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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, NW
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended October 3, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to __________
Commission file number 2-69336
CRAMER, INC.
A Kansas Corporation IRS Employment I.D. #48-0638707
625 Adams Street
Kansas City, Kansas 66105 Telephone No. (913) 621-6700
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[ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 4,051,400 shares of common stock, no
par value, as of November 1, 1999.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CRAMER, INC.
BALANCE SHEET
UNAUDITED
(Amounts in Thousands, Except Share Data)
ASSETS 10/3/99 12/31/98
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CURRENT ASSETS:
Cash $ 75 $ 63
Accounts receivable, net of allowance of $34 at October 3, 1999,
and $21 at December 31, 1998 1,487 1,114
Inventories 1,430 1,483
Prepaid expenses 269 230
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Total current assets 3,261 2,890
PROPERTY, PLANT AND EQUIPMENT
At cost 6,027 5,818
Accumulated depreciation 5,224 5,068
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803 750
OTHER ASSETS:
Intangible pension asset 160 160
Goodwill 176 190
Other non current assets 167 189
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Total Assets $ 4,567 $ 4,179
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $ 2,044 $ 1,548
Accounts payable 674 429
Accrued liabilities 579 600
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Total current liabilities 3,297 2,577
NON-CURRENT LIABILITIES:
Pension benefits payable 442 494
Other 217 238
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Total non-current liabilities 659 732
STOCKHOLDERS' EQUITY:
Common stock, no par value; authorized, 6,000,000 shares; issued and
outstanding 4,051,400 shares at October 3, 1999,
and December 31, 1998 3,824 3,824
Accumulated deficit (2,946) (2,687)
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878 1,137
Minimum pension liability adjustment (267) (267)
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Net stockholders' equity 611 870
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Total Liabilities and Stockholders' Equity $ 4,567 $ 4,179
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CRAMER, INC.
STATEMENTS OF INCOME
UNAUDITED
(Amounts in Thousands, Except Per Share Data)
QUARTER ENDED NINE MONTHS ENDED
10/3/99 10/4/98 10/3/99 10/4/98
--------- --------- --------- ----------
NET SALES $ 3,349 $ 3,031 $ 9,843 $ 9,757
COST OF SALES 2,389 2,397 7,022 7,013
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Gross profit 960 904 2,821 2,744
OPERATING EXPENSES:
Selling expenses 644 596 1,946 1,780
General and administrative 347 312 983 900
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Total operating expenses 991 908 2,929 2,680
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Income (loss) from operations (31) (4) (108) 64
OTHER EXPENSE:
Interest expense, net (33) (16) (88) (63)
Other, net (53) (20) (63) (25)
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Total other expense (86) (36) (151) (88)
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LOSS BEFORE INCOME TAXES (117) (40) (259) (24)
INCOME TAX BENEFIT 0 0 0 0
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NET INCOME LOSS $ (117) $ (40) $ (259) $ (24)
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Net loss per share based on basic and diluted
weighted average number of common
equivalent shares outstanding $ (0.04) $ (0.01) (0.06) $ (0.01)
Weighted Average Common Equivalent
Shares Outstanding Basic 4,051,400 4,051,400 4,051,400 4,051,400
Diluted 4,051,400 4,051 400 4,051,400 4,051,400
There is no difference between Net Loss and Total Comprehensive Loss for the
quarter or nine-month periods ending October 3, 1999 and October 4, 1998.
These interim financial statements contain all adjustments required for them to
be comparable to the annual financial statements issued on Form 10KSB.
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CRAMER, INC.
