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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from _________ to __________
Commission File No. 1-12559
CRAGAR INDUSTRIES, INC.
(Name of small business issuer in its charter)
DELAWARE 86-0721001
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4636 NORTH 43RD AVENUE, PHOENIX, ARIZONA
85031 (Address of principal executive offices)
(602) 247-1300
(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Number of shares of common stock, $.01 par value, outstanding as of March
31, 1999: 2,453,990.
Transitional small business disclosure format. Yes [ ] No [X]
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CRAGAR INDUSTRIES, INC.
BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 94,645 $ -
Accounts receivable, less allowance for doubtful accounts of
$110,248 as of 3/31/99 and $108,995 as of 12/31/98 4,245,638 2,879,277
Inventories, net 4,048,922 4,352,453
Prepaid expenses 213,505 200,017
-------------- -------------
Total current assets 8,602,710 7,431,747
Property and equipment, net 586,773 654,534
Other assets, net 21,320 21,320
-------------- -------------
9,210,803 $ 8,107,601
-------------- -------------
-------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,490,583 $ 2,376,112
Accrued expenses 1,317,017 1,032,644
Accrued interest 81,101 74,678
Line of credit 2,867,641 2,530,161
Long-term debt, current installments 250,400 250,400
-------------- -------------
Total current liabilities 7,006,742 6,263,995
Line of credit, excluding current installments 3,352,933 3,290,333
Long-term debt, excluding current installments 907,067 709,667
-------------- -------------
Total liabilities 11,266,742 10,263,995
-------------- -------------
Stockholders' equity:
Preferred stock, par value $.01; authorized 200,000 shares,
22,500 shares issued and outstanding 225 225
Additional paid-in capital - preferred 2,020,440 2,090,513
Common stock, par value $.01; authorized 5,000,000 shares,
2,453,990 shares issued and outstanding 24,540 24,540
Additional paid-in capital - common 12,097,115 12,097,115
Accumulated deficit (16,198,259) (16,368,787)
-------------- -------------
Total stockholders' equity (deficit) (2,055,939) (2,156,394)
-------------- -------------
$ 9,210,803 $ 8,107,601
-------------- -------------
-------------- -------------
</TABLE>
See accompanying notes to condensed financial statements.
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CRAGAR INDUSTRIES, INC.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1999 1998
-------------- -------------
<S> <C> <C>
Net sales $ 4,186,763 $ 3,115,197
Cost of goods sold 3,313,470 2,487,467
-------------- -------------
Gross profit 873,293 627,730
Selling, general and administrative expenses 588,782 826,431
-------------- -------------
Income (loss) from operations 284,511 (198,701)
-------------- -------------
Non-operating (income) expenses, net
Interest expense, net 185,105 172,208
Other, net (1,049) (20,307)
-------------- -------------
Total non-operating expenses 184,056 151,901
-------------- -------------
Income (loss) before income taxes 100,455 (350,602)
Income taxes - -
-------------- -------------
Net earnings (loss) $ 100,455 $ (350,602)
-------------- -------------
-------------- -------------
Basic earnings (loss) per share $ 0.02 $ (0.15)
-------------- -------------
-------------- -------------
Weighted average shares outstanding - basic 2,453,990 2,453,990
-------------- -------------
-------------- -------------
Diluted earnings (loss) per share $ 0.01 $ (0.15)
-------------- -------------
-------------- -------------
Weighted average shares outstanding - diluted 4,836,401 2,453,990
-------------- -------------
-------------- -------------
</TABLE>
See accompanying notes to condensed financial statements.
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CRAGAR INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net earnings (loss) $ 100,455 $ (350,602)
Adjustments to reconcile net earnings (loss) to net cash
used in operating activities:
Provision for (write-off of) doubtful accounts 1,252 36,483
Reduction in provision for obsolete and slow-moving inventory (166,389) (145,792)
Depreciation and amortization of property and equipment 73,952 71,630
Amortization of other assets - 12,940
Increase (decrease) in cash resulting from changes in:
Accounts receivable (1,367,614) (636,763)
Inventories 469,920 (214,093)
Prepaid expenses (13,487) (88,892)
Bank overdraft - 9,033
Accounts payable and accrued expenses 398,844 628,007
Accrued interest 6,423 (52,235)
-------------- ---------------
Net cash used in operating activities (496,644) (730,284)
-------------- ---------------
Cash flows from investing activities
Purchases of property and equipment (6,191) (59,480)
-------------- ---------------
Net cash used in investing activities (6,191) (59,480)
-------------- ---------------
Cash flows from financing activities
Issuance of preferred stock and warrants - 1,650,000
Net borrowings (repayments) on note payable 400,080 (781,373)
Proceeds from long-term debt 260,000 -
Repayments of long-term debt (62,600) (2,210)
Repayments of capital lease obligations - (92,975)
-------------- ---------------
Net cash provided by financing activities 597,480 773,442
-------------- ---------------
Net increase (decrease) in cash 94,645 (16,322)
Cash and cash equivalents at beginning of period - 16,322
-------------- ---------------
Cash and cash equivalents at end of period $ 94,645 $ -
-------------- ---------------
-------------- ---------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 178,682 $ 224,443
-------------- ---------------
-------------- ---------------
</TABLE>
See accompanying notes to condensed financial statements.
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CRAGAR INDUSTRIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation:
The interim financial data of Cragar Industries, Inc., ("CRAGAR" or
`the Company") presented as of and for the three months ended March 31,
1999 and 1998 is unaudited; however, in the opinion of the Company, the
interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results
for the interim periods.
The year-end balance sheet information was derived from audited
financial statements. These interim financial statements should be read
in conjunction with the Company's audited financial statements.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
2. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
(Unaudited)
<S> <C> <C>
Raw Materials $ 2,195,984 $ 2,612,857
Work in Process 123,259 161,164
Finished Goods 2,562,539 2,577,681
------------ ------------
4,881,782 5,351,702
Less allowance for obsolete and slow-moving inventory 832,860 999,249
------------ ------------
Inventories, net $ 4,048,922 $ 4,352,453
------------ ------------
------------ ------------
</TABLE>
3. Net Earnings (loss) per Share
Net Earnings (loss) per common share amounts are based on the
weighted average number of common shares and common stock equivalents
outstanding as reflected on Exhibit 11 to this Quarterly Report on Form
10-QSB.
