge Note of the
Registrant*
4.10 Credit and Security Agreement, dated as of April 14, 1995,
executed by and between Registrant and Norwest Business
Credit, Inc.*
4.10(a) Amendment to Credit and Security Agreement, dated as of
September 19, 1995, executed by and between Registrant and
Norwest Business Credit, Inc.*
4.10(b) First Amendment to Credit Agreement, dated as of ___, 1996,
executed by and between Registrant and Norwest Business
Credit, Inc.
4.10(c) NORWEST WAIVER
4.11 Form of Class A Stock Purchase Warrant Certificate
4.12 Form of Class B Stock Purchase Warrant Certificate
4.13 Form of Class C Stock Purchase Warrant Certificate
4.14 Form of Stock Option / Restricted Stock Grant for grants made
pursuant to either or both the CRAGAR Industries, Inc. 1996
Non-Employee Directors' Stock Option Plan filed as Exhibit
10.1 and the CRAGAR Industries, Inc. 1996 Stock Option and
Restricted Stock Plan filed as Exhibit 10.2
II-5
<PAGE> 95
4.15 Form of Representative's Warrant Agreement, dated ________,
1996, by and between the Registrant and Dickinson & Co.**
5.1 Opinion of Snell & Wilmer L.L.P. regarding the legality of the
Securities and Representative's Warrants being registered
10.1 CRAGAR Industries, Inc. 1996 Non-Employee Directors' Stock
Option Plan*
10.1(a) First Amendment to the CRAGAR Industries, Inc. 1996
Non-Employee Directors' Stock Option Plan, dated October 1,
1996*
10.2 CRAGAR Industries, Inc. 1996 Stock Option and Restricted Stock
Plan*
10.2(a) First Amendment to the CRAGAR Industries, Inc. 1996 Stock
Option and Restricted Stock Plan, dated October 1, 1996*
10.3 Commercial Lease, dated February 5, 1993, executed by and
between Registrant and Principal Mutual Life Insurance
Company*
10.4 Employment Agreement, dated January 1, 1996, executed by and
between Registrant and Tony Barrett*
10.5 Purchase Program, dated January 24, 1996, executed by and
between Registrant and Super Shops*
10.6 Form of 1992 Promissory Note of Registrant, dated December 31,
1992, issued in connection with Registrant's original
capitalization*
10.6(a) Form of First Note Amendment of 1992 Promissory Note of
Registrant, dated September 30, 1994*
10.6(b) Form of Agreement to Forgive Interest, dated December 14,
1994, executed by and between Registrant and certain holders
of 1992 Promissory Notes of Registrant*
10.6(c) Form of Letter, dated February 16, 1995, issued by Registrant
to (i) holders of the 1992 Promissory Notes of Registrant, and
(ii) holder of the $350,000 Note of Registrant, whereby
holders of the Notes agreed to contribute to capital the 1992
Promissory Notes and the $350,000 Note*
10.7 $108,333 Promissory Note of Registrant, dated December 15,
1994, issued to Sidney Dworkin*
10.7(a) Form of Letter, dated February 16, 1995, issued by Registrant
to (i) holders of the 1992 Promissory Notes of Registrant, and
(ii) holder of the $350,000 Note of Registrant, whereby
holders of the Notes agreed to contribute to capital the 1992
Promissory Notes and the $350,000 Note (attached as Exhibit
10.6(c))*
II-6
<PAGE> 96
10.8 Cognovit Promissory Note dated September 30, 1993, executed by
Registrant and payable to Performance Industries, Inc.*
10.8(a) Cross Receipt executed by and between Lee Hartzmark and
Registrant in connection with Assignment of Cognovit
Promissory Note*
10.9 Wheel & Component Purchase Agreement dated April 3, 1996,
executed by and between Registrant and Titan Wheel
International, Inc.
10.10 Redistribution Agreement dated November 7, 1996, executed by
and between Registrant and RELCO Corp.
11.1 Computation of Earnings Per Share
21 List of Subsidiaries of the Registrant*
23.1 Consent of Snell & Wilmer, L.L.P (included in Exhibit 5.1)
23.2 Consent of KPMG Peat Marwick LLP, independent certified public
accountants
24 Power of Attorney (included on signature page of Registration
Statement)*
27 Financial Data Schedule
99.1 Deleted
99.2 Deleted
99.3 Form of Lock-Up Agreement, executed by and between the
Registrant and certain of the Registrant's security-holders.**
- -----------
* Previously filed
** To be filed
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide the
Underwriter at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant 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. In the event that a claim for
indemnification against such liabilities (other than the
II-7
<PAGE> 97
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and contained in
the form of prospectus field by the Registrant pursuant to Rule 424(b)(1), or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the
Securities Act, each post effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement to: (i)
including any prospectus required by Section 10(a)(3) of the Securities Act of
1933; (ii) reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in this Registration Statement;
(iii) include any material information with respect to the plan of distribution
not previously disclosed in this Registration Statement or any material change
to such information in the registration statement.
(2) That, for the purpose of determining any liability under
the Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
II-8
<PAGE> 98
SIGNATURES
In accordance with the requirements of the Securities Act of
1933, the Registrant has duly caused this Amendment No. 1 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Phoenix, State of Arizona, on the 22nd day of
November, 1996.
CRAGAR INDUSTRIES, INC.
By: /s/
---------------------------------------
Michael L. Hartzmark
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment No. 1 to the Registration Statement on Form SB-2 has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ President, Chief Executive November 22, 1996
- ---------------------------------------- Officer, and Director (Principal
Michael L. Hartzmark Executive Officer)
/s/ Vice President of Operations November 22, 1996
- ---------------------------------------- (Principal Financial and
Anthony W. Barrett Accounting Officer)
* Director November 22, 1996
- ----------------------------------------
Sidney Dworkin
* Director November 22, 1996
- ----------------------------------------
Donald McIntyre
* Director November 22, 1996
- ----------------------------------------
Mark Schwartz
/s/ Director November 22, 1996
- ----------------------------------------
Ed Faber
*By: /s/
------------------------------------
Michael L. Hartzmark
Attorney-in-Fact
</TABLE>
II-9
<PAGE> 99
EXHIBITS INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
- ------ ----------- ------------
<S> <S> <S>
1.1 Deleted
1.2 Form of Underwriting Agreement, dated _______, 1996, by and
between Registrant and Dickinson & Co.
3.1 Second Amended and Restated Certificate of Incorporation of
the Registrant filed with State of Delaware on October 1,
1996*
3.2 Amended and Restated Bylaws of the Registrant*
4.1 Second Amended and Restated Certificate of Incorporation of
the Registrant (filed as Exhibit 3.1)*
4.2 Form of Certificate representing Common Stock*
4.3 Form of Warrant Agreement*
4.4 Form of Warrant Certificate (attached as Exhibit A to Form of
Warrant Agreement filed as Exhibit 4.3)*
4.5 Deleted
4.6 Deleted
4.7 Form of 1993 Convertible Subordinated Secured Note of the
Registrant, dated September 30, 1993*
4.7(a) Form of First Note Amendment to 1993 Convertible Subordinated
Secured Note of the Registrant, dated September 30, 1995*
4.7(b) Form of Second Note Amendment to 1993 Convertible Subordinated
Secured Note of the Registrant*
4.8 $350,000 Promissory Note of the Registrant, dated December 15,
1994, issued to Sidney Dworkin*
4.8(a) Agreement between Registrant and Sidney Dworkin, dated October
12, 1995, amending the terms and conditions of the $350,000
Promissory Note*
4.8(b) First Note Amendment to the $350,000 Promissory Note of the
Registrant issued to Sidney Dworkin*
4.9 Form of 1996 Unsecured Promissory Bridge Note of the
Registrant*
4.10 Credit and Security Agreement, dated as of April 14, 1995,
executed by and between Registrant and Norwest Business
Credit, Inc.*
4.10(a) Amendment to Credit and Security Agreement, dated as of
September 19, 1995, executed by and between Registrant and
Norwest Business Credit, Inc.*
4.10(b) First Amendment to Credit Agreement, dated as of ___, 1996,
executed by and between Registrant and Norwest Business
Credit, Inc.
4.10(c) Waiver and Amendment to Credit and Security Agreement, dated
November 20, 1996, executed by and between Registrant and
Norwest Business Credit, Inc.
4.11 Form of Class A Stock Purchase Warrant Certificate
4.12 Form of Class B Stock Purchase Warrant Certificate
4.13 Form of Class C Stock Purchase Warrant Certificate
4.14 Form of Stock Option / Restricted Stock Grant for grants made
pursuant to either or both the CRAGAR Industries, Inc. 1996
Non-Employee Directors' Stock Option Plan filed as Exhibit
10.1 and the CRAGAR Industries, Inc. 1996 Stock Option and
Restricted Stock Plan filed as Exhibit 10.2
</TABLE>
<PAGE> 100
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
- ------ ----------- ------------
<S> <S> <S>
4.15 Form of Representative's Warrant Agreement, dated ________,
1996, by and between the Registrant and Dickinson & Co.**
5.1 Opinion of Snell & Wilmer L.L.P. regarding the legality of the
Securities and Representative's Warrants being registered
10.1 CRAGAR Industries, Inc. 1996 Non-Employee Directors' Stock
Option Plan*
10.1(a) First Amendment to the CRAGAR Industries, Inc. 1996
Non-Employee Directors' Stock Option Plan, dated October 1,
1996*
10.2 CRAGAR Industries, Inc. 1996 Stock Option and Restricted Stock
Plan*
10.2(a) First Amendment to the CRAGAR Industries, Inc. 1996 Stock
Option and Restricted Stock Plan, dated October 1, 1996*
10.3 Commercial Lease, dated February 5, 1993, executed by and
between Registrant and Principal Mutual Life Insurance
Company*
10.4 Employment Agreement, dated January 1, 1996, executed by and
between Registrant and Tony Barrett*
10.5 Purchase Program, dated January 24, 1996, executed by and
between Registrant and Super Shops*
10.6 Form of 1992 Promissory Note of Registrant, dated December 31,
1992, issued in connection with Registrant's original
capitalization*
10.6(a) Form of First Note Amendment of 1992 Promissory Note of
Registrant, dated September 30, 1994*
10.6(b) Form of Agreement to Forgive Interest, dated December 14,
1994, executed by and between Registrant and certain holders
of 1992 Promissory Notes of Registrant*
10.6(c) Form of Letter, dated February 16, 1995, issued by Registrant
to (i) holders of the 1992 Promissory Notes of Registrant, and
(ii) holder of the $350,000 Note of Registrant, whereby
holders of the Notes agreed to contribute to capital the 1992
Promissory Notes and the $350,000 Note*
10.7 $108,333 Promissory Note of Registrant, dated December 15,
1994, issued to Sidney Dworkin*
10.7(a) Form of Letter, dated February 16, 1995, issued by Registrant
to (i) holders of the 1992 Promissory Notes of Registrant, and
(ii) holder of the $350,000 Note of Registrant, whereby
holders of the Notes agreed to contribute to capital the 1992
Promissory Notes and the $350,000 Note (attached as Exhibit
10.6(c))*
</TABLE>
<PAGE> 101
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
- ------ ----------- ------------
<S> <S> <S>
10.8 Cognovit Promissory Note dated September 30, 1993, executed by
Registrant and payable to Performance Industries, Inc.*
10.8(a) Cross Receipt executed by and between Lee Hartzmark and
Registrant in connection with Assignment of Cognovit
Promissory Note*
10.9 Wheel & Component Purchase Agreement dated April 3, 1996,
executed by and between Registrant and Titan Wheel
International, Inc.
10.10 Redistribution Agreement dated November 7, 1996, executed by
and between Registrant and RELCO Corp.
11.1 Computation of Earnings Per Share
21 List of Subsidiaries of the Registrant*
23.1 Consent of Snell & Wilmer, L.L.P (included in Exhibit 5.1)
23.2 Consent of KPMG Peat Marwick LLP, independent certified public
accountants
24 Power of Attorney (included on signature page of Registration
Statement)*
27 Financial Data Schedule
99.1 Deleted
99.2 Deleted
99.3 Form of Lock-Up Agreement, executed by and between the
Registrant and certain of the Registrant's security-holders.**
- -----------
* Previously filed
** To be filed
</TABLE>
<PAGE> 102
APPENDIX A
DESCRIPTION OF GRAPHIC AND IMAGE MATERIAL
Location: Inside Front cover of the Prospectus
Item: Photographs
Description: The photographs appearing on the inside front cover of the
Prospectus are, beginning with the center photograph and then
moving clockwise from the upper left hand corner, of the
following types of wheels: (a) CRAGAR Legacy S/S Super Sport
Series 08/61, (b) CRAGAR LITE Three Spoke Series 230,
(c) CRAGAR Racing Super Star Series 44, (d) TRU~SPOKE Wire
Wheels TRU~CRUISER Series 16/716, and (e) CRAGAR One-Piece
Aluminum Split Five Spoke Series 247. The photographs appearing
on the back cover of the Prospectus depict certain of CRAGAR's
wheels used for drag racing.
<PAGE> 1
EXHIBIT 1.2
CRAGAR INDUSTRIES, INC.
850,000 SHARES OF COMMON STOCK
AND
850,000 COMMON STOCK PURCHASE WARRANTS
UNDERWRITING AGREEMENT
_______________, 1996
Dickinson & Co.
As Representative of the
Several Underwriters
referred to herein
2425 East Camelback Road, Suite 725
Phoenix, Arizona 85016
Ladies and Gentlemen:
CRAGAR Industries, Inc., a Delaware corporation (the "Company"),
proposes to issue and sell to the several underwriters (the "Underwriters")
named in Schedule I hereto for whom you are acting as representative (the
"Representative") an aggregate of 850,000 shares (the "Firm Shares") of Common
Stock, $.01 par value per share (the "Common Stock"), and 850,000 redeemable
common stock purchase warrants (the "Firm Warrants") exercisable for one share
of Common Stock each (the "Firm Warrants") (the Firm Shares and the Firm
Warrants together, the "Firm Securities"). The respective amounts of the Firm
Securities to be so purchased by the several Underwriters are set forth opposite
their names in Schedule I hereto. The Company also proposes to sell, at the
Underwriters' option, an aggregate of up to 127,500 additional shares (the
"Option Shares") of Common Stock and up to 127,500 additional Warrants (the
"Option Warrants") (the Option Shares and the Option Warrants together, the
"Option Securities") as discussed more fully in Section 2 below. The Company
further agrees to issue, upon the Closing Date as hereafter defined in Section
2, certain warrants (the "Representative's Warrants") to the Representative or
its designees as more fully discussed in Section 4(p) below. The Firm
Securities, the Option Securities (to the extent the aforementioned option is
exercised) and the shares into which the Warrants are exercisable are herein
collectively called the "Securities."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
<PAGE> 2
1. Representations and Warranties of the Company.
The Company represents, warrants, and agrees as follows:
(a) A registration statement on Form SB-2 (File No.
333-13415) with respect to the Securities, including a form of
prospectus subject to completion, has been prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as
amended (the "Act"), and the rules and regulations (the "Rules and
Regulations") of the Securities and Exchange Commission (the
"Commission") thereunder and has been filed with the Commission under
the Act. Copies of such registration statement, including any
pre-effective and post-effective amendments thereto, the prospectuses
subject to completion (meeting the requirements of Rule 430A of the
Rules and Regulations) contained therein and the exhibits, financial
statements and schedules, as finally amended and revised, have
heretofore been delivered by the Company to the Representative. Such
registration statement, herein referred to as the "Registration
Statement," upon filing of the Prospectus referred to below with the
Commission, shall be deemed to include all information omitted
therefrom in reliance upon Rule 430A and contained in the Prospectus or
term sheet referred to below, has been declared effective by the
Commission under the Act, and no post-effective amendment to the
Registration Statement has been filed as of the date of this Agreement.
The term "Prospectus" as used in this Agreement means (i) the
prospectus in the form included in the Registration Statement, or (ii)
if the prospectus included in the Registration Statement omits
information in reliance upon Rule 430A under the Act and such
information is included in a prospectus filed with the Commission
pursuant to Rule 424(b) under the Act or as part of a post-effective
amendment to the Registration Statement after the Registration
Statement becomes effective, the prospectus as so filed, or (iii) if
the prospectus included in the Registration Statement omits information
in reliance upon Rule 430A under the Act and such information is
included in a term sheet (as described in Rule 434(b) under the Act)
filed with the Commission pursuant to Rule 424(b) under the Act, the
prospectus included in the Registration Statement and such term sheet,
taken together. The prospectus subject to completion in the form
included in the Registration Statement at the time of the initial
filing of such Registration Statement with the Commission and as such
prospectus is amended from time to time until the date upon which the
Registration Statement is declared effective by the Commission is
referred to in this Agreement as the "Preliminary Prospectus."
(b) The Company is a corporation duly formed, validly
existing, and in good standing under the laws of the State of Delaware,
with full corporate power and corporate authority to own or lease its
properties and conduct its business as described in the Registration
Statement; the Company is qualified to transact business in all
jurisdictions in which the conduct of its business requires such
qualification, except where the failure to qualify would not have a
material adverse effect upon the business or property of the Company.
(c) The Company has authorized and outstanding
capital stock as set forth under the heading "Capitalization" in the
Prospectus; the outstanding shares of Common Stock of the Company have
been duly authorized and validly issued, are fully paid and
nonassessable, and have been issued in compliance with all federal and
state securities laws;
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<PAGE> 3
all of the Securities to be issued and sold by the Company pursuant to
this Agreement have been duly authorized and, when issued and paid for
as contemplated herein, will be validly issued, fully paid, and
nonassessable; and no preemptive rights of stockholders exist with
respect to any of the Securities nor the issue and sale thereof; no
stockholder of the Company has any right pursuant to any agreement to
require the Company to register, in the Registration Statement, the
sale of any shares owned by such stockholder under the Act; all
necessary and proper corporate proceedings have been taken to validly
authorize the issuance and sale of the Securities and no further
approval or authority of the stockholders or the Board of Directors of
the Company is required for the issuance and sale of the Securities to
be sold by the Company as contemplated herein.
(d) The Securities conform in all material respects
to the description thereof in the Registration Statement. Except as
specifically disclosed in the Registration Statement and the financial
statements of the Company and the related notes thereto, the Company
does not have outstanding any options or warrants to purchase, or any
preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or
commitments to issue or sell, shares of its capital stock or any such
options, rights, convertible securities, or obligations. The
descriptions of the Company's stock option and other stock-based plans,
and of the options or other rights granted and exercised thereunder,
set forth in the Prospectus are accurate summaries and fairly present
the information required to be shown with respect to such plans and
rights in all material respects. The Company and its affiliates are not
currently offering any securities other than the Securities, nor have
they offered or sold any of the Company's securities, except as
described in the Registration Statement.
(e) The Commission has not issued any order
preventing or suspending the use of any Preliminary Prospectus or the
Prospectus relating to the proposed offering of the Firm Securities nor
instituted or, to the best knowledge of the Company, threatened
instituting proceedings for that purpose. The Registration Statement
contains, and the Prospectus and any amendments or supplements thereto
will contain, all statements that are required to be stated therein by,
and in all respects conform or will conform, as the case may be, to the
requirements of, the Act and the Rules and Regulations. Neither the
Registration Statement nor any amendment thereto, and neither the
Prospectus nor any supplement thereto, contains or will contain, as the
case may be, any untrue statement of a material fact or omits or will
omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading; provided, however, that the
Company makes no representations or warranties as to information
contained in or omitted from the Registration Statement or the
Prospectus, or any such amendment or supplement, in reliance upon, and
in conformity with, written information furnished to the Company by or
on behalf of the Representative specifically for use in the preparation
thereof.
