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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
(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, 1997
[ ] 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)
DELAWARE 86-0721001
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
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:
COMMON STOCK, $.01 PAR VALUE THE BOSTON STOCK EXCHANGE
COMMON STOCK PURCHASE WARRANTS THE BOSTON STOCK EXCHANGE
Securities Registered Under Section 12(g) of the Exchange Act:
NONE
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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, 1997 were
$16,545,159.
At March 31, 1998, the aggregate market value of Common Stock held by non-
affiliates of the registrant was $9,820,290, 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
31, 1998 was 2,482,865.
DOCUMENTS INCORPORATED BY REFERENCE
Portions from the registrant's definitive Proxy Statement relating to its
Annual Meeting of Stockholders to be held May 15, 1998, 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]
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CRAGAR INDUSTRIES, INC.
ANNUAL REPORT ON FORM 10-KSB
TABLE OF CONTENTS
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Page
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PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
ITEM 1. DESCRIPTION OF BUSINESS . . . . . . . . . . . . . . .1
ITEM 2. DESCRIPTION OF PROPERTY . . . . . . . . . . . . . . 16
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS. . . . . . . . . . . . . . . . . . 17
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . 17
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION . . . . . . . . . . . . . . . . . 21
ITEM 7. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . 33
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES . . . . . . . . . . . . . . . . . . . . 33
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT. . . . . . . . . . . . . . . . . . . . . 34
ITEM 10. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . 34
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . 34
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS. . . . . . . . . . . . . . . . . . . . 34
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . 34
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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 J. H. Heafner Company, Inc., Keystone
Automotive Warehouse, RELCO, Buckeye Sales, Inc. and Discount 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-Registered
Trademark-, CRAGAR Lite-Registered Trademark-, Keystone Klassic-Registered
Trademark-, S/S-Registered Trademark-, Star Wire-TM-, CRAGAR XLS-TM-,
TRU CRUISER-TM-, and TRU SPOKE-Registered Trademark-.
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 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. During 1997, Class A, B and C warrants to purchase 243,685 shares
were exercised.
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INDUSTRY BACKGROUND
SIZE AND GROWTH OF INDUSTRY
The automotive wheel industry is generally divided into two segments,
original equipment wheels and custom aftermarket wheels. The custom wheel
segment, in which the Company operates, represented manufacturer sales of
approximately $737 million in 1996, an increase of 56.2% over the total of $472
million achieved in 1990.
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%). The percentages above are based on sales in
1994 and could have changed. 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 or directly to the public. To
spread the overhead costs associated with establishing these company-owned
distribution centers, such centers often carry competitors'
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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.
In 1996, the majority of retail custom wheel purchases were made at four
outlet types: new vehicle dealers (20.1% of the total purchases), specialty
product and installation outlets (16.9% of the total purchases), speed shops and
performance retailers (14.3% of the total purchases) and mail order companies
(10.2% of the total purchases).
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:
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,
wheel accessories and other automotive aftermarket products. 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,
however, the Company has held informal discussions with a variety of candidates.
EXPAND PRODUCT DISTRIBUTION
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The Company is expanding its product distribution capabilities in
underserved markets, such as California, southern Florida, New England, and the
northwestern United States, and has broadened its customer base to include major
tire distributors that supply both national and local retail tire stores.
Historically, the Company has focused its distribution efforts on selected
domestic markets, which are served by value-added resellers specializing in
selling high-performance automotive aftermarket parts and accessories. The
Company has also implemented a national accounts program in which it sells
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
continue 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 XLS wheel
line, introduced the one-piece aluminum S/S 980 series wheels, and significantly
broadened its TRU SPOKE line with three new wheel designs and a new line of
accessories. The company has also developed a new line of motorcycle wheels for
Harley-Davidson Motorcycles.
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. 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.
IMPROVE OPERATING EFFICIENCIES
The Company intends to continue improving 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
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products and processing operations will enable it to devote a greater percentage
of its resources to product design, marketing, and distribution, and to shift
certain inventory, warranty, and other risks to its suppliers.
PRODUCTS
CRAGAR offers a large variety of custom wheels, which can be divided into
six general categories: (i) composite wheels, known as Legacy and CRAGAR Lite
wheels; (ii) wire or spoked wheels; (iii) race wheels; (iv) one-piece cast
aluminum wheels; (v) steel wheels; and (vi) street steel wheels. In addition,
the Company offers a full line of wheel accessories, including lug nuts,
spacers, bolts, washers, spinners, and hubcaps.
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The following table provides sales and other information about the
Company's major product lines:
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PRODUCT LINE % OF 1997 GROSS SALES % OF 1996 GROSS SALES TYPE OF CONSTRUCTION CUSTOMER NICHE
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<S> <C> <C> <C> <C>
Composite, 25.7% 24.3% Inner case aluminum disc welded to Nostalgia car and
Legacy, and outer steel rim current line truck
CRAGAR Lite owners
Wheels
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Wire or Spoked 18.1% 19.5% Steel spokes attached to inner Urban and inner city
Wheels, Star steel hub and outer steel rim or consumers
Wire felly
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Race Wheels 16.5% 16.9% Two outer aluminum rim halves Pro and amateur race
welded together with aluminum drivers and
center or spacer performance car
owners
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One-piece Cast 15.3% 7.9% Cast one-piece aluminum with Low and high-end
Aluminum Wheels machined, painted, or chrome plated consumers of all
types of vehicles
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Steel Wheels 10.4% 17.0% Inner steel disc welded to outer Low-end consumers of
steel rim all types of
vehicles
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Street Steel 7.3% 8.7% Three piece steel and aluminum Hot rod and race
Wheels center welded to outer steel rim enthusiasts with
cars and trucks
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Wheel 4.5% 4.6% Steel and aluminum hub caps, lug All types of
Accessories nuts, spinners, locks, spacers consumers and
vehicles
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Miscellaneous 2.2% 1.1% Excess wheels and accessories N/A
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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 pioneered 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.
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.
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. In 1997, 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.
RACE WHEELS
CRAGAR race wheels are higher-priced, three-piece, lightweight, polished
aluminum wheels. These wheels are used by professional drag racers, who are
sometimes provided CRAGAR wheels without charge in return for their promotion of
CRAGAR and for displaying a CRAGAR sticker on their cars. The Super Race and
the Super Star are the Company's two highest-end professional race wheels.
The Company also sells race wheels to amateur racers, professional racers,
and individuals who want the look of the race wheel for street use. The race
wheels for this product category are the Dragstar and the Super Lite II. In
addition, the Company has introduced a series of race wheels with billet centers
for street use. In 1998, the Company introduced a steel wheel for truck racing.
ONE-PIECE CAST ALUMINUM WHEELS
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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 United States and
Brazil.
In 1998, the Company is introducing four styles under its XLS series and a
newly designed version of its S/S style wheel called the S/S 980 series.
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.
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.
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 purchased from the Far East sources.
PRODUCT DEVELOPMENT
The Company currently offers a broad spectrum of products that are designed
to fit a wide variety of automobiles, vans, and trucks. The Company plans to
leverage these product lines by adapting its wheels and accessories to fit
additional vehicle models, makes, and years. In addition, the Company intends
to increase its product development efforts with increased emphasis on products
for trucks and sport utility vehicles. In this regard, during the past two
years the Company introduced its CRAGAR XLS Wheel line, the CRAGAR S/S 980
series and significantly broadened its TRU SPOKE line with three new wheel
designs and a new line of accessories. The Company has also developed a new
line of motorcycle wheels for Harley-Davidson Motorcycles.
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To enhance its product development efforts, the Company engages experienced
outside consultants to assist the Company's current in-house product development
staff consisting of two engineers.
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. Some of these customers include J. H. Heafner Company, Inc.,
Keystone Automotive Warehouse and RELCO. 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 41.0% and 39.7% of the Company's gross sales in 1997
and 1996, respectively.
TIRE DEALERS AND AUTOMOTIVE PERFORMANCE RETAILERS.
The Company sells its custom wheels and other products to major tire and
automotive performance retailers, including Super Shops, Discount Tire and Les
Schwab, 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 45.3% and 42.4% of the Company's gross sales in 1997 and
1996, respectively.
MAIL ORDER OUTLETS.
The Company sells its products to mail order catalog houses, including
Buckeye Sales and Atech Motorsports, 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 8.8% and 13.9% of the Company's gross sales in 1997
and 1996, respectively.
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INTERNATIONAL DISTRIBUTORS.
The Company sells to exporters and directly to distributors in select
foreign countries. International sales accounted for approximately 4.8% and
4.0%, respectively, of the Company's gross sales in 1997 and in 1996.
