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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 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)
Securities Registered Under Section 12(b) of the Exchange Act:
None
Securities Registered Under Section 12(g) of the Exchange Act:
COMMON STOCK, $.01 PAR VALUE
COMMON STOCK PURCHASE WARRANTS
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, 1998 were
$12,081,884.
At March 24, 1999, the aggregate market value of Common Stock held by
non-affiliates of the registrant was $10,582,832, based on the closing sales
price of the Common Stock on such date as reported by the OTC Bulletin Board.
The number of shares outstanding of the registrant's Common Stock on
March 24, 1999 was 2,453,990.
DOCUMENTS INCORPORATED BY REFERENCE
Portions from the registrant's definitive Proxy Statement relating to its
Annual Meeting of Stockholders to be held May 21, 1999, 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
<S> <C> <C>
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
ITEM 1. DESCRIPTION OF BUSINESS . . . . . . . . . . . . . . .1
ITEM 2. DESCRIPTION OF PROPERTY . . . . . . . . . . . . . . 11
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS. . . . . . . . . . . . . . . . . . 11
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ITEM 5. MARKET FOR COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . 11
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION . . . . . . . . . . . . . . . . . 14
ITEM 7. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . 25
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES . . . . . . . . . . . . . . . . . . . . 25
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT. . . . . . . . . . . . . . . . . . . . . 25
ITEM 10. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . 25
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . 25
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS. . . . . . . . . . . . . . . . . . . . 25
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . 26
</TABLE>
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
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 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. Major resellers include The Heafner Group, Inc. (which includes J. H.
Heafner Company, Inc., ITCO Logistics Corp., Speed Merchants dba Competition
Parts Warehouse and Oliver and Winston, Inc.), Keystone Automotive
Operations, Inc., RELCO Corp., Buckeye Sales, Inc. and Discount Tire. The
Company also intends to expand the capabilities of its website or utilize
other E-commerce websites to enable the marketing and sale of certain of its
custom vehicle wheels and wheel accessories and other performance replacement
parts over the Internet.
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, 1998, the Company's ten largest customers accounted for
approximately 57.2% of gross sales, with J.H. Heafner Company, Inc.
accounting for 13.5% of gross sales, Keystone Automotive accounting for 7.7%
and RELCO Corp. accounting for 5.1% 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, Inc., ("Super
Shops") accounting for 27.5%, J.H. Heafner Company, Inc. accounting for 9.6%,
and Keystone Automotive Operations, Inc. accounting for 6.2% of gross sales.
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 has had and
could continue to have a material impact on the Company's results of
operations and financial condition. See "Risk Factors - Dependence on Key
Distributors; Implementation of New Distribution Channels."
In order to appeal to a broad spectrum of consumers, the Company offers a
wide selection of custom wheels. The Company's products include entry-level
custom steel wheels, wire and spoked wheels, chrome plated, one-piece cast
aluminum wheels, and race wheels. The Company's wheels feature classic
designs that have been sold under the CRAGAR name since the 1960s as well as
contemporary designs that reflect continually changing consumer preferences.
The Company sells its products under a variety of brand names, including
CRAGAR(R), CRAGAR Lite(R), Keystone(R) Klassic(R), S/S(R), Star Wire(TM),
CRAGAR XLS(TM), TRU=CRUISER(TM), and TRU=SPOKE(R).
ORGANIZATION AND CORPORATE HISTORY
The Company was incorporated in Delaware in 1992 to acquire certain
assets, including the accounts receivable, inventory, property, equipment,
patents, trademarks, and copyrights in a leveraged buyout from the Wheel and
Tire Division of Mr. Gasket Company, Inc., which had filed for
reorganization. In December 1996, the Company completed an initial public
offering 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. During 1998,
no warrants to purchase shares of Common Stock were exercised.
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During January 1998, the Company issued 22,500 shares of preferred
stock in exchange for $1,650,000 cash and the conversion of $600,000 of
investor notes payable. The Company also granted 333,333 warrants valued at
$229,333 to purchase shares of Common Stock in connection with the preferred
stock issuance. On April 20, 1998, in connection with the establishment of a
credit facility, the Company issued warrants to NationsCredit Commercial
Funding valued at $21,960 to purchase 50,000 shares of Common Stock at a
price of $5.25 per share. On August 8, 1998, the Company agreed to grant
warrants to certain individuals who provided bridge loans to the Company in
the aggregate principal amount of $600,000 during December 1997 and January
1998. For each $100,000 made available to the Company, the Company agreed to
grant warrants to purchase 1,500 shares of Common Stock at an exercise price
of $3.00 per share. The principal amounts of the loans were subsequently
converted into 60,000 shares of Series A Preferred Stock. In addition, the
Company agreed to grant warrants to certain individuals who pledged assets to
secure the Company's obligations under the Loan and Credit Agreement with
NationsCredit Commercial Funding. The Company agreed to grant warrants to
purchase 7,000 shares of Common Stock for each $100,000 in value of the
assets pledged on an annual basis, which warrants will be exercisable at an
exercise price equal to the price of the Company's Common Stock on the date
of grant. See "Factors That May Affect Future Results and Financial Condition
- - Dependence on External Financing.
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 believes that revenues in the
industry increased in 1997 and 1998, but at a lower rate. The Company
believes, however, that unit sales in the industry remained flat or fell in
1997 and 1998, primarily as a result of original equipment manufacturers
providing better wheels from the factory.
The Company believes that the growth in revenues, as represented
above, from the custom wheel segment of the automotive wheel industry is
attributable 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; (iii)
increased sales of custom wheels through tire dealers, performance retailers,
and other specialty automotive outlets; and (iv) increased price per unit.
PRODUCT OFFERINGS
The custom wheel market is generally divided into six product
categories: one-piece aluminum wheels (representing the largest segment of
the market based on dollar sales); performance racing wheels; two-piece
aluminum wheels; steel wheels; wire wheels; and composite wheels. 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,
direct telemarketing, or E-commerce using the Internet. A number of the
Company's competitors have taken a step toward vertical integration by
establishing company-owned warehouse distribution centers that can sell their
products to retailers or directly to the public. To spread the overhead costs
associated with establishing these company-owned distribution centers, such
centers often carry competitors' products. In addition to the other
distribution channels discussed herein, the Company has at
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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.
The Company believes that a majority of retail custom wheel
purchases traditionally have been made at four outlet types: new vehicle
dealers, specialty product and installation outlets, speed shops and
performance retailers, and mail order companies. The Company anticipates,
however, that a growing percentage of custom wheel purchases will be made via
the Internet in E-commerce transactions.
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 or finished wheels 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.
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 reduce
duplicative expenditures, 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, selling,
distribution or product development capabilities, and reduce unit costs. The
Company currently has no specific agreements or understandings with respect
to any acquisitions or alliances; however, the Company has held and will
continue to hold informal discussions with a variety of candidates.
EXPAND PRODUCT DISTRIBUTION
The Company is attempting to expand its product distribution
capabilities in underserved markets, such as California, southern Florida,
New England, and the mid-Atlantic 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 also has 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, the Company 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.
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ENHANCE EXISTING PRODUCT LINES; DEVELOP NEW PRODUCTS
The Company is always examining ways 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. During the past two years the Company introduced its CRAGAR
XLS wheel line, introduced the one-piece aluminum S/S 980 series wheels, and
broadened its TRU SPOKE line with an eighty spoke design and a new line of
accessories. The Company also has developed a new line of motorcycle wheels
for Harley-Davidson Motorcycles and has the engineering and production
capabilities to develop motorcycle wheels for other cruiser bikes, such as
those manufactured by Excelsior Henderson, American Quantum, Confederate,
Titan, Big Dog Cycles, California Motor Cycle and Bikers Dream, although the
Company has had no discussions with any of these companies other than Titan
and Bikers Dream.
INCREASE MARKETING EFFORTS
The Company intends to continue its marketing, advertising, and
promotional efforts to further enhance and leverage the strength of the
CRAGAR brand name. Promotional efforts will include a continued relationship
with drag race drivers and teams participating in events sanctioned by the
National Hot Rod Association ("NHRA"). The Company, however, anticipates
reducing future expenditures associated with its NHRA commitment. As a means
to leverage the strength of its brand names, the Company also will pursue
licensing arrangements for its brand names to be featured on high-quality
automotive aftermarket and other products.
INTERNET-BASED MARKETING AND E-COMMERCE
The Company intends to expand the attributes and functionality of
its existing website and utilize other E-commerce websites to enable the
marketing and sale of certain of its custom vehicle wheels and wheel
accessories through the Internet. In addition, the Company currently is
seeking to enter into agreements with one or more of the major Internet
portals to establish E-commerce stores for certain of its products. Although
the Company believes that marketing and selling its products online could
significantly expand the market for its products, there can be no assurance
that the Company will be successful in implementing this strategy or that the
sale of the Company's products on the Internet will be successful.
