<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _________ to __________
Commission File No. 1-12559
CRAGAR INDUSTRIES, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C>
DELAWARE 86-0721001
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
</TABLE>
4636 NORTH 43RD AVENUE, PHOENIX, ARIZONA 85031
(Address of principal executive offices)
(602) 247-1300
(Issuer's telephone number)
Securities Registered Under Section 12(b) of the Exchange Act:
<TABLE>
<S> <C>
COMMON STOCK, $.01 PAR VALUE THE BOSTON STOCK EXCHANGE
COMMON STOCK PURCHASE WARRANTS THE BOSTON STOCK EXCHANGE
</TABLE>
Securities Registered Under Section 12(g) of the Exchange Act:
NONE
<PAGE> 2
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's revenues for the fiscal year ended December 31, 1996 were
$18,625,497.
At March 21, 1997, the aggregate market value of Common Stock held by
non-affiliates of the registrant was $8,845,362, based on the closing sales
price of the Common Stock on such date as reported by the Nasdaq SmallCap
Market.
The number of shares outstanding of the registrant's Common Stock on
March 21, 1997 was 2,210,305.
DOCUMENTS INCORPORATED BY REFERENCE
Portions from the registrant's definitive Proxy Statement relating to
its Annual Meeting of Stockholders to be held May 15, 1997, are incorporated by
reference into Part III of this Annual Report on Form 10-KSB.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE> 3
CRAGAR INDUSTRIES, INC.
ANNUAL REPORT ON FORM 10-KSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I ..................................................................................................... 1
ITEM 1. DESCRIPTION OF BUSINESS................................................... 1
ITEM 2. DESCRIPTION OF PROPERTY................................................... 13
ITEM 3. LEGAL PROCEEDINGS......................................................... 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................................... 14
PART II ..................................................................................................... 14
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS........................................... 14
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION......................................................... 15
ITEM 7. FINANCIAL STATEMENTS...................................................... 27
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES............................................................... 27
PART III ..................................................................................................... 27
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT ............................................................... 27
ITEM 10. EXECUTIVE COMPENSATION.................................................... 27
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT..................................................... 27
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.............................................................. 27
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.......................................... 27
</TABLE>
<PAGE> 4
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Cragar Industries, Inc. (the "Company") designs, produces, and sells
high-quality, custom vehicle wheels and wheel accessories. The Company believes
that the CRAGAR name is one of the most widely recognized brand names in the
automotive aftermarket industry. The Company's broad selection of products is
designed to appeal to a wide range of automotive enthusiasts who desire to
modify the styling, design, or performance of their cars, trucks, or vans. The
Company sells its wheel products in the automotive aftermarket through a
national distribution network of value-added resellers, including tire and
automotive performance warehouse distributors and retailers, and mail order
houses. Major resellers include Super Shops, J. H. Heafner Company, Inc., and B
& R Wholesale Tire.
In order to appeal to a broad spectrum of consumers, the Company offers
a wide selection of custom wheels. CRAGAR's products include entry-level custom
steel wheels, wire and spoked wheels that are popular with urban and inner city
consumers, chrome plated, one-piece cast aluminum wheels designed to appeal to
the luxury automobile owner, and race wheels that are used by both amateur and
professional race drivers. The Company's wheels feature classic designs that
have been sold under the CRAGAR name since the 1960s as well as contemporary
designs that reflect continually changing consumer preferences. The Company
sells its products under a variety of brand names, including CRAGAR(R), CRAGAR
Lite(TM), Keystone Klassic(R), S/S(R), Star Wire(TM), TRU-CRUISER(TM), and
TRU-SPOKE(R).
ORGANIZATION AND CORPORATE HISTORY
The Company was incorporated in Delaware in 1992 to acquire certain
assets, including the accounts receivable, inventory, property, equipment,
patents, trademarks, and copyrights in a leveraged buyout from the Wheel and
Tire Division of Mr. Gasket Company, Inc., which had filed for reorganization.
In December 1996, the Company successfully completed an initial public offering
(the ("IPO") of 850,000 shares of its Common Stock, $0.01 par value ("Common
Stock") and warrants to purchase 850,000 shares of Common Stock (the
"Warrants"). The initial public offering price was $6.00 per share of Common
Stock and $0.10 per Warrant. Each Warrant was immediately exercisable and
entitles the registered holder to purchase one share of Common Stock at a price
of $6.60. The Warrants expire on December 18, 2001. In connection with the
offering, the Company issued to the underwriter additional warrants to purchase
up to 85,000 shares of Common Stock and 85,000 Warrants at an exercise price of
$7.50 per share of Common Stock and $0.125 per Warrant. The underwriter was also
granted an over-allotment option of 127,500 shares of Common Stock and/or
127,500 Warrants. On December 31, 1996, the underwriter exercised a portion of
its over-allotment option and purchased 70,000 shares of Common Stock and
127,500 Warrants. The underwriters' option to purchase the additional 57,500
shares of Common Stock has expired.
1
<PAGE> 5
INDUSTRY BACKGROUND
Size and Growth of Industry
The automotive wheel industry is generally divided into two segments,
original equipment wheels and custom aftermarket wheels, which together
accounted for approximately $2.0 billion in manufacturer sales during 1994. Of
this amount, the custom wheel segment, in which the Company operates,
represented manufacturer sales of approximately $650 million, an annual increase
of 15.5% over the total of $420 million achieved in 1991.
The Company attributes the continuing growth in the custom wheel
segment of the automotive wheel industry to several factors, including (i)
increased sales of domestic cars, sport utility vehicles, and light trucks,
which have resulted in greater numbers of vehicles in use and, consequently,
more potential consumers of automotive aftermarket products such as the
Company's wheels; (ii) increased average vehicle life, which the Company
believes contributes to greater demand for automotive aftermarket products, such
as custom wheels, as vehicle owners seek to enhance the appearance of older
vehicles; and (iii) increased sales of custom wheels through tire dealers,
performance retailers, and other specialty automotive outlets. The Company
believes that the desire of many vehicle owners for individuality in the
appearance and styling of their vehicles will lead to continued growth in the
custom wheel market, since the installation of custom wheels represents one of
the easiest, least expensive, and quickest ways for such owners to dramatically
alter their vehicles' appearance.
Product Offerings
The custom wheel market is generally divided into six product
categories: one-piece aluminum wheels (representing 36% of the market);
performance racing wheels (20%); two-piece aluminum wheels (16%); steel wheels
(14%); wire wheels (10%); and composite wheels (4%). These product categories
are differentiated by the material content of the wheel, the level of technology
necessary to produce the wheel, price, target customer, styling attributes, and
applications. 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
2
<PAGE> 6
or directly to the public. To spread the overhead costs associated with
establishing these company-owned distribution centers, such centers often carry
competitors' products. In addition to the other distribution channels discussed
herein, the Company has at certain times in the past sold its products through
distribution centers operated by its competitors, such as American Racing
Equipment, Inc. and Prime Wheel-Golden Wheel.
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, many of its competitors do not manufacture their own wheels,
but purchase the wheel components from third parties for later assembly and sale
to the public. Unlike the Company, however, most of its competitors do not offer
a full line of custom wheel products nor have an established brand identity. The
Company believes that the fragmented nature of the custom wheel market offers an
opportunity for certain competitors, such as the Company, to act as market
consolidators through the acquisition of other custom wheel companies or product
lines that can complement their existing operations.
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. The Company will
seek to achieve this objective by pursuing the following strategies:
Increase Marketing Efforts
The Company intends to increase its marketing, advertising, and
promotional efforts to further enhance and leverage the strength of the CRAGAR
brand name. Promotional efforts will include an increased emphasis on the
Company's relationships with drag race drivers and teams and on the sponsorship
of professional and amateur drag race events sanctioned by the National Hot Rod
Association ("NHRA"). Additionally, public relations campaigns will be conducted
in trade publications, racing magazines, and consumer magazines. The Company
also has developed distinctive point-of-purchase displays directed to end
consumers. As a means to leverage the strength of its brand names, the Company
will pursue licensing arrangements for its brand names to be featured on
high-quality automotive aftermarket and other products.
Expand Product Distribution
The Company intends to expand its product distribution capabilities in
underserved markets, such as California, southern Florida, New England, and the
northwestern United States, and to broaden its customer base to include major
tire distributors that supply both national and local retail
3
<PAGE> 7
tire stores. Historically, the Company has focused its distribution efforts on
selected domestic markets, which are served by value-added resellers
specializing in selling high-performance automotive aftermarket parts and
accessories. The Company has also implemented a national accounts program in
which it would sell products directly to mass merchandisers that require factory
direct service. The Company has established a redistribution arrangement
necessary to serve these national account prospects as well as certain local and
regional areas not serviced by its current warehouse distributors. In addition,
CRAGAR will seek to develop and enhance relationships with distributors in
selected foreign countries, such as Japan, Mexico, Russia, Australia, and
Germany, where it believes it currently enjoys significant brand name
recognition.
Enhance Existing Product Lines; Develop New Products
The Company plans to enhance its existing product lines by adapting
its wheels and accessories to fit additional vehicle models, makes, and years
and to develop new product lines to meet changing consumer demands. In addition,
the Company intends to continue to increase its product development efforts with
increased emphasis on products for trucks and sport utility vehicles. In this
regard, during the past two years the Company introduced its CRAGAR Lite wheel
line, introduced a series of one-piece aluminum wheels, and significantly
broadened its TRU-SPOKE line with three new wheel designs and a new line of
accessories. The Company also is test marketing a new line of custom wheels that
feature distinctive wheel coatings, such as camouflage, marble, and simulated
carbon fiber.
Pursue Strategic Acquisitions and Alliances
The Company plans to pursue strategic acquisitions and alliances to
capitalize on the substantial fragmentation of the market for custom wheels and
wheel accessories and the difficulty of market participants in maintaining
product selection broad enough to meet customer demands resulting from the
increase in the variety of domestic and imported vehicle makes and models.
Acquisition or alliance candidates will be selected based on their potential to
broaden the Company's product lines or enlarge its product offerings, expand the
geographical scope of its distribution network into new or underserved markets,
enhance the Company's marketing, distribution or product development
capabilities, or reduce unit costs. The Company currently has no specific
agreements or understandings with respect to any acquisitions or alliances.
Improve Operating Efficiencies
The Company intends to improve its operating efficiencies by enhancing
its assembly and materials handling through plant upgrades, the purchase of new
equipment, and the implementation of more sophisticated inventory management and
by outsourcing certain of its production processes. The Company has begun to
selectively outsource the processing, assembly, and manufacturing of some of its
custom wheels, components, and accessories, and expects to explore further
outsourcing in the future. The Company believes that the outsourcing of selected
products and processing operations will enable it to devote a greater percentage
of its resources to product design, marketing,
4
<PAGE> 8
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.
5
<PAGE> 9
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 19.5% 24.2% Steel spokes Urban and inner
Wheels, Star attached to inner city consumers
Wire steel hub and outer
steel rim or felly
Composite, 24.3% 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 17.0% 16.7% Inner steel disc Low-end
welded to outer steel consumers of all
rim types of vehicles
Race Wheels 16.9% 15.8% Two outer aluminum Pro and amateur
rim halves welded race drivers and
together with performance car
aluminum center or owners
spacer
Street Steel 8.7% 8.5% Three piece steel and Hot rod and race
Wheels aluminum center enthusiasts with
welded to outer steel cars and trucks
rim
One-piece Cast 7.9% 7.8% Cast one-piece Low and high-end
Aluminum aluminum with consumers of all
Wheels machined, painted, types of vehicles
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 1.1% 4.6% Excess wheels and N/A
accessories
</TABLE>
6
<PAGE> 10
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 eighteen 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
labels.
Composite, Legacy, and CRAGAR Lite Wheels
Composite wheels consist of a chrome plated die cast aluminum center
welded to a chrome plated rolled steel outer rim. CRAGAR patented the process of
attaching the aluminum center to the steel rim in 1964. In addition to the
Company's popular S/S and SS/T composite wheels, the Company in 1995 purchased
the exclusive rights to manufacture and market the Keystone Klassic, one of the
most popular wheels in automotive history. The Company believes this product
solidifies CRAGAR's Legacy Line to include the most popular nostalgia wheels in
the market. The Company recently introduced 16 and 17 inch versions of its S/S
wheel.
Another addition introduced in 1995 was the Company's development (with
patent pending technology) of the CRAGAR Lite wheel line using a new
light-weight steel rim. While over 30% lighter than conventional rims, these
light-weight rims are stronger than conventional rims because the rims are made
of high-strength alloy steel. The CRAGAR Lite rim improves ride stability,
reduces wheel vibrations, lessens wear on the suspension, and enhances fuel
economy. The Company currently has two CRAGAR Lite styles, both used for
front-wheel drive vehicles.
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. From time to time, CRAGAR also
supplies other companies with steel wheels for resale under private labels.
Race Wheels
CRAGAR race wheels are higher-priced, three-piece, lightweight,
polished aluminum wheels. These wheels are used by professional drag racers, who
are sometimes provided CRAGAR wheels without charge in return for their
promotion of CRAGAR and for displaying a CRAGAR sticker on
7
<PAGE> 11
their cars. The Super Race and the Super Star are the Company's two highest-end
professional race wheels.
The Company also sells race wheels to amateur racers, professional
racers, and individuals who want the look of the race wheel for street use. The
race wheels for this product category are the Dragstar and the Super Lite II. In
addition, the Company has introduced a series of race wheels with billet centers
for street use.
Street Steel Wheels
The Company sells chrome plated steel, look-alike versions of its race
wheels. The Street Star is a lower-priced copy of the Dragstar, and the Street
Lite is a copy of the SuperLite II.
One-Piece Cast Aluminum Wheels
The Company currently offers several styles of one-piece cast aluminum
wheels. One category of one-piece cast aluminum wheels consists of high-end,
chrome-plated, polished, machine finish or silver-painted wheels with innovative
styling. The highest-end 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. The Company also offers certain other polished and machine
finished one-piece, cast aluminum wheels designed for light trucks. These wheels
are currently purchased from manufacturers in the Philippines, Taiwan, China,
Indonesia, and the United States.
Other categories of one-piece cast aluminum wheels consist of the
Hammer, Star, Blade, and Modular styles. These styles have been on the market
for many years and are available from almost all of the Company's domestic and
foreign competitors. These wheels have become "commodity" items and provide
relatively small gross margins. These wheels are currently purchased from
manufacturers in China and the United States.
Wheel Accessories
The Company offers a large and varied line of accessories, including
hubcaps, medallions, lug nuts, washers, steel locks, spinners, beadlock rings,
and trim rings. Accessories are sold both packaged and loose.
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
8
<PAGE> 12
adapting its wheels and accessories to fit additional vehicle models, makes, and
years. In addition, the Company intends to increase its product development
efforts with increased emphasis on products for trucks and sport utility
vehicles. In this regard, during the past two years the Company introduced its
CRAGAR Lite Wheel line and significantly broadened its TRU-SPOKE line with three
new wheel designs and a new line of accessories. The Company is test marketing a
new line of custom wheels that feature distinctive wheel coatings, such as
camouflage, marble, and simulated carbon fiber.
To enhance its product development efforts, the Company plans to engage
an experienced outside consultant to assist the Company's current in-house
product development staff. In addition, the Company plans to supplement its
existing product development staff with the addition of one or more new
employees with product development experience.
DISTRIBUTION, SALES AND MARKETING
Product Distribution
The Company currently sells its products through the following
distribution channels:
Warehouse Distributors. The Company sells its products to
warehouse distributors that sell to tire dealers, automotive performance
retailers, service stations, and specialty boutiques. These customers include J.
H. Heafner Company, Inc., B & R Wholesale Tire and Wheel, and Keystone
Automotive Warehouse. Automotive aftermarket warehouse distributors often stock
a full selection of high-quality merchandise. The Company believes that
warehouse distributors will continue to be an important factor in the Company's
penetration of new geographic areas. Sales to warehouse distributors accounted
for 39.7% and 46.2% of the Company's gross sales in 1996 and 1995, respectively.
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 42.4% and 36.1% of the Company's gross sales in 1996 and in 1995,
respectively.
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 13.9% and 12.1% of the
Company's gross sales in 1996 and 1995, respectively.
9
<PAGE> 13
International Distributors. The Company sells to exporters and
directly to distributors in select foreign countries. International sales
accounted for approximately 4.0% and 5.4%, respectively, of the Company's gross
sales in 1996 and in 1995.
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 that require factory
direct service. The Company is in the process of establishing a redistribution
arrangement necessary to serve these national account prospects as well as
certain local and regional areas not currently serviced by its current warehouse
distributors. Toward that goal, the Company shipped orders to four new
warehouse/distributor accounts during the first quarter of 1997. 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 December 31, 1996, the Company employed six individuals in its
sales and marketing department and retained four independent representative
agencies. The Company's sales and marketing employees are responsible for
implementing marketing plans and sales programs, providing technical advice and
customer service, handling customer inquiries, following up on shipments to
customers, informing customers of special promotions, coordinating the Company's
trade shows, and providing other types of customer service. The Company plans to
hire an executive to coordinate the Company's marketing efforts.
As one of its marketing programs, the Company is a sponsor for all
professional and amateur drag race events sanctioned by the NHRA. The Company
sponsors cars carrying the CRAGAR logo in all three professional categories,
including the Top Fuel, Funny Car, and Pro Stock divisions. Among the many
well-known drivers and teams that CRAGAR has relationships with are Kenny
Bernstein (1996 Top Fuel Champion), Warren Johnson (multi-year Pro Stock
Champion) and Larry Dixon (1995 Rookie of the Year); team owners such as Joe
Gibbs (former NFL Super Bowl coach), and Don "The Snake" Prudhomme (legendary
driver and former champion); and teams with major sponsors, such as McDonald's,
Budweiser, Miller Genuine Draft, Skoal Bandit, ProLong, GM Performance Parts,
and Mac Tools.
Outside sales representatives typically interface directly with the
Company's customers. These individuals approach the Company's customers on a
frequent basis to solicit orders. These sales representatives either earn a
commission on each sale or receive a flat monthly retainer. Sales
representatives work with a particular internal salesperson and together deal
with each customer in order to facilitate high levels of service.
10
<PAGE> 14
For the year ended December 31, 1996, the Company's ten largest
customers accounted for a total of approximately 75.7% of gross sales, with
Super Shops accounting for 24.3%, J. H. Heafner Company, Inc. 12.1%, and B & R
Wholesale Tire 8.4%. In 1995, the Company's ten largest customers accounted for
a total of approximately 70.4% of its gross sales, with Super Shops, J. H.
Heafner Company, Inc., and B & R Wholesale Tire accounting for 23.6%, 11.8%, and
9.5% of gross sales, respectively. The Company does not have any long-term
contractual relationships with any of its major customers. As a result of the
Company's decision not to meet competitors' pricing on steel wheels, the Company
expects sales of steel wheels to J. H. Heafner Company, Inc. to decrease in the
future. The Company's sales to J. H. Heafner Company, Inc. approximated $2.6
million in 1996.
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. The Company's average accounts receivable days outstanding
was 70 days as of December 31, 1996.
PRODUCTION
The Company assembles most of its products at its facility in Phoenix,
Arizona. While outside vendors manufacture most of the component parts used in
the Company's products, the Company undertakes certain basic production
operations, including bending spokes on presses; de-flashing various components;
piercing rims, hubs, and fellies for wire and spoked wheels; dimpling rims for
wire wheels; and machining a variety of components. In recent periods, the
Company has begun to outsource selectively the processing, assembly, and
manufacture of some of its custom wheels, components, and accessories, and
expects to explore the further outsourcing of product production in the future.
The Company believes that the outsourcing of selected products and processing
operations will enable it to devote a greater percentage of its resources to
product design, marketing, and distribution and to shift certain inventory,
warranty, and other risks to its suppliers. In addition, the Company intends to
improve its own production operations through plant improvements, the purchase
of new equipment, and the implementation of an enhanced inventory management
system.
The Company maintains its own in-house testing facility for its wheels.
The Company also utilizes independent test laboratories for all its wheels,
which certify their results relating to load ratings, cornering fatigue, and
radial fatigue.
COMPETITION
The market for the Company's products is highly competitive and
fragmented with over 100 domestic and foreign sellers of custom wheels.
Competition is based primarily on product selection (including style and vehicle
fit), product availability, quality, design innovation, price, payment terms,
and service. Competition in the custom wheel market is intense, and the Company
believes that several major wheel manufacturers, such as American Racing
Equipment, Inc., Prime Wheel-Golden Wheel, Progressive Custom Wheels, Inc.,
Ultra Custom Wheel Co., and Superior Industries
11
<PAGE> 15
International, as well as suppliers to major automobile manufacturers, pose
significant competition because of their substantial resources.
The level and source of the Company's competition varies based on
product category. Cast aluminum wheels comprise the largest portion of the
custom wheel market. There are numerous competitors in the cast wheel market,
including American Racing Equipment, Inc., Prime Wheel-Golden Wheel, Progressive
Custom Wheels, Inc., Ultra Custom Wheel Co., Superior Industries International,
and certain smaller domestic companies as well as numerous foreign
manufacturers. Most of these companies also make composite wheels. In race
wheels, the Company has two major competitors, Weld Racing, Inc. and Center Line
Performance Wheels. The largest wire wheel competitors include Roadster Wheels,
Inc., Crown Wire Wheel Co., and Dayton Wheel Products, Inc. In steel wheels,
competitors include Mangels Wheels, Unique Wheel, Inc., American Racing
Equipment, Inc., and Greenball Corp.
INTELLECTUAL PROPERTY
The Company markets its custom wheels and products under a variety of
brand names designed to capitalize on its reputation. The Company believes that
its trademarks, most importantly CRAGAR, are critical to its business. The
Company also owns the rights to certain design and other patents and also relies
on trade secrets and proprietary know-how, which it seeks to protect, in part,
through confidentiality and proprietary information agreements. The Company has
also entered into agreements with its vendors to restrict the use of technology
provided by the Company. There can be no assurance, however, that the Company's
patents will preclude the Company's competitors from designing competitive
products, that the proprietary information or confidentiality agreements with
employees and others will not be breached, that the Company's patents will not
be infringed, that the Company would have adequate remedies for any breach or
infringement, or that the Company's trade secrets will not otherwise become
known to or independently developed by competitors.
CRAGAR(R), Keystone(R) Klassic(R), Legacy(TM), CRAGAR LITE(TM), Star
Wire(TM), TRU-CRUISER(TM), Street Pro(R), S/S(R), The Wheel People(TM), and
TRU-SPOKE(R) are trademarks of the Company.
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.
12
<PAGE> 16
The Company maintains stock adjustment and warranty return policies.
The Company's stock adjustment return policy allows the customer to return
certain factory-fresh, resalable merchandise to the Company for credit. The
Company's warranty return policy allows customers to return certain defective
products that are covered under the Company's limited warranty. In both cases,
customers are only allowed to return a specified percentage, usually less than
2%, of the previous year's purchases. Should this specified percentage be
exceeded, the Company at its discretion can either reject the return request or
accept the return request and charge a 15% handling fee. On a quarterly basis,
the Company recognizes a provision for stock adjustments and warranty returns in
arriving at net sales. The provision is based on a historical 12 month moving
average of actual return activity. In 1996, stock adjustment returns were
approximately $849,734 compared to approximately $775,018 for 1995. Warranty
returns were approximately $429,797 in 1996 and approximately $174,854 in 1995.
There can be no assurance that future warranty claims, returns, or stock
adjustments will not be materially greater than anticipated and have a material
adverse effect on the Company's business, financial condition, and results of
operations.
EMPLOYEES
As of December 31, 1996, the Company had 92 employees, a majority of
whom were full-time employees, and ten independent contractors. Employment
levels vary during the course of a year due to the seasonality of the Company's
business. The Company considers its employee relations to be good. None of the
Company's employees are represented by unions.