The Company intends to increase its distribution capabilities in
underserved markets, such as California, southern Florida, New England, and the
northwestern United States and to broaden its customer base to include more
major tire distributors that supply both national and local retail tire stores.
The Company has also implemented a national accounts program in which it sells
products directly to mass merchandisers that require factory direct service.
The Company has established redistribution arrangements necessary to serve these
national account prospects as well as certain local and regional areas not
currently serviced by its current warehouse distributors. In addition, CRAGAR
will continue 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, 1997, the Company employed six individuals in its sales
and marketing department and retained five independent representative agencies.
The Company's sales and marketing employees, as well as outside agencies, 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.
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.
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For the year ended December 31, 1997, the Company's ten largest customers
accounted for a total of approximately 66.3% of gross sales, with Super Shops,
Inc. ("Super Shops") accounting for 27.5%, J. H. Heafner Company, Inc. 9.6%, and
Keystone Automotive 6.2%. In 1996, the Company's ten largest customers
accounted for a total of approximately 75.7% of its gross sales, with Super
Shops, J. H. Heafner Company, Inc., and B & R Wholesale Tire accounting for
24.3%, 12.1%, and 8.4% of gross sales, respectively. The Company does not have
any long-term contractual relationships with any of its major customers. Due to
the significant concentration of sales to the Company's top ten customers, the
loss of any one such customer could have a material impact on the Company's
results of operations and financial condition.
On September 19, 1997, the Company's principal customer, Super Shops,
filed for reorganization under Chapter 11 of the Federal Bankruptcy Code in the
United States Bankruptcy Court, Central District of California. At December 31,
1997, the account receivable owed to the Company by Super Shops totaled
$3,523,028, all of which has been reserved. Super Shops has ceased operations
and has begun a liquidation plan. Because the Company is an unsecured creditor,
and liquidation proceeds may not be sufficient to satisfy claims of secured
creditors, there is no assurance that the Company will recover any of the
account receivable from Super Shops. Furthermore, even if the Company is able
to recover a portion of the account receivable, the timing and amount of such
recovery is uncertain. Accordingly, the Company has established an allowance
for bad debt that includes the entire $3,523,028 account receivable from Super
Shops. Since Super Shops has ceased operations, the Company has lost its
largest customer. It is uncertain whether other current or new customers can
make up for the lost revenues generated by Super Shops. See "Management's
Discussion and Analysis or Plan of Operation - Liquidity and Capital Resources."
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 72 days as of December 31, 1997.
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
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suppliers. In addition, the Company intends to continue improving 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., American Eagle and Superior Industries International, as well as suppliers
to major automobile manufacturers, pose significant competition because of their
substantial resources.
The level and source of the Company's competition varies based on product
category. Cast aluminum wheels comprise the largest portion of the custom wheel
market. There are numerous competitors in the cast wheel market, including
American Racing Equipment, Inc., Prime Wheel-Golden Wheel, Progressive Custom
Wheels, Inc., Ultra Custom Wheel Co., American Eagle, 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., Luxor and Dayton Wheel Products, Inc. In
steel wheels, competitors include Mangels Wheels, Unique Wheel, Inc. and
American Racing Equipment, Inc.
15
<PAGE>
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-Registered Trademark-, CRAGAR XLS-TM-, Keystone-Registered
Trademark- Klassic-Registered Trademark-, Legacy-TM-, CRAGAR LITE-Registered
Trademark-, Star Wire-TM-, TRU=CRUISER-TM-, Street Pro-Registered Trademark-,
S/S-Registered Trademark-, The Wheel People-TM-, and TRU=SPOKE-Registered
Trademark- 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.
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. Stock adjustment returns were approximately $630,142 in
1997 compared to approximately $849,734 for 1996. Warranty returns were
approximately $473,458 in 1997 and approximately $429,797 in 1996. There can be
no assurance that future warranty claims, returns,
16
<PAGE>
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, 1997, the Company had 74 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 is an unsecured creditor in the matter of IN RE SUPER SHOPS,
INC., ET AL., Case No. LA 97-46094-ER, a bankruptcy action filed by Super Shops,
Inc., previously the Company's primary customer. Because the Company is an
unsecured creditor in this matter, the amount and timing of the recovery, if
any, on its account receivable from Super Shops, Inc. is uncertain. See
"Management's Discussion and Analysis or Plan of Operation - Liquidity and
Capital Resources." There are currently no other material pending proceedings
to which the Company is a party or to which any of its property is subject,
although the Company from time to time is involved in routine litigation
incidental to the conduct of its business. The Company currently maintains
product liability insurance, with limits of $1.0 million per occurrence and $2.0
million in the aggregate per annum. However, such coverage is becoming
increasingly expensive and difficult to obtain. There can be no assurance that
the Company will be able to maintain adequate product liability insurance at
commercially reasonable rates or that the Company's insurance will be adequate
to cover future product liability claims. Any losses that the Company may
suffer as a result of claims in excess of the Company's coverage could have a
material adverse effect on the Company's business, financial condition, and
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
17
<PAGE>
During the Company's fiscal quarter ended December 31, 1997, 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, 1997, as reported by NASDAQ, the closing sales prices of
the Company's Common Stock and Warrants were $5.938 and $0.788, respectively.
Prior to the completion of the Company's IPO in December 1996, there was no
public market for the Company's securities.
On April 13, 1998, the closing sales prices of the Company's Common Stock
and Warrants as reported by NASDAQ were $5.00 and $0.375, 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.
The following table sets forth the range of high and low closing bid prices
for the Company's Common Stock as reported by NASDAQ for each quarter following
the Company's IPO in December 1996. Prior to December 1996, there was no public
market for the Company's securities.
<TABLE>
<CAPTION>
BID PRICES (1)
-------------------
HIGH LOW
---- ---
<S> <C> <C>
Quarter ended March 31, 1997 $6 $4 3/8
Quarter ended June 30, 1997 5 3/8 4 1/4
Quarter ended September 30, 1997 5 3/8 5
Quarter ended December 31, 1997 6 1/2 4 1/2
</TABLE>
(1) All quotations represent official data released by NASDAQ.
Since its inception, the Company has not paid nor 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 existing credit facility with
NationsCredit Commercial Funding Corp. ("NCFC") prohibits the payment of
dividends by the Company without the lender's prior written consent.
18
<PAGE>
Between April 29, 1997 and June 30, 1997, the Company issued options to
purchase 115,200 shares of Common Stock to officers and directors of the
Company.
Apart from its IPO, the Company sold the following securities in 1997 and
1998 without registration under the Securities Act of 1933, as amended (the
"Securities Act"):
In December 1997, the Company obtained debt financing from two
stockholders of the Company totaling $600,000. The notes, which bear interest
at a rate of 12% per annum, were due in full in January 1998. In January 1998,
the $600,000 notes to stockholders were converted into 6,000 shares of Series A
Convertible Preferred Stock as part of the $2.0 million private placement,
discussed below.
On January 23, 1998, the Company raised $2.0 million from a private
placement of 20,000 shares of Series A Convertible Preferred Stock ("Series A
Preferred Stock") and related Warrants. The private placement was made to a
group of accredited investors in reliance on the exemptions from registration
provided by Sections 4(2) and 4(6) under the Securities Act of 1933, and
included the conversion of $900,000 of existing debt into equity. As of March
31, 1998, another $250,000 had been raised from the private placement of 2,500
shares of Series A Preferred Stock, for a total of $2.25 million in additional
paid-in-capital.
The purpose of the private placement was to raise additional capital in
order to meet the minimum maintenance requirements for continued listing on
NASDAQ and the Boston Stock Exchange. The Company's capital and surplus and
shareholders' equity had fallen below the minimums required by NASDAQ and the
Boston Stock Exchange primarily as a result of the establishment of the
allowance for bad debt arising from the bankruptcy of Super Shops. With the
proceeds from the private placement, the Company exceeds the minimum
requirements for continued listing on the Boston Stock Exchange, but currently
does not meet the minimum tangible net worth amount required to maintain its
listing on NASDAQ. There can be no assurance that the Company will be able to
meet these minimum requirements in the future. If the Company fails to meet and
maintain such requirements in the future, the Company's securities could be
delisted from NASDAQ and the Boston Stock Exchange, which likely would have a
material adverse effect on the market value of the Company's securities.
The Series A Convertible Preferred Stock is subject to the terms and
conditions of the Certificate of Designation and the Series A Convertible
Preferred Stock Purchase Agreement discussed below and in detail in the
Company's Form 8-K/A filed on January 15, 1998.