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 continued to selectively outsource the processing, assembly,
and manufacturing of some of its custom wheels, components, and accessories,
and expects to explore further outsourcing in the future. The Company
believes that the outsourcing of selected products and processing operations
will enable it to devote a greater percentage of its resources to product
design, marketing, and distribution, and to shift certain inventory,
warranty, and other risks to its suppliers.
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PRODUCTS
The Company 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.
The following table provides sales and other information about the
Company's major product lines:
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% OF 1998 % OF 1997 TYPE OF
PRODUCT LINE GROSS SALES GROSS SALES CONSTRUCTION CUSTOMER NICHE
------------ ----------- ----------- ------------------- -------------------
<S> <C> <C> <C> <C>
Legacy and CRAGAR Lite 29.2% 25.7% Inner cast aluminum Nostalgia car and
Wheels disc welded to outer current line truck
steel rim owners
Wire or Spoked Wheels, 20.0% 18.1% Steel spokes Urban and inner city
Star Wire attached to inner consumers
steel hub and outer
steel rim or felly
Race Wheels 14.4% 16.5% Two outer aluminum Pro and amateur race
rim halves welded drivers and
together with performance car
aluminum center or owners
spacer
One-piece Cast Aluminum 14.9% 15.3% Cast one-piece Low and high-end
Wheels aluminum with consumers of all
machined, painted or types of vehicles
chrome plated
Steel Wheels 7.9% 10.4% Inner steel disc Low-end consumers of
welded to outer all types of vehicles
steel rim
Street Steel Wheels 7.5% 7.3% Three-piece steel Hot rod and race
and aluminum center enthusiasts with
welded to outer cars and trucks
steel rim
Wheel Accessories 4.9% 4.5% Steel and aluminum All types of
hub caps, lug nuts, consumers and
spinners, locks, vehicles
spacers
Miscellaneous 1.2% 2.2% Excess wheels and N/A
accessories
</TABLE>
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LEGACY AND CRAGAR LITE WHEELS
Legacy and Cragar Lite are composite wheels consisting of a chrome
plated die cast aluminum centers welded to a chrome plated rolled steel outer
rim. The Company 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.
WIRE OR SPOKED WHEELS
The Company 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 1998, the Company introduced a new decorative medallion and
spinner and a new wheel style, including a wheel with 80 spokes. The Company
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 1998, the Company introduced a steel wheel for truck racing.
ONE-PIECE CAST ALUMINUM WHEELS
The Company currently offers several styles of one-piece cast
aluminum wheels. One category of one-piece cast aluminum wheels consists of
high-end, chrome-plated, polished, machine finish or silver-painted wheels
with innovative styling. The highest-end styles are designed for CRAGAR's
"muscle car" or "hot rod" niche, including classic Mustangs, Camaros,
Firebirds, and Monte Carlos. In addition, these wheels are also popular with
owners of high-end European and Japanese cars. The Company also offers
certain other polished and machine finished one-piece, cast aluminum wheels
designed for light trucks. In 1998, the Company introduced four styles under
its XLS series and a newly designed version of its S/S style wheel called the
S/S 980 series. These wheels are currently purchased from manufacturers in
the United States and Brazil.
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.
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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 sources in the Far East.
PRODUCT DEVELOPMENT
The Company currently offers a broad spectrum of products that are
designed to fit a wide variety of automobiles, vans, and trucks. The Company
is always evaluating ways to leverage these product lines by adapting its
wheels and accessories to fit additional vehicle models, makes, and years.
During the past two years, the Company introduced its CRAGAR XLS wheel line
and the CRAGAR S/S 980 series, and broadened its TRU SPOKE line with a new
wheel design with eighty spokes and a new line of accessories. The Company
has also developed a line of motorcycle wheels for Harley-Davidson
Motorcycles and has the engineering and production capabilities to develop
motorcycle wheels for other cruiser bikes, such as those manufactured by
Excelsior Henderson, American Quantum, Confederate, Titan, Big Dog Cycles,
California Motor Cycle and Bikers Dream, although the Company has had no
discussions with any of these companies other than Titan and Bikers Dream.
To enhance its product development efforts, the Company engages
experienced outside consultants to assist the Company's in-house product
development person.
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 The Heafner Group, Inc.,
Keystone Automotive Operations, Inc. and RELCO Corp. 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 51.1% and 41.0% of the
Company's gross sales in 1998 and 1997, respectively.
TIRE DEALERS AND AUTOMOTIVE PERFORMANCE RETAILERS
The Company sells its custom wheels and other products to major tire
and automotive performance retailers, including Sears Roebuck & Co., Pep
Boys-Manny, Moe & Jack, Inc., 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 31.5% and 45.3% of the Company's gross sales in 1998
and 1997, 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
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and increasing direct sales to consumers. Sales to mail order outlets
accounted for 14.3% and 8.8% of the Company's gross sales in 1998 and 1997,
respectively.
INTERNATIONAL DISTRIBUTORS
The Company sells to exporters and directly to distributors in
select foreign countries. International sales accounted for approximately
3.1% and 4.8% of the Company's gross sales in 1998 and 1997, respectively.
INTERNET-BASED SALES AND E-COMMERCE
The Company intends to expand the attributes and functionality of its
existing website or utilize other E-commerce websites to enable the marketing
and sale of certain of its custom vehicle wheels and wheel accessories
through the Internet. In addition, the Company currently is seeking to enter
into agreements with one or more of the major Internet portals to establish
E-commerce stores for certain of its products. Although the Company believes
that marketing and selling its products online could significantly expand the
market for its products, there can be no assurance that the Company will be
successful in implementing this strategy or that the sale of the Company's
products on the Internet will be successful.
ADDITIONAL DISTRIBUTION EFFORTS
In addition to the above product distribution channels, the Company
intends to increase its distribution capabilities in underserved markets,
such as California, southern Florida, New England, and the mid-Atlantic
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 also has 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, 1998, the Company employed six individuals in its
sales and marketing department and retained three 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 sponsors certain
professional and amateur drag race participants who race in 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 Don "The Snake" Prudhomme (legendary driver and
former champion); and teams with major sponsors, such as 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 and are paid a commission on each sale.
Sales representatives work with a particular internal salesperson and
together deal with each customer in order to facilitate high levels of
service.
For the year ended December 31, 1998, the Company's ten largest
customers accounted for a total of approximately 57.2% of gross sales, with
J. H. Heafner Company, Inc. accounting for 13.5%, Keystone Automotive
Operations, Inc. accounting for 7.7% and RELCO Corp. accounting for 5.1% of
gross sales. In 1997, the Company's ten largest customers accounted for a
total of approximately 66.3% of its gross sales, with Super Shops,
8
<PAGE>
J. H. Heafner Company, Inc., and Keystone Automotive Operations, Inc.
accounting for 27.5%, 9.6%, and 6.2% 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 has had and in
the future 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, as of December
31, 1998, the Company has written off the entire $3,523,028 account
receivable from Super Shops. 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 180
days from the date of invoice. The Company's average accounts receivable days
outstanding was 89 days as of December 31, 1998.
PRODUCTION
The Company assembles most of its products at its facility in
Phoenix, Arizona. While outside vendors manufacture most of the component
parts used in the Company's products, the Company undertakes certain basic
production operations, including bending spokes on presses; de-flashing
various components; piercing rims, hubs, and fellies for wire and spoked
wheels; dimpling rims for wire wheels; and machining a variety of components.
In recent periods, the Company has begun to outsource selectively the
processing, assembly, and manufacture of some of its custom wheels,
components, and accessories, and expects to explore the further outsourcing
of product production in the future. The Company believes that the
outsourcing of selected products and processing operations will enable it to
devote a greater percentage of its resources to product design, marketing,
and distribution and to shift certain inventory, warranty, and other risks to
its suppliers. In addition, the Company intends to 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,
9
<PAGE>
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.
INTELLECTUAL PROPERTY
The Company markets its custom wheels and products under a variety
of brand names designed to capitalize on its reputation. The Company believes
that its trademarks, most importantly CRAGAR, are critical to its business.
The Company also owns the rights to certain design and other patents and also
relies on trade secrets and proprietary know-how, which it seeks to protect,
in part, through confidentiality and proprietary information agreements. The
Company has also entered into agreements with its vendors to restrict the use
of technology provided by the Company. There can be no assurance, however,
that the Company's patents will preclude the Company's competitors from
designing competitive products, that the proprietary information or
confidentiality agreements with employees and others will not be breached,
that the Company's patents will not be infringed, that the Company would have
adequate remedies for any breach or infringement, or that the Company's trade
secrets will not otherwise become known to or independently developed by
competitors.
CRAGAR(R), CRAGAR XLS(TM), Keystone(R) Klassic(R), Legacy(TM),
CRAGAR Lite(R), Star Wire(TM), TRU=CRUISER(TM), Street Pro(R), S/S(R), The
Wheel People(TM), and TRU=SPOKE(R) are trademarks of the Company.