(f) The financial statements of the Company, together
with related notes and schedules included in the Registration
Statement, present fairly in all material respects the financial
position and the results of operations of the Company, at the indicated
dates and for the indicated periods. Such financial statements,
schedules and related notes have been
3
<PAGE> 4
prepared in accordance with generally accepted accounting principles,
consistently applied throughout the periods involved, and all
adjustments necessary for a fair presentation of results for such
periods have been made. The summary and selected financial and
statistical data and schedules included in the Registration Statement
present fairly the information shown therein and have been compiled on
a basis consistent with the financial statements presented therein. No
other financial statements or schedules are required to be included in
the Registration Statement.
(g) There is no action, suit, or proceeding pending
or, to the best knowledge of the Company, after due inquiry, threatened
against the Company before any court or regulatory, governmental, or
administrative agency or body, or arbitral forum, that might result in
a material adverse change in the business or financial condition of the
Company, except as set forth in the Registration Statement. Except as
set forth in the Registration Statement, the Company is not subject to
the provisions of any injunction, judgment, decree, or order of any
court, regulatory body, administrative agency, or other governmental
body or arbitral forum, that might result in a material adverse change
in the business, assets, or condition of the Company.
(h) The Company has good and marketable title to all
of the properties and assets reflected in either the financial
statements or as described in the Registration Statement and such
properties and assets are not subject to liens, mortgages, security
interests, pledges, or encumbrances of any kind, except those reflected
in such financial statements or as described in the Registration
Statement, and except for equipment leases entered into by the Company
in the ordinary course of its business and such encumbrances that,
individually or in the aggregate, would not have a material adverse
effect on the business or financial condition of the Company. The
Company occupies its leased properties under valid and binding leases
conforming in all material respects to the description thereof set
forth in the Registration Statement.
(i) The Company has filed (or has received extensions
with regard to) all federal, state, local, and foreign income tax
returns that have been required to be filed and has paid all taxes
indicated by said returns and has paid all tax assessments received by
it. There is no income, sales, use, transfer, or other tax deficiency
or assessment that has been or might reasonably be expected to be
asserted or threatened against the Company that might result in a
material adverse change in the business or financial condition of the
Company. The Company has paid all sales, use, transfer, and other taxes
applicable to it and its business and operations.
(j) Since the respective dates as of which
information is given in the Registration Statement, as it may be
amended or supplemented, and prior to the Closing Date and Option
Closing Date, and except in each case as described in or as
contemplated by the Registration Statement and Prospectus, (i) there
has not been any material adverse change in or affecting the condition,
financial or otherwise, of the Company or the earnings, business
affairs, management, or business prospects of the Company; (ii) there
has not been any transaction entered into by the Company, other than
transactions in the ordinary course of business or transactions
specifically described in the Registration Statement as it may be
4
<PAGE> 5
amended or supplemented; (iii) the Company has not sustained any
material loss or interference with its businesses or properties from
fire, flood, windstorm, accident, or other calamity; (iv) the Company
has not paid or declared any dividends or other distribution with
respect to its capital stock and the Company is not in default in the
payment of principal of or interest on any outstanding debt
obligations; and (v) there has not been any change in the capital stock
(other than the sale of the Securities or the exercise of outstanding
stock options or warrants as described in the Registration Statement)
or material increase in indebtedness of the Company. The Company does
not have any material contingent obligation which is not disclosed in
the Registration Statement (or contained in the financial statements or
related notes thereto), as such may be amended or supplemented.
(k) The Company is not in violation or default under
any provision of its Certificate of Incorporation or Bylaws and is not
in material violation or default under any of its agreements, leases,
licenses, contracts, franchises, mortgages, permits, deeds of trust,
indentures, or other instruments or obligations to which the Company is
a party or by which it or any of its properties is bound or may be
materially affected (collectively, "Contracts").
(l) The execution and performance of this Agreement
and the consummation of the transactions herein contemplated do not and
will not conflict with or result in a breach of, or violation of, any
of the terms or provisions of, or constitute, either by itself or upon
notice or the passage of time or both, a default under, any Contract to
which the Company is a party or by which the Company or any of its
property may be bound or affected, except where such breach, violation,
or default would not have a material adverse effect on the business or
financial condition of the Company, or violate any of the provisions of
the Certificate of Incorporation or Bylaws of the Company or violate
any order, judgment, statute, rule, or regulation applicable to the
Company of any court or of any regulatory, administrative, or
governmental body or agency or arbitral forum having jurisdiction over
the Company or any of its property.
(m) The Company has the legal right, corporate power
and corporate authority to enter into this Agreement and perform the
transactions contemplated hereby. This Agreement has been duly
authorized, executed, and delivered by the Company and, assuming due
authorization, execution and acceptance by the Representative on behalf
of the several Underwriters, constitutes a legally binding agreement
enforceable against the Company in accordance with its terms, except as
the enforceability may be subject to or limited by bankruptcy,
insolvency, reorganization, arrangement, moratorium, or other similar
laws affecting the rights of creditors generally and subject to the
effect of general principles of equity (including, without limitation,
matters of public policy and equitable principles).
(n) Each approval, registration, qualification,
license, permit, consent, order, authorization, designation,
declaration, or filing by or with any regulatory, administrative, or
other governmental body or agency necessary in connection with the
execution and delivery by the Company of this Agreement and the
consummation of the transactions herein contemplated (except such
additional actions as may be required to qualify the Securities for
public offering under state securities or Blue Sky laws) has been
obtained or made and each is in full force and effect.
5
<PAGE> 6
(o) The Company owns or possesses adequate and
sufficient rights by license agreement or otherwise to use and enjoy
the full rights in and to all patents, patent rights, trade secrets,
license or royalty arrangements, trademarks and trademark rights,
service marks, trade names, copyrights, know how or proprietary
techniques or rights thereto of others, and governmental, regulatory,
or administrative authorizations, orders, permits, certificates, and
consents necessary for the conduct of the business of the Company other
than those that would not individually or in the aggregate have a
material adverse effect on the Company; the Company is not aware of any
pending or threatened action, suit, proceeding, or claim by others,
either domestically or internationally, that the Company is violating
any (i) patents, patent rights, copyrights, trademarks, or trademark
rights, inventions, service marks, trade names, licenses or royalty
arrangements, trade secrets, know how or proprietary techniques or
rights thereto of others, or (ii) governmental, regulatory or
administrative authorizations, orders, permits, certificates, and
consents; the Company is not aware, after due diligence, of any rights
of third parties to, or any infringement of, any of the Company's
patents, patent rights, trademarks or trademark rights, copyrights,
licenses or royalty arrangements, trade secrets, know how or
proprietary techniques, as well as processes and substances, or rights
thereto of others, that could materially adversely affect the use
thereof by the Company or that would have a material adverse effect on
the Company; the Company is not aware of any pending or threatened
action, suit, proceeding, or claim by others challenging the validity
or scope of any of such patents, patent rights, trademarks, or
trademark rights, copyrights, licenses or royalty arrangements, trade
secrets, know how, or proprietary techniques or rights thereto of
others. The Company possesses no patent.
(p) There are no Contracts or other documents
required to be described in the Registration Statement or to be filed
as exhibits to the Registration Statement by the Act or by the Rules
and Regulations that have not been described or filed as required.
(q) The Company is conducting its business in
compliance with all applicable laws, rules, and regulations of the
jurisdictions in which it is conducting business, including, without
limitation, all applicable local, state, federal, and foreign
environmental laws and regulations, except where the failure to so
comply would not have a material adverse effect on the business or
financial condition of the Company. The Company possesses adequate
certificates or permits issued by the appropriate federal, state, and
local regulatory authorities necessary to conduct its business and to
retain possession of its properties. The Company has not received any
notice of any proceeding relating to the revocation or modification of
any such federal, state, and local regulatory certificates or permits.
(r) All transactions among the Company and the
officers, directors, and affiliates of the Company have been accurately
disclosed, in all material respects, in the Prospectus, to the extent
required to be disclosed in the Prospectus in accordance with the Act
and the Rules and Regulations. As used in this Agreement, the term
"affiliate" shall mean a person or entity controlling, controlled by,
or under common control with, any specified person or entity, or the
ability to direct, directly or indirectly, the management or policies
of the controlled person or entity, whether through the ownership of
voting securities, by contract, positions of employment, family
relationships, service as an officer, director, or partner of the
person or entity, or otherwise.
6
<PAGE> 7
(s) The Company has not, to the best of its
knowledge, directly or indirectly, (i) made any unlawful contribution
to any candidate for public office, or failed to disclose fully any
contribution in violation of law, or (ii) made any payment to any
federal, state, local, or foreign governmental officer or official, or
other person charged with similar public or quasi-public duties, other
than payments required or permitted by the laws of the United States or
any other such jurisdiction.
(t) The Company maintains insurance of the types and
in the amounts that it deems adequate for its business including, but
not limited to, general liability insurance and insurance covering all
real and personal property owned or leased by the Company against all
risks customarily insured against by similar businesses, all of which
insurance is in full force and effect.
(u) KPMG Peat Marwick, L.L.P., who have audited and
certified the financial statements filed with the Commission as part of
the Registration Statement, are independent public accountants as
required by the Act and the Rules and Regulations.
(v) The Company has taken all appropriate steps
reasonably necessary or appropriate to assure that no offering, sale,
or other disposition of any Common Stock of the Company will be made
directly or indirectly, by any of its affiliates, directors or
executive officers for a period of 12 months after the date of the
Prospectus, or by the persons specified in Schedule II for the periods
specified therein, in each case, except as otherwise provided herein or
with the prior written consent of the Representative. For a period of
two years from the date of the Prospectus, the Company, at its expense,
shall provide the Representative with copies of the Company's daily
transfer sheets, which shall be mailed to the Representative no less
frequently than weekly.
(w) The Company is classified as a "C" corporation
with the Internal Revenue Service.
(x) The Company's Board of Directors consists of
those persons listed in the Prospectus. Except as disclosed in the
Prospectus, none of such persons is employed by the Company nor is any
of them affiliated with the Company, except for service on its Board of
Directors.
(y) Except as provided for herein, no broker's or
finder's fees or commissions are due and payable by the Company, and
none will be paid by it.
(z) Neither the Company, nor to its knowledge, after
due and diligent inquiry, any person other than the Representative, has
made any representation, promise, or warranty, whether verbal or in
writing, to anyone, whether an existing stockholder or not, that any of
the Securities will be reserved for or directed to them during the
proposed public offering.
2. Purchase, Sale and Delivery of the Firm Securities. On the basis of
the representations, warranties, and covenants herein contained, and subject to
the conditions herein set forth, the Company agrees to sell to the Underwriters
and each Underwriter agrees, severally and not
7
<PAGE> 8
jointly, to purchase, at the gross price per Share and per Warrant indicated in
the Prospectus (the "Initial Price") less the Underwriters' discount of ten
percent (10%) of the Initial Price, the Firm Shares and the number of Firm
Securities set forth opposite the name of each Underwriter in Schedule I hereof,
subject to adjustments in accordance with Section 9 hereof.
Payment for the Firm Securities to be sold hereunder is to be made by
certified or bank cashier's check(s) drawn to the order of the Company for the
Firm Securities, against delivery of certificates therefor to the Representative
for the several accounts of the Underwriters. Such payment is to be made at the
offices of O'Connor, Cavanagh, Anderson, Killingsworth & Beshears, P.A., One
East Camelback Rd., Phoenix, Arizona 85012-1656 at 10:00 A.M., Phoenix time, on
the third business day after the date of this Agreement, or at such other time
and date not later than four business days thereafter as the Representative and
the Company shall agree upon, such time and date being herein referred to as the
"Closing Date." (As used herein, "business day" means a day on which the Boston
Stock Exchange, Inc. is open for trading and on which banks in Arizona are open
for business and not permitted by law or executive order to be closed.) The
certificates for the Firm Securities shall be in definitive form with engraved
borders and will be delivered in such denominations and in such registrations as
the Representative requests in writing not later than the second business day
prior to the Closing Date, and will be made available for inspection by the
Representative at least two business days prior to the Closing Date at the
offices of the Representative or American Stock Transfer & Trust Company located
in New York City or New Jersey, as the Representative elects. Delivery of the
certificates for the Firm Securities shall be made against payment therefor at
either of such offices, as the Representative elects.
In addition, on the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the Company
grants an option to the several Underwriters to purchase the Option Securities
at the Initial Price, less the Underwriters' discount, subject to adjustment as
provided in Section 9. The maximum number of Option Securities to be sold by the
Company is 127,500 shares of Common Stock and 127,500 Warrants. The option
granted hereby may be exercised in whole or in part, but only once, and at any
time upon written notice given within 45 days after the Closing Date, by the
Representative on behalf of the several Underwriters, to the Company setting
forth the number of Option Securities as to which the several Underwriters are
exercising the option, the names and denominations in which the Option
Securities are to be registered, and the time and date at which such
certificates are to be delivered. The certificates for Option Securities are to
be delivered to a location designated by the Representative on a date designated
by the Representative (which may be the same as the Closing Date but shall in no
event be earlier than the Closing Date nor earlier than three nor later than ten
business days after the giving of the notice referred to above) (such time and
date being herein referred to as the "Option Closing Date"). Except as otherwise
agreed by the Representative on behalf of the several Underwriters in writing,
the number of Option Securities to be purchased by each Underwriter shall be in
the same proportion to the total number of Option Securities being purchased as
the number of Firm Securities being purchased by such Underwriter bears to the
total number of the Firm Securities, adjusted by the Representative in such
manner as to avoid fractional shares. The option with respect to the Option
Securities granted hereunder may be exercised solely to cover over-allotments in
the sale of the Firm Securities by the Underwriters or to permit purchases by
the Underwriters to the extent permitted by law. The Representative may cancel
such option at any time, in whole or in part, prior to its expiration, by giving
written notice of such cancellation to the
8
<PAGE> 9
Company. To the extent, if any, that the option is exercised, payment for
the Option Securities shall be made on the Option Closing Date by certified or
bank cashier's check(s) drawn to the order of the Company for the Option
Securities, against delivery of certificates therefor at the offices of
O'Connor, Cavanagh, Anderson, Killingsworth & Beshears, P.A. noted above.
3. Offering by the Underwriters. It is understood that the several
Underwriters are to make a public offering of the Firm Securities as soon as
practicable after the Registration Statement becomes effective. The Firm
Securities are to be initially offered to the public at the Initial Price set
forth in the Prospectus. The Representative may from time to time thereafter
change the public offering price and other selling terms. To the extent, if at
all, that any Option Securities are purchased pursuant to Section 2 hereof, the
Representative will offer them to the public on the foregoing terms.
It is further understood that the Representative will act on behalf of
the Underwriters in the offering and sale of the Securities, in accordance with
a Master Agreement Among Underwriters entered into by the Representative and the
several other Underwriters on or prior to the date hereof.
4. Covenants of the Company. The Company covenants and agrees with the
several Underwriters that:
(a) The Company will (i) prepare and timely file with the
Commission under Rule 424(b) of the Rules and Regulations a prospectus or term
sheet (as described in Rule 434(b) of the Rules and Regulations) containing
information previously omitted at the time of effectiveness of the Registration
Statement in reliance on Rule 430A of the Rules and Regulations and (ii) not
file any amendment to the Registration Statement or supplement to the Prospectus
of which the Representative shall not previously have been advised and furnished
with a copy or to which the Representative shall have reasonably objected in
writing or which is not in compliance with the Rules and Regulations.
(b) The Company will advise the Representative promptly and
will confirm such advice in writing (i) when the Registration Statement has
become effective, (ii) of any request of the Commission for amendment of the
Registration Statement or for supplement to the Prospectus or for any additional
information, or (iii) of the issuance by the Commission or any state securities
commission of any stop order suspending the effectiveness of the Registration
Statement or the use of the Prospectus or of the institution of any proceedings
for that purpose, and the Company will use its best efforts to prevent the
issuance of any such stop order preventing or suspending the use of the
Prospectus and to obtain as soon as possible the lifting thereof, if issued.
(c) The Company will cooperate with the Representative in
endeavoring to qualify the Securities for sale under the securities laws of such
jurisdictions as the Representative may have reasonably requested in writing and
will make such applications, file such documents, furnish such information, and
take such other actions as may be reasonably required by federal or state
securities laws or regulations whether before, during, or after the offering.
The Company will, from time to time, prepare and file such statements, reports,
and other documents, as are or may be required to continue such qualifications
in effect for so long a period as the Representative may reasonably
9
<PAGE> 10
request for distribution of the Securities; provided, however, that the Company
shall not be required to register or qualify as a foreign corporation or to take
any action that would subject it to service of process in suits, other than
relating to the sale of the Securities, in any jurisdiction where it is not now
so subject.
(d) The Company will register the Common Stock and the
Warrants with the Commission under the provisions of Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and will
maintain such registration in effect for a period of five years from the
effective date of the Registration Statement. The Company will qualify the
Securities for trading on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ") and for listing on the Boston Stock
Exchange (the "BSE") and will use its best efforts to maintain such
qualification and listing for as long as the Common Stock is qualified for
inclusion in NASDAQ and on the BSE.
(e) The Company will deliver to, or upon the order of, the
Representative, from time to time, as many copies of any Preliminary Prospectus
as the Representative may reasonably request. The Company will deliver to, or
upon the order of, the Representative during the period when delivery of a
Prospectus is required under the Act, as many copies of the Prospectus in final
form, or as thereafter amended or supplemented, as the Representative may
reasonably request. The Company will deliver to the Representative at or before
the Closing Date, two signed copies of the Registration Statement and all
amendments thereto, including all exhibits filed therewith, and will deliver to
the Representative such number of copies of the Registration Statement, without
exhibits, but including any information incorporated by reference, and of all
amendments thereto, as the Representative may request.
(f) If during the period of time in which a Prospectus is
required to be delivered under the Act, by an underwriter or dealer, any event
shall occur as a result of which, in the judgment of the Company or in the
opinion of counsel for the Representative, it becomes necessary to amend or
supplement the Prospectus in order to make the statements therein not
misleading, or if it is necessary at any time to amend or supplement the
Prospectus to comply with any law, the Company promptly will prepare and file
with the Commission an appropriate amendment to the Registration Statement or
supplement to the Prospectus so that the Registration Statement, including the
Prospectus as so amended or supplemented, will not be misleading, or so that the
Registration Statement, including the Prospectus, will comply with the Act.
(g) The Company will make generally available to its
stockholders, as soon as it is practicable to do so, but in any event not later
than 15 months after the effective date of the Registration Statement, an
earnings statement in reasonable detail, covering a period of at least 12
consecutive months beginning after the effective date of the Registration
Statement, which earnings statement shall satisfy the requirements of Section 11
(a) of the Act and Rule 158 of the Rules and Regulations and will advise the
Representative in writing when such statement has been so made available and
will furnish the Representative with a true and correct copy thereof.