See "Management's Discussion and Analysis or Plan of Operation-
Factors That May Affect Future Results And Financial Condition-Regulatory
Compliance" for a discussion of governmental regulation of the Company's
business.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's executive offices, product development, sales,
accounting, computer, production, and distribution facilities are currently
housed in a leased industrial building. The 167,000 square foot facility is
located in Phoenix, Arizona. The lease expires in June 2003, and the Company has
a right of first refusal to purchase the property. The Company believes that the
facility is adequate for its current operations and those contemplated by the
Company in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company from time to time is involved in routine litigation
incidental to the conduct of its business. On November 27, 1996, the Company was
dismissed as a defendant in an action in the United States District Court for
the Eastern District of Michigan, entitled Patricia Ellerholz v. Goodyear Tire &
Rubber Co. There are currently no material pending proceedings to which the
Company is a party or to which any of its property is subject. The Company
currently maintains product liability insurance, with limits of $1.0 million per
occurrence and $2.0 million in the aggregate
13
<PAGE> 17
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's business, financial condition, and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the Company's fiscal quarter ended December 31, 1996, there were
no matters submitted to a vote of security holders.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock and Warrants are publicly traded on the
NASDAQ SmallCap Market ("NASDAQ") under the symbols CRGR and CRGRW,
respectively, as well as listed on the Boston Stock Exchange ("BSE") under the
symbols CWH and CWHW, respectively.
On December 31, 1996, as reported by the NASDAQ, the closing sales
prices of the Company's Common Stock and Warrants were $5.875 and $0.75,
respectively. Prior to the completion of the Company's initial public offering,
there was no public market for the Company's securities.
On February 28, 1997, the closing sales prices of the Company's Common
Stock and Warrants as reported by the NASDAQ were $5.00 and $0.563,
respectively. At that date, the number of holders of record of the Company's
Common Stock and Warrants was 39. The Company believes that many additional
holders of Common Stock and Warrants are unidentified because their securities
are held by brokers in nominee accounts. Through February 28, 1997, the
Company's Common Stock has traded at a high of $6.00 and a low of $4.813,
and the Company's Warrants have traded at a high of $1.00, and a low of $0.563,
as reported by the NASDAQ.
Since its inception, the Company has not paid or declared any dividends
on its Common Stock, and the Company does not anticipate that it will do so 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 main credit facility prohibits the payment
of dividends by the Company without the lender's prior written consent.
14
<PAGE> 18
Apart from its recent IPO, the Company has sold the following
securities within the past three years without registration under the Securities
Act of 1933, as amended (the "Securities Act"):
On December 15, 1994, the Company sold to Mr. Sidney Dworkin 29,167
shares of Common Stock, 3,937.5 Class A Warrants, 24,500 Class B Warrants, and
two promissory notes in the principal amounts of $350,000 and $108,333. On
January 31, 1995, Mr. Dworkin contributed the $108,333 note to the capital of
the Company, and on December 24, 1996, the $350,000 note converted into 68,056
shares of the Company's Common Stock. Each Class A Warrant is exercisable to
purchase one share of Common Stock at $1.43 at any time before December 31,
1999. Each Class B Warrant is exercisable to purchase one share of Common Stock
at $0.36 at any time before December 31, 1999.
On September 30, 1995, the Company issued shares of Common Stock to
certain holders of the Company's secured promissory notes in lieu of paying
accrued interest on the notes. Each note holder received 15,070 shares of Common
Stock for every $100,000 of interest payable. In the aggregate, 26,410 shares of
Common Stock were issued for $175,245.
On July 1, 1996, in connection with a bridge financing, the Company
sold promissory notes in the aggregate amount of $1,500,000 (the "Bridge
Notes"). The holders of the Bridge Notes were also granted Class C Warrants to
purchase an aggregate of 126,000 shares of Common Stock at $3.25 per share at
any time before June 30, 2001. In December, 1996, the Company used a portion of
its proceeds from the IPO to pay off the Bridge Notes in full.
On June 10, 1996, and November 9, 1996, the Company issued options to
purchase an aggregate of 68,200 shares of Common Stock to officers and directors
of the Company.
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 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
FORWARD-LOOKING STATEMENTS
This report contains forward looking statements. Additional written or
oral forward looking statements may be made by the Company from time to time in
filings with the Securities and Exchange Commission or otherwise. Such forward
looking statements are within the meaning of that term in Section 27A of the
Securities Act, and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Such statements may include, but not be limited
to, projections of revenues, income, or loss, estimates of capital expenditures,
plans for future operations, products or services, and financing needs or plans,
as well as assumptions relating to the foregoing. The words "believe," "expect,"
"anticipate," "estimate," "project," and similar expressions identify forward
looking statements, which speak only as of the date the statement was made.
Forward looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results could
15
<PAGE> 19
differ materially from those set forth in, contemplated by, or underlying the
forward looking statements. The following disclosures, as well as other
statements in the Company's report, including those contained below in this Item
6, "Management's Discussion and Analysis of Financial Condition and Results of
Operation," and in the Notes to the Company's Financial Statements, describe
factors, among others, that could contribute to or cause such differences.
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. For the year
ended December 31, 1996, the Company's ten largest customers accounted for a
total of approximately 75.7% of gross sales, with Super Shops accounting for
24.3%, J. H. Heafner Company, Inc. 12.1%, and B & R Wholesale Tire 8.4%. In
1995, the Company's ten largest customers accounted for a total of approximately
70.4% of its gross sales, with Super Shops, J. H. Heafner Company, Inc., and B &
R Wholesale Tire accounting for 23.6%, 11.8%, and 9.5% of gross sales,
respectively. The Company does not have any long-term contractual relationships
with any of its major customers. As a result of the Company's decision not to
meet competitors' pricing on steel wheels, the Company expects sales of steel
wheels to J. H. Heafner Company, Inc. to decrease in the future. The Company's
sales to J. H. Heafner Company, Inc. approximated $2.6 million in 1996.
The Company was formed in 1992 to acquire certain assets, including the
accounts receivable, inventory, property, equipment, patents, trademarks, and
copyrights in a leveraged buyout from the Wheel and Tire Division of Mr. Gasket
Company, Inc., which had filed for reorganization. The fair value of the net
assets acquired exceeded the final purchase price, and, accordingly, the fair
value of the property and equipment, patents, trademarks, and copyrights
acquired was reduced to zero. The remaining balance of $3,687,341 was classified
as excess of fair value of assets acquired over cost (commonly referred to as
negative goodwill) and is being amortized to income over five years using the
straight-line method ($737,468 per annum through December 31, 1997).
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.
16
<PAGE> 20
<TABLE>
<CAPTION>
Years Ended
December 31
----------------------------
STATEMENTS OF OPERATIONS DATA: 1996 1995
------------- --------------
<S> <C> <C>
Net sales................................................... 100.0% 100.0%
Costs of goods sold......................................... 91.6 88.5
----- -----
Gross profit................................................ 8.4 11.5
Selling, general and administrative expenses................ (16.0) (12.7)
Amortization of excess of fair value of assets
acquired over cost.......................................... 4.0 3.2
----- -----
Income (loss) from operations............................... (3.7) 2.0
Interest and other expenses, net............................ (4.1) (5.0)
Extraordinary gain.......................................... 1.8 0.0
----- -----
Net loss.................................................... (6.0) (3.0)
===== =====
</TABLE>
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 AND YEAR ENDED DECEMBER 31, 1995
Net sales consist of gross sales less discounts, returns, and
allowances. Net sales for the year ended December 31, 1996 were $18,625,497
compared to $22,935,773 in 1995, representing a 18.8% decline in sales. The
decrease in net sales was attributable, in part, to the fact that the Company
sold a large amount of excess inventory in 1995 compared to 1996. In addition,
the Company accrued a larger amount of cash rebates, discounts, and returns
during 1996 as compared to 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 three other
significant customers, and an overall reduction in sales in the wire wheel
segment of the automotive aftermarket for a total reduction in sales
approximating $4.3 million. With the exception of the continuing softness of the
wire wheel business, the Company does not see these trends continuing, except as
in the normal course of business.
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 year ended December 31, 1996 was
$1,557,799 versus $2,646,426 for 1995. As a percentage of net sales, gross
profit decreased in 1996 compared to 1995, from 11.5% to 8.4%. The decreases in
gross profit both in absolute dollars and as a percentage of sales reflected the
overall decrease in sales, a change in the Company's product mix toward certain
lower margin items, including a $1.9 million decrease in relatively high margin
wire and spoked wheels, and increased cash discounts, rebates, returns and
advertising allowances approximating $800,000 during 1996 versus 1995.
17
<PAGE> 21
In an effort to increase gross profits, the Company is taking steps to
increase its marketing and promotional efforts to increase sales. In addition,
the Company is focusing on reducing its costs, with particular emphasis on the
selected outsourcing of certain product and component manufacturing. Beginning
in April 1996, the Company began purchasing fully assembled steel wheels through
a formal supply arrangement with one of its vendors. Approximately 17.0% of the
Company's gross sales during 1996 were attributable to the sale of steel wheels.
Late in the second quarter of 1996, the Company began using machine shops in
California to process certain components that had previously been manufactured
in California, shipped to Phoenix for additional processing, and then shipped
back to California for certain processing. The Company anticipates that the
resulting reduction of in-bound freight costs and the reduction in inventory
levels will lead to lower costs. However, the Company also expects its gross
profits and overall results of operations to vary from period to period based
upon a variety of factors including changes in order levels from customers, the
timing of orders, changes in product mix and other factors.
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 year ended December 31,
1996 were $2,987,308 compared to $2,912,393 for the year ended December 31,
1995. This 2.5% increase was primarily due to legal expenses incurred in
connection with a protracted legal proceeding (see "Item 3, Legal Proceedings")
as well as other expenses related to the Company's IPO. The Company expects that
future SG&A expenses will increase in absolute amounts and possibly in
proportion to net sales resulting, in part, from anticipated increases in costs
associated with advertising and marketing promotional activities, increased
product development activities, the hiring of additional personnel, and
compliance with the reporting and other requirements of a public company.
Interest and other expenses, net, for fiscal 1996 were $767,293
compared to $1,165,257 for 1995. The decrease in interest expense is primarily
attributable to the Company's replacement of its former credit facility with
the Norwest Credit Facility in the first half of 1995, which generally has more
favorable terms. See "Management's Discussion and Analysis of Plan of Operation
- -- Liquidity and Capital Resources." In 1996, the Company recognized a
one-time gain in the amount of approximately $287,000 in connection with the
sale of polishing assets that the Company had operated in Mexicali, Mexico as
well as other equipment. In connection with the Company's repurchase of a
promissory note on July 1, 1996 in the amount of approximately $1.1 million, the
Company recognized an extraordinary gain in the amount of $330,489.
Because of its carry-forward losses from previous years, the Company
had no income tax provision in 1996 and had no provision for alternative minimum
taxes in 1996.
Net loss for the year ended December 31, 1996 was $1,128,844 compared
to $693,756 for 1995, an increase of $435,088. Of this increase, $1,024,729 was
attributable to additional returns and allowances including an increase in
reserves, $445,336 was attributable to inventory standard cost write downs,
and $145,035 was attributable to excess IPO expenses. These amounts were offset
by $287,000 gain from sale of equipment and the $330,489 extraordinary gain.
18
<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
On December 18, 1996, the Company successfully completed its IPO which
produced net proceeds of $4,494,199. This offering significantly increased the
Company's cash and equity balances. It also allowed the Company to retire
$1,500,000 in aggregate principal amount of bridge financing notes issued by the
Company on July 1, 1996. Upon the completion of the IPO, an aggregate principal
amount of $1,850,000 of the Company's promissory notes and related accrued
interest of $150,000 automatically converted into 359,722 shares of the
Company's Common Stock.
In April 1995, the Company entered into a revolving credit facility
("Credit Facility") with Norwest Business Credit, Inc. ("Norwest"). The Credit
Facility currently has a maximum commitment of $9.5 million, subject to certain
restrictions with respect to the collateral borrowing base. The Credit Facility
expires April 15, 1998 and is secured by the Company's accounts receivable,
inventories, intangible assets, and property and equipment. Interest is due
monthly at the prime rate plus 2.25%. As of December 31, 1996, the outstanding
balance under the Credit Facility was approximately $2.96 million, and the
remaining amount available to be borrowed thereunder was approximately $2.92
million.
The Credit Facility requires the maintenance of certain specified
financial ratios and satisfaction of other financial tests. As of December 31,
1996, the Company was in default of the net income covenant of the Credit
Facility. On March 27, 1997, Norwest granted a waiver with respect to this
default. There can be no assurance that the Company will be able to satisfy the
financial ratios and other tests under the Credit Facility for future periods.
Failure to satisfy such requirements could have a material adverse effect on the
Company's business, financial condition, and results of operation. See
"--Factors that May Affect Future Results and Financial Condition -- Current
Defaults; Dependance on External Financing" below.
At December 31, 1996, the Company had an accumulated deficit of
$7,558,489. For the year ended December 31, 1996, the Company's operating
activities provided $1,380,192 of cash which was primarily attributable to a
$1.47 million reduction in accounts receivable and a $1.03 million reduction in
inventories. The Company's investing activities in 1996 provided approximately
$273,000 cash from the sale of equipment. The Company's financing activities
used approximately $790,000 cash resulting primarily from the net repayment of
debt of approximately $5.26 million offset by proceeds from the IPO of $4.49
million.
As of December 31, 1996, the Company's average accounts receivable days
outstanding was 70 days as opposed to 87 days at December 31, 1995. Payment
terms for its customers vary from cash on delivery to up to 210 days. The
allowance for doubtful accounts as a percentage of accounts receivable was 2.9%
at December 31, 1995, as compared to 1% at December 31, 1996. This decrease in
the allowance reflected the significant reduction (73.4%) in accounts receivable
greater than 60 days past due. The Company had no significant delinquent
accounts outstanding at December 31, 1996. The Company's inventory turnover
ratio approximated 2.6 for the year ended December 31, 1996 as compared to 3.1
for the year ended December 31, 1995.
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. Based on the Company's operating plan,
management believes that the proceeds from its IPO and anticipated cash flow
from operations will
19
<PAGE> 23
be sufficient to meet the Company's anticipated operating and capital needs for
at least the next 12 months. 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 additional financing. No
assurance can be given of the Company's ability to obtain such financing on
favorable terms, if at all. If the Company is unable to obtain additional
financing, its ability to meet its current and future revenue growth plans could
be materially and adversely affected.
SEASONALITY
Historically, the Company has experienced higher revenue in the first
two quarters of the year than in the latter half of the year. The Company
believes that this results from seasonal buying patterns resulting, in part,
from an increased demand for certain automotive parts and accessories associated
with more favorable weather conditions, and the fact that many of its ultimate
customers have added liquidity from income tax refunds during the first half of
the year.
INFLATION
Increases in inflation generally result in higher interest rates.
Higher interest rates on the Company's borrowings would decrease the
profitability of the Company. To date, general price inflation has not had a
significant impact on the Company's operations; however, increases in metal
prices have from time to time, and could in the future, adversely affect the
Company's gross profit.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
The Company's future operating results and financial condition are
dependent upon, among other things, the Company's ability to implement its
business strategy. Potential risks and uncertainties that could affect the
Company's profitability are set forth below.
History of Previous Losses
The Company was incorporated in December 1992 and has incurred significant
losses in each of its completed fiscal years. For the year ended December 31,
1996, the Company incurred a net loss of $1,128,844. Net losses for this period
included $737,469 from the amortization of negative goodwill related to the
Company's initial acquisition of the Cragar assets, a $330,489 extraordinary
gain related to the forgiveness of certain of the Company's debt, and a one-time
gain of approximately $287,000 related to the sale of polishing assets that the
Company had operated in Mexico as well as other equipment. There can be no
assurance that the Company will be profitable in the future. Net sales for the
year ended December 31, 1996 declined to $18.6 million from $22.9 million for
1995. As of December 31, 1996, the Company had cumulative losses of $7.6 million
and total stockholders' equity of approximately $3.8 million.
Covenant Defaults; Dependence on External Financing
20
<PAGE> 24
The Norwest 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 December 31, 1996, the Company was in default
under the net income covenant of the Credit Facility and would also have
defaulted under the debt service covenant but for a prior waiver of that test
for the period ended December 31, 1996. There can be no assurance that the
Company will be able to satisfy the terms and conditions of the Credit Facility
in the future or that the Credit Facility will be extended beyond its current
expiration date. In addition, there can be no assurance that the cash flow from
operations will be sufficient to fund the Company's existing operations or to
enable the Company to implement fully its business strategies especially in the
event that the Company is required to refinance or replace the Credit Facility.
As a result, the Company may need to raise additional funds through equity or
debt financings. No assurance can be given that such additional financing will
be available on terms acceptable to the Company, if at all. Further, any such
financings may result in further dilution to the Company's stock and higher
interest expense and may not be on terms that are favorable to the Company.
General Economic Factors
The Company's business is directly impacted by certain external factors, such as
the general demand for aftermarket automotive parts, prices for raw materials
used in producing the Company's products, fluctuations in discretionary consumer
spending, and general economic conditions, including employment levels, business
conditions, interest rates, and tax rates. While the Company believes that
current economic conditions favor growth in the markets it serves, various
factors, including those listed above could lead to decreased sales and
increased operating expenses, as in 1995, when the Company's gross margins were
adversely impacted by increased metal prices. There can be no assurance that
various factors will not adversely affect the Company's business in the future
or prevent the Company from successfully implementing its business strategies.
No Assurance of Successful Acquisitions
The Company intends to consider acquisitions of and alliances with other
companies that could complement the Company's existing business, including
acquisitions of complementary product lines. There can be no assurance that
suitable acquisition or joint venture candidates can be identified, or that, if
identified, adequate and acceptable financing sources will be available to the
Company that would enable it to consummate such transactions. Furthermore, there
can be no assurance that the Company will be able to integrate successfully such
acquired companies or product lines into its existing operations, which could
increase the Company's operating expenses in the short-term and materially and
adversely affect the Company's results of operations. Moreover, any acquisition
by the Company may result in potentially dilutive issuances of equity
securities, the incurrence of additional debt, and amortization of expenses
related to goodwill and intangible assets, all of which
21
<PAGE> 25
could adversely affect the Company's profitability. Acquisitions involve
numerous risks, such as the diversion of the attention of the Company's
management from other business concerns, the entrance of the Company into
markets in which it has had no or only limited experience, and the potential
loss of key employees of the acquired company, all of which could have a
material adverse effect on the Company's business, financial condition, and
results of operations.
Variability in Operating Results; Seasonality
The Company's results of operations have been and will continue to be subject to
substantial variations as a result of a number of factors, any of which could
have a material adverse effect on the Company's business, financial condition,
and results of operations. In particular, the Company's operating results can
vary because of the size and timing of customer orders, delays in new product
enhancements and new product introductions, vendor quality control and delivery
difficulties, market acceptance of new products, product returns, product
rebates and allowances, seasonality in product purchases by distributors and end
users, and pricing trends in the automotive aftermarket industry in general and
in the specific markets in which the Company participates. Historically, the
Company's net sales have been highest in the first and second quarters of each
year. Significant variability in orders during any period may have an adverse
impact on the Company's cash flow or work flow, and any significant decrease in
orders could have a material adverse effect on the Company's results of
operations. The Company believes that any period-to-period comparisons of its
financial results are not necessarily meaningful and should not be relied upon
as an indication of future performance.
Changing Customer Trends; Need for Product Development
The Company's success depends, in part, on its ability to correctly and
consistently anticipate, gauge, and respond in a timely manner to changing
consumer preferences. There can be no assurance that the Company's core products
will continue to enjoy acceptance among consumers or that any of the company's
future product offerings will achieve or maintain market acceptance. The Company
attempts to minimize the risks relating to changing consumer trends by offering
a wide variety of product styles, analyzing consumer purchases, maintaining
active product development efforts, and monitoring the sales performance of its
various product lines. However, any misjudgment by the Company of the market for
a particular product, or its failure to correctly anticipate changing consumer
preferences, could have a material adverse effect on its business, financial
condition, and results of operations. In order to enhance its product
development efforts, the Company plans to supplement its existing product
development staff by hiring one or more new employees with product development
experience and by engaging an outside consultant to assist the Company's product
development staff. There can be no assurance that the Company will be able to
attract and retain such additional personnel or that the costs associated with
additional product development efforts will not have an adverse effect on the
Company's business, financial condition, and results of operations.
Dependence on Key Distributors; Implementation of New Distribution Channels
22
<PAGE> 26
A limited number of customers have accounted for a substantial portion of the
company's revenue in each year. The financial condition and success of its
current customers and the Company's ability to obtain orders from new customers
are critical to the Company's success. For the year ended December 31, 1996, the
Company's ten largest customers accounted for a total of approximately 75.7% of
gross sales, with Super Shops accounting for 24.3%, J. H. Heafner Company, Inc.
12.1%, and B & R Wholesale Tire 8.4%. In 1995, the Company's ten largest
customers accounted for a total of approximately 70.4% of its gross sales, with
Super Shops, J. H. Heafner Company, Inc., and B & R Wholesale Tire accounting
for 23.6%, 11.8%, and 9.5% of gross sales, respectively. The Company does not
have any long-term contractual relationships with any of its major customers. As
a result of the Company's decision not to meet competitors' pricing on steel
wheels, the Company expects sales of steel wheels to J. H. Heafner Company, Inc.
to decrease in the future. While the Company's business strategy calls for it to
expand its product distribution capabilities to additional markets and to
broaden its customer base so that it can become less dependent on significant
customers, any loss, material reduction, or delay of orders by any of the
Company's major customers, including reductions as a result of market, economic,
or competitive pressures in the automotive aftermarket industry, could adversely
affect the Company's business, financial condition, and results of operations.
Dependence on Third Party Suppliers
The Company's business depends upon the assembly of component parts and the
shipment of finished wheels and wheel accessories from third-party suppliers.
From time to time, the Company has experienced delays in the delivery of
component parts and finished products from vendors. In addition, one of the
Company's significant suppliers is located in China, which from time to time has
been subject to numerous trading restrictions by the United States. The Company
also has suppliers in Indonesia, the Philippines, and Taiwan. The purchase of
materials from foreign suppliers may be adversely affected by political and
economic conditions abroad over which the Company has no control. Although to
date, the Company has generally been able to acquire adequate supplies of such
components and finished product in a timely manner, any extended interruption in
supply, significant increase in the price, or reduction in the quality of such
components could have a material adverse effect on the Company's business,
financial condition, and results of operations. The Company has begun to
outsource selectively the production of some of its products and may increase
such outsourcing in the future. While the Company anticipates that such
outsourcing programs will stabilize costs and shift certain inventory, warranty,
and other risks to its suppliers, there can be no assurance that the continued
or increased outsourcing of its products will have these desired effects.
Highly Competitive Industry
The market for the Company's products is highly competitive. The Company
competes primarily on the basis of product selection (which includes style and
vehicle fit), timely availability of product for delivery, quality, design
innovation, price, payment terms, and service. Many of the Company's competitors
have substantially greater financial, personnel, marketing, and other resources
than the Company. Increased competition could result in price reductions (which
may be in the form of
23
<PAGE> 27
rebates or allowances), reduced margins, and loss of market share, all of which
could have a material adverse effect on the Company's business, financial
condition, and results of operations.
Regulatory Compliance
The Company is subject to various federal and state governmental regulations
related to occupational safety and health, labor, and wage practices as well as
federal, state, and local governmental regulations relating to the storage,
discharge, handling, emission, generation, manufacture, and disposal of toxic or
other hazardous substances used to produce the Company's products. The Company
believes that it is currently in material compliance with such regulations.