PRODUCT RETURNS AND WARRANTIES
Historically, the Company's wheels have been sold with a limited
one-year warranty from the date of purchase. The Company's warranties
generally provide that, in the case of defects in material or workmanship,
the Company, at its option, will either replace or repair the defective
product without charge. The Company currently maintains product liability
insurance for its products, with limits of $1.0 million per occurrence and
$2.0 million in the aggregate, per annum. Such coverage is becoming
increasingly expensive. There can be no assurance that the Company's
insurance will be adequate to cover future product liability claims or that
the Company will be able to maintain adequate liability insurance at
commercially reasonable rates.
The Company maintains stock adjustment and warranty return policies. The
Company's stock adjustment return policy allows the customer to return
certain factory-fresh, resaleable 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 $787,764 in 1998 compared to
approximately $630,142 for 1997. Warranty returns were approximately $213,355
in 1998 and approximately $473,458 in 1997. There can be no assurance that
future warranty claims, returns, or stock adjustments will not be materially
greater than anticipated and have a material adverse effect on the Company's
business, financial condition, and results of operations.
EMPLOYEES
As of December 31, 1998, the Company had 76 employees, the majority
of whom were full-time employees, and six independent contractors. Employment
levels vary during the course of a year due to the seasonality of the
Company's business. The Company considers its employee relations to be good.
None of the Company's employees are represented by unions.
10
<PAGE>
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 more than adequate for its current operations and those
contemplated by the Company in the foreseeable future. As a result, the
Company may attempt to sub-lease a portion of the facility in the 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. In connection with this proceeding, the Company incurred an
obligation of $125,000 in 1998 for preference payments as a result of the
on-going liquidation of the bankruptcy estate. 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
During the Company's fiscal quarter ended December 31, 1998, there
were no matters submitted to a vote of security holders.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
DESCRIPTION OF EXISTING CAPITAL STOCK
The Company is a Delaware corporation and its affairs are governed
by its Amended and Restated Certificate of Incorporation ("Certificate of
Incorporation") and Bylaws and the Delaware General Corporation Law. The
following description of the Company's capital stock, which is complete in
all material respects, is qualified in all respects by reference to the
Company's Certificate of Incorporation and Bylaws, which have been filed as
exhibits to the Company's Registration Statement on Form SB-2 (Registration
No. 333-13415), and by the Certificate of Designation relating to the Series
A Convertible Preferred Stock, a form of which has been filed as an exhibit
to the Company's Amendment No. 1 to Current Report on Form 8-K filed January
23, 1998.
The authorized capital stock of the Company consists of 5,000,000
shares of Common Stock, $0.01 par value, and 200,000 shares of Preferred
Stock, $0.01 par value.
11
<PAGE>
COMMON STOCK
The holders of outstanding shares of Common Stock are entitled to
receive dividends out of assets legally available thereof at such times and
in such amounts as the Board of Directors may, from time to time, determine,
subject to any preferences which may be granted to the holders of Preferred
Stock. Holders of Common Stock are entitled to one vote per share on all
matters on which the holders of Common Stock are entitled to vote. The Common
Stock is not entitled to preemptive rights and is not subject to redemption
or conversion. Upon liquidation, dissolution, or winding-up of the Company,
the assets (if any) legally available for distribution to shareholders are
distributable ratably among the holders of the Common Stock after payment of
all debt and liabilities of the Company and the liquidated preference of any
outstanding class or series of Preferred Stock. The rights, preferences, and
privileges of holders of Common Stock are subject to the preferential rights
of the Series A Convertible Preferred Stock (the "Series A Preferred Stock")
and any other outstanding series of Preferred Stock that the Company may
issue in the future.
PREFERRED STOCK
The Board of Directors may, without further action of the
stockholders of the Company, issue shares of Preferred Stock in one or more
series and fix or alter the rights or preferences thereof, including the
voting rights, redemption provisions (including sinking fund provisions),
dividend rights, dividend rates, liquidation preferences, conversion rights,
and any other rights, preferences, privileges, and restrictions of any wholly
unissued series of Preferred Stock. The rights of holders of Common Stock are
subject to, and may be adversely affected by, the rights of holders of the
Series A Preferred Stock and of any other Preferred Stock that may be issued
in the future. The Series A Preferred Stock and the issuance of shares of
additional Preferred Stock could adversely affect the voting power of holders
of Common Stock and could have the effect of delaying, deferring, or
preventing a change in control of the Company or other corporate action.
On January 23, 1998, the Company raised approximately $2.0 million
from a private placement of 20,000 shares of 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 1933 Act, and included the conversion of
$600,000 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 Series A 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. Dividends in arrears for Preferred Stock totaled $135,625 at
December 31, 1998.
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 remain 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.
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<PAGE>
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. 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 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 any time 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.
Because the registration statement to be filed by the Company was
not declared effective by the Securities and Exchange Commission within 120
days after the date of issuance of the Series A Preferred Stock, the Series A
Floating Price was decreased by an additional 1%. Based on the price of the
Company's Common Stock as of December 31, 1998, the number of shares of
Common Stock that could have been acquired upon exercise of all outstanding
shares of Series A Preferred Stock was approximately 750,000.
The Series A Preferred Stock will be redeemable, in whole or in
part, at any time 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 Stated Value of 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
transaction not involving any public offering.
13
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PRICE RANGE OF COMMON STOCK; DIVIDENDS
The Company's outstanding Common Stock is currently quoted on the
OTC Bulletin Board under the symbol "CRGR". The Company's Common Stock and
Warrants were delisted from Nasdaq in October 1998 and from the Boston Stock
Exchange in March 1999 for failure to meet the minimum listing requirements
for these exchanges. The following table sets forth the high and low closing
sale prices of the Common Stock, as reported by Nasdaq through September 30,
1998 and the OTC Bulletin Board thereafter.
<TABLE>
<CAPTION>
MARKET PRICE
HIGH LOW
----- ------
<S> <C> <C>
FISCAL YEAR 1997
First Quarter $6.00 $4.375
Second Quarter 5.375 4.25
Third Quarter 5.375 5.00
Fourth Quarter 6.50 4.50
FISCAL YEAR 1998
First Quarter 6.00 5.00
Second Quarter 5.75 5.00
Third Quarter 5.1875 4.25
Fourth Quarter 4.3125 3.0625
FISCAL YEAR 1999
First Quarter (through March 24, 1999) 5.50 3.75
</TABLE>
On March 24, 1999, the last reported sale price of the Common Stock
on the OTC Bulletin Board was $4.3125 per share. As of March 24, 1999, the
Company estimates that there were approximately 374 beneficial holders of the
Company's Common Stock. The Company has never paid cash dividends on its
Common Stock and does not anticipate doing 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 and expansion of the Company's business.
In addition, the provisions of the Company's outstanding Series A Preferred
Stock prohibit the payment of dividends on the Common Stock under certain
circumstances. In addition, the Company's credit facility prohibits payments
of cash dividends without the lender's consent.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD LOOKING STATEMENTS
This report contains forward looking statements. Additional written
or oral forward looking statements may be made by the Company from time to
time in filings with the Securities and Exchange Commission or otherwise.
Such forward looking statements are within the meaning of that term as
defined 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 are not 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
14
<PAGE>
in the notes to the Company's financial statements, describe factors, among
others, that could contribute to or cause such differences. Specifically,
management is uncertain whether the anticipated cash flow from operations
will be sufficient to meet the Company's anticipated operations and working
capital needs. Therefore, the Company is seeking to secure additional working
capital through the sale of equity or debt securities. 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 regarding the
Company's ability to obtain such financing on favorable terms, it at all. If
the Company is unable to obtain additional financing, its ability to meet its
anticipated operating and working capital needs could be materially and
adversely affected. As a result of the Company's continued losses and the
uncertainty surrounding the Company's ability to meet its anticipated
operating and working capital needs, the independent auditors' report on the
Company's 1998 financial statements has been modified for a going concern.
See note 2 to the Company's financial statements.
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, 1998, the Company's ten largest customers accounted for a total
of approximately 57.2% of gross sales, with J. H. Heafner Company, Inc.
accounting for 13.5%, Keystone Automotive Operations, Inc. accounting for
7.7%, and RELCO Corp. accounting for 5.1% of gross sales. In 1997, the
Company's ten largest customers accounted for a total of approximately 66.3%
of its gross sales, with Super Shops, J. H. Heafner Company, Inc., and
Keystone Automotive Operations, Inc. accounting for 27.5%, 9.6%, and 6.2% 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 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, as of December 31, 1997, the Company established an allowance
for bad debt that included the entire $3,523,028 account receivable from
Super Shops and, as of December 31, 1998, the Company had written off the
entire amount from its financial statements. At the time Super Shops ceased
operations, the Company lost its largest customer. While the Company has made
some progress toward replacing the lost revenues generated by Super Shops, it
is uncertain whether other current or new customers can fully make up for the
lost revenues.
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 excess of fair value of assets acquired
over cost had been fully amortized.