4. Other Related Reserves and Allowances
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
(Unaudited)
<S> <C> <C>
Stock Adjustments and Returns $ 91,505 $ 129,849
Rebates Reserve 10,079 5,869
Cash Discounts 23,409 21,156
Advertising Allowance 17,433 49,069
Warranty Reserve 429,278 397,991
Royalty Reserve 4,020 2,732
</TABLE>
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5. Preferred Stock and Warrants
During the first quarter ended March 31, 1998, the Company issued
22,500 shares of Series A Preferred Stock for $1,350,000 cash and the
conversion of $900,000, in principal amount, of investor notes payable.
The Company also granted warrants valued at $229,333 to purchase
333,333 shares of Common Stock at a price of $8.75 per share in
connection with the preferred stock issuance. On April 20, 1998, 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 $900,000 during December 1997 and January
1998. For each $100,000 made available to the Company, the Company
granted 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 90,000 shares of Series A Preferred
Stock. In addition, the Company agreed to grant warrants to certain
individuals who continue to pledge 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 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.
On May 15, 1998, the Company granted options to each of Sidney Dworkin,
Donald McIntrye and Mark Schwartz, Directors of the Company, to
purchase 2,000 shares of Common Stock at an exercise price of $5.25 per
share. During November 1998, all previously granted options under the
Directors' Stock Option Plan were repriced to $4.125, which was the
fair market price of the Common Stock on the date of repricing. During
the first quarter ended March 31, 1999, no warrants or options to
purchase shares of Common Stock were exercised and no Series A
Preferred Stock was converted to Common Stock. Dividends in arrears for
outstanding Preferred Stock at March 31, 1999 totaled $175,000, which
are payable, at the discretion of the Company, in cash or additional
shares of the Company's Series A Preferred Stock. See "Factors That May
Affect Future Results and Financial Condition - Dependence on External
Financing."
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements. Additional written
or oral forward-looking statements may be made by the Company from time to
time in filings with the Securities Exchange Commission or otherwise. Such
forward-looking statements are within the meaning of that term in Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such statements may include, but 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 2,
"Management's Discussion and Analysis of Financial Condition or Plan of
Operation," and in the Notes to the Company's Financial Statements, describe
factors, among others, that could contribute to or cause such differences.
INTRODUCTION
CRAGAR 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.
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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, retailers and mail order
houses.
The Company was formed in 1992 to acquire certain assets, including
the accounts receivable, inventory, property, equipment, patents, trademarks,
and copyrights in a leveraged buyout from the Wheel and Tire Division of Mr.
Gasket Company, Inc., which had filed for reorganization. The fair value of
the net assets acquired exceeded the final purchase price, and, accordingly,
the fair value of the property and equipment, patents, trademarks, and
copyrights acquired was reduced to zero. The remaining balance of $3,687,341
was classified as excess of fair value of assets acquired over cost (commonly
referred to as negative goodwill) and was amortized to income over five years
using the straight-line method ($737,468 per annum through December 31, 1997).
RESULTS OF OPERATIONS
The following table sets forth various items as a percentage of net
sales revenue for the three month periods ended March 31, 1999 and March 31,
1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
----- -----
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of goods sold 79.1 79.8
----- -----
Gross profit 20.9 20.2
SG&A 14.1 26.6
----- -----
Income (loss) from operations 6.8 (6.4)
Non-operating expense, net 4.4 4.9
Income taxes - -
----- -----
Net earnings (loss) 2.4% (11.3)%
----- -----
----- -----
</TABLE>
COMPARISON OF QUARTER ENDED MARCH 31, 1999 AND QUARTER ENDED MARCH 31, 1998
Net sales consist of gross sales less returns, discounts, and
allowances. Net sales for the quarter ended March 31, 1999 were $4,186,763
compared to $3,115,197 during the quarter ended March 31, 1998, representing
a 34.4% increase in net sales. The increase was primarily attributable to
sales of the Company's new wire wheel to J. H. Heafner, Inc., the Company's
largest customer, additional sales to existing customers and a reduction in
its inventory of slow-moving and obsolete product. Returns, discounts, and
allowances decreased by 7.1% between the quarter ended March 31, 1999 and the
quarter ended March 31, 1998. The decrease in returns, discounts, and
allowances was primarily attributable to modifications in customer agreements
for the period ended March 31, 1999.
Gross profit is determined by subtracting cost of goods sold from
net sales. Cost of goods sold consists primarily of the costs of raw
materials, including steel and aluminum, overhead, material processing, and
labor used in the production of the Company's products, as well as the
freight costs of shipping product to the Company's customers. Gross profit
for the quarter ended March 31, 1999 was $873,293 compared to $627,730 for
the quarter ended March 31, 1998. As a percentage of net sales, gross profit
increased in the first quarter of 1999 compared to the first quarter of 1998,
from 20.2% to 20.9%. The gross profit improvement in the quarter ended March
31, 1999 was primarily the result of product mix changes, continued cost
reduction programs, and increased production, which resulted in improved
overhead absorption. Cost reduction efforts including the reduction of
production personnel and outsourcing of selected manufacturing processes
positively affected gross profit in the first quarter of 1999. However, the
Company also expects its gross profits and overall results of operations to
vary from period to period based upon a variety of factors, including changes
in order levels from customers, the timing of orders, changes in product mix,
the level of net sales and
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other factors, such as overhead absorption. Overhead absorption variations
result from changes in production levels and efficiencies.
Selling, general, and administrative ("SG&A") expenses consist
primarily of salaries and wages, marketing expenses and promotional programs,
office expenses, legal and accounting expenses, commissions, bad debt
reserves, product development expenses, and general overhead. These expenses
for the first quarter ended March 31, 1999 were $588,782 compared to $826,431
for the quarter ended March 31, 1998. This decrease of $237,649, or 28.8%,
was due in part to the Company's concentrated focus on reducing SG&A
expenses. The reductions were realized throughout SG&A expenditures, though,
primarily with reductions in labor and related costs, implementation of a
less costly sales and marketing plan, and lower legal, accounting, and
professional fees.
Non-operating expenses, net, for the first quarter of 1999 were
$184,056 compared to $151,901 for the first quarter of 1998. The increase of
$32,155, or 21.2%, is primarily attributable to an increase in interest
expense resulting from the Company's increase in the amount outstanding and
related loan fees and costs charged under its credit facility.