Failure to comply with current or future environmental regulations could result
in the imposition of substantial fines on the Company, suspension of production,
alteration of its production processes, cessation of operations, or other
actions which could materially and adversely affect the Company's business,
financial condition, and results of operations. In the ordinary course of its
business, the Company uses metals, oils, and similar materials, which are stored
on site. The waste created by use of these materials is transported off-site on
a regular basis by a state-registered waste hauler. Although the Company is not
aware of any material claim or investigation with respect to these activities,
there can be no assurance that such a claim may not arise in the future or that
the cost of complying with governmental regulations in the future will not have
a material adverse effect on the Company.
Reliance on Intellectual Property
The Company owns the rights to certain trademarks and patents, relies on trade
secrets and proprietary information, technology, and know-how, and seeks to
protect this information through agreements with employees and vendors. There
can be no assurance that the Company's patents will preclude the Company's
competitors from designing competitive products, that proprietary information or
confidentiality agreements with employees and others will not be breached, that
the Company's patents will not be infringed, that the Company would have
adequate remedies for any breach or infringement, or that the Company's trade
secrets will not otherwise become known to or independently developed by
competitors.
Risks Associated with International Sales; Currency Fluctuations
As part of the Company's business strategy, it intends to expand into selected
international markets. In 1996 and 1995, the Company derived approximately 4.0%
and 5.4%, 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.
24
<PAGE> 28
Control by Existing Stockholders
The directors, officers, and principal stockholders of the Company beneficially
own approximately 24.7% of the Company's outstanding Common Stock. 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.
Effect of Preferred Stock on Rights of Common Stock
The Company's Amended and Restated Certificate of Incorporation authorizes the
Board of Directors of the Company to issue "blank check" Preferred Stock, the
relative rights, powers, preferences, limitations, and restrictions of which may
be fixed or altered from time to time by the Board of Directors. Accordingly,
the Board of Directors is empowered, without stockholder approval, to issue
Preferred Stock with dividend, liquidation, conversion, voting, or other rights
that could adversely affect the voting power and other rights of the holders of
Common Stock. The Preferred Stock could be utilized, under certain
circumstances, as a method of discouraging, delaying, or preventing a change in
control of the Company that stockholders might consider to be in the Company's
best interests. Although the Company has no present intention of issuing any
shares of its authorized Preferred Stock, there can be no assurance that the
Company will not do so in the future.
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 loss of the services of Dr. Hartzmark
could have a material adverse effect on the business of the Company. While Dr.
Hartzmark does not have an employment agreement with the Company, Dr. Hartzmark
and his family currently hold over 11.77% of the Company's Common Stock. The
successful implementation of the Company's business strategies depends on the
hiring and retention of additional management, engineering, marketing, product
development, and other personnel. There can be no assurance that the Company
will be able to identify and attract additional qualified management and other
personnel when needed or that the Company will be successful in retaining such
additional management and personnel if added. Moreover, there can be no
assurance that the additional costs associated with the hiring of additional
personnel will not adversely effect the Company's results of operations. The
Company does not maintain key man life insurance on any of its personnel.
Limited Liability of Directors
25
<PAGE> 29
The Company's Certificate of Incorporation provides, with certain exceptions,
that the Company's directors will not be personally liable for monetary damages
for breach of the directors' fiduciary duty of care to the Company or its
stockholders. This provision does not eliminate the duty of care, and in
appropriate circumstances equitable remedies such as an injunction or other
forms of nonmonetary relief would remain available under Delaware law. This
provision also does not affect a director's responsibilities under any other
laws, such as the federal securities laws or state or federal environmental
laws.
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.
Listing and Maintenance Criteria for Securities; Penny Stock Rules
The Common Stock and Warrants are listed on the Nasdaq Small Cap Market and the
Boston Stock Exchange. There can be no assurance that the Company in the future
will meet the requirements for continued listing on the Nasdaq SmallCap Market
or the Boston Stock Exchange with respect to the Common Stock or Warrants. If
the Common Stock or the Warrants fail to maintain such listings, the market
value of the Common Stock and Warrants likely would decline and holders likely
would find it more difficult to dispose of, or to obtain accurate quotations as
to the market value of, the Common Stock and Warrants. In addition, if the
Company fails to maintain Nasdaq SmallCap Market listing for its securities, and
no other exclusion from the definition of a "penny stock" under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") is available, then any
broker engaging in a transaction in the Company's securities would be required
to provide any customer with a risk disclosure document, disclosure of market
quotations, if any, disclosure of the compensation of the broker-dealer and its
salesperson in the transaction, and monthly account statements showing the
market values of the Company's securities held in the customer's accounts. The
bid and offer quotation and compensation information must be provided prior to
effecting the transaction and must be contained on the customer's confirmation.
If brokers become subject to the "penny stock" rules when engaging in
transactions in the Company's securities, they would become less willing to
engage in such transactions, thereby making it more difficult for the Company's
securityholders to dispose of Common Stock and Warrants.
ITEM 7. FINANCIAL STATEMENTS
The audited financial statements of the Company as of and for the year
ended December 31, 1996 are located beginning at page F-1 of this Annual Report
on Form 10-KSB.
26
<PAGE> 30
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES.
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 10. EXECUTIVE COMPENSATION
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information respecting the foregoing four Items of Part III is hereby
incorporated by reference to the Company's definitive Proxy Statement relating
to its Annual Meeting of Shareholders to be held May 15, 1997.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The exhibits required to be filed as a part of this Annual Report are
listed below. The exhibits marked with an asterisk (*) are incorporated by
reference to the Company's Registration Statement on Form SB-2 (No. 333-13415).
EXHIBIT
NUMBER DESCRIPTION
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 Form of Certificate representing Common Stock*
4.2 Form of Warrant Agreement
4.3 Form of Warrant Certificate*
4.4 Credit and Security Agreement, dated as of April 14, 1995, executed by
and between Registrant and Norwest Business Credit, Inc.*
27
<PAGE> 31
4.4(a) Amendment to Credit and Security Agreement, dated as of September 19,
1995, executed by and between Registrant and Norwest Business Credit,
Inc.*
4.4(b) First Amendment to Credit Agreement, dated as of May 24, 1996, executed
by and between Registrant and Norwest Business Credit, Inc.*
4.4(c) Waiver and Amendment to Credit Agreement, dated November 20, 1996,
executed by and between Registrant and Norwest Business Credit, Inc.*
4.4(d) Second Amendment to Credit Agreement, dated as of February 12, 1997,
executed by and between Registrant and Norwest Business Credit, Inc.
4.4(e) Waiver and Amendment to Credit Agreement, dated March 27, 1997,
executed by and between Registrant and Norwest Business Credit, Inc.
4.5 Form of Class A Stock Purchase Warrant Certificate*
4.6 Form of Class B Stock Purchase Warrant Certificate*
4.7 Form of Class C Stock Purchase Warrant Certificate*
4.8 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 and the CRAGAR Industries, Inc. 1996 Stock
Option and Restricted Stock Plan*
4.9 Form of Representative's Warrant Agreement, dated December 18, 1996, by
and between the Registrant and Dickinson & Co.
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*
28
<PAGE> 32
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*
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.*
10.11 Form of 1993 Convertible Subordinated Secured Note of the Registrant,
dated September 30, 1993*
10.11(a) Form of First Note Amendment to 1993 Convertible Subordinated Secured
Note of the Registrant, dated September 30, 1995*
29
<PAGE> 33
10.11(b) Form of Second Note Amendment to 1993 Convertible Subordinated Secured
Note of the Registrant*
10.12 $350,000 Promissory Note of the Registrant, dated December 15, 1994,
issued to Sidney Dworkin*
10.12(a) Agreement between Registrant and Sidney Dworkin, dated October 12,
1995, amending the terms and conditions of the $350,000 Promissory
Note*
10.12(b) First Note Amendment to the $350,000 Promissory Note of the Registrant
issued to Sidney Dworkin*
10.13 Form of 1996 Unsecured Promissory Bridge Note of the Registrant*
11.1 Computation of Earnings Per Share
21 List of Subsidiaries of the Registrant*
24 Powers of Attorney
27 Financial Data Schedule
99 Form of Lock-Up Agreement, executed by and between the Registrant and
certain of the Registrant's security-holders.*
(b) REPORTS ON FORM 8-K.
None.
30
<PAGE> 34
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of
the Exchange Act, the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
CRAGAR INDUSTRIES, INC.
By: /s/ Michael L. Hartzmark
-------------------------------------
Michael L. Hartzmark
President and Chief Executive Officer
Date: March 28, 1997
------------------------------------
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Michael L. Hartzmark President, Treasurer, Chief March 28, 1997
- -----------------------------------------
Michael L. Hartzmark Executive Officer, and Director
(Principal Executive Officer)
/s/ Anthony W. Barrett Vice President of Operations March 28, 1997
- -----------------------------------------
Anthony W. Barrett (Principal Financial and
Accounting Officer)
* Director March 28, 1997
- -----------------------------------------
Sidney Dworkin
* Director March 28, 1997
- -----------------------------------------
Donald McIntyre
* Director March 28, 1997
- -----------------------------------------
Mark Schwartz
* Director March 28 , 1997
- -----------------------------------------
Ed Faber
*By: /s/ Michael L. Hartzmark
------------------------------------
Michael L. Hartzmark
Attorney-in-Fact
</TABLE>
31
<PAGE> 35
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report...............................................................................F-2
Balance Sheet as of December 31, 1996......................................................................F-3
Statements of Operations for the years ended December 31, 1996 and 1995....................................F-4
Statements of Stockholders' Equity for the years ended December 31, 1996 and 1995..........................F-5
Statements of Cash Flows for the years ended December 31, 1996 and 1995....................................F-6
Notes to Financial Statements..............................................................................F-8
</TABLE>
F-1
<PAGE> 36
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, 1996, and the related statements of operations, stockholders'
equity, and cash flows for each of the years in the two-year period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CRAGAR Industries, Inc. as of
December 31, 1996, and the results of its operations and its cash flows for each
of the years in the two-year period ended December 31, 1996 in conformity with
generally accepted accounting principles.
Phoenix, Arizona
March 4, 1997, except for the second
paragraph of note 8 which is as of
March 27, 1997
F-2
<PAGE> 37
CRAGAR INDUSTRIES, INC.
Balance Sheet
December 31, 1996
<TABLE>
<CAPTION>
ASSETS
------
Current assets:
<S> <C>
Cash and cash equivalents $ 863,049
Accounts receivable, less allowance for doubtful accounts of $28,475 3,562,358
Inventories, net 6,302,612
Prepaid expenses 38,498
------------
Total current assets 10,766,517
------------
Property and equipment, net 825,505
Other assets, net 163,122
------------
$ 11,755,144
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,509,473
Accrued expenses 1,439,627
Accrued interest 123,352
Current installments of capital lease obligations 69,219
Current installments of long-term debt 7,999
------------
Total current liabilities 4,149,670
------------
Note payable 2,957,392
Capital lease obligations, less current installments 108,123
Long-term debt, less current installments 3,736
Excess of fair value of assets acquired over cost 737,468
------------
Total liabilities 7,956,389
------------
Stockholders' equity:
Preferred stock, par value $.01; authorized 200,000 shares,
no shares issued and outstanding --
Common stock, par value $.01; authorized 5,000,000 shares,
2,210,305 shares issued and
outstanding at December 31, 1996 22,103
Additional paid-in capital 11,335,141
Accumulated deficit (7,558,489)
------------
Total stockholders' equity 3,798,755
Commitments, contingencies and subsequent event (notes 8, 16, 19 and 20)
------------
$ 11,755,144
============
</TABLE>
See accompanying notes to the financial statements.
F-3
<PAGE> 38
CRAGAR INDUSTRIES, INC.
Statements of Operations
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Net sales $ 18,625,497 22,935,773
Costs of goods sold 17,067,698 20,289,347
------------ -----------
Gross profit 1,557,799 2,646,426
------------ -----------
Selling, general and administrative expenses 2,987,308 2,912,393
Amortization of excess of fair value of assets acquired over cost (737,469) (737,468)
------------ -----------
Income (loss) from operations (692,040) 471,501
------------ -----------
Non-operating revenues (expenses), net:
Interest expense, net (1,027,135) (1,164,510)
Other, net 259,842 (747)
------------ -----------
Total non-operating expenses (767,293) (1,165,257)
------------ -----------
Loss before income taxes and extraordinary item (1,459,333) (693,756)
Income taxes -- --
------------ -----------
Loss before extraordinary item (1,459,333) (693,756)
Extraordinary item:
Gain on forgiveness of debt 330,489 --
------------ -----------
Net loss $ (1,128,844) (693,756)
============ ===========
Loss per common equivalent share before extraordinary item $ (1.26) (.60)
============ ===========
Loss per common equivalent share $ (.98) (.60)
============ ===========
Shares used in computation 1,155,687 1,158,200
============ ===========
</TABLE>
See accompanying notes to the financial statements.
F-4
<PAGE> 39
CRAGAR INDUSTRIES, INC.
Statements of Stockholders' Equity
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------
ADDITIONAL STOCKHOLDERS'
NUMBER OF PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
---------- ------------ ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balances,
January 1,
1995 904,173 $ 9,042 1,282,635 (5,735,889) (4,444,212)
Issuance of
common stock 26,410 264 174,981 -- 175,245
Contribution of
subordinated
investor debt
-- -- 3,358,323 -- 3,358,323
Net loss -- -- -- (693,756) (693,756)
--------- ---------- ---------- ---------- ----------
Balances,
December 31,
1995 930,583 9,306 4,815,939 (6,429,645) (1,604,400)
Issuance of
common stock
warrants
-- -- 37,800 -- 37,800
Issuance of
common stock 920,000 9,200 4,484,999 -- 4,494,199
Contribution of
investor debt 359,722 3,597 1,996,403 -- 2,000,000
Net loss -- -- -- (1,128,844) (1,128,844)
--------- ---------- ---------- ---------- ----------
Balances,
December 31,
1996 2,210,305 $ 22,103 11,335,141 (7,558,489) 3,798,755
========= ========== ========== ========== ==========
</TABLE>
See accompanying notes to the financial statements.
F-5
<PAGE> 40
CRAGAR INDUSTRIES, INC.
Statements of Cash Flows
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,128,844) (693,756)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Provision for losses on accounts receivable (38,553) (232,960)
Provision for obsolete and slow-moving inventory 43,618 (125,227)
Depreciation and amortization of property and equipment 298,911 264,554
Amortization of other assets 127,684 161,131
Amortization of excess fair value of assets acquired over cost (737,469) (737,468)
Gain on sale of fixed assets (287,000) --
Extraordinary gain on forgiveness of debt (330,489) --
Increase (decrease) in cash resulting from changes in:
Accounts receivable 1,470,683 1,073,704
Inventories 1,033,912 (114,248)
Non-trade receivables 190,119 91,181
Prepaid expenses (8,745) (5,755)
Other assets 33,499 (95,700)
Accounts payable and accrued expenses 713,558 872,632
Accrued interest (692) 69,834
----------- ----------
Net cash provided by operating activities 1,380,192 527,922
----------- ----------
Cash flows from investing activities:
Purchases of property and equipment (77,326) (179,296)
Proceeds from the sale of property and equipment 350,000 --
----------- ----------
Net cash provided by (used in) investing activities
272,674 (179,296)
----------- ----------
Cash flows from financing activities:
Net borrowings (repayments) on note payable (4,343,503) 46,515
Proceeds from issuance of long-term debt 1,462,200 22,034
Repayments of long-term debt (2,378,941) (507,207)
Repayments of capital lease obligations (61,572) (59,406)
Issuance of warrants 37,800 --
Net proceeds from issuance of common stock 4,494,199 --
----------- ----------
Net cash used in financing activities (789,817) (498,064)
----------- ----------
Increase (decrease) in cash 863,049 (149,438)
Cash and cash equivalents at beginning of year -- 149,438
----------- ----------
Cash and cash equivalents at end of year $ 863,049 --
=========== ==========
</TABLE>
(Continued)
F-6
<PAGE> 41
CRAGAR INDUSTRIES, INC.
Statements of Cash Flows, Continued
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 805,974 977,894
Cash paid for income taxes 3,342 --
NONCASH FINANCING AND INVESTING ACTIVITIES:
Contribution of subordinated investor debt $2,000,000 3,358,323
Issuance of common stock in exchange for accrued interest -- 175,245
Exchange of asset reducing accounts payable 130,000 --
Capital lease obligations incurred for new equipment -- 240,371
</TABLE>
See accompanying notes to the financial statements.
F-7
<PAGE> 42
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements
December 31, 1996 and 1995
(1) DESCRIPTION OF BUSINESS
CRAGAR Industries, Inc. (the Company) designs, produces and sells
composite, aluminum, steel and wire custom wheels and wheel accessories.
It markets and sells to automotive aftermarket distributors and dealers
throughout the United States, Canada, Mexico, Australia and other
international markets.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND 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. 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 related loan agreement.
F-8
<PAGE> 43
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements, Continued
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment to the customer.
Provisions are made currently for estimated product returns.
EXCESS OF FAIR VALUE OF ASSETS ACQUIRED OVER COST
The excess of fair value of assets acquired over cost in the original
amount of $3,687,341 is being amortized to income over five years using
the straight-line method.
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.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. 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.
STOCK BASED COMPENSATION
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles ("APB") Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations. As such,
compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price.
On January 1, 1996, the Company adopted SFAS No. 123, Accounting for
Stock-Based Compensation, which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the
date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro
forma net earnings (loss) and pro forma earnings (loss) per share
disclosures for employee stock option grants made in 1995 and future
years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosure provisions of
SFAS No. 123.
F-9
<PAGE> 44
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements, Continued
LOSS PER SHARE
For 1996, loss per share is based upon the weighted average number of
common shares outstanding plus common stock equivalents. A total of
176,019 common equivalent shares have been used in the 1996 loss per
share calculation. For 1995 and 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 247,370 common equivalent
shares have been used in the 1995 loss per share calculation pursuant to
SAB 83.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of,
on January 1, 1996. The Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceeded the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this Statement did not have a material impact on the
Company's financial position, results of operations or liquidity.
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 amount 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.
(3) INVENTORIES
Inventories as of December 31, 1996 consist of:
<TABLE>
<CAPTION>
<S> <C>
Raw materials and supplies $3,847,350
Work-in-process 816,607
Finished goods 2,460,909
----------
7,124,866
Less allowance for obsolete and slow-moving inventory 822,254
----------
$6,302,612
==========
</TABLE>
F-10
<PAGE> 45
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements, Continued
(4) 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 was being paid via a $.25 to $.50 per unit discount on the
plating fees paid to the subcontractor as provided in the services
agreement.
In July 1996, the Company terminated the services agreement with the
subcontractor in Mexico, and sold certain assets maintained in Mexico to
a third party for approximately $350,000. 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 non-operating revenue in the accompanying statement of operations
for the year ended December 31, 1996.
(5) PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1996 consists of the following:
<TABLE>
<S> <C>
Equipment $1,016,828
Leasehold improvements 536,536
Furniture and fixtures 37,080
----------
1,590,444
Less accumulated depreciation and amortization 764,939
----------
Property and equipment, net $ 825,505
==========
</TABLE>
(6) OTHER ASSETS
Other assets as of December 31, 1996 consists of:
<TABLE>
<S> <C>
Organization costs, net of accumulated
amortization of $374,523 $ 93,629
Deferred loan costs, net of accumulated
amortization of $57,803 44,697
Deposits and other 24,796
--------
Total other asset $163,122
========
</TABLE>
F-11
<PAGE> 46
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements, Continued
(7) ACCRUED EXPENSES
Accrued expenses as of December 31, 1996 consist
of the following:
<TABLE>
<S> <C>
Accrual for stock adjustments, rebates, cash discounts,
advertising and warranty $ 903,449
Payroll and related benefits 133,847
Real estate, personal property and other taxes 57,157
Professional fees 335,655
Other 9,519
----------
$1,439,627
==========
</TABLE>
(8) NOTE PAYABLE
The Company has a credit agreement with a finance company with a maximum
amount of credit of $9,500,000 available to the Company, 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 2.25%
(10.50% at December 31, 1996). The loan agreement expires in April 1998
and contains no automatic renewal options. The balance outstanding on
this facility at December 31, 1996 was $2,957,392. The Company had
approximately $2,918,000 available on the line of credit as of December
31, 1996.
As of December 31, 1996, the Company was in violation of a financial
covenant required under the credit agreement. On March 27, 1997, the
finance company waived the debt covenant violation.
(9) LONG-TERM DEBT
Long-term debt as of December 31, 1996 consists of:
<TABLE>
<S> <C>
Promissory note, bearing interest at 9%, payable in
monthly installments of $777, maturing June 1998,
secured by equipment $11,735
Less current installments 7,999
-------
Long-term debt, less current installments $ 3,736
=======
</TABLE>
F-12
<PAGE> 47
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements, Continued
The annual maturities of long-term debt after December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------
<S> <C>
1997 $ 7,999
1998 3,736
-------
Total annual maturities of long-term debt $11,735
=======
</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. The unsecured promissory note and
non-compete agreement had outstanding principal balances of $1,066,098
and $44,118, respectively, at June 20, 1996. The stockholder paid the
creditor $700,000 in consideration of said assignment.
In July 1996, the Company obtained bridge notes from unrelated parties
totaling $1,500,000. 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.
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 was being amortized to
interest expense over the term of the related financing. 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 year ended December 31,
1996. In December 1996, the Company paid off all bridge notes in full
upon completion of its initial public offering. The remaining debt
discount related to the warrants was immediately amortized to interest
expense.
(10) INVESTOR DEBT
During December 1996, $1,500,000 of the Company's outstanding "junior
investor notes" and a $350,000 note to a stockholder were converted to
359,722 shares of common stock as a result of the completion of its
initial public offering.
Total interest expense on investor debt was $147,996 and $116,177 for the
years ended December 31, 1996 and 1995, respectively.
On January 31, 1995, other subordinated investor notes (not including the
junior investor notes) in the amount of $3,358,323 were contributed to
the capital of the Company. No securities of the Company or any other
consideration was issued or delivered to the original investors in
connection with the contribution.
F-13
<PAGE> 48
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements, Continued
(11) OUTSTANDING WARRANTS
At December 31, 1996, 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 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 became exercisable on December 15, 1994 and expire
December 31, 1999. The Company also issued Class C warrants to purchase
126,000 shares of common stock at an exercise price of $3.25 per share
which expires June 30, 2001. In the opinion of management, the exercise
price of the Class A and Class B warrants approximated their fair value
at the date of grant; therefore, no debt discount was recorded at the
date of grant.
Warrants to acquire 977,500 shares of the Company's common stock at $6.60
per share and representative's warrants to acquire 85,000 shares of the
Company's common stock at $7.50 per share were outstanding as of
December 31, 1996 as a result of the completion of the Company's
initial public offering.
(12) STOCK OPTION PLAN
During 1996, the Company's Board of Directors and stockholders formally
approved the Company's stock option and restricted stock plan and
nonemployee director plan (the 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 non-incentive 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 non-incentive 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 non-incentive stock options. On June 10, 1996, the Company
granted 11,900 options under the nonemployee director plan at an exercise
price of $5.14 a share and no options were granted under the restricted
stock plan. On November 9, 1996, the Company granted 53,500 options under
the restricted stock and option plan, 700 options under the Directors'
Plan and 2,100 other options at an exercise price of $5.60 per share.
The per share weighted-average fair value of stock options granted during
1996 was $3.90 on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
expected dividend yield 0%, risk-free interest rate of 5.96%, expected
volatility of 40.9% and an expected life of 4 years.