15
<PAGE>
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: 1998 1997 1996
------ ----------- --------
<S> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . 89.1 84.1 91.1
------ ------ -------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.9 15.9 8.9
Selling, general and administrative expenses . . . . . . . . . . . . (36.5) (44.7) (16.6)
Amortization of excess of fair value of assets acquired over cost . . -0- 4.5 4.0
------ ------ -------
Income (loss) from operations . . . . . . . . . . . . . . . . . . . . (25.6) (24.3) (3.7)
Interest and other expenses, net . . . . . . . . . . . . . . . . . . (7.3) (4.5) (4.1)
Extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . 0.0 0.0 1.8
------ ------ -------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (32.9)% (28.8)% (6.0)%
------ ------ -------
------ ------ -------
</TABLE>
16
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COMPARISON OF YEAR ENDED DECEMBER 31, 1998 AND YEAR ENDED DECEMBER 31, 1997
Net sales consist of gross sales less discounts, returns, and
allowances. Net sales for the year ended December 31, 1998 were $12,081,884
compared to $16,545,159 in the year ended December 31,1997, representing a
27.0% decline in net sales. The decrease was primarily attributable to the
lack of shipments to Super Shops, formerly the Company's largest customer,
which filed for bankruptcy on September 19, 1997 and is currently being
liquidated. Not including net sales of $5,053,572 to Super Shops, Inc. in
1997, net sales increased by 5.1%. The Company sold fewer wheels in 1998 as
compared to 1997. Generally, however, the average net sales per wheel rose
slightly in 1998 from 1997.
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, 1998 was $1,312,398 versus $2,636,887 for the year ended
December 31, 1997. As a percentage of net sales, gross profit decreased in
1998 compared to 1997, from 15.9% to 10.9%. The decrease in gross profit,
both in terms of dollars and as a percentage of net sales, was primarily
attributable to the loss of sales to Super Shops resulting in lower overhead
absorption through the production cycle and a decrease in margins as the
Company attempted to sell the excess inventory produced based on Super Shops'
anticipated sales volume.
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, 1998 were $4,404,391 compared to $7,394,235 for the year
ended December 31, 1997. This 40.4% decrease was primarily attributable to
the expense of $3,523,028 recognized in 1997 for bad debt reserve related to
the past due receivable from Super Shops as described above. Excluding the
allowance, SG&A for the year ended December 31, 1998 increased $533,184 or
13.8% over the comparable twelve month period ended December 31, 1997. This
increase was due, in large part, to the amortization and write-off of certain
intangible costs, totaling $427,674, related to wheel designs and molds. In
addition, the Company launched an aggressive non-recurring marketing campaign
aimed at strengthening the Company's brand name in the aftermath of the Super
Shops bankruptcy. The increases in marketing expenses and the intangible cost
write-off were partially offset by the Company's continued focus on reducing
other expenses. The Company did not receive any benefit from the amortization
of excess of fair value of assets over acquired cost in 1998. This amount,
which totaled $737,468 in 1997, was fully amortized by December 31, 1997.
Interest and other expenses, net, for fiscal 1998 were $879,449
compared to $748,905 for fiscal 1997. Interest expense increased from
$752,388 in 1997 to $792,221 in 1998, an increase of $39,833 or 5.3%. This
increase is attributable to a higher average outstanding debt balance in 1998
than in 1997. Other revenue (expense), net, decreased from $3,483 in 1997 to
$(87,228) in 1998. This decrease was primarily attributable to the preference
payment due as a result of the Super Shops bankruptcy. The initial preference
payment obligation was substantially higher than the finalized negotiated
amount due. The Company was successful in negotiating a much smaller
preference payment without forfeiting its claims against the bankruptcy
estate. Although there is no assurance the Company will receive any proceeds,
the Company anticipates the liquidation of the bankruptcy estate will yield
the Company proceeds in excess of this preference payment.
Because of the Company's current period net loss and its
carry-forward losses from previous years, the Company had no income tax
provision in 1998 and had no provision for alternative minimum taxes in 1998.
Net loss for the year ended December 31, 1998 was $3,971,442 compared
to $4,768,785 for the year ended December 31, 1997, a decrease of $797,343.
Excluding the reserve for bad debts in 1997, the net loss increased
$2,725,685 from 1997 to 1998. This increase is primarily attributable to the
decrease in sales due to the loss of sales from Super Shops, non-recurring
marketing expenses, the amortization of excess of fair value of assets over
acquired cost, and the preference payment associated with the Super Shops
bankruptcy.
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LIQUIDITY AND CAPITAL RESOURCES
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 and promotional activities,
$500,000 was used for product development, and $330,000 was used for
additional staffing and consultants. The remainder of the proceeds were used
to reduce the outstanding loan balance on the Company's credit facility with
Norwest Business Credit, Inc. Upon the completion of the initial public
offering, 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
approximately $2.25 million from a private placement of 22,500 shares of
Series A Preferred Stock and related Warrants. See "Market For The
Registrant's Common Stock and Related Stockholder Matters."
In April 1998, the Company entered into a revolving and term credit
facility ("Credit Facility") with NationsCredit Commercial Corporation
("NCFC"). The Credit Facility has a maximum commitment of $8.5 million,
subject to certain restrictions with respect to the collateral borrowing
base. The Credit Facility expires April 19, 2003 and is secured by the
Company's accounts receivable, inventories, intangible assets, property and
equipment and pledged assets of three investors. Interest is due monthly at
the prime rate plus 1.25%.
See "--Factors that May Affect Future Results and Financial
Condition; Dependence on External Financing," and "History of Previous Losses;
Stockholders' Deficit; Going Concern Opinion" below.
As of December 31, 1998, the Company's average accounts receivable
days outstanding was 89 days as compared to 72 days at December 31, 1997.
Payment terms for its customers vary from cash on delivery to up to 180 days.
The allowance for doubtful accounts as a percentage of accounts receivable
was 54.8% at December 31, 1997, as compared to 3.7% at December 31, 1998.
This decrease in the allowance reflects the write-off of the Super Shops
accounts receivable and related reserve. The Company's inventory turnover
ratio approximated 2.4 for the year ended December 31, 1998 as compared to
2.5 for the year ended December 31, 1997.
The Company had negative cash flow from operations of $(2,834,075)
and $(3,994,258) for 1998 and 1997, respectively. The Company showed an
improvement in its cash flow used in operations of $1,160,183 from 1997 to
1998. This improvement is primarily attributable to the amortization of
excess fair value of assets acquired over cost included in 1997 operations
and the amortization of other assets expensed in 1998. The Company had net
cash provided by investing activities of $13,859 in 1998. In 1997, the
Company used net cash of $(453,317) from investing activities. The difference
of $467,176, which represents an improvement in cash flows from investing
activities, is primarily attributable to the Company investing more cash in
the purchases of property and equipment during 1997. In 1998, the Company
disposed of assets approximately equal to the amount invested in additional
property and equipment. The Company had net cash provided by financing
activities of $2,803,894 in 1998 and $3,600,848 in 1997. Due to the
improvement in the cash flow used in operations during 1998, the Company did
not require as much cash flow provided by financing activities. In 1998, of
the total cash provided by financing activities, the Company received
$1,650,000 in equity financing. In 1997, the Company received $513,178 of the
total cash provided by financing activities from equity financing. Overall,
the Company used net cash from all activities of $16,322 in 1998 and $846,727
in 1997.
The Company does not anticipate any major capital budget
expenditures in 1999, except for the costs associated with upgrading its
existing computer system to make it Year 2000 compliant. Those costs,
including internal payroll costs, are estimated not to exceed $75,000. In
addition, while the Company believes its operating activities will provide
net cash during 1999, there can be no assurance that the Company's operating
activities will generate sufficient cash flow to meet its operating cash flow
requirements and other current obligations. Consequently, the Company will
likely be required to raise additional funds from 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.
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.
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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, Super Shops, Inc., formerly the Company's
principal customer, filed for reorganization under Chapter 11 of the Federal
Bankruptcy Code in the United States Bankruptcy Court, Central District of
California. At December 31, 1998, the account receivable owed to the Company
by Super Shops totaled $3,523,028, which has been completely written off.
Since the date of filing for reorganization, 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, even if the Company should be able to recover
a portion of the account receivable, the timing and amount of such recovery
is uncertain. As a result of Super Shops ceasing operations, the Company also
lost its largest customer, which resulted in decreased revenue during 1998.
It is uncertain whether other current or new customers can make up for the
lost revenues generated by Super Shops. During 1998, the Company incurred an
obligation of $125,000 for preference payments as a result of the on-going
liquidation of the bankruptcy estate. Although there is no assurance the
Company will receive any proceeds, the Company anticipates that the
liquidation of the bankruptcy estate will yield the Company proceeds in
excess of this preference payment. Failure to resolve this matter
satisfactorily could have a material adverse effect on the Company's results
of operations and financial condition.
