<PAGE>
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 September 30, 2000
/ / 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)
(623) 247-1300
(Issuer's telephone number)
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 / /
Number of shares of common stock, $.01 par value, outstanding as of
September 30, 2000: 3,010,883.
Transitional small business disclosure format. Yes / / No /X/
<PAGE>
CRAGAR INDUSTRIES, INC.
Condensed Balance Sheets
September 30, 2000 and December 31, 1999
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 31,050 $ 1,387
Accounts receivable, net of allowance for
doubtful accounts of $135,000 and $149,860 451,975 1,443,886
Inventory, net - 540,373
Investments 1,578,789 437,500
Other current assets 115,946 78,665
----------- -----------
Total current assets 2,177,760 2,501,811
Property and equipment, net 83,196 207,245
Other Assets 57,624 57,624
----------- -----------
Total Assets $ 2,318,580 $ 2,766,680
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 672,171 $ 773,474
Short term note payable 1,200,000 -
Accrued interest 17,967 53,947
Deferred revenue 40,000 275,000
Accrued expenses 416,130 826,997
----------- -----------
Total current liabilities 2,346,268 1,929,418
Line of Credit - 2,331,548
Long Term Debt 100,000 460,000
----------- -----------
Total Liabilities 2,446,268 4,720,966
----------- -----------
Stockholders' Deficit
Preferred stock, par value $ .01; authorized 200,000 shares
11,000 and 22,500 shares issued and outstanding 110 225
Additional paid-in capital - preferred 1,055,294 2,166,956
Common stock, par value $ .01; authorized 10,000,000 shares
3,010,883 and 2,456,990 shares issued and outstanding 30,109 24,570
Additional paid-in capital - common 13,887,089 12,244,515
Dividends Paid (205,488) -
Accumulated deficit (14,894,802) (16,390,552)
----------- -----------
Total stockholders' deficit (127,688) (1,954,286)
----------- -----------
Total Liabilities and Stockholders' Deficit $ 2,318,580 $ 2,766,680
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements
2
<PAGE>
CRAGAR INDUSTRIES, INC.
Condensed Statements of Operations
Three Months and Nine Months Ended September 30, 2000 and 1999
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Net Sales $ 10,242 $2,428,920 $ 586,393 $ 10,818,776
Royalty revenues 85,744 - 365,253 -
----------- ----------- ----------- ------------
Total revenues 95,986 2,428,920 951,646 10,818,776
Cost of goods sold 37,512 1,806,393 624,078 8,527,808
----------- ----------- ----------- ------------
Gross profit 58,474 622,527 327,568 2,290,968
Selling, general and administrative expenses 21,706 501,975 556,075 1,653,708
----------- ----------- ----------- ------------
Income (loss) from operations 36,768 120,552 (228,507) 637,260
----------- ----------- ----------- ------------
Non-operating income (expenses), net
Interest expense (29,234) (145,658) (150,679) (476,918)
Other 3,474 248,215 1,913,158 220,432
----------- ----------- ----------- ------------
Total non-operating income (expenses), net (25,760) 102,557 1,762,479 (256,486)
----------- ----------- ----------- ------------
Net earnings before income taxes and
extraordinary items 11,008 223,109 1,533,972 380,774
Income taxes - - - -
----------- ----------- ----------- ------------
Net earnings before extraordinary item 11,008 223,109 1,533,972 380,774
Extraordinary item
Forgiveness of debt - - - 150,200
----------- ----------- ----------- ------------
Net earnings $ 11,008 $ 223,109 $1,533,972 $ 530,974
=========== =========== =========== ===========
Basic earnings per share
Net earnings before extraordinary item $ - $ 0.07 $ 0.51 $ 0.11
Extraordinary item - - - 0.06
----------- ----------- ----------- ------------
Net earnings $ - $ 0.07 $ 0.51 $ 0.17
=========== =========== =========== ===========
Weighted average shares outstanding 3,010,883 2,456,990 2,641,621 2,456,990
=========== =========== =========== ===========
Diluted earnings per share
Net earnings before extraordinary item $ - $ 0.04 $ 0.30 $ 0.05
Extraordinary item - - 0.03
----------- ----------- ----------- ------------
Net earnings $ - $ 0.04 $ 0.30 $ 0.08
=========== =========== =========== ===========
Weighted average shares outstanding 3,010,883 5,183,197 4,484,329 5,183,197
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed financial statements
3
<PAGE>
CRAGAR INDUSTRIES, INC.