F-14
<PAGE> 49
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements, Continued
The Company applies APB Opinion 25 in accounting for its Plan, and
accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net loss and loss per share
would have been reduced to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
1996
-------------
<S> <C>
Net loss:
As reported $ (1,128,844)
Pro forma (1,420,500)
=============
Loss per share:
As reported $ (.98)
Pro forma (1.23)
=============
</TABLE>
The full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma net loss amounts presented
above because compensation cost is reflected over the options' vesting
period of four years.
A summary of the aforementioned stock plan follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE PRICE
NUMBER PER SHARE
----------- -------------
<S> <C> <C>
Balance, December 31, 1995 -- $ --
Granted 68,200 5.52
Forfeited -- --
Exercised -- --
------ -----
Balance, December 31, 1996 68,200 $5.52
====== =====
</TABLE>
F-15
<PAGE> 50
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements, Continued
A summary of stock options granted at December 31, 1996 follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------------------
OPTIONS EXERCISABLE
WEIGHTED- ------------------------------------
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1996 LIFE PRICE 1996 PRICE
- ------------------- ----------------- --------------- --------------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
$5.14 11,900 9 years, 6 mos. $ 5.14 11,200 $ 5.14
$5.60 56,300 9 years, 10 mos. 5.60 55,600 5.60
----------------- --------------- ---------- -------------
68,200 $ 5.52 66,800 $ 5.52
================= =============== ========== =============
</TABLE>
(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, 1996.
(14) COMMON STOCK
On September 30, 1995, the Company issued 26,410 shares of common stock
valued 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 shares. All share and per share
amounts have been restated to reflect the effect of the stock split.
During 1996, the Company completed an initial public offering in which it
issued a total of 920,000 shares of common stock and 977,500 warrants to
purchase a total of 977,500 shares of common stock for approximately
$4,494,000 cash net of stock issuance costs.
(15) INCOME TAXES
The Company had no current or deferred income taxes for the years ended
December 31, 1996 and 1995. The reconciliation of the expected income tax
expense (benefit) calculated at the U.S. Federal statutory rate of 34% to
actual income taxes per the financial statements for the years ended
December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Computed "expected" tax benefit $(383,807) (235,877)
Change in the valuation allowance for deferred tax assets 421,000 216,000
State and local income taxes, net of federal income tax benefit (51,000) (30,800)
Other, net 13,807 50,677
--------- --------
$ -- --
========= ========
</TABLE>
F-16
<PAGE> 51
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements, Continued
The Company has net operating loss carryforwards at December 31, 1996 of
approximately $4,400,000 for Federal income tax purposes, which begin to
expire in 2010. In the event of a change in ownership pursuant to
Internal Revenue Service regulations, utilization of the net operating
loss carryforwards may be eliminated or significantly reduced.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1995 are presented below:
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful
accounts $ 11,000 60,000
Inventories, principally due to allowance for obsolete and
slow-moving inventory 632,000 593,000
Differences in basis of assets upon acquisition, principally
property and equipment and accounts receivable 169,000 806,000
Property and equipment, principally due to differences in
depreciation 104,000 --
Net operating loss carryovers 1,774,000 860,000
Rebates and sales discounts accrual 116,000 133,000
Other 128,000 74,000
----------- ----------
Total gross deferred tax assets 2,934,000 2,526,000
Less valuation allowance (2,934,000) (2,513,000)
----------- ----------
Net deferred tax assets -- 13,000
----------- ----------
Deferred tax liabilities:
Property and equipment, principally due to differences in
depreciation -- 13,000
----------- ----------
Total gross deferred liabilities -- 13,000
----------- ----------
Net deferred income taxes $ -- --
=========== ==========
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1996
and 1995 was $2,934,000 and $2,513,000, respectively. The net change in
the total valuation allowance for the years ended December 31, 1996 and
1995 was an increase of $421,000 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-17
<PAGE> 52
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 recorded
under capital leases as of December 31, 1996 is as follows:
<TABLE>
<S> <C>
Equipment $ 312,529
Less accumulated amortization 99,520
-----------
$ 213,009
===========
</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, 1996 are:
<TABLE>
<CAPTION>
YEARS ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------ ------------ -------------
<S> <C> <C>
1997 $ 95,295 $ 327,776
1998 112,997 327,776
1999 -- 325,693
2000 -- 346,191
2001 -- 355,596
Thereafter -- 471,429
-------- ----------
Total minimum lease payments 208,292 $2,154,461
==========
Less amount representing interest (at rates
ranging from 9% to 19.05%) 30,950
--------
Present value of minimum capital lease payments 177,342
Less current installments of capital lease
obligations 69,219
--------
Capital lease obligations, excluding current
installments $108,123
========
</TABLE>
F-18
<PAGE> 53
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 $372,529 and $414,131 for the
years ended December 31, 1996 and 1995, respectively.
(17) MAJOR CUSTOMERS
The Company sold a substantial portion of its product to three customers
in 1996 and in 1995. Sales amounts for 1996 and 1995 for these customers
are as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
PERCENT OF PERCENT OF
SALES SALES
------ ------
<S> <C> <C>
Sales to major customers:
Super Shops 24.3% 23.6%
Heafner Tire 12.1 11.8
Keystone Automotive 4.6 3.7
------ ------
41.0% 39.1%
====== ======
</TABLE>
Accounts receivable from significant customers as of December 31, 1996
and 1995 follows:
<TABLE>
<CAPTION>
1996 1995
-------------- ---------------
PERCENT OF PERCENT OF
ACCOUNTS ACCOUNTS
RECEIVABLE RECEIVABLE
-------------- ---------------
<S> <C> <C>
Accounts receivable from major customers:
Super Shops 40.1% 29.4%
Heafner Tire 3.9 8.6
Keystone Automotive 8.7 10.8
-------------- ---------------
52.7% 48.8%
============== ===============
</TABLE>
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
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:
F-19
<PAGE> 54
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements, Continued
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, 1996, 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 -- The terms of the Company's long-term 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.
(19) CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and 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, 1996, the Company had concentrations of credit risk
consisting of cash balances of approximately $2,683 over the FDIC
coverage at one financial institution.
(20) LITIGATION AND CLAIMS
The Company is involved in various claims and actions arising in the
ordinary course of business. In the opinion of management, based on
consultation with legal counsel, the ultimate disposition of these
matters will not have a material adverse effect on the Company's
financial position, results of operations or liquidity. Accordingly, no
provision has been made in the accompanying financial statements for
losses, if any, that might result from the ultimate resolution of these
matters.
F-20
<PAGE> 1
Exhibit 4.2
CRAGAR INDUSTRIES, INC.
WARRANT AGREEMENT
THIS AGREEMENT (the "Agreement"), dated as of December 18, 1996, is
between CRAGAR INDUSTRIES, INC., a Delaware corporation (the "Company"), and
AMERICAN STOCK TRANSFER & TRUST COMPANY, as warrant agent (the "Warrant Agent").
WHEREAS, in connection with (i) an offering to the public of up to
977,500 shares of the Company's Common Stock, $.01 par value (the "Common
Stock"), and 977,500 Redeemable Common Stock Purchase Warrants (the "Redeemable
Warrants"), and (ii) the issuance to Dickinson & Co. (the "Representative") or
its designees of warrants (the "Representative's Warrants") to purchase up to
(x) 85,000 additional shares of Common Stock and (y) 85,000 Common Stock
Purchase Warrants (the "Underlying Warrants"), each such Underlying Warrant
entitling the holder thereof to purchase one share of Common Stock (the
Redeemable Warrants and the Underlying Warrants, the "Warrants"), the Company
will issue up to 1,062,500 Warrants evidencing the right to purchase an
aggregate of 1,062,500 shares of Common Stock as constituted on the date hereof
as contemplated by the Prospectus of the Company dated December 18, 1996 (the
"Definitive Prospectus"); and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing so to act, in connection with the
issuance, registration, transfer, exchange, exercise, and redemption of the
Warrants;
NOW, THEREFORE, in consideration of the promises and the mutual
agreements herein set forth, the parties agree as follows:
Section 1. APPOINTMENT OF WARRANT AGENT. The Company hereby appoints
the Warrant Agent to act as agent of the Company for the Warrants, and the
Warrant Agent hereby accepts such appointment and agrees to perform the same in
accordance with the terms and conditions set forth in this Agreement.
Section 2. WARRANTS AND FORM OF WARRANT CERTIFICATES.
(a) Each Redeemable Warrant shall entitle the registered
holder of the certificate representing such Warrant to purchase upon the
exercise thereof one share of Common Stock, subject to the adjustments provided
for in Section 9 hereof, at any time until 5:00 p.m., New York City time, on
December 18, 2001 (five years after the date of the Definitive Prospectus),
unless earlier redeemed pursuant to Section 11 hereof.
(b) Each Representative's Warrant entitles the registered
holder of the certificate representing such Warrant to purchase upon the
exercise thereof one share of Common Stock, subject to adjustments provided in
Section 8 of the Representative's Warrant Agreement referred to below, and one
Underlying Warrant at any time after 9:00 a.m., New York City time, on December
19, 1997 (one year from the date of the Definitive Prospectus) until 5:00 p.m.,
New York City time, on
<PAGE> 2
December 18, 2001 (five years after such date), in accordance with a
Representative's Warrant Agreement, dated the date hereof (the "Representative's
Warrant Agreement").
(c) Each Underlying Warrant entitles the registered holder of
the certificate representing such Warrant to purchase upon the exercise thereof
one share of Common Stock, subject to adjustments provided in Section 9 hereof,
at any time after 9:00 a.m., New York City time, on December 19, 1997 (one year
from the date of the Definitive Prospectus) until 5:00 p.m., New York City time,
on December 18, 2001 (five years from such date).
(d) The Warrant certificates shall be in registered form only.
The text of the Warrant certificate and the form of election to exercise a
warrant on the reverse side thereof shall be substantially in the form of
Exhibit A attached hereto. Each Warrant certificate shall be dated by the
Warrant Agent as of the date of issuance thereof (whether upon initial issuance
or upon transfer or exchange), and shall be executed on behalf of the Company by
the manual or facsimile signature of its President or a Vice President, under
its corporate seal, affixed or in facsimile, and attested to by the manual or
facsimile signature of its Secretary or an Assistant Secretary. In case any
officer of the Company who shall have signed any Warrant certificate shall cease
to be such officer of the Company prior to the issuance thereof, such Warrant
certificate may nevertheless be issued and delivered with the same force and
effect as though the person who signed the same had not ceased to be such
officer of the Company. Any such Warrant certificate may be signed on behalf of
the Company by persons who, at the actual date of execution of such Warrant
certificate, are the proper officers of the Company, although at the nominal
date of such Warrant certificate any such person shall not have been such
officer of the Company.
Section 3. EXERCISE OF WARRANTS, DURATION AND WARRANT PRICE. Subject to
the provisions of this Agreement, each registered holder of one or more Warrant
certificates shall have the right, which may be exercised as provided in such
Warrant certificates, to purchase from the Company (and the Company shall issue
and sell to such registered holder) the number of shares of Common Stock to
which the Warrants represented by such certificates are at the time entitled
hereunder.
Each Warrant not exercised by its expiration date shall become void,
and all rights thereunder and all rights in respect thereof under this Agreement
shall cease on such date.
A Warrant may be exercised by the surrender of the certificate
representing such Warrant to the Company, at the office of the Warrant Agent, or
at the office of a successor to the Warrant Agent, with the subscription form
set forth on the reverse thereof duly executed and properly endorsed with the
signatures properly guaranteed, and upon payment in full to the Warrant Agent
for the account of the Company of the Warrant Price (as hereinafter defined) for
the number of shares of Common Stock as to which the Warrant is exercised. Such
Warrant Price shall be paid in full in cash, or by certified check or bank draft
payable in United States currency to the order of the Warrant Agent.
The price per share of Common Stock at which the Warrants may be
exercised (the "Warrant Price") shall be $6.60 (adjusted in accordance with
Section 9 hereof, taking into account prior adjustments).
2
<PAGE> 3
Subject to the further provisions of this Section 3 and of Section 6
hereof, upon surrender of Warrant certificates and payment of the Warrant Price,
the Company shall issue and cause to be delivered, with all reasonable dispatch
to or upon the written order of the registered holder of such Warrants and in
such name or names as such registered holder may designate, subject to
applicable securities laws, a certificate or certificates for the number of
securities so purchased upon the exercise of such Warrants, together with cash,
as provided in Section 10 of this Agreement, in respect of any fraction of a
share or security otherwise issuable upon such surrender. All shares of Common
Stock issued upon the exercise of a Warrant shall be validly issued, fully paid
and nonassessable and shall be listed on any and all national securities
exchanges or approved for quotation on the level of National Association of
Securities Dealers Automatic Quotation System ("Nasdaq") upon which any other
shares of the Common Stock or securities otherwise issuable are then listed or
traded.
Certificates representing such securities shall be deemed to have been
issued and any person so designated to be named therein shall be deemed to have
become a holder of record of such securities as of the date of the surrender of
such Warrants and payment of the Warrant Price; provided, however, that if, at
the date of surrender of such Warrants and payment of such Warrant Price, the
transfer books for the Common Stock or other securities purchasable upon the
exercise of such Warrants shall be closed, the certificates for the securities
in respect of which such Warrants are then exercised shall be issuable as of the
date on which such books shall next be opened and until such date the Company
shall be under no duty to deliver any certificate for such securities. The
rights of purchase represented by each Warrant certificate shall be exercisable,
at the election of the registered holder thereof, either as an entirety or from
time to time for part of the number of securities specified therein and, in the
event that any Warrant certificate is exercised in respect of less than all of
the securities specified therein at any time prior to the expiration date of the
Warrant certificate, a new Warrant certificate or certificates will be issued to
such registered holder for the remaining number of securities specified in the
Warrant certificate so surrendered.
Section 4. COUNTERSIGNATURE AND REGISTRATION. The Warrant Agent shall
maintain books (the "Warrant Register") for the registration and the
registration of transfer of the Warrants. Upon the initial issuance of the
Warrants, the Warrant Agent shall issue and register the Warrants in the names
of the respective holders thereof in such denominations and otherwise in
accordance with instructions delivered to the Warrant Agent by the Company. The
Warrant certificates shall be countersigned manually or by facsimile by the
Warrant Agent (or by any successor to the Warrant Agent then acting as such
under this Agreement) and shall not be valid for any purpose unless so
countersigned. Warrant certificates may be so countersigned, however, by the
Warrant Agent and delivered by the Warrant Agent, notwithstanding that the
persons whose manual or facsimile signatures appear thereon as proper officers
of the Company shall have ceased to be such officers at the time of such
countersignature or delivery.
Prior to due presentment for registration of transfer of any Warrant
certificate, the Company and the Warrant Agent may deem and treat the person in
whose name such Warrant certificate shall be registered upon the Warrant
Register (the "registered holder") as the absolute owner of such Warrant
certificate and of each Warrant represented thereby (notwithstanding any
notation of ownership or other writing on the Warrant certificate made by anyone
other than the Company or the Warrant Agent), for the purpose of any exercise
thereof, of any distribution or notice to the holder
3
<PAGE> 4
thereof, and for all other purposes, and neither the Company nor the Warrant
Agent shall be affected by any notice to the contrary.
Section 5. TRANSFER AND EXCHANGE OF WARRANTS. The Warrant Agent shall
register the transfer, from time to time, of any outstanding Warrant upon the
Warrant Register, upon surrender of the certificate evidencing such warrant for
transfer, properly endorsed with signatures properly guaranteed and accompanied
by appropriate instructions for transfer. Upon any such transfer, a new Warrant
certificate representing an equal aggregate number of Warrants shall be issued
to the transferee and the surrendered Warrant certificate shall be canceled by
the Warrant Agent. The Warrant certificates so canceled shall be delivered by
the Warrant Agent to the Company from time to time upon request. Notwithstanding
the foregoing, no transfer or exchange may be made except in compliance with
applicable securities laws.
Warrant certificates may be surrendered to the Warrant Agent, together
with a written request for exchange, and thereupon the Warrant Agent shall issue
in exchange therefor one or more new Warrant certificates as requested by the
registered holder of the Warrant certificate or certificates so surrendered,
representing an equal aggregate number of Warrants.
The Warrant Agent shall not be required to effect any registration of
transfer or exchange which will result in the issuance of a Warrant certificate
for a fraction of a Warrant.
No service charge shall be made for any exchange or registration of
transfer of Warrant certificates.
The Warrant Agent is hereby authorized to countersign and to deliver,
in accordance with the terms of this Agreement, the new Warrant certificates
required to be issued pursuant to the provisions hereof, and the Company,
whenever required by the Warrant Agent, will supply the Warrant Agent with
certificates duly executed on behalf of the Company for such purpose.
Section 6. PAYMENT OF TAXES. The Company will pay any documentary stamp
taxes attributable to the initial issuance of the shares of Common Stock
issuable upon the exercise of Warrants; provided, however, the Company shall not
be required to pay any tax or taxes which may be payable in respect of any
transfer involved in the issuance or delivery of any certificates for shares of
Common Stock in a name other than registered holder of Warrants in respect of
which such shares are issued, and in such case neither the Company nor the
Warrant Agent shall be required to issue or deliver any certificate for shares
of Common Stock or any Warrant certificate until the person requesting the same
has paid to the Company the amount of such tax or has established to the
Company's satisfaction that such tax has been paid.
Section 7. MUTILATED OR MISSING WARRANTS. In case any of the Warrant
certificates shall be mutilated, lost, stolen or destroyed, the Company may in
its discretion issue, and the Warrant Agent shall countersign and deliver in
exchange and substitution for and upon cancellation of the mutilated Warrant
certificate, or in lieu of and substitution for the Warrant certificate lost,
stolen or destroyed, a new Warrant certificate representing an equal aggregate
number of Warrants, but only upon receipt of evidence satisfactory to the
Company and the Warrant Agent of such loss, theft or
4
<PAGE> 5
destruction of such Warrant certificate and reasonable indemnity, if requested,
also satisfactory to them. Applicants for such substitute Warrant certificates
shall also comply with such other reasonable conditions and pay such reasonable
charges as the Company or the Warrant Agent may prescribe.
Section 8. RESERVATION OF COMMON STOCK. There have been reserved, and
the Company shall at all times keep reserved, out of the authorized and unissued
shares of Common Stock, a number of shares sufficient to provide for the
exercise of the rights of purchase represented by the Redeemable Warrants, the
Representative's Warrants and the Underlying Warrants then outstanding or
issuable upon exercise, and the transfer agent for the Common Stock and every
subsequent transfer agent for any shares of the Company's capital stock issuable
upon the exercise of any of the rights of purchase aforesaid are hereby
irrevocably authorized and directed at all times to reserve such number of
authorized and unissued shares as shall be requisite for such purpose.
Prior to the issuance of any shares of Common Stock upon exercise of
the Warrants, the Company shall secure the listing of such shares on any and all
national securities exchanges or approved for quotation on the level of Nasdaq
upon which any of the other shares of the Common Stock are then listed or
quoted. So long as any unexpired Redeemable Warrants remain outstanding, the
Company will file such post-effective amendments to the Registration Statement
or supplements to the Prospectus filed pursuant to the Securities Act of 1933,
as amended (the "Act"), with respect to the Warrants (or such other registration
statements or post-effective amendments or supplements) as may be necessary to
permit trading in the Warrants and to permit the Company to deliver to each
person exercising a Warrant a Prospectus meeting the requirements of Section
10(a)(3) of the Act, and otherwise complying therewith; and the Company will,
from time to time, furnish the Warrant Agent with such Prospectuses in
sufficient quantity to permit the Warrant Agent to deliver such a Prospectus to
each holder of a Warrant upon the exercise thereof. The Company will keep a copy
of this Agreement on file with the transfer agent for the Common Stock and with
every subsequent transfer agent for any shares of the Company's capital stock
issuable upon the exercise of the rights of purchase represented by the
Warrants.
The Warrant Agent is hereby irrevocably authorized to requisition from
time to time from such transfer agent stock certificates required to honor
outstanding Warrants. The Company will supply such transfer agent with duly
executed certificates for such purpose and will itself provide or otherwise make
available any cash as provided in Section 10 of this Agreement. All Warrant
certificates surrendered in the exercise of the rights thereby evidenced shall
be canceled by the Warrant Agent and shall thereafter be delivered to the
Company, and such canceled Warrant certificates shall constitute sufficient
evidence of the number of shares of Common Stock which have been issued upon the
exercise of such Warrants. Promptly after the expiration date of the Warrants,
the Warrant Agent shall certify to the Company the aggregate number of such
Warrants which expired unexercised, and after the expiration date of the
Warrants, no shares of Common Stock shall be subject to reservation in respect
of such Warrants.
Section 9. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES OF COMMON
STOCK. The number and kind of securities purchasable upon the exercise of the
Warrants and the Warrant Price shall be subject to adjustment from time to time
upon the happening of certain events, as follows:
5
<PAGE> 6
9.1 ADJUSTMENTS. The number of shares of Common Stock
purchasable upon the exercise of each Warrant and the Warrant Price shall be
subject to adjustment as follows:
(a) If the Company (i) pays a dividend in Common
Stock or makes a distribution in Common Stock, (ii) subdivides its outstanding
Common Stock into a greater number of shares, (iii) combines its outstanding
Common Stock into a smaller number of shares, or (iv) issues, by
reclassification of its Common Stock, other securities of the Company, then the
number of shares of Common Stock purchasable upon exercise of a Warrant
immediately prior thereto will be adjusted so that the holder of a Warrant will
be entitled to receive the kind and number of shares of Common Stock or other
securities of the Company that such holder would have owned or would have been
entitled to receive immediately after the happening of any of the events
described above, had the Warrant been exercised immediately prior to the
happening of such event or any record date with respect thereto. Any adjustment
made pursuant to this subsection 9.1(a) will become effective immediately after
the effective date of such event retroactive to the record date, if any, for
such event.
(b) In case the Company shall distribute to all or
substantially all holders of its Common Stock evidences of its indebtedness or
assets (excluding cash dividends or distributions out of earnings) or rights,
options, warrants, or convertible securities containing the right to subscribe
for or purchase Common Stock, then the Company shall reserve, and the
Warrantholder shall be entitled to receive upon the exercise of such Warrant,
for each Share issuable upon exercise of such Warrant, the amount of
indebtedness or assets or the number of rights, options, warrants, or
convertible securities that such Warrantholder would have received had the
Warrantholder been the holder of such Share on the record date established by
the Company for the determination of holders of Common Stock entitled to receive
such distribution, or, if no such record date shall have been established, then
on the date of such distribution.
(c) No adjustment in the number of shares purchasable
pursuant to the Warrants shall be required unless such adjustment would require
an increase or decrease of at least one percent in the number of shares then
purchasable upon the exercise of the Warrants or, if the Warrants are not then
exercisable, the number of shares purchasable upon the exercise of the Warrants
on the first date thereafter that the Warrants become exercisable; provided,
however, that any adjustments which by reason of this subsection 9.1(c) are not
required to be made immediately shall be carried forward and taken into account
in any subsequent adjustment.
(d) Whenever the number of shares purchasable upon
the exercise of the Warrant is adjusted, as herein provided, the Warrant Price
for shares payable upon exercise of the Warrant shall be adjusted by multiplying
such Warrant Price immediately prior to such adjustment by a fraction, of which
the numerator shall be the number of shares purchasable upon the exercise of the
Warrant immediately prior to such adjustment, and of which the denominator shall
be the number of shares so purchasable immediately thereafter.
(e) Whenever the number of shares purchasable upon
the exercise of the Warrants is adjusted as herein provided, the Company shall
cause to be promptly mailed to the Warrant Agent and each registered holder of a
Warrant by first class mail, postage prepaid, notice of such adjustment and with
regard to the Warrant Agent only, a certificate of the chief financial officer
6
<PAGE> 7
of the Company setting forth the number of shares purchasable upon the exercise
of the Warrants after such adjustment, a brief statement of the facts requiring
such adjustment and the computation by which such adjustment was made.