HISTORY OF PREVIOUS LOSSES; STOCKHOLDERS' DEFICIT; GOING CONCERN OPINION
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, 1998, the Company incurred a net loss of $3,971,442. Net sales for
the year ended December 31, 1998 declined to $12,081,884 from $16,545,159 for
the same period in 1997. As of December 31, 1998, the Company had an accumulated
deficit of $16,368,787 and a total stockholders' deficit of $2,156,394. There
can be no assurance that the Company will be profitable in the future.
As a result of the Company's continued losses and the uncertainty
regarding the Company's ability to meet its anticipated operating and working
capital needs, the independent auditors' report on the Company's 1998 financial
statements has been modified for a going concern.
DEPENDENCE ON EXTERNAL FINANCING
On April 20, 1998, the Company executed the NCFC Credit Facility, a
portion of the proceeds of which were used to pay off the Company's previous
credit facility with Norwest Business Credit, Inc., which expired on April
15, 1998. The terms of this new credit facility 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. As of December 31, 1998, the outstanding
amount owed by the Company under the NCFC Credit Facility was approximately
$6,780,000. The NCFC Credit Facility is secured by substantially all of the
Company's assets and has a term of four years. The NCFC Credit Facility also
is secured by certain investment property with a value of approximately
$800,000 that was pledged to NCFC by three private investors. In exchange for
that pledge, the Company agreed to grant
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warrants to purchase 7,000 shares of Common Stock for each $100,000 in value
of assets pledged on an annual basis as long as the pledge remains
outstanding, which warrants are exercisable at a price equal to the price of
the Company's Common Stock on the date of grant. These three private
investors have since temporarily increased the value of the investment
property securing the NCFC Credit Facility to $1,500,000. As of December 31,
1998, the Company had approximately $149,000 of excess availability under the
NCFC Credit Facility. As a result, it is likely that the Company will be
required to raise additional funds through equity or debt financings. No
assurance can be given that additional financing will be available on terms
acceptable to the Company, if at all.
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 57.2% of the Company's gross sales
for 1998. The top three customers accounted for 26.3% of gross sales. For the
year ended December 31, 1998, J. H. Heafner Company, Inc. accounted for
13.5%, Keystone Automotive Operations, Inc. accounted for 7.7% and RELCO
Corp. accounted for 5.1% 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, Inc. accounting for
27.5%, J. H. Heafner Company, Inc. accounting for 9.6%, and Keystone
Automotive accounting for 6.2% of gross sales.
The Company's former primary customer, Super Shops, Inc., filed for
Chapter 11 bankruptcy protection on September 19, 1997 in the United States
Bankruptcy Court, Central District of California. Super Shops subsequently
ceased operations and has commenced 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.
RISKS ASSOCIATED WITH ESTABLISHMENT OF INTERNET-BASED MARKETING
The Company intends to expand the attributes and functionality of
its website or utilize other E-commerce websites to enable the marketing and
sale of certain of its custom vehicle wheels and wheel accessories through
the Internet. In addition, the Company is seeking to establish an E-commerce
store with one or more of the major Internet portals and sell certain of its
custom wheels and wheel accessories via the Internet. Although the Company
has had discussions with various companies regarding such an arrangement, the
Company has not yet entered into any definitive agreements to sell any of its
products online nor has the Company sold any of its products directly over
the Internet. Accordingly, the Company's attempts to market and sell its
products online may be unsuccessful.
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.
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 stability in the
markets it serves, various factors, including those listed above, could lead
to decreased sales and
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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.
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. During the
third quarter ended September 30, 1998, the Company experienced difficulty in
receiving acceptable chrome plating of centers for its S/S style wheels,
although the Company now believes it has resolved this problem. 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 price, or reduction in quality of such
components could have a material adverse effect on the Company's business,
financial condition, and results of operations. The Company has been
selectively outsourcing 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 continues to consider acquisitions of and alliances with
other companies that could complement the Company's existing business,
including outsourcing its manufacturing and sales operations and 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, even if the Company completes one or more acquisitions, there
can be no assurance that the Company will be able to integrate successfully
the 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, 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.
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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 effect 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 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
In 1998 and 1997, the Company derived approximately 3.1% and 4.8%,
respectively, of total gross sales from international markets. The Company
does not anticipate that sales from international markets will increase
significantly. 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.
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CONTROL BY EXISTING STOCKHOLDERS
The directors, officers, and principal stockholders of the Company
beneficially own approximately 57.4% of the Company's Common Stock, assuming
exercise of all outstanding options and warrants. As a result, these persons
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 the first quarter
of 1998, for example, the Company issued 22,500 shares of its Series A
Preferred Stock for approximately $2,250,000 in additional capital, which, as
of December 31, 1998, could have been converted into approximately 750,000
shares of Common Stock at the option of the holders of the Series A Preferred
Stock. 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.
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 beneficially held, as of December 31,
1998, more than 18% of the Company's Common Stock, assuming exercise of all
outstanding options and warrants. 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.
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 is required to pay
dividends on its Series A Preferred Stock; however, it anticipates those
dividends will be paid in kind, rather than in cash, with additional shares
of Series A Preferred Stock. In addition, the Company's NCFC Credit Facility
prohibits the payments of cash dividends without the lender's consent.
DATA PROCESSING AND TECHNOLOGY AND YEAR 2000 ISSUES
The Company recognizes the potential business impacts related to the
Year 2000 computer system issue and is implementing a plan to assess and
improve the Company's state of readiness with respect to such issues. The
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Year 2000 issue is one where computer systems may recognize the designation
"00" as 1900 when it means 2000, resulting in system failure or
miscalculations.
The Company has initiated a comprehensive review of its core
information technology systems, which the Company is dependent upon for the
conduct of day to day business operations, in order to determine the adequacy
of those systems in light of future business requirements. Year 2000
readiness was one of a variety of factors to be considered in the review of
core systems.
In recognition of the Year 2000 issue, the Company has started a
comprehensive review of all information technology and non-information
technology systems used by the Company. Such review includes testing and
analysis of Company products and inquiries of third parties supplying
information technology and non-information technology systems, computer
hardware and software products and components, and other equipment to the
Company. In addition, the Company has sent requests for information to its
critical suppliers requesting information about their Year 2000 readiness and
plans for Year 2000 compliance.
As a result of its review to date, the Company has determined that
certain of its internal software systems are inadequate for the Company's
future business needs, and need to be upgraded because of various
considerations, including Year 2000 non-compliance. In certain cases the
timing of system upgrades is being accelerated because of the Year 2000
issue, although the Company believes upgrades, modification or replacement
would have been necessary in the near future regardless of such issues. The
Company expects to make necessary upgrades to its computer information
systems, related to Year 2000 non-compliance, prior to the Year 2000. Other
upgrades, modifications or replacement identified through this review process
that are not critical to the Year 2000 issue will be undertaken in an orderly
manner so as to not disrupt the Company's on-going operations. These
non-critical upgrades, changes or modifications may not be started or
completed by the Year 2000. The costs for upgrades or replacement of systems
will be capitalized as assets and subsequently amortized over the estimated
life of the assets. The costs for modification of systems will be expensed in
the period incurred. The Company believes the costs of upgrades to the
current information technology systems will not exceed $75,000, including
internal payroll costs, and will not have a material affect on its financial
position or results of operations. The upgrades are expected to be made late
in the second quarter or early third quarter 1999 and the full integration of
the upgrades are expected to be complete by September 30, 1999.
Based on the responses from the Company's critical suppliers, the
suppliers are either Year 2000 compliant or have developed plans to be Year
2000 compliant by December 31, 1999. The Company plans to continue monitoring
its critical suppliers for Year 2000 compliance and take appropriate steps if
it appears any critical suppliers will not be Year 2000 compliant by December
31, 1999.
At this time, the Company has not developed Year 2000 contingency
plans, other than the review and remedial actions described above, and does
not intend to do so unless the Company believes such plans are merited by the
results of its continuing Year 2000 review.
If the Company or the third parties with which it has relationships
were to cease or not successfully complete its or their Year 2000 remediation
efforts, the Company could encounter disruptions to its business that could
have a material adverse effect on its business, financial position and
results of operations. The Company could be materially and adversely impacted
by widespread economic or financial market disruption or by Year 2000
computer system failures at third parties with which it has relationships.
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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,
1999. 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 did not have a 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, 1999. 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 did not have a
material impact on the Company.
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, "Employer's Disclosures
about Pensions and Other Postretirement Benefits" (SFAS No. 132) which
becomes effective for the Company on January 1, 1999. SFAS No. 132
establishes standards for the information that public enterprises report in
annual financial statements. Management does not expect the adoption of SFAS
No. 132 to have a material impact on the Company.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133) which becomes
effective for the Company on July 1, 1999. Management does not expect the
adoption of SFAS No. 133 to have a material impact on the Company.