(h) The Company will, for a period of five years from the
effective date of the Registration Statement, deliver to the Representative
copies of annual reports and copies of all other documents, reports, and
information furnished by the Company to its stockholders or filed with any
securities exchange pursuant to the requirements of such exchange or with the
Commission pursuant
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<PAGE> 11
to the Act or the Exchange Act. The Company will deliver to the Representative
similar reports with respect to significant subsidiaries, as that term is
defined in the Rules and Regulations, which are not consolidated in the
Company's financial statements.
(i) The Company will apply the net proceeds of the sale of the
Securities sold by it materially in accordance with the statements under the
caption "Use of Proceeds" in the Prospectus.
(j) The Company has required each of its directors, executive
officers, affiliates, and each of its security holders listed on Schedule II, to
enter into agreements not to sell any shares of the Company's Common Stock for a
period of time ending on the date specified on Schedule II with respect to such
director, executive officer, affiliate, or security-holder (being a period
ending 12 months or 90 days, as so specified, from the date of the Prospectus),
without the prior written consent of the Representative. The Company has
furnished the Representative with an executed copy of each such agreement
substantially in the form attached as Schedule III which has been executed by
each person or entity specified in Schedule II.
(k) The Company has made original documents (or true copies
thereof) and other information relating to the Company's affairs available to
the Underwriters and to their counsel. Included within the documents made
available have been at least the Certificate of Incorporation and all amendments
thereto, the Bylaws and all amendments thereto, minutes of all of the meetings
of the incorporators, directors, and stockholders, all financial statements, and
copies of all Contracts to which the Company is a party or in which the Company
has an interest.
(l) For a period of five years from the effective date of the
Registration Statement, the Company shall provide the Representative, on not
less than an annual basis, with internal forecasts setting forth projected
results of operations for each quarterly and annual period in the two fiscal
years following the respective dates of such forecasts. Such forecasts shall be
provided to the Representative more frequently than annually if prepared more
frequently by management, and revised forecasts shall be prepared and provided
to the Representative when required to reflect more current information, revised
assumptions, or actual results that differ materially from those set forth in
the forecasts. Such forecasts shall be kept confidential unless made public
directly or indirectly by the Company or unless required by law or court order
to be made available to any person or entity and such forecasts shall not be
used in violation of applicable securities laws, and the Representative shall
indemnify the Company for any breach of this covenant. In addition, for a period
of five years from the effective date of the Registration Statement, the Company
will provide to the Representative on a timely basis periodic statements setting
forth such information regarding the Company's results of operations and
financial position (including balance sheet, profit and loss statements, and
data regarding outstanding purchase orders) as is regularly prepared by the
management of the Company, in any such case to the extent such information is
not covered by Section 4(h) above.
(m) The Company has appointed American Stock Transfer & Trust
Company as the Company's transfer agent. Unless the Representative otherwise
consents in writing, the Company will continue to retain such transfer agent, or
a transfer agent reasonably satisfactory to the Representative, for a period of
five years following the effective date of the Registration Statement. The
Company will make arrangements to have available at the office of the transfer
agent sufficient
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<PAGE> 12
quantities of certificates representing Shares of Common Stock issuable upon the
exercise of the Warrants as may be needed for the quick and efficient transfer
of such Securities. During such five year period, at the request of the
Representative, the Company shall cause such transfer agent to provide the
Representative on a monthly basis with copies of the Company's stock transfer
sheets and, when requested by the Representative, a current list of the
Company's security holders, including a list of the beneficial owners of
securities held by a depository trust company, and other nominees.
(n) For a period of five years from the effective date of the
Registration Statement, the Company, at its expense, shall continue to retain
KPMG Peat Marwick, L.L.P., or another accounting firm reasonably acceptable to
the Representative, as its regularly engaged independent certified public
accountants and shall cause such accountants to review (but not audit) the
Company's financial statements for each of the first three fiscal quarters prior
to the announcement of quarterly financial information, the filing of the
Company's 10-Q quarterly report, and the filing of quarterly financial
information to stockholders.
(o) Except with the Representative's approval, the Company
agrees that the Company will not do any of the following for 25 days after the
Closing Date or the Option Closing Date, whichever occurs later:
(i) Undertake or authorize any change in its capital
structure or authorize, issue or permit any public or private
offering of additional securities;
(ii) Authorize, create, issue, or sell any funded
obligations, notes, or other evidences of indebtedness, except
in the ordinary course of business;
(iii) Consolidate or merge with or into any other
corporation or effect a material corporate reorganization of
the Company; or
(iv) Create any mortgage or any lien upon any of its
properties or assets, except in the ordinary course of its
business.
(p) The Company shall deliver to the Representative warrants
(the "Representative's Warrants") to purchase, for $.001 per warrant, in the
aggregate 85,000 Shares of Common Stock and 85,000 Warrants in the form attached
hereto as Appendix "A." The Representative's Warrants will be exercisable for a
four-year term, commencing one year after the effective date of the Registration
Statement, at an exercise price equal to one hundred twenty percent (120%) of
the Initial Price of the Firm Securities. The Representative's Warrants shall
not be redeemable by the Company, and shall be exercisable at any time
commencing one year after the effective date of the Registration Statement and
continuing for four years thereafter.
(q) For a period commencing on the date hereof and ending 12
months after the effective date of the Registration Statement, neither the
Company nor any of its officers or directors will hold discussions with any
member of the news media or issue news releases or other publicity about the
Company regarding the financial condition or any significant event of the
Company without the approval of the Company's legal counsel named in the
Prospectus under the heading
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<PAGE> 13
"Legal Matters," or such other counsel as may be approved by the Representative.
During such period, the Company will deliver to the Representative copies of
such news releases or other publicity about the Company promptly after
distribution thereof.
(r) For a period of five years from the effective date of the
Registration Statement, the Company will appoint a non-voting advisor,
designated by the Representative, to its Board of Directors; such designee shall
attend meetings of the Board and receive no more or less compensation than is
paid to other non-management directors of the Company and shall be entitled to
receive reimbursement for all reasonable costs incurred in attending such
meetings, including, but not limited to, food, lodging, and transportation. To
the extent permitted by law, the Company will indemnify the Representative and
its designee for the actions of such designee as a director of the Company. In
the event the Company maintains a liability insurance policy affording coverage
for the acts of its officers and directors, it will agree, if possible, to
include both the Representative and its designee as an insured under such
policy. If the Representative does not exercise its option to designate an
advisor to the Company's Board of Directors, the Representative shall
nonetheless have the right to send a representative (who need not be the same
individual from meeting to meeting) to observe each meeting of the Board of
Directors. The Company agrees to give the Representative notice of each such
meeting and to provide the Representative with an agenda and minutes of the
meeting no later than it gives such notice and provides such items to the
directors.
5. Costs and Expenses. The Company will pay or cause to be paid all
costs, expenses and fees in connection with the offering or incident to the
performance of the obligations of the Company under this Agreement, including,
without limiting the generality of the foregoing, the following: (a) all
expenses (including any transfer taxes) incurred in connection with the delivery
to the several Underwriters of the Securities sold hereunder, (b) all fees and
expenses (including, without limitation, fees and expenses of the Company's
accountants and counsel, but excluding fees and expenses of counsel for the
Underwriters other than fees in connection with blue sky matters in connection
with the preparation, printing, filing, delivery, and shipping of the
Registration Statement (including the financial statements therein and all
amendments and exhibits thereto)), Preliminary Prospectuses and the Prospectus
as amended or supplemented, (c) the cost of printing, filing, and delivering
this Agreement and other underwriting documents including Underwriters'
Questionnaires, Underwriters' Powers of Attorney, Blue Sky Memoranda, Agreements
Among Underwriters, Selected Dealers Agreements, Invitation Telecopy, and any
letters transmitting the offering materials to the Underwriters or selling group
members (including costs of mailing and shipment), (d) all filing fees and fees
and disbursements of counsel to the Underwriters incurred in connection with the
qualification of the Securities and their components for offer and sale under
the applicable state or foreign securities laws, (e) filing and listing fees of
the Commission, National Association of Securities Dealers, Inc., ("NASD"),
NASDAQ and any other similar entity in connection with the offering, (f) the
cost of printing certificates representing the Securities and issuable upon the
exercise of the Warrants, (g) the costs and charges of any transfer agent or
registrar, (h) the costs of advertising, including but not limited to the Wall
Street Journal and the Arizona Republic, as well as any other advertising
undertaken at the Company's request, (i) the cost of the Company's executive
employees for marketing and public relations associated with "road shows" and
other presentations to NASD approved broker/dealers, (j) the fees for financial
coverage in Standard and Poor's Corporate Record Service, (k) the costs of
preparing, printing and distributing bound volumes for the Representative and
its counsel, and (l) all other costs and expenses incident
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<PAGE> 14
to the performance of the Company's obligations under this Agreement which are
not otherwise provided for in this Section. The Company shall use a printer
acceptable to the Representative. Any transfer taxes imposed on the sale of the
Securities to the several Underwriters will be paid by the Company. The Company
shall pay to the Representative a non-accountable expense allowance of up to
three percent (3%) of the gross proceeds of the Securities, payable at the
Closing(s), of which Twenty-Five Thousand Dollars ($25,000) has been advanced to
the Representative on or before the date hereof, which shall be credited to the
allowance noted above. This expense allowance is in addition to the
Underwriters' discount. The Underwriters shall be responsible for the fees and
disbursements of their counsel, except as noted otherwise in this Section 5. The
Company shall not be required to pay for any of the Underwriters' other
expenses, except that if this Agreement shall not be consummated because the
conditions in Section 7 hereof are not satisfied, or because this Agreement is
terminated by the Representative pursuant to Section 6 hereof, or by reason of
any failure, refusal, or inability on the part of the Company to perform any
undertaking or satisfy any condition of this Agreement or to comply with any of
the terms hereof on its part to be performed, unless such failure to satisfy
said condition or to comply with said terms is due solely to the default of the
Underwriters, then the Company shall reimburse the several Underwriters for
out-of-pocket expenses, including fees and disbursements of counsel, incurred in
connection with investigating, marketing, and proposing to market the Securities
or in contemplation of performing their obligations hereunder, and in any event
the Underwriters may retain amounts theretofore paid to them as set forth above.
6. Conditions of Obligations of the Underwriters. The several
obligations of the Underwriters to purchase the Firm Securities on the Closing
Date and the Option Securities, if any, on the Option Closing Date are subject
to the accuracy, as of the Closing Date or the Option Closing Date, as the case
may be, of the representations and warranties of the Company contained herein,
and to the performance by the Company of its covenants and obligations hereunder
and to the following additional conditions:
(a) The Registration Statement shall have become effective not
later than 5:00 p.m., Arizona time, on the date of this Agreement, or such later
date and time as may be consented to in writing by the Representative. No stop
order suspending the effectiveness of the Registration Statement, as amended
from time to time, shall have been issued and no proceedings for that purpose
shall have been taken or, to the best knowledge of the Company, after due
inquiry, shall be contemplated by the Commission or any state securities
commission.
(b) The Representative shall have received on the Closing Date
or the Option Closing Date, as the case may be, the opinion of Snell & Wilmer,
counsel for the Company, dated the Closing Date or the Option Closing Date, as
the case may be, addressed to the Underwriters to the effect that:
(i) The Company is a corporation duly organized,
validly existing, and in good standing as a corporation under
the laws of the State of Delaware, with corporate power and
corporate authority to own or lease its properties and conduct
its business as described in the Registration Statement; the
Company is duly qualified as a foreign corporation to transact
business in all jurisdictions in which the conduct of its
business requires such qualification, except where the failure
to qualify would
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<PAGE> 15
not have a material adverse effect upon the business or
financial condition of the Company.
(ii) The Company has authorized and outstanding
capital stock as set forth under the caption "Capitalization"
in the Prospectus; and the outstanding shares of Common Stock
of the Company have been duly authorized and validly issued,
are fully paid and nonassessable.
(iii) All of the Securities to be issued and sold by
the Company pursuant to this Agreement have been duly
authorized by all necessary corporate action and, when issued
and delivered to the Underwriters against payment therefor, as
contemplated herein, will be validly issued, fully paid, and
nonassessable. Further, to the best of such counsel's
knowledge, no preemptive rights of stockholders exist with
respect to any of the Securities or the issue and sale
thereof; no stockholder of the Company has any right pursuant
to any agreement to require the Company to register the sale
of any shares owned by such stockholder under the Act in the
public offering contemplated herein; and no further approval
or authority of the stockholders of the Board of Directors of
the Company is required for the issuance and sale of the
Securities to be sold by the Company as contemplated herein.
(iv) The certificates evidencing the Securities to be
delivered hereunder comply in all material respects with the
requirements of Delaware law and the Securities conform in all
material respects to the description thereof contained in the
Prospectus.
(v) Except as specifically disclosed in the
Registration Statement and the financial statements of the
Company, and the related notes thereto, the Company does not
have outstanding any options to purchase, or any preemptive
rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts
or commitments to issue or sell, shares of its capital stock
or any such options, rights, convertible securities, or
obligations. The descriptions of the Company's stock option
and other stock-based plans, and any other options or warrants
heretofore granted by the Company, set forth in the Prospectus
are accurate summaries and fairly present the information
required to be shown with respect to such plans and rights in
all material respects.
(vi) The Registration Statement has become effective
under the Act and no stop order proceedings with respect
thereto have been instituted or are pending or threatened
under the Act and nothing has come to such counsel's attention
to lead them to believe that such proceedings are
contemplated; any required filing of the Prospectus and any
supplement thereto or term sheet (as described in Rule 434(b)
of the Rules and Regulations) relating thereto pursuant to
Rule 424(b) of the Rules and Regulations has been made in
accordance with Rule 424(b).
(vii) The Registration Statement, all Preliminary
Prospectuses, the Prospectus and each amendment or supplement
thereto comply as to form in all
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<PAGE> 16
material respects with the requirements of the Act and the
Rules and Regulations (except that such counsel need express
no opinion as to the financial statements, schedules, and
other financial and statistical information included therein).
(viii) Such counsel does not know of any Contracts or
other documents required to be filed as exhibits to the
Registration Statement or described in the Registration
Statement or the Prospectus that are required to be filed or
described, which are not so filed or described as required,
and such Contracts and documents as are summarized in the
Registration Statement or the Prospectus are fairly summarized
in all material respects.
(ix) Except as otherwise described in the
Registration Statement and Prospectus, to the best of such
counsel's knowledge, there is no action or suit pending before
any court of the United States of a character required to be
disclosed in the Prospectus pursuant to the Act and the Rules
and Regulations; and to the best of such counsel's knowledge,
there is no action, suit, or proceeding threatened by a
written communication to the Company against the Company
before any U.S. court or regulatory, governmental, or
administrative agency or body or arbitral forum of a character
required to be disclosed in the Prospectus pursuant to the Act
and the Rules and Regulations; and to the best of such
counsel's knowledge, the Company is not a party or subject to
the provisions of any injunction, judgment, decree, or order
of any court, regulatory body, administrative agency, or other
governmental body or agency or arbitral forum.
(x) The execution and performance of this Agreement
and the consummation of the transactions herein contemplated
do not and will not conflict with or result in the breach of,
or violation of, any of the terms or provisions of, or
constitute, either by itself or upon notice or the passage of
time or both, a default under, any Contract to which the
Company is a party or by which the Company or any of its
property may be bound or affected, except where such breach,
violation, or default would not have a material adverse effect
on the business or financial condition of the Company, or
violate any of the provisions of the Certificate of
Incorporation or Bylaws of the Company or violate any statute,
judgment, decree, order, rule, or regulation known to such
counsel or any court or of any governmental, regulatory, or
administrative body or agency or arbitral forum having
jurisdiction over the Company or any its property.
(xi) The Company is not in violation or default under
any provision of any of its Certificate of Incorporation or
Bylaws; and, to the best of such counsel's knowledge, the
Company is not in violation of or default under any Contracts
to which the Company is a party or by which it or any of its
properties is bound or may be affected, except where such
violation or default would not have a material adverse effect
on the business or financial condition of the Company.
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<PAGE> 17
(xii) The Company has the corporate power and
corporate authority to enter into this Agreement and perform
the transactions contemplated hereby. This Agreement has been
duly authorized, executed, and delivered by the Company, and,
assuming due authorization, execution, and acceptance by the
Representative on behalf of the Underwriters, this Agreement
constitutes a valid and binding agreement of the Company,
enforceable in accordance with its terms, except as such
enforceability may be limited by or affected by judicial
decisions and laws governing, limiting, or affecting equitable
remedies or relief generally (including, without limitation,
matters of public policy and equitable principles), whether
considered in a proceeding at law or in equity, or by
bankruptcy, insolvency, liquidation, reorganization,
arrangement, moratorium, or other laws or judicial decisions
relating to or affecting rights of creditors generally, and
except to the extent that rights to indemnity hereunder may be
limited by federal or state securities laws or the public
policy underlying such laws.
(xiii) To the best of such counsel's knowledge, all
approvals, consents, orders, authorizations, designations,
registrations, permits, qualifications, licenses,
declarations, or filings by or with any regulatory,
administrative, or governmental body necessary in connection
with the execution and delivery by the Company of this
Agreement and the consummation of the transactions herein
contemplated have been obtained or made and all are in full
force and effect.
(xiv) To the knowledge of such counsel, the Company
owns or possesses adequate and sufficient rights by license
agreements or otherwise to use and enjoy the full rights in
and to all patents, patent rights, trade secrets, licenses or
royalty arrangements, trademarks and trademark rights, service
marks, trade names, copyrights, know how or proprietary
techniques, or rights thereto of others, and governmental,
regulatory, or administrative authorizations, orders, permits,
certificates, and consents necessary for the conduct of the
business of the Company, except where the failure to possess
the same would not have a material adverse effect on the
business or financial condition of the Company; such counsel
is not aware of any pending or threatened action, suit,
proceeding, or claim by others, either domestically or
internationally, that the Company is violating any patents,
patent rights, copyrights, trademarks or trademark rights,
service marks, trade names, licenses or royalty arrangements,
trade secrets, know how or proprietary techniques, or rights
thereto of others; such counsel is not aware of any rights of
third parties to, or any infringement of, any of the Company's
patents, patent rights, trademarks or trademark rights,
copyrights, licenses or royalty arrangements, trade secrets,
know how or proprietary techniques, the existence of which
would have a material adverse affect on the business or
financial condition of the Company; and such counsel is not
aware of any pending or threatened action, suit, proceeding,
or claim by others challenging the validity or scope of any of
such patents, patent rights, trademarks or trademark rights,
copyrights, license or royalty arrangements, trade secrets,
know how, or proprietary techniques or rights thereto of
others, the existence of which would have a material adverse
effect on the business or financial condition of the Company.
The Company has no patents.
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<PAGE> 18
(xv) No transfer taxes are required to be paid under
any applicable state law in connection with the sale and
delivery of the Securities to the Underwriters hereunder.
In rendering such opinion such counsel may rely as to matters governed
by the laws, other than federal laws of the United States of America, on local
counsel acceptable to the Representative in applicable jurisdictions, provided
that such counsel shall state that they believe that they and the Underwriters
are justified in relying on such other counsel. As to factual matters, such
counsel may rely on certificates obtained from directors and officers of the
Company, its stockholders, and from public officials. Matters stated to
counsel's knowledge shall be made after due and diligent inquiry, and the
opinion shall so note that requirement. In addition to the matters set forth
above, such opinion also shall include a statement to the effect that nothing
has come to the attention of such counsel which leads them to believe that the
Registration Statement, or any amendment thereto, at the time the Registration
Statement or amendment became effective, contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, or the Prospectus or any amendment or
supplement thereto, at the time it was filed pursuant to Rule 424(b) or at the
Closing Date or the Option Closing Date, as the case may be, contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading (except that such
counsel need express no view as to financial statements, schedules, and other
financial information and statistical data and information included therein).