(f) For the purpose of this subsection 9.1, the term
"Common Stock" shall mean (i) the class of stock designated as the Common Stock
of the Company at the date of this Agreement, or (ii) any other class of stock
resulting from successive changes or reclassifications of such Common Stock
consisting solely of changes in par value, or from par value to no par value, or
from no par value to par value. In the event that at any time, as a result of an
adjustment made pursuant to this Section 9, a registered holder shall become
entitled to purchase any securities of the Company other than shares of Common
Stock, thereafter the number of such other securities so purchasable upon
exercise of the Warrants shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions with
respect to the shares contained in this Section 9.
(g) The adjustments set forth in this Section 9.1
shall be applied with respect to each Underlying Warrant retroactively to the
date of original issuance of the Representative's Warrant to which it relates,
as if such Underlying Warrant had been issued and outstanding on and from such
original issuance date, and notwithstanding the fact that at the time any event
occurs giving rise to adjustment under this Section 9.1, such Underlying Warrant
has not yet been issued pursuant to the Representative's Warrant to which such
Underlying Warrant relates.
9.2 NO ADJUSTMENT FOR DIVIDENDS. Except as provided in
subsection 9.1, no adjustment in respect of any dividends or distributions out
of earnings shall be made during the term of the Warrants or upon the exercise
of the Warrants.
9.3 NO ADJUSTMENT IN CERTAIN CASES. No adjustments are
required to be made pursuant to Section 9 hereof in connection with the issuance
in the transactions related hereto of shares of Common Stock, the Warrants (or
the underlying shares of Common Stock), or the Representative's Warrants (or any
of the underlying securities).
9.4 PRESERVATION OF PURCHASE RIGHTS UPON RECLASSIFICATION,
CONSOLIDATION, ETC. In case of any consolidation of the Company with or merger
of the Company into another corporation or in case of any sale or conveyance to
another corporation of the property, assets or business of the Company as an
entirety or substantially as an entirety, the Company or such successor or
purchasing corporation, as the case may be, shall execute with the Warrant Agent
an agreement that the registered holders of the Warrants shall have the right
thereafter, upon payment of the Warrant Price in effect immediately prior to
such action, to purchase, upon exercise of each Warrant, the kind and amount of
shares and other securities and property which it would have owned or have been
entitled to receive after the happening of such consolidation, merger, sale or
conveyance had each Warrant been exercised immediately prior to such action. In
the event of a merger described in Section 368(a)(2)(E) of the Internal Revenue
Code of 1954, as amended, in which the Company is not the surviving corporation,
the right to purchase shares of Common Stock under the Warrants will terminate
on the date of such merger and thereupon the Warrants will become null and void,
but only if the controlling corporation agrees to substitute for the Warrants
its warrants which entitle the holders thereof to
7
<PAGE> 8
purchase upon their exercise the kind and amount of shares and other securities
and property which they would have owned or been entitled to receive had the
Warrants been exercised immediately prior to such merger. Any such agreements
referred to in this subsection 9.4 shall provide for adjustments, which shall be
as nearly equivalent as may be practicable to the adjustments provided for in
Section 9 hereof. The provisions of this subsection 9.4 shall similarly apply to
successive consolidations, mergers, sales, or conveyances.
9.5 PAR VALUE OF SHARES OF COMMON STOCK. Before taking any
action that would cause an adjustment reducing the Warrant Price below the then
par value of the Common Stock issuable upon exercise of the Warrants, the
Company will take any corporate action which may, in the opinion of its counsel,
be necessary in order that the Company may validly and legally issue fully paid
and nonassessable Common Stock at such adjusted Warrant Price.
9.6 INDEPENDENT PUBLIC ACCOUNTANTS. The Company may retain a
firm of independent public accountants of recognized regional or national
standing (which may be any such firm regularly employed by the Company) to make
any computation required under this Section 9, and a certificate signed by such
firm shall be conclusive evidence of the correctness of any computation made
under this Section 9.
9.7 STATEMENT ON WARRANT CERTIFICATES. Irrespective of any
adjustments in the Warrant Price or the number of securities issuable upon
exercise of Warrants, Warrant certificates theretofore or thereafter issued may
continue to express the same price and number of securities as are stated in the
similar Warrant certificates initially issuable pursuant to this Agreement.
However, the Company may, at any time in its sole discretion (which shall be
conclusive), make any change in the form of Warrant certificate that it may deem
appropriate and that does not affect the substance thereof; and any Warrant
certificate thereafter issued, whether upon registration of, transfer of, or in
exchange or substitution for, an outstanding Warrant certificate, may be in the
form so changed.
9.8 NO RIGHTS AS STOCKHOLDER; NOTICES TO HOLDERS OF WARRANTS.
If, at any time prior to the expiration of a Warrant and prior to its exercise,
any one or more of the following events shall occur:
(a) any action that would require an adjustment
pursuant to subsection 9.1 or 9.4 hereof; or
(b) a dissolution, liquidation or winding up of the
Company (other than in connection with a consolidation, merger or sale of its
property, assets and business as an entirety or substantially as an entirety)
shall be proposed; then the Company must give notice in writing of such event to
the registered holders of the Warrants, as provided in Section 18 hereof, at
least 20 days to the extent practicable, prior to the date fixed as a record
date or the date of closing the transfer books for the determination of the
stockholders entitled to any relevant dividend, distribution, subscription
rights or other rights or for the determination of stockholders entitled to vote
on such proposed dissolution, liquidation or winding up. Such notice must
specify such record date or the date of closing the transfer books, as the case
may be. Failure to mail or receive such notice or any defect therein will not
affect the validity of any action taken with respect thereto.
8
<PAGE> 9
Section 10. FRACTIONAL INTERESTS. The Company is not required to issue
fractional shares of Common Stock on the exercise of a Warrant. If any fraction
of a share of Common Stock would, except for the provisions of this Section 10,
be issuable on the exercise of a Warrant (or specified portion thereof), the
Company will in lieu thereof pay an amount in cash equal to the then Current
Market Price multiplied by such fraction. For purposes of this Agreement, the
term "Current Market Price" means (i) if the Common Stock is traded in the
over-the-counter market and is not listed for quotation on the Nasdaq National
Market or the Nasdaq SmallCap Market nor on any national securities exchange,
the average of the per share closing bid prices of the Common Stock on the 30
consecutive trading days immediately preceding the date in question, as reported
by Nasdaq or an equivalent generally accepted reporting service, or (ii) if the
Common Stock is listed for quotation on the Nasdaq National Market or the Nasdaq
SmallCap Market or on a national securities exchange, the average for the 30
consecutive trading days immediately preceding the date in question of the daily
per share closing prices of the Common Stock as quoted by the Nasdaq National
Market or the Nasdaq SmallCap Market or on the principal stock exchange on which
it is listed, as the case may be, whichever is the higher. For purposes of
clause (i) above, if trading in the Common Stock is not reported by Nasdaq, the
bid price referred to in said clause shall be the lowest bid price as reported
on the OTC Bulletin Board or in the "pink sheets" published by National
Quotation Bureau, Incorporated. The closing price referred to in clause (ii)
above shall be the last reported sale price or, in case no such reported sale
takes place on such day, the average of the reported closing bid and asked
prices, in either case as quoted by the Nasdaq National Market or the Nasdaq
SmallCap Market or on the national securities exchange on which the Common Stock
is then listed.
Section 11. REDEMPTION.
(a) The then outstanding Warrants may be redeemed, at the
option of the Company, at $.10 per share of Common Stock purchasable upon
exercise of such Warrants, at any time after the average Daily Market Price per
share of the Common Stock for a period of at least 20 consecutive trading days
ending not more than three days prior to the date of the notice given pursuant
to Section 11(b) hereof has equaled or exceeded $9.00, and prior to expiration
of the Warrants. The Daily Market Price of the Common Stock will be determined
by the Company in the manner set forth in Section 11(e) as of the end of each
trading day (or, if no trading in the Common Stock occurred on such day, as of
the end of the immediately preceding trading day in which trading occurred) and
verified to the Warrant Agent before the Company may give notice of redemption.
All outstanding Warrants must be redeemed if any are redeemed, and any right to
exercise an outstanding Warrant shall terminate at 5:00 p.m. (New York City
time) on the date fixed for redemption. A trading day means a day in which
trading of securities occurred on the Boston Stock Exchange.
(b) The Company may exercise its right to redeem the Warrants
only by giving the notice set forth in the following sentence. If the Company
exercises its right to redeem, it shall give notice to the Warrant Agent and the
registered holders of the outstanding Warrants by mailing or causing the Warrant
Agent to mail to such registered holders a notice of redemption, first class,
postage prepaid, at their addresses as they shall appear on the records of the
Warrant Agent. Any notice mailed in the manner provided herein will be
conclusively presumed to have been duly given whether or not the registered
holder actually receives such notice.
9
<PAGE> 10
(c) The notice of redemption must specify the redemption
price, the date fixed for redemption (which must be at least 30 days after such
notice is mailed), the place where the Warrant certificates must be delivered
and the redemption price paid, and that the right to exercise the Warrant will
terminate at 5:00 P.M. (New York City time) on the date fixed for redemption.
(d) Appropriate adjustment shall be made to the redemption
price and to the minimum Daily Market Price prerequisite to redemption set forth
in Section 11(a) hereof, in each case on the same basis as provided in Section 9
hereof with respect to adjustment of the Warrant Price.
(e) For purposes of this Agreement, the term "Daily Market
Price" means (i) if the Common Stock is traded in the over-the-counter market
and not quoted on the Nasdaq National Market or the Nasdaq SmallCap Market nor
on any national securities exchange, the closing bid price of the Common Stock
on the trading day in question, as reported by Nasdaq or an equivalent generally
accepted reporting service, or (ii) if the Common Stock is quoted on the Nasdaq
National Market or the Nasdaq SmallCap Market or on a national securities
exchange, the daily per share closing price of the Common Stock as quoted on the
Nasdaq National Market or the Nasdaq SmallCap Market or on the principal stock
exchange on which it is listed on the trading day in question, as the case may
be, whichever is the higher. For purposes of clause (i) above, if trading in the
Common Stock is not reported by Nasdaq, the bid price referred to in said clause
shall be the lowest bid price as quoted on the OTC Bulletin Board or reported in
the "pink sheets" published by National Quotation Bureau, Incorporated. The
closing price referred to in clause (ii) above shall be the last reported sale
price or, in case no such reported sale takes place on such day, the average of
the reported closing bid and asked prices, in either case on the Nasdaq National
Market or the Nasdaq SmallCap Market or on the national securities exchange on
which the Common Stock is then listed.
(f) On the redemption date, each Warrant will be automatically
converted into the right to receive the redemption price and the Warrant Agent
will no longer honor any purported exercise of a Warrant. On or before the
redemption date, the Company will deposit with the Warrant Agent sufficient
funds for the purpose of redeeming all of the outstanding unexercised Warrants.
All such funds shall be maintained by the Warrant Agent in an interest-bearing,
segregated account. Funds remaining in such account on the date three years from
the redemption date will be returned to the Company. Any Warrants thereafter
submitted to the Warrant Agent for redemption will be forwarded for redemption
by the Warrant Agent to the Company and the Warrant Agent will have no further
responsibility with respect thereto.
Section 12. RIGHTS AS WARRANTHOLDERS. Nothing contained in this
Agreement or in any of the Warrants shall be construed as conferring upon the
holders thereof, as such, any of the rights of stockholders of the Company,
including, without limitation, the right to receive dividends or other
distributions, to exercise any preemptive rights, to vote or to consent or to
receive notice as stockholders in respect of the meetings of stockholders or the
election of directors of the Company or any other matter. Anything herein to the
contrary notwithstanding, the Company shall cause copies of all financial
statements and reports, proxy statements and other documents as it shall send
generally to its stockholders to be sent by the same class mail as sent to its
stockholders, postage prepaid, on the date of the mailing to such stockholders,
to each registered holder of Warrants at his or her address
10
<PAGE> 11
appearing on the Warrant Register as of the record date for the determination of
the stockholders entitled to such documents.
Section 13. DISPOSITION OF PROCEEDS ON EXERCISE OF WARRANTS. The
Warrant Agent must account promptly to the Company with respect to Warrants
exercised, and must promptly pay to the Company all monies received by it upon
the exercise of such Warrants, and agrees to keep copies of this Agreement
available for inspection by holders of Warrants during normal business hours.
Section 14. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF WARRANT AGENT.
Any corporation into which the Warrant Agent may be merged or with which it may
be consolidated, or any corporation resulting from any merger or consolidation
to which the Warrant Agent shall be a party, or any corporation succeeding to
the corporate trust business of the Warrant Agent, shall be the successor to the
Warrant Agent hereunder without the execution or filing of any paper or any
further act on the part of any of the parties hereto, provided that such
corporation would be eligible for appointment as a successor Warrant Agent under
the provisions of Section 16 of this Agreement. In case at the time such
successor to the Warrant Agent shall succeed to the agency created by this
Agreement and any of the Warrant certificates shall have been countersigned but
not delivered, any such successor to the Warrant Agent may adopt the
countersignature of the original Warrant Agent and deliver such Warrant
certificates so countersigned; and in case at that time any of the Warrant
certificates shall not have been countersigned, any successor to the Warrant
Agent may countersign such Warrant certificates either in the name of the
predecessor Warrant Agent or in the name of the successor Warrant Agent, and in
all such cases the Warrants represented by such Warrant certificates shall have
the full force provided in the Warrant certificates and in this Agreement. Any
such successor Warrant Agent shall promptly give notice of its succession as
Warrant Agent to the Company and to the registered holder of each Warrant
certificate.
If at any time the name of the Warrant Agent is changed and at such
time any of the Warrant certificates have been countersigned but not delivered,
the Warrant Agent may adopt the countersignature under its prior name and
deliver Warrant certificates so countersigned; and if at that time any of the
Warrant certificates have not been countersigned, the Warrant Agent may
countersign such Warrant certificates either in its prior name or in its changed
name; and in all such cases the Warrants represented by such Warrant
certificates will have the full force provided in the Warrant certificates and
in this Agreement.
Section 15. DUTIES OF WARRANT AGENT. The Warrant Agent hereby
undertakes the duties and obligations imposed by this Agreement upon the
following terms and conditions, all of which bind the Company and the holders of
Warrants by their acceptance thereof:
(a) The statements of fact and recitals contained herein and
in the Warrants shall be taken as statements of the Company, and the Warrant
Agent assumes no responsibility for the correctness of any of the same except
such as describe the Warrant Agent or action taken or to be taken by it. The
Warrant Agent assumes no responsibility with respect to the distribution of the
Warrants except as herein expressly provided.
11
<PAGE> 12
(b) The Warrant Agent will not be responsible for any failure
of the Company to comply with any of the covenants contained in this Agreement
or in the Warrants to be complied with by the Company.
(c) The Warrant Agent may consult at any time with counsel
satisfactory to it (who may be counsel for the Company) and the Warrant Agent
shall incur no liability or responsibility to the Company or to any holder of
any Warrant in respect of any action taken, suffered or omitted by it hereunder
in good faith and in accordance with the opinion or the advice of such counsel.
(d) The Warrant Agent will incur no liability or
responsibility to the Company or to any holder of any Warrant for any action
taken in reliance on any notice, resolution, waiver, consent, order, certificate
or other paper, document or instrument believed by it to be genuine and to have
been signed, sent or presented by the proper party or parties.
(e) The Company agrees to pay to the Warrant Agent reasonable
compensation for all services rendered by the Warrant Agent in the execution of
this Agreement, to reimburse the Warrant Agent for all expenses, taxes (other
than income taxes) and governmental charges and other charges incurred by the
Warrant Agent in the execution of this Agreement and to indemnify the Warrant
Agent and save it harmless against any and all liabilities, including judgments,
costs and reasonable counsel fees, for anything done or omitted by the Warrant
Agent in the execution of this Agreement, except as a result of the Warrant
Agent's negligence, willful misconduct or bad faith.
(f) The Warrant Agent will be under no obligation to institute
any action, suit or legal proceeding or to take any other action on behalf of
the Company or any registered holder, but this provision will not affect the
power of the Warrant Agent to take such action as the Warrant Agent may consider
proper. All rights of action under this Agreement or under any of the Warrants
may be enforced by the Warrant Agent without the possession of any of the
Warrants or the production thereof at any trial or other proceeding relative
thereto, and any such action, suit or proceeding instituted by the Warrant Agent
must be brought in its name as Warrant Agent, and any recovery of judgment must
be for the ratable benefit of all the registered holders of the Warrants, as
their respective rights or interests may appear.
(g) The Warrant Agent and any stockholder, director, officer
or employee of the Warrant Agent may buy, sell or deal in any of the Warrants or
other securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with or lend
money to the Company or otherwise act as fully and freely as though it were not
Warrant Agent under this Agreement. Nothing herein precludes the Warrant Agent
from acting in any other capacity for the Company or for any other legal entity.
(h) The Warrant Agent will act hereunder solely as agent and
not in a ministerial capacity, and its duties will be determined solely by the
provisions hereof. The Warrant Agent shall not be liable for anything which it
may do or refrain from doing in connection with this Agreement, except for its
own negligence, willful misconduct or bad faith.
12
<PAGE> 13
(i) Any request, direction, election, order or demand of the
Company will be sufficient if evidenced by an instrument signed in the name of
the Company by its President, a Vice President or chief financial officer
(unless other evidence in respect thereof is herein specifically prescribed);
and any resolution of the Board of Directors may be evidenced to the Warrant
Agent by a copy thereof certified by the Secretary or an Assistant Secretary of
the Company.
Section 16. CHANGE OF WARRANT AGENT. The Warrant Agent may resign and
be discharged from its duties under this Agreement by giving the Company at
least 30 days prior notice in writing, and by mailing notice in writing to the
registered holders at their addresses appearing on the Warrant Register, of such
resignation, specifying a date when such resignation shall take effect. The
Warrant Agent may be removed by like notice to the Warrant Agent from the
Company and by like mailing of notice to the registered holders of the Warrants.
If the Warrant Agent resigns or is removed or otherwise becomes incapable of
acting, the Company shall appoint a successor to the Warrant Agent. If the
Company fails to make such appointment within 30 days after such removal or
after it has been notified in writing of such resignation or incapacity by the
resigning or incapacitated Warrant Agent or by the registered holder of a
Warrant (who shall, with such notice, submit his Warrant certificate for
inspection by the Company), then the registered holder of any Warrant may apply
to any court of competent jurisdiction for the appointment of a successor to the
Warrant Agent. Any successor Warrant Agent, whether appointed by the Company or
by such a court, must be registered and otherwise authorized to serve as a
transfer agent pursuant to the Securities Exchange Act of 1934, as amended. If
at any time the Warrant Agent ceases to be eligible in accordance with the
provisions of this Section 16, it will resign immediately in the manner and with
the effect specified in this Section 16. After acceptance in writing of the
appointment, the successor Warrant Agent will be vested with the same powers,
rights, duties and responsibilities as if it had been originally named as
Warrant Agent without further act or deed; but the former Warrant Agent will
deliver and transfer to the successor Warrant Agent any property at the time
held by it hereunder, and execute and deliver any further assurance, conveyance,
act or deed necessary for this purpose. Upon request of any successor Warrant
Agent, the Company will make, execute, acknowledge and deliver any and all
instruments in writing for more fully and effectually vesting in and confirming
to such successor Warrant Agent all such powers, rights, duties and
responsibilities. Failure to file or mail any notice provided in this Section
16, however, or any defect therein, will not affect the legality or validity of
the resignation or removal of the Warrant Agent or the appointment of the
successor Warrant Agent, as the case may be.
Section 17. IDENTITY OF TRANSFER AGENT. Following the appointment of
any transfer agent for the Common Stock or of any subsequent transfer agent for
shares of the Common Stock or other shares of the Company's capital stock
issuable upon the exercise of the rights of purchase represented by the
Warrants, the Company will file with the Warrant Agent a statement setting forth
the name and address of such transfer agent.
Section 18. NOTICES. All notices, requests and other communications
pursuant to this Agreement must be in writing and will be sufficiently given or
made when delivered or mailed by first class mail, postage prepaid, addressed as
follows:
(a) if to the Company, to (until another address is filed in
writing by the Company with the Warrant Agent):
13
<PAGE> 14
Cragar Industries, Inc.
4636 N. 43rd Avenue
Phoenix, Arizona 85031
(602) 247-1300
Attention: President
(b) if to the Warrant Agent, to (until another address is
filed in writing by the Warrant Agent with the Company):
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(212) 936-5100
Attention: Warrant Department
(c) if to the registered holder of a Warrant, to the address
of such holder as shown in the Warrant Register.
Section 19. SUPPLEMENTS AND AMENDMENTS. The Company and the Warrant
Agent may from time to time supplement or amend this Agreement without the
approval of any holders of Warrants in order to cure any ambiguity or to correct
or supplement any provision contained herein which may be defective or
inconsistent with any other provision herein, or to make any other provisions in
regard to matters or questions arising hereunder which the Company and the
Warrant Agent may deem necessary or desirable and which shall not be
inconsistent with the provisions of the Warrants, or which shall not adversely
affect the interests of the holders of Warrants (including reducing the Warrant
Price or extending the redemption or expiration date). In any situation in which
this Agreement cannot be amended pursuant to the next sentence above, this
Agreement may be amended by the holder or holders of a majority of the
outstanding Warrants representing a majority of the Shares underlying such
Warrants; provided, however, that without the consent of each holder of a
Warrant, there can be no increase of the Warrant Price or reduction of the
exercise period for such holder's Warrants and provided, further, that no such
amendment may affect the rights or duties of the Warrant Agent without the
consent of the Warrant Agent.
Section 20. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Warrant Agent or the
registered holders of the Warrants will bind and inure to the benefit of their
respective successors and assigns hereunder.
Section 21. GOVERNING LAW. This Agreement will be deemed to be a
contract made under the laws of the State of Arizona and for all purposes will
be construed in accordance with the laws of said State.
Section 22. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement will
be construed to give to any person or corporation other than the Company, the
Warrant Agent and the registered holders of the Warrants any legal or equitable
right, remedy or claim under this Agreement. This
14
<PAGE> 15
Agreement is for the sole and exclusive benefit of the Company, the Warrant
Agent and the registered holders of the Warrants.
Section 23. COUNTERPARTS. This Agreement may be executed in
counterparts and each of such counterparts will for all purposes be deemed to be
an original, and all such counterparts will together constitute but one and the
same instrument.
Section 24. DESCRIPTIVE HEADINGS. The descriptive headings of the
several Sections of this Agreement are inserted for convenience only and do not
control or affect the meaning or construction of any of the provisions hereof.
15
<PAGE> 16
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, as of the day and year first above written.
CRAGAR INDUSTRIES, INC.
By: /s/ Michael R. Miller
-------------------------
Name: Michael R. Miller
-----------------------
Its: COO/Secretary
-----------------------
AMERICAN STOCK TRANSFER &
TRUST COMPANY
By: /s/ H. J. Lemmer
-------------------------
Name: Herbert J. Lemmer
-----------------------
Its: Vice President
-----------------------
16
<PAGE> 17
Warrant No. ____
EXHIBIT A
WARRANT TO PURCHASE _____ SHARES OF COMMON STOCK
VOID AFTER 5:00 P.M.,
NEW YORK CITY TIME, ON DECEMBER ____, 2001
CRAGAR INDUSTRIES, INC.
This certifies that, for value received ______________, the registered
holder hereof or assigns (the "Holder"), is entitled to purchase from CRAGAR
INDUSTRIES, INC., a Delaware corporation (the "Company"), at any time before
5:00 p.m., New York City time, on December ____, 2001, at the purchase price per
share of $6.60 (the "Warrant Price"), the number of shares of Common Stock, par
value $0.01 per share, of the Company set forth above (the "Shares") . The
number of shares of Common Stock purchasable upon exercise of the Warrant
evidenced hereby and the Warrant Price is subject to adjustment from time to
time as set forth in the Warrant Agreement referred to below.