STATEMENTS OF CASH FLOWS
UNAUDITED
(Amounts in Thousands)
Nine Months Ended
10/3/99 10/4/98
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Cash flows from operating activities:
Net loss $ (259) $ (24)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 192 174
Changes in operating assets and liabilities:
Accounts receivable (373) (127)
Inventories 53 (220)
Prepaid expenses (39) 79
Accounts payable and accrued expenses 224 175
Other non-current liabilities (73) (34)
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Net cash provided by (used by) operating activities (278) 23
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Cash flows from investing activities:
Capital expenditures (209) (117)
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Cash flows from financing activities:
Principal payments on notes payable (3,810) (3,627)
Proceeds from issuance of notes payable 4,306 3,702
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Net cash provided by financing activities 496 75
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Net increase (decrease) in cash 12 (19)
Cash at beginning of year 63 52
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Cash at end of quarter 75 $ 33
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Supplemental disclosures:
Cash paid during the period for:
Interest $ 88 $ 63
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Income tax $ 0 $ 0
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
A. FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, this
report on Form 10-QSB contains forward-looking statements that
involve risks and uncertainties. The Company's actual results
could differ materially from the forward looking statements. In
connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, Cramer, Inc. reminds
readers that there are many important factors that could cause the
Company's actual results to differ materially from those projected
in forward-looking statements of the Company made by, or on behalf
of, the Company. When used in this Form 10-QSB and in other
filings by the Company with the Securities and Exchange
Commission, in the Company's press releases and in oral statements
made with the approval of an authorized executive officer, words
or phrases such as "will likely result", "expects", "are expected
to", "will continue", "is anticipated", "estimate", "project" or
similar expressions are intended to identify forward-looking
statements. The Company wishes to caution readers not to place
undue reliance on such forward-looking statements.
There are a number of reasons why investors should not place undue
reliance on forward-looking statements. Among the risks and
uncertainties that could cause the Company's actual results for
future periods to differ materially from any forward-looking
statements made are the following:
- Fluctuations or reductions in product demand and market acceptance
- The level of product development by the Company
- Capacity and supply constraints or difficulties
- The results of financing efforts
- The effect of new laws and regulations
- Unexpected additional expenses or operating losses
- Competition
- The Company's reliance on certain vendors for key components.
- The possible effect of the year 2000 on computer systems
- The potential inability of the Company's keyboard product line and
internet distribution channel to generate sufficient sales to
cover sales, marketing and introduction costs
The foregoing list of risks and uncertainties is not meant to be
complete.
B. POSSIBLE EFFECT OF THE YEAR 2000
As with many other companies, Cramer may be impacted by the "year
2000 problem". The "year 2000 problem" arose because many existing
computer programs use only the last two digits to refer to a year.
Therefore, these computer programs do not properly recognize a year
that begins with "20" instead of the familiar "19". If not
corrected, many computer applications
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could fail or create erroneous results.
In developing a response to the year 2000 issue, the Company has
considered all of its computer systems, both those that are directly
related to information technology systems and other systems where
computer controls exist. The Company has also considered the
readiness of its key vendors and customers.
The Company's only critical system is its Enterprise Resource
Planning (ERP) system that encompasses the Company's manufacturing,
scheduling, purchasing, and accounting systems. The ERP system
resides on an IBM advanced 36/AS 400. During the third quarter of
1999, the Company completed converting the advanced 36/AS400's
operating system and the core ERP system to allow recognition of
years beginning with a "20" using the 100 year fixed window
methodology. This methodology converts all dates entered into the
system in a prescribed manner that will allow the ERP system to
consistently handle dates both before and after the turn of the
century.
The Company has appointed an internal task force to review year 2000
compliance issues for all other areas where computer controls exist.
This review includes all other information technology systems other
than the ERP system and possible computer controlled processes in
the Company's facilities, communications, manufacturing equipment,
etc. At November 1, 1999, the task force had completed its inventory
of all of the Company's systems and has determined that all computer
controlled systems have already been appropriately remediated for
the year 2000.
The Company has developed a questionnaire to assess its vendors'
readiness to handle the year 2000 issue. These questionnaires were
distributed to vendors in later portions of 1998 and in early 1999.
The responses to these questionnaires have been reviewed and, as
necessary, supplemented with verbal discussions with the vendor's
management and information system professionals. Based on these
procedures, the Company is unaware of any vendor that claims that it
will not be year 2000 complaint by the end of 1999.
Through discussions with appropriate parties, the Company is aware
that its 8 largest wholesale and catalog customers are aware of the
year 2000 issue and are currently determining how to convert their
systems to handle the problem. Since the remainder of the Company's
sales are to a wide variety of other furniture re-sellers, which
change from year to year, there are no efforts currently underway to
assess the status of these customers' year 2000 readiness.