Because of its carry-forward losses from previous years, the Company
had no income tax provision in the first quarter of 1999 and 1998.
Net earnings for the first quarter ended March 31, 1999 were
$100,455 compared to net loss of $350,602 for the first quarter ended March
31, 1998, an increase in earnings of $451,057. Basic earnings per share for
the first quarter ended March 31, 1999, after deducting the dividends due
holders of the Series A Preferred Stock, was $.02 compared to basic loss per
share of $0.15 for the first quarter ended March 31, 1998. See Exhibit 11 to
this Quarterly Report on Form 10-QSB.
LIQUIDITY AND CAPITAL RESOURCES
On April 20, 1998, the Company secured a credit facility (the "NCFC
Credit Facility") with NationsCredit Commercial Funding Corporation ("NCFC").
The terms of the NCFC Credit Facility specify a maximum combined term loan
and revolving loan totaling $8.5 million at an interest rate of 1.25% above
the prime rate. The NCFC Credit Facility is secured by substantially all of
the Company's assets and certain pledged assets from three investors and
expires on April 19, 2002. As of March 31, 1999 the outstanding balance under
the NCFC Credit Facility was approximately $7,100,000, and the Company had
excess availability of approximately $55,000. The NCFC Credit Facility
contains no financial performance covenants and requires prior approval
rights to any declarations of cash dividend payments.
At March 31, 1999, the Company had an accumulated deficit of
$16,198,259. For the quarter ended March 31, 1999, the Company's operating
activities used $496,644 of cash, which was primarily attributable to the
increase in accounts receivable, offset by net earnings, the decrease in
inventory, and increases in accounts payable and accrued expenses. The
Company's decrease in inventory at March 31, 1999 from the year ended
December 31, 1998 level provided approximately $303,000 in cash. During the
quarter ended March 31, 1999, the Company's financing activities provided
$597,480 in cash. The increase in cash from financing activities was due to a
net increase of $400,080 in borrowings under the revolving line of the NCFC
Credit Facility and $260,000 in proceeds from loans received from private
lenders offset by long-term debt payments of $62,600.
Although the Company believes that the amount available under the
NCFC Credit Facility together with cash from operations and its current cash
position will be sufficient to fund the Company's working capital
requirements for 1999, 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.
Therefore, the Company is currently attempting to secure additional equity or
subordinated debt. No assurance can be given of the Company's ability to
obtain such financing on favorable terms, if at all. If the Company is
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unable to obtain additional financing, its ability to meet its current and
future revenue growth plans could be materially and adversely affected.
ACCOUNTING MATTERS
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS No. 130) which became effective for the Company January 1,
1998. SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components in a full set of general-purpose
financial statements. The adoption of SFAS No. 130 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, 1998. SFAS No. 131 establishes
standards for the way that public enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
reports issued to stockholders. The adoption of SFAS No. 131 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. The adoption of SFAS No. 132 did not 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.
SEASONALITY
Historically, the Company has experienced higher revenue in the
first two quarters of the year than in the latter half of the year. The
Company believes that this results from seasonal buying patterns resulting,
in part, from an increased demand for certain automotive parts and
accessories and its ultimate customers having added liquidity from income tax
refunds during the first half of the year.
INFLATION
Increases in inflation generally result in higher interest rates.
Higher interest rates on the Company's borrowings would decrease the
profitability of the Company. To date, general price inflation has not had a
significant impact on the Company's operations; however, increases in metal
prices have from time to time, and could in the future, adversely affect the
Company's gross profit.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
The Company's future operating results and financial condition are
dependent upon, among other things, the Company's ability to implement its
business strategy. Potential risks and uncertainties that could affect the
Company's profitability are set forth below.
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HISTORY OF PREVIOUS LOSSES
The Company was incorporated in December 1992 and has incurred
significant losses in each of its completed fiscal years. For the quarter
ended March 31, 1999, however, the Company incurred net earnings of $100,455.
There can be no assurance that the Company will be profitable in the future.
Net sales for the year ended December 31, 1998 declined to $12,081,884 from
$16,545,159 for the year ended December 31, 1997. Net sales for the three
months ended March 31, 1999 increased to $4,186,763 from $3,115,197 for the
same period in 1998. As of March 31, 1999, the Company had cumulative losses
of $16,198,259 and total stockholders' deficit of $2,055,934.
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 66.7% of the Company's gross sales
for the first three months of 1999. The top three customers accounted for
41.7% of gross sales. For the three months ended March 31, 1999, J. H.
Heafner Company, Inc. accounted for 30.7% of gross sales, ATECH Motorsports
accounted for 5.5% of gross sales and B & R/Player Wire Wheels accounted for
5.5% of 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. 7.7%, and RELCO Corp. 5.1%. Due to the
significant concentration of sales to the Company's top ten customers, the
loss of any one such customer could have a material impact on the Company's
results of operations and financial condition.
The Company 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.
On September 19, 1997, the Company's then 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. While the
Company has continued to establish and improve sales relationships with new
and existing customers since Super Shops, Inc. filed for bankruptcy
protection, it is still uncertain whether those relationships will fully
replace the revenues previously generated by Super Shops. Failure to resolve
this matter satisfactorily could have a material adverse effect on the
Company.
DEPENDENCE ON THIRD PARTY SUPPLIERS
The Company's business depends upon the assembly of component parts
and the shipment of finished wheels and wheel accessories from third-party
suppliers. From time to time, the Company has experienced delays in the
delivery of component parts and finished products from vendors. In addition,
one of the Company's significant suppliers is located in China, which from
time to time has been subject to numerous trading restrictions by the United
States. The Company also has suppliers in Brazil, Korea and Taiwan. The
purchase of materials from foreign suppliers may be adversely affected by
political and economic conditions abroad over which the Company has no
control. Although to date the Company has generally been able to acquire
adequate supplies of such components and finished product in a timely manner,
any extended interruption in supply, significant increase in the price, or
reduction in the quality of such components could have a material adverse
effect on the Company's business, financial condition, and results of
operations. The Company has begun to outsource selectively the production of
some of its products and may increase such
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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.
