<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 1998
[ ] 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)
Check whether the issuer (1) has 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 []
Number of shares of common stock, $.01 par value, outstanding as of March
31, 1998: 2,453,990.
Transitional small business disclosure format. Yes [ ] No [X]
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CRAGAR INDUSTRIES, INC.
BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
ASSETS March 31, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ - $ 016,322
Accounts receivable, less allowance for doubtful accounts
of $3,652,819 as of 3/31/98 and $3,616,336 as of 12/31/97 3,598,160 2,997,880
Inventories, net 5,013,365 4,653,480
Prepaid expenses 100,045 11,153
------------ ------------
Total current assets 8,711,570 7,678,835
------------ ------------
Property and equipment, net 960,603 972,753
Other assets, net 391,320 404,260
------------ ------------
$10,063,493 $ 9,055,848
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank Overdraft $ 9,033 $ -
Accounts payable 2,751,006 2,147,243
Accrued expenses 1,025,328 1,003,295
Accrued interest 83,260 135,495
Line of credit 737,172 1,518,544
Capital lease obligations, current installments 15,148 108,123
------------ ------------
Total current liabilities 4,620,947 4,912,700
------------ ------------
Line of credit 4,000,000 4,000,000
Investor Notes Payable - 600,000
------------ ------------
Total liabilities 8,620,947 9,512,700
------------ ------------
Stockholders' equity:
Preferred stock, par value $.01; authorized 200,000 shares,
22,500 shares issued and outstanding 225 -
Additional paid-in capital - preferred 2,033,181 -
Common stock, par value $.01; authorized 5,000,000 shares,
2,453,990 shares issued and outstanding 24,540 24,540
Additional paid-in capital - common 12,075,215 11,845,882
Accumulated deficit (12,690,615) (12,327,274)
------------- ------------
Total stockholders' equity (deficit) 1,442,546 (456,852)
------------- ------------
$10,063,493 $ 9,055,848
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------------- ------------
</TABLE>
See accompanying notes to condensed financial statements.
2
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CRAGAR INDUSTRIES, INC.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1998 1997
------------- ------------
<S> <C> <C>
Net sales $ 3,115,197 $ 4,644,521
Cost of goods sold 2,487,467 3,863,096
------------- ------------
Gross profit 627,730 781,425
------------- ------------
Selling, general and administrative expenses 826,431 830,079
Amortization of excess of fair value of assets acquired over cost - (184,367)
------------- ------------
Income (loss) from operations (198,701) 135,713
------------- ------------
Non-operating (income) expenses, net
Interest expense, net 172,208 110,721
Other, net (20,307) 16,404
------------- ------------
Total non-operating expenses 151,901 127,125
------------- ------------
Income (loss) before income taxes (350,602) 8,588
Income taxes - -
------------- ------------
Net earnings (loss) $ (350,602) $ 8,588
------------- ------------
------------- ------------
Basic earnings (loss) per share $ (.15) $ 0.00
------------- ------------
------------- ------------
Weighted average shares outstanding - basic 2,453,990 2,210,305
------------- ------------
------------- ------------
Diluted earnings (loss) per share $ (.15) $ 0.00
------------- ------------
------------- ------------
Weighted average shares outstanding - diluted 2,453,990 2,386,324
------------- ------------
------------- ------------
</TABLE>
See accompanying notes to condensed financial statements.