ITEM 7. FINANCIAL STATEMENTS
The audited financial statements of the Company as of December 31,
1998 and for each of the years in the two-year period ended December 31, 1998
are located beginning at page F-1 of this Annual Report on Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 10. EXECUTIVE COMPENSATION
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information respecting the foregoing four Items of Part III is hereby
incorporated by reference to the Company's definitive Proxy Statement relating
to its Annual Meeting of Shareholders to be held May 21, 1999.
25
<PAGE>
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.
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
NUMBER
<S> <C>
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. Form of Certificate representing Common Stock*
4.1 Form of Warrant Agreement**
4.3 Form of Warrant Certificate*
4.4 Loan and Security Agreement, dated as of April 20, 1998, executed by
and between Registrant and NationsCredit Commercial Corporation ****
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***
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*
</TABLE>
26
<PAGE>
<TABLE>
<S> <C>
10.4 Purchase Program, dated January 24, 1996, executed by and between
Registrant and Super Shops*
10.5 Form of 1992 Promissory Note of Registrant, dated December 31, 1992,
issued in connection with Registrant's original capitalization*
10.5(a) Form of First Note Amendment of 1992 Promissory Note of Registrant,
dated September 30, 1994*
10.5(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*
10.5(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*
10.6 $108,333 Promissory Note of Registrant, dated December 15, 1994, issued
to Sidney Dworkin*
10.6(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*
10.7 Cognovit Promissory Note dated September 30, 1993, executed by
Registrant and payable to Performance Industries, Inc.*
10.7(a) Cross Receipt executed by and between Lee Hartzmark and Registrant in
connection with Assignment of Cognovit Promissory Note*
10.8 Wheel & Component Purchase Agreement dated April 3, 1996, executed by
and between Registrant and Titan Wheel International, Inc.*
10.9 Redistribution Agreement dated November 7, 1996, executed by and
between Registrant and RELCO Corp.*
10.10 Form of 1993 Convertible Subordinated Secured Note of the Registrant,
dated September 30, 1993*
10.10(a) Form of First Note Amendment to 1993 Convertible Subordinated Secured
Note of the Registrant, dated September 30, 1995*
10.10(b) Form of Second Note Amendment to 1993 Convertible Subordinated Secured
Note of the Registrant*
10.11 $350,000 Promissory Note of the Registrant, dated December 15, 1994,
issued to Sidney Dworkin*
10.11(a) Agreement between Registrant and Sidney Dworkin, dated October 12,
1995, amending the terms and conditions of the $350,000 Promissory
Note*
10.11(b) First Note Amendment to the $350,000 Promissory Note of the Registrant
issued to Sidney Dworkin*
10.12 Form of 1996 Unsecured Promissory Bridge Note of the Registrant*
21 List of Subsidiaries of the Registrant*
23 Consent of KPMG LLP
27 Financial Data Schedule
99 Form of Lock-Up Agreement, executed by and between the Registrant and
certain of the Registrant's security-holders.*
</TABLE>
27
<PAGE>
(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-K for the fiscal year ended December 31, 1996 (No. 1-12559)
*** Incorporated by reference to the Company's Current Report on Form
8-K, filed January 23, 1999 (no. 1-12559)
**** Incorporated by reference to the Company's Quarterly Report on Form
10-QSB, filed on May 15, 1998 (no. 1-12559)
28
<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: March 31, 1999
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Michael L. Hartzmark
- -------------------------- President, Treasurer, Chief March 31, 1999
Michael L. Hartzmark Executive Officer, and Director
(Principal Executive Officer)
/s/ Richard P. Franke
- -------------------------- Chief Financial Officer March 31, 1999
Richard P. Franke (Principal Financial Officer)
/s/ Michael Miller
- -------------------------- Secretary, Chief Operating March 31, 1999
Michael Miller Officer, and Director
/s/ Sidney Dworkin
- -------------------------- Director March 31, 1999
Sidney Dworkin
/s/ Donald McIntyre
- -------------------------- Director March 31, 1999
Donald McIntyre
/s/ Mark Schwartz
- -------------------------- Director March 31, 1999
Mark Schwartz
</TABLE>
29
<PAGE>
CRAGAR INDUSTRIES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report F-2
Balance Sheet as of December 31, 1998 F-3
Statements of Operations for the years ended December 31, 1998 and 1997 F-4
Statements of Stockholders' Deficiency for the years ended December 31,
1998 and 1997 F-5
Statements of Cash Flows for the years ended December 31, 1998 and 1997 F-6
Notes to Financial Statements F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CRAGAR Industries, Inc.:
We have audited the accompanying balance sheet of CRAGAR Industries, Inc. as of
December 31, 1998, and the related consolidated statements of operations,
stockholders' deficiency and cash flows for each of the years in the two-year
period ended December 31, 1998. 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, 1998, and the results of its operations and its cash flows for each
of the years in the two-year period ended December 31, 1998 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 2 to the
financial statements, the Company has a stockholders' deficiency and the Company
has suffered recurring losses from operations. These matters raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in note 2. The financial statements
do not include any adjustments that might result from this uncertainty.
KPMG LLP
March 18, 1999
F-2
<PAGE>
CRAGAR INDUSTRIES, INC.
BALANCE SHEET
December 31, 1998
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Accounts receivable, less allowance for doubtful accounts of $108,995 $ 2,879,277
Inventories, net 4,352,453
Prepaid expenses 200,017
-----------
Total current assets 7,431,747
Property and equipment, net 654,534
Other assets, net 21,320
-----------
$ 8,107,601
-----------
-----------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Line of credit $ 2,530,161
Accounts payable 2,376,112
Accrued expenses 1,032,644
Accrued interest 74,678
Current installments of long-term debt 250,400
-----------
Total current liabilities 6,263,995
Line of credit, excluding current installments 3,290,333
Long-term debt, excluding current installments 709,667
-----------
Total liabilities 10,263,995
-----------
Stockholders' deficiency:
Preferred stock, par value $.01; authorized 200,000 shares, 22,500 shares
issued and outstanding 225
Additional paid-in capital - preferred 2,090,513
Common stock, par value $.01; authorized 5,000,000 shares, 2,453,990 shares
issued and outstanding at December 31, 1998 24,540
Additional paid-in capital - common 12,097,115
Accumulated deficit (16,368,787)
-----------
Total stockholders' deficiency (2,156,394)
Commitments, contingencies and subsequent events (notes 7, 12, 13, 14 and 15)
-----------
$ 8,107,601
-----------
-----------
</TABLE>
See accompanying notes to the financial statements.
F-3
<PAGE>
CRAGAR INDUSTRIES, INC.
Statements of Operations
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ----------
<S> <C> <C>
Net sales $12,081,884 16,545,159
Costs of goods sold 10,769,486 13,908,272
----------- ----------
Gross profit 1,312,398 2,636,887
Selling, general and administrative expenses 4,404,391 7,394,235
Amortization of excess of fair value of assets acquired over cost -- (737,468)
----------- ----------
Loss from operations (3,091,993) (4,019,880)
Other revenues (expenses), net:
Interest expense, net (792,221) (752,388)
Other, net 37,772 3,483
Settlement (125,000) --
----------- ----------
Loss before income taxes (3,971,442) (4,768,785)
Income taxes -- --
----------- ----------
Net loss $ (3,971,442) (4,768,785)
----------- ----------
----------- ----------
Basic net loss per common share $ (1.67) (2.08)
----------- ----------
----------- ----------
Diluted net loss per common share $ (1.67) (2.08)
----------- ----------
----------- ----------
Weighted-average shares outstanding - basic and diluted 2,453,990 2,291,278
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to the financial statements.
F-4
<PAGE>
CRAGAR INDUSTRIES, INC.
Statements of Stockholders' Deficiency
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
-------------------------- -----------------------
NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT
--------- -------- --------- ------
<S> <C> <C> <C> <C>
Balances, December 31, 1996 2,210,305 $22,103 -- $ --
Issuance of common stock for
warrants exercised 243,685 2,437 -- --
Net loss -- -- -- --
--------- -------- ---- ------
Balances, December 31, 1997 2,453,990 24,540 -- --
Issuance of preferred stock -- -- 22,500 225
Warrants issued with line of
credit financing -- -- -- --
Warrants issued with preferred
stock -- -- -- --
Amortization of warrant
valuation -- -- -- --
Net loss -- -- -- --
--------- ------- ------ -----
Balances, December 31, 1998 2,453,990 $24,540 22,500 $225
--------- ------- ------ -----
--------- ------- ------ -----
</TABLE>
<TABLE>
<CAPTION>
PAID-IN CAPITAL
--------------------------- ACCUMULATED STOCKHOLDERS'
COMMON PREFERRED DEFICIT DEFICIENCY
---------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Balances, December 31, 1996 11,335,141 -- (7,558,489) 3,798,755
Issuance of common stock for
warrants exercised 510,741 -- -- 513,178
Net loss -- -- (4,768,785) (4,768,785)
---------- ---------- ----------- ----------
Balances, December 31, 1997 11,845,882 -- (12,327,274) (456,852)
Issuance of preferred stock -- 2,249,775 -- 2,250,000
Warrants issued with line of
credit financing 21,900 -- -- 21,900
Warrants issued with preferred
stock 229,333 (229,333) -- --
Amortization of warrant
valuation -- 70,071 (70,071) --
Net loss -- -- (3,971,442) (3,971,442)
---------- ---------- ----------- ----------
Balances, December 31, 1998 12,097,115 2,090,513 (16,368,787) (2,156,394)
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
</TABLE>
See accompanying notes to the financial statements.
