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 3/31/02
[ ] 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: 4,041,246 shares of common stock, no
par value as of April 30, 2002.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CRAMER, INC.
BALANCE SHEET
UNAUDITED
(Amounts in Thousands, Except Share Data)
<Table>
<Caption>
ASSETS
3/31/02 12/31/01
------------ ------------
CURRENT ASSETS:
Cash 0 282
Accounts receivable, net of allowance of $30 814 563
Inventories, net of allowance of $105 679 721
Prepaid expenses and other current assets 295 325
------------ ------------
Total current assets 1,788 1,891
PROPERTY, PLANT AND EQUIPMENT
At cost 6,224 6,215
Accumulated depreciation (5,623) (5,595)
------------ ------------
600 630
OTHER ASSETS:
Intangible pension asset 0 4
------------ ------------
Total Assets $ 2,388 $ 2,525
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Cash overdrafts $ 53 $ 0
Note payable 2,320 2,320
Accounts payable 464 485
Accounts payable- related party 149 101
Accrued liabilities 636 801
------------ ------------
Total current liabilities 3,622 3,707
NONCURRENT LIABILITIES:
Pension benefits payable 287 326
Other 223 218
------------ ------------
Total noncurrent liabilities 510 544
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, no par value; authorized, 6,000,000 shares; issued and
outstanding 4,041,246 shares at April 30, 2002
and 4,041,400 at December 31, 2001 3,820 3,820
Accumulated deficit (5,212) (5,198)
------------ ------------
(1,392) (1,378)
Minimum pension liability adjustment (352) (348)
------------ ------------
Net stockholders' equity (deficit) (1,744) (1,726)
------------ ------------
Total Liabilities and Stockholders' Equity (Deficit) $ 2,388 $ 2,525
============ ============
</Table>
See Notes to Condensed Financial Statements
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CRAMER, INC.
STATEMENTS OF INCOME
UNAUDITED
(Amounts in Thousands, Except Per Share Data)
<Table>
<Caption>
THREE MONTHS ENDED
3/31/02 4/1/01
-------------- --------------
NET SALES $ 2,032 $ 3,298
COST OF SALES 1,326 2,574
-------------- --------------
Gross profit 706 724
OPERATING EXPENSES:
Selling expenses 378 524
General and administrative 312 297
-------------- --------------
Total operating expenses 690 821
-------------- --------------
Income (loss) from operations 16 (97)
OTHER EXPENSE:
Interest expense, net (30) (54)
Other, net (0) (0)
-------------- --------------
Total other expense (30) (54)
-------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES (14) (151)
INCOME TAX EXPENSE (BENEFIT) 0 0
-------------- --------------
NET INCOME (LOSS) $ (14) $ (151)
============== ==============
Net income (loss) per share based on weighted
average number of common equivalent
shares outstanding - basic and diluted $ 0.00 $ (0.04)
Weighted Average Common Equivalent
Shares Outstanding: Basic 4,041,246 4,041,400
Diluted 4,041,246 4,041,400
</Table>
See Notes to Condensed Financial Statements
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CRAMER, INC.
STATEMENTS OF CASH FLOWS
UNAUDITED
(Amounts in Thousands)
<Table>
<Caption>
Three Months Ended
3/31/01 4/1/01
---------- ----------
Cash flows from operating activities:
Net income (loss) $ (14) $ (151)
Adjustments to reconcile net income (loss) to net cash
flows from operating activities:
Depreciation and amortization 39 51
Changes in operating assets and liabilities:
Accounts receivable (251) 334
Inventories 42 266
Prepaid expenses and other assets 30 (13)
Intangible pension asset 4 0
Accounts payable and accrued expenses (138) (450)
Noncurrent pension benefits payable (43) 0
Other noncurrent liabilities 5 11
---------- ----------
Net cash flows from operating activities (326) 48
---------- ----------
Cash flows from investing activities:
Capital expenditures (9) (17)
---------- ----------
Net cash flows from investing activities (9) (17)
---------- ----------
Cash flows from financing activities:
Principal payments on notes payable 0 (31)
Increase in cash overdrafts 53 0
---------- ----------
Net cash flows from financing activities 53 (31)
---------- ----------
Net increase (decrease) in cash (282) 0
Cash at beginning of year 282 0
---------- ----------
Cash at end of quarter $ 0 $ 0
========== ==========
Supplemental disclosures:
Cash paid during the period for:
Interest $ 30 $ 54
========== ==========
Income tax $ 0 $ 0
========== ==========
</Table>
See Notes to Condensed Financial Statements
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CRAMER, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Interim Financial Statements
The condensed interim financial statements included herein have been prepared by
Cramer, Inc. (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (the "Commission"). The
financial statements reflect adjustments of a normal recurring nature that are,
in the opinion of management, necessary to present fairly such information.