LISTING AND MAINTENANCE CRITERIA FOR SECURITIES; PENNY STOCK RULES
The Common Stock and Warrants are quoted on the OTC Bulletin Board
under the symbol "CRGR". The Company's capital and surplus and shareholders'
equity have fallen below the minimums required by NASDAQ and the Boston Stock
Exchange, primarily as a result of continuing losses. As a result, the
Company's Common Stock and Warrants are no longer listed on NASDAQ and the
Boston Stock Exchange. There can be no assurance that the Company in the
future will meet the requirements for listing on the Nasdaq SmallCap Market
or the Boston Stock Exchange with respect to the Common Stock or Warrants. If
the Common Stock or the Warrants fail to re-attain such listings, the market
value of the Common Stock and Warrants likely would decline and holders
likely would find it more difficult to dispose of, or to obtain accurate
quotations as to the market value of, the Common Stock and Warrants. In
addition, if the Company fails to re-attain Nasdaq SmallCap Market listing
for its securities, and no other exclusion from the definition of a "penny
stock" under the Securities Exchange Act of 1934 is available, then any
broker engaging in a transaction in the Company's securities would be
required to provide any customer with a risk disclosure document, disclosure
of market quotations, if any, disclosure of the compensation of the
broker-dealer and its salesperson in the transaction, and monthly account
statements showing the market values of the Company's securities held in the
customer's accounts. The bid and offer quotation and compensation information
must be provided prior to effecting the transaction and must be contained on
the customer's confirmation. If brokers become subject to the "penny stock"
rules when engaging in transactions in the Company's securities, they would
become less willing to engage in such transactions, thereby making it more
difficult for the Company's security holders to dispose of Common Stock and
Warrants.
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, and has a maturity date of April 2002. As
of March 31, 1999, the outstanding amount owed by the Company under the NCFC
Credit Facility was approximately $7,100,000, and the Company had excess
availability of approximately $55,000. 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 $1,500,000 that was pledged to NCFC by three private
investors. In exchange for that pledge, the Company agreed to grant warrants
to purchase 7,000 shares of Common Stock on an annual basis per $100,000
pledged 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. In addition, during March 1999, the Company obtained
additional secured subordinated debt financing in the amount of $260,000 from
three private lenders. The terms of this financing provides for an annual
interest rate of 10% with maturity in March 2001. This financing is
subordinate to the NCFC Credit Facility. In exchange for the financing, the
Company also agreed to grant, to the lenders, warrants to purchase 33,333
shares of Common Stock at an exercise price of $3.00 per share for each
$100,000 in extended debt.
Although the Company believes that the amount available under the
NCFC Credit Facility together with cash from operations and funds received
from the additional debt financed during the first quarter ended March 31,
1999, will be sufficient to fund the Company's working capital requirements
for 1999, there can be no assurance that the Company's cash flow from
operations, together with its current cash position and amounts available
under the NCFC Credit Facility, will be sufficient to implement fully its
business strategies especially in the event that the Company is required to
refinance or replace the NCFC Credit Facility. As a result, the Company is
attempting to secure additional funds through equity or debt financings. The
Company
11
<PAGE>
has engaged an investment banker, on a non-exclusive basis, to assist in
securing such financing. No assurance can be given that such additional
financing will be available on terms acceptable to the Company, if at all.
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 growth in the
markets it serves, various factors, including those listed above, could lead
to decreased sales and increased operating expenses. There can be no
assurance that various factors will not adversely affect the Company's
business in the future or prevent the Company from successfully implementing
its business strategies.
DATA PROCESSING AND TECHNOLOGY AND YEAR 2000
The Company 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
Year 2000 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 continued 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
12
<PAGE>
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.
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 successfully integrate
such acquired companies or product lines into its existing operations, which
could increase the Company's operating expenses in the short-term and
materially 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.
13
<PAGE>
CHANGING CUSTOMER TRENDS; NEED FOR PRODUCT DEVELOPMENT
The Company's success depends, in part, on its ability to correctly
and consistently anticipate, gauge, and respond in a timely manner to
changing consumer preferences. There can be no assurance that the Company's
core products will continue to enjoy acceptance among consumers or that any
of the Company's future product offerings will achieve or maintain market
acceptance. The Company attempts to minimize the risks relating to changing
consumer trends by offering a wide variety of product styles, analyzing
consumer purchases, maintaining active product development efforts, and
monitoring the sales performance of its various product lines. However, any
misjudgment by the Company of the market for a particular product, or its
failure to correctly anticipate changing consumer preferences, could have a
material adverse effect on its business, financial condition, and results of
operations. In order to enhance its product development efforts, the Company
may supplement its existing product development staff by hiring one or more
new employees with product development experience and by engaging an outside
consultant to assist the Company's product development staff. There can be no
assurance that the Company will be able to attract and retain such additional
personnel or that the costs associated with additional product development
efforts will not have an adverse effect on the Company.
REGULATORY COMPLIANCE
The Company is subject to various federal and state governmental
regulations related to occupational safety and health, labor, and wage
practices as well as federal, state, and local governmental regulations
relating to the storage, discharge, handling, emission, generation,
manufacture, and disposal of toxic or other hazardous substances used to
produce the Company's products. The Company believes that it is currently in
material compliance with such regulations. Failure to comply with current or
future environmental regulations could result in the imposition of
substantial fines on the Company, suspension of production, alteration of its
production processes, cessation of operations, or other actions which could
have a material adverse affect on the Company. In the ordinary course of its
business, the Company uses metals, oils, and similar materials, which are
stored on site. The waste created by use of these materials is transported
off-site on a regular basis by a state-registered waste hauler. Although the
Company is not aware of any material claim or investigation 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
14
<PAGE>
relative to the U.S. dollar and fluctuations in foreign currency exchange
rates could have an adverse impact on the price of the Company's products in
its international markets.
CONTROL BY EXISTING STOCKHOLDERS
The directors, officers, and principal stockholders of the Company
beneficially own more than 57.4% of the Company's outstanding Common Stock,
assuming exercise of all outstanding options and warrants and conversion of
Series A Preferred Stock. As a result, these persons will have a significant
influence on the affairs and management of the Company, as well as on all
matters requiring stockholder approval, including electing and removing
members of the Company's Board of Directors, causing the Company to engage in
transactions with affiliated entities, causing or restricting the sale or
merger of the Company, and changing the Company's dividend policy. Such
concentration of ownership and control could have the effect of delaying,
deferring, or preventing a change in control of the Company even when such a
change of control would be in the best interest of the Company's other
stockholders.