Condensed Statements of Cash Flows
Nine Months Ended September 30, 2000 and 1999
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------
2000 1999
----------- ---------
<S> <C> <C>
Cash flows from operating activities
Net earnings $ 1,533,972 $ 530,974
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Provision for (write-off of) doubtful accounts (14,860) 86,308
Reduction in (increase in) provision for obsolete
and slow moving inventory (1,392,430) (376,429)
Depreciation and amortization of property and equipment 30,000 216,854
Loss on sale of property and equipment 78,971 -
Gain on sale economic rights to certain investment assets (1,834,188) -
Increase (decrease) in cash resulting from changes in:
Accounts receivable 1,006,771 909,656
Inventory 1,933,006 1,543,189
Other current assets (37,281) (115,229)
Accounts payable and accrued expenses (747,170) (702,176)
Accrued interest (35,980) 4,930
----------- ---------
Net cash provided by (used in) operating activities 520,811 2,098,077
----------- ---------
Cash flows from investing activities
Purchases in property and equipment - (59,066)
Purchases in investments (1,979,600) -
Proceeds from dispositions of economic rights to
certain investment assets 2,620,000 -
----------- ---------
Net cash provided by (used in) investing activities 640,400 (59,066)
----------- ---------
Cash flows from financing activities
Net borrowings (repayments) on bank line of credit (2,331,548) (1,846,056)
Proceeds from short-term debt 1,200,000 -
Proceeds from long-term debt - 260,000
Repayments of long-term debt - (187,800)
----------- ---------
Net cash provided by (used in) financing activities (1,131,548) (1,773,856)
----------- ---------
Net increase (decrease) in cash and cash equivalents 29,663 265,155
Cash and cash equivalents at beginning of period 1,387 -
----------- ---------
Cash and cash equivalents at end of period $ 31,050 $ 265,155
============ ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 186,659 $ 471,987
============ ===========
Noncash financing and investing activities:
Conversion of bridge financing to common stock $ 260,000
Conversion of bridge financing to sale of economic rights to
certain investment assets 100,000
Conversion of preferred stock and certain deferred dividend
payments to common stock 1,355,488
</TABLE>
See accompanying notes to condensed financial statements
4
<PAGE>
CRAGAR INDUSTRIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation:
The interim financial data as of and for the three months and nine
months ended September 30, 2000, and 1999 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.
2. Inventories
<TABLE>
<CAPTION>
Inventories consist of the following: SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------- -------------------
(Unaudited)
<S> <C> <C>
Raw materials $ - $ 682,854
Work in process - 172,308
Finished Goods - 1,077,844
------------------- -------------------
- 1,933,006
Less allowance for obsolete and
slow-moving inventory - 1,392,633
Inventories, net ------------------- -------------------
$ - $ 540,373
=================== ===================
</TABLE>
The reduction in inventory was the result of the Company's efforts
to sell off all its inventory as part of its change in business
strategy, which involved licensing the rights to sell wheels under
the CRAGAR brand name to third parties and terminating its own
manufacturing operations. See "Management's Discussion and Analysis
or Plan of Operations-Introduction".
3. Basic and Diluted Earnings (Loss) per Share
Basic and Diluted Earnings (loss) per 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. 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 9,000 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
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
5
<PAGE>
of the Company's common stock on the date of grant. As of June 30,
1999 the Company had granted warrants to purchase 73,500 shares of
the Company's common stock at an exercise price equal to the fair
market value on the date of grant. On May 21, 1999, the Company
granted options to each of Sidney Dworkin, Donald McIntyre and Mark
Schwartz, Directors of the Company, to purchase 2,000 shares of
common stock at an exercise price of $3.75 per share, which was the
fair market value of the underlying common stock on the date of
grant. Also, on May 21, 1999, the Board of Directors of the Company
passed a resolution whereby, it was agreed that, in lieu of cash
payments for director fees, Sidney Dworkin, Donald McIntyre and Mark
Schwartz, Directors of the Company, would each be granted options to
purchase 4,000 shares of the Company's common stock, at an exercise
price of $3.75 per share, which was the fair market value of the
underlying common stock on the date of grant. Until the Company's
cash position improves, the Board of Directors has agreed that for
each board meeting an outside director attends, the Company will
grant options to that director to purchase 2,000 shares of the
Company's common stock exercisable at an exercise price equal to the
price of the Company's common stock on the date of grant. During the
third quarter ended September 30, 2000, warrants or options to
purchase 97,500 shares of common stock were exercised and 11,500
shares of Series A Preferred Stock were converted to 456,393 shares
of the Company's common stock. During the fiscal quarter ended
September 30, 2000, the Company, as part of its debt refinancing,
granted to two investors, who had previously pledged additional
collateral for the Company's NCFC Credit Facility, warrants to
purchase 84,000 shares of the Company's common stock at an exercise
price equal to the fair market value price on the date of grant.
Dividends in arrears for outstanding Series A Preferred Stock at
September 30, 2000, totaled $185,637, 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 not be
limited to, projections of revenues, income or loss, estimates of capital
expenditures, plans for future operations, products or services, and
financing needs or plans, as well as assumptions relating to the foregoing.
The words "believe," "expect," "anticipate," "estimate," "project," and
similar expressions identify forward-looking statements, which speak only as
of the date the statement was made. Forward-looking statements are inherently
subject to risks and uncertainties, some of which cannot be predicted or
quantified. Future events and actual results could differ materially from
those set forth in, contemplated by, or underlying the forward-looking
statements. The following disclosures, as well as other statements in the
Company's report, including those contained below in this Item 2,
"Management's Discussion and Analysis of Financial Condition or Plan of
Operation," and in the Notes to the Company's Financial Statements, describe
factors, among others, that could contribute to or cause such differences.
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. In addition, no assurance
can be given regarding the Company's ability to obtain such financing on
favorable terms, if at all. If the Company is unable to obtain additional
financing, its ability to meet its anticipated operating and working capital
needs will be materially and adversely affected. As a result of the
Company's stockholders' deficit 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 1999 financial statements has
been qualified for a going concern.