Holders of Series A Preferred Stock are entitled to receive cumulative
dividends equal to 7% per annum on the Stated Value of the Series A Preferred
Stock ($100 per share). Dividends are payable in arrears at the Company's
option in either (i) cash or (ii) additional shares of Series A Preferred Stock.
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<PAGE>
Holders of the Series A Preferred Stock will have no voting rights prior to
conversion, except that, so long as any shares of Series A Preferred Stock
remaining outstanding, the Company may not, without the affirmative vote of the
holders of a majority of the Series A Preferred Stock then outstanding, (i)
alter or change adversely the powers, preferences or rights given to the Series
A Preferred Stock or (ii) authorize, create, issue or increase any class of
stock ranking as to dividends or distribution of assets upon liquidation senior
to or pari passu with the Series A Preferred Stock.
Upon any liquidation, dissolution, or winding-up of the Company, the
holders of the Series A Preferred Stock will be entitled to receive out of the
assets of the Company, for each share of Series A Preferred Stock outstanding,
an amount equal to the Stated Value per share, plus an amount equal to accrued
but unpaid dividends per share, before any distribution or payment is made to
the holders of any securities junior to the Series A Preferred Stock.
Each share of Series A Preferred Stock is convertible into shares of the
Company's Common Stock at the Series A Conversion Ratio (as defined below) at
the option of the holder of the Series A Preferred Stock, in whole or in part,
at anytime following the 120-day period after the issuance of the Series A
Preferred Stock. On the third anniversary of the issuance of the Series A
Preferred Stock, each share of Series A Preferred Stock remaining outstanding
will be mandatorily converted into shares of Common Stock at the Series A
Conversion Ratio. The Series A Conversion Ratio equals a fraction, the
numerator of which is the Series A Stated Value plus accrued but unpaid
dividends, and the denominator of which is the Series A Conversion Price (as
defined below) at such time.
The Series A Conversion Price for each share of Series A Preferred Stock in
effect on any conversion date during the 60-day period following the 120-day
period after the issuance of the Series A Preferred Stock will equal the Series
A Fixed Price (as defined below). Thereafter, the Series A Conversion Price for
each share of Series A Preferred Stock in effect on any conversion date will
equal the lesser of the Series A Fixed Price or the Series A Floating Price (as
defined below). The "Series A Fixed Price" will be equal to the greater of 115%
of the closing bid price per share of the Common Stock on the date of issuance
of the Series A Preferred Stock or $6.75, and the Series A Floating Price will
be equal to 97% of the average closing bid price per share of the Company's
Common Stock during the 10 trading days immediately preceding the date of
conversion; provided, however, that (i) for each 30-day period following the
date of issuance of the Series A Preferred Stock, the Series A Floating Price
will be reduced by an additional 1 1/2% of the closing bid price per share of
the Company's Common Stock during the 10 trading days prior to the date of
conversion, (ii) in no event will the Series A Floating Price be reduced below
80% of the closing bid price per share of the Company's Common Stock, and (iii)
in the event any holder of Series A Preferred Stock has directly or indirectly
taken a "short position" or engaged in any substantially similar transaction
with respect to the Common Stock at anytime during the period commencing on the
date of issuance of the Series A Preferred Stock through the date of conversion
of such stock, the Series A Conversion Price for the Series A Preferred Stock
held by such holder will be the greater of the Series A Fixed Price and the
Series A Floating Price.
20
<PAGE>
If the registration statement to be filed by Company is not declared
effective by the Securities and Exchange Commission for any reason within 120
days after the date of issuance of the Series A Preferred Stock, then for
each month after the expiration of such 120-day period that such registration
statement has not been declared effective, the Series A Floating Price, as
computed above, will be decreased by an additional 1%, provided, however,
that in no event will the aggregate discount to the Series A Floating Price
under (i) of the prior sentence and this sentence exceed 20%. As of June 17,
1998, the registration statement had not been filed with the Securities and
Exchange Commission nor had it been declared effective. The Company intends
to file a registration statement covering the shares of Common Stock
underlying the Series A Preferred Stock as promptly as practicable after the
filing of this Report on Form 10-KSB/A.
The Series A Preferred Stock will be redeemable, in whole or in part, at
anytime upon the payment to the holders of the Series A Preferred Stock of (i) a
cash payment equal to the closing bid price per share of the Company's Common
Stock on the date of redemption, multiplied by the number of shares of Common
Stock that would be issued if the Series A Preferred Stock was converted on such
date at the Series A Conversion Price, (ii) a cash payment equal to all accrued
dividends payable with respect to such Series A Preferred Stock, and (iii) a
number of warrants to purchase Common Stock with an exercise price equal to the
Series A Preferred Stock being redeemed by the Series A Fixed Price, with a term
expiring three years from the date of redemption.
In case of any reclassification of the Company's Common Stock, any
consolidation or merger of the Company with or into another entity, the sale or
transfer of all or substantially all of the assets of the Company and certain
other events, the holders of the Series A Preferred Stock then outstanding will
have the right thereafter to convert such shares only into the shares of stock
and other securities and property receivable upon or deemed to be held by the
holders of the Company's Common Stock following such reclassification,
consolidation, merger, sale, or transfer, and the holders of the Series A
Preferred Stock will be entitled upon such event to receive such amount of
securities and property as the holders of the Common Stock of the Company into
which such shares of Series A Preferred Stock could have been converted
immediately prior to such reclassification, consolidation, merger, sale or
transfer would have been entitled.
In connection with the issuance of the Series A Preferred Stock, the
Company also granted Warrants to the holders of the Series A Preferred Stock to
acquire up to 333,333 shares of the Company's Common Stock at an exercise price
of $8.10 per share. The Warrants may be exercised at any time on or before
January 23, 2001, three years after the date of issuance of the Series A
Preferred Stock.
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
21
<PAGE>
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
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 or Plan of Operation," and in the Notes
to the Company's Financial Statements, describe factors, among others, that
could contribute to or cause such differences. Specifically, the Company's
ability to achieve its strategies is substantially dependent upon its ability
to secure a replacement credit facility on satisfactory terms, of which there
can be no assurance. See "--Liquidity and Capital Resources."
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, 1997, the Company's ten largest customers accounted for a total of
approximately 66.3% of gross sales, with Super Shops, Inc., ("Super Shops")
accounting for 27.5%, J. H. Heafner Company, Inc. 9.6%, and Keystone Automotive
6.2%. In 1996, the Company's ten largest customers accounted for a total of
approximately 75.7% of its gross sales, with Super Shops, J. H. Heafner Company,
Inc., and B & R Wholesale Tire accounting for 24.3%, 12.1%, and 8.4% of gross
sales, respectively. The Company does not have any long-term contractual
relationships with any of its major customers. Due to the significant
concentration of sales to the Company's top ten customers, the loss of any one
such customer could have a material impact on the Company's results of
operations and financial condition.
On September 19, 1997, the Company's principal customer, Super Shops,
filed for reorganization under Chapter 11 of the Federal Bankruptcy Code in
the United States Bankruptcy Court, Central District of California. Super
Shops has ceased operations and has begun a liquidation plan. Because the
Company is an unsecured creditor, and liquidation proceeds may not be
sufficient to satisfy claims of secured creditors, there is no assurance that
the Company will be able to
22
<PAGE>
recover any of the account receivable from Super Shops. Furthermore, even if
the Company is able to recover a portion of the account receivable, the timing
and amount of such recovery is uncertain. Accordingly, the Company has
established an allowance for bad debt that includes the entire $3,523,028
account receivable from Super Shops. Since Super Shops has ceased operations,
the Company has lost its largest customer. It is uncertain whether other
current or new customers can make up for the lost revenues generated by Super
Shops.
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 has been amortized to income over five
years using the straight-line method ($737,468 per annum through December 31,
1997). As of December 31, 1997 the remaining balance of excess of Fair Value of
Assets Acquired Over Cost is zero.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of net sales represented by certain items included in the Company's Statements
of Operations.
<TABLE>
<CAPTION>
Years Ended
December 31
---------------------------------------------------
STATEMENTS OF OPERATIONS DATA: 1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . 84.1 91.1 88.5
---- ---- ----
Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.9 8.9 11.5
Selling, general and administrative expenses . . . . . . . . . . . . . . (44.7) (16.6) (12.7)
Amortization of excess of fair value of assets acquired over cost . . . . 4.5 4.0 3.2
--- --- ---
Income (loss) from operations . . . . . . . . . . . . . . . . . . . . . . (24.3) (3.7) 2.0
Interest and other expenses, net . . . . . . . . . . . . . . . . . . . . (4.5) (4.1) (5.0)
Extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.0 1.8 0.0
--- --- ---
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (28.8) (6.0) (3.0)
---- --- ---
---- --- ---
</TABLE>
23
<PAGE>
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 AND YEAR ENDED DECEMBER 31, 1996
Net sales consist of gross sales less discounts, returns, and
allowances. Net sales for the year ended December 31, 1997 were $16,545,159
compared to $18,625,497 in the year ended December 31,1996, representing a
11.2% decline in net sales. The decrease was primarily due to the Company's
decision to withdraw from a relationship with a significant customer that had
demanded price reductions as a condition of further business, which accounted
for approximately $1.3 million of the decrease, and the balance was
attributable to a reduction of sales of relatively low margin steel wheels.