3
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CRAGAR INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net earnings (loss) $ (350,602) $ 8,588
Adjustments to reconcile net earnings (loss) to net cash used
in operating activities:
Provision for (write-off of) doubtful accounts 36,483 (5,283)
Reduction in provision for obsolete and slow-moving inventory (145,792) (93,643)
Depreciation and amortization of property and equipment 71,630 76,013
Amortization of other assets 12,940 33,847
Amortization of excess fair value of assets acquired over cost - (184,367)
Increase (decrease) in cash resulting from changes in:
Accounts receivable (636,763) (1,764,469)
Inventories (214,093) 581,542
Prepaid expenses (88,892) (41,983)
Other assets - (7,500)
Bank overdraft 9,033 -
Accounts payable and accrued expenses 628,007 (58,614)
Accrued interest (52,235) (60,464)
------------ -----------
Net cash used in operating activities (730,284) (1,516,333)
------------ ------------
Cash flows from investing activities
Purchases of property and equipment (59,480) (117,164)
------------ ------------
Net cash used in investing activities (59,480) (117,164)
------------ ------------
Cash flows from financing activities
Issuance of preferred stock and warrants 1,650,000 -
Net borrowings (repayments) on note payable (781,373) 987,112
Repayments of long-term debt (2,210) (1,880)
Repayments of capital lease obligations (92,975) (16,206)
------------ ------------
Net cash provided by financing activities 773,442 969,026
------------ ------------
Net decrease in cash (16,322) (664,471)
Cash and cash equivalents at beginning of period 16,322 863,050
------------ ------------
Cash and cash equivalents at end of period $ - $ 198,578
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to condensed financial statements.
4
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CRAGAR INDUSTRIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation:
The interim financial data of Cragar Industries, Inc., (the Company)
presented as of and for the three months ended March 31, 1998 and 1997 is
unaudited; however, in the opinion of the Company, the interim data includes
all adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of the results for the interim periods.
The year-end balance sheet information was derived from audited
financial statements. These interim financial statements should be read in
conjunction with the Company's audited financial statements.
The preparation of financial statements 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.
2. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
(UNAUDITED)
-------------- -----------------
<S> <C> <C>
Raw Materials $ 2,817,821 $ 3,041,710
Work in Process 200,858 197,074
Finished Goods 2,557,902 2,123,694
-------------- -----------------
5,576,581 5,362,478
Less allowance for obsolete and slow-moving inventory 563,216 708,998
-------------- -----------------
Inventories, net $ 5,013,365 $ 4,653,480
-------------- -----------------
-------------- -----------------
</TABLE>
3. Basic and Diluted Earnings (loss) per Share
Basic and Diluted Earnings (loss) per common share amounts are based on
the weighted average number of common shares and common stock equivalents
outstanding as reflected on Exhibit 11 to this Quarterly Report on Form
10-QSB.
4. Other Related Reserves and Allowances
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
--------------
UNAUDITED
-------------- -----------------
<S> <C> <C>
Stock Adjustments and Returns $ 82,633 $ 109,179
Rebates Reserve 50,955 39,646
Cash Discounts 19,044 17,103
Advertising Allowance 22,919 6,988
Warranty Reserve 390,750 348,613
Royalty Reserve 12,588 11,409
</TABLE>
5
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5. Preferred Stock and Warrants
During January 1998, the Company issued 22,500 shares of preferred stock
for $1,650,000 cash and conversion of $600,000 of investor notes payable. The
Company also granted 333,333 warrants to purchase shares of common stock
valued at $229,333 in connection with the preferred stock issuance. During
the first quarter ended March 31, 1998, no warrants to purchase shares of
Common Stock were exercised.
ITEM 2. 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 Exchange Commission or otherwise. Such
forward-looking statements are within the meaning of that term in Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. 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 2, "Management's Discussion and Analysis of Financial Condition 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.
INTRODUCTION
CRAGAR, (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.
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 was amortized to income over five years
using the straight-line method ($737,468 per annum through December 31,
1997). As of the year ended December 31, 1997 the balance of the excess of
fair value of assets acquired over cost was zero.
6
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RESULTS OF OPERATIONS
The following table sets forth various items as a percentage of net
sales revenue for the three month periods ended March 31, 1998 and March 31,
1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of goods sold 79.8 83.2
------------- -------------
Gross profit 20.2 16.8
SG&A 26.5 17.9
Amortization of negative goodwill - (4.0)
------------- -------------
Income (loss) from operation (6.4) 2.9
Non-operating expense, net 4.9 2.7
Income taxes - -
------------- -------------
Net earnings (loss) (11.3) 0.2
</TABLE>
COMPARISON OF QUARTER ENDED MARCH 31, 1998 AND QUARTER ENDED MARCH 31, 1997
Net sales consist of gross sales less discounts, returns and allowances.