6
<PAGE>
INTRODUCTION
From the Company's inception in 1992 through the first nine months of 1999
the Company designed, produced, and sold high-quality custom vehicle wheels and
wheel accessories. The Company sold 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.
In connection with a reassessment of its business strategy, the Company
considered combinations and strategic alliances with other companies that could
complement the Company's existing business, including outsourcing its
manufacturing and sales operations. In furtherance of this business strategy, on
September 30, 1999, the Company granted an exclusive worldwide license to Weld
Racing, Inc. ("Weld") to manufacture, sell, and distribute its line of wheels
with non-cast wrought aluminum alloy outer rims and related accessories
("Wrought Wheel Business") in exchange for a royalty based on sales of the
licensed products and sold certain assets to Weld related to its Wrought Wheel
Business. The Company and Weld completed this transaction in October 1999.
On October 15, 1999, the Company entered into a similar transaction
pursuant to which the Company granted an exclusive worldwide license to Carlisle
Tire and Wheel Co. ("Carlisle") to manufacture, sell, and distribute its line of
wheels with steel outer rims and related accessories ("SOR Wheel Business") in
exchange for a royalty based on sales of the licensed products and sold certain
assets to Carlisle related to its SOR Wheel Business. The Company and Carlisle
completed this transaction in December 1999.
On September 1, 2000, the Company entered into a licensing transaction
pursuant to which the Company granted an exclusive worldwide license to
Performance Wheel Outlet, Inc. ("Performance") to manufacture, sell, and
distribute its line of one-piece cast aluminum wheels ("One-Piece Wheel
Business") in exchange for a royalty based on sales of the licensed products.
Because the licensing of the Company's SOR Wheel Business and sale of
related assets to Carlisle, combined with the licensing of the Company's Wrought
Wheel Business and sales of related assets to Weld, may be considered a sale of
substantially all of the Company's assets, the proposed transaction with
Carlisle was submitted for approval by the Company's shareholders in accordance
with Delaware law at a Special Meeting of Shareholders held on December 22,
1999. The proposed transaction was approved by a shareholder vote with over 67%
of the Company's shares having been voted in favor of the proposed transaction.
With the transactions with Weld, Carlisle and Performance completed,
the Company no longer engages in the manufacture, marketing, sale or
distribution of any products related to its Wrought Wheel Business, SOR Wheel
Business and One-Piece Wheel Business. In general, the outsourcing of the
manufacturing, marketing, sales and distribution operations with respect to
the licensed products, together with the sale of the related assets, has
resulted in a substantial decrease in the Company's revenues and related
operating and marketing costs. The Company believes the decrease in revenues
will be replaced by a stream of royalty payments generated by net sales of
the licensed products by the Company's licensing partners. The Company will
rely on Weld's, Carlisle's and Performance's greater financial, operational
and distribution capabilities to increase net sales of the licensed products
and generate a stream of revenues in the form of quarterly royalty payments.
In addition, the Company is entitled to royalties based on net sales of any
new products developed by Carlisle related to the SOR Wheel Business under
the CRAGAR brand name, on net sales of any new products developed by Weld
related to the Wrought Wheel Business under the CRAGAR brand name and on net
sales of any new products developed by Performance related to the One-Piece
Wheel Business under the CRAGER brand name. Because the licensing partners'
primary fiduciary obligation is to their shareholders rather than the
Company's shareholders, they may make decisions or take steps that may result
in lower royalty payments or could adversely affect the CRAGAR brand name.
See "Risk Factors - Dependence on Third Parties to Generate Royalties."
As part of the Company's new business strategy, the Company also
intends to pursue licensing opportunities for other aftermarket performance
automotive products through the utilization of the CRAGAR brand name.
7
<PAGE>
RECENT DEVELOPMENTS
During the fiscal quarter ended December 31, 1999, the Company completed
a Stock Purchase Agreement with an individual investor of Wrenchead.com, Inc.
to exchange $150,000 in cash for 240,000 shares of common stock of
Wrenchead.com, Inc. ("Wrenchead"). Wrenchead.com is a provider of e-commerce
tools for both Business-to-Consumer and Business-to-Business for the
automotive aftermarket. Wrenchead.com offers for sale millions of brand name
auto and truck parts, accessories, performance products and consumer items.
Wrenchead.com (WWW.WRENCHEAD.COM) also services "do-it-yourselfers" and
professional mechanics with installation, maintenance and repair expertise.
Wrenchead is headquartered in White Plains, N.Y. Lead investors include
Polaris Venture Partners, SFX Entertainment and CBS.
During the fiscal quarter ended December 31, 1999, the Company also entered
into a Stock Option Agreement with an individual investor of Wrenchead to
exchange $300,000 in cash for an irrevocable option to purchase 315,000 shares
of Wrenchead's common stock and 312,500 shares of Wrenchead's Series A Preferred
Stock for $8.08 per share ($5,070,000 in cash, less the $300,000 option premium)
and 75,000 shares of common stock of the Company. This option was exercised on
April 27, 2000. During the first quarter ended March 31, 2000, the Stock Option
Agreement was amended, with the Company assigning its rights to purchase a
specified number of shares in Wrenchead to certain other investors in Wrenchead.