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, 1997
was $2,636,887 versus $1,661,799 for the year ended December 31, 1996. As a
percentage of net sales, gross profit increased in 1997 compared to 1996, from
8.9% to 15.9%. Product mix changes and the introduction of several new wheel
styles at higher margins contributed to the gross margin improvement. Cost
reduction efforts including the reduction of production personnel and
outsourcing of selected manufacturing processes positively affected gross profit
in the second, third and fourth quarters of 1997 as programs started to be fully
implemented. 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 non-manufacturing overhead. These expenses for the year ended December 31,
1997 were $7,394,235 compared to $3,091,308 for the year ended December 31,
1996. This 139.2% increase was primarily attributed to the expense of
$3,523,028 recognized for bad debt reserve related to the past due receivable
from Super Shops as described above. Excluding the allowance, SG&A was
$3,871,207 ( an increase of $779,899) for the year ended December 31, 1997,
which represents an increase of 33.8% over the comparable twelve month period
ended December 31, 1996. This increase was due in part to the Company's focus
on promoting its new products through increased marketing expenses and related
travel expenses. Promotional expenses for the Company's racing wheel market
segmented accounted for approximately 30% of the period-to-period change. Costs
associated with public company responsibilities including reporting requirements
and investor relations account for an additional 10% of the increase in SG&A.
The balance of the increase resulted from general increases in marketing
expenses and promotional expenses, including the introduction of the
Harley-Davidson motorcycle wheels.
Interest and other expenses, net, for fiscal 1997 were $748,905 compared to
$767,293 for fiscal 1996. Interest expense decreased from $1,027,135 in 1996 to
$752,388 in 1997, a decrease of $274,747 or 26.7%. This decrease is attributed
to a lower average outstanding debt balance in 1997 than in 1996 resulting from
proceeds from the Company's IPO in December and from the elimination of
certain investor debt. Other
24
<PAGE>
income, net decreased from $259,842 in 1996 to $3,483 in 1997. The 1996 amount
consisted primarily of a $287,000 gain from the sale of certain Company assets,
which did not occur in 1997.
Because of its carry-forward losses from previous years, the Company had no
income tax provision in 1997 and had no provision for alternative minimum taxes
in 1997.
Net loss for the year ended December 31, 1997 was $4,768,785 compared to
$1,128,844 for the year ended December 31, 1996, an increase of $3,639,941. Of
this increase, $3,523,028 was attributable to the full reserve placed on the
Super Shops accounts receivable. During 1996, the Company recognized an
extraordinary gain from the forgiveness of debt in the amount of $330,489 that
did not occur in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Pursuant to a registration statement (SEC File No. 333-13415) declared
effected on December 18, 1996, the Company sold 850,000 shares of Common Stock
and 850,000 Common Stock Purchase Warrants in an offering underwritten by
Dickinson & Co. and RAS Securities Corp. Including the overallotment, the
aggregate gross proceeds of the offering were $5,617,750. The Company's total
expenses in connection with the offering, including underwriting discounts and
commissions, were $1,123,550. The net proceeds of the offering were $4,494,200,
which significantly increased the Company's cash and equity balances. Of these
proceeds, $1,500,000 was used to pay off the aggregate principal amount of
bridge financing notes issued by the Company on July 1, 1996, $1,100,000 was
used for advertising the promotional activities, $500,000 was used for product
development, and $330,000 was used for additional staffing and consultants. The
remainder of the proceeds has been used to reduce the outstanding loan balance
on the Company's credit facility with Norwest Business Credit, Inc. 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.
During the quarter ended March 31, 1998, the Company raised $2.25 million
from a private placement of 22,500 shares of Series A Convertible Preferred
Stock ("Series A Preferred Stock") and related Warrants. See "Market For The
Registrant's Common Stock and Related Stockholder Matters."
In April 1995, the Company entered into a revolving credit facility
("Credit Facility") with Norwest Business Credit, Inc. ("Norwest"). As of
April 1, 1998, the Credit Facility had a maximum commitment of $5.8 million,
subject to certain restrictions with respect to the collateral borrowing
base. The Credit Facility was due to expire on April 15, 1998 and was
secured by the Company's accounts receivable, inventories, intangible assets,
and property and equipment. Interest was due monthly at the prime rate plus
4.25%. Norwest agreed to temporarily extend the Credit Facility through
April 30, 1998.
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As a result of Super Shops filing for Chapter 11 bankruptcy protection,
the Company was unable to use the outstanding account receivable from Super
Shops of approximately $3,523,028 in determining the amount the Company was
able to borrow under the Credit Facility. As of December 31, 1997, the
outstanding balance under the Credit Facility was approximately $5.52
million, and the Company was over-advanced on its borrowing base by
approximately $763,000. The Company entered into an amendment to its
Security and Credit Agreement with Norwest which allowed the over-advance
subject to a pay down obligation requiring the Company to reduce the
over-advance amount outstanding under the Credit Facility to zero by January
24, 1998. The Company met this requirement as of January 24, 1998. However,
the Credit Facility required the maintenance of certain specified financial
ratios, as well as other non-financial requirements. With the filing of
reorganization by Super Shops, the Company was not able to comply with these
requirements. The Company had discussions with Norwest and other
third-party lenders in order to replace the Credit Facility, which was
scheduled to expire on April 15, 1998, subject to extension until April 30,
1998.
On April 20, 1998, the Company entered into a credit arrangement with
NationsCredit Commercial Funding Corporation ("NCFC"), which replaced the
Norwest Credit Facility. The terms of this credit arrangement provide for a
maximum combined term loan and revolving loan totaling $8.5 million at an
interest rate of 1.25% above the prime rate (the "NCFC Credit Facility").
The NCFC Credit Facility is secured by substantially all of the Company's
assets and has a term of four years. The Company borrowed $4,857,683 under
the NCFC Credit Facility to fully repay the outstanding amount under the
Norwest Credit Facility, which left the Company with $1,367,467 of
availability following the closing of the NCFC Credit Facility. The Company
believes that the NCFC Credit Facility together with other sources of cash
will be sufficient to meet the Company's working capital needs for at least
the next twelve months. There can be no assurance, however, that the Company
will not require additional funding in the event that cash flow from
operations is less than anticipated or expenditures are greater than
expected. If the Company requires additional financing, the Company may be
forced to pursue other sources of working capital.
At December 31, 1997, the Company had an accumulated deficit of
$12,327,274. For the year ended December 31, 1997, the Company's operating
activities used $3,990,522 of cash, which was primarily attributable to a
$3.02 million increase in accounts receivable and an $800,000 reduction in
accounts payable and accrued expenses. The Company's decrease in inventory
in 1997 from the 1996 level provided approximately $1.91 million cash. The
Company's financing activities provided approximately $3.60 million cash
resulting primarily from borrowings on the line of credit and proceeds from
the issuance of long-term debt and common stock; however, the Company was in
violation of certain financial covenants as of December 31, 1997.
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As of December 31, 1997, the Company's average accounts receivable days
outstanding was 72 days as compared to 70 days at December 31, 1996. 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 0.8%
at December 31, 1996, as compared to 54.8% at December 31, 1997. This increase
in the allowance reflects the reserve for the estimated loss on the Super Shops
accounts receivable. The Company's inventory turnover ratio approximated 2.5
for the year ended December 31, 1997 as compared to 2.6 for the year ended
December 31, 1996.
As a consequence of the bankruptcy of Super Shops, management was
uncertain whether the anticipated cash flow from operations would be
sufficient to meet the Company's anticipated operating and capital needs. As
a result of the NCFC Credit Facility, however, management believes that the
amounts available under that credit facility plus anticipated cash flow from
operations will be sufficient to meet the Company's anticipated operating and
capital needs for at least the next twelve months. There can be no assurance,
however, that cash flow from operations will not be less than anticipated or
that expenses will not be greater than expected, in which case the Company
may be required to pursue other sources of working capital. Accordingly, the
Company is negotiating with other financial institutions to secure additional
sources of capital. No assurance can be given of the Company's ability to
obtain such financing on favorable terms, if at all.