Although the Company believes that the disclosures are adequate to make the
interim information presented not misleading, certain information and footnote
disclosures, including significant accounting policies, normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. These interim financial statements should be read in conjunction
with the financial statements and the notes thereto included in the Annual
Report on Form 10-KSB filed by the Company with the Commission for fiscal year
ended December 31, 2001. Quarterly operating results may vary significantly and
are not necessarily indicative of the results for the full year or any future
period.
2. 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 Company's insurance
carriers. One such claim currently outstanding alleges damages of $375,000. The
Company has included a complete discussion of product liability claims and
related accruals in Part II, Item 1 "Legal Proceedings" below.
The Company believes their products are safe and reliable when assembled, used
and maintained in a reasonable manner, and believes it adequately reserves
against its reasonably likely exposure under these claims based upon past
experience.
3. Use of Estimates
Accounting estimates are an integral part of the financial statements and are
based on management's knowledge and experience about past and current events and
assumptions about future events. Certain accounting estimates are particularly
sensitive because of their significance to the financial statements and because
of the possibility that future events affecting them may differ significantly
from those expected. The most sensitive estimates affecting the financial
statements were the warranty and product liability accruals, and the inventory
reserve.
The Company offers product warranties with terms of up to fifteen years. The
majority of the Company's warranty claims relate to failed seating parts. The
Company estimates its accrual for future warranty costs based on durability
testing, engineering studies, actual costs incurred in prior years and
historical sales data.
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The warranty accrual decreased from $232,000 at December 31, 2001 to $218,000 at
March 31, 2002. This decrease was the result of declining warranty costs in
the first quarter of 2002. This decrease can be attributed to more aggressive
management of warranty claims, which has resulted in fewer claims and lower
costs.
The reserve for obsolete and slow-moving inventory is based on management's
analysis of inventory turns, historical write-offs, future production plans
including any product line changes, and sales trends. The decrease in inventory
reserves from $110,000 at December 31, 2001 to $105,000 as of March 31, 2002 was
the result the write-off of certain inventory items for which a reserve had been
recorded at December 31, 2001.
A discussion of the product liability accrual is included in Part II, Item 1,
Legal Proceedings.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Sales for the quarter decreased $1,266,000 or 38%. The recent recession
and intense competition resulted in a decline in seating sales of over
$1M, or 54%. In addition, ladder product sales were down $194,000 due
to weaker catalog performance. These declines were offset by a $94,000
increase in Kik-step sales, reflecting this product's strong brand and
market penetration.
Gross margins decreased from $724,000 in the first quarter of 2001 to
$704,000 in the first quarter of 2002. However, gross margins as a
percentage of net sales in the first quarter of 2002 improved to 35%
compared to 25% in the first quarter of 2001. Increased margins as a
percent of sales were the combined result of lower material costs and
significant overhead reductions. These overhead reductions included a
decrease in utilities and plant supplies, due in part to increased
outsourcing of the manufacture of certain products in 2002.
Selling expenses decreased from $528,000 in the first quarter of 2001
to $378,000 in the first quarter of 2002, a reduction of $150,000. Of
this amount, $102,000 represented a decrease in commissions as a result
of declining sales. The remaining decrease was related primarily to
staff reductions and lower travel costs.