Net sales for the quarter ended March 31, 1998 were $3,115,197 compared to
$4,644,521 during the quarter ended March 31, 1997, representing a 32.9%
decrease in sales. The decrease was primarily attributable to the lack of
shipments to the Company's former primary customer, Super Shops, Inc. ("Super
Shops"), which filed for bankruptcy on September 19, 1997 and is currently
being liquidated. Discounts, returns and allowances decreased by 24.7%
between the quarter ended March 31, 1998 and the quarter ended March 31,
1997. The decrease in discounts, returns and allowances was attributable to
historical trends, modifications in customer agreements and lower sales
levels for the period ended March 31, 1998.
Gross profit is determined by subtracting cost of goods sold from net
sales. Cost 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, as well as the freight costs of
shipping product to the Company's customers. Gross profit for the quarter
ended March 31, 1998 was $627,730 compared to $781,425 for the quarter ended
March 31, 1997. As a percentage of net sales, gross profit increased in the
first quarter of 1998 compared to the first quarter of 1997, from 16.8% to
20.2%. Product mix changes and the introduction of several new wheel styles
at higher margins contributed to the gross profit improvement. The reduction
in sales attributable to the loss of Super Shops sales in the quarter ended
March 31, 1998 had no material impact on gross profit. Cost reduction
efforts including the reduction of production personnel and outsourcing of
selected manufacturing processes positively affected gross profit in the
first quarter of 1998. 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, the level of net sales 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,
bad debt reserves, and general overhead. These expenses for the first
quarter ended March 31, 1998 were $826,431 compared to $830,079 for the
quarter ended March 31, 1997. This decrease of 0.4% was due in part to the
Company's focus on reducing expenses, primarily in labor with some offsetting
by increased legal expenses.
Non-operating expenses, net, for the first quarter of 1998 were $151,901
compared to $127,125 for the first quarter of 1997. The increase of $24,776
is primarily attributable to an increase in interest expense
7
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resulting from the Company's increase in the amount outstanding under its
credit facility with Norwest Business Credit and an additional two percent
interest charge because the Company was in default under the Norwest Credit
Facility. See "Management's Discussion and Analysis or Plan of Operation --
Liquidity and Capital Resources."
Because of its carry-forward losses from previous years, the Company had
no income tax provision in the first quarter of 1998 and 1997.
Net loss for the first quarter ended March 31, 1998 was $350,602
compared to net earnings of $8,588 for the first quarter ended March 31,
1997, an increase in losses of $359,140. Basic loss per share for the first
quarter ended March 31, 1998 was $.15 compared to basic earnings per share of
$0.00 for the first quarter ended March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ended March 31, 1998, the Company raised $2.25
million ($1.65 million in cash and conversion of $600,000 in investor notes
payable) from a private placement of 22,500 shares of Series A Convertible
Preferred Stock ("Series A Preferred Stock"), which includes the issuance of
warrants to purchase 333,333 shares of the Company's common stock at $8.75
per share.
In April 1995, the Company entered into a revolving credit facility
("Norwest Credit Facility") with Norwest Business Credit, Inc. ("Norwest").
As of April 1, 1998, the Norwest Credit Facility had a maximum commitment of
$5.8 million, subject to certain restrictions with respect to the Company's
collateral borrowing base. Prior to April 1, 1998, the maximum commitment
was $9.5 million. The Norwest Credit Facility, which was due to expire on
April 15, 1998, 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 extend the Credit
Facility to April 30, 1998. As of March 31, 1998, the outstanding balance
under the Credit Facility was $4,737,172, and the Company had excess
availability of $454,069.
On April 22, 1998, the Company secured a credit facility (the "NCFC
Credit Facility") with NationsCredit Commercial Funding Corporation ("NCFC").
The terms of the NCFC Credit Facility specify 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 is secured by substantially all of
the Company's assets and has a term of four years. The Company was able to
fully repay the Norwest Credit Facility from the proceeds of NCFC Credit
Facility. As of April 22, 1998 the outstanding balance under the NCFC Credit
Facility was $4,857,683, and the Company had excess availability of
$1,367,467. The NCFC Credit Facility contains no financial performance
covenants and requires prior approval rights to any declarations of dividend
payments. $4,000,000 of the balance of the Norwest Credit Facility as of
March 31, 1998 and December 31, 1997 has been reclassified long-term based on
the terms of the NCFC Credit Facility.