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.
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RISKS ASSOCIATED WITH BANKRUPTCY OF PRINCIPAL CUSTOMER
On September 19, 1997, the Company's principal customer, Super Shops,
Inc., ("Super Shops") filed for reorganization under Chapter 11 of the
Federal Bankruptcy Code in the United States Bankruptcy Court, Central
District of California. On December 31, 1997, the account receivable owed to
the Company by Super Shops totaled $3,523,028. The Company will continue to
review various alternatives with respect to this matter. The Company's Chief
Operating Officer is the Chairman of the Creditors' Committee and is
vigorously attempting to retrieve all funds due the Company. Super Shops has
ceased operations and has begun a liquidation plan. As an unsecured
creditor, there is no assurance that the Company will recover any of the
account receivable from Super Shops. Furthermore, if the Company should be
able to recover a portion of the account receivable the timing and amount of
such recovery is uncertain. Accordingly, the Company has established an
allowance for bad debt that includes the entire $3,523,028 account receivable
from Super Shops. Since Super Shops has ceased operations, the Company has
lost its largest customer. It is uncertain whether other current or new
customers can make up for the lost revenues generated by Super Shops.
Failure to resolve this matter satisfactorily could have a material adverse
effect on the Company.
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,
1997, the Company incurred a net loss of $4,768,785 including $3,523,028 from
the reserve placed on the Super Shops accounts receivable. There can be no
assurance that the Company will be profitable in the future. Net sales for the
year ended December 31, 1997 declined to $16.5 million from $18.6 million for
the year ended December 31, 1996. As of December 31, 1997, the Company had
cumulative losses of $12.3 million and a total stockholders' deficiency of
approximately $457,000.
DEPENDENCE ON EXTERNAL FINANCING
On April 20, 1998, the Company entered into a credit arrangement with
NationsCredit Commercial Funding Corporation ("NCFC") the terms of which
provide for a combined term loan and revolving loan totaling $8.5 million at
an interest rate of 1.25% above the prime rate (the"NCFC Credit Facility").
The NCFC credit facility is secured by substantially all of the Company's
assets and has a term of four years. The Company used the proceeds of the
NCFC Credit Facility to fully repay the existing credit facility with Norwest
Business Credit, Inc., which was in default. Prior to the NCFC Credit
Facility, the Company had experienced working capital deficiencies that
adversely affected the Company's operations. As a result of the Company's
ongoing capital requirements, the Company is substantially dependent on the
NCFC Credit Facility for working capital.
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Although the Company currently is in compliance with the terms and conditions
of the NCFC Credit Facility, there can be no assurance that the Company will
be able to continue to satisfy such terms and conditions in the future. In
addition, if the Company's anticipated cash flow from operations is
significantly lower than anticipated or its anticipated expenses are
significantly greater than expected, there can be no assurance that the
Company's cash flow from operations will be sufficient to meet its
obligations under the NCFC Credit Facility or enable the Company to
implement fully its business strategies. As a result, the Company may be
required 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. 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.
DATA PROCESSING AND TECHNOLOGY AND YEAR 2000
The Company has commenced a study of its computer systems in order to assess its
exposure to year 2000 issues. The Company expects to make the necessary
modifications or changes to its computer information systems to enable proper
processing of transactions relating to the year 2000 and beyond. The Company
believes the cost to modify its existing systems, should it choose to do so, is
not material. The Company will evaluate appropriate courses of action,
including replacement of certain systems whose associated costs would be
recorded as assets and subsequently amortized, or modification of its existing
systems which costs would be expensed as incurred. There can be no assurance
that the Company will be able to completely resolve all year 2000 issues in a
timely fashion or that the ultimate cost to identify and implement solutions to
all year 2000 problems will not be material to the Company.
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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. The Company's capital and surplus and
shareholders' equity have fallen below the minimums required by Nasdaq and
the Boston Stock Exchange primarily as a result of the establishment of an
allowance for bad debt arising from the bankruptcy of the Company's primary
customer. With the $2.25 million proceeds from the private placement of
Series A Convertible Preferred Stock, the Company exceeds the minimum
requirements for continued listing on the Boston Stock Exchange, but will
need to raise additional equity capital to exceed the minimum listing
requirements for Nasdaq. Nasdaq has advised the Company that it intends to
delist the Company's securities from the Nasdaq Small Cap Market for failure to
meet the minimum net tangible assets requirement for continued listing. The
Company has requested an oral hearing to appeal the decision by Nasdaq and
intends to demonstrate to Nasdaq that it has adopted a plan to achieve and
maintain compliance with the net tangible assets requirement on a timely
basis. There can be no assurance, however, that Nasdaq will grant the
Company's appeal or, if granted, 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.
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
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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 may 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
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, 1997,
the Company's ten largest customers accounted for a total of approximately 66.3%
of gross sales, with Super Shops accounting for 27.5%, J. H. Heafner Company,
Inc. 9.6%, and Keystone Automotive 6.2%. For the year ended December 31, 1996,
the Company's ten largest customers accounted for a total of approximately 75.7%
of its gross sales, with Super Shops, J. H. Heafner Company, Inc., and B & R
Wholesale Tire accounting for 24.3%, 12.1%, and 8.4% of gross sales,
respectively. The Company does not have any long-term contractual relationships
with any of its major customers. On September 19, 1997, Super Shops filed for
reorganization under Chapter 11 of the Federal Bankruptcy Code in the United
States Bankruptcy Court, Central District of California. At December 31, 1997,
the accounts receivable owed to the Company by Super Shops totaled $3,523,028,
all of which has been reserved. Super Shops has ceased operations and has begun
a liquidation plan. As an unsecured creditor, there is no assurance that the
Company will recover any of the accounts receivable from Super Shops.
Furthermore, if the Company should be able to recover a portion of the accounts
receivable the timing of such recovery is uncertain. Accordingly, the Company
has established an allowance for bad debt that includes the entire $3,523,028
account receivable from Super Shops. Since Super Shops has ceased operation,
the Company has lost its largest customer. It is uncertain whether other
current or new customers can
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make up for the lost revenues generated by Super Shops. See "Management's
Discussion and Analysis or Plan of Operation - Liquidity and Capital Resources".
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, some of the
Company's suppliers are located in China, which from time to time has been
subject to numerous trading restrictions by the United States. The Company also
has had 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 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.
NO ASSURANCE OF SUCCESSFUL ACQUISITIONS
The Company is considering acquisitions of and alliances with other companies
that could complement the Company's existing business, including acquisitions of
complementary product lines. There have been discussions with a number of
companies, however, 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
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amortization of expenses related to goodwill and intangible assets, all of which
could adversely affect the Company's profitability. Acquisitions involve
numerous risks, such as the diversion of the attention of the Company's
management from other business concerns, the entrance of the Company into
markets in which it has had no or only limited experience, and the potential
loss of key employees of the acquired company, all of which could have a
material adverse effect on the Company's business, financial condition, and
results of operations.
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.
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RISKS ASSOCIATED WITH INTERNATIONAL SALES; CURRENCY FLUCTUATIONS
As part of the Company's business strategy, it intends to expand into selected
international markets. In 1997 and 1996, the Company derived approximately 4.8%
and 4.0%, 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.
CONTROL BY EXISTING STOCKHOLDERS
The directors, officers, and principal stockholders of the Company beneficially
own approximately 26.9% 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 might 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. In the first quarter ended
March 31, 1998, for example, the Company issued 22,500 shares of its Series A
Preferred Stock for $2.25 million in additional capital. Additional series
of Preferred Stock could be issued, 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. There
can be no assurance that the Company will not issue additional shares of
Preferred Stock in the future.
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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 12.65% 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
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 NCFC Credit Facility prohibits the payments of cash
dividends without the lender's consent.
ACCOUNTING MATTERS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
No. 130) which became effective for the Company January 1, 1998. SFAS No. 130
establishes standards for reporting and displaying comprehensive income and its
components in a full set of general-purpose financial statements. Management
does not expect the adoption of SFAS No. 130 to have a material impact on the
Company.
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In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131) which became effective for
the Company January 1, 1998. SFAS No. 131 establishes standards for the way
that public enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim reports issued to stockholders.
Management does not expect the adoption of SFAS No. 131 to have a material
impact on the Company.
ITEM 7. FINANCIAL STATEMENTS
The audited financial statements of the Company as of December 31, 1997 and
for each of the years in the two-year period ended December 31, 1997 are located
beginning at page F-1 of this Annual Report on Form 10-KSB/A.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
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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, 1998.
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.