EFFECT OF PREFERRED STOCK ON RIGHTS OF COMMON STOCK
The Company's Amended and Restated Certificate of Incorporation
authorizes the Board of Directors of the Company to issue "blank check"
preferred stock, the relative rights, powers, preferences, limitations, and
restrictions of which may be fixed or altered from time to time by the Board
of Directors. Accordingly, the Board of Directors is empowered, without
stockholder approval, to issue preferred stock with dividend, liquidation,
conversion, voting, or other rights that could adversely affect the voting
power and other rights of the holders of Common Stock. In the first quarter
of 1998, for example, the Company issued 22,500 shares of its Series A
preferred stock for $2.25 million in additional capital, which as of March
31, 1999, could have been converted into approximately 722,800 shares of
Common 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 March 31,
1999, over 20.9% of the Company's Common Stock assuming exercise of all
outstanding options and warrants and conversion of Series A Preferred Stock.
The successful implementation of the Company's business strategies may
involve the hiring and retention of additional management, engineering,
marketing, product development, and other personnel. There can be no
assurance that the Company will be able to identify and attract additional
qualified management and other personnel when needed or that the Company will
be successful in retaining such additional management and personnel if added.
Moreover, there can be no assurance that the additional costs associated with
the hiring of additional personnel will not adversely affect the Company's
results of operations. The Company does not maintain key man life insurance
on any of its personnel.
LIMITED LIABILITY OF DIRECTORS
The Company's Certificate of Incorporation provides, with certain
exceptions, that the Company's directors will not be personally liable for
monetary damages for breach of the directors' fiduciary duty of care to the
Company or its stockholders. This provision does not eliminate the duty of
care, and in appropriate circumstances, equitable remedies such as an
injunction or other forms of non-monetary relief would remain available under
Delaware law. This provision also does not affect a director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws.
15
<PAGE>
NO CASH DIVIDENDS
The Company has never paid cash or stock dividends on its Common
Stock and does not anticipate that it will pay cash dividends in the
foreseeable future. It is contemplated that any earnings will be used to
finance the growth of the Company's business. The Company will be paying
dividends on its Series A Preferred Stock, however it anticipates those
dividends will be paid in kind rather than in cash. In addition, the
Company's NCFC Credit Facility prohibits the payments of cash dividends
without the lender's consent.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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, Case No. LA 97-46094-ER. 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,
which is due to be paid in the third quarter of 1999, 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During March 1999, the Company obtained additional secured
subordinated debt financing in the amount of $260,000 from three private
lenders. The terms of this financing provides for an annual interest rate of
10% with maturity in March 2001.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company had dividends in arrears for outstanding Preferred Stock
at March 31, 1999 totaling $175,000, which are payable, at the discretion of
the Company, in cash or additional shares of the Company's Series A Preferred
Stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<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*
10.1 Form of Promissory Note of the Registrant, dated March 16,
1999
10.2 Form of Security Agreement underlying Promissory Note of the
Registrant, dated March 16, 1999
11 Schedule of Computation of Earnings per Share
27.1 1999 Financial Data Schedule for the Three Months Ended March
31, 1999
</TABLE>
(b) Reports on Form 8-K
None
--------------
* Incorporated by reference to the Company's Registration Statement on
Form SB-2 (No. 333-13415).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CRAGAR INDUSTRIES, INC.
Dated: May 12, 1999 By: /s/Michael L. Hartzmark
------------------ ----------------------------------
Michael L. Hartzmark
President and CEO
Dated: May 12, 1999 By: /s/Richard P. Franke
------------------ ----------------------------------
Richard P. Franke
Chief Financial Officer
(Principal Financial and Accounting Officer)
17
<PAGE>
EXHIBIT 10.1
CRAGAR INDUSTRIES, INC.
PROMISSORY NOTE
DUE MARCH 15, 2001
MARCH 16, 1999
THE SECURITIES REPRESENTED BY THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR THE SECURITIES LAWS OF ANY
STATE. THE SECURITIES MAY NOT BE PLEDGED, HYPOTHECATED, SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
COVERING THE SECURITIES REPRESENTED BY THIS NOTE UNDER THE ACT AND OTHER
FILINGS UNDER ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL,
WHICH OPINION IS SATISFACTORY IN FORM AND SUBSTANCE TO THE COMPANY, TO THE
EFFECT THAT SUCH REGISTRATION AND OTHER FILINGS ARE NOT REQUIRED UNDER THE
ACT OR ANY APPLICABLE STATE SECURITIES LAWS AND THAT THE TRANSACTION COMPLIES
WITH THE RULES AND REGULATIONS IN EFFECT THEREUNDER.
FOR VALUE RECEIVED, the undersigned, Cragar Industries, Inc., a Delaware
corporation ("Maker"), promises to pay XXXXXXXX ("Payee"), at or such other
place as Payee shall designate in writing, the principal sum of XXXXXXXX
Dollars ($XXX,XXX.00), plus interest at the rate of ten percent (10%) per
annum. Interest, which begins accruing as of March 16, 1999, shall be due and
payable on March 15 of each year and ending at such time that Maker shall
have paid Payee all of the outstanding principal, and accrued interest
evidenced by this Note. In no event shall payment of all outstanding
principal and accrued interest be later than March 15, 2001. The principal
and interest due under this Note may be prepaid at any time without penalty.
This Note is the obligation of Maker only, and no recourse shall be had
for the payment thereof of the principal or interest thereon against any
stockholder, officer or director of Maker, either directly or through Maker,
by virtue of any statute for the enforcement of any assessment or otherwise,
all such liability of stockholders, directors and officers as such being
released by Payee by the acceptance of this Note.
In order to secure the principal of this Note, the Maker has granted to
Payee a security interest, evidenced by the filing of a UCC-1, in and to the
equipment, inventory, accounts receivable and all other personal property of
the Maker, tangible and intangible, wherever located and proceeds thereof
(the "Collateral"), subject and subordinate to the existing security
interests of NationsCredit Commercial Corporation ("NCCC") and the pledgors
of certain investment property used as additional collateral under the NCCC
Loan and Security Agreement, or with
<PAGE>
the consent of the holder hereof, which consent shall not be unreasonably
withheld, to the security interests of any other institutional creditor of
the Maker now or hereafter having a security interest in any of the foregoing
(hereinafter collectively referred to as the "Senior Creditors").