For $204,000, in cash the Company assigned to certain investors its irrevocable
option to purchase 214,602 shares of Wrenchead's common stock and 212,898 shares
of Wrenchead's Series A Preferred Stock, leaving the Company an irrevocable
option to purchase 100,398 shares of Wrenchead's common stock and 99,602 shares
of Wrenchead's Series A Preferred Stock for $8.56 per share ($1,712,000 in cash,
less the $96,000 paid with the option). The difference in the option price, or
$204,000, was repaid to the Company during February 2000.
This transaction was completed during the fiscal quarter ended June 30, 2000.
During the fiscal quarter ended December 31, 1999, the Company entered
into a Sales Agreement with the same individual investor pursuant to which
the Company agreed to $363,300 in cash for 45,000 shares of Wrenchead common
stock. This transaction closed on April 27, 2000. As a result of these
transactions, the Company owns 385,398 shares of Wrenchead common stock and
99,602 shares of Wrenchead Series A Preferred Stock.
During the fiscal quarter ended June 30, 2000, the Company formed a limited
partnership to raise the funds necessary to complete the two Wrenchead
transactions. The Company is the general partner of the limited partnership. As
of September 30, 2000, the limited partnership had raised $2,720,000, which was
primarily used to acquire the economic rights to 181,333 shares of Wrenchead
common stock owned by the Company.
On September 1, 2000, the Company entered into a licensing transaction
pursuant to which the Company granted an exclusive worldwide license to
Performance Wheel Outlet, Inc. ("Performance") to manufacture, sell, and
distribute its line of one-piece cast aluminum wheels ("One-Piece Wheel
Business") in exchange for a royalty based on sales of the licensed products.
During the fiscal quarter ended September 30, 2000, the Company sold or
disposed of all its remaining inventory.
8
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth various items as a percentage of net
sales revenue for the three month and nine month periods ended September 30,
2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total revenues 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 39.1 74.4 65.6 78.8
------ ------- ------- -------
Gross profit 60.9 25.6 34.4 21.2
SG&A 22.6 20.6 58.4 15.3
------ ------ ------- -------
Income (loss) from operations 38.3 5.0 (24.0) 5.9
Non-operating income (expense), net (26.8) 4.2 185.2 (2.4)
Income taxes - - - -
Extraordinary gain - - - 1.4
--------- ---------- ------- -------
Net earnings (loss) 11.5 % 9.2 % 161.2 % 4.9 %
========= ========== ======= =======
</TABLE>
COMPARISON OF QUARTER ENDED SEPTEMBER 30, 2000 AND QUARTER ENDED SEPTEMBER 30,
1999
The comparison of the Company's financial results for the fiscal
quarter ended September 30, 2000 and 1999 set forth below has been
significantly affected by the Company's significant change in business
strategy in the fourth quarter of 1999. As a result of this change in
strategy, which contemplates royalties from net sales of CRAGAR brand
products from its licensing partners as its primary source of revenue, the
Company has experienced a dramatic reduction in revenues and related costs
and expenses between the periods.
Total revenues consist of gross sales less discounts, returns and
allowances plus royalties on sale of licensed products. Net sales for the
quarter ended September 30, 2000 were $10,242 compared to $2,428,920 during the
quarter ended September 30, 1999, representing a 99.6% decrease in sales. Net
sales for the quarter ended September 30, 2000, consisted of sales of remaining
inventory not a part of the Weld, Carlisle and PDK transactions. The decrease
was primarily attributable to the Company no longer actively manufacturing and
distributing wheels. The Company does not anticipate significant sales of
inventory in subsequent periods. The decrease in net sales was partially offset
by royalty income of $85,744 earned under the Weld and Carlisle licensing
agreements.
The decrease in discounts, returns and allowances was attributable to
the Company's decision to no longer manufacture and distribute wheels. All
anticipated returns, discounts and allowances related to the sale of the
remaining inventory had been reserved for as of December 31, 1999.
Gross profit is determined by subtracting cost of goods sold from
total revenues. Historically, cost of goods sold consisted primarily of the
costs of labor, aluminum, steel, raw materials, overhead, and material
processing used in the production of the Company's products, as well as the
freight costs of shipping product to the Company's customers. Gross profit
for the quarter ended September 30, 2000 was $58,474 compared to $622,527 for
the quarter ended September 30, 1999. This significant decrease was
attributable primarily to the Company's change in business strategy. The
Company believes that it set aside adequate reserves as of December 31, 1999
to account for any pricing discounts necessary to sell the remaining
inventory at current market conditions.
Selling, general, and administrative ("SG&A") expenses consist
primarily of commissions, marketing expenses, promotional programs, salaries and
wages, product development expenses, office expenses, accounting and legal
expenses, bad debt reserves, and general overhead. These expenses for the third
quarter ended September 30, 2000 were $21,706 compared to $501,975 for the
quarter ended September 30, 1999, a 95.7% decrease. This decrease was due
primarily to the Company's change in business strategy during the quarter ended
December 31, 1999, which resulted in significant reductions in its SG&A
expenses, primarily
9
<PAGE>
related to sales, marketing and personnel. In addition, due to the change in
business strategy, the Company made certain reductions to its accruals and
reserves that the Company had not previously written down.