Such counsel shall permit O'Connor, Cavanagh, Anderson, Killingsworth &
Beshears, P.A. to rely upon such opinion in rendering its opinion under Section
6(c).
(c) The Underwriters shall have received from O'Connor,
Cavanagh, Anderson, Killingsworth & Beshears, P.A., counsel for the
Underwriters, an opinion dated the Closing Date and the Option Closing Date, if
any, substantially to the effect that (i) the Registration Statement has become
effective under the Act and to the best of the knowledge of such counsel, no
stop order proceedings with respect thereto have been instituted or are pending
or threatened under the Act; and (ii) the Registration Statement, all
Preliminary Prospectuses, the Prospectus, and each amendment or supplement
thereto comply as to form in all material respects with the requirements of the
Act and the applicable Rules and Regulations thereunder (except that such
counsel need express no opinion as to the financial statements, schedules, and
other financial or statistical information included therein). In rendering such
opinion, O'Connor, Cavanagh, Anderson, Killingsworth & Beshears, P.A. may rely
as to all matters governed other than by Arizona and federal laws on the opinion
of counsel referred to in paragraph (b) of this Section 6. In addition to the
matters set forth above, such opinion shall also include a statement to the
effect that nothing has come to the attention of such counsel which leads them
to believe that the Registration Statement, the Prospectus, or any amendment
thereto contains any untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or the Prospectus or any amendment or supplement
thereto, at the time it was filed pursuant to Rule 424(b) or at the Closing Date
or the Option Closing Date, as the case may be, contained an untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading (except that such
counsel need express no view as to financial statements, schedules, and other
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<PAGE> 19
financial information included therein). With respect to such statement,
O'Connor, Cavanagh, Anderson, Killingsworth & Beshears, P.A. may state that
their belief is based upon the procedures set forth therein, but is without
independent check and verification.
(d) The Representative and the Company shall have received at
or prior to the Closing Date from O'Connor, Cavanagh, Anderson, Killingsworth &
Beshears, P.A., a Blue Sky memorandum, in form and substance satisfactory to the
Representative, with respect to the qualification for offering and sale by the
Underwriters of the Securities under the state securities or Blue Sky laws of
such jurisdictions as the Representative may have designated to the Company in
writing.
(e) The Representative shall have received on the date hereof
and on the Closing Date and the Option Closing Date, as the case may be, a
signed letter from KPMG Peat Marwick, L.L.P., auditors for the Company, dated
the date hereof, the Closing Date and the Option Closing Date, as the case may
be, which shall confirm, on the basis of a review in accordance with the
procedures set forth in the letter signed by such firm and dated and delivered
to the Representative on the date noted above the following matters:
(i) They are independent certified public accountants
with respect to the Company within the meaning of the Act and
the applicable Rules and Regulations.
(ii) The financial statements and schedules included
in the Registration Statement and Prospectus covered by their
reports therein set forth comply as to form in all material
respects with the applicable accounting requirements of the
Act and the applicable Rules and Regulations.
(iii) On the basis of procedures (but not an
examination in accordance with generally accepted auditing
standards) consisting of a reading of the minutes of meetings
and consents of the stockholders and Board of Directors of the
Company and the committees of such Board subsequent to
September 30, 1996, as set forth in the minute books of the
Company, inquiries of officers and other employees of the
Company who have responsibilities for financial and accounting
matters with respect to transactions and events subsequent to
September 30, 1996, and such other specified procedures and
inquiries to a date not more than three days prior to the date
of such letter, nothing has come to their attention which in
their judgment would indicate that (A) with respect to the
period subsequent to September 30, 1996, there were, as of the
date of the most recent available monthly consolidated
financial statements of the Company and, as of a specified
date not more than three days prior to the date of such
letter, any changes in the capital stock or long-term
indebtedness of the Company or payment or declaration of any
dividend or other distribution, or decrease in net current
assets, total assets or net stockholder's equity, in each case
as compared with the amounts shown in the most recent audited
consolidated financial statements included in the Registration
Statement and the Prospectus, except for changes or decreases
which the Registration Statement and the Prospectus disclose
have occurred or may occur or which are set forth in such
letter or (B) during the period from September 30, 1996, to
the date of the most recent available monthly
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<PAGE> 20
unaudited consolidated financial statements of the Company and
to a specified date not more than five days prior to the date
of such letter, there was any decrease, as compared with the
three-month period ended September 30, 1996, in total revenues
or total or per share net income, except for decreases that
the Registration Statement and the Prospectus disclose have
occurred or may occur or that are set forth in such letter.
(iv) Stating that they have compared specific dollar
amounts, numbers of shares, percentages of revenues and
earnings, and other financial information pertaining to the
Company set forth in the Registration Statement and the
Prospectus, which have been specified by the Representative,
to the extent that such amounts, numbers, and percentages and
information may be derived from the general accounting and
financial records of the Company and its subsidiaries or from
schedules furnished by the Company, with the results obtained
from the application of specified reasonings, inquiries and
other appropriate procedures specified by the Representative
(which procedures do not constitute an examination in
accordance with generally accepted auditing standards) set
forth in such letter heretofore delivered, and found them to
be in agreement.
(v) Such other matters as may be reasonably requested
by the Underwriters. All such letters shall be in form and
substance satisfactory to the Representative and its counsel.
(f) The Representative shall have received on the Closing Date
and the Option Closing Date, if any, a certificate or certificates on behalf of
the Company by the Chief Executive Officer and the Chief Financial Officer of
the Company to the effect that, as of the Closing Date or the Option Closing
Date, as the case may be, each of them jointly and severally represents as
follows:
(i) The Registration Statement has become effective
under the Act and no stop order suspending the effectiveness
of the Registration Statement has been issued, and no
proceedings for such purpose have been taken or are, to the
best of their knowledge, after due inquiry, contemplated or
threatened by the Commission or any state securities
commissions.
(ii) They do not know of any investigation,
litigation, or proceeding instituted or threatened against the
Company of a character required to be disclosed in the
Registration Statement which is not so disclosed as required
by the Act or the Rules and Regulations; and they do not know
of any Contract or other document required to be filed as an
exhibit to the Registration Statement which is not so filed.
(iii) They have carefully examined the Registration
Statement and the Prospectus and, in their opinion, as of the
effective date of the Registration Statement, the statements
contained in the Registration Statement were and are correct,
in all material respects, and such Registration Statement and
Prospectus do not omit to state a material fact required to be
stated therein or necessary in order to
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<PAGE> 21
make the statements therein, in light of the circumstances
under which they were made, not misleading and, in their
opinion, since the effective date of the Registration
Statement, no event has occurred which should be set forth in
a supplement to or an amendment of the Prospectus which has
not been so set forth in such supplement or amendment.
(iv) The representations and warranties of the
Company contained in Section 1 hereof are true and correct in
all material respects as of the Closing Date or the Option
Closing Date, as the case may be, as if such representations
and warranties were made as of such date; and all covenants,
agreements, and conditions to be performed or satisfied by the
Company under this Agreement on or prior to the Closing Date
or the Option Closing Date, as the case may be, have been
performed or satisfied.
(g) The Company shall have furnished to the Representative
such further certificates and documents confirming the representations,
warranties and covenants contained herein and related matters as the
Representative may reasonably have requested.
The opinions and certificates described in this Agreement shall be
deemed to be in compliance with the provisions hereof only if they are in all
respects satisfactory to the Representative and to O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, P.A., counsel for the Underwriters and any other
counsel for the Underwriters.
If any of the conditions herein provided for in this Section 6 shall
not have been fulfilled when and as required by this Agreement to be fulfilled,
the obligations of the Underwriters hereunder may be terminated by the
Representative by notifying the Company of such termination in writing or by
telegram at or prior to the Closing Date or the Option Closing Date, as the case
may be. In such event, the Company and the Underwriters shall not be under any
obligation to each other (except to the extent provided in Sections 5 and 8
hereof).
7. Conditions of the Obligations of the Company. The obligations of the
Company to sell and deliver the Securities required to be delivered as and when
specified in this Agreement are subject to the conditions that at the Closing
Date or the Option Closing Date, as the case may be, no stop order suspending
the effectiveness of the Registration Statement shall have been issued and in
effect or proceedings therefor initiated or threatened.
8. Indemnification.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and its respective affiliates, directors, officers, partners,
employees, agents, counsel, and representatives, (collectively, "Underwriter
Parties") against any losses, claims, damages, or liabilities to which such
Underwriter Parties or any one or more of them may become subject under the Act
or otherwise, insofar as such losses, claims, damages, or liabilities (or
actions or proceedings in respect thereof) arise out of or are based upon (i)
any failure by the Company or any of its affiliates, directors, officers,
employees, agents, counsel, and representatives (collectively, the "Company
Parties") to perform any obligation hereunder or any other agreement among any
of the Company Parties and
21
<PAGE> 22
any of the Underwriter Parties, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
or (iii) the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances under which they were made, and will
reimburse each Underwriter Party for any legal or other expenses incurred by
such Underwriter Party in connection with investigating or defending any such
loss, claim, damage, liability, action or proceeding; provided, however, that
(X) the Company will not be liable in any such case to the extent that any such
loss, claim, damage, or liability arises out of or is based upon an untrue
statement, or alleged untrue statement, or omission or alleged omission made in
the Registration Statement, any Preliminary Prospectus, the Prospectus, or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Underwriters specifically
for use in the preparation thereof (which the parties hereto agree is limited
solely to that information contained in the last paragraph on the cover page and
the paragraph relating to stabilization on page 2 of the Prospectus or
Preliminary Prospectus and in the section thereof entitled "Underwriting"), and
(Y) such indemnity with respect to any Preliminary Prospectus shall not inure to
the benefit of any Underwriter Party from whom the person asserting any such
loss, claim, damage, or liability purchased the Securities which are the subject
thereof if such person did not receive a copy of the Prospectus (or the
Prospectus as amended or supplemented) at or prior to the confirmation of the
sale or such Securities to such person in any case where such delivery is
required by the Act and the untrue statement or omission of a material fact
contained in such Preliminary Prospectus was corrected in the Prospectus (or the
Prospectus as amended or supplemented.) This indemnity agreement will be in
addition to any liability that the Company may otherwise have.
(b) Each Underwriter will severally indemnify and hold
harmless the Company Parties against any losses, claims, damages, or liabilities
to which the Company Parties or any one or more of them may become subject,
under the Act or otherwise, insofar as such losses, claims, damages, or
liabilities (or actions or proceedings in respect thereof) arise out of or are
based upon (i) any failure by such Underwriter Party to perform any obligations
hereunder or any other agreement among any of the Underwriter Parties and any of
the Company Parties, (ii) any untrue statement or alleged untrue statement of
any material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, or (iii) the
omission or the alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading in the
light of the circumstances under which they were made; and will reimburse any
legal or other expense reasonably incurred by the Company Parties in connection
with investigating or defending any such loss, claim, damage, liability, action,
or proceeding; provided, however, that each Underwriter will be liable in each
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission has been made in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through such Underwriter specifically
for use in the preparation thereof (which the parties hereto agree is limited
solely to that information contained in the last paragraph on the cover page and
the paragraph relating to stabilization on page 2 of the Prospectus or
Preliminary Prospectus and in the section thereof entitled "Underwriting"). This
indemnity agreement will be in addition to any liability which such Underwriter
may otherwise have.
22
<PAGE> 23
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to this Section 8, such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing. No
indemnification provided for in Section 8(a) or (b) shall be available to any
party who shall fail to give notice as provided in this Section 8(c) if the
party to whom notice was not given was unaware of the proceeding to which such
notice would have related and was prejudiced by the failure to give such notice,
but the failure to give such notice shall not relieve the indemnifying party or
parties from any liability which it or they may have to the indemnified party
for contribution or otherwise than on account of the provisions of Section 8(a)
or (b). In case any such proceeding shall be brought against any indemnified
party and it shall notify the indemnifying party of the commencement thereof,
the indemnifying party shall be entitled to participate therein and, to the
extent that it shall wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel reasonably satisfactory to
such indemnified party and shall pay as incurred the fees and disbursements of
such counsel related to such proceeding. In any such proceeding, any indemnified
party shall have the right to retain its own counsel at its own expense.
Notwithstanding the foregoing, the indemnifying party shall pay as incurred the
fees and expenses of the counsel retained by the indemnified party in the event
(i) the indemnifying party and the indemnified party shall have mutually agreed
to the retention of such counsel or (ii) the named parties to any such
proceeding (including any impleaded parties) include both the indemnifying party
and the indemnified party and representation of both parties by the same counsel
would be inappropriate due to actual or potential differing interests between
them. It is understood that the indemnifying party shall not, in connection with
any proceeding or related proceedings in the same jurisdiction, be liable for
the reasonable fees and expenses of more than one separate firm for all such
indemnified parties. Such firm shall be designated in writing by the
Representative in the case of parties indemnified pursuant to Sections 8(a) and
by the Company in the case of parties indemnified pursuant to Section 8(b). The
indemnifying party shall not be liable for any settlement of any proceeding
effected without its written consent but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party agrees to
indemnify the indemnified party from and against any loss or liability by reason
of such settlement or judgment.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a) or (b) above in respect of any losses, claims, damages, or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages, or
liabilities (or actions or proceedings in respect thereof) in such proportion as
is appropriate to reflect the relative benefits received by the Company on the
one hand and the Underwriters on the other from the offering of the Securities.
If, however, the allocation provided by the immediately preceding sentence is
not permitted by applicable law or if the indemnified party failed to give the
notice required under Section 8(c) above, then each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative benefits but also
the relative fault of the Company on the one hand and the Underwriters on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages, or liabilities (or actions or proceedings in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Company on the one hand and the Underwriters on the
other shall
23
<PAGE> 24
be deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company bear to the total
underwriting fees and commissions received by the Underwriters, in each case as
set forth in the table on the cover page of the Prospectus. The relative fault
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company on the
one hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 8(d) were determined by pro
rata allocation or by any other method of allocation that does not take account
of the equitable considerations referred to above in this Section 8(d). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, or liabilities (or actions or proceedings in respect thereof)
referred to above in this Section 8(d) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection 8 (d), (i) no Underwriter shall be required to
contribute any amount in excess of the underwriting discounts and commissions
applicable to the Securities purchased by that Underwriter, and (ii) no person
guilty of fraudulent misrepresentations (within the meaning of Section 11 (f) of
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The Underwriters' obligations in this Section
8(d) to contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) In any proceeding relating to the Registration Statement,
any Preliminary Prospectus, the Prospectus, or any supplement or amendment
thereto, each party against whom contribution may be sought under this Section 8
hereby consents to the jurisdiction of any court having jurisdiction over any
other contributing party, agrees that process issuing from such court may be
served upon him or it by any other contributing party and consents to the
service of such process and agrees that any other contributing party may join
him or it as an additional defendant in any such proceeding in which such other
contributing party is a party.
9. Default by Underwriters. If on the Closing Date or the Option
Closing Date, as the case may be, any Underwriter shall fail to purchase and pay
for the portion of the Securities which such Underwriter has agreed to purchase
and pay for on such date (otherwise than by reason of any default on the part of
the Company or the failure to occur of a condition precedent to the Closing),
the Representative on behalf of the Underwriters, shall use its best efforts to
procure as soon as possible but not later than five business days thereafter one
or more of the other Underwriters, or any others, to purchase from the Company
such amounts as may be agreed upon and upon the terms set forth herein, the Firm
Securities or Option Securities, as the case may be, which the defaulting
Underwriter or Underwriters failed to purchase. If during such period the
Representative shall not have procured such other Underwriters, or any others,
to purchase the Firm Securities or Option Securities, as the case may be, agreed
to be purchased by the defaulting Underwriter or Underwriters then (a) if the
aggregate number of shares with respect to which such default shall occur does
not exceed 10% of the Firm Securities or Option Securities, as the case may be,
covered hereby, the other Underwriters shall be obligated, severally, in
proportion to the respective numbers of Firm
24
<PAGE> 25
Securities or Option Securities, as the case may be, which such defaulting
Underwriter or Underwriters failed to purchase, or (b) if the aggregate number
of shares of Firm Securities or Option Securities, as the case may be, with
respect to which such default shall occur exceeds 10% of the Firm Securities or
Option Securities, as the case may be, covered hereby, the Company or the
Representative on behalf of the Underwriters will have the right, by written
notice given within the next 24-hour period to the parties to this Agreement, to
terminate this Agreement without liability on the part of the non-defaulting
Underwriters of the Company, except to the extent provided in Section 8 and
Section 5 hereof. In the event of a default by any Underwriter or Underwriters,
as set forth in this Section 9, the Closing Date or Option Closing Date, as the
case may be, may be postponed for such period, not exceeding seven days, as the
Representative may determine in order that the required changes in the
Registration Statement or in the Prospectus or in any other documents or
arrangements may be effected. The term "Underwriter" includes any person
substituted for a defaulting Underwriter. Any action taken under this Section 9
shall not relieve any defaulting Underwriter from liability in respect of any
default of such Underwriter under this Agreement.
10. Notices. All communications hereunder must be in writing and,
except as otherwise provided herein, will be mailed, delivered, telecopied, or
telegraphed and confirmed as follows: if to the Underwriters, to Dickinson &
Co., 2425 East Camelback Road, Suite 725, Phoenix, Arizona 85016; Telephone
(602) 957-1951, Fax: (602) 957-3052; Attention: Mr. Glenn Cushman, with a copy
to O'Connor, Cavanagh, Anderson, Killingsworth & Beshears, P.A., One East
Camelback Rd., Suite 1100, Phoenix, Arizona 85012-1656; Telephone (602)
263-2606; Fax: (602) 263-2900; Attention: Robert S. Kant, Esq.; if to the
Company, to CRAGAR Industries, Inc., 4636 North 43rd Avenue, Phoenix, Arizona
85031; Telephone: (602) 247-1300, Fax: (602) 846-9034; Attention: Dr. Michael L.
Hartzmark, President.
11. Termination. This Agreement may be terminated by the Representative
by notice to the Company as follows:
(a) at any time prior to the earlier of (i) the time the
Securities are released by the Representative for sale by notice to the
Underwriters, or (ii) 11:30 A.M., Phoenix time, on the first business day
following the date of this Agreement.
(b) at any time prior to the Closing Date if any of the
following has occurred: (i) since the respective dates as of which information
is given in the Registration Statement and the Prospectus, any material adverse
change or any development involving a prospective material adverse change in or
affecting the business or financial condition of the Company, or the earnings,
business affairs, management or business prospects of the Company, whether or
not arising in the ordinary course of business, (ii) any outbreak of hostilities
or other national or international calamity or crisis or change in economic or
political conditions if the effect of such outbreak, calamity, crisis, or change
on the financial markets or economic conditions would, in the reasonable
judgment of the Representative, have a material adverse effect on the securities
markets in the United States, (iii) suspension of trading in securities on the
New York Stock Exchange, Inc., the American Stock Exchange, or the BSE, or
limitation on prices (other than limitations on hours or numbers of days of
trading) for securities on any such exchange, (iv) the enactment, publication,
decree, or other promulgation of any federal or state statute, regulation, rule
or order of any court or other
25
<PAGE> 26
governmental authority which in the reasonable opinion of the Representative
materially and adversely affects or will materially or adversely affect the
business or operations of the Company or (v) declaration of a banking moratorium
by either federal or New York authorities.