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*
3.3 Form of Certificate of Designation***
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.*
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.*
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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.**
4.10 Form of Series A Convertible Preferred Stock Purchase
Agreement***
4.11 Form of Warrant***
4.12 NationsCredit Loan and Security Agreement dated as of April 20,
1998 executed by and between the Company and NationsCredit
Commercial Funding****
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*
38
<PAGE>
10.4 Employment Agreement, dated January 1, 1996, executed by and
between Registrant and Tony Barrett*
10.5 Purchase Program, dated January 24, 1996, executed by and between
Registrant and Super Shops*
10.6 Form of 1992 Promissory Note of Registrant, dated December 31,
1992, issued in connection with Registrant's original
capitalization*
10.6(a) Form of First Note Amendment of 1992 Promissory Note of
Registrant, dated September 30, 1994*
10.6(b) Form of Agreement to Forgive Interest, dated December 14, 1994,
executed by and between Registrant and certain holders of 1992
Promissory Notes of Registrant*
10.6(c) Form of Letter, dated February 16, 1995, issued by Registrant to
(i) holders of the 1992 Promissory Notes of Registrant, and (ii)
holder of the $350,000 Note of Registrant, whereby holders of the
Notes agreed to contribute to capital the 1992 Promissory Notes
and the $350,000 Note*
10.7 $108,333 Promissory Note of Registrant, dated December 15, 1994,
issued to Sidney Dworkin*
10.7(a) Form of Letter, dated February 16, 1995, issued by Registrant to
(i) holders of the 1992 Promissory Notes of Registrant, and (ii)
holder of the $350,000 Note of Registrant, whereby holders of the
Notes agreed to contribute to capital the 1992 Promissory Notes
and the $350,000 Note*
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*
39
<PAGE>
10.11(a) Form of First Note Amendment to 1993 Convertible Subordinated
Secured Note of the Registrant, dated September 30, 1995*
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 Loss 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.
* Incorporated by reference to the Company's Registration on Form SB-2 (No.
333-13415)
** Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1996 (No. 1-12559)
*** Incorporated by reference to the Company's Current Report of Form 8-K,
filed January 23, 1998 (no. 1-12559)
**** Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the period ended March 31, 1998 (No. 1-12559)
40
<PAGE>
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: June 17, 1998
--------------
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.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Michael L. Hartzmark President, Treasurer, Chief June 17, 1998
- ------------------------ Executive Officer, and
Michael L. Hartzmark Director (Principal Executive
Officer)
/s/ Michael R. Miller Chief Operating Officer, June 17, 1998
- ----------------------- Secretary, and Director
Michael R. Miller
/s/ Anthony W. Barrett Vice President of Sales June 17, 1998
- ------------------------ Operations (Principal
Anthony W. Barrett Financial and Accounting
Officer)
/s/ Sidney Dworkin Director June 17, 1998
- ------------------------
Sidney Dworkin
/s/ Donald McIntyre Director June 17, 1998
- ------------------------
Donald McIntyre
/s/ Mark Schwartz Director June 17, 1998
- ------------------------
Mark Schwartz
*By: /s/ Michael L. Hartzmark
--------------------------
Michael L. Hartzmark
Attorney-in-Fact
41
<PAGE>
CRAGAR INDUSTRIES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-2
Balance Sheet as of December 31, 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . .F-3
Statements of Operations for the years ended December 31, 1997 and 1996. . . . . . . . . . .F-4
Statements of Stockholders' Deficiency for the years ended December 31, 1997 and 1996. . . .F-5
Statements of Cash Flows for the years ended December 31, 1997 and 1996. . . . . . . . . . .F-6
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CRAGAR Industries, Inc.:
We have audited the financial statements of CRAGAR Industries, Inc. as listed in
the accompanying index. 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, 1997, and the results of its operations and its cash flows for each
of the years in the two-year period ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
March 20, 1998, except for the second
paragraph of Note 19 which is as of
April 20, 1998.
F-2
<PAGE>
CRAGAR INDUSTRIES, INC.
Balance Sheet
December 31, 1997
<TABLE>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 16,322
Accounts receivable, less allowance for doubtful accounts of $3,616,336 2,997,880
Inventories, net 4,653,480
Prepaid expenses 11,153
----------------
Total current assets 7,678,835
----------------
Property and equipment, net 972,753
Other assets, net 404,260
----------------
$ 9,055,848
----------------
----------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 2,147,243
Accrued expenses 1,003,295
Accrued interest 135,495
Line of credit, current maturities 1,518,544
Capital lease obligations, current maturities 108,123
----------------
Total current liabilities 4,912,700
Line of credit, excluding current maturities 4,000,000
Investor notes payable 600,000
----------------
Total liabilities 9,512,700
----------------
Stockholders' deficiency:
Preferred stock, par value $.01; authorized 200,000 shares, no shares issued or
outstanding --
Common stock, par value $.01; authorized 5,000,000 shares, 2,453,990 shares
issued and outstanding at December 31, 1997 24,540
Additional paid-in capital 11,845,882
Accumulated deficit (12,327,274)
----------------
Total stockholders' deficiency (456,852)
Commitments, contingencies and subsequent events
----------------
$ 9,055,848
----------------
----------------
</TABLE>
See accompanying notes to the financial statements.
F-3
<PAGE>
CRAGAR INDUSTRIES, INC.
Statements of Operations
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Net sales $ 16,545,159 18,625,497
Costs of goods sold 13,908,272 16,963,698
------------- -------------
Gross profit 2,636,887 1,661,799
------------- -------------
Selling, general and administrative expenses 7,394,235 3,091,308
Amortization of excess of fair value of assets acquired over cost (737,468) (737,469)
------------- -------------
Loss from operations (4,019,880) (692,040)
Other revenues (expenses), net:
Interest expense, net (752,388) (1,027,135)
Other, net 3,483 259,842
------------- -------------
Loss before income taxes and extraordinary item (4,768,785) (1,459,333)
Income taxes -- --
------------- -------------
Loss before extraordinary item (4,768,785) (1,459,333)
Extraordinary item:
Gain on forgiveness of debt -- 330,489
------------- -------------
Net loss $ (4,768,785) (1,128,844)
------------- -------------
------------- -------------
Basic net loss per share before extraordinary item $ (2.08) (1.49)
------------- -------------
------------- -------------
Basic net loss per share $ (2.08) (1.15)
------------- -------------
------------- -------------
Shares used in per share calculation 2,291,278 979,668
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to the financial statements.
F-4
<PAGE>
CRAGAR INDUSTRIES, INC.
Statements of Stockholders' Deficiency
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------
ADDITIONAL STOCKHOLDERS'
NUMBER OF PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIENCY)
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
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 com-
mon stock 920,000 9,200 4,484,999 -- 4,494,199
Contribution of
investor 359,722 3,597 1,996,403 -- 2,000,000
debt
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
Issuance of com-
mon stock
for warrants
exercised 243,685 2,437 510,741 -- 513,178
Net loss -- -- -- (4,768,785) (4,768,785)
------------- ------------- ------------- ------------- -------------
Balances,
December 31,
1997 2,453,990 $ 24,540 11,845,882 (12,327,274) (456,852)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to the financial statements.
F-5
<PAGE>
CRAGAR INDUSTRIES, INC.
Statements of Cash Flows
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,768,785) (1,128,844)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Provision for losses on accounts receivable 3,587,861 (38,553)
Provision for obsolete and slow-moving inventory (260,945) 43,618
Depreciation and amortization of property and equipment 306,069 298,911
Amortization of other assets 140,387 127,684
Amortization of excess fair value of assets acquired over cost (737,468) (737,469)
Gain on sale of property and equipment -- (287,000)
Extraordinary gain on forgiveness of debt -- (330,489)
Increase (decrease) in cash resulting from changes in:
Accounts receivable (3,023,383) 1,470,683
Inventories 1,910,077 1,033,912
Non-trade receivables -- 190,119
Prepaid expenses 27,345 (8,745)
Other assets (381,525) 33,499
Accounts payable and accrued expenses (806,034) 713,558
Accrued interest 12,143 (692)
------------ ------------
Net cash provided by (used in) operating activities (3,994,258) 1,380,192
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (453,317) (77,326)
Proceeds from the sale of property and equipment -- 350,000
------------ ------------
Net cash provided by (used in) investing activities (453,317) 272,674
------------ ------------
Cash flows from financing activities:
Net borrowings (repayments) on line of credit 2,561,152 (4,343,503)
Proceeds from issuance of long-term debt 600,000 1,462,200
Repayments of long-term debt (4,263) (2,378,941)
Repayments of capital lease obligations (69,219) (61,572)
Issuance of warrants -- 37,800
Net proceeds from issuance of common stock 513,178 4,494,199
------------ ------------
Net cash provided by (used in) financing activities 3,600,848 (789,817)
------------ ------------
Increase (decrease) in cash and cash equivalents (846,727) 863,049
Cash and cash equivalents at beginning of year 863,049 --
------------ ------------
Cash and cash equivalents at end of year $ 16,322 863,049
------------ ------------
------------ ------------
(Continued)
</TABLE>
F-6
<PAGE>
CRAGAR INDUSTRIES, INC.