Any term of this Note may be amended and the observance of any term
hereof may be waived only with the written consent of both Maker and Payee.
The provisions of this Note shall be governed by and construed in
accordance with the laws of the State of Arizona without giving effect to
principles of conflict of laws.
The terms and conditions contained this Note shall apply to and bind the
heirs, representatives, successors, administrators and assigns of the parties
hereto.
This Note is not assignable without the prior written consent of the
other party. Any attempt at such an assignment without such consent shall be
void.
IN WITNESS WHEREOF, Maker has executed this Note in favor of Payee as of
the date first set forth above.
"MAKER":
CRAGAR INDUSTRIES, INC.
a Delaware corporation
By: _______________________________
Michael L. Hartzmark, President
2
<PAGE>
EXHIBIT 10.2
CRAGAR INDUSTRIES, INC.
SECURITY AGREEMENT
This Security Agreement ("AGREEMENT") is dated as of the 16th day of
March, 1999, and is executed by CRAGAR INDUSTRIES, INC., a Delaware
corporation ("Debtor"), in favor of XXXXXXX, ("SECURED PARTY"). Capitalized
terms used herein but not otherwise defined herein are used with the meanings
set forth in that certain Loan and Security Agreement (as it may be amended
and modified from time to time) ("LOAN AGREEMENT") dated as of April 21,
1998, between Debtor and NATIONSCREDIT COMMERCIAL CORPORATION, THROUGH ITS
NATIONSCREDIT COMMERCIAL FUNDING DIVISION ("Lender").
1. For valuable consideration, and to secure the performance of the
obligations hereinafter described, Debtor hereby assigns to Secured Party,
and grants to Secured Party, pursuant to Article 9 of the Uniform Commercial
Code as adopted in Arizona, a security interest in and to the goods and
property described in EXHIBIT A attached hereto and incorporated herein by
this reference (all of which shall be collectively referred to herein as
"COLLATERAL").
2. This Agreement and the security interest created hereby are given
for the purpose of securing: (a) any and all rights of subrogation of Secured
Party against Debtor arising as a result of the exercise by Lender of its
rights and remedies under that certain Promissory Note (as it may be amended
and modified from time to time) dated as of March 16, 1999, between Secured
Party and Lender; (b) performance of each agreement of Debtor herein
contained; (c) payment and performance of any additional existing or future
obligations of Debtor to Secured Party when evidenced by a writing or
writings reciting that they are so secured; and (d) any and all amendments,
modifications, increases, renewals and/or extensions of any of the foregoing.
3. Subject to the Loan and Pledge Agreements, Debtor represents,
warrants and agrees that: (a) Debtor has and will continue to have full title
to the Collateral free from any liens, leases, encumbrances, defenses or
other claims except for those provided to Lender in the Loan Agreement and to
Pledgors under the Pledge Agreements made a part of the Loan Agreement; (b)
Debtor will execute all documents (including financing statements and motor
vehicle title applications) and take such other action as Secured Party deems
necessary to create and perfect a security interest in the Collateral; (c)
Debtor will, at its sole cost and expense, defend any claims that may be made
against the Collateral, except for those made by Lender pursuant to the Loan
Agreement and Pledgors under the Pledge Agreements; (d) the Collateral shall
be kept at, upon or about Debtor's address set forth herein, and Debtor will
not, without Lender's, Pledgors' and Secured Party's prior written consent,
part with possession of; transfer, sell, lease, encumber, conceal or
otherwise dispose of the Collateral or any interest therein, except in the
normal course of business; (e) the Collateral will be maintained in good
condition and repair, and will not be knowingly used in violation of any
applicable laws, rules or regulations; (f) Debtor will pay and discharge all
taxes and liens on the Collateral prior to delinquency; (g) Debtor will
maintain insurance on the Collateral covering such risks and in such form and
amount as may be required by Secured Party from time to time, with insurers
satisfactory to Secured Party and with loss payable to Secured Party as its
interest may appear, and upon request Debtor will deliver the original of
such policy or policies to Secured Party; (h) Debtor will permit Secured
Party to inspect the Collateral and Debtor's books and records pertaining
thereto at any time; and (i) the Collateral will at all times remain personal
property.
4. Subject to the Loan and Pledge Agreements, with respect to any of
the Collateral consisting of accounts, rights to payment, accounts
receivable, and the like (collectively, the "RECEIVABLES"), Debtor further
represents, warrants and agrees that to the best of Debtor's knowledge and
belief: (i) the Receivables are genuine,
<PAGE>
valid and enforceable in accordance with their terms, and are not subject to
any defenses, offsets or other claims; (ii) Debtor has full title to the
Receivables, and has not heretofore transferred, conveyed, encumbered,
assigned or released any interest therein, except as provided in the Loan
Agreements and the Pledge Agreements; and (iii) Debtor will take all steps
necessary to preserve and maintain the Receivables and Debtor's interest
therein.
5. Secured Party may, from time to time, request from obligors
indebted on the Collateral, if any, information concerning the same.
6. In the event that Debtor shall fail to perform any obligation
hereunder, Secured Party may, but shall not be obligated to, perform the
same, and the cost thereof shall be payable by Debtor to Secured Party
immediately and without demand, and shall bear interest at the rate of 12%
per annum.
7. Secured Party may, in the event of default by Debtor in so doing,
pay taxes, assessments, liens, fees, charges or encumbrances, or order and
pay for repairs or spend any amounts necessary to maintain the Collateral in
Debtor's exclusive possession and in good condition and repair, and all
amounts expended by Secured Party shall, with interest thereon at the rate of
12% per annum, constitute an indebtedness of Debtor to Secured Party secured
by the Collateral and by the terms of this Agreement and shall be immediately
due and payable, but no such act or expenditure by Secured Party shall
relieve Debtor from the consequences of such default.
8. There shall be a "DEFAULT" or "EVENT OF DEFAULT" hereunder upon the
occurrence of any of the following events: (a) any "EVENT OF DEFAULT", as
such term is defined in the Promissory Note; or (b) any "EVENT OF DEFAULT",
as such term is defined in the Loan Agreement; or (c) any "EVENT OF DEFAULT",
as such term is defined in the Pledge Agreement; or (d) the breach of any
representation and warranty contained herein; or (e) the breach of any of the
terms, conditions or covenants contained herein.