F-5
<PAGE>
CRAGAR INDUSTRIES, INC.
Statements of Cash Flows
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,971,442) (4,768,785)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for losses on accounts receivable 255,120 3,587,861
Provision for obsolete and slow-moving inventory 785,000 (260,945)
Depreciation and amortization of property and equipment 304,360 306,069
Amortization of other assets 427,674 140,387
Amortization of excess fair value of assets acquired over cost -- (737,468)
Gain on sale of property and equipment 21,900 --
Increase (decrease) in cash resulting from changes in:
Accounts receivable (136,517) (3,023,383)
Inventories (483,973) 1,910,077
Prepaid expenses (188,864) 27,345
Other assets (44,734) (381,525)
Accounts payable and accrued expenses 258,218 (806,034)
Accrued interest (60,817) 12,143
----------- -----------
Net cash used in operating activities (2,834,075) (3,994,258)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (113,823) (453,317)
Disposition of property and equipment 127,682 --
----------- -----------
Net cash provided by (used in) investing activities 13,859 (453,317)
----------- -----------
Cash flows from financing activities:
Proceeds from sale of preferred stock 1,650,000 --
Net borrowings (repayments) on Norwest line of credit (5,518,544) 2,561,152
Net borrowings (repayments) on NCFC line of credit 5,820,494 --
Proceeds from issuance of long-term debt 1,127,000 600,000
Repayments of long-term debt (166,933) (4,263)
Repayments of capital lease obligations (108,123) (69,219)
Net proceeds from issuance of common stock -- 513,178
----------- -----------
Net cash provided by financing activities 2,803,894 3,600,848
----------- -----------
Decrease in cash and cash equivalents (16,322) (846,727)
Cash and cash equivalents at beginning of year 16,322 863,049
----------- -----------
Cash and cash equivalents at end of year $ -- 16,322
----------- -----------
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 854,038 805,974
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
Conversion of investor notes payable to preferred stock 600,000 --
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to the financial statements.
F-6
<PAGE>
CRAGAR INDUSTRIES, INC.
Notes to Financial Statements
December 31, 1998
(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 an accumulated deficit of $16,368,787 as of December 31, 1998,
has generated substantial losses for several years, and has a
stockholders' deficiency of $2,156,394 as of December 31, 1998. The
Company's business plan calls for an increase in sales from new and
existing customers, decrease in operating expenses, and an equity
investment from a new private offering 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
plans will be successfully carried out. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) 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.
(b) 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.
(c) 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.
(d) 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.
F-7
<PAGE>
(e) REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment to the
customer. Provisions are made currently for estimated product
returns.
(f) 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 was amortized to operations over five years
using the straight-line method through December 31, 1997.
(g) IMPAIRMENT OF LONG-LIVED ASSETS
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.
(h) 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.
(i) 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.
(j) EMPLOYEE STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25) and related
interpretations in accounting for its employee stock options and to
adopt the "disclosure only" alternative treatment under Statement of
Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION (SFAS 123). SFAS 123 requires the use of fair value
option valuation models that were not developed for use in valuing
employee stock options. Under SFAS No. 123, deferred compensation is
recorded for the excess of the fair value of the stock on the date of
the option grant, over the exercise price of the option. The deferred
compensation is amortized over the vesting period of the option.
F-8
<PAGE>
(k) NET LOSS PER COMMON SHARE
Basic net loss per common share is computed based on weighted average
shares outstanding and excludes any potential dilution from stock
options, warrants and other common stock equivalents. Diluted net
loss per common share 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, 1998 and 1997 of 1,642,611 and
1,264,778, respectively, have been excluded from the calculation of
diluted net loss per common share as their effect is antidilutive.
(l) 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:
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, 1998, 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.
(m) CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of accounts
receivable. 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.
(n) SEGMENT REPORTING
The Company has only one segment, sales of wheels and wheel
accessories. The Company's foreign sales totaled 3.1% in 1998 and
4.8% in 1997.
F-9
<PAGE>
(4) INVENTORIES
<TABLE>
<S> <C>
Inventories as of December 31, 1998 consist of:
Raw materials and supplies $2,612,857
Work-in-process 161,164
Finished goods 2,577,681
----------
5,351,702
Less allowance for obsolete and slow-moving inventory 999,249
----------
$4,352,453
----------
----------
</TABLE>
(5) PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1998 consists of the following:
<TABLE>
<S> <C>
Equipment $1,035,296
Leasehold improvements 558,791
Furniture and fixtures 435,815
----------
2,029,902
Less accumulated depreciation and amortization 1,375,368
----------
Property and equipment, net $ 654,534
----------
----------
</TABLE>
(6) ACCRUED EXPENSES
Accrued expenses as of December 31, 1998 consist of the following:
<TABLE>
<S> <C>
Accrual for stock adjustments, rebates, cash discounts,
advertising, royalty and warranty $ 502,787
Payroll and related benefits 127,982
Professional fees 113,590
Real estate, personal property and other taxes 90,254
Settlement 125,000
Other 73,031
----------
$1,032,644
----------
----------
</TABLE>
F-10
<PAGE>
(7) CREDIT FACILITY
During 1998, the Company secured a new credit facility with a finance
company. The terms of the credit facility specify a maximum combined term
loan and revolving line of credit totaling $8.5 million, subject to
certain restrictions with respect to the collateral borrowing base. The
credit facility contains no financial covenants and is collateralized by
certain assets of the Company under a security agreement, which includes
accounts receivable, inventories, intangible assets, and property. Certain
stockholders have also pledged personal investments totaling $1.5 million
as collateral on the credit facility and a portion of the investments are
considered in determining the borrowing base. The line of credit bears
interest at the prime rate plus 1.25% (9.0% at December 31, 1998) and is
due in full in April 2002. As of December 31, 1998, $5,820,494 was
outstanding under the line of credit and approximately $149,000 was
available to borrow under the line of credit.
In April 1998, the Company borrowed $1,127,000 under the term loan
component of the credit facility. The term note is payable in monthly
principal and interest payments based upon the prime rate plus 1.25%
(9.00% at December 31, 1998) and is due April 2002. As of December 31,
1998, $960,067 was outstanding under the term loan.
The credit facility requires the Company to maintain an outstanding
minimum principal balance and collateral borrowing base of at least $4
million from the combination of the line of credit and term loans. As this
minimum balance must be maintained until April 2002, $4 million of the
total balances due under the credit facility are classified as long-term
at December 31, 1998.
Aggregate maturities of the line of credit and term loan over the next
five years are as follows: 1999 - $2,780,561; 2000 - $250,400; 2001 -
$250,400; and 2002 - $3,499,200.
(8) PREFERRED STOCK
In December 1997, the Company obtained debt financing from two
stockholders (investors) of the Company totaling $600,000. The notes,
bearing 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. Total interest
expense on investor debt was $3,000 and $2,800 for the years ended
December 31, 1998 and 1997, respectively.
During January 1998, the Company issued 22,500 shares of 7% Series A
Convertible Preferred Stock for $1,650,000 cash and conversion of $600,000
of investor notes payable to stockholders, all of which were outstanding
at December 31, 1997. Dividends in arrears for preferred stock totaled
$135,625 at December 31, 1998.
F-11
<PAGE>
(9) OUTSTANDING WARRANTS
At December 31, 1998 and 1997, the Company has outstanding Class A
warrants to purchase 7,877.5 shares 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, 1998 and 1997, the Company has
outstanding Class C warrants to purchase 21,000 shares 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, B, and C 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, 1998 and 1997 as a result of the completion of the Company's initial
public offering in December 1996.
During January 1998, the Company granted warrants to purchase 333,333
shares of the Company's common stock at $8.75 per share in conjunction
with the preferred stock issuance. These warrants became exercisable in
January 1998 and expire in January 2001. These warrants were valued at
$229,333 and recorded as a contra entry to additional paid-in capital -
preferred. This amount is being amortized to accumulated deficit on a
straight-line basis over the three-year life of the warrants.
In April 1998, the Company issued warrants to purchase 50,000 shares of
the Company's common stock at a price of $5.25 per share to a financing
company as part of securing its credit facility. The warrants became
exercisable in April 1998, at the execution of the credit facility, and
expire in April 2003. These warrants were valued at $21,900 based upon the
market value of similar publicly traded warrants as of the date of grant.
This warrant value was fully amortized to interest expense in 1998.
No warrants to purchase shares of the Company's common stock were
exercised during 1998.