(c) as provided in Sections 6 and 9 of this Agreement.
This Agreement also may be terminated by the Representative, by notice
to the Company, as to any obligation of the Underwriters to purchase the Option
Securities, upon the occurrence at any time at or prior to the Option Closing
Date of any of the events described in subparagraph (b) above or as provided in
Sections 6 and 9 of this Agreement.
12. Successors. This Agreement has been and is made solely for the
benefit of the Underwriters and the Company and their respective successors,
executors, administrators, heirs, and assigns, and the Underwriter Parties and
Company Parties referred to herein, and no other person will have any right or
obligation hereunder. The term "successors" shall not include any purchaser of
the Securities merely because of such purchase.
13. Miscellaneous. The reimbursement, indemnification, and contribution
agreements contained in this Agreement and the representations and warranties in
this Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of any
Underwriter Party, or by or on behalf of any Company Party, and (c) delivery of
and payment for the Securities under this Agreement.
This Agreement and any notices delivered hereunder may be executed in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument. This Agreement and
any and all notices may be delivered by telecopy and shall be effective upon
receipt, with the original of such document to be deposited promptly in the U.S.
Mail.
The statements set forth in the last paragraph on the cover page, the
paragraph on page 2 with respect to stabilization and under the caption
"Underwriting" in the Prospectus constitute the only written information
furnished by or on behalf of any Underwriter for inclusion in the Prospectus or
the Registration Statement.
This Agreement and all disputes and controversies relating hereto or in
connection with the transactions contemplated hereby shall be governed by, and
construed in accordance with, the laws of the State of New York.
26
<PAGE> 27
If the foregoing agreement is in accordance with your understanding of
our agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement between the Company and the several
Underwriters in accordance with its terms as of the date first above written.
Very truly yours,
CRAGAR INDUSTRIES, INC.
By:_____________________________________
Name:
Title:
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of ________________, 1996.
DICKINSON & CO.
As Representative of the several
Underwriters listed on Schedule I
By:_______________________________
Name:
Title:
27
<PAGE> 28
SCHEDULE I
Schedule of Underwriters
<TABLE>
<CAPTION>
Number of Firm
Securities to be Purchased
Underwriter Shares Warrants
- ----------- ------ --------
<S> <C> <C>
Dickinson & Co.
</TABLE>
28
<PAGE> 29
SCHEDULE II
<TABLE>
<CAPTION>
NAME PERIOD OF AGREEMENT
- ---- NOT TO SELL
-----------
<S> <C>
</TABLE>
29
<PAGE> 30
SCHEDULE III
Dickinson & Co.
2425 East Camelback Road, Suite 725
Phoenix, Arizona 85016
Gentlemen:
The undersigned is the holder of shares of capital stock or has the
right to acquire shares of capital stock (collectively "Securities") of CRAGAR
Industries, Inc. (the "Company"). I acknowledge and understand that you are
acting as the Underwriter in the proposed public offering of 850,000 Shares of
Common Stock of the Company and 850,000 Common Stock Purchase Warrants of the
Company, together with up to an additional 127,500 Shares of Common Stock and an
additional 127,500 Common Stock Purchase Warrants (collectively, the
"Securities") as set forth in a Prospectus which the undersigned has reviewed.
In connection with your agreeing to so act, and for your benefit, the
undersigned hereby undertakes and agrees with you that during the period of
[three months/12 months] from the date of the Prospectus relating to the
offering of the Securities, the undersigned will not offer for sale, sell or
otherwise dispose of, directly or indirectly, any securities of the Company, in
any manner whatsoever, whether pursuant to Rule 144 under the Securities Act of
1933 or otherwise, without your prior written consent. The undersigned further
understands that the Company will take such steps as may be necessary to enforce
the foregoing provisions and restrict the sale or transfer of such securities as
provided herein including, but not limited to, notification to the Company's
transfer agent regarding any such restrictions; and the undersigned hereby
agrees to and authorizes any actions and acknowledges that the Company and you
are relying upon this Agreement in taking any such actions.
If the foregoing conforms to your understanding of our agreement,
please so indicate by signing a copy of this Agreement, whereupon it shall
become a binding agreement between and among us.
Very truly yours,
----------------------------------------
Signature
----------------------------------------
Printed Name
----------------------------------------
Number of Shares
30
<PAGE> 1
Exhibit 4.10(b)
FIRST AMENDMENT TO CREDIT AGREEMENT
This Amendment is made as of the ____ day of , 1996, by and between
CRAGAR INDUSTRIES, INC., a Delaware corporation (the "Borrower"), and NORWEST
BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender").
Recitals
The Borrower and the Lender have entered into the Credit and Security
Agreement dated as of April 14, 1995 (the "Credit Agreement").
The Lender has agreed to make certain loan advances to the Borrower and
to issue or cause to be issued certain letters of credit for the account of the
Borrower pursuant to the terms and conditions set forth in the Credit Agreement.
The loan advances under the Credit Agreement are evidenced by the
Borrower's promissory note dated as of April 14, 1995, in the maximum principal
amount of $9,500,000.00 and payable to the order of the Lender (the "Note").
All indebtedness of the Borrower to the Lender is secured pursuant to
the terms of the Credit Agreement and all other Security Documents as defined
therein (collectively, the "Security Documents"). Michael L. Hartzmark
("Hartzmark") has entered into that certain Support Agreement with the Borrower
and the Lender dated as of April 14, 1995.
The Borrower has requested that certain amendments be made to the
Credit Agreement, which the Lender is willing to make pursuant to the terms and
conditions set forth herein.
Agreements
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, it is agreed as follows:
1. Terms used in this Agreement which are defined in the Credit
Agreement shall have the same meanings as defined therein, unless otherwise
defined herein.
2. Prior to the date of this Amendment, the Borrower has, at certain
times, failed to maintain the average minimum debt service coverage ratio
required by Section 6.12 of the Credit Agreement, the minimum book Adjusted Net
Worth required by Section 6.13 of the Credit Agreement and the minimum Net
Income required by Section 6.14 of the Credit Agreement, exceeded its limit on
Capital Expenditures for 1995 contained in Section 7.10 of the Credit Agreement
and has made certain payments on Subordinated Indebtedness which are not in
accordance with Section 7.19 of the Credit Agreement, all of which constitute
Defaults under the terms of the Credit Agreement (collectively, the "Current
Defaults"). Lender, although under no obligation to do so, hereby waives the
Current Defaults subject to the satisfaction by Cragar of all the terms and
conditions set forth in this Amendment. Nothing herein shall be construed as a
wavier by Lender of any existing default under the terms of the Credit Agreement
other than the Current Defaults. Nothing herein shall be construed as obligating
Lender to waive any future defaults under the Credit Agreement including any
future defaults under Sections 6.12, 6.13, 6.14, 7.10 and 7.19 of the Credit
Agreement.
3. The Credit Agreement is hereby amended as follows:
<PAGE> 2
(a) Paragraph (ii)(B) contained in the definition of
"Borrowing Base" contained in Section 1.1 of the Credit Agreement is hereby
amended to read in its entirety as follows:
(B) The lesser of (x) the sum of the following percentages of
various classes of Eligible Inventory; (i) 55% of Raw
Materials Inventory; (ii) 55% of Current Finished Goods
Inventory; and (iii) 35% of Dated Finished Goods Inventory not
to exceed $500,000.00; or (y) $4,500,000.00, plus
(b) The definition of "Eligible Inventory" contained in
Section 1.1 of the Credit Agreement is hereby amended by adding a new
subparagraph (ix) thereto to read as follows:
(ix)Blemished Finished Goods Inventory.
(c) The definition of "Floating Rate" contained in Section 1.1
of the Credit Agreement is hereby amended effective December 1, 1995, to read in
its entirety as follows:
"Floating Rate" means an annual rate equal to the Base Rate plus two
and one quarter percent (2.25%), provided, however, that from the first
day of the first month following the receipt by the Lender of the
Borrower's 1996 fiscal year end audited financial statements showing
Net Income for the 1996 fiscal year of $935,000.00 or more and an
Adjusted Net Worth of not less than $3,435,000.00, the Floating Rate
shall be reduced to an annual rate equal to the sum of the Base Rate
plus one and one-quarter percent (1.25%), which Floating Rate in either
case shall change when and as the Base Rate changes.
(d) The definition of "Inventory Overadvance Rate" contained
in Section 1.1 of the Credit Agreement is hereby amended effective December 1,
1995, to read in its entirety as follows:
"Inventory Overadvance Rate" means an annual rate equal to the sum of
the Base Rate, plus 3.25%, which Inventory Overadvance Rate shall
change when and as the Base Rate changes.
(e) Section 6.12 of the Credit Agreement is hereby amended to
read in its entirety as follows:
6.12 Debt Service Coverage Ratio. The Borrower agrees, that for each
fiscal quarter, beginning with the fiscal quarter ending March 31,
1996, it shall maintain an average minimum Debt Service Coverage Ratio
of not less than 1.2 to 1. For the fiscal quarter ending March 31,
1996, said ratio shall be based upon the immediately preceding three
month period. For the fiscal quarter ending June 30, 1996, said ratio
shall be based upon the immediately preceding six month period. For the
fiscal quarter ending September 30, 1996, said ratio shall be based
upon the immediately preceding nine month period. For each fiscal
quarter thereafter, said ratio shall be based upon the immediately
preceding twelve month period. The Debt Service Coverage Ratio shall be
calculated according to the following formula:
Funds from Operations + Interest Expense - Unfinanced Portion of
Capital Expense
Current Maturities Long Term Debt + Interest Expense
In making the foregoing calculation Interest Expenses shall not include
any interest
2
<PAGE> 3
on Subordinated Indebtedness, the payment of which is accrued but
deferred under the terms of a subordination agreement between the
holder of such debt and Lender in accordance with the provisions of
Section 7.19 until such interest is actually paid.
(f) Section 6.13 of the Credit Agreement is hereby amended to
read in its entirety as follows:
6.13 Adjusted Net Worth. The Borrower will at all times from and after
March 31, 1996, maintain a minimum book Adjusted Net Worth of
$2,500,000.00 as of the last day of each calendar month. Thereafter, so
long as this Agreement remains in effect, such minimum book Adjusted
Net Worth shall be increased as of the end of each fiscal quarter over
the previous fiscal quarter's minimum book Adjusted Net Worth, as
follows:
(a) for the first quarter of each year $125,000.00;
(b) for the second quarter of each year $150,000.00;
(c) for the third quarter of each year $75,000.00; and
(d) for the fourth quarter of each year $50,000.00.
Adjusted Net Worth decreases for any one calendar month will be
permitted so long as the Adjusted Net Worth minimums set forth herein
are achieved.
(g) Section 7.19 of the Credit Agreement is hereby amended to
read in its entirety as follows:
7.19 Payments on Subordinated Indebtedness. The Borrower will not make
any payment of principal or interest on any Subordinated Indebtedness
so long as any of the Obligations are outstanding. Notwithstanding the
foregoing, in each fiscal year the Borrower may make payments (i) in an
amount equal to 25% of Borrower's Excess Cash Flow on the Investor Debt
payable by the Borrower semi-annually upon receipt by the Lender of the
Borrower's June 30th unaudited statement showing such calculation and
upon receipt by the Lender of the Borrower's audited financial
statement for the fiscal year; (ii) of regularly scheduled principal
and interest payments on the Seller Debt; upon receipt by the Lender of
the Borrower's June 30, 1996, unaudited statement showing that it is in
compliance with Sections 6.12, 6.13 and 6.14 hereof; and (iii)
regularly scheduled payments of interest owing on the Bridge Loan, as
such interest is earned or payment of principal owing on the Bridge
Loan; provided, however, that no interest accruing on the Bridge Loan
prior to December 31, 1995, shall be paid by the Borrower; provided,
however, that at the time of any such payment on the Subordinated
Indebtedness pursuant to clause (i) or (ii) above, each of the
following conditions are satisfied and at the time of any such payment
on the Subordinated Indebtedness pursuant to clause (iii) above the
following condition (a) is satisfied:
(a) No Default Period exists and such payment does not and
will not result in a Default or Event of Default;
(b) The average unborrowed availability under the Commitment
less the L/C Amount for the 30 day period immediately preceding such
payment as shown in the Lender's records shall equal not less than
$250,000.00; and
3
<PAGE> 4
(c) Upon such payment by the Borrower the unborrowed
availability under the Commitment, less the L/C Amount shall total not
less than $250,000.00.
(h) Exhibits C and G attached to this Amendment are hereby
substituted for Exhibits C and G attached to the Credit Agreement.
4. Notwithstanding the prohibitions of Section 7.6 of the Credit
Agreement, the Lender hereby consents to the sale by the Borrower of its plant
in Mexicali, Mexico for a purchase price of $350,000.00 and hereby further
consents to the retention and use of the proceeds of such sale by the Borrower.
This waiver is a one-time waiver of the provisions of Section 7.6 of the Credit
Agreement solely with respect to the sale of the Borrower's plant in Mexicali,
Mexico and Section 7.6 shall remain in full force and effect, unmodified in any
way notwithstanding this one-time waiver.
5. Except as explicitly amended by this Amendment, all of the terms and
conditions of the Credit Agreement shall remain in full force and effect and
shall apply to any advance or letter of credit thereunder.
6. The Borrower agrees to pay the Lender as of the date hereof a fully
earned, non-refundable fee in the amount of $7,500.00 in consideration of the
execution by the Lender of this Amendment and consents to the recalculation of
interest due to the modification of the definition of "Floating Rate" in
paragraph 3(c) above.
7. This Amendment shall be effective upon receipt by the Lender of an
executed original hereof, together with each of the following, each in substance
and form acceptable to the Lender in its sole discretion:
(a) The Acknowledgment and Agreement of Hartzmark set forth at
the end of this Amendment, duly executed by Hartzmark.
(b) Certificate of the Secretary of the Borrower certifying as
to (i) the resolutions of the board of directors of the Borrower approving the
execution and delivery of this Amendment, (ii) the fact the Articles of
Incorporation and Bylaws of the Borrower, which were certified and delivered to
the Lender pursuant to the Certificate of the Borrower's Secretary dated as of
April 14, 1995 in connection with the execution and delivery of the Credit
Agreement continue in full force and effect and have not been amended or
otherwise modified except as set forth in the Certificate to be delivered, and
(iii) certifying that the officers and agents of the Borrower who have been
certified to the Lender, pursuant to the Certificate of the Borrower's Secretary
dated as of April 14, 1995, as being authorized to sign and to act on behalf of
the Borrower continue to be so authorized or setting forth the sample signatures
of each of the officers and agents of the Borrower authorized to execute and
deliver this Amendment and all other documents, agreements and certificates on
behalf of the Borrower.
(c) Opinion of the Borrower's counsel as to the matters set
forth in paragraphs 8(a) and (b) hereof and as to such other matters as the
Lender shall require.
8. The Borrower hereby represents and warrants to the Lender as
follows:
(a) The Borrower has all requisite power and authority to
execute this Amendment and to perform all of its obligations hereunder, and this
Amendment has been duly executed and delivered by the Borrower and constitutes
the legal, valid and binding obligation of the Borrower, enforceable in
accordance with its terms.
4
<PAGE> 5
(b) The execution, delivery and performance by the Borrower of
this Amendment have been duly authorized by all necessary corporate action and
do not (i) require any authorization, consent or approval by any governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, (ii) violate any provision of any law, rule or regulation or of any
order, writ, injunction or decree presently in effect, having applicability to
the Borrower, or the articles of incorporation or by-laws of the Borrower, or
(iii) result in a breach of or constitute a default under any indenture or loan
or credit agreement or any other agreement, lease or instrument to which the
Borrower is a party or by which it or its properties may be bound or affected.
(c) All of the representations and warranties contained in
Article 5 of the Credit Agreement are correct on and as of the date hereof as
though made on and as of such date, except to the extent that such
representations and warranties relate solely to an earlier date.
9. All references in the Credit Agreement to "this Agreement" shall be
deemed to refer to the Credit Agreement as amended hereby; and any and all
references in the Security Documents to the Credit Agreement shall be deemed to
refer to the Credit Agreement as amended hereby.
10. Except as noted in Paragraph 2 above, the execution of this
Amendment and acceptance of any documents related hereto shall not be deemed to
be a waiver of any Default or Event of Default under the Credit Agreement or
breach, default or event of default under any Security Document or other
document held by the Lender, whether or not known to the Lender and whether or
not existing on the date of this Amendment.
11. The Borrower hereby absolutely and unconditionally releases and
forever discharges the Lender, and any and all participants, parent
corporations, subsidiary corporations, affiliated corporations, insurers,
indemnitors, successors and assigns thereof, together with all of the present
and former directors, officers, agents and employees of any of the foregoing,
from any and all claims, demands or causes of action of any kind, nature or
description, whether arising in law or equity or upon contract or tort or under
any state or federal law or otherwise, which the Borrower has had, now has or
has made claim to have against any such person for or by reason of any act,
omission, matter, cause or thing whatsoever arising from the beginning of time
to and including the date of this Amendment, whether such claims, demands and
causes of action are matured or unmatured or known or unknown.
12. The Borrower hereby reaffirms its agreement under the Credit
Agreement to pay or reimburse the Lender on demand for all costs and expenses
incurred by the Lender in connection with the Credit Agreement, the Security
Documents and all other documents contemplated thereby, including without
limitation all reasonable fees and disbursements of legal counsel. Without
limiting the generality of the foregoing, the Borrower specifically agrees to
pay all fees and disbursements of counsel to the Lender for the services
performed by such counsel in connection with the preparation of this Amendment
and the documents and instruments incidental hereto. The Borrower hereby agrees
that the Lender may, at any time or from time to time in its sole discretion and
without further authorization by the Borrower, make a loan to the Borrower under
the Credit Agreement, or apply the proceeds of any loan, for the purpose of
paying any such fees, disbursements, costs and expenses and the fee required
under paragraph 6 hereof.
13. This Amendment and the Acknowledgment and Agreement of Hartzmark
may be executed in any number of counterparts, each of which when so executed
and delivered shall be deemed an original and all of which counterparts, taken
together, shall constitute one and the same instrument.
5
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the day and year first above written.
CRAGAR INDUSTRIES, INC., a Delaware corporation
By ___________________________________
Its___________________________________
NORWEST BUSINESS CREDIT, INC., a Minnesota
corporation
By ___________________________________
Its___________________________________
6
<PAGE> 7
ACKNOWLEDGMENT AND AGREEMENT OF HARTZMARK
The undersigned, Michael L. Hartzmark, having entered into that certain
Support Agreement dated as of April 14, 1995, with Cragar Industries, Inc. (the
"Borrower") and Norwest Business Credit, Inc. (the "Lender"), hereby (i)
acknowledges receipt of the foregoing Amendment; (ii) consents to the terms and
execution thereof; (iii) reaffirms his obligations to the Lender pursuant to the
terms of said Support Agreement; and (iv) acknowledges that the Lender may
amend, restate, extend, renew or otherwise modify the Credit Agreement and any
indebtedness or agreement of the Borrower, or enter into any agreement or extend
additional or other credit accommodations, without notifying or obtaining the
consent of the undersigned and without impairing the obligations of the
undersigned under said Support Agreement.