At March 31, 1998, the Company had an accumulated deficit of
$12,690,615. For the quarter ended March 31, 1998, the Company's operating
activities used $730,284 of cash, which was primarily attributable to the net
loss and increases in accounts receivable and inventories, offset by
increases in accounts payable and accrued expenses. The Company's increase in
inventory at March 31, 1998 from the year ended December 31, 1997 level used
approximately $0.36 million in cash. The Company's financing activities
included the sale of preferred stock for $2.25 million, of which $1.48
million was used to reduce the amount owed under the Norwest Credit Facility
and pay down long term debt, resulting in net cash provided from financing
activities of approximately $0.77 million.
8
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As an ongoing consequence of the bankruptcy of Super Shops, the
Company's principal customer, management is uncertain whether the anticipated
cash flow from operations will be sufficient to meet the Company's
anticipated operating, growth plans and capital needs. Therefore, the
Company also is currently negotiating with other financial institutions to
secure additional equity or subordinated debt. There can be no assurance
that the Company's cash flow will be sufficient to finance its operations as
currently planned or that it will be able to supplement its cash flow with
additional financing. No assurance can be given of the Company's ability to
obtain such financing on favorable terms, if at all. If the Company is
unable to obtain additional financing, its ability to meet its current and
future revenue growth plans could be materially and adversely affected.
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. The adoption of SFAS No. 130 had no material impact on the
Company.
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. The adoption of SFAS No. 131 had no material impact on the
Company.
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 and its
ultimate customers having 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.
RISK ASSOCIATED WITH BANKRUPTCY OF PRINCIPAL CUSTOMER
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. On March
31, 1998, the accounts receivable owed to the Company by Super Shops totaled
9
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$3,523,028, all of which has been reserved. The Company will continue to
review various alternatives with respect to this matter. The Company's Chief
Operating Officer is the Chairman of the Unsecured Creditors' Committee and
is vigorously attempting to recover 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
accounts 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. Because Super Shops has ceased operations, the Company
also has lost its largest customer, which resulted in decreased revenues
during the first quarter of 1998. 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 quarter
ended March 31, 1998, the Company incurred a net loss of $350,602. 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 $16,545,159 from $18,625,497
for the year ended December 31, 1996. Net sales for the three months ended
March 31, 1998 declined to $3,115,197 from $4,644,521 for the same period in
1997. As of March 31, 1998, the Company had cumulative losses of $12,690,615
and total stockholders' equity of $1,442,546.
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 minimum required by NASDAQ
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. There
can be no assurance that the Company in the future will meet the requirements
for continued listing on the Nasdaq SmallCap Market or the Boston Stock
Exchange with respect to the Common Stock or Warrants. If the Common Stock
or the Warrants fail to maintain such listings, the market value of the
Common Stock and Warrants likely would decline and holders likely would find
it more difficult to dispose of, or to obtain accurate quotations as to the
market value of, the Common Stock and Warrants. In addition, if the Company
fails to maintain Nasdaq SmallCap Market listing for its securities, and no
other exclusion from the definition of a "penny stock" under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") is available, then any
broker engaging in a transaction in the Company's securities would be
required to provide any customer with a risk disclosure document, disclosure
of market quotations, if any, disclosure of the compensation of the
broker-dealer and its salesperson in the transaction, and monthly account
statements showing the market values of the Company's securities held in the
customer's accounts. The bid and offer quotation and compensation
information must be provided prior to effecting the transaction and must be
contained on the customer's confirmation. If brokers become subject to the
"penny stock" rules when engaging in transactions in the Company's
securities, they would become less willing to engage in such transactions,
thereby making it more difficult for the Company's securityholders to dispose
of Common Stock and Warrants.