Non-operating expense, net, for the third quarter of 2000 was $25,760
compared to net non-operating income of $102,557 for the third quarter of
1999. This decrease of $128,317 was attributable primarily to the gain
realized on the sale of the economic rights to 20,000 shares of Wrenchead
common stock during the third quarter of 1999. See "Management's Discussion
and Analysis or Plan of Operation - Recent Developments."
Because of carry-forward losses from previous years, the Company had no
income tax provision in the third quarter of 2000 or 1999.
Net earnings for the third quarter ended September 30, 2000 were $11,008
compared to net earnings of $223,109 for the third quarter ended September 30,
1999. Basic earnings per share for the third quarter ended September 30, 2000
was $0.00 compared to basic earnings per share of $.07 for the third quarter
ended September 30, 1999. Diluted earnings per share for the three months ended
September 30, 2000 was $0.00 compared to diluted earnings per share of $.04 for
the same three month period in 1999. See Exhibit 11 to the Quarterly Report on
Form 10-QSB.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2000 AND NINE MONTHS ENDED
SEPTEMBER 30, 1999
The comparison of the Company's financial results for the nine months
ended September 30, 2000 and 1999 set forth below has been significantly
affected by the Company's significant change in business strategy in the
fourth quarter of 1999. As a result of this change in strategy, which
contemplates royalties from net sales of CRAGAR brand products from its
licensing partners as its primary source of revenue, the Company has
experienced a dramatic reduction in revenues and related costs and expenses
between the periods.
Total revenues consist of gross sales less discounts, returns and
allowances plus royalties on sale of licensed products. Net sales for the
nine months ended September 30, 2000 were $951,646 compared to $10,818,776
during the nine months ended September 30, 1999, representing a 91.2%
decrease in sales. Net sales for the nine months ended September 30, 2000,
consisted of sales of remaining inventory not a part of the Weld, Carlisle
and PDK transactions. This decrease was attributable primarily to the Company
no longer actively manufacturing and distributing wheels. The Company does
not anticipate additional sales of inventory in subsequent periods. The
decrease in net sales was partially offset by royalty income of $365,253
earned under the Weld and Carlisle licensing agreements.
The decrease in discounts, returns and allowances was attributable to the
Company's decision to no longer manufacture and distribute wheels. All
anticipated returns, discounts and allowances related to the sale of the
remaining inventory had been reserved for as of December 31, 1999.
Gross profit is determined by subtracting cost of goods sold from net
sales. Historically, cost of goods sold consisted primarily of the costs of
labor, aluminum, steel, raw materials, overhead, and material processing used
in the production of the Company's products, as well as the freight costs of
shipping product to the Company's customers. Gross profit for the nine months
ended September 30, 2000 was $327,568 compared to $2,290,968 for the nine
months ended September 30, 1999. The decrease was attributable primarily to
the Company's change in business strategy. The Company believes that it set
aside adequate reserves as of December 31, 1999 to account for any pricing
discounts necessary to sell the remaining inventory at current market
conditions.
Selling, general, and administrative ("SG&A") expenses consist primarily of
commissions, marketing expenses, promotional programs, salaries and wages,
product development expenses, office expenses, accounting and legal expenses,
bad debt reserves, and general overhead. These expenses for the nine months
ended September 30, 2000 were $556,075 compared to $1,653,708 for the nine
months ended September 30, 1999, a 66.4% decrease. This decrease was due
primarily to the Company's change in business strategy
10
<PAGE>
during quarter ended December 31, 1999, which resulted in significant reductions
in its SG&A expenses, primarily related to sales, marketing and personnel.
Non-operating net income, for the nine months ended September 30, 2000
was $1,762,479 compared to net expense of $256,486 for the same period in
1999. The increase of $2,018,965 was attributable primarily to the gain
realized on the sale of the economic rights to 180,333 shares of Wrenchead
common stock and the reduction in interest expense due to lower debt levels.
See "Management's Discussion and Analysis or Plan of Operation - Recent
Developments."
Because of carry-forward losses from previous years, the Company had no
income tax provision in the nine months ended September 30, 2000 or 1999.
Net earnings for the nine months ended September 30, 2000 were $1,533,972
compared to net earnings of $530,974 for the nine months ended September 30,
1999. Excluding the extraordinary gain of $150,200, resulting from the
forgiveness of debt by certain material and media vendors, the Company had net
earnings for the nine months ended September 30, 1999 of $380,774. Basic
earnings per share for the nine months ended September 30, 2000 was $.51
compared to basic earnings per share of $.17 for the nine months ended September
30, 1999. Diluted earnings per share for the nine months ended September 30,
2000 was $.30 compared to diluted earnings per share of $.08 for the same nine
month period in 1999. See Exhibit 11 to the 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 specified 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. During the fiscal quarter ending September 30,
2000, the Company paid off and terminated the NCFC Credit Facility. The
proceeds for the pay-off were provided by a loan from two investors totaling
$1,200,000 at an interest rate of 2.25% above the prime rate. The loan is
secured by substantially all of the Company's assets and expires in August
2001.
