AMENDMENT NO. 2 TO
SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
<Table>
[X] Preliminary proxy statement [ ] Confidential, for use of the
Commission only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive proxy statement
Definitive additional materials
Soliciting material under Rule 14a-12
</Table>
CRAMER, INC.
------------------------------------------------
(Name of registrant as specified in its Charter)
Payment of filing fee (check the appropriate box)
No fee required
Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and 0-11
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth amount on which the
filing fee is calculated and state how it was determined)
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction
-----------------------------------------------------------------------
(5) Total fee paid
-----------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials
-----------------------------------------------------------------------
[ ] Check Box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which the
offsetting fee was paid previously. Identify the previous filing by
registration statement number, or the form or schedule and the date of
its filing.
-----------------------------------------------------------------------
(1) Amount previously paid:
-------------------------------------
(2) Form Schedule or Registration Statement No.:
------------------
(3) Filing party:
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(4) Date filed:
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PRELIMINARY COPY, SUBJECT TO COMPLETION
AUGUST __, 2002
CRAMER, INC.
625 Adams Street
Kansas City, Kansas 66105
- --------------------------------------------------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
_________, 2002
- --------------------------------------------------------------------------------
To our shareholders:
The 2002 annual meeting of shareholders of Cramer, Inc. will be held at the
Cramer corporate headquarters, 625 Adams Street, Kansas City, Kansas 66105, on
________, 2002 at 11:00 a.m. (local time). At the meeting, our shareholders will
vote upon:
Item 1: The election of two directors to serve until the 2003 annual
meeting of shareholders
Item 2: The ratification of the appointment of Stirtz Bernards Boyden
Surdel & Larter, PA as our independent auditors for 2002
Item 3: A proposal to amend the Company's Articles of Incorporation to
increase the number of authorized shares of capital stock from
8,200,000 shares to 74,200,000 shares, which will be the first
step in a series of transactions with the Company's corporate
parent that will take the Company private
and transact any other business that may properly come before the meeting.
All holders of record of our common stock at the close of business on ________,
2002 are entitled to vote at the meeting or any postponement or adjournment of
the meeting.
You are cordially invited to attend the meeting. Whether or not you intend to be
present at the meeting, your Board of Directors asks that you sign, date and
return the enclosed proxy card promptly. A prepaid return envelope is provided
for your convenience. Your vote is important and all shareholders are encouraged
to attend in person or vote by proxy.
Thank you for your support and continuing interest in your Company.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Gregory Coward
------------------------------------
Gregory Coward, President and Chief
Executive Officer
Kansas City, Kansas
_________,2002
- --------------------------------------------------------------------------------
PRELIMINARY COPY, SUBJECT TO COMPLETION
AUGUST __, 2002
CRAMER, INC.
PROXY STATEMENT
2002 ANNUAL MEETING OF SHAREHOLDERS
- --------------------------------------------------------------------------------
This proxy statement provides information regarding the annual meeting of
shareholders to be held at the Company's corporate headquarters at 625 Adams
Street, Kansas City, Kansas 66105, on ___________, 2002 at 11:00 a.m. (local
time), or any adjournments thereof. This proxy statement and form of proxy were
mailed to shareholders on or about ___________, 2002.
ABOUT THE MEETING
WHAT IS THE PURPOSE OF THE ANNUAL MEETING?
At the annual meeting, our shareholders will vote on the election of
two directors, the ratification of the appointment of our independent auditors,
and a proposal to amend the Articles of Incorporation to authorize additional
shares of common stock. Management will report on your Company's results for
2001, the progress of our turnaround plan for the Company, and a proposed series
of transactions with the Company's corporate parent that will take the Company
private, and respond to questions from shareholders.
WHO IS ENTITLED TO VOTE AT THE MEETING?
Shareholders of record at the close of business on ________, 2002 are
entitled to receive notice of the annual meeting and vote their shares held on
that date at the meeting. Each shareholder is entitled to one vote per share.
WHAT CONSTITUTES A QUORUM?
The presence at the meeting, in person or by proxy, of the holders of a
majority of our shares outstanding on the record date will constitute a quorum,
permitting the meeting to proceed. On the record date, ____________ shares of
common stock were outstanding. Proxies received but marked as abstentions and
broker non-votes will be included in the calculation of the number of shares
present at the meeting for the purpose of establishing a quorum.
1
HOW DO I VOTE?
If you complete and properly sign the enclosed proxy card and return it
to us before the meeting, your shares will be voted as you direct. If you are a
registered shareholder and attend the meeting in person, you may deliver your
completed proxy card to us at the meeting. You are also invited to vote in
person at the meeting. If your shares are held in "street name" and you wish to
vote at the meeting, you must obtain a proxy form from the institution that
holds your shares.
CAN I CHANGE MY VOTE AFTER I RETURN MY PROXY CARD?
Yes. Even after you have submitted your proxy, you may change your vote
at any time before the meeting by sending a written notice of revocation or a
duly executed proxy with a later date to the Secretary of the Company. Your
proxy will also be revoked if you attend the meeting and vote in person. If you
merely attend the meeting but do not vote in person, your previously granted
proxy will not be revoked.
WHO IS SOLICITING MY PROXY?
Your proxy is being solicited by the Board of Directors. Officers,
directors and employees of the Company may solicit proxies on behalf of the
Board by mail, telephone or email. The Company will pay all expenses of
soliciting proxies for the annual meeting.