_________________________________
Michael L. Hartzmark
7
<PAGE> 8
EXHIBIT C
Permitted Liens, Indebtedness and Guarantees
Liens
Time Clocks (UCC Filed)
Studebaker Worthington Leasing Corp.
XL/Datacomp, Inc.
ACM Equipment Rental and Sales, Co.
Heller Financial (Mori Seki CNC)
Indebtedness
Subordinated Indebtedness
Indebtedness evidenced by that certain Promissory Note dated December 15, 1994
in the original principal amount of $350,000.00 executed by Borrower in favor of
Sidney Dworkin (the "Bridge Loan");
Indebtedness evidenced by those certain Two-Year Convertible Subordinate Secured
Notes of Borrower totaling $1,500,000.00 dated from August 1993 through February
1994 (the "Junior Debt"); and
Indebtedness evidenced by that certain Cognovit Promissory Note dated January,
1995 in the original principal amount of $1,340,000.00 executed by Borrower in
favor of Performance Industries, Inc., an Ohio corporation (the "Seller Debt")
8
<PAGE> 9
EXHIBIT G
Assets for Sale by Borrower
Paint Line (with associated conveyors, washers, burners, blowers, booths, powder
guns, cyclones, baghouses, dryers, motors, pumps, and other related equipment)
Waste Water Treatment Equipment
Miscellaneous Chrome Plating Equipment
Vapor Degreaser
Pro-Trac Tire Molds
One-Piece Aluminum Wheel Molds
Mexicali Polishing Equipment
Spinning Machine
9
<PAGE> 1
EXHIBIT 4.10(c)
[NORWEST BUSINESS CREDIT LETTERHEAD]
November 20, 1996
Michael L. Hartzmark
Cragar Industries, Inc.
4636 North 43rd Avenue
Phoenix, AZ 85031
Dear Mr. Hartzmark:
According to Section 6.14 of the Credit and Security Agreement dated April 14,
1995 (the "Agreement") by and between Cragar Industries, Inc., a Delaware
corporation (the "Borrower" or "Cragar"), and Norwest Business Credit, Inc.
(the "Lender" or "NBCI"), the Borrower will achieve a cumulative Net Income
(after tax net income from continuing operations) for the preceding three
fiscal quarters ending September 30, 1996 of not less than $350,000. Cragar has
represented and warranted to Norwest Business Credit, Inc. ("NBCI") that it has
failed to achieve the required cumulative Net Income level as outlined in
Section 6.14 of the Agreement. Furthermore, Cragar has stated that its Net
Income for the three quarters ended September 30, 1996 was <$199,773>. THIS
RESULT CONSTITUTES AN EVENT OF DEFAULT PURSUANT TO SECTION 8.1 OF THE
AGREEMENT.
According to Section 6.13 of the Agreement, the Borrower will at all times
maintain a minimum book Adjusted Net Worth (net worth as defined by GAAP plus
Seller Debt plus Junior Debt) of $2,500,000 as of the last day of each calendar
month. Thereafter, such minimum book Adjusted Net worth shall be increased as
of the quarter ended September 30, 1996 over the previous fiscal quarter's
minimum book Adjusted Net Worth by $75,000. Cragar has represented and
warranted to NBCI that it has failed to achieve the required cumulative book
Adjusted Net Worth level as outlined in Section 6.13 of the Agreement.
Furthermore, Cragar has stated that its book Adjusted Net Worth for the quarter
ended June 30, 1996 was $2,686,730 and for the quarter ended September 30, 1996
was $351,118. THIS RESULT CONSTITUTES AN EVENT OF DEFAULT PURSUANT TO SECTION
8.1 OF THE AGREEMENT.
According to Section 6.12 of the Agreement, the Borrower will at all times
maintain an average minimum Debt Service Coverage Ratio (funds from operations
plus interest expense less unfinanced portion of capital expense divided by
current maturities long term debt plus interest expense) of not less than 1.2 to
1. Cragar has represented and warranted to NBCI that it has failed to achieve
the required average minimum Debt service Coverage Ratio as outlined in Section
6.12 of the Agreement. Furthermore, Cragar has stated that its average minimum
Debt Service Coverage Ratio for the period ended September 30, 1996 was 0.35 to
1. THIS RESULT CONSTITUTES AN EVENT OF DEFAULT PURSUANT TO SECTION 8.1 OF THE
AGREEMENT.
<PAGE> 2
CRAGAR INDUSTRIES
NOVEMBER 20, 1996
- --------------------------------------------------------------------------------
As an accommodation to Cragar, NBCI hereby agrees to waive the cumulative Net
Income, the minimum book Adjusted Net Worth, and average minimum Debt Service
Coverage Ratio covenant defaults for the period ending September 30, 1996 as
described above. THIS WAIVER IS APPLICABLE ONLY TO THE CUMULATIVE NET INCOME,
THE MINIMUM BOOK ADJUSTED NET WORTH, AND AVERAGE MINIMUM DEBT SERVICE COVERAGE
RATIO COVENANT FOR THE PERIOD ENDING SEPTEMBER 30, 1996 DEFAULT AND NOT TO ANY
OTHER EXISTING OR FUTURE DEFAULT OF ANY KIND. NBCI reserves all rights and
remedies allowed it under the Agreement.
In addition to the above referenced covenant default waivers, Cragar and NBCI
have agreed to the following amendments to the financial covenants:
- - The cumulative Net Income Covenant will be amended to a quarterly covenant
for the period ended December 31, 1996. In addition, the covenant target for
this period will be changed to allow for a net loss for the quarter ended
December 31, 1996 of no more than $250,000. All subsequent periods will
remain unchanged.
- - The minimum book Adjusted Net Worth covenant will be amended to include the
$1,500,000 in Investor Debt and Negative Goodwill in the covenant
calculation for all subsequent periods. In addition, the Adjusted Net Worth
target for December 31, 1996 will be reduced to correspond to the Net Income
Covenant. Specifically, the Adjusted Net Worth for the period ended December
31, 1996 will be allowed to decline by $250,000 to $2,498,000. All other
minimum book Adjusted Net Worth covenant targets will remain unchanged.
- - The average minimum Debt Service Coverage Ratio will be waived for the
period ended December 31, 1996. This ratio will be maintained at 1.2 for all
subsequent measurement periods and will be calculated based on the operating
results for the preceding twelve months. However, for the period ended March
31, 1997, the ratio will be based on the preceding three months; for the
period ended June 30, 1997, the preceding six months; for the period ended
September 30, 1997, the preceding nine months; and for the period ended
December 31, 1997, the preceding twelve months. All other terms and
conditions will remain unchanged.
In consideration for these amendments and waivers, Cragar agrees to pay to NBCI
an amendment/waiver fee in the amount of $7,500. This amount will be charged to
your loan on or after January 1, 1997. In addition, Cragar will be responsible
for all costs and fees associated with the implementation of the above outlined
waivers and amendments.
If you have any questions regarding this matter, please feel free to contact me
at (602) 248-2469.
Sincerely,
/s/ Darcy Della Flora
- ------------------------
Darcy Della Flora
Vice President
<PAGE> 1
EXHIBIT 4.11
Right to Purchase
____ Shares
CRAGAR INDUSTRIES, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
STOCK PURCHASE WARRANT
Void after 3:00 p.m. e.s.t., December 31, 1999
This Warrant Certificate certifies that the bearer is entitled to
purchase common shares ($0.01 par value) of Cragar Industries, Inc., a Delaware
corporation, herein referred to as the Company. Each Warrant entitles the bearer
thereof to purchase from the Company, on or after January 1, 1993 and on or
before December 31, 1999, one fully-paid and nonassessable common share ($0.01
par value) of the Company at the initial exercise price of One Dollar ($1.00)
per share payable in lawful money of the United States of America upon
surrender of this Warrant Certificate and payment of the exercise price at the
office or agency of the Company, but only subject to the conditions set forth
herein.
This Warrant is transferrable by delivery. By accepting this warrant,
the holder agrees that the Company may treat any bearer as absolute owner for
all purposes, notwithstanding any notice to the contrary.
No warrant may be exercised after the close of business on December 31,
1999, and to the extent not exercised by such time, all Warrants evidenced
hereby shall become void.
Reference is hereby made to the further provisions of this Warrant
Certificate set forth on Exhibit "A" attached hereto and such further provisions
shall for all purposes have the same effect as though fully set forth.
IN WITNESS WHEREOF, Cragar Industries, Inc., has caused this Warrant
Certificate to be signed by its President and by its Treasurer, each by a
facsimile of his signature.
Dated: ____________________
CRAGAR INDUSTRIES, INC.
By:
---------------------------------
James A. Haggerty, President
and:
--------------------------------
Michael L. Hartzmark, Treasurer
Page 1 of 3
<PAGE> 2
EXHIBIT "A"
CRAGAR INDUSTRIES, INC.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants expiring December 31, 1999, to purchase not
exceeding 207,693 common shares ($0.01 par value) of the Company, herein
referred to as the Shares.
Statement of Rights of Warrant Holders
1. Reservation of Stock. The Company covenants that, while the warrants
are exercisable, it will reserve from its authorized and unissued common stock a
sufficient number of shares to provide for the delivery of stock pursuant to the
exercise of this and all other similar warrants.
2. Protection against Dilution. In any of the following events,
occurring hereafter, appropriate adjustment shall be made in the number of
Shares deliverable upon the' exercise of this warrant or the price per Share to
be paid, so as to maintain the proportionate interest of each warrant holder:
(a) recapitalization of the Company through a split-up of the outstanding shares
of common stock or a combination of the outstanding shares into a lesser number;
(b) declaration of a dividend on the common stock of the Company, payable in
common stock or securities convertible into common stock; (c) issuance of common
stock at less than the price per Share payable upon the exercise of this
warrant, or issuance of securities carrying conversion privileges or bearing
stock purchase warrants for common stock at more favorable terms than provided
by this warrant.
3. Selective Preemptive Right. If, at any time prior to the valid
exercise of this warrant by the holder hereof, the Company offers any shares of
common stock or securities convertible into common stock to the common
stockholders as a class for subscription, in accordance with the preemptive
right of stockholders, the holder hereof shall be entitled to subscribe for the
same number of shares of common stock or securities convertible into common
stock as he would have been entitled to purchase had he exercised this warrant
and become a stockholder.
4. Merger. In case the Company, or any successor, shall be consolidated
or merged with another company, or substantially all of its assets shall be sold
to another company in exchange for stock with the view to distributing such
stock to its stockholders, each Share of stock purchasable by this warrant shall
be replaced for the purposes hereof by the securities or property issuable or
distributable in respect of one Share of common stock of the Company, or its
successors, upon such consolidation, merger, or sale, and adequate provision to
that effect shall be made at the time thereof.
5. Stockholders' Rights. Until the valid exercise of this warrant, the
holder hereof shall not be entitled to any rights of a stockholder; but
immediately upon the exercise of this warrant and upon payment as provided
herein, the holder hereof shall be deemed a record holder of the common stock.
6. Divisibility of Warrant. This warrant may be divided into warrants
of one Share or multiples thereof, upon surrender at the office of the warrant
agent.
Page 2 of 3
<PAGE> 3
EXHIBIT "A"
7. Fractional Warrants. Upon the exercise of this warrant, no fractions
of Shares shall be issued; but fractional warrants will be delivered, entitling
the holder, upon surrender with other fractional warrants aggregating one or
more full Shares, to purchase such full Shares.
8. Negotiability. Title to this warrant shall pass by delivery, in the
same manner as a negotiable instrument payable to bearer. The holder hereof may
be treated by the Company and all other persons as the absolute owner for all
purposes and entitled to exercise this warrant or to transfer title to same.
9. Term. This warrant shall become void unless the rights hereunder are
exercised and payment made prior to 3:00 p.m., e.s.t., December 31, 1999;
provided that in case of the earlier dissolution of the Company, this warrant
shall become void on the date fixed for such dissolution.
FORM OF SUBSCRIPTION
To: Cragar Industries, Inc. The undersigned, the owner of the within
warrant, hereby irrevocably elects to exercise the purchase rights represented
by this warrant for, and to purchase thereunder, _______ Shares of common stock
of CRAGAR INDUSTRIES, INC. and herewith makes payment of $____________ therefor,
and requests that the certificates for such Shares be issued in the name of and
be delivered to __________________, whose address is
_____________________________ and if such Shares shall not be all of the Shares
purchasable hereunder, that a new warrant of like tenor for the balance of the
Shares purchasable hereunder be delivered to the undersigned.
Date:
--------------------------- ------------------------------
Page 3 of 3
<PAGE> 1
EXHBIT 4.12
Right to Purchase
3,500 Shares
CRAGAR INDUSTRIES, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
CLASS B STOCK PURCHASE WARRANT
Void after 3:00 p.m. e.s.t., December 31, 1999
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR THE
SECURITIES LAWS OF ANY STATE. THE SECURITIES MAY NOT BE PLEDGED,
HYPOTHECATED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE
OF AN EFFECTIVE REGISTRATION STATEMENT COVERING THE SECURITIES
REPRESENTED BY THIS CERTIFICATE UNDER THE ACT AND OTHER FILINGS UNDER
ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL, WHICH
OPINION IS SATISFACTORY IN FORM AND SUBSTANCE TO THE COMPANY, TO THE
EFFECT THAT SUCH REGISTRATION AND OTHER FILINGS ARE NOT REQUIRED UNDER
THE ACT OR ANY APPLICABLE STATE SECURITIES LAWS AND THAT THE
TRANSACTION COMPLIES WITH THE RULES AND REGULATIONS IN EFFECT
THEREUNDER.
This Warrant Certificate certifies that the bearer is entitled to
purchase shares of common stock ($0.01 par value) (the "Shares") of Cragar
Industries, Inc., a Delaware corporation, herein referred to as the Company.
Each Warrant entitles the bearer thereof to purchase from the Company, on or
after December 31, 1994 and on or before December 31, 1999, one fully-paid and
nonassessable common share ($0.01 par value) of the Company at the initial
exercise price of Two and 50/100 Dollars ($2.50) per share, payable in lawful
money of the United States of America upon surrender of this Warrant Certificate
and payment of the exercise price at the office or agency of the Company, but
only subject to the conditions set forth herein.
<PAGE> 2
No warrant may be exercised after the close of business on December 31,
1999, and to the extent not exercised by such time, all Warrants evidenced
hereby shall become void.
Reference is hereby made to the further provisions of this Warrant
Certificate set forth on Exhibit "A" attached hereto and such further provisions
shall for all purposes have the same effect as though fully set forth.
IN WITNESS WHEREOF, Cragar Industries, Inc., has caused this Warrant
Certificate to be signed by its President and by its Secretary, each by a
facsimile of his or her signature.
Dated: ___________________.
CRAGAR INDUSTRIES, INC.
By: Michael L. Hartzmark, President
-------------------------------------
Michael L. Hartzmark, President
and:
-------------------------------------
Marianne Hartzmark, Secretary
2
<PAGE> 3
Exhibit "A"
CRAGAR INDUSTRIES, INC.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants expiring December 31, 1999, to purchase not
exceeding 3,500 common shares ($0.01 par value) of the Company, herein referred
to as the Shares.
Statement of Rights of Warrant Holders
1. Reservation of Stock. The Company covenants that, while the warrants
are exercisable, it will reserve from its authorized and unissued common stock a
sufficient number of shares to provide for the delivery of stock pursuant to the
exercise of this and all other similar warrants.
2. Protection against Dilution. In any of the following events,
occurring hereafter, appropriate adjustment shall be made in the number of
Shares deliverable upon the exercise of this warrant or the price per Share to
be paid, so as to maintain the proportionate interest of each warrant holder:
(a) recapitalization of the Company through a split-up of the outstanding shares
of common stock or a combination of the outstanding shares into a lesser number;
(b) declaration of a dividend on the common stock of the Company, payable in
common stock or securities convertible into common stock; (c) issuance of common
stock at less than the price per Share payable upon the exercise of this
warrant, or issuance of securities carrying conversion privileges or bearing
stock purchase warrants for common stock at more favorable terms than provided
by this warrant.
EXHIBIT "A"
Page 1 of 3
<PAGE> 4
3. Selective Preemptive Right. If, at any time prior to the valid
exercise of this warrant by the holder hereof, the Company offers any shares of
common stock or securities convertible into common stock to the common
shareholders as a class for subscription, in accordance with the preemptive
right of stockholders, the holder hereof shall be entitled to subscribe for the
same number of shares of common stock or securities convertible into common
stock as he would have been entitled to purchase had he exercised this warrant
and become a stockholder.
4. Merger. In case the Company, or any successor, shall be consolidated
or merged with another company, or substantially all of its assets shall be sold
to another company in exchange for stock with the view to distributing such
stock to its stockholders, each Share of stock purchasable by this warrant shall
be replaced for the purposes hereof by the securities or property issuable or
distributable in respect of one Share of common stock of the Company, or its
successors, upon such consolidation, merger, or sale, and adequate provision to
that effect shall be made at the time thereof.
5. Stockholders' Rights. Until the valid exercise of this warrant, the
holder hereof shall not be entitled to any rights of a stockholder; but
immediately upon the exercise of this warrant and upon payment as provided
herein, the holder hereof shall be deemed a record holder of the common stock.
6. Divisibility of Warrant. This warrant may be divided into warrants
of one Share or multiples thereof, upon surrender at the office of the warrant
agent.
EXHIBIT "A"
Page 2 of 3
<PAGE> 5
7. Fractional Warrants. Upon the exercise of this warrant, no fractions
of Shares shall be issued; but fractional warrants will be delivered, entitling
the holder, upon surrender with other fractional warrants aggregating one or
more full Shares, to purchase such full Shares.
8. Negotiability. Title to this warrant shall pass by delivery, in the
same manner as a negotiable instrument payable to bearer. The holder hereof may
be treated by the Company and all other persons as the absolute owner for all
purposes and entitled to exercise this warrant or to transfer title to same.
9. Term. This warrant shall become void unless the rights hereunder are
exercised and payment made prior to 3:00 p.m., e.s.t., December 31, 1999;
provided that in case of the earlier dissolution of the Company, this warrant
shall become void on the date fixed for such dissolution.
FORM OF SUBSCRIPTION
To: Cragar Industries, Inc. The undersigned, the owner of the within
warrant, hereby irrevocably elects to exercise the purchase rights represented
by this warrant for, and to purchase thereunder, ________ Shares of common stock
of CRAGAR INDUSTRIES, INC., and herewith makes payment of $_____________
therefor, and requests that the certificates for such Shares be issued in the
name of and be delivered to _________________________, whose address is
___________________________________ and if such Shares shall not be all of the
Shares purchasable hereunder, that a new warrant of like tenor for the balance
of the Shares purchasable hereunder be delivered to the undersigned.