General and administrative expenses increased during the first quarter
of 2002 by $15,000 or 5% compared to the same period in 2001. Fees
related to Rotherwood's provision of a letter of credit as security for
the bank line totaled $40,000 in the first quarter of 2002 and were not
in effect during the first quarter 2001. This increase was offset by
lower labor costs in the first quarter of 2002.
Interest expense totaled $30,000 in the first quarter of 2002, compared
to $54,000 in the comparable period last year. This reduction was the
result of lower interest rates in 2002.
The Company incurred a net operating loss before tax of $14,000 in the
first quarter of 2002, compared to a loss of $151,000 in the first
quarter of 2001. Operating losses improved, despite declining sales,
due to reductions in overhead and improved margins.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations reduced cash by $326,000 in the first quarter
of 2002, compared to a surplus of $48,000 in 2001.
Accounts receivable totaled $814,000 at March 31, 2002 compared to
$516,000 at December 31, 2001. The increase was a result of an increase
in sales in January of 2002 over December of 2001.
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Inventories declined from $721,000 at December 31, 2001 to $629,000 at
March 31, 2002, a 13% decrease. More aggressive purchasing and
inventory controls contributed to the decline.
Accounts payable and accrued expenses declined $138,000 in the first
quarter of 2002 as a result of more aggressive purchasing controls and
a decrease in accrued insurance premiums.
Capital expenditures of $9,000 during the first quarter of 2002 related
to the purchase of additional tooling.
The outstanding balance under the Company's bank line of credit
remained $2,320,000, the maximum amount allowed under the agreement,
throughout the first quarter of 2002. The combined facility is secured
by a $2,000,000 letter of credit from Rotherwood, the Company's parent,
and security interests in the assets of both Cramer and Pacer
Corporation, a company owned by Rotherwood. Cramer and Pacer are
co-borrowers on the total amount of the credit facility. In exchange
for Rotherwood's financial accommodation to the Company, the Company
agreed to pay Rotherwood a fee equal to 2% per quarter of the total
amount of the letter of credit until the letter of credit expires. As
of March 31, 2002, the Company had accrued $80,000 of such fees. The
Company plans to pay for these fees by issuing common stock (see Note 3
to the Financial Statements and Management's Discussion and Analysis in
the 2001 Form 10-KSB for additional discussion of the credit facility
and related matters).
In April 2002, the Company obtained an extension of the credit facility
through June 28, 2002. The Company is not in compliance with the
financial net worth covenant in the loan agreement governing the credit
facility. For this and other reasons, the Company is unable to predict
whether the bank will renew the credit facility when it matures in
June, 2002. If the bank does not renew or increase the facility and the
Company cannot obtain substitute or additional debt financing or obtain
an equity investment in the Company, the Company may be required to
seek bankruptcy protection or to cease operations.
FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, this report on
Form 10-QSB contains forward-looking statements that involve risk and
uncertainties. The Company's actual results could differ materially. 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
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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:
o The Company's continuing declines in revenues and
continuing losses
o Questions about the Company's continuing viability as
a going concern and management's plans to address
that issue
o Any failure of the Company's turnaround plan to
achieve its objectives
o The possibility that the bank will not renew the
Company's credit facility and that the Company could
not obtain substitute or additional debt financing,
or obtain any equity financing
o Fluctuations or reductions in product demand and
market acceptance
o The level of product development by the Company
o Capacity, facility and supply constraints or
difficulties
o The possibility that Cramer's sister company will
borrow more funds than anticipated under the
Rotherwood credit facility, which would further
reduce the Company's borrowing capacity under the
Company's credit facility
o The effect of new laws and regulations
o Unexpected additional expenses or operating losses
o Strong competition
o Reliance on certain vendors for key products and
components
o Deferred plant maintenance and the cost of future
maintenance
o If product and warranty liability claims exceed the
amounts reserved
o Control by insiders
The foregoing list of risks and uncertainties is not meant to be complete.