This Warrant may be redeemed, at the option of the Company, at $.10 per
share of Common Stock purchasable upon exercise hereof, at any time after the
average Daily Market Price (as defined in Section 11 of the Warrant Agreement)
per share of the Common Stock for a period of at least 20 consecutive trading
days ending not more than three days prior to the date of the notice given
pursuant to Section 11(b) thereof has equaled or exceeded $9.00, and prior to
expiration of this Warrant. The Holder's right to exercise this Warrant
terminates at 5:00 p.m. (New York City time) on the date fixed for redemption in
the notice of redemption delivered by the Company in accordance with the Warrant
Agreement.
The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant certificate with the Purchase Form attached hereto
duly executed and guaranteed and simultaneous payment of the Warrant Price
(subject to adjustment) at the principal office in New York, New York, of
American Stock Transfer & Trust Company (the "Warrant Agent"). Payment of such
price may be made at the option of the Holder in cash or by certified check or
bank draft, all as provided in the Warrant Agreement.
The Warrants evidenced hereby are part of a duly authorized issue of
Warrants and are issued under and in accordance with the Warrant Agreement dated
as of December ____, 1996, between the Company and the Warrant Agent (the
"Warrant Agreement") and are subject to the terms and provisions contained in
such Warrant Agreement, to all of which the Holder of this Warrant certificate
by acceptance hereof consents. A copy of the Warrant Agreement may be obtained
for inspection by the Holder hereof upon written request to the Warrant Agent.
<PAGE> 18
Upon any partial exercise of the Warrants evidenced hereby, there will
be issued to the Holder a new Warrant certificate in respect of the Shares
evidenced hereby that have not been exercised. This Warrant certificate may be
exchanged at the office of the Warrant Agent by surrender of this Warrant
certificate properly endorsed either separately or in combination with one or
more other Warrants for one or more new Warrants to purchase the same aggregate
number of Shares as evidenced by the Warrant or Warrants exchanged. No
fractional Shares will be issued upon the exercise of rights to purchase
hereunder, but the Company will pay the cash value of any fraction upon the
exercise of one or more Warrants.
The number of shares of Common Stock issuable upon exercise of this
Warrant are subject to adjustment as provided in Section 9 of the Warrant
Agreement.
The Holder hereof may be treated by the Company, the Warrant Agent and
all other persons dealing with this Warrant certificate as the absolute owner
hereof for all purposes and as the person entitled to exercise the rights
represented hereby, any notice to the contrary notwithstanding, and until any
transfer is entered on such books, the Company may treat the Holder hereof as
the owner for all purposes.
Dated: __________ CRAGAR INDUSTRIES, INC.
By: _______________
President
ATTEST:
_____________________
Secretary
2
<PAGE> 19
CRAGAR INDUSTRIES, INC.
PURCHASE FORM
Mailing Address:
CRAGAR INDUSTRIES, INC.
4636 N. 43rd Avenue
Phoenix, Arizona 85031
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant certificate for, and to purchase
thereunder, __________ Shares of Common Stock provided for therein, and requests
that certificates for such Shares be issued in the name of:
_______________________________________________________________________________
_______________________________________________________________________________
(Please Print or Type Name, Address and Social Security Number)
and, if said number of Shares shall not be all the Shares purchasable hereunder,
that a new Warrant certificate for the balance of the Shares purchasable under
the within Warrant certificate be registered in the name of the undersigned
Holder or his or her Assignee as below indicated and delivered to the address
stated below.
Dated: ______________________
Name of Holder or Assignee:
______________________________________________________________________________
(Please Print)
Address: _____________________________________________________________________
______________________________________________________________________________
Signature:
_______________________________________
NOTE: The above signature must correspond with the name as it appears upon the
face of the within Warrant certificate in every particular, without alteration
or enlargement or any change whatever, unless these Warrants have been assigned.
Signature Guaranteed:
_______________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (Banks, Stock Brokers, Savings and Loan Association, and Credit
Unions) WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM
PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE> 20
ASSIGNMENT
(To be signed only upon assignment of Warrants)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto
___________________________________________________________________________
(Name and Address of Assignee Must Be Printed or Typewritten)
___________________________________________________________________________
the within Warrants, hereby irrevocably constituting and appointing __________
Attorney to transfer said Warrants on the books of the Company, with full power
of substitution in the premises.
Dated: _____________
______________________________________________
Signature of Registered Holder
Note: The signature on this assignment must
correspond with the name as it appears upon
the face of the within Warrant certificate
in every particular, without alteration or
enlargement or any change whatever.
Signature Guaranteed:
________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (Banks, Stock Brokers, Savings and Loan Association, and Credit
Unions) WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM
PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE> 1
Exhibit 4.4(d)
SECOND AMENDMENT TO CREDIT AGREEMENT
This Amendment is made as of the 12th day of February, 1997, 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, as amended by that certain First Amendment
to Credit Agreement dated as of September I9, 1996 (collectively, 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 indebtness 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 Amendment 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, for the
period ending September 30, l996, 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, 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 of the terms and conditions set forth in this Amendment. Nothing herein
shall be construed as a waiver 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, and 6.14 of
the Credit Agreement.
<PAGE> 2
3. The Credit Agreement is hereby amended as follows:
(a) There are hereby added to Section 1.1(b) of the Credit
Agreement the following definitions.
"Net Loss" means after tax net loss of the Borrower from
ordinary continuing operations.
"Negative Goodwill" means negative goodwill determined in
accordance with generally accepted accounting principles
consistent with those used in preparing Borrower's most recent
audited financial statements.
(b) The definition of "Adjusted Net Worth" is hereby amended
to read in its entirety as follows:
"Adjusted Net Worth" means net worth determined in accordance
with generally accepted accounting principles consistent with
those used in preparing Borrower's most recent audited
financial statements plus Negative Goodwill and Subordinated
Indebtedness other than the Bridge Loan.
(c) Section 6.12 of the Credit Agreement is hereby amended to
read in its entirety as follow":
6. 12 Debt Service Coverage Ratio. The Borrower agrees, that
for each fiscal quarter, beginning with the fiscal quarter
ending March 31, 1997, 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, 1997, said ratio shall be
based upon the immediately preceding three month period. For
the fiscal quarter ending June 30, 1997, said ratio shell be
based upon the immediately preceding six month period. For the
fiscal quarter ending September 30, 1997, 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 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
2
<PAGE> 3
accordance with the provisions of Section 7.19 until such
interest is actually paid.
(d) Section 6.13 of the Credit Agreement is hereby amended to
read in its entirety as follows:
6.13 Adjusted Net Worth. The Borrower's book Adjusted Net
Worth shall not decrease by more than $250,000.00 for the
fiscal quarter ending December 31, 1996 as measured against
the Borrower's book Adjusted Net Worth for the fiscal quarter
ended September 30, 1996. The Borrower will at all times from
and after December 31, 1996, maintain a minimum book Adjusted
Net Worth of $2,448,000.00 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.
(e) Section 6.14 of the Credit Agreement is hereby
amended to read in its entirety as follows:
6.14 Net Income. Borrower will, as of last day of each fiscal
quarter beginning with the quarter ending December 31, 1996,
achieve a minimum Net Income (or in the event a Net Loss is
allowed for such fiscal quarter, a maximum Net Loss) as
follows:
(a) as of December 31, 1996, for the preceding fiscal
quarter, a cumulative Net Loss of not more than $250,000.00;
(b) as of each March 31 commencing with March 31,
1997, for the preceding fiscal quarter, a cumulative Net
Income of not less than $125,000.00;
(c) as of each June 30 commencing with June 30, 1997,
for the preceding two fiscal quarters, a cumulative Net Income
of not less than $275,000.00;
3
<PAGE> 4
(d) as of each September 30 commencing with September
30, 1997, for the preceding three quarters, a cumulative Net
Income of not less than $350,000.00;
(e) as of each December 31 commencing with December
31, 1997, for the preceding four fiscal quarters, a cumulative
Net Income of not less than $400,000.00.
(f) There is hereby added to Exhibit C a new
paragraph to the end of the Section entitled "Subordinated
Indebtedness", which provides as follows:
Indebtedness evidenced by those certain Promissory Notes of
borrower totaling $1,500,000.00 dated June 30, 1996 (the
"Investor Debt").
4. 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
5. The Borrower agrees to pay the Lender a fully earned,
non-refundable fee in the amount of $7,500.00 in consideration of the execution
by the Lender of this Amendment. Said fee shall be due and payable January 1,
1997.
6. 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 that 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 7(a) and (b) hereof and as to such other matters as the
Lender shall require.
7. The Borrower hereby represents and warrants to the Lender as
follows:
4
<PAGE> 5
(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.
(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 bylaws 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.
8. 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.
9. 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.
10. 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.
11. 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
5
<PAGE> 6
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 5 hereof.
12. 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.
6
<PAGE> 7
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 /s/ Michael L. Hartzmark
---------------------------------
Its /s/ Pres / CEO
---------------
NORWEST BUSINESS CREDIT, INC., a Minnesota
corporation
By /s/ Darcy Della Flora
----------------------------------
Its /s/ Vice President
-------------------
7
<PAGE> 8
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.
/s/ Michael L. Hartzmark
---------------------------
Michael L. Hartzmark
8
<PAGE> 1
EXHIBIT 4.4(e)
[NORWEST LETTERHEAD]
March 27, 1997
Michael L. Hartzmark, President
Cragar Industries, Inc.
4636 North 43rd Avenue
Phoenix, Arizona 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. (the "Borrower"
or "Cragar"), and Norwest Business Credit, Inc. (the "Lender" or "NBCI"), the
Borrower will as of December 31, 1996, for the preceding fiscal quarter,
achieve a cumulative Net Loss of not more than $250,000.00. Cragar has
represented and warranted to NBCI that it has failed to remain within the
maximum Net Loss amount as outlined in Section 6.14 of the Agreement.
Furthermore, Cragar has stated that its Net Loss for the quarter ended December
31, 1996 totaled approximately [$1,064,000]. This result constitutes an Event
of Default pursuant to Section 8.1 of the Agreement.
As an accommodation to Cragar, NBCI agrees to waive the Net Income covenant
default (Section 6.14) for the period ended December 31, 1996. This letter
should be considered a waiver of the Net Income default and is applicable only
to the Net Income covenant for the period ending December 31, 1996 and not to
any other existing or future defaults of any kind. NBCI reserves any and all
rights and remedies allowed it under the Agreement.
In consideration of this waiver, Cragar agrees to pay to NBCI a waiver fee in
the amount of $2,500. This amount will be charged to your loan account on April
1, 1997.
If you have any questions regarding this matter, please contact me at 248-2479.
Sincerely,
/s/ Scott O. Schryver
- ---------------------
Scott O. Schryver
Vice President
<PAGE> 1
Exhibit 4.9
REPRESENTATIVE'S WARRANT AGREEMENT
THIS REPRESENTATIVE'S WARRANT AGREEMENT (the "Agreement"), dated as of
December 18, 1996, is made and entered into by and between CRAGAR INDUSTRIES,
INC., a Delaware corporation (the "Company"), and DICKINSON & CO. (together with
its successors and assigns, the "Warrantholder").
The Company agrees to issue and sell, and the Warrantholder agrees to
purchase, for the price of $85.00, warrants, as hereinafter described (the
"Warrants"), to purchase (i) up to 85,000 (subject to adjustment pursuant to
Section 8 hereof) shares (the "Shares") of the Company's Common Stock, $.01 par
value (the "Common Stock") and (ii) up to 85,000 Common Stock Purchase Warrants
(the "Common Stock Warrants"), each such Common Stock Warrant being exercisable
to purchase one share of Common Stock, in connection with a public offering (the
"Offering") by the Company of up to 850,000 shares of Common Stock and up to
850,000 Common Stock Purchase Warrants pursuant to an underwriting agreement
(the "Underwriting Agreement"), dated as of December 18, 1996, among the Company
and the Warrantholder, as Representative of the several underwriters, as
contemplated by the prospectus of the Company dated December 18, 1996 (the
"Final Prospectus"). (The Common Stock Warrants underlying the Warrants are
hereinafter referred to as the "Underlying Warrants." The shares of Common Stock
purchasable upon exercise of the Warrants and the Underlying Warrants are
hereinafter referred to as the "Underlying Warrant Stock.") The purchase and
sale of the Warrants shall occur upon completion of the Offering, and be subject
to the conditions to the Representative's obligations to purchase Shares of
Common Stock and Common Stock Warrants thereunder. The Underlying Warrants shall
be subject to all of the terms and conditions of the warrant agreement, dated as
of December 18, 1996, between the Company and American Stock Transfer & Trust
Company, as Warrant Agent (the "Warrant Agreement").
In consideration of the foregoing and for the purpose of defining the
terms and provisions of the Warrants and the respective rights and obligations
thereunder, the Company and the Warrantholder, for value received, hereby agree
as follows:
Section 1. TRANSFERABILITY AND FORM OF WARRANTS.
1.1. REGISTRATION. The Warrants shall be numbered and shall be
registered on the books of the Company when issued.
1.2. TRANSFER. The Warrants may not be sold, transferred,
assigned, pledged or hypothecated by the Warrantholder or any other person,
except in accordance with and subject to applicable securities laws, (i) to any
member of the National Association of Security Dealers, Inc. participating in
the offering as underwriter or as a member of the Selling Group to which the
<PAGE> 2
Final Prospectus relates and bona fide officers and partners thereof, or (ii) by
operation of law or by reason of the reorganization of the Company or (iii)
after December 18, 1997 to any person that agrees to exercise the Warrants so
acquired immediately upon acquisition thereof. All Warrant certificates shall
bear an appropriate legend describing the foregoing restriction and stating the
time period for which the restriction is operative.
The Warrants shall be transferable only on the books of the Company
maintained at its principal office in Phoenix, Arizona or wherever its principal
office may then be located, upon delivery thereof duly endorsed by the
Warrantholder or by its duly authorized attorney or representative, accompanied
by proper evidence of succession, assignment, or authority to transfer. Upon any
registration of transfer, the Company shall execute and deliver new Warrants to
the person entitled thereto.
1.3 FORM OF WARRANTS. The text of the Warrants and of the form
of election to purchase Shares and Underlying Warrants shall be substantially as
set forth in Exhibit A attached hereto. The number of shares of Common Stock
issuable upon exercise of the Warrants is subject to adjustment upon the
occurrence of certain events, all as hereinafter provided. The Warrants shall be
executed on behalf of the Company by its Chairman of the Board, Chief Executive
Officer, President, or by a Vice President, and attested to by its Secretary or
an Assistant Secretary.
A Warrant bearing the signature of an individual who was at
the time of execution thereof the proper officer of the Company shall bind the
Company, notwithstanding that such individual shall have ceased to hold such
office prior to the delivery of such Warrant or did not hold such office on the
date of this Agreement.
The Warrants shall be dated as of the date of signature
thereof by the Company either upon initial issuance or upon division, exchange,
substitution, or transfer.
Section 2. EXCHANGE OF WARRANT CERTIFICATE. Any Warrant certificate
may be exchanged for another certificate or certificates entitling the
Warrantholder to purchase a like aggregate number of Shares and Underlying
Warrants as the certificate or certificates surrendered then entitled such
Warrantholder to purchase. Any Warrantholder desiring to exchange a Warrant
certificate shall make such request in writing delivered to the Company, and
shall surrender, properly endorsed, with signatures guaranteed, the certificate
evidencing the Warrant to be so exchanged. Thereupon, the Company shall execute
and deliver to the person entitled thereto a new Warrant certificate as so
requested.
Section 3. TERM OF WARRANTS; EXERCISE OF WARRANTS. Subject to the
terms of this Agreement, the Warrantholder shall have the right, at any time
during the period commencing at 9:00 A.M. Arizona Time, on the date one year
from the date of the Final Prospectus, and ending at 5:00 P.M., Arizona Time, on
the date immediately preceding the date five years from the date
2
<PAGE> 3
of the Final Prospectus (the "Termination Date"), to purchase from the Company
up to the number of fully paid and nonassessable shares and Underlying Warrants
to which the Warrantholder may at the time be entitled to purchase pursuant to
this Agreement, upon surrender to the Company, at its principal office, of the
certificate evidencing the Warrants to be exercised, together with the purchase
form on the reverse thereof duly filled in and signed, with signatures
guaranteed, and upon payment to the Company of the Warrant Price (as defined in
and determined in accordance with the provisions of Sections 7 and 8 hereof),
for the number of Shares and Underlying Warrants in respect of which such
Warrants are then exercised, but in no event for less than 100 Shares and 100
Underlying Warrants (unless less than an aggregate of 100 Shares and 100
Underlying Warrants are then purchasable under all outstanding Warrants held by
a Warrantholder). Each Warrant may be exercised only for an equal number of
Shares and Underlying Warrants. Payment of the aggregate Warrant Price shall be
made in cash or by check. No Underlying Warrant may be exercised by the
Warrantholder after 5:00 p.m., Arizona Time, on the date immediately preceding
the Termination Date. The exercise price of the Underlying Warrants shall be
$6.60, subject to adjustment as is provided in Section 9 of the Warrant
Agreement.
Upon surrender of the Warrants and payment of the Warrant Price, the
Company shall issue and cause to be delivered with all reasonable dispatch to or
upon the written order of the Warrantholder and in such name or names as the
Warrantholder may designate a certificate or certificates for the number of full
Shares and Underlying Warrants so purchased upon the exercise of the Warrant,
together with cash, as provided in Section 9 hereof, in respect of any
fractional Shares otherwise issuable upon surrender; provided, however, that the
right of the Warrantholder to designate a person other than the Warrantholder as
the recipient of Shares or Underlying Warrants receivable upon the exercise of
the Warrants shall be subject to the Securities Act of 1933, as amended, and the
rules and regulations promulgated by the Securities and Exchange Commission
thereunder. Such certificate or certificates shall be deemed to have been issued
and any person so designated to be named therein shall be deemed to have become
a holder of record of such securities as of the date of surrender of the
Warrants and payment of the Warrant Price, notwithstanding that the certificate
or certificates representing such securities shall not actually have been
delivered or that the stock and Underlying Warrant transfer books of the Company
shall then be closed. The Warrants shall be exercisable, at the election of the
Warrantholder, either in full or from time to time in part and, in the event
that a certificate evidencing the Warrants is exercised in respect of less than
all of the Shares and Underlying Warrants specified therein at any time prior to
the Termination Date, a new certificate evidencing the remaining portion of the
Warrants will be issued by the Company.
Section 4. PAYMENT OF TAXES. The Company will pay all documentary
stamp taxes, if any, attributable to the initial issuance of the Warrants,
Shares, and Underlying Warrants, and the securities and Shares issuable upon
exercise thereof; provided, however, the Company shall not be required to pay
any tax which may be payable in respect of any secondary transfer of the
Warrants, the Shares, and Underlying Warrants.
3
<PAGE> 4
Section 5. MUTILATED OR MISSING WARRANTS. In case the certificate or
certificates evidencing the Warrants shall be mutilated, lost, stolen, or
destroyed, the Company shall, at the request of the Warrantholder, issue and
deliver in exchange and substitution for and upon cancellation of the mutilated
certificate or certificates, or in lieu of and substitution for the certificate
or certificates lost, stolen, or destroyed, a new Warrant certificate or
certificates of like tenor and representing an equivalent right or interest, but
only upon receipt of evidence satisfactory to the Company of such loss, theft,
or destruction of such Warrant and a bond of indemnity, if requested, also
satisfactory in form and amount at the applicant's cost. Applicants for such
substitute Warrant certificate shall also comply with such other reasonable
regulations and pay such other reasonable charges as the Company may prescribe.
Section 6. RESERVATION OF SHARES. There has been reserved, and the
Company shall at all times keep reserved so long as the Warrants remain
outstanding, out of its authorized Common Stock, such number of shares of Common
Stock as shall be subject to purchase under the Warrants (including such number
of shares of Underlying Warrant Stock subject to purchase upon exercise of the
Underlying Warrants). Every transfer agent for the Common Stock and other
securities of the Company issuable upon the exercise of the Warrants will be
irrevocably authorized and directed at all times to reserve such number of
authorized shares and other securities as shall be requisite for such purpose.
The Company will keep a copy of this Agreement and the Warrant Agreement on file
with every transfer agent for the Common Stock and other securities of the
Company issuable upon the exercise of the Warrants. The Company will supply
every such transfer agent with duly executed stock and other certificates, as
appropriate, for such purpose and will provide or otherwise make available any
cash which may be payable as provided in Section 9 hereof.
Section 7. WARRANT PRICE. The price (the "Warrant Price") at which
Shares and Underlying Warrants shall be purchasable upon the exercise of the
Warrants shall be $7.50 per Share and $.125 per Underlying Warrant, subject to
adjustment as provided in Section 8.
Section 8. ADJUSTMENT OF NUMBER OF SHARES. The number and kind of
securities purchasable upon the exercise of the Warrants and the Warrant Price
shall be subject to adjustment from time to time upon the happening of certain
events, as follows:
8.1. ADJUSTMENTS. The number of Shares purchasable upon
the exercise of the Warrants shall be subject to adjustment as follows:
(a) In case the Company shall (i) pay a dividend in
Common Stock or make a distribution in Common Stock, (ii) subdivide its
outstanding Common Stock, (iii) combine its outstanding Common Stock into a
smaller number of shares of Common Stock, or (iv) issue by reclassification of
its Common Stock other securities of the Company, the number of shares
purchasable upon exercise of the Warrants immediately prior thereto shall be
adjusted so that the
4
<PAGE> 5
Warrantholder shall be entitled to receive the kind and number of shares or
other securities of the Company which it would have owned or would have been
entitled to receive immediately after the happening of any of the events
described above, had the Warrants been exercised immediately prior to the
happening of such event or any record date with respect thereto. Any adjustment
made pursuant to this subsection 8.1(a) shall become effective immediately after
the effective date of such event retroactive to the record date, if any, for
such event.
(b) In case the Company shall distribute to all or
substantially all holders of its Common Stock evidences of its indebtedness or
assets (excluding cash dividends or distributions out of earnings) or rights,
options, warrants, or convertible securities containing the right to subscribe
for or purchase Common Stock, then the Company shall reserve, and the
Warrantholder shall be entitled to receive upon the exercise of such Warrant,
for each Share issuable upon exercise of such Warrant, the amount of
indebtedness or assets or the number of rights, options, warrants, or
convertible securities that such Warrantholder would have received had the
Warrantholder been the holder of such Share on the record date established by
the Company for the determination of holders of Common Stock entitled to receive
such distribution, or, if no such record date shall have been established, then
on the date of such distribution. Notwithstanding the above, in the event that
any of the provisions of this subsection 8.1(b) do not comply with the Conduct
Rules of the National Association of Securities Dealers, as such rules exist on
the date of this Agreement (the "Conduct Rules"), then such provisions shall be
deemed to be null and void, but only to the extent that such provisions do not
comply with the Conduct Rules, in which case the Warrantholder will be entitled
to receive the maximum amount of indebtedness or assets of the Company and/or
that number of rights, options, warrants, or convertible securities that the
Warrantholder may receive without violating the Conduct Rules.
(c) No adjustment in the number of shares purchasable
pursuant to the Warrants shall be required unless such adjustment would require
an increase or decrease of at least one percent in the number of shares then
purchasable upon the exercise of the Warrants or, if the Warrants are not then
exercisable, the number of shares purchasable upon the exercise of the Warrants
on the first date thereafter that the Warrants become exercisable; provided,
however, that any adjustments which by reason of this subsection 8.1(c) are not
required to be made immediately shall be carried forward and taken into account
in any subsequent adjustment.