Date:_________________________ _______________________________
EXHIBIT "A"
Page 3 of 3
<PAGE> 1
exhibit 4.13
Right to Purchase
_________ Shares
CRAGAR INDUSTRIES, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
CLASS C STOCK PURCHASE WARRANT
Void after 3:00 p.m. e.s.t., June 30, 2001
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR THE
SECURITIES LAWS OF ANY STATE. THE SECURITIES MAY NOT BE PLEDGED,
HYPOTHECATED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE
OF AN EFFECTIVE REGISTRATION STATEMENT COVERING THE SECURITIES
REPRESENTED BY THIS CERTIFICATE UNDER THE ACT AND OTHER FILINGS UNDER
ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL, WHICH
OPINION IS SATISFACTORY IN FORM AND SUBSTANCE TO THE COMPANY, TO THE
EFFECT THAT SUCH REGISTRATION AND OTHER FILINGS ARE NOT REQUIRED UNDER
THE ACT OR ANY APPLICABLE STATE SECURITIES LAWS AND THAT THE
TRANSACTION COMPLIES WITH THE RULES AND REGULATIONS IN EFFECT
THEREUNDER.
This Warrant Certificate certifies that the bearer is entitled to
purchase shares of common stock ($0.01 par value) (the "Shares") of Cragar
Industries, Inc., a Delaware corporation, herein referred to as the Company.
Each Warrant entitles the bearer thereof to purchase from the Company, on or
after June 30, 1996 and on or before June 30, 2001, one fully-paid and
nonassessable common share ($0.01 par value) of the Company at the initial
exercise price of _________________ ($_______) per share, subject to adjustment
in accordance with Exhibit A, payable in lawful money of the United States of
America upon surrender of this Warrant Certificate and payment of the exercise
price at the office or agency of the Company, but only subject to the conditions
set forth herein.
No warrant may be exercised after the close of business on June 30,
2001, and to the extent not exercised by such time, all Warrants evidenced
hereby shall become void.
<PAGE> 2
Reference is hereby made to the further provisions of this Warrant
Certificate set forth on Exhibit "A" attached hereto and such further provisions
shall for all purposes have the same effect as though fully set forth.
IN WITNESS WHEREOF, Cragar Industries, Inc., has caused this Warrant
Certificate to be signed by its President and by its Secretary, each by a
facsimile of his or her signature.
Dated: ____________ ___, 1996
CRAGAR INDUSTRIES, INC.
By:
------------------------------
Michael L. Hartzmark, President
and:
-----------------------------
Marianne Hartzmark, Secretary
2
<PAGE> 3
Exhibit "A"
CRAGAR INDUSTRIES, INC.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants expiring June 30, 2001, to purchase not exceeding
________ common shares ($0.01 par value) of the Company, herein referred to as
the Shares.
Statement of Rights of Warrant Holders
1. Reservation of Stock. The Company covenants that, while the warrants
are exercisable, it will reserve from its authorized and unissued common stock a
sufficient number of shares to provide for the delivery of stock pursuant to the
exercise of this and all other similar warrants.
2. Protection against Dilution. In any of the following events,
occurring hereafter, appropriate adjustment shall be made in the number of
Shares deliverable upon the exercise of this warrant or the price per Share to
be paid, so as to maintain the proportionate interest of each warrant holder:
(a) recapitalization of the Company through a split-up of the outstanding shares
of common stock or a combination of the outstanding shares into a lesser number;
(b) declaration of a dividend on the common stock of the Company, payable in
common stock or securities convertible into common stock; (c) issuance of common
stock at less than the price per Share payable upon the exercise of this
warrant, or issuance of securities carrying conversion privileges or bearing
stock purchase warrants for common stock at more favorable terms than provided
by this warrant.
3. Merger. In case the Company, or any successor, shall be consolidated
or merged with another company, or substantially all of its assets shall be sold
to another company in exchange for stock with the view to distributing such
stock to its stockholders, each Share of
EXHIBIT "A"
Page 1 of 3
<PAGE> 4
stock purchasable by this warrant shall be replaced for the purposes hereof by
the securities or property issuable or distributable in respect of one Share of
common stock of the Company, or its successors, upon such consolidation, merger,
or sale, and adequate provision to that effect shall be made at the time
thereof.
4. Stockholders' Rights. Until the valid exercise of this warrant, the
holder hereof shall not be entitled to any rights of a stockholder; but
immediately upon the exercise of this warrant and upon payment as provided
herein, the holder hereof shall be deemed a record holder of the common stock.
5. Divisibility of Warrant. This warrant may be divided into warrants
of one Share or multiples thereof, upon surrender at the office of the warrant
agent.
6. Fractional Warrants. Upon the exercise of this warrant, no fractions
of Shares shall be issued; but fractional warrants will be delivered, entitling
the holder, upon surrender with other fractional warrants aggregating one or
more full Shares, to purchase such full Shares.
7. Negotiability. Title to this warrant shall pass by delivery, in the
same manner as a negotiable instrument payable to bearer. The holder hereof may
be treated by the Company and all other persons as the absolute owner for all
purposes and entitled to exercise this warrant or to transfer title to same.
8. Term. This warrant shall become void unless the rights hereunder are
exercised and payment made prior to 3:00 p.m., e.s.t., June 30, 2001; provided
that in case of the earlier dissolution of the Company, this warrant shall
become void on the date fixed for such dissolution.
EXHIBIT "A"
Page 2 of 3
<PAGE> 5
FORM OF SUBSCRIPTION
To: Cragar Industries, Inc. The undersigned, the owner of the within
warrant, hereby irrevocably elects to exercise the purchase rights represented
by this warrant for, and to purchase thereunder, ________ Shares of common stock
of CRAGAR INDUSTRIES, INC., and herewith makes payment of $_____________
therefor, and requests that the certificates for such Shares be issued in the
name of and be delivered to _________________________, whose address is
___________________________________ and if such Shares shall not be all of the
Shares purchasable hereunder, that a new warrant of like tenor for the balance
of the Shares purchasable hereunder be delivered to the undersigned.
Date:_________________________ _______________________________
EXHIBIT "A"
Page 3 of 3
<PAGE> 1
EXHIBIT 4.14
CRAGAR INDUSTRIES, INC.
STOCK OPTION / RESTRICTED STOCK GRANT
DATE OF GRANT: __________________, 19__
GRANT OF OPTION OR RESTRICTED STOCK
Cragar Industries, Inc. (the "Company") hereby grants to ________________ (the
"Grantee"), who is either an employee or Director of the Company or one of its
subsidiaries, the following:
/ / an option to purchase ___________ shares of the Company's Class A
Common Stock (the "Option Shares") at $____________ per share; this
option is intended to be an "Incentive Stock Option" as defined in
Section 422 of the Internal Revenue Code of 1986, as amended.
/ / an option to purchase __________ shares of the Company's Class A Common
Stock (the "Option Shares") at $___________ per share; this option is
NOT intended to be an "Incentive Stock Option" as defined in Section
422 of the Internal Revenue Code of 1986, as amended.
/ / an award of_______________ shares of the Company's Class A Common Stock
as a restricted stock grant (the "Restricted Stock"), subject to the
restrictions set forth below.
INSTALLMENT EXERCISE
All options shall be exercisable in three (3) installments, as follows:
(a) on and after the second anniversary of the Date of Grant, up to
one-third (1/3) of the total number of Option Shares;
(b) on and after the third anniversary of the Date of Grant, up to
two-thirds (2/3) of the Option Shares; and
(c) on and after the fourth anniversary of the Date of Grant, the
remaining Option Shares.
TERMINATION OF OPTION
The option will terminate on the first to occur of the following:
(a) 180 days after the termination of Grantee's employment or
termination of Grantee's service as a Director of the Company by reason
of resignation, death or disability;
<PAGE> 2
(b) immediately upon termination of Grantee's employment or service as
a Director if such termination is caused by (i) any act of malfeasance
or wrongdoing committed by Grantee, (ii) any breach of a covenant not
to compete or employment contract with the Company or any subsidiary,
or (iii) engaging in any conduct that would warrant the Grantee's
discharge for cause; and
(c) the date that is 10 years after the Date of Grant.
METHOD OF EXERCISE
The Grantee may exercise the Option with respect to all or a part of
the number of Option Shares that are then exercisable by giving notice in
writing to the Company, attention:___________ . The notice shall specify the
number of Option Shares as to which the option is to be exercised and the date
of exercise, which date shall be at least five days after the giving of such
notice.
Full payment by the Grantee of the option price for the Option Shares
to be purchased shall be made on or before the date of exercise by check or,
with the prior written consent of the Committee, in whole or in part through the
surrender of previously acquired shares of the Company's Class A Common Stock,
valued at their fair market value on the exercise date.
NON-TRANSFERABILITY OF OPTION
The Option granted hereby shall not be transferable and shall be
exercised only by the Grantee except, in the case of death of the Grantee, by
his or her executor or personal representative.
RESTRICTIONS ON TRANSFERABILITY OF RESTRICTED STOCK
For a period of three years from the Date of Grant, a Grantee of
Restricted Stock shall not sell, exchange, pledge or otherwise transfer any
shares of Restricted Stock. Certificates representing Restricted Stock shall
contain a legend referring to such restrictions and such certificates shall be
held by the Company, and not delivered to the Grantee, until the lapse of such
restrictions.
INCORPORATION OF PLANS BY REFERENCE
This Grant is made pursuant to the terms of either or both of the
Company's 1996 Stock Option and Restricted Stock Plan and the 1996 Directors'
Stock Option Plan, the terms of which are incorporated herein by this reference.
The Committee shall interpret and construe the Plan and this Stock Grant, and
its interpretations and determinations shall be conclusive and binding on the
Company and the Grantee.
2
<PAGE> 3
SIGNATURES
The Company and the Grantee have signed this Grant to acknowledge their
agreement with the terms hereof.
CRAGAR INDUSTRIES, INC. GRANTEE
BY:_________________________ ________________________________
3
<PAGE> 1
Exhibit 5.1
November 21, 1996
Cragar Industries, Inc
4636 North 43rd Avenue
Phoenix, Arizona 85031
Re: Registration Statement on Form SB-2
Ladies and Gentlemen:
We have acted as counsel to Cragar Industries, Inc., a Delaware
corporation (the "Company") in connection with the preparation of a Registration
Statement on Form SB-2 (the "Registration Statement"), relating to the offer and
sale by the Company of (a) 850,000 shares of Common Stock (and the offering of
an additional 127,500 shares if the over-allotment option is exercised in full);
(b) 850,000 Common Stock Purchase Warrants to purchase shares of Common Stock
(and the offering of an additional 127,500 Common Stock Purchase Warrants if the
over-allotment option is exercised in full); (c) 850,000 shares of Common Stock
underlying the Common Stock Purchase Warrants (and the offering of an additional
127,500 shares of Common Stock if the over-allotment option is exercised in
full); (d) Representative's Warrants to purchase 85,000 shares of Common Stock
and 85,000 Underlying Warrants; (e) 85,000 shares of Common Stock underlying the
Representative's Warrants; and (f) 85,000 shares of Common Stock underlying the
Underlying Warrants (collectively, the "Securities"). In this regard, we have
reviewed the Registration Statement and the exhibits thereto. In addition, we
have reviewed the originals, or copies certified or otherwise identified to our
satisfaction, of all such corporate records of the Company and such other
instruments and other certificates of public officials, officers, and
representatives of the Company and other persons, and we have made such
investigations of law, as we have deemed appropriate as a basis for the opinions
expressed below. In rendering the opinions expressed below, we have assumed that
the signatures on all documents that we have reviewed are genuine and that the
Common Stock, the Common Stock Purchase Warrants, the Representative's Warrants,
and the Underlying Warrants will conform in all material respects to the
description thereof set forth in the Registration Statement.
Based upon the foregoing, we advise you that, in our opinion, when the
following events have occurred:
<PAGE> 2
November 21, 1996
Page 2
(a) The Registration Statement has become effective under the
Securities Act;
(b) The due authorization, registration, and delivery of the
certificate or certificates evidencing the Common Stock has occurred;
(c) The due authorization, execution and delivery of the
Underwriting Agreement pursuant to which the Representative's Warrants are to
be issued has occurred;
(d) The compliance with all applicable contracts, agreements, and
instruments in respect of the issuance of the Securities; and
(e) The Securities are issued and sold and consideration has been
received therefore in the manner specified in the Registration Statement and the
exhibits thereto; then
1. The Common Stock to be issued by you will be legally
issued, fully paid and non-assessable.
2. The Common Stock Purchase Warrants, the Representative's
Warrants, and the Underlying Warrants to be issued by you will be legally issued
and will constitute the valid and binding obligation of the Company enforceable
in accordance with its terms, except as enforceability thereof may be limited by
(i) applicable bankruptcy, insolvency, reorganization, moratorium, or other
similar laws relating to or affecting the rights of creditors generally, and
(ii) the application of general principles of equity (whether such
enforceability is considered in a proceeding in equity or at law). The shares of
Common Stock issuable upon exercise of the Common Stock Purchase Warrants, the
Representative's Warrants, and the Underlying Warrants and receipt by the
Company of the consideration for such shares in accordance with the terms
thereof will be legally issued, fully paid and non-assessable.
The foregoing opinions are limited to the federal law of the United
States of America and the General Corporation Law of the State of Delaware. We
express no opinion as to the application of the various state securities laws to
the offer, sale, issuance, or delivery of the Common Stock.
We hereby consent to the filing of this opinion as Exhibit 5 to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Registration Statement and in the Prospectus included therein.
Very truly yours,
SNELL & WILMER L.L.P.
<PAGE> 1
Exhibit 10.9
CRAGAR/AUTOMOTIVE WHEELS, INC.
WHEEL & COMPONENT PURCHASE AGREEMENT
The Purchase Agreement is by and between Cragar Industries, Inc. its successors
and assigns hereafter referred to as "Cragar" and Titan Wheel International
Inc., a California Corporation, with it's principal place of business in
Quincy, IL (hereafter referred to as "AWI").
WHEREAS, Cragar wishes to purchase certain products, as hereinafter defined,
manufactured by AWI which will then be incorporated into by Cragar.
WHEREAS, AWI wants to sell to Cragar the Products that AWI manufacturers.
NOW, THEREFORE, the parties agree as follows:
1. PRODUCTS - As used herein, the term "Products" shall mean those wheel
assemblies listed on Attachment I, attached hereto and incorporated herein
by reference, and to any other wheel assemblies which may be added to
Attachment I by Cragar and AWI from time to time by mutual agreement.
2. PURCHASES - AWI agrees to sell to Cragar, and Cragar agrees to buy from AWI
100% of its requirements for products set forth in Attachment I. Cragar
will release orders to AWI.
3. TERM - This Agreement will commence as of the date of signing and will
continue until December, 31, 1997, unless terminated sooner pursuant to the
terms of this Agreement.
This Agreement may be extended for a mutually agreeable period of time by
written agreement of both parties; provided that both parties advise one
another in writing within 120 days of the expiring term. The terms and
conditions of this Agreement would apply to any extension or renewal.
4. FORECASTS AND ORDERS - Any forecast for products provided by Cragar shall
not be considered orders for products, shall be used by AWI for general
corporate planning purposes only, and may be disregarded by without prior
notice to AWI. Cragar shall issue a three (3) month firm schedule along
with an eight (8) month tentative schedule. The tentative schedule shall be
revised monthly and reconfirmed by AWI.
Cragar will deliver to AWI orders for products on order formats utilized by
Cragar which will specify the quantity of each product ordered and the
data by which the product must be provided to said Cragar facility.
In the event an order is placed for products to be delivered within three
(3) months of the date of this order which exceeds the firm orders
previously furnished, AWI shall exert its best efforts to fill the order.
<PAGE> 2
AWI will maintain a safety stock of two weeks rolling forecast on their
floor at all times.
AWI and Cragar agree that AWI will establish minimum economic
quantities.
Cragar may terminate an order for its convenience in whole or part, by
written or telegraphic notice within ninety (90) days. If an order is
terminated for Cragar's convenience within ninety (90) days, any claim
of AWI shall be settled on the basis of irrevocable obligations and
reasonable documented cost it has incurred in the performance of the
order for labor and materials which are not usable by AWI for making
other goods it manufactures. This provision is intended to apply to the
individual releases or part orders for products, and may not be used to
terminate the agreement in its entirety.
5. DELIVERY -- AWI shall deliver the products ordered to the designated
Cragar facility, or its designated Cragar facility, or its designee on
the delivery dates set forth in the order. Time is of the essence in
delivering product in a timely manner. Delivery performance is defined
as products received in Phoenix and/or the site designated by Cragar no
earlier than three (3) working after the purchase order date. AWI agrees
to a delivery ratio of equal to or exceeding eighty percent (80%)
measured over any three (3) month period. If this level of performance
is not met, AWI will have three (3) months to correct the deficiency.
If, after this three (3) month correction period the on-time delivery
percent is not met, Cragar can terminate the agreement, or take a one
(1) percent cash discount per each ten (10) percent below eighty (80)
percent for all shipments.
FREIGHT -- Cragar shall be responsible for arranging transportation and
AWI will ship to any location requested by Cragar. All freight will be
paid by Cragar. In the event product is determined to be effective by
Cragar and AWI, AWI will issue credit to Cragar for the freight in from
the customer, freight out for the replacement wheel, plus the wheel
cost. In the event a wheel is shipped direct to the customer by AWI,
AWI will issue credit to Cragar for only the freight cost associated
with the return wheel.
PACKAGING -- AWI shall package the products so that the products will
not be damaged or destroyed in transit. As to each product shipment, AWI
must include a packing list specifying the product(s), the quantity of
each product, the order number, release number, and/or blanket purchase
order number, if applicable, and any other information Cragar requires.
6. PRICING -- During the term of this agreement, the price of these
products shall be the applicable price set forth in Attachment I. The
1996 pricing will be reviewed on or about November 1, 1996 and 1997
prices will be effective January 1, 1997. Pricing shall remain firm
until January 1 of each year. Prices are based on AWI's material and
labor costs as of the date of this agreement. These costs will be
reviewed annually and prices may be adjusted for increase or decrease in
these costs. AWI will provide any documentation requested relating to
any adjustment. AWI's material costs are based on Hot Rolled, Pickled
and Oiled at $.195/lb.
<PAGE> 3
AWI will submit to Cragar their quotation from the raw material supplier
on or about November 1. AWI will provide Cragar with its adjustment
request no later than November 30 yearly.
7. PAYMENT -- Payment terms are net Forty Five (45) days.
8. QUALITY/DEFECTS -- If any product or other product sold to Cragar is
defective in material or workmanship, or does not conform to Cragar's
specifications/quality requirements, AWI agrees at its sole cost, to
repair or replace the defective product or other product. Quality
standards will be agreed upon in advance and will be documented and/or
displayed at AWI's place of business. The quality standards will be
reviewed quarterly, or as conditions dictate. AWI will supply Cragar
with any tests reports, IE., salt spray, radial fatigue or corning, as
tests are preformed in the normal course of business.
9. ENTIRE AGREEMENT -- The terms of this Agreement will supersede any
conflicting or inconsistent terms contained in orders or attachments to
this Agreement and the terms and conditions of this Agreement shall
apply to all such orders placed by Cragar.
10. AMENDMENTS -- This Agreement may be amended only by a written document
signed by the parties which states that it is intended to amend this
Agreement.
11. SEVERABILITY -- The invalidity or unenforceability of any term of this
Agreement shall not affect the validity and enforceability of this
Agreement or any of its other terms, and this Agreement and such other
terms shall be construed as though the invalid or unenforceable term(s)
were not included herein.