At September 30, 2000, the Company had an accumulated deficit of
$14,894,802. For the nine months ended September 30, 2000, the Company's
operating activities provided $520,811 of cash, which was primarily attributable
to the Company' net earnings for the period, the collection of accounts
receivable and sale of inventory. During the nine months ended September 30,
2000, the Company's investing activities provided $640,400 of cash. The increase
in cash from investing activities was primarily attributable to the net proceeds
received on the sale of the economic rights to a portion of the shares of
Wrenchead stock owned by the Company. During the nine months ended September 30,
2000, the Company's financing activities used $1,131,548 of cash. The decrease
in cash from financing activities was primarily due to a net decrease in Company
debt.
The Company does not anticipate any major capital budget expenditures in
2000. In addition, the Company does not believe its operating activities will
generate sufficient cash flow to meet its operating cash flow requirements and
other current obligations. Consequently, it is likely the Company will 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.
ACCOUNTING MATTERS
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 became
effective for the Company on January 1, 1999. SFAS No. 132 establishes standards
for the
11
<PAGE>
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 became effective for the Company on
July 1, 1999. The adoption of SFAS No. 133 did not 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. The Company expects this seasonality to have an effect on the
revenue stream derived from sales of CRAGAR brand products by the Company's
license partners.
INFLATION
Increases in inflation generally result in higher interest rates. Higher
interest rates on the Company's borrowings would decrease the profitability of
the Company. To date, general price inflation has not had a significant impact
on the Company's operations; however, increases in metal prices have from time
to time, and could in the future, adversely affect the Company's gross profit.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
The Company's future operating results and financial condition are
dependent upon, among other things, the Company's ability to implement its
business strategy. Potential risks and uncertainties that could affect the
Company's profitability are set forth below.
HISTORY OF PREVIOUS LOSSES
The Company was incorporated in December 1992 and incurred significant
losses in each of its completed fiscal years through 1998. The Company posted
its first net profit for fiscal year ended December 31, 1999 although a
significant portion of the profit was due to the gain on sale of assets in
connection with the Company's change in business strategy. For the nine
months ended September 30, 2000, the Company incurred net earnings of
$1,533,972. There can be no assurance, however, that the Company will be
profitable in the future. As a result of the Company's change in business
strategy, net sales for the nine months ended September 30, 2000 decreased to
$586,393 from $10,818,776 for the same period in 1999. As of September 30,
2000, the Company had cumulative losses of $14,894,802 and total
stockholders' deficit of $127,688.
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 the NCFC credit facility provided for a maximum
combined term loan and revolving loan totaling $8.5 million at an interest
rate of 1.25% above the prime rate. During the fiscal quarter ending
September 30, 2000, the Company paid off and terminated the NCFC Credit
Facility. The proceeds for the pay-off were provided by a loan from two
investors totaling $1,200,000 at an interest rate of 2.25% above the prime
rate. The loan is secured by substantially all of the Company's assets and
expires in August 2001. It is anticipated the Company will be required to
raise additional funds through equity or debt financings. No assurance can be
given, however, that additional financing will be available on terms
acceptable to the Company, if at all.
12
<PAGE>
DEPENDENCE ON THIRD PARTIES TO GENERATE ROYALTIES
As a result of the Company's change in business strategy, the Company's
revenues and operating results are substantially dependent on the efforts and
success of its third party licensing partners. Because the amount of
royalties payable to the Company are determined by the net sales of those
products by the Company's licensing partners, the Company's revenues are
subject to the abilities of its licensing partners to generate substantial
net sales and deliver a high-quality product on a timely basis to its
customers. In addition, because the primary fiduciary obligations of the
Company's licensing partners are to their shareholders rather than the
Company's shareholders, they may make decisions or take steps that would
result in lower royalty payments than would otherwise be the case. If any
licensing partner does not meet its obligations under its respective
licensing agreement, the Company's primary remedy is to terminate that
license agreement, which may be an effective remedy only if the Company can
identify and secure other capable licensees of the affected products.
INABILITY TO SUPPORT MANUFACTURING, MARKETING, SALE AND DISTRIBUTION IF THIRD
PARTY TERMINATES THE LICENSE AGREEMENT
If any licensing partner terminates its license agreement or the Company
terminates the license agreement for any reason, the Company will be forced
to incur the cost of manufacturing, marketing, selling and distributing the
licensed products without the financial resources and distribution
capabilities of its licensees. In the alternative, the Company would be
forced to secure another licensee capable of manufacturing, marketing,
selling and distributing the licensed products on behalf of the Company and
paying any royalties based on the net sales of those products. There can be
no assurance that the Company would be able to meet these obligations in the
event that one or more of the license agreements is terminated.
ROYALTY PAYMENTS WILL DECREASE AS A PERCENTAGE OF SALES AS ROYALTIES INCREASE
The royalty structure negotiated by the Company with some of its current
licensing partners provides for a decrease in the applicable percentage of
net sales that determines royalty payments to the Company as net sales
increase above certain levels. The consequence of this structure is that the
Company's ability to realize the benefits of a substantial increase in sales
with respect to any group of its licensed products will be limited by the
negotiated royalty fee structure as net sales of the licensed products
increase.