Statements of Cash Flows, Continued
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 591,562 805,974
Cash paid for income taxes -- 3,342
NONCASH FINANCING AND INVESTING ACTIVITIES:
Contribution of subordinated investor debt $ -- 2,000,000
Exchange of asset reducing accounts payable -- 130,000
See accompanying notes to the financial
statements.
</TABLE>
F-7
<PAGE>
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements
December 31, 1997 and 1996
(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, Australia and other international
markets.
(2) LIQUIDITY
The Company's financial statements have been presented on the basis that it
is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company
has a accumulated deficit from operations of $12,327,274 as of December 31,
1997, has generated substantial losses in each of the last three years, and
has a stockholders' deficiency of $456,852 as of December 31, 1997. Super
Shops, the Company's primary customer, filed for Chapter 11 bankruptcy
protection on September 19, 1997 in the United States Bankruptcy Court,
Central District of California, resulting in a provision for estimated bad
debt expense of $3,523,028 in 1997, equal to 100% of the outstanding
accounts receivable from this customer. Additionally, the Company's
operating line of credit expired in April 1998. The Company has also
violated several covenants related to its line of credit and, accordingly,
the Company is in technical default under its credit agreement. The
Company's business plan calls for an increase in sales from new product
lines, decrease in operating expenses, equity investment from a new
investor and its stockholders, and refinance of its existing line of
credit which management believes will be adequate to provide the Company
with operating cash flow and to meet its current obligations. However,
there is no certainty that the Company's other plans will be successfully
carried out.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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.
F-8
<PAGE>
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements, Continued
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.
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 operations 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 whereby deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
F-9
<PAGE>
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements, Continued
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.
NET LOSS PER SHARE
In 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings Per Share. This statement
establishes standards for computing and presenting earnings per share
(EPS). Under this new statement, Basic EPS is computed based on weighted
average shares outstanding and excludes any potential dilution from stock
options, warrants and other common stock equivalents. Diluted EPS reflects
potential dilution from the exercise or conversion of securities into
common stock or from other contracts to issue common stock. Assumed
exercise of the outstanding stock options and warrants at December 31, 1997
and 1996 of 1,264,778 and 1,403,263, respectively, have been excluded form
the calculation of Diluted EPS as their effect is antidilutive. All
periods have been restated in accordance with SFAS 128.
On September 27, 1996, the Company's Board of Directors approved a 7-for-1
stock split. All share and per share amounts have been retroactively
adjusted to reflect this 7-for-1 stock split.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company reviews long-lived assets and certain identifiable intangibles
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 undiscounted 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.
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-10
<PAGE>
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, 1997, 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.
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 in excess of the FDIC insurance coverage of $100,000. As described
in note 1, the Company sells its products to automotive aftermarket
distributors and dealers throughout the United States, Canada, 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. Due
to the significant concentration of sales to the Company's top ten
customers, the loss of any one such customer could have a material impact
on the Company's results of operations and financial condition.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 amounts to conform
with 1997 presentation.
(4) INVENTORIES
Inventories as of December 31, 1997 consist of:
<TABLE>
<S> <C>
Raw materials and supplies $ 3,041,710
Work-in-process 197,074
Finished goods 2,123,694
--------------
5,362,478
Less allowance for obsolete and slow-moving 708,998
inventory --------------
$ 4,653,480
--------------
--------------
</TABLE>
F-11
<PAGE>
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements, Continued
(5) OTHER NON-OPERATING REVENUES
In July 1996, the Company terminated a services agreement with a
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.
(6) PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1997 consists of the following:
<TABLE>
<S> <C>
Equipment $ 1,229,788
Leasehold improvements 558,791
Furniture and fixtures 255,182
------------
2,043,761
Less accumulated depreciation and amortization 1,071,008
------------
Property and equipment, net $ 972,753
------------
------------
</TABLE>
(7) OTHER ASSETS
Other assets as of December 31, 1997 consists of:
<TABLE>
<S> <C>
Wheel design, patent and trademark costs $ 370,000
Deferred loan costs, net of accumulated 12,940
amortization of $104,561
Deposits and other 21,320
------------
Total other assets $ 404,260
------------
------------
</TABLE>
(8) ACCRUED EXPENSES
Accrued expenses as of December 31, 1997 consist of the following:
<TABLE>
<S> <C>
Accrual for stock adjustments, rebates, cash
discounts, advertising, royalty and warranty $ 532,938
Payroll and related benefits 146,583
Real estate, personal property and other taxes 83,333
Professional fees 185,040
Other 55,401
------------
$ 1,003,295
------------
------------
</TABLE>
F-12
<PAGE>
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements, Continued
(9) LINE OF CREDIT
The Company has a credit agreement with a finance company with a maximum
amount of credit of $9,500,000 available to the Company, which was
lowered to $5.8 million as of April 1, 1998, 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% (10.75% at
December 31, 1997). The loan agreement expires and is due in full in April
1998 and contains no automatic renewal options. The balance outstanding on
this facility at December 31, 1997 was $5,518,544. The Company is
overdrawn by approximately $763,000 on the line of credit available as of
December 31, 1997 and is in violation of certain financial covenants
required under the credit agreement, including minimum requirements for
adjusted net worth, net income and debt service coverage ratios.
Accordingly, the Company is in technical default under its credit
agreement. The Company paid this line of credit in full in April 1998
(note 19).
(10) BRIDGE NOTES FROM UNRELATED PARTIES
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 an 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.
(11) INVESTOR NOTES PAYABLE
In December 1997, the Company obtained debt financing from two stockholders
of the Company totaling $600,000. The notes, which bear interest at a rate
of 12% per annum, were due in full in January 1998. In January 1998, the
$600,000 notes to stockholders were converted into 6,000 shares of Series A
Convertible Preferred Stock as part of the $2.0 million private placement
(note 22).
F-13
<PAGE>
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements, Continued
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 $2,800 and $147,996 for the
years ended December 31, 1997 and 1996, respectively.
(12) OUTSTANDING WARRANTS
At December 31, 1997 and 1996, the Company has outstanding Class A warrants
to purchase 7,877.5 and 122,062.5 shares, respectively, of the Company's
common stock at $1.43 per share. These warrants became exercisable on
January 1, 1993 and expire on December 31, 1999. Class B warrants to
purchase 24,500 shares of the Company's common stock at $0.36 per share
outstanding at December 31, 1996 were exercised in 1997. At December 31,
1997 and 1996, the Company has outstanding Class C warrants to purchase
21,000 and 126,000 shares, respectively, of the Company's common stock at
$3.25 per share. These warrants became exercisable on July 1, 1996 and
expire on 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 the
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, 1997 and 1996 as a result of the completion of the Company's initial
public offering in December 1996.
(13) 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 purchase shares of the Company's common stock to eligible employees and
directors. 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 for incentive options 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. As of December 31, 1997, 71,600 stock options
under the Plans were available for grant.
F-14
<PAGE>
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements, Continued
The per share weighted-average fair value of stock options granted during
1997 and 1996 was $3.29 and $3.90, respectively, on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions: expected dividend yield 0%, expected volatility of 40.9% and
an expected life of 4 years for both 1997 and 1996. The risk-free interest
rate was 6.50% and 5.96% for 1997 and 1996, respectively.
The Company applies APB Opinion 25 in accounting for its Plan, and
accordingly, no compensation cost has been recognized for its stock options
to employees 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 increased to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Net loss:
As reported $ (4,768,785) (1,128,844)
Pro forma (4,984,985) (1,420,500)
------------- -------------
------------- -------------
Loss per share:
As reported $ (2.08) $ (1.15)
Pro forma (2.17) (1.44)
------------- -------------
------------- -------------
</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.