Due to the time required for the year 2000 project, non-essential
enhancements to the company's computer systems have been delayed at
times, however, the direct costs associated with the year 2000
project have been less than $15,000.
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The Company is developing contingency plans in case its ERP system,
its other computer controlled systems, its vendors, or major
customers prove not to be ready for the year 2000. With respect to
the ERP system, the Company believes that it can operate with manual
controls and systems for some period if all or portions of the ERP
system were not fully operational. Depending on the extent of the
deficiency, additional clerical personnel may have to be hired for a
short period of time. Contingency plans for vendor supplied parts
may include the purchase of additional inventory in the final month
of 1999.
There can be no assurance that year 2000 remediation by the Company
or third parties will be properly or timely completed and failure to
do so could have a material adverse effect on the Company's
financial condition. The Company can not fully predict the actual
effects of the year 2000 issue, which depends on numerous
uncertainties such as (1) whether major third parties address this
issue properly and timely and (2) whether broad-based or systemic
economic failures may occur. The Company is currently unaware of any
events, trends, or condition regarding this issue that may have a
material effect on the Company's results of operations, liquidity,
or financial position.
C. SUMMARY OF OPERATIONS
Order income for the first three-quarters of 1999 was $9,962,000.
This is a reduction of approximately 3% as compared to the Company's
order income in the first three-quarters of 1998. The reduction in
order intake is consistent with the experience of the industry as a
whole. For the first 6 months of 1999, the Business and
Institutional Furniture Manufactures Association (BIFMA) reported
that total industry sales of non-wood seating were approximately 3%
less in 1999 as compared to 1998.
At $9,843,000, net sales for the first three-quarters of 1999 were
$86,000 higher than for the same period in 1998. The Company was
able to increase sales in 1999 as compared to 1998 despite lower
order volumes by improving manufacturing and Implementing shorter
customer order lead times. Management believes the shorter
lead-times provides better customer service and is a competitive
advantage.
The Company's backlog at the end of October 3, 1999 was $946,000.
This is $32,000 less than at December 31, 1998. The reduction in
backlog is consistent with the Company's efforts to reduce
lead-times. Substantially all of the Company's backlog is scheduled
to ship within the next three months.
As a percentage of net sales, gross margins in the first nine months
of 1999 were 28.7% as compared to 28.1% in the first nine months of
1998.
Selling expenses in the first nine months of 1999 increased by
$166,000 as compared to the first nine months of 1998. Personnel
costs increased in order to hire individuals to more actively manage
the Company's key customers and to allow more timely contact and
follow-up with the increasing number of
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customer leads being generated by the Company's web page. In
addition, the Company's cost for product placement in third party
catalogs in the first three quarters of 1999 have increased as
compared to the same period in 1998. This increase in costs is due
to participation in a greater number of catalogs, and increases in
the rates being charged by certain of the Company's larger volume
customers. Finally, in the third quarter of 1999 the Company
incurred approximately $65,000 in consulting to correct certain
technical deficiencies in the keyboard product line. Management
considers these fees to be part of the costs for introducing the
keyboard product.
General and administrative costs in the first nine months of 1999
increased by $83,000 as compared to the total for the same period
in1998. Approximately half of the increase represents additional
legal fees related to the successful defense of several product
liability claims. These claims are being defended by the Company
under the Self Insured Retention clauses in its liability policies
with insurance companies and are a normal part of the Company's
business. See Note 9 of the Company's Form 10KSB for the year ended
December 31, 1998 for further discussion. An additional increase in
administrative costs represents fees for training courses that are
an integral part of a comprehensive program to adopt the principles
of continuous improvement and lean manufacturing. Management
believes that this program will result in future lower costs and a
significant improvement in cycle times; both of which are necessary
for the Company to reverse it current operating losses.
Interest expense in the first three-quarters of 1999 increased by
$25,000 as compared to the first three-quarters of 1998. The
increase is consistent with the increase in average borrowings as
discussed below.