-9-
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 Company's insurance carriers. These
claims are subject to deductibles ranging from $0 to $50,000 ($50,000
is the most common deductible). The Company maintains product liability
insurance coverage with limits of $1 million per occurrence and $2
million aggregate, plus $15 million in umbrella coverage. After the
Company has exhausted its deductible by paying a total of $50,000
(whether in legal fees and expenses, settlement amounts, damages
awards, or any combination thereof) on any single claim, its liability
insurance carrier is obligated to pay any sums owed for legal fees and
expenses, settlement amounts and damages awards in excess of $50,000
for that claim. The Company has been able to offset settlement costs
through amounts paid by co-defendants in certain cases historically.
Over the last five fiscal years, the Company has averaged 3.7 new
claims per year. An average of approximately 50% of those claims
resulted in defense costs and settlement amounts or awards exceeding
$50,000. The average total cost of defense and settlement awards paid
by the Company over that period was $35,000 per claim. The number of
new claims made or lawsuits filed against the Company during years 2000
and 2001 were two and three, respectively. The Company's claims history
has leveled out over the past three years at two to three claims per
year.
The Company had six open claims at December 31, 2001 and at March 31,
2002. During the first quarter of 2002, no new claims were filed
against the Company. On April 22, 2002, the Company settled one of the
six claims for $7,500. The total cost of legal fees and settlement
costs for this claim was $49,500. The Company does not believe the
remaining open claims will have materially different average results
than historical experience described above. None of the claims allege
damages in excess of policy limits. One of the claimants alleges
damages of $375,000 and is discussed below. While management believes
the Company has substantial defenses with respect to these claims, the
ultimate outcome of such litigation cannot be predicted with certainty.
Such claims are an ordinary aspect of the Company's business and
industry. The Company believes these products are safe and reliable
when assembled, used and maintained in a reasonable manner, and
believes it adequately reserves against its reasonably likely exposure
under these claims based upon past experience.
The Company discusses each claim with its product liability counsel to
determine the merits of the case and the most likely outcome. In some
cases, it is too early to make that assessment. The Company determines
a reserve for specific claims based on average claims history, the
specific
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merits of the case, the amount of damages alleged, the costs incurred
to date and the amount of the insurance deductible. The Company
recorded a reserve for specific claims of $104,000 at December 31, 2001
and $109,000 at March 31, 2002.
In addition to reserves for specific cases, the Company estimates its
exposure for unasserted claims and records additional reserves using
the claims history discussed above as well as recent trend insights.
The Company had received notice of six incidents for which no claims
had been asserted at December 31, 2001 and did not receive notice of
any additional unasserted claims during the first quarter of 2002. The
Company maintained a reserve for unasserted claims of $113,000 at
December 31, 2001 and at March 31, 2002. The underlying assumptions
regarding claims history and average costs per claim did not change
during the first quarter of 2002. Accordingly, the Company did not
change its reserve for unasserted claims. Although the Company's claims
history has stabilized in recent years, the Company cannot be certain
that future claims experience will be consistent with historical claims
experience. An increase in the frequency or average cost of future
claims could increase the Company's exposure to product liability
expense. However, the maximum total legal defense and settlement costs
for each claim is limited to the $50,000 deductible.
On February 25, 1998, the Company was served with a suit filed by
Pauline and Daniel Robitaille ("Plaintiff") in the Superior Court of
Massachusetts, Norfolk County. On October 20, 2000, the Plaintiff made
a demand of $375,000 against the Company. The Plaintiff claims she was
injured when she fell from a three-step ladder manufactured and/or
distributed by the Company, suffering a foot injury. The Company's
$50,000 insurance deductible is now exhausted and the Company's
insurance carrier has assumed defense of this claim. All future legal
expenses, including attorney's fees, settlement and any verdict against
the Company, are the responsibility of the Company's insurer, Lexington
Insurance Company.
The Company was assessed $117,500 in penalties by OSHA as a result of
an inspection conducted in 2000 and signed a settlement agreement from
OSHA which calls for payments of $23,000 (see "Patents, Trademarks and
Government Regulation" in Item 1 of the 2001 10-KSB).
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: 5-20-02 /s/ NICHOLAS M. CHRISTIANSON
------------------------- -----------------------------------
Nicholas M. Christianson
Interim Chief Financial Officer
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