(d) Whenever the number of shares purchasable upon
the exercise of the Warrant is adjusted, as herein provided, the Warrant Price
for shares payable upon exercise of the Warrant shall be adjusted by multiplying
such Warrant Price immediately prior to such adjustment by a fraction, of which
the numerator shall be the number of shares purchasable upon the exercise of the
Warrant immediately prior to such adjustment, and of which the denominator shall
be the number of shares so purchasable immediately thereafter.
(e) Whenever the number of shares purchasable upon
the exercise of the Warrants is adjusted as herein provided, the Company shall
cause to be promptly mailed to the
5
<PAGE> 6
Warrantholder by first class mail, postage prepaid, notice of such adjustment
and a certificate of the chief financial officer of the Company setting forth
the number of shares purchasable upon the exercise of the Warrants after such
adjustment, a brief statement of the facts requiring such adjustment and the
computation by which such adjustment was made.
(f) For the purpose of this subsection 8.1, the term
"Common Stock" shall mean (i) the class of stock designated as the Common Stock
of the Company at the date of this Agreement, or (ii) any other class of stock
resulting from successive changes or reclassifications of such Common Stock
consisting solely of changes in par value, or from par value to no par value, or
from no par value to par value. In the event that at any time, as a result of an
adjustment made pursuant to this Section 8, the Warrantholder shall become
entitled to purchase any securities of the Company other than Shares and
Underlying Warrants, thereafter the number of such other securities so
purchasable upon exercise of the Warrants shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Shares contained in this Section 8.
8.2. NO ADJUSTMENT FOR DIVIDENDS. Except as provided in
subsection 8.1, no adjustment in respect of any dividends or distributions out
of earnings shall be made during the term of the Warrants or upon the exercise
of the Warrants.
8.3. NO ADJUSTMENT IN CERTAIN CASES. No adjustments shall
be made pursuant to Section 8 hereof in connection with the issuance of Shares,
Underlying Warrants or Underlying Warrant Stock sold as part of the public sale
and issuance of shares of Common Stock and Common Stock Warrants pursuant to the
Underwriting Agreement or the issuance of Shares, Underlying Warrants or
Underlying Warrant Stock upon exercise of the Warrants.
8.4. PRESERVATION OF PURCHASE RIGHTS UPON
RECLASSIFICATION, CONSOLIDATION, ETC. In case of any consolidation of the
Company with or merger of the Company into another corporation or in case of any
sale or conveyance to another corporation of the property, assets or business of
the Company as an entirety or substantially as an entirety, the Company or such
successor or purchasing corporation, as the case may be, shall execute with the
Warrantholder an agreement that the Warrantholder shall have the right
thereafter upon payment of the Warrant Price in effect immediately prior to such
action to purchase, upon exercise of the Warrants, the kind and amount of shares
and other securities and property which it would have owned or have been
entitled to receive after the happening of such consolidation, merger, sale or
conveyance had the Warrants (and each underlying security) been exercised
immediately prior to such action. In the event of a merger described in Section
368(a)(2)(E) of the Internal Revenue Code of 1954, as amended, in which the
Company is the surviving corporation, the right to purchase Shares and
Underlying Warrants under the Warrants shall terminate on the date of such
merger and thereupon the Warrants shall become null and void, but only if the
controlling corporation shall agree to substitute for the Warrants its warrant
which entitles the holder thereof to purchase upon its exercise the kind and
amount of shares and other securities and property which it would have
6
<PAGE> 7
owned or been entitled to receive had the Warrants been exercised immediately
prior to such merger. Any such agreements referred to in this subsection 8.4
shall provide for adjustments, which shall be as nearly equivalent as may be
practicable to the adjustments provided for in Section 8 hereof. The provisions
of this subsection 8.4 shall similarly apply to successive consolidations,
mergers, sales, or conveyances.
8.5. PAR VALUE OF SHARES OF COMMON STOCK. Before taking
any action that would cause an adjustment effectively reducing the portion of
the Warrant Price allocable to each Share below the then par value per share of
the Common Stock issuable upon exercise of the Warrants, the Company will take
any corporate action which may, in the opinion of its counsel, be necessary in
order that the Company may validly and legally issue fully paid and
nonassessable Common Stock upon exercise of the Warrants.
8.6. INDEPENDENT PUBLIC ACCOUNTANTS. The Company may
retain a firm of independent public accountants of recognized national standing
(which may be any such firm regularly employed by the Company) to make any
computation required under this Section 8, and a certificate signed by such firm
shall be conclusive evidence of the correctness of any computation made under
this Section 8.
8.7. STATEMENT ON WARRANT CERTIFICATES. Irrespective of
any adjustments in the number of securities issuable upon exercise of Warrants,
Warrant certificates theretofore or thereafter issued may continue to express
the same number of securities as are stated in the similar Warrant certificates
initially issuable pursuant to this Agreement. However, the Company may, at any
time in its sole discretion (which shall be conclusive), make any change in the
form of Warrant certificate that it may deem appropriate and that does not
affect the substance thereof; and any Warrant certificate thereafter issued,
whether upon registration of transfer of, or in exchange or substitution for, an
outstanding Warrant certificate, may be in the form so changed.
Section 9. FRACTIONAL INTERESTS. The Company is not required to
issue fractional shares of Common Stock on the exercise of a Warrant. If any
fraction of a share of Common Stock would, except for the provisions of this
Section 10, be issuable on the exercise of a Warrant (or specified portion
thereof), the Company will in lieu thereof pay an amount in cash equal to the
then Current Market Price multiplied by such fraction. For purposes of this
Agreement, the term "Current Market Price" means (i) if the Common Stock is
traded in the over-the-counter market and is not listed for quotation on the
Nasdaq National Market or the Nasdaq SmallCap Market nor on any national
securities exchange, the average of the per share closing bid prices of the
Common Stock on the 30 consecutive trading days immediately preceding the date
in question, as reported by Nasdaq or an equivalent generally accepted reporting
service, or (ii) if the Common Stock is listed for quotation on the Nasdaq
National Market or the Nasdaq SmallCap Market or on a national securities
exchange, the average for the 30 consecutive trading days immediately preceding
the date in question of the daily per share closing prices of the Common Stock
as quoted by the Nasdaq National Market or the Nasdaq SmallCap Market or on the
principal stock
7
<PAGE> 8
exchange on which it is listed, as the case may be, whichever is the higher. For
purposes of clause (i) above, if trading in the Common Stock is not reported by
Nasdaq, the bid price referred to in said clause shall be the lowest bid price
as reported on the OTC Bulletin Board or in the "pink sheets" published by
National Quotation Bureau, Incorporated. The closing price referred to in clause
(ii) above shall be the last reported sale price or, in case no such reported
sale takes place on such day, the average of the reported closing bid and asked
prices, in either case as quoted by the Nasdaq National Market or the Nasdaq
SmallCap Market or on the national securities exchange on which the Common Stock
is then listed.
Section 10. NO RIGHTS AS STOCKHOLDER; NOTICES TO WARRANTHOLDER.
Nothing contained in this Agreement or in the Warrants shall be construed as
conferring upon the Warrantholder or its transferees any rights as a stockholder
of the Company, including the right to vote, receive dividends, consent or
receive notices as a stockholder in respect of any meeting of stockholders for
the election of directors of the Company or any other matter. If, however, at
any time prior to the expiration of the Warrants and prior to their exercise,
any one or more of the following events shall occur:
(a) any action which would require an adjustment pursuant to
Section 8.1 or 8.4; or
(b) a dissolution, liquidation, or winding up of the Company
(other than in connection with a consolidation, merger, or sale of its
property, assets and business as an entirety or substantially as an
entirety) shall be proposed;
then the Company shall give notice in writing of such event to the
Warrantholder, as provided in Section 14 hereof, at least 20 days, unless such
period is impracticable, prior to the date fixed as a record date or the date of
closing the transfer books for the determination of the stockholders entitled to
any relevant dividend, distribution, subscription rights, or other rights or for
the determination of stockholders entitled to vote on such proposed dissolution,
liquidation, or winding up. Such notice shall specify such record date or the
date of closing the transfer books, as the case may be. Failure to mail or
receive such notice or any defect therein shall not affect the validity of any
action taken with respect thereto. If the Company has not disclosed publicly the
event set forth in such notice, and this fact is clearly indicated on such
notice, the Warrantholder shall maintain such information in confidence until so
disclosed.
Section 11. RESTRICTIONS ON TRANSFER; REGISTRATION RIGHTS; LEGEND ON
SHARES.
(a) The Warrantholder agrees that prior to making any
disposition of the Warrants, the Shares, the Underlying Warrants, or the
Underlying Warrant Stock other than to persons or entities identified in clauses
(i) through (iii), inclusive, of Section 1.2, the Warrantholder shall give
written notice to the Company describing briefly the manner in which any such
proposed disposition is to be made and containing such other information as may
8
<PAGE> 9
reasonably be requested by the Company to evaluate the applicability of federal
and state securities laws to such disposition; and no such disposition shall be
made if the Company has notified the Warrantholder that in the opinion of
counsel reasonably satisfactory to the Warrantholder a registration statement or
other notification or post-effective amendment thereto (hereinafter collectively
a "Registration Statement") under the Act is required with respect to such
disposition and no such Registration Statement has been filed by the Company
with, and declared effective, if necessary, by, the Securities and Exchange
Commission (the "Commission") or that such disposition is otherwise prohibited
by state securities or blue sky laws.
(b) The Company shall be obligated to the owners of the
Warrants, the Shares, the Underlying Warrants and the Underlying Warrant Stock
to file a Registration Statement as follows:
(i) Whenever during the four-year period beginning on
the date one year from the date of the Final Prospectus and ending on the date
immediately preceding the date five years from the date of the Final Prospectus,
the Company proposes to file with the Commission a Registration Statement (other
than as to securities issued pursuant to an employee benefit plan or as to a
transaction subject to Rule 145 promulgated under the Act), it shall, at least
30 days prior to each such filing, give written notice of such proposed filing
to the Warrantholder and each holder of Shares, Underlying Warrants, and the
Underlying Warrant Stock, at their respective addresses as they appear on the
records of the Company, and shall offer to include and shall include in such
filing any proposed disposition of the Shares, the Underlying Warrants, and the
Underlying Warrant Stock upon receipt by the Company, not less than 10 days
prior to the proposed filing date, of a request therefor setting forth the facts
with respect to such proposed disposition and all other information with respect
to such person reasonably necessary to be included in such Registration
Statement. In the event that the managing underwriter for said offering advises
the Company in writing that the inclusion of such securities in the offering
would be detrimental to the offering, such securities shall nevertheless be
included in the Registration Statement, provided that the Warrantholder and each
holder of Shares, Underlying Warrants, and the Underlying Warrant Stock desiring
to have such securities included in the Registration Statement agrees in
writing, for a period of 90 days following such offering, not to sell or
otherwise dispose of such securities pursuant to such Registration Statement,
which Registration Statement the Company shall keep effective for a period of at
least nine months following the expiration of such 90-day period.
(ii) In addition to any Registration Statement
pursuant to Section 11(b)(i) above, during the four-year period beginning on the
date one year from the date of the Final Prospectus and ending on the date
immediately preceding the date five years from the date of the Final Prospectus
the Company will, as promptly as practicable (but in any event within 60 days),
after written request by Dickinson & Co., or by a person or persons holding (or
having the right to acquire by virtue of holding the Warrants or Underlying
Warrants) at least 50% of the shares of Common Stock which have been (or may be)
issued upon exercise of the Warrants and
9
<PAGE> 10
Underlying Warrants, prepare and file at its own expense a Registration
Statement with the Commission and appropriate Blue Sky authorities, or amend an
existing Registration Statement, sufficient to permit the public offering of the
Shares, the Underlying Warrants, and the Underlying Warrant Stock, and will use
its reasonable best efforts at its own expense through its officers, directors,
auditors and counsel, in all matters necessary or advisable, to cause such
Registration Statement to become effective as promptly as practicable; provided,
however, that the Company shall only be obligated to file one such Registration
Statement under this Section 11(b)(ii).
(c) All fees, disbursements and out-of-pocket expenses (other
than Warrantholders' brokerage fees and commissions and legal fees of counsel to
the Warrantholder, if any) in connection with the filing of any Registration
Statement under Section 11(b) and in complying with applicable securities and
Blue Sky laws shall be borne by the Company. The Company at its expense will
supply any Warrantholder and any holder of Shares, Underlying Warrants, or
Underlying Warrant Stock with copies of such Registration Statement and the
prospectus included therein and other related documents in such quantities as
may be reasonably requested by the Warrantholder or holder of Shares, Underlying
Warrants, or Underlying Warrant Stock.
(d) If the Warrantholder shall be entitled to registration of
any Shares, Underlying Warrants, or Underlying Warrant Stock as provided in this
Section 11 and so requests, in lieu of such registration, the Company shall have
the right, for a period of 30 days following such request, to purchase or cause
to be purchased all of the securities to which such request for registration
pertains, at the Current Market Price (as defined in Section 9) less the
exercise price, if any, of the Warrants or Underlying Warrants, as the case may
be.
(e) The Company shall not be required by this Section 11 to
file such Registration Statement if, in the opinion of counsel for the
Warrantholders and holders of Shares, Underlying Warrants, and the Underlying
Warrant Stock and the Company (or, should they not agree, in the opinion of
another counsel experienced in securities law matters acceptable to counsel for
such holders and the Company), the proposed public offering or other transfer as
to which such Registration Statement is requested is exempt from applicable
federal and state securities laws and would result in all purchasers or
transferees obtaining securities which are not "restricted securities," as
defined in Rule 144 under the Act.
(f) The provisions of this Section 11 and Section 12 hereof
shall apply to the extent as provided herein if the Company chooses to file an
Offering Statement under Regulation A promulgated under the Act.
(g) The Company agrees that until all Shares, Underlying
Warrants, and the Underlying Warrant Stock have been sold under a Registration
Statement or pursuant to Rule 144 under the Act, it will use reasonable best
efforts to keep current in filing all materials required to
10
<PAGE> 11
be filed with the Commission in order to permit the holders of such securities
to sell the same under Rule 144.
(h) Each certificate for Warrants, Shares, Underlying
Warrants, and shares of Underlying Warrant Stock shall bear the following
legend, unless, at the time of exercise or transfer or exchange, as the case may
be, such securities are subject to a currently effective Registration Statement
under the Act or unless, in the opinion of the Company's counsel, or, at the
sole option of the certificate holder in the opinion of counsel reasonably
acceptable to the Company, the securities represented thereby need no longer be
subject to such restrictions:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY
APPLICABLE STATE SECURITIES LAW. SUCH SECURITIES MAY NOT BE SOLD OR
OTHERWISE TRANSFERRED UNLESS (i) A REGISTRATION STATEMENT UNDER THE
SECURITIES ACT AND SUCH APPLICABLE STATE SECURITIES LAWS SHALL HAVE
BECOME EFFECTIVE WITH REGARD THERETO OR (ii) IN THE OPINION OF COUNSEL
REASONABLY ACCEPTABLE TO THE COMPANY, REGISTRATION UNDER THE SECURITIES
ACT AND SUCH APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN
CONNECTION WITH A PROPOSED SALE OR TRANSFER.
Section 12. INDEMNIFICATION.
(a) In the event of the filing of any Registration Statement
with respect to the Warrants, the Shares, the Underlying Warrants, or the
Underlying Warrant Stock pursuant to Section 11 hereof, the Company agrees to
indemnify and hold harmless the Warrantholder or any holder of such Shares, the
Underlying Warrants, or the Underlying Warrant Stock and each person, if any,
who controls the Warrantholder or any holder of such Shares, the Underlying
Warrants, or the Underlying Warrant Stock, within the meaning of the Act,
against any losses, claims, damages or liabilities, joint or several (which
shall, for all purposes of this Agreement, include, but not be limited to, all
costs of defense and investigation and all attorneys' fees), to which the
Warrantholder or any holder of such Shares, the Underlying Warrants, or the
Underlying Warrant Stock or such controlling person may become subject, under
the Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in any such
Registration Statement, or any related preliminary prospectus, final prospectus,
or amendment or supplement thereto, or arise out of or are based upon 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;
provided, however, that the Company will not be
11
<PAGE> 12
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 such Registration Statement,
preliminary prospectus, final prospectus or amendment or supplement thereto in
reliance upon, and in conformity with, written information furnished to the
Company by such Warrantholder or the holder of such Shares, Underlying Warrants,
or the Underlying Warrant Stock specifically for use in the preparation thereof.
This indemnity will be in addition to any liability which the Company may
otherwise have.
(b) The Warrantholder and the holders of the Shares,
Underlying Warrants, or the Underlying Warrant Stock agree that they will
indemnify and hold harmless the Company, each other person referred to in
subparts (1), (2) and (3) of Section 11(a) of the Act in respect of the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Act, against any losses, claims, damages or liabilities
(which shall, for all purposes of this Agreement, include but not be limited to,
all costs of defense and investigation and all attorneys' fees) to which the
Company or any such director, officer or controlling person may become subject
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
such Registration Statement, or any related preliminary prospectus, final
prospectus or amendment or supplement thereto, or arise out of or are based upon
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,
but in each case only to the extent that such untrue statement or alleged untrue
statement or omission or alleged omission was made in such Registration
Statement, preliminary prospectus, final prospectus or amendment or supplement
thereto in reliance upon, and in conformity with, written information furnished
to the Company by the Warrantholder or such holder of Shares, Underlying
Warrants, or the Underlying Warrant Stock specifically for use in the
preparation thereof. This indemnity agreement will be in addition to any
liability which the Warrantholder or such holder of Shares or Underlying
Warrants or Underlying Warrant Stock may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 12 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 12, notify the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
the indemnifying party from any liability which it may have to any indemnified
party otherwise than as to the particular item as to which indemnification is
then being sought solely pursuant to this Section 12. In case any such action is
brought against any indemnified party, and it notifies the indemnifying party of
the commencement thereof, the indemnifying party will be entitled to participate
in, and, to the extent that it may wish, jointly with any other indemnifying
party similarly notified, reasonably assume the defense thereof, subject to the
provisions herein stated, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense hereof, the
indemnifying party will not be liable to such indemnified party under this
Section 12 for any legal or other expenses subsequently incurred by such
indemnified
12
<PAGE> 13
party in connection with the defense thereof other than reasonable costs of
investigation, unless the indemnifying party shall not pursue the action to its
final conclusion. The indemnified party shall have the right to employ separate
counsel in any such action and to participate in the defense thereof, but the
fees and expenses of such counsel shall not be at the expense of the
indemnifying party if the indemnifying party has assumed the defense of the
action with counsel reasonably satisfactory to the indemnified party; provided
that if the indemnified party is a Warrantholder or a holder of Shares,
Underlying Warrants, or Underlying Warrant Stock or a person who controls a
Warrantholder or a holder of Shares, Underlying Warrants, or Underlying Warrant
Stock within the meaning of the Act, the fees and expenses of such counsel shall
be at the expense of the indemnifying party if (i) the employment of such
counsel has been specifically authorized in writing by the indemnifying party or
(ii) the named parties to any such action, including any impleaded parties,
include both a Warrantholder or a holder of Shares, Underlying Warrants, or
Underlying Warrant Stock or such controlling person and the indemnifying party
and a Warrantholder or a holder of Shares, Underlying Warrants, or Underlying
Warrant Stock or such controlling person shall have been advised by such counsel
that there may be one or more legal defenses available to a Warrantholder or a
holder of Shares, Underlying Warrants, or Underlying Warrant Stock or
controlling person which are not available to or in conflict with any legal
defenses which may be available to the indemnifying party (in which case the
indemnifying party shall not have the right to assume the defense of such action
on behalf of a Warrantholder or a holder of Shares, Underlying Warrants, or
Underlying Warrant Stock or such controlling person, it being understood,
however, that the indemnifying party shall not, in connection with any one such
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of more than one separate firm of
attorneys for the Warrantholder, the holders of the Shares, Underlying Warrants,
and Underlying Warrant Stock and controlling persons, which firm shall be
designated in writing by a majority in interest of such holders and controlling
persons based upon the value of the securities included in the Registration
Statement). No settlement of any action against an indemnified party shall be
made without the consent of the indemnified and the indemnifying parties, which
shall not be unreasonably withheld in light of all factors of importance to such
parties.
Section 13. CONTRIBUTION. In order to provide for just and equitable
contribution under the Act in any case in which (i) a Warrantholder or any
holder of the Shares, Underlying Warrants, or Underlying Warrant Stock or
controlling person makes a claim for indemnification pursuant to Section 12
hereof but it is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to appeal
or the denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that the express provisions of
Section 12 hereof provide for indemnification in such case or (ii) contribution
under the Act may be required on the part of any Warrantholder or any holder of
the Shares, Underlying Warrants, or Underlying Warrant Stock or controlling
person, then the Company and any Warrantholder or any such holder of the Shares,
Underlying Warrants, or Underlying Warrant Stock or controlling person shall
contribute to the
13
<PAGE> 14
aggregate losses, claims, damages or liabilities to which they may be subject
(which shall, for all purposes of this Agreement, include, but not be limited
to, all costs of defense and investigation and all attorneys' fees), in either
such case (after contribution from others) on the basis of relative fault as
well as any other relevant equitable considerations. 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 a Warrantholder or holder of Shares, Underlying Warrants, or Underlying
Warrant Stock or controlling person 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 such holders of such securities and
such controlling persons agree that it would not be just and equitable if
contribution pursuant to this Section 13 were determined by pro rata allocation
or by any other method which does not take account of the equitable
considerations referred to in this Section 13. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or liabilities (or
actions in respect thereof) referred to above in this Section 13 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. No
person guilty of fraudulent misrepresentation (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.
Section 14. NOTICES. Any notice pursuant to this Agreement by the
Company or by a Warrantholder, a holder of Shares, Underlying Warrants, or
Underlying Warrant Stock must be in writing and shall be deemed to have been
duly given if delivered (including by overnight delivery service) or mailed by
certified mail, return receipt requested:
(a) If to a Warrantholder, a holder of Shares, Underlying
Warrants or Underlying Warrant Stock:
Dickinson & Co.
2425 East Camelback Road, Suite 725
Phoenix, Arizona 85016
Attention: Glenn Cushman
(b) If to the Company:
CRAGAR Industries
4636 N. 43rd Avenue
Phoenix, Arizona 85031
Attention: Michael L. Hartzmark, President
Each party may from time to time change the address to which notices to
it are to be delivered or mailed hereunder by notice in accordance herewith to
the other party.
14
<PAGE> 15
Section 15. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company, the Warrantholder, or the
holders of Shares, Underlying Warrants, or Underlying Warrant Stock shall bind
and inure to the benefit of their respective permitted successors and assigns
hereunder.
Section 16. MERGER OR CONSOLIDATION OF THE COMPANY. The Company will
not merge or consolidate with or into any other corporation or sell all or
substantially all of its property to another corporation, unless the provisions
of Section 8.4 are complied with.
Section 17. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All statements
contained in the Underwriting Agreement or any schedule, exhibit or certificate
delivered thereunder by or on behalf of the parties hereto, shall be deemed to
be representations and warranties hereunder. Notwithstanding any investigations
made by or on behalf of the parties to this Agreement, all representations,
warranties, and agreements made by the parties to this Agreement or pursuant
hereto shall survive.
Section 18. APPLICABLE LAW. This Agreement shall be deemed to be a
contract made under the laws of the State of Arizona and for all purposes shall
be construed in accordance with the laws of said State.
Section 19. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall
be construed to give to any person or corporation other than the Company, the
Warrantholder and the holders of Shares, Underlying Warrants, or Underlying
Warrant Stock any legal or equitable right, remedy or claim under this
Agreement. This Agreement shall be for the sole and exclusive benefit of the
Company, the Warrantholder and the holders of Shares, Underlying Warrants and
Underlying Warrant Stock.