12. ASSIGNMENT -- AWI nor Cragar shall not assign this Agreement, whether
voluntarily or involuntarily, without prior written consent of the other
party.
13. BINDING EFFECT -- Except as otherwise provided, this Agreement
shall be binding on the successors and assigns of each party hereto.
14. NOTICES -- Notification required or permitted hereunder shall be sent
to the purchasing representative of the applicable Cragar's facility and
to the following parties:
Mr. Michael Hartzmark Mr. Steven A. Root
Cragar Industries Titan Wheel
4636 N. 43rd Ave 2701 Spruce St
Phoenix, AZ 85031 Quincy, IL 62301
15. LAW -- This Agreement shall be governed by and construed in accordance
with the internal laws as of the State of Illinois.
<PAGE> 4
16. FORCE MAJEURE - Neither party shall be responsible to the other party for
any delay in or failure of performance of its obligations under this
Agreement to the extent attributable to causes beyond its reasonable
control, including but not limited to, acts of God, fires, floods,
strikes, acts of any government or delays by carriers, provided that the
party affected thereby gives the other parties prompt notice of the
occurrence of any event which is likely to cause any such delay or failure
and of its best estimate of the length of any delay and possibility that
it will be unable to resume performance; and provided further that said
affected party shall use its best efforts to expeditiously overcome the
effects of the event and to resume performance.
17. DEFAULT PROVISIONS - If either party fails to comply with any terms of the
Agreement, the other party may terminate the Agreement with sixty (60)
days written notice.
18. REMEDIES CUMULATIVE - Each of the rights and remedies of the parties set
forth in this Agreement shall be cumulative with all other such rights and
remedies, as well as with all rights and remedies of the parties otherwise
available at law or in equity.
Dated: April 3, 1996
Michael Hartzmark Steven A. Root
President and CEO Vice President
Sales and Marketing
<PAGE> 1
Exhibit 10.10
REDISTRIBUTION AGREEMENT
This Agreement is made as of November 1, 1996 between RELCO Corp.
d/b/a NexDay USA ("NexDay") and Cragar Industries, Inc. ("Manufacturer").
WHEREAS, Manufacturer desires for NexDay to purchase, store, handle and
redistribute for Manufacturer from time to time, certain of Manufacturer's
goods pending sale of the goods to Manufacturer's customers; and
WHEREAS, NexDay is willing to so purchase, store, handle and redistribute such
goods, upon the terms and conditions set forth herein;
NOW THEREFORE, the parties agree as follows:
1. Covered Goods. This Agreement shall apply to all goods of
Manufacturer purchased by NexDay at the request of the Manufacturer from time
to time during the term of this Agreement. The specific goods to be purchased
are set forth on Exhibit A attached hereto.
2. Covered Services and Charges. The services to be performed by
NexDay and the fees, expenses and other charges to be due from time to time from
Manufacturer to NexDay for such services are set forth on Exhibit A attached
hereto and elsewhere in this agreement. For purposes of this Agreement,
including Exhibit A, the following definitions shall apply:
"Value" of any item of goods means Manufacturer's wholesale selling
price of the goods.
"Handling" means receiving goods from Manufacturer at the warehouse
door, checking-in the goods and placing the goods in storage. All charges for
Handling are per package, piece or other unit specified on Exhibit A, or a
percentage of Value as specified on Exhibit A. In addition to a charge for
Handling, Manufacturer shall pay a reasonable charge for (i) any loading and
unloading by NexDay of trucks, rail cars and other delivery vehicles not at the
warehouse door and (ii) any handling of damaged goods. All Handling charges
accrue upon the date that NexDay accepts care, custody and control of the
goods, regardless of unloading date or date of issue of any NexDay receipt or
acknowledgment.
"Storage" means keeping the goods in storage pending redelivery to
Manufacturer or shipping to Manufacturer's customers.
(a) Unless Exhibit A sets forth a Storage charge per package,
piece or other unit, there shall be no charges for Storage so long as
1
<PAGE> 2
Manufacturer's average quantity of goods purchased under this Agreement
for each 12 month period (or shorter period if the term of this
Agreement ends other than on the anniversary of this Agreement) turns
over at the annual turnover rate specified on Exhibit A. If such
turnover rate is not achieved, there shall be a Storage charge equal to
the difference between aggregate amount of charges that NexDay would
have charged for all services under this Agreement if such turnover rate
had been achieved, and the aggregate amount of charges that NexDay did
charge for all services under this Agreement. NexDay shall compute the
amount (if any) of such Storage charges upon each anniversary of this
Agreement and upon any termination of the term of this Agreement.
(b) If Exhibit A sets forth a Storage charge per package, piece or
other unit, such Storage charges begin upon the date that NexDay accepts
care, custody and control of the goods, regardless of unloading date or
date of issue of any NexDay receipt or acknowledgment. Except as
otherwise set forth on Exhibit A, a full month's Storage charge will
apply on all goods received between the first and the 15th, inclusive,
of a calendar month; one-half month's Storage charge will apply on all
goods received between the 16th and last day, inclusive, of a calendar
month; and a full month's storage charge will apply to all goods in
storage on the first day of a calendar month.
"Redistribution" means processing shipping orders to Manufacturer's
customers, picking the goods, boxing the order, applying a personalized
label/packing slip (other than Custom Labeling) and invoice/COD tag, and
delivering the order to the carrier for shipping to the customer. All charges
for Redistribution are per package, piece or other unit as specified in Exhibit
A or a percentage of value as specified on Exhibit A. Unless otherwise
specified on Exhibit A or if Custom Labeling applies, all packaging materials
and labels shall be supplied by NexDay at its expense.
"Shipping Expenses" means the standard shipping fees and expenses
chargeable by the specified carrier.
"Returns and Warranty Processing" means receiving goods from
Manufacturer's customers at the warehouse door, checking-in the goods, limited
visual inspection, re-boxing of sellable product and labeling of warranty
pieces for Manufacturer's inspection. All charges for Returns and Warranty
Processing are per piece or as otherwise specified on Exhibit A. Such charges
accrue upon the date that NexDay accepts care, custody and control of the
goods, regardless of unloading date or date of issue of any NexDay receipt or
acknowledgment. If NexDay is not to provide Returns and Warranty Processing,
Manufacturer shall be solely responsible therefor.
2
<PAGE> 3
"Customer Order Taking" means Manufacturer's customers directly
contacting NexDay for product, nearest dealer or other information or to place
purchase orders. All charges for Customer Order Taking are per contact or as
otherwise specified on Exhibit A. NexDay shall have no credit risk on any
purchase orders taken by it. If NexDay is not to provide Customer Order Taking,
Manufacturer shall be solely responsible therefor.
"Inventory Management/Replenishing" means regular reordering of stock
of goods from Manufacturer to maximum inventory levels. All charges for
Inventory Management are as specified on Exhibit A. If Manufacturer is allowed
access to NexDay's automated inventory management system, NexDay shall have the
right to deny or limit further access by Manufacturer at any time. If NexDay is
not to provide Inventory Management/Replenishing, Manufacturer shall be solely
responsible therefore.
"Repackaging" means repackaging goods into individual shipping cartons.
All charges for Repackaging are per piece or as otherwise specified on Exhibit
A. If NexDay is not to provide Repackaging, Manufacturer shall be solely
responsible therefor.
"Custom Labeling" means applying a special label, other than that which
is produced by NexDay's standard automatic equipment, bearing Manufacturer's
name and address as the shipper, and requiring special design, printing or
handling. All charges for Custom Labeling shall be per label or as otherwise
specified on Exhibit A.
3. Term. Term of this Agreement shall commence November 1, 1996, and
shall continue until 90 days after either party gives written notice of
termination to the other party. In addition, NexDay may terminate the term of
this Agreement upon (i) the failure of Manufacturer to pay NexDay any amount
due hereunder within 30 days after the date payment is due, or (ii) the filing
of any bankruptcy or insolvency proceeding with respect to Manufacturer.
4. Warehouse Locations. After consultation with NexDay and subject to
any restrictions contained in applicable warehouse leases, Manufacturer shall
determine which of NexDay's distribution locations are to be used to serve
Manufacturer's customers and shall give written notice of such determination
(and any charges) to NexDay at least 30 days prior to the delivery of any
goods to each such location. In the event the Manufacturer elects to move its
inventory from one NexDay warehouse location to another, or to any other
location at its discretion, Manufacturer agrees to pay all shipping and
handling charges incurred.
5. Inventory Levels. Subject to any Inventory Management/Replenishing
services to be provided by NexDay, Manufacturer
3
<PAGE> 4
shall determine the amount and mix of its goods to be kept in inventory at each
of NexDay's distribution locations and shall give written notice of such
determination (and any changes) to NexDay at least 30 days prior to the
effective date thereof.
6. Ownership of Inventory. NexDay shall retain ownership and full risk
of loss over all of the goods purchased at the request of Manufacturer. In the
event of termination of this agreement by either party, Manufacturer agrees to
repurchase, within 90 days of written notification by NexDay, all inventories
purchased at their request for the purposes outlined in this agreement. The
repurchase price will be the current purchase price of the goods from the
Manufacturer.
7. Inventory Finance Charge. Manufacturer shall pay an inventory
financing service fee for all inventory purchased by NexDay at Manufacturer's
request. The fee will be charged at the end of each calendar quarter and will
be based upon the value of the aggregate average inventory in all NexDay
warehouse locations for the preceeding three months. The interest rate will be
the current Prime Lending Rate plus one percent as reported in the Wall Street
Journal on the last business day of the calendar quarter.
8. Insurance. The purchased goods shall be insured by NexDay against
loss or injury however caused.
9. Inventory Counts and Variances.
(a) NexDay shall prepare and deliver to Manufacturer an annual
inventory count of goods in NexDay's inventory that are subject to the terms
and conditions specified herein.
10. Shipment to NexDay.
(a) All goods for storage shall be delivered at the warehouse properly
marked and packaged for Handling. Manufacturer shall furnish NexDay, at or
prior to such delivery, a manifest showing marks, brands or sizes to be kept
and accounted for separately, and the services desired consistent with Exhibit
A.
(b) Manufacturer shall supply NexDay with (i) material safety data
sheets on all goods that may constitute "hazardous or toxic materials," (ii)
all documentation necessary to obtain hazardous or toxic material surcharge
waivers from shippers, and (iii) technical and engineering support to satisfy
NexDay's insurers and local fire safety officials to the risks of handling and
storing Manufacturer's goods. Manufacturer shall indemnify and hold NexDay
harmless from and against any and all liability, damage, loss or expense
(including, without limitation, reasonable attorneys fees) the NexDay may
suffer or incur in connection with any services it may perform under this
4
<PAGE> 5
Agreement with respect to any goods that may constitute "hazardous or toxic
materials."
11. Delivery Requirements.
(a) No goods shall be delivered or transferred out except upon receipt
by NexDay of complete instructions properly signed by Manufacturer, or if
Customer Order Taking is provided by NexDay, upon receipt by NexDay of the
customer's purchase order. However, goods may be delivered or transferred out
upon instructions by telephone in accordance with a prior written
authorization, but NexDay shall not be responsible for loss or error occasioned
thereby. If orders or instructions are received by NexDay by 3:00 p.m. local
warehouse time, on a business day, for goods to be shipped by U.P.S., the order
will be shipped that same day. If the orders or instructions are received by
NexDay after 3:00 p.m. local warehouse time or if the orders or instructions
are for goods to be shipped other than U.P.S., the order will be shipped on the
next business day. Weekends and holidays are not business days even if the
warehouse is open.
(b) When goods are ordered out, a reasonable time shall be given
NexDay to carry out the instructions, and if NexDay is unable because of acts
of God, war, public enemies, seizure under legal process, strikes, lockouts,
riots and civil commotion, or any reason beyond NexDay's control, or because of
loss or destruction of goods for which NexDay is not liable, or because of any
other excuse provided by law, NexDay shall not be liable for failure to carry
out such instructions, and goods remaining in storage will continue to be
subject to regular Storage charges.
(c) COD shipments can be sent by NexDay to Manufacturers customers. If
NexDay ships COD using Manufacturer's shipping contract, shipper will forward
all collected funds direct to Manufacturer. If COD shipments are made using
NexDay's shipping contract, funds will be collected from the shipper and
remitted to the manufacturer weekly along with a ledger confirming each
transaction. If "Will Call" CODs occur at a NexDay Warehouse location,
collected funds will be forwarded to the NexDay home office for inclusion in the
next weekly remittance to the manufacturer. NexDay assumes no financial
responsibility whatsoever for COD checks that it collects on manufacturer's
behalf that are dishonored or uncollectible for any reason.
12. No Negotiable Warehouse Receipts. No receipt or acknowledgement
that may be issued by NexDay to Manufacturer regarding goods received by NexDay
from Manufacturer shall be or constitute a negotiable warehouse receipt.
5
<PAGE> 6
13. Payment Terms.
(a) On or about the last day of each calendar month, NexDay shall
issue an invoice to Manufacturer for amounts due to NexDay hereunder through
the 25th day of each month. Each such invoice shall be due and payable in full
by the 10th day of the next calendar month. Failure of NexDay to include any
charge in a timely manner on an invoice shall not preclude inclusion of the
charge on a subsequent invoice.
(b) Invoices submitted to Manufacturer for payment by NexDay will
contain the wholesale value of the goods shipped, the freight cost to
manufacturer's customer, if applicable, and the fees specified on Exhibit A.
(c) An interest charge of 1-1/2% per month shall be assessed and
payable on the entire unpaid balance of any amount which remains unpaid for 30
days or more after the due date thereof.
(d) If Manufacturer is delinquent by more than 30 days on any amounts
due NexDay, NexDay may refuse to deliver any goods until all such amounts are
paid.
14. Moves by NexDay. NexDay reserves the right to move, at its
expense, 14 days after notice is sent to Manufacturer, any goods in storage
from the warehouse in which they may be stored to any other of NexDay's
warehouses. NexDay may, at any time at its expense and without notice, move
goods within the warehouse in which they are stored.
15. Miscellaneous. This Agreement (i) constitutes the entire
agreement of the parties with respect to the subject matter hereof, (ii) may be
amended or supplemented only in writing signed by both parties, (iii) shall be
binding upon and inure to the benefit of the parties hereto and their
successors and permitted assigns, and (iv) shall be governed by and construed
in accordance with the laws of Kansas. Manufacturer shall not have the right to
assign this Agreement or any part hereof without the prior written consent of
NexDay. NexDay shall have the right to assign this Agreement or any part hereof
to any other entity owned or controlled by RELCO Corp. The exclusive venue and
jurisdiction for all litigation between the parties relating to this Agreement
shall be in the District Court of Johnson County, Kansas or the United States
District Court, District of Kansas and the parties voluntarily submit
themselves to the jurisdiction of such courts and waive any objection to venue
or jurisdiction in such courts.
6
<PAGE> 7
NEXDAY: MANUFACTURER:
RELCO CORP. d/b/a NexDay USA Cragar Industries, Inc.
By /s/ Michael G. Burroughs By /s/ Michael Hartzmark
----------------------------- -----------------------------
Name: Michael G. Burroughs Name: Michael Hartzmark
Title: VP, Specialized Services Title: President/CEO
Date 11/7 , 1996 Date 11/7 , 1996
--------------- ----------------
7
<PAGE> 1
EXHIBIT 11.1
CRAGAR INDUSTRIES, INC.
SCHEDULE OF COMPUTATION OF EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
PRIMARY EARNINGS PER COMMON SHARES ------------------------- -------------------------------
1994 1995 1995 1996
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net earnings (loss) $ (449,317) $ (693,756) $ 67,499 $ 417,716
============ ============ ============ ============
Weighted average number of common and
common equivalent shares:
Weighted average common shares outstanding(1) 125,183.7 130,118.7 129,181.5 132,940.6
Common equivalent shares using the treasury stock method(2) 35,371.1 35,371.1 35,371.1 35,371.1
----------- ----------- ----------- -----------
160,554.8 165,489.8 164,552.6 168,311.7
Effect of 7-to-1 split 7.0 7.0 7.0 7.0
----------- ----------- ----------- -----------
Average common shares outstanding, as adjusted 1,123,883.6 1,158,428.6 1,151,868.2 1,178,181.9
=========== =========== =========== ===========
Net earnings (loss) per common share and common
equivalent share $ (0.40) $ (0.60) $ 0.06 $ 0.35
============ ============ ============ ============
NINE MONTHS ENDED SEPTEMBER 30,
FULLY-DILUTED EARNINGS PER COMMON SHARE -------------------------------
1995 1996
---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net earnings $ 67,499 $ 417,716
============ ============
Weighted average number of common
and common equivalent shares:
Weighted average common shares outstanding(1) 129,181.5 132,940.6
Common equivalent shares using the treasury stock method(2) 35,371.1 35,371.1
Conversion of $1,500,000 convertible debt 41,666.6 41,666.6
---------- ----------
206,219.2 209,978.3
Effect of 7-to-1 split 7.0 7.0
---------- ----------
Average common shares outstanding, as adjusted 1,443,534.4 1,469,848.1
=========== ===========
Net earnings per common share -- assuming full
dilution $ 0.05 $ 0.28
============ ============
</TABLE>
- ---------------
(1) Gives effect to the weighted average number of actual common shares
outstanding during each period presented.
(2) Gives effect to the exercise of 122,063.2 Class A, 24,500 Class B and
126,000 Class C Warrants, exercise of the Non-Employee Director Options and
Employee Stock Options and conversion of $350,000 convertible debt using
the treasury stock method pursuant to the Securities and Exchange
Commission Staff Accounting Bulletin No. 83.
<PAGE> 1
EXHIBIT 23.2
[LETTERHEAD OF KPMG PEAT MARWICK LLP]
ACCOUNTANTS' CONSENT
The Board of Directors
Cragar Industries, Inc.:
We consent to the use of our report included in the Form SB-2 Registration
Statement for Cragar Industries, Inc. and to the reference to our firm under
the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Phoenix, Arizona
November 22, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1995 AUDITED FINANCIAL STATEMENTS AND JUNE 30, 1996 UNAUDITED FINANCIAL
STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 FILED BY CRAGAR
INDUSTRIES, INC. DATED OCTOBER 3, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 JUN-30-1996
<CASH> 0 0
<SECURITIES> 0 0
<RECEIVABLES> 4994 6326
<ALLOWANCES> 151 41
<INVENTORY> 7380 7092
<CURRENT-ASSETS> 12492 13707
<PP&E> 1047 953
<DEPRECIATION> 466 614
<TOTAL-ASSETS> 13966 14929
<CURRENT-LIABILITIES> 4138 5361
<BONDS> 8457 8086
0 0
0 0
<COMMON> 1 1
<OTHER-SE> (1605) (1126)
<TOTAL-LIABILITY-AND-EQUITY> 13966 14929
<SALES> 22936 12528
<TOTAL-REVENUES> 22936 12528
<CGS> 20289 10597
<TOTAL-COSTS> 23201 11974
<OTHER-EXPENSES> (736) (499)
<LOSS-PROVISION> (233) (110)
<INTEREST-EXPENSE> 1165 542
<INCOME-PRETAX> (694) 511
<INCOME-TAX> 0 31
<INCOME-CONTINUING> 472 923
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (694) 480
<EPS-PRIMARY> (.64) .43
<EPS-DILUTED> 0 .33
</TABLE>