10
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COVENANT DEFAULTS; DEPENDENCE ON EXTERNAL FINANCING
The NCFC Credit Facility, which expires April 22, 2002, has a maximum
commitment of $8.5 million, and is subject to collateral availability at the
time of borrowing. There can be no assurance that the Company will be able to
satisfy the terms and conditions of the NCFC Credit Facility in the future. In
addition, there can be no assurance that cash flow from operations will be
sufficient to fund the Company's existing operations or to enable the Company to
implement fully its business strategies, especially if the Company is required
to refinance or replace the NCFC Credit Facility. As a result, the Company may
be required to raise additional funds through equity or debt financing. No
assurance can be given that such additional financing will be available on terms
acceptable to the Company, if at all. Further, any such financing 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.
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. The Company's top ten customers
accounted for approximately 55.9% of the Company's gross sales for the first
three months of 1998. The top three customers accounted for 27.0% of gross
sales. For the three months ended March 31, 1998, J. H. Heafner Company, Inc.
accounted for 12.0% of gross sales, PDK accounted for 7.9% of gross sales and
Reliable Automotive Company, Inc. accounted for 7.1% of 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 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. 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.
The Company's primary customer, Super Shops, filed for Chapter 11
bankruptcy protection on September 19, 1997 in the United States Bankruptcy
Court, Central District of California. Super Shops has ceased operations and
began a liquidation plan. The Company does not have any long-term contractual
relationships with any of its major customers. While the Company's business
strategy calls for it to expand its product distribution capabilities to
additional markets and to broaden its customer base so that it can become less
dependent on significant customers, any loss, material reduction, or delay of
orders by any of the Company's major customers, including reductions as a result
of market, economic, or competitive pressures in the automotive aftermarket
industry, could adversely affect the Company.
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.
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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.
DEPENDENCE ON THIRD PARTY SUPPLIERS
The Company's business depends upon the assembly of component parts and the
shipment of finished wheels and wheel accessories from third-party suppliers.
From time to time, the Company has experienced delays in the delivery of
component parts and finished products from vendors. In addition, one of the
Company's significant suppliers is located in China, which from time to time has
been subject to numerous trading restrictions by the United States. The Company
also has suppliers in Brazil 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.
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 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 a
potentially dilutive issuance of equity securities,
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the incurrence of additional debt, and amortization of expenses related to
goodwill and intangible assets, all of which could adversely affect the
Company's profitability. Acquisitions involve numerous risks, such as the
diversion of the attention of the Company's management from other business
concerns, the entrance of the Company into markets in which it has had no or
only limited experience, and the potential loss of key employees of the
acquired company, all of which could have a material adverse effect on the
Company.
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. In particular,
the Company's operating results can vary because of the size and timing of
customer orders, delays in new product enhancements and new product
introductions, vendor quality control and delivery difficulties, market
acceptance of new products, product returns, product rebates and allowances,
seasonality in product purchases by distributors and end users, and pricing
trends in the automotive aftermarket industry in general and in the specific
markets in which the Company participates. Historically, the Company's net
sales have been highest in the first and second quarters of each year.
Significant variability in orders during any period may have an adverse
impact on the Company's cash flow or work flow, and any significant decrease
in orders could have a material adverse effect on the Company's results of
operations. The Company believes that any period-to-period comparisons of
its financial results are not necessarily meaningful and should not be relied
upon as an indication of future performance.
CHANGING CUSTOMER TRENDS; NEED FOR PRODUCT DEVELOPMENT
The Company's success depends, in part, on its ability to correctly and
consistently anticipate, gauge, and respond in a timely manner to changing
consumer preferences. There can be no assurance that the Company's core
products will continue to enjoy acceptance among consumers or that any of the
Company's future product offerings will achieve or maintain market
acceptance. The Company attempts to minimize the risks relating to changing
consumer trends by offering a wide variety of product styles, analyzing
consumer purchases, maintaining active product development efforts, and
monitoring the sales performance of its various product lines. However, any
misjudgment by the Company of the market for a particular product, or its
failure to correctly anticipate changing consumer preferences, could have a
material adverse effect on its business, financial condition, and results of
operations. In order to enhance its product development efforts, the Company
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.
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
have a material adverse affect on the Company. 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
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with respect to these activities, there can be no assurance that such a claim
may not arise in the future or that the cost of complying with governmental
regulations in the future will not have a material adverse effect on the
Company.