F-15
<PAGE>
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements, Continued
A summary of the aforementioned stock plan follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
----------------------------------- ----------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at the beginning of the
year 68,200 $ 5.52 -- --
Granted 141,700 5.12 68,200 5.52
Forfeited (36,500) 5.16 -- --
Exercised -- -- -- --
------------ ------------ ------------ ------------
Balance at the end of the year 173,400 5.26 68,200 5.52
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Exercisable at the end of the year 173,400 5.26 68,200 5.52
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted-average fair value of
options granted during the year $ 3.29 $ 3.90
------------ ------------
------------ ------------
</TABLE>
A summary of stock options granted at December 31, 1997 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 1997 LIFE PRICE 1997 PRICE
----------------- ---------------- ------------------ ----------- ---------------- -----------
<S> <C> <C> <C> <C>
$5.12 110,700 9 years, 7 mos. $ 5.12 110,700 $ 5.12
5.14 11,900 8 years, 6 mos. 5.14 11,900 5.14
5.60 50,800 8 years, 10 mos. 5.60 50,800 5.60
---------------- ----------- ---------------- -----------
173,400 $ 5.26 173,400 $ 5.26
---------------- ----------- ---------------- -----------
---------------- ----------- ---------------- -----------
</TABLE>
F-16
<PAGE>
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements, Continued
(14) COMMON STOCK
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 in the accompanying financial statements 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, 1997 and 1996. 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, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Computed "expected" tax benefit $ (1,621,387) (383,807)
Change in the valuation allowance for
deferred tax assets 2,193,000 421,000
State and local income taxes, net of
federal income tax benefit (328,682) (51,000)
Other, net 242,931 13,807
------------- -------------
$ -- --
------------- -------------
------------- -------------
</TABLE>
The Company has net operating loss carryforwards at December 31, 1997 of
approximately $5,834,000 for Federal income tax purposes, which begin to
expire in 2010. In the event of a change in ownership pursuant to Internal
Revenue Service regulations, utilization of the net operating loss
carryforwards may be eliminated or significantly reduced.
F-17
<PAGE>
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements, Continued
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1997 and
1996 are presented below:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts $ 1,447,000 11,000
Inventories, principally due to allowance for obsolete
and slow-moving inventory 883,000 632,000
Differences in basis of assets upon acquisition, principally
property and equipment and accounts receivable 169,000 169,000
Property and equipment, principally due to differences in
depreciation 133,000 104,000
Net operating loss carryovers 2,334,000 1,774,000
Rebates and sales discounts accrual 79,000 116,000
Other 82,000 128,000
------------ ------------
Total gross deferred tax assets 5,127,000 2,934,000
Less valuation allowance (5,127,000) (2,934,000)
------------ ------------
Net deferred tax assets -- --
Deferred tax liabilities -- --
------------ ------------
------------ ------------
Net deferred income taxes $ -- --
------------ ------------
------------ ------------
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1997 and 1996
was $5,127,000 and $2,934,000, respectively. The net change in the total
valuation allowance for the years ended December 31, 1997 and 1996 was an
increase of $2,193,000 and $421,000, 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-18
<PAGE>
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, 1997 is as follows:
<TABLE>
<S> <C>
Equipment $ 334,996
Less accumulated amortization 204,701
-----------
$ 130,295
-----------
-----------
</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, 1997 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------ ------------- ------------
<S> <C> <C> <C>
1998 $ 112,997 $ 327,776
1999 -- 325,693
2000 -- 346,191
2001 -- 355,596
Thereafter -- 473,085
------------- ------------
Total minimum lease payments 112,997 $ 1,828,341
------------
------------
Less amount representing interest (at
rates ranging from 9% to 19.05%) 4,874
-------------
Present value of minimum capital lease
payments 108,123
Less current maturities of capital lease
obligations 108,123
-------------
Capital lease obligations, excluding
current maturities $ --
-------------
-------------
</TABLE>
No renewal options are provided for in the operating lease agreements. In
the normal course of business, operating leases are generally renewed or
replaced by other leases. Total rental expense under operating leases with
a term in excess of one month was $311,467 and $372,529 for the years ended
December 31, 1997 and 1996, respectively.
F-19
<PAGE>
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements, Continued
(17) CONCENTRATIONS OF RISK -- MAJOR CUSTOMERS
The Company sold a substantial portion of its product to three customers in
1997 and in 1996. Sales amounts for 1997 and 1996 for these customers are
as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
PERCENT OF PERCENT OF
SALES SALES
---------- ----------
<S> <C> <C>
Sales to major customers:
Super Shops 27.5% 24.3%
Heafner Tire 9.6 12.1
B&R Wholesale Tire -- 8.4
Keystone Automotive 6.2 4.6
---------- ----------
43.3% 49.4%
---------- ----------
---------- ----------
</TABLE>
Gross accounts receivable from significant customers as of December 31,
1997 and 1996 follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
PERCENT OF PERCENT OF
ACCOUNTS ACCOUNTS
RECEIVABLE RECEIVABLE
---------- ----------
<S> <C> <C>
Accounts receivable from major
customers:
Super Shops 52.0% 40.1%
Heafner Tire 2.3 3.9
Keystone Automotive 3.9 8.7
---------- ----------
58.2% 52.7%
---------- ----------
---------- ----------
</TABLE>
On September 19, 1997, Super Shops filed for Chapter 11 bankruptcy
protection in the United States Bankruptcy Court, Central District of
California. As a result, the Company established an allowance for bad debt
of $3,523,028 to reserve for 100% of receivables related to this customer
at December 31, 1997.
(18) 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>
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements, Continued
(19) SUBSEQUENT EVENTS
On January 2, 1998, the Company obtained $300,000 of debt financing from an
existing stockholder of the Company. The note, which bears interest at 12%
per annum, is due February 2, 1998. The note was converted to 3,000 shares
of Series A Convertible Preferred Stock on January 23, 1998.
On January 23, 1998, the Company completed a private placement of 20,000
Series A Convertible Preferred Stock with proceeds received from the
transaction totaling $2.25 million, including the conversion to preferred
stock of $900,000 of investor notes payable.
On April 20, 1998, the Company executed an $8.5 million revolving loan
and credit agreement with a new financial institution. Interest payments
are due monthly at the prime rate of interest plus 1.25%. The agreement
expires on April 19, 2002 and is subject to borrowing limits based on
eligible levels of inventory, accounts receivable, and other assets.
Proceeds from this arrangement were used to pay in full the outstanding
balance on the previous line of credit (note 9). A portion of the balance
on the old facility as of December 31, 1997 has been reclassified
long-term based on the terms of the new facility.
F-21
<PAGE>
EXHIBIT 11
CRAGAR INDUSTRIES, INC.
SCHEDULE OF COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended March 31,
EARNINGS (LOSS) PER SHARE 1998 1997
----------------------------
<S> <C> <C>
Net earnings (loss) $ (350,602) $ 8,588
Less: Preferred Stock Dividends in Arrears (17,500) -
----------- ---------
Income (loss) available to Common Stockholders $ (368,102) $ 8,588
----------- ---------
----------- ---------
Basic EPS - Weighted Average
Shares outstanding 2,453,990 2,210,305
----------- ---------
----------- ---------
Basic Earnings (Loss) per Share $ (0.15) $ 0.00
----------- ---------
----------- ---------
Basic EPS - Weighted Average
Shares outstanding 2,453,990 2,210,305
Effect of Diluted Securities:
Stock Options and Warrants (1) - 176,019
Convertible Preferred Stock (1) - -
----------- ---------
Diluted EPS - Weighted Average
Shares Outstanding 2,453,990 2,386,324
----------- ---------
----------- ---------
Diluted Earnings (Loss) per Share $ (0.15) $ 0.00
----------- ---------
----------- ---------
</TABLE>
(1) The Company's outstanding stock options, warrants, and convertible
preferred stock have an antidilutive effect on net loss per share.
As a result, such amounts have been excluded from the computations
of diluted loss per share.
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 16,322
<SECURITIES> 0
<RECEIVABLES> 6,614,216
<ALLOWANCES> 3,616,336
<INVENTORY> 4,653,480
<CURRENT-ASSETS> 7,678,835
<PP&E> 2,043,761
<DEPRECIATION> 1,071,008
<TOTAL-ASSETS> 9,055,848
<CURRENT-LIABILITIES> 4,912,700
<BONDS> 0
0
0
<COMMON> 24,540
<OTHER-SE> (481,392)
<TOTAL-LIABILITY-AND-EQUITY> 9,055,848
<SALES> 16,545,159
<TOTAL-REVENUES> 16,545,159
<CGS> 13,908,272
<TOTAL-COSTS> 7,394,235
<OTHER-EXPENSES> 3,483
<LOSS-PROVISION> 3,587,861
<INTEREST-EXPENSE> 752,388
<INCOME-PRETAX> (4,768,785)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,768,785)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,768,785)
<EPS-PRIMARY> (2.08)
<EPS-DILUTED> (2.08)
</TABLE>