9. Upon the occurrence of any default or event of default hereunder,
all obligations secured hereby shall, at Secured Party's option, immediately
become due and payable without notice or demand, and Secured Party shall have
in any jurisdiction where enforcement hereof is sought, in addition to all
other rights and remedies which Secured Party may have under law, all rights
and remedies of a secured party under the Uniform Commercial Code and in
addition the following rights and remedies, all of which may be exercised
with or without further notice to Debtor: (a) to settle, compromise or
release on terms acceptable to Secured Party, in whole or in part, any
amounts owing on the Collateral; (b) to enforce payment and prosecute any
action or proceeding with respect to any and all of the Collateral; (c) to
extend the time of payment, make allowances and adjustments and issue credits
in Secured Party's name or in the name of Debtor; (d) to foreclose the liens
and security interests created under this Agreement or under any other
agreement relating to the Collateral by any available judicial procedure or
without judicial process; (e) to enter any premises where any Collateral may
be located for the purpose of taking possession of or removing any
Collateral; (f) to remove from any premises where any Collateral may be
located, the Collateral and any and all documents, instruments, files and
records relating to the Collateral, and Secured Party may, at Debtor's cost
and expense, use the supplies and space of Debtor at any or all of its places
of business as may be necessary or appropriate to properly administer and
control the Collateral or the handling of collections and realizations
thereon; and (g) to sell, assign, lease, or otherwise dispose of the
Collateral or any part thereof, either at public or private sale, in lots or
in bulk, for cash, on credit or otherwise, with or without representations or
warranties, and upon such terms as shall be acceptable to Secured Party, all
at Secured Party's sole option and as Secured Party in its sole discretion
may deem advisable. Debtor irrevocably appoints Secured Party its true and
lawful attorney in fact, which appointment is coupled with an interest, for
purposes of accomplishing any of the foregoing. The net cash proceeds
resulting from the collection, liquidation, sale, lease or other disposition
of the Collateral shall be applied, first, to the expenses (including
<PAGE>
reasonable attorneys fees) of retaking, holding, storing, processing and
preparing for sale, selling, collecting, liquidating and the like, and then
to the satisfaction of all obligations and indebtedness secured hereby. Such
proceeds shall be applied to particular obligations and indebtedness, or
against principal or interest, in Secured Party's absolute discretion. Debtor
will, at Secured Party's request, assemble all Collateral and make it
available to Secured Party at such place or places as Secured Party may
designate which are reasonably convenient to both parties, whether at the
premises of Debtor or elsewhere, and will make available to Secured Party all
premises and facilities of Debtor for the purpose of Secured Party's taking
possession of the Collateral or removing or putting the Collateral in
saleable form. Debtor agrees to pay all costs and expenses incurred by
Secured Party in the enforcement of this Agreement, including without
limitation reasonable attorneys' fees, whether or not suit is filed hereon.
10. Upon the occurrence of any default or event of default hereunder,
Secured Party shall also have the following additional rights and remedies
with respect to the Receivables, all of which may be exercised with or
without further notice to Debtor: to notify any and all parties to any of the
Receivables that the same have been assigned to Secured Party and that all
performance thereunder shall thereafter be rendered to Secured Party; to
renew, extend, modify, amend, accelerate, accept partial performance on,
release, settle, compromise, compound, collect or otherwise liquidate or deal
with, on terms acceptable to Secured party, in whole or in part, the
Receivables and all of Debtors rights or interest therein; to enter into any
other agreement relating to or affecting the Receivables; to enforce
performance and prosecute any action or proceeding with respect to any and
all of the Receivables, and take or bring, in Secured Party's name or in the
name of Debtor, all steps, actions, suits or proceedings deemed by Secured
Party necessary or desirable with respect to the Receivables; and to exercise
all other rights, powers and remedies of Debtor with respect to the
Receivables; provided, however, that Secured Party shall be under no
obligation whatsoever to take any of the foregoing actions, and Secured Party
shall have no liability or responsibility for any act or omission taken with
respect thereto. Debtor hereby nominates and appoints Secured Party as
attorney-in-fact to perform all acts and execute all documents deemed
necessary by Secured Party in furtherance of the terms hereof.
11. If this Security Agreement is given to secure obligations of any
person or entity other than that of Debtor (such person or entity being
hereinafter referred to as "Principal"), Debtor waives notice of default,
presentment, demand for payment, protest, notice of protest, notice of
nonpayment or dishonor, and all other notices and demands of any kind
whatsoever; and Debtor consents and agrees that Secured Party may, from time
to time, without notice or demand and without affecting the enforceability or
security hereof: (a) take, alter, enforce or release any additional security
for the obligations secured hereby; (b) renew, extend, modify, amend,
accelerate, accept partial payments on, release, settle, compromise,
compound, collect or otherwise liquidate the obligations secured hereby or
any security therefor, and bid and purchase at any sale; (c) release or
substitute Principal or any guarantors of the obligations secured hereby; or
(d) amend, modify, waive, supplement or terminate the Loan Agreement or any
of the Loan Documents. Upon the occurrence of a default or an event of
default hereunder, Secured Party may enforce this Agreement independently of
any other remedy or security Secured Party may at any time hold in connection
with the obligations secured hereby, and it shall not be necessary for
Secured Party to proceed upon or against, and/or exhaust, any other remedy or
security before proceeding to enforce this Agreement. Until all obligations
secured hereby are paid in full, Debtor waives all right of subrogation and
all rights and remedies that Debtor may have or be able to assert by reason
of the laws of the State of Arizona pertaining to the rights and remedies of
sureties including, without limitation, A.R.S. Sections 12-1641 through
12-1646, and Arizona Rules of Civil Procedure 17(f).
12. Debtor further represents and warrants:
(a) The Collateral will be kept at Debtor's principal places of
business:
<PAGE>
4636 North 43rd Avenue Phoenix, Arizona 85031
(b) Debtor shall promptly notify Secured Party in writing of any
change in location of the Collateral, Debtor's place or places of
business.
(c) Debtor hereby acknowledges express intent to hereby waive and
abandon all personal property exemptions granted by law upon the goods
which are the subject of this Agreement. NOTICE: By signing this
Agreement, Debtor waives all rights provided by law to claim such goods
exempt from process.
13. This Agreement may not be altered or amended except with the
written consent of each of the parties. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective heirs,
executors, administrators, assigns and successors. The term "SECURED PARTY"
shall mean the holder and owner, including any pledgee or assignee, of the
obligations secured hereby whether or not named as the Secured Party herein.