RELIANCE ON INTELLECTUAL PROPERTY
The Company owns the rights to certain trademarks and patents, relies on
trade secrets and proprietary information, technology, and know-how, and
seeks to protect this information through agreements with employees and
vendors. There can be no assurance that the Company's patents will preclude
the Company's competitors from designing competitive products, that
proprietary information or confidentiality agreements with employees and
others will not be breached, that the Company's patents will not be
infringed, that the Company would have adequate remedies for any breach or
infringement, or that the Company's trade secrets will not otherwise become
known to or independently developed by competitors.
RISKS ASSOCIATED WITH INTERNATIONAL SALES; CURRENCY FLUCTUATIONS
As part of the Company's business strategy, it intends to expand into
selected international markets. In 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. 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 would be in the best interest
of the Company's other stockholders.
EFFECT OF PREFERRED STOCK ON RIGHTS OF COMMON STOCK
The Company's Amended and Restated Certificate of Incorporation authorizes
the Board of Directors of the Company to issue "blank check" preferred stock,
the relative rights, powers, preferences, limitations, and restrictions of which
may be fixed or altered from time to time by the Board of Directors.
Accordingly, the Board of Directors is empowered, without stockholder approval,
to issue preferred stock with dividend, liquidation, conversion, voting, or
other rights that could adversely affect the voting power and other rights of
the holders of Common Stock. In January and February 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 affect 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 CASH DIVIDENDS
The Company has never paid cash or stock dividends on its Common Stock
and does not anticipate that it will pay cash dividends in the foreseeable
future. It is contemplated that any earnings will be used to finance the
growth of the Company's business. The Company will be paying dividends on
its Series A Preferred Stock, however it anticipates those dividends will be
paid in kind with common or preferred stock. In addition, the Company's NCFC
Credit Facility prohibits the payments of cash dividends without
NationsCredit Commercial Funding's consent.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company from time to time is involved in routine litigation
incidental to the conduct of its business. In addition, the Company is
involved with the legal proceedings associated with the filing of Chapter 11
bankruptcy protection of Super Shops, the Company's former primary customer.
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. As an
unsecured creditor, there is no assurance that the Company will recover any
of the accounts receivable from Super Shops. Otherwise, there are currently
no material pending proceedings to which the Company is a party or to which
any of its property is subject. The Company currently maintains product
liability insurance, with limits of $1.0 million per occurrence and $2.0
million in the aggregate 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
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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.
ITEM 2. DEFAULTS UPON SENIOR SECURITIES
See ITEM 2 "Management's Discussion and Analysis or Plan of Operation
- Liquidity and Capital Resources" above for a discussion of the
Company's default under the Norwest Credit Facility, which has
been paid in full and replaced by the NCFC Credit Facility.
ITEM 3. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
11 Schedule of Computation of Earnings per Share*
27.1 Financial Data Schedule*
27.2 Financial Data Schedule*
4.4(f) Fourth Amendment to Security and Credit Agreement,
dated as of November 12, 1997 executed by and between
the Company and Norwest Business Credit, Inc.*
4.4(g) Fifth Amendment to Security and Credit Agreement,
dated as of January 8, 1998 executed by and between the
Company and Norwest Business Credit, Inc.*
4.4(h) Sixth Amendment to Security and Credit Agreement,
dated as of April 16, 1998 executed by and between the
Company and Norwest Business Credit, Inc.*
4.4(i) NationsCredit Loan and Security Agreement dated as
of April 20, 1998 executed by and between the Company
and NationsCredit Commercial Funding.*
(b) Reports on Form 8-K
Report on Form 8-K filed on January 15, 1998
Report on Form 8-K/A filed on January 23, 1998
- -----------------
* Previously filed
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CRAGAR INDUSTRIES, INC.
Dated: AUGUST 26, 1998 By: /S/ MICHAEL L. HARTZMARK
--------------- --------------------------
Michael L. Hartzmark
President and CEO
Dated: AUGUST 26, 1998 By: /S/ ANTHONY BARRETT
--------------- -------------------------
Anthony Barrett
Vice President of Sales Operations
(Principal Financial and Accounting
Officer)
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