CHANGE IN BUSINESS STRATEGY MAY DEPRESS THE PRICE OF COMMON STOCK
The completion of the sale and licensing of the Company's Wrought Wheel,
SOR Wheel and One-Piece Wheel businesses and any other related licensing
arrangement the Company may complete in the future represents a significant
change in the Company's business model. In general, the outsourcing of the
manufacturing, marketing, sales and distribution operations with respect to
the licensed products, together with the sale of the related assets, has
resulted in a substantial decrease in the Company's revenues and operating
and marketing costs. The Company anticipates that the decrease in revenues
and operating and marketing costs will be replaced by a stream of royalty
payments generated by the net sales of the licensed products by the Company's
licensing partners. As a result, the Company does not have a history of
financial results upon which shareholders can rely to make a determination
that the new business strategy will be successful. Given the uncertainty of
the consequences of this change in business strategy, as well as the
significant decrease in revenues that has occurred, there can be no assurance
that this change will result in a profitable stream of royalty payments. As a
result of this uncertainty, the price of the Company's common stock may be
adversely affected.
EXTENSION OF CRAGAR BRAND NAMES TO OTHER PRODUCTS MAY NOT BE SUCCESSFUL
The Company's new business strategy contemplates the extension of the
CRAGAR brand names to new products developed by its licensees as well as to
non-wheel related products within the automotive aftermarket
13
<PAGE>
industry. The Company regards this extension of its brand names to new products
as a key element of a strategy that is designed to increase net sales of CRAGAR
brand products to generate increased royalty revenues. There can be no
assurance, however, that either the Company or its licensees will be successful
in developing and marketing any new products under the CRAGAR brand names, or if
any new products are developed, that the net sales of these products will have a
positive impact on the Company's financial results.
NO DUTY TO DISTRIBUTE ROYALTY PAYMENTS TO ITS SHAREHOLDERS
Any royalty payments made to the Company pursuant to the licensing
agreements initially will be used by the Company to increase its working capital
and reduce its debt. The Company has never paid any cash dividends on its common
stock and does not anticipate doing so in the foreseeable future. As a result,
shareholders should not anticipate that they will receive any distribution of
the royalties generated by the Company's licensing transactions.
DEPENDENCE ON KEY CUSTOMERS; LICENSEES ABILITY TO MARKET AND SELL TO EXISTING
AND NEW CUSTOMERS
A limited number of customers have historically accounted for a
substantial portion of the Company's revenues in each year. Given the
Company's change in business strategy, the Company expects that its current
licensing partners will account for an even greater percentage of its
revenues in the future. The financial condition and success of its customers
and the Company's ability to obtain orders from new customers have been
critical to the Company's success and will be critical to the success of the
Company's licensing partners. As a result of its change in business strategy
as described above, the Company's revenues have declined significantly and
most of its revenues are dependent on royalties from sales of CRAGAR products
by Weld, Carlisle and Performance. There can be no assurance that any of the
licensees will be successful in their sales and marketing efforts.
INVESTMENT IN WRENCHEAD MAY NOT BE PROFITABLE
The Company has made a substantial investment in Wrenchead, Inc. There
can be no assurance that the investment in Wrenchead will turn out to be
profitable.
HIGHLY COMPETITIVE INDUSTRY
The market for the Company's products is highly competitive. The Company
historically competed 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. The Company
anticipates that its licensing partners will compete on those same terms. The
Company believes that Weld, Carlisle and Performance have superior financial,
operational and distribution capabilities to compete effectively within the
custom aftermarket wheel industry. However, there can be no assurance that
the Company's licensing partners, Weld, Carlisle and Performance will be
successful in marketing custom aftermarket wheels under the CRAGAR brand
names. Increased competition could result in price reductions (which may be
in the form of rebates or allowances), reduced margins, and loss of market
share, all of which could have a material adverse effect on the Company's
licensing partners, possibly resulting in the reduction or elimination of
royalty payments due to the Company.
GENERAL ECONOMIC FACTORS
The automobile aftermarket industry 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
in which its products are sold, 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 licensing
partners' businesses in the future, causing a decrease
14
<PAGE>
in royalty payments due the Company, or prevent the Company from successfully
implementing its business strategies.
NO ASSURANCE OF ADDITIONAL SUCCESSFUL ALLIANCES
In furtherance of the Company's change in business strategy and sale of
the Company's Wrought Wheel, SOR Wheel and One-Piece Wheel businesses, the
Company continues to consider alliances with other companies that could
complement the Company's new business strategy, including other licensing
opportunities involving other complementary automotive aftermarket product
lines where the Company can capitalize on the CRAGAR brand name. There can be
no assurance that suitable licensing candidates can be identified, or that,
if identified, adequate and acceptable licensing terms will be available to
the Company that would enable it to consummate such transactions.
Furthermore, even if the Company completes one or more licensing agreements,
there can be no assurance that the licensing partners will be successful in
manufacturing, marketing, selling and distributing the licensed products.
Moreover, any additional investment by the Company in Wrenchead or other
companies may result in a potentially dilutive issuance of equity securities, or
the incurrence of additional debt which could adversely affect the Company's
financial position. Alliances, whether licensing or direct investments in
companies, involve numerous risks, such as the diversion of the attention of the
Company's management from other business concerns and the entrance of the
Company into markets in which it has had no or only limited experience, both of
which could have a material adverse effect on the Company.