Other non-operating expense increased by $38,000 in the first nine
months of 1999 as compared to the same period in 1998. The increase
is primarily due to the fact that in 1998 the Company received
refunds of prior year workers' compensation insurance premiums. No
such refunds have been received thus far in 1999.
Primarily as a result of the increases in operating expenses, the
Company experienced a loss before income taxes of $259,000 in the
first three-quarters of 1999. This is a difference of $235,000 when
compared to the net loss before income taxes of $24,000 during the
first three-quarters of 1998.
Growth in the sales of the Company's new keyboard based products
have been below plan. Contrary to the Company's other products; the
keyboard is sold directly to end users primarily through the
Company's web page and direct telemarketing. During the first
three-quarters of 1999, the start-up sales, marketing and
manufacturing costs for this product line exceeded the gross margin
generated. The resultant net loss from these activities were more
than the net income provided by the Company's core business.
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Management expects that the profitability of the Company's core
seating and utility product business to increase in future years.
The gross margins on these products have improved in 1999 as
compared to 1998 (see discussion in "Summary of Operations" in the
Company's first quarter 1999 Form 10QSB) and management believes
that the improvements will continue. Furthermore, the investments in
new sales personnel are anticipated to increase order intake and
sales levels of these core products in the future.
To reduce going forward costs, the Company has more closely
integrated the marketing of the keyboard product line with the
Company's traditional products. This combination enables the company
to command greater gross margins on system sales than on keyboard
sales alone. Further, the focus of the internet and direct
telemarketing sales efforts has expanded to include all of the
Company's products. Finally, the operating costs for the internet
and direct telemarketing efforts are being reduced to correspond
more closely to the gross margins being achieved.
Management believes that for 1999 as a whole, the profits from the
core seating and utility business will approximate the losses
associated with the introduction of the keyboard products. However,
management believes that, in the long run, the keyboard product
line, internet and direct telemarketing efforts will be successful.
D. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's trade accounts receivable increased by $373,000 from
December 31, 1998 to October 3, 1999. The increase is principally
due to the timing of sales in the final weeks of the respective
periods.
Inventories decreased by $53,000 during the period from December 31,
1998 to October 3, 1999. The difference represents normal
fluctuations in the Company's inventory balances.
Capital expenditures aggregated $209,000 during the first
three-quarters of 1999 and consisted primarily of replacements to
tooling maintained at vendors used in manufacturing the Company's
existing utility products. Most of the new tooling expenditures will
allow reductions in existing product costs or will eliminate
anticipated product cost increases.
The Company's accounts payable increased by $245,000 from the
December 31, 1998 balance. The increase is a result of increased
purchases of raw materials to support the increased business
activity in the final weeks of the third quarter of 1999.
During the first three quarters of 1999 the Company reduced its
long-term pension liability by $52,000 in accordance with
established payment schedules.
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The Company's notes payable increased by $496,000 during the first
three quarters of 1999. The increase is principally due to the timing
of sales that was described above, the Company's operating losses for
the period, and the expenditures for new tooling. The Company continues
to participate in a consolidated cash management and credit facility
with its parent, Rotherwood. (See discussion in Note 3 to the Financial
Statements in the Company's 1998 Form 10KSB.) The note was renewed in
September of 1999 and the total amount available was increased from
$2,000,000 to $2,500,000. Management believes that the Company's access
to this facility, along with existing cash balances and cash generated
from future operations, will be adequate to meet future operating
requirements and liquidity needs.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in several lawsuits relating to product
liability claims arising from accidents allegedly occurring in
connection with the use of its products. The claims are covered by
insurance and are being defended by the Company's independent counsel,
or by counsel assigned by the insurance carriers, but are subject to
deductibles ranging from $0 to $100,000. A number of the claimants
allege substantial damages. While management believes the Company has
substantial defenses with respect to the claims, the ultimate outcome
of such litigation cannot be predicted with certainty. The Company has
reasonably estimated and accrued in its financial statements its
portion of the deductible as a product liability contingency. Such
claims are an ordinary aspect of the Company's business.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CRAMER, INC.
(Registrant)
Date: 11/12/99 /s/ Gary Rubin
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Gary A. Rubin
Vice President, Finance & CFO