(10) 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, 1998, 90,600 stock options under the Plans were available
for grant.
F-12
<PAGE>
The per share weighted-average fair value of stock options granted during
1998 and 1997 was $3.24 and $3.29, 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 1998 and
1997. The risk-free interest rate was 5.46% and 6.50% for 1998 and 1997,
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>
1998 1997
----------- -----------
<S> <C> <C>
Net loss:
As reported $(3,971,442) (4,768,785)
Pro forma (4,113,742) (4,984,985)
Loss per share:
As reported $ (1.67) (2.08)
Pro forma (1.73) (2.18)
</TABLE>
The full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma net loss amounts presented
above because compensation cost is reflected over the options' vesting
period of four years.
A summary of the aforementioned stock plan follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
---------------------------- ----------------------------
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 173,400 $5.26 68,200 $5.52
Granted 6,000 5.25 141,700 5.12
Forfeited (25,000) 5.12 (36,500) 5.16
Exercised -- -- -- --
-------- ----- ------- -----
Balance at the end of the year 154,400 $5.28 173,400 $5.26
-------- ----- ------- -----
-------- ----- ------- -----
Exercisable at the end of the year 154,400 $5.28 173,400 $5.26
-------- ----- ------- -----
-------- ----- ------- -----
Weighted-average fair value of
options granted during the year $3.24 $3.29
-------- ----- ------- -----
-------- ----- ------- -----
</TABLE>
F-13
<PAGE>
A summary of stock options granted at December 31, 1998 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 1998 LIFE PRICE 1998 PRICE
--------------- --------------- --------------- ---------- --------------- ---------
<S> <C> <C> <C> <C> <C>
5.12 - 5.14 97,600 8 years, 6 mos. $ 5.12 97,600 $ 5.12
5.25 6,000 9 years, 7 mos. 5.25 6,000 5.25
5.60 50,800 7 years, 10 mos. 5.60 50,800 5.60
------- ------ ------- -------
154,400 $ 5.28 154,400 $ 5.28
------- ------ ------- -------
------- ------ ------- -------
</TABLE>
(11) LOSS PER SHARE
A summary of the Company's basic and diluted loss per share follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997
----------- ----------
<S> <C> <C>
Net loss $(3,971,442) (4,768,785)
Less preferred stock dividends in arrears (135,625) --
----------- ----------
Loss available to common stockholders $(4,107,067) (4,768,785)
----------- ----------
----------- ----------
Basic EPS-weighted average shares outstanding 2,453,990 2,291,278
----------- ----------
----------- ----------
Basic loss per share $(1.67) (2.08)
----------- ----------
----------- ----------
Basic EPS-weighted average shares outstanding 2,453,990 2,291,278
Effect of dilutive securities -- --
----------- ----------
----------- ----------
Dilutive EPS-weighted average shares outstanding 2,453,990 2,291,278
----------- ----------
----------- ----------
Diluted loss per share $ (1.67) (2.08)
----------- ----------
----------- ----------
Stock options and warrants not included in diluted EPS
since antidilutive 1,642,611 1,264,778
----------- ----------
----------- ----------
</TABLE>
F-14
<PAGE>
(12) INCOME TAXES
The Company had no current or deferred income taxes for the years ended
December 31, 1998 and 1997. The reconciliation of the expected income tax
benefit calculated at the U.S. Federal statutory rate of 34% to loss
before income taxes for the years ended December 31, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Computed "expected" tax benefit $(1,350,290) (1,621,387)
Change in the valuation allowance for deferred tax assets 1,397,000 2,193,000
State and local income taxes, net of federal income tax
benefit (237,515) (328,682)
Other, net 190,805 (242,931)
----------- ---------
$ -- --
----------- ---------
----------- ---------
</TABLE>
The Company has net operating loss carryforwards at December 31, 1998 of
approximately $13,721,000 for Federal income tax purposes, which begin to
expire in 2010. In the event of a change in ownership pursuant to Internal
Revenue Service regulations, utilization of the net operating loss
carryforwards may be eliminated or significantly reduced.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts $44,000 1,447,000
Inventories, principally due to allowance for obsolete
and slow-moving inventory 536,000 883,000
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 59,000 133,000
Net operating loss carryovers 5,488,000 2,334,000
Rebates and sales discounts accrual 106,000 79,000
Other 122,000 82,000
--------- ---------
Total gross deferred tax assets 6,524,000 5,127,000
Less valuation allowance (6,524,000) (5,127,000)
--------- ---------
Net deferred tax assets -- --
Deferred tax liabilities -- --
--------- ---------
Net deferred income taxes $ -- --
--------- ---------
--------- ---------
</TABLE>
F-15
<PAGE>
The net change in the total valuation allowance for the years ended
December 31, 1998 and 1997 was an increase of $1,397,000 and $2,193,000,
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. Management believes that the inability to utilize net
operating loss carryforwards to offset future taxable income within the
carryforward periods is more likely than not. Accordingly, a 100 percent
valuation allowance has been recorded against the net deferred tax assets.
(13) OPERATING LEASES
The Company 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, 1998 are as follows:
<TABLE>
<S> <C>
Years ending December 31:
1999 $ 339,799
2000 360,297
2001 364,702
2002 348,090
2003 55,170
----------
Total lease payments $1,468,058
----------
----------
</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 $309,909 and $311,467 for the years
ended December 31, 1998 and 1997, respectively.
(14) CONCENTRATIONS OF RISK -- MAJOR CUSTOMER
The Company sold a substantial portion of its product to three customers
in 1998 and to four customers in 1997. Sales amounts for 1998 and 1997 for
these customers are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- -----------
PERCENT OF PERCENT OF
SALES SALES
---------- -----------
<S> <C> <C>
Sales to major customers:
Heafner Tire 13.5% 9.6%
Reliable Auto - Kansas 5.1 5.8
Keystone Automotive 7.7 6.2
Super Shops -- 27.5
---- ----
26.3% 49.1%
---- ----
---- ----
</TABLE>
F-16
<PAGE>
Gross accounts receivable from significant customers as of December 31,
1998 and 1997 follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
PERCENT OF PERCENT OF
ACCOUNTS ACCOUNTS
RECEIVABLE RECEIVABLE
---------- -----------
<S> <C> <C>
Accounts receivable from major customers:
Keystone Automotive 16.2% 3.9%
Heafner Tire 15.7 2.3
Reliable Auto - Kansas 8.8 4.8
Super Shops -- 52.0
---- ----
40.7% 63.0%
---- ----
---- ----
</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. In 1998, this receivable was written off against the
allowance for doubtful accounts.
(15) CONTINGENCIES
In 1997, the Company developed a plan to deal with the Year 2000 problem
and began converting its computer systems to be Year 2000 compliant. The
plan provides for the conversion efforts to be completed by the end of
1999. The Year 2000 problem is the result of computer programs being
written using two digits rather than four to define the applicable year.
Management has also assessed the Year 2000 remediation efforts of the
Company's significant suppliers. Although management believes its efforts
minimize the potential adverse effects on the Company of a supplier's
failure to be Year 2000 compliant on time, there can be no absolute
assurance that all its suppliers will become Year 2000 compliant on time
or in a way that will be compatible with the Company's systems. The
Company does not believe expenditures to be Year 2000 compliant will be
material, and is expensing all costs associated with these systems changes
as the costs are incurred. However, there can be no assurance that the
Company will be able to completely resolve all Year 2000 issues or that
the ultimate cost to identify and implement solutions to all Year 2000
problems will not be material to the Company.
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-17
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Cragar Industries, Inc.:
We consent to the incorporation by reference in the registration statement of
Cragar Industries, Inc. on Form S-3/A (File No. 333-58187) filed as of August
20, 1998, of our report dated March 18, 1999, on the balance sheet of Cragar
Industries, Inc. as of December 31, 1998 and the related statements of
operations, stockholders' deficiency and cash flows for each of the years in
the two-year period ended December 31, 1998, which report appears in the
December 31, 1998, annual report on Form 10-KSB of Cragar Industries, Inc.
KPMG LLP
Phoenix, Arizona
March 30, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 2,988,272
<ALLOWANCES> 108,995
<INVENTORY> 4,352,453
<CURRENT-ASSETS> 7,431,747
<PP&E> 2,029,902
<DEPRECIATION> 1,375,368
<TOTAL-ASSETS> 8,107,601
<CURRENT-LIABILITIES> 6,263,995
<BONDS> 0
0
0
<COMMON> 24,540
<OTHER-SE> (2,181,159)
<TOTAL-LIABILITY-AND-EQUITY> 8,107,601
<SALES> 12,081,884
<TOTAL-REVENUES> 12,081,884
<CGS> 10,769,486
<TOTAL-COSTS> 4,404,391
<OTHER-EXPENSES> 87,228
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 792,221
<INCOME-PRETAX> (3,971,442)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,971,442)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,971,442)
<EPS-PRIMARY> (1.67)
<EPS-DILUTED> (1.67)
</TABLE>