14. All of Secured Party's rights and remedies hereunder are cumulative
and not exclusive, and are in addition to all rights and remedies provided by
law or under any other agreement between Debtor and Secured Party, or
otherwise. Where the context permits, the plural term shall include the
singular, and vice versa. Where more than one person, partnership,
corporation or other entity executes this Agreement as Debtor, their
liability hereunder shall be joint and several. This Agreement shall be
governed by, and construed and enforced in accordance with, the laws of the
State of Arizona. Notice of acceptance hereof by Secured Party is hereby
waived by Debtor.
CRAGAR INDUSTRIES, INC., a Delaware corporation,
"DEBTOR"
By: ____________________________________
Title: _________________________________
<PAGE>
EXHIBIT A
COLLATERAL DESCRIPTION
This Security Agreement covers the following property (the "COLLATERAL"):
(a) All of Debtor's accounts receivable, rights to payment, accounts,
notes, drafts, acceptances, instruments, documents of title, policies and
certificates of insurance, insurance claims, general intangibles and chattel
paper now existing or hereafter arising, herein called "Accounts". The terms
"accounts receivable", "rights to payment", "accounts", "notes", "drafts",
"acceptances", "instruments", "documents of title", "policies and
certificates of insurance", "insurance claims", "general intangibles", and
"chattel paper" shall include not only such thereof as arise out of the sale
or other disposition at any time and from time to time of inventory, goods, or
equipment, but also such thereof as arise out of or for furnishing services,
or the furnishing, or the furnishing of the use of or lease of; any goods.
(b) All of the inventory of Debtor including without limitation all
goods, merchandise and other personal property and all parts, accessories,
additions or accessions thereto, now owned or hereafter acquired by Debtor,
which are held for sale or lease or are to be furnished under contract of
service, hereinafter called Inventory. The term "Inventory" as used herein
means goods, merchandise, raw materials, work in process, materials used or
consumed in Debtor's business, finished goods and other personal property and
all parts, accessories, additions or accessions thereto, and products thereof
and all documents of title evidencing any part thereof; now owned or
hereafter acquired by Debtor, which are held for sale or lease or are to be
furnished under contracts of service, and shall also include any of the
foregoing items used by Debtor for demonstration, executive, or similar
purposes to the end that no goods of the type which are "Inventory" under the
foregoing definition shall be deemed to be excluded therefrom because they
are a long or short period not actually held or offered for sale, lease or
otherwise.
(c) All interest of Debtor now existing or hereafter arising in goods
or merchandise as to which an account receivable for goods sold or delivered
has arisen.
(d) All present and future furniture, fixtures, goods and equipment, as
those terms are defined in the Uniform Commercial Code, of every type now
owned or hereafter acquired by Debtor, complete with accessories,
attachments, accessions, repairs, replacements, parts and equipment now or
hereafter owned, attached or appertaining thereto or commingled or used in
connection therewith, or substituted therefor.
(e) All of Debtor's rights under all insurance policies covering the
Collateral and any and all proceeds, loss payments, and premium refunds
payable regarding the same.
(f) All causes of action claims, compensation, and recoveries for any
damage to, or destruction of the Collateral, or any part thereof; whether
direct or consequential, or for any damage or injury to the Collateral, or
for any loss or diminution in value of the Collateral.
(g) All proceeds from the sale or disposition of any of the aforesaid
Collateral. "Proceeds" as herein used includes not only case proceeds but
also all accounts, accounts receivables, notes, drafts, acceptances, chattel
paper and other forms of obligations and receivables which at any time
constitute all or part or are included in the proceeds of the Collateral.
(h) All books and records now owned or hereafter acquired by Debtor
pertaining to any of the above-described Collateral, including but not
limited to any computer-readable memory and any computer hardware or software
necessary to process such memory.
<PAGE>
EXHIBIT 11
CRAGAR INDUSTRIES, INC.
SCHEDULE OF COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
EARNINGS (LOSS) PER SHARE Three Months Ended March 31,
1999 1998
--------------- ---------------
<S> <C> <C>
Net earnings (loss) $ 100,455 $ (350,602)
Less: PREFERRED Stock Dividends in Arrears (39,375) (17,500)
--------------- ---------------
Income (loss) available to Common Stockholders $ 61,080 $ (368,102)
--------------- ---------------
--------------- ---------------
Basic EPS - Weighted Average
Shares outstanding 2,453,990 2,453,990
--------------- ---------------
--------------- ---------------
Basic Earnings (Loss) per Share $ 0.02 $ (0.15)
--------------- ---------------
--------------- ---------------
Basic EPS - Weighted Average
Shares outstanding 2,453,990 2,453,990
Effect of Diluted Securities:
Stock Options and Warrants (1) 1,659,611 -
Convertible Preferred Stock (1) 722,800 -
--------------- ---------------
Diluted EPS - Weighted Average
Shares Outstanding 4,836,401 2,453,990
--------------- ---------------
--------------- ---------------
Diluted Earnings (Loss) per Share $ 0.01 $ (0.15)
--------------- ---------------
--------------- ---------------
</TABLE>
(1) The Company's outstanding stock options, warrants, and convertible preferred
stock have an antidilutive effect on net loss per share for the three months
ended March 31, 1998. As a result, such amounts have been excluded from the
computations of diluted loss per share for that period.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 94,645
<SECURITIES> 0
<RECEIVABLES> 4,355,886
<ALLOWANCES> 110,248
<INVENTORY> 4,048,922
<CURRENT-ASSETS> 8,602,709
<PP&E> 2,036,093
<DEPRECIATION> 1,449,320
<TOTAL-ASSETS> 9,210,803
<CURRENT-LIABILITIES> 7,006,737
<BONDS> 0
0
225
<COMMON> 24,540
<OTHER-SE> (2,080,704)
<TOTAL-LIABILITY-AND-EQUITY> 9,210,803
<SALES> 4,186,763
<TOTAL-REVENUES> 4,186,763
<CGS> 3,313,470
<TOTAL-COSTS> 588,782
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 185,105
<INCOME-PRETAX> 100,455
<INCOME-TAX> 0
<INCOME-CONTINUING> 100,455
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 100,455
<EPS-PRIMARY> .02
<EPS-DILUTED> .01
</TABLE>