VARIABILITY IN OPERATING RESULTS; SEASONALITY
The Company's results of operations have historically been subject to
substantial variations as a result of a number of factors. In particular, the
Company's operating results have varied due to 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 has had an impact on the Company's cash flow or workflow. 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. The Company expects that its licensing partners will be subject to
the same variations and industry seasonality as the Company has experienced in
the past. These variations may cause fluctuations in the sales of CRAGAR branded
products thereby causing fluctuations in the royalties due the Company.
CHANGING CUSTOMER TRENDS; NEED FOR PRODUCT DEVELOPMENT
The Company's success will depend, in part, on the ability of its licensing
partners 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 licensed products will continue to enjoy acceptance among
consumers or that any of the future CRAGAR branded products developed and
marketed by its licensing partners will achieve or maintain market acceptance.
Any misjudgment by the Company's licensing partners of the market for a
particular product or product extension, or their failure to correctly
anticipate changing consumer preferences, could have a material adverse effect
on their businesses, financial condition, and results of operations. Any
material adverse effect experienced by either of the Company's licensing
partners may have an adverse effect on the Company and its financial condition
and results of operations.
15
<PAGE>
REGULATORY COMPLIANCE
The Company historically has been 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 has been and is currently in
material compliance with such regulations. In the ordinary course of its
business, the Company used metals, oils, and similar materials, which were
stored on site. The waste created by use of these materials was 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.
The Company is subject to regulation as a publicly-traded company under
the Securities Exchange Act of 1934. In addition, as a consequence of the
sale and licensing of its Wrought Wheel, SOR Wheel and One-Piece Wheel
businesses, which could be considered a sale of substantially all of its
assets, in exchange for the receipt of a stream of royalty payments, the
Company could face regulatory issues under the Investment Company Act of 1940
if the royalty payments are considered investment securities. If the Company
is considered to be an investment company under the 1940 Act, it would be
required to register under that Act as an investment company. As a registered
investment company, the Company would be subject to further regulatory
oversight of the Division of Investment Management of the Commission, and its
activities would be subject to substantial and costly regulation under the
1940 Act. The Company does not believe that its activities will subject it to
the 1940 Act and accordingly does not intend to register as an investment
company under the Act, although there can be no assurance that such
registration would not be required in the future.
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 licensees, employees, both current and former,
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.
CONTROL BY EXISTING STOCKHOLDERS
The directors, officers, and principal stockholders of the Company
beneficially own approximately 52.0% of the Company's outstanding Common Stock.
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
16
<PAGE>
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. During the fiscal quarter
ended September 30, 2000, 11,500 shares of Series A Preferred Stock and the
preferred stock dividends issued on that stock were converted into 456,393
shares of the Company's 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.
PART II - OTHER INFORMATION
ITEM 1. 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.
The Company has filed a complaint in the matter of Cragar Industries, Inc.
versus Keystone Automotive Operations, Inc. ("Keystone") in the Superior Court
of Arizona, County of Maricopa, Case No. CV99-21619, seeking to recover in
excess of $290,000 in past due amounts for product purchased from the Company by
Keystone.
The Company has filed a complaint in the matter of Cragar Industries,
Inc. versus RELCO Corporation ("RELCO") in the United States District Court
for the District of Arizona, Case No. CIV00-0210, seeking to recover in
excess of $170,000 in past due amounts for product purchased from the Company
by RELCO.
The Company has filed a complaint in the matter of Cragar Industries,
Inc. versus Titan Wheel International, Inc. and Titan International, Inc.
("Titan") in the United States District Court for the District of Arizona,
Case No. CIV99-0649, seeking damages of more than $4,500,000, claiming breach
of contract, breach of warranty, and conversion arising out of a supply
contract with Titan's subsidiary Automotive Wheel, Inc. for the delivery of
automotive wheels to the Company.
The Company has filed a complaint in the matter of Cragar Industries,
Inc. versus Dallas Wheels and Accessories, Inc. ("Dallas") in the District
Court, Dallas County, Texas, 101st Judicial District, Cause No. 00-4994
seeking to recover in excess of $74,000 in past due amounts for product
purchased from the Company by Dallas.
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 discontinued 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
17
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company had dividends in arrears for outstanding Series A Preferred
Stock at September 30, 2000 totaling $185,637, 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
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)EXHIBITS
EXHIBIT NO. DESCRIPTION
3.1 Second Amended and Restated Certificate of Incorporation of
the Registrant filed with the State of Delaware on October 1,
1996*
3.2 Amended and Restated Bylaws of the Registrant*
10.1 Stock Option**
10.2 Sales Agreement**
10.3 Amendment to Sales Agreement**
11 Schedule of Computation of Earnings per Share
27.1 2000 Financial Data Schedule for the Three and Nine Months
Ended September 30, 2000
(b) Reports on Form 8-K
None
--------------------
* Incorporated by reference to the Company's Registration Statement on
Form SB-2 (No. 333-13415).
** Incorporated by reference to Company's Quarterly Report on Form 10QSB
filed on August 14, 2000 (no. 1-12559)
18
<PAGE>
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: November 14, 2000 By:/s/ MICHAEL L. HARTZMARK
------------------- --------------------------
Michael L. Hartzmark
CEO
Dated: November 14, 2000 By:/s/ RICHARD P. FRANKE
------------------- ---------------------------
Richard P. Franke
Chief Financial Officer
(Principal Financial and
Accounting Officer)
19