Section 20. AMENDMENT. This Agreement may only be amended by an
affirmative vote of the holders of the Warrants representing a majority of the
Shares and the Underlying Warrants; provided, however, that the provisions of
Sections 11, 12, and 13 hereof may only be amended by an affirmative vote of the
person or persons holding (or having the right to acquire by virtue of holding
the Warrants or Underlying Warrants) a majority of the shares of Common Stock
that have been or may be issued upon exercise of the Warrants or Underlying
Warrants.
15
<PAGE> 16
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, all as of the day and year first above written.
CRAGAR INDUSTRIES, INC.
(CORPORATE SEAL)
By /s/ Michael L. Hartzmark
-----------------------------
Name: Michael L. Hartzmark
Title:
ATTEST:
/s/ Michael Miller
- ------------------------------
Michael Miller
Secretary
DICKINSON & CO.
By /s/ Glenn S. Cushman
------------------------------
Name: Glenn S. Cushman
Title:
16
<PAGE> 17
NEITHER THIS WARRANT, NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF, HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), OR ANY APPLICABLE STATE SECURITIES LAW. SUCH SECURITIES MAY NOT BE SOLD
OR OTHERWISE TRANSFERRED UNLESS (i) A REGISTRATION STATEMENT UNDER THE
SECURITIES ACT AND SUCH APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME
EFFECTIVE WITH REGARD THERETO OR (ii) IN THE OPINION OF COUNSEL REASONABLY
ACCEPTABLE TO THE COMPANY, REGISTRATION UNDER THE SECURITIES ACT AND SUCH
APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH A PROPOSED
SALE OR TRANSFER.
Warrant Certificate, No. _____
REPRESENTATIVE'S WARRANT
TO PURCHASE ______ SHARES OF COMMON STOCK AND ____ UNDERLYING
WARRANTS TO PURCHASE AN AGGREGATE OF ____ SHARES OF COMMON STOCK
VOID AFTER 5:00 P.M.,
ARIZONA TIME, ON [date immediately preceding date
five years from the date of the Final Prospectus]
CRAGAR INDUSTRIES, INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
This certifies that, for value received, ___________________
____________ , the registered holder hereof or assigns (the "Warrantholder"), is
entitled to purchase from CRAGAR INDUSTRIES, INC., a Delaware corporation (the
"Company"), at any time during the period commencing at 9:00 a.m., Arizona Time,
on [date one year from the date of the Final Prospectus] and before 5:00 p.m.,
Arizona Time, on [date immediately preceding date five years from date of the
Final Prospectus], at the purchase price (the "Warrant Price") of $7.50 per
Share and $0.125 per Underlying Warrant, the number of Shares of Common Stock of
the Company and the number of Underlying Warrants of the Company set forth
above. The number of Shares purchasable upon exercise of each Warrant evidenced
hereby shall be subject to adjustment from time to time as set forth in the
Representative's Warrant Agreement referred to below.
1
<PAGE> 18
The Warrants evidenced hereby may be exercised in whole or in
part by presentation of this Warrant certificate with the Purchase Form attached
hereto duly executed (with a signature guarantee as provided thereon) and
simultaneous payment of the Warrant Price at the principal office of the
Company. Payment of such price shall be made at the option of the Warrantholder
in cash or by check.
The Warrants evidenced hereby represent a portion of an
aggregate of up to 85,000 Warrants issued under and in accordance with a
Representative's Warrant Agreement, dated as of December 18, 1996, between the
Company and Dickinson & Co. (the "Representative's Warrant Agreement") and are
subject to the terms and provisions contained in the Representative's Warrant
Agreement, to all of which the Warrantholder by acceptance hereof consents.
Capitalized terms used herein and not otherwise defined will have the meanings
given in the Representative's Warrant Agreement.
Upon any partial exercise of the Warrants evidenced hereby,
there shall be signed and issued to the Warrantholder a new Warrant certificate
in respect of the number of shares of Common Stock and number of Underlying
Warrants as to which the Warrants evidenced hereby shall not have been
exercised. These Warrants may be exchanged at the office of the Company by
surrender of this Warrant certificate properly endorsed for one or more new
Warrants of the same aggregate number of Shares of Common Stock and number of
Underlying Warrants as are evidenced by the Warrant or Warrants exchanged. No
fractional shares of Common Stock will be issued upon the exercise of rights to
purchase hereunder, but the Company shall pay the cash value of any fraction
upon the exercise of one or more Warrants. These Warrants are transferable at
the office of the Company solely in the manner and subject to the limitations
set forth in the Representative's Warrant Agreement.
This Warrant certificate does not entitle any Warrantholder to
any of the rights of a stockholder of the Company.
CRAGAR INDUSTRIES, INC.
By ____________________________
[Seal]
ATTEST:
_________________________
Secretary
2
<PAGE> 19
Dated: _________________
3
<PAGE> 20
CRAGAR INDUSTRIES, INC.
PURCHASE FORM
CRAGAR Industries
4636 North 43rd Avenue
Phoenix, Arizona 85018
The undersigned hereby irrevocably elects to exercise the
right of purchase represented by the within Warrant certificate for, and to
purchase thereunder, _________ Shares of Common Stock and an equal number of
Underlying Warrants provided for therein, and requests that certificates for the
shares of Common Stock and the Underlying Warrants be issued in the name of:
______________________________________________________________________________
(Please Print or Type Name, Address and Social Security Number)
______________________________________________________________________________
and, if said number of Shares and Underlying Warrants shall not be all the
Shares and Underlying Warrants purchasable hereunder, that a new Warrant
certificate for the balance of the Shares and Underlying Warrants purchasable
under the within Warrant certificate be registered in the name of the
undersigned Warrantholder or his or her allowable Assignee as below indicated
and delivered to the address stated below.
Dated: ______________
Name of Warrantholder
or Assignee: _______________________________________________________________
(Please Print)
Address: ___________________________________________________________________
Signature: _________________________________________________________________
Note: The above signature must correspond with the name as written upon the
face of this Warrant certificate in every particular, without
alteration or enlargement or any change whatever, unless these Warrants
have been assigned.
Signature Guaranteed:
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(Banks, Stock Brokers, Savings and Loan Association, and Credit Union) WITH
4
<PAGE> 21
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO
S.E.C. RULE 17Ad-15.
5
<PAGE> 22
ASSIGNMENT
(To be signed only upon assignment of Warrants)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto
_______________________________________________________________________________
(Name and Address of Assignee Must Be Printed or Typewritten)
_______________________________________________________________________________
the within Warrants, hereby irrevocably constituting and appointing ___________
Attorney to transfer said Warrants on the books of the Company, with full power
of substitution in the premises.
Dated: __________ ____________________________________________________
Signature of Registered Holder
Note: The signature on this assignment must correspond with the name as it
appears upon the face of the within Warrant certificate in every
particular, without alteration or enlargement or any change whatever.
Signature Guaranteed:
______________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (Banks, Stock Brokers, Savings and Loan Association, and Credit
Union) WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM
PURSUANT TO S.E.C. RULE 17Ad-15.
6
<PAGE> 23
NEITHER THIS WARRANT, NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF, HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), OR ANY APPLICABLE STATE SECURITIES LAW. SUCH SECURITIES MAY NOT BE SOLD
OR OTHERWISE TRANSFERRED UNLESS (i) A REGISTRATION STATEMENT UNDER THE
SECURITIES ACT AND SUCH APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME
EFFECTIVE WITH REGARD THERETO OR (ii) IN THE OPINION OF COUNSEL REASONABLY
ACCEPTABLE TO THE COMPANY, REGISTRATION UNDER THE SECURITIES ACT AND SUCH
APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH A PROPOSED
SALE OR TRANSFER.
Warrant Certificate, No. 001
REPRESENTATIVE'S WARRANT
TO PURCHASE 17,000 SHARES OF COMMON STOCK AND 17,000 UNDERLYING
WARRANTS TO PURCHASE AN AGGREGATE OF 17,000 SHARES OF COMMON STOCK
VOID AFTER 5:00 P.M.,
ARIZONA TIME, ON DECEMBER 18, 2001
CRAGAR INDUSTRIES, INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
This certifies that, for value received, RAS Securities Corp., the
registered holder hereof or assigns (the "Warrantholder"), is entitled to
purchase from CRAGAR INDUSTRIES, INC., a Delaware corporation (the "Company"),
at any time during the period commencing at 9:00 a.m., Arizona Time, on December
19, 1997 and before 5:00 p.m., Arizona Time, on December 18, 2001, at the
purchase price (the "Warrant Price") of $7.50 per Share and $0.125 per
Underlying Warrant, the number of Shares of Common Stock of the Company and the
number of Underlying Warrants of the Company set forth above. The number of
Shares purchasable upon exercise of each Warrant evidenced hereby shall be
subject to adjustment from time to time as set forth in the Representative's
Warrant Agreement referred to below.
<PAGE> 24
NEITHER THIS WARRANT, NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF, HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), OR ANY APPLICABLE STATE SECURITIES LAW. SUCH SECURITIES MAY NOT BE SOLD
OR OTHERWISE TRANSFERRED UNLESS (i) A REGISTRATION STATEMENT UNDER THE
SECURITIES ACT AND SUCH APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME
EFFECTIVE WITH REGARD THERETO OR (ii) IN THE OPINION OF COUNSEL REASONABLY
ACCEPTABLE TO THE COMPANY, REGISTRATION UNDER THE SECURITIES ACT AND SUCH
APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH A PROPOSED
SALE OR TRANSFER.
Warrant Certificate, No. 002
REPRESENTATIVE'S WARRANT
TO PURCHASE 20,000 SHARES OF COMMON STOCK AND 20,000 UNDERLYING WARRANTS TO
PURCHASE AN AGGREGATE OF 20,000 SHARES OF COMMON STOCK
VOID AFTER 5:00 P.M.,
ARIZONA TIME, ON DECEMBER 18, 2001
CRAGAR INDUSTRIES, INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
This certifies that, for value received, Fahnestock & Co., Inc., the
registered holder hereof or assigns (the "Warrantholder"), is entitled to
purchase from CRAGAR INDUSTRIES, INC., a Delaware corporation (the "Company"),
at any time during the period commencing at 9:00 a.m., Arizona Time, on December
19, 1997 and before 5:00 p.m., Arizona Time, on December 18, 2001, at the
purchase price (the "Warrant Price") of $7.50 per Share and $0.125 per
Underlying Warrant, the number of Shares of Common Stock of the Company and the
number of Underlying Warrants of the Company set forth above. The number of
Shares purchasable upon exercise of each Warrant evidenced hereby shall be
subject to adjustment from time to time as set forth in the Representative's
Warrant Agreement referred to below.
<PAGE> 25
NEITHER THIS WARRANT, NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF, HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), OR ANY APPLICABLE STATE SECURITIES LAW. SUCH SECURITIES MAY NOT BE SOLD
OR OTHERWISE TRANSFERRED UNLESS (i) A REGISTRATION STATEMENT UNDER THE
SECURITIES ACT AND SUCH APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME
EFFECTIVE WITH REGARD THERETO OR (ii) IN THE OPINION OF COUNSEL REASONABLY
ACCEPTABLE TO THE COMPANY, REGISTRATION UNDER THE SECURITIES ACT AND SUCH
APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH A PROPOSED
SALE OR TRANSFER.
Warrant Certificate, No. 003
REPRESENTATIVE'S WARRANT
TO PURCHASE 24,000 SHARES OF COMMON STOCK AND 24,000 UNDERLYING WARRANTS TO
PURCHASE AN AGGREGATE OF 24,000 SHARES OF COMMON STOCK
VOID AFTER 5:00 P.M.,
ARIZONA TIME, ON DECEMBER 18, 2001
CRAGAR INDUSTRIES, INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
This certifies that, for value received, Dickinson & Co., the
registered holder hereof or assigns (the "Warrantholder"), is entitled to
purchase from CRAGAR INDUSTRIES, INC., a Delaware corporation (the "Company"),
at any time during the period commencing at 9:00 a.m., Arizona Time, on December
19, 1997 and before 5:00 p.m., Arizona Time, on December 18, 2001, at the
purchase price (the "Warrant Price") of $7.50 per Share and $0.125 per
Underlying Warrant, the number of Shares of Common Stock of the Company and the
number of Underlying Warrants of the Company set forth above. The number of
Shares purchasable upon exercise of each Warrant evidenced hereby shall be
subject to adjustment from time to time as set forth in the Representative's
Warrant Agreement referred to below.
<PAGE> 26
NEITHER THIS WARRANT, NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF, HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), OR ANY APPLICABLE STATE SECURITIES LAW. SUCH SECURITIES MAY NOT BE SOLD
OR OTHERWISE TRANSFERRED UNLESS (i) A REGISTRATION STATEMENT UNDER THE
SECURITIES ACT AND SUCH APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME
EFFECTIVE WITH REGARD THERETO OR (ii) IN THE OPINION OF COUNSEL REASONABLY
ACCEPTABLE TO THE COMPANY, REGISTRATION UNDER THE SECURITIES ACT AND SUCH
APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH A PROPOSED
SALE OR TRANSFER.
Warrant Certificate, No. 004
REPRESENTATIVE'S WARRANT
TO PURCHASE 8,000 SHARES OF COMMON STOCK AND 8,000 UNDERLYING WARRANTS TO
PURCHASE AN AGGREGATE OF 8,000 SHARES OF COMMON STOCK
VOID AFTER 5:00 P.M.,
ARIZONA TIME, ON DECEMBER 18, 2001
CRAGAR INDUSTRIES, INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
This certifies that, for value received, T. Marshall Swartwood, the
registered holder hereof or assigns (the "Warrantholder"), is entitled to
purchase from CRAGAR INDUSTRIES, INC., a Delaware corporation (the "Company"),
at any time during the period commencing at 9:00 a.m., Arizona Time, on December
19, 1997 and before 5:00 p.m., Arizona Time, on December 18, 2001, at the
purchase price (the "Warrant Price") of $7.50 per Share and $0.125 per
Underlying Warrant, the number of Shares of Common Stock of the Company and the
number of Underlying Warrants of the Company set forth above. The number of
Shares purchasable upon exercise of each Warrant evidenced hereby shall be
subject to adjustment from time to time as set forth in the Representative's
Warrant Agreement referred to below.
<PAGE> 27
NEITHER THIS WARRANT, NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF, HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), OR ANY APPLICABLE STATE SECURITIES LAW. SUCH SECURITIES MAY NOT BE SOLD
OR OTHERWISE TRANSFERRED UNLESS (i) A REGISTRATION STATEMENT UNDER THE
SECURITIES ACT AND SUCH APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME
EFFECTIVE WITH REGARD THERETO OR (ii) IN THE OPINION OF COUNSEL REASONABLY
ACCEPTABLE TO THE COMPANY, REGISTRATION UNDER THE SECURITIES ACT AND SUCH
APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH A PROPOSED
SALE OR TRANSFER.
Warrant Certificate, No. 005
REPRESENTATIVE'S WARRANT
TO PURCHASE 8,000 SHARES OF COMMON STOCK AND 8,000 UNDERLYING WARRANTS TO
PURCHASE AN AGGREGATE OF 8,000 SHARES OF COMMON STOCK
VOID AFTER 5:00 P.M.,
ARIZONA TIME, ON DECEMBER 18, 2001
CRAGAR INDUSTRIES, INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
This certifies that, for value received, Thomas M. Swartwood, the
registered holder hereof or assigns (the "Warrantholder"), is entitled to
purchase from CRAGAR INDUSTRIES, INC., a Delaware corporation (the "Company"),
at any time during the period commencing at 9:00 a.m., Arizona Time, on December
19, 1997 and before 5:00 p.m., Arizona Time, on December 18, 2001, at the
purchase price (the "Warrant Price") of $7.50 per Share and $0.125 per
Underlying Warrant, the number of Shares of Common Stock of the Company and the
number of Underlying Warrants of the Company set forth above. The number of
Shares purchasable upon exercise of each Warrant evidenced hereby shall be
subject to adjustment from time to time as set forth in the Representative's
Warrant Agreement referred to below.
<PAGE> 28
NEITHER THIS WARRANT, NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF, HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), OR ANY APPLICABLE STATE SECURITIES LAW. SUCH SECURITIES MAY NOT BE SOLD
OR OTHERWISE TRANSFERRED UNLESS (i) A REGISTRATION STATEMENT UNDER THE
SECURITIES ACT AND SUCH APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME
EFFECTIVE WITH REGARD THERETO OR (ii) IN THE OPINION OF COUNSEL REASONABLY
ACCEPTABLE TO THE COMPANY, REGISTRATION UNDER THE SECURITIES ACT AND SUCH
APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH A PROPOSED
SALE OR TRANSFER.
Warrant Certificate, No. 006
REPRESENTATIVE'S WARRANT
TO PURCHASE 8,000 SHARES OF COMMON STOCK AND 8,000 UNDERLYING WARRANTS TO
PURCHASE AN AGGREGATE OF 8,000 SHARES OF COMMON STOCK
VOID AFTER 5:00 P.M.,
ARIZONA TIME, ON DECEMBER 18, 2001
CRAGAR INDUSTRIES, INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
This certifies that, for value received, Glenn S. Cushman, the
registered holder hereof or assigns (the "Warrantholder"), is entitled to
purchase from CRAGAR INDUSTRIES, INC., a Delaware corporation (the "Company"),
at any time during the period commencing at 9:00 a.m., Arizona Time, on December
19, 1997 and before 5:00 p.m., Arizona Time, on December 18, 2001, at the
purchase price (the "Warrant Price") of $7.50 per Share and $0.125 per
Underlying Warrant, the number of Shares of Common Stock of the Company and the
number of Underlying Warrants of the Company set forth above. The number of
Shares purchasable upon exercise of each Warrant evidenced hereby shall be
subject to adjustment from time to time as set forth in the Representative's
Warrant Agreement referred to below.
<PAGE> 1
EXHIBIT 11.1
CRAGAR Industries, Inc.
SCHEDULE OF COMPUTATION OF LOSS PER SHARE
<TABLE>
<CAPTION>
PRIMARY LOSS PER COMMON SHARE YEARS ENDED DECEMBER 31,
--------------------------
1996 1995
---- ----
<S> <C> <C>
Net loss $(1,128,844) $ (693,756)
=========== ==========
Weighted average number of common shares equivalent:
Weighted average common shares outstanding(1) 979,668 910,830
Common equivalent shares using the Treasury Stock Method(2) 176,019 247,370
----------- ----------
Average common shares outstanding 1,155,687 1,158,200
=========== ==========
Net loss per common share and common
equivalent share $ (0.98) $ (0.60)
=========== ==========
</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 Class A, Class B and Class C Warrants,
exercise of the Non-Employee Director Options, and exercise of the stock
option and restricted stock plan options using the treasury stock method.
<PAGE> 1
EXHIBIT 24
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Michael L. Hartzmarkand Michael Miller and Anthony Barrett, and each of
them, his true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign the Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1996, for filing with the Securities and Exchange
Commission by Cragar Industries, Inc., a Delaware corporation, together with any
and all amendments to such Form 10-KSB, and to file the same with all exhibits
thereto, and all documents in connection therewith, with the Securities and
Exchange Commission, granting to such attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or each of them, may
lawfully do or cause to be done by virtue hereof.
DATED: February 10, 1997
/s/ Ed Faber
---------------
Ed Faber
STATE OF ARIZONA )
) ss.
County of Maricopa )
On this 10th day of February, 1997, before me, the undersigned Notary
Public, personally appeared Ed Faber, known to me to be the person whose name is
subscribed to the within instrument and acknowledged that he executed the same
for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
[OFFICIAL SEAL]
/s/ Susan M. River
--------------------
Notary Public
My commission expires: 5-4-98
<PAGE> 2
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Michael L. Hartzmark and Michael Miller and Anthony Barrett, and each
of them, his true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign the Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1996, for filing with the Securities and Exchange
Commission by Cragar Industries, Inc., a Delaware corporation, together with any
and all amendments to such Form 10-KSB, and to file the same with all exhibits
thereto, and all documents in connection therewith, with the Securities and
Exchange Commission, granting to such attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or each of them, may
lawfully do or cause to be done by virtue hereof.
DATED: February 10, 1997
/s/ Sidney Dworkin
--------------------
Sidney Dworkin
STATE OF ARIZONA )
) ss.
County of Maricopa )
On this 10th day of February, 1997, before me, the undersigned Notary
Public, personally appeared Sidney Dworkin, known to me to be the person whose
name is subscribed to the within instrument and acknowledged that he executed
the same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
[OFFICIAL SEAL]
/s/ Susan M. River
--------------------
Notary Public
My commission expires: 5-4-98
<PAGE> 3
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Michael L. Hartzmark and Michael Miller and Anthony Barrett, and each
of them, his true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign the Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1996, for filing with the Securities and Exchange
Commission by Cragar Industries, Inc., a Delaware corporation, together with any
and all amendments to such Form 10-KSB, and to file the same with all exhibits
thereto, and all documents in connection therewith, with the Securities and
Exchange Commission, granting to such attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or each of them, may
lawfully do or cause to be done by virtue hereof.
DATED: February 10, 1997
/s/ Mark Schwartz
--------------------
Mark Schwartz
STATE OF ARIZONA )
) ss.
County of Maricopa )
On this 10th day of February, 1997, before me, the undersigned Notary
Public, personally appeared Mark Schwartz, known to me to be the person whose
name is subscribed to the within instrument and acknowledged that he executed
the same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
[OFFICIAL SEAL]
/s/ Susan M. River
--------------------
Notary Public
My commission expires: 5-4-98
<PAGE> 4
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Michael L. Hartzmark and Michael Miller and Anthony Barrett, and each
of them, his true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign the Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1996, for filing with the Securities and Exchange
Commission by Cragar Industries, Inc., a Delaware corporation, together with any
and all amendments to such Form 10-KSB, and to file the same with all exhibits
thereto, and all documents in connection therewith, with the Securities and
Exchange Commission, granting to such attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or each of them, may
lawfully do or cause to be done by virtue hereof.
DATED: February 10, 1997
/s/ Donald McIntyre
--------------------
Donald McIntyre
STATE OF ARIZONA )
) ss.
County of Maricopa )
On this 10th day of February, 1997, before me, the undersigned Notary
Public, personally appeared Donald McIntyre, known to me to be the person whose
name is subscribed to the within instrument and acknowledged that he executed
the same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
[OFFICIAL SEAL]
/s/ Susan M. River
--------------------
Notary Public
My commission expires: 5-4-98
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001024125
<NAME> CRAGAR INDUSTRIES
<MULTIPLIER> 1
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 863,049
<SECURITIES> 0
<RECEIVABLES> 3,590,833
<ALLOWANCES> 28,475
<INVENTORY> 6,302,612
<CURRENT-ASSETS> 10,766,517
<PP&E> 1,590,444
<DEPRECIATION> 764,939
<TOTAL-ASSETS> 11,755,144
<CURRENT-LIABILITIES> 4,149,670
<BONDS> 3,069,251
0
0
<COMMON> 22,103
<OTHER-SE> 3,776,652
<TOTAL-LIABILITY-AND-EQUITY> 11,755,144
<SALES> 18,625,497
<TOTAL-REVENUES> 18,625,497
<CGS> 17,067,698
<TOTAL-COSTS> 19,317,537
<OTHER-EXPENSES> (259,842)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,027,135
<INCOME-PRETAX> (1,459,333)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,459,333)
<DISCONTINUED> 0
<EXTRAORDINARY> 330,489
<CHANGES> 0
<NET-INCOME> (1,128,844)
<EPS-PRIMARY> (.98)
<EPS-DILUTED> (.98)
</TABLE>