WHAT ARE THE BOARD'S RECOMMENDATIONS?
Unless you give other instructions on your proxy card, the persons
named as proxy holders on the proxy card will vote your shares in accordance
with the recommendation of the Board of Directors. The Board recommends you
vote:
o FOR the election of James R. Zicarelli and David E. Crandall
as directors for a term expiring at the 2003 annual meeting of
shareholders
o FOR the ratification of the appointment of Stirtz Bernards
Boyden Surdel & Larter, PA as our independent auditors for
2002
o FOR the approval of the amendment to the Company's Articles of
Incorporation increasing the authorized shares of capital
stock from 8,200,000 shares to 74,200,000 shares. Because the
Articles amendment is the first step in a series of
transactions with the Company's corporate parent that will
take the Company private, as an affiliate of the parent, Mr.
Zicarelli abstained from voting on that proposal.
HOW MANY VOTES ARE NEEDED TO APPROVE EACH ITEM?
The affirmative vote of a plurality of the shares voting is required to
elect each director. Our shareholders have cumulative voting rights in electing
directors. Because two directors are being elected, this means you have two
votes for each share of stock owned by you in the election of directors.
2
You may cast all of your votes for one nominee or vote your shares for both
nominees. Abstentions and broker non-votes in the election of directors will not
be counted as negative votes and will have no affect. The proxies will not have
discretionary authority to cumulate your votes unless you strike through one
nominee's name on the proxy card.
The affirmative vote of a majority of the shares voting is required to
ratify the appointment of our independent auditors. Abstentions and broker
non-votes on this issue will not be counted as negative votes and will have no
effect.
The affirmative vote of a majority of the outstanding shares of common
stock of the Company is required to approve the amendment to increase the
authorized shares. In light of this vote requirement, abstentions and broker
non-votes on this Proposal will have the same effect as shares voted against the
Proposal.
ITEM I
ELECTION OF DIRECTORS
Your Company's Board of Directors is currently comprised of two members
whose terms expire at the 2002 annual meeting.
Here is some information about the persons nominated for election as
directors.
JAMES R. ZICARELLI DIRECTOR SINCE 1992
- --------------------------------------------------------------------------------
James R. Zicarelli, 50, is President of Rotherwood Ventures, LLC ("Rotherwood"),
a Minnesota holding company and majority shareholder of your Company. Mr.
Zicarelli serves as CEO of Sagebrush Corporation, a library services and
publishing company. Previously, he served as CEO of Cramer, Inc. (1995 to 2001);
CEO of Pacer Corporation (1992 to 2001); CFO of GV Medical, Inc. (1983 to 1990);
and Division Controller of National Computer Systems (1974 to 1983). He holds a
BA from Carleton College and an MBA from The University of St. Thomas.
DAVID E. CRANDALL DIRECTOR SINCE 1992
- --------------------------------------------------------------------------------
David E. Crandall, 59, is Chairman and CEO of PPA Industries, Dallas, Texas, a
company he founded in 1980 and that is engaged in the manufacture of electronic
enclosures, pre-fabricated wall systems and machinery packages.(1) Previously,
he was Senior Vice President of Manufacturing Operations and board member of
Sunshine Mining Company (1977 to 1980); Senior Vice President, Finance for the
Great Western Sugar Company (1974 to 1977); and various positions with
Electronic Data Systems and Citibank on Wall Street (1971 to 1974). Mr. Crandall
served 3-1/2 years in the U.S. Army, during which time he computerized the
Admissions System at West Point Academy. He served ten years on the Board of
Trustees at St. Mark's School of Texas. He holds a BA from The University of
Kansas and an MBA from The University of Missouri at Kansas City.
(1) PPA Industries filed for reorganization under the Bankruptcy Code in
February 2000. The case was subsequently dismissed.
3
There is no family relationship between any of the directors or
officers of the Company.
Messrs. Zicarelli and Crandall have consented to serve on the Board of
Directors for a term expiring at the 2003 annual meeting. If either individual
should become unavailable to serve as a director (which is not expected), the
Board may designate a substitute nominee. In that case, the persons named as
proxies will vote for the substitute nominee designated by the Board.
HOW OFTEN DID THE BOARD MEET IN 2001?
The Board of Directors met ten times in 2001. No director attended less
than 75% of those meetings.
WHAT COMMITTEES HAS THE BOARD ESTABLISHED?
The Board formally appointed an Audit Committee and a Compensation
Committee in 2001. Prior to 2001, the Board of Directors served as the Audit
Committee and Compensation Committee. Because there are only two directors on
the Board at the present time, the Audit Committee and Compensation Committee
consist of the two current directors.
Audit Committee
We have elected to apply Rule 4200(a)(15) of the NASDAQ listing
standards ("NASDAQ Rule 4200(a)(15)") to determine whether the members of the
Audit Committee are "independent." Mr. Crandall is considered "independent" as
defined by NASDAQ Rule 4200(a)(15). In light of Mr. Zicarelli's status as
President of Rotherwood and his prior service as CEO of Cramer, Mr. Zicarelli is
not deemed "independent" as defined by that Rule. Nevertheless, your Board has
determined that Mr. Zicarelli's service on the Audit Committee is in the best
interest of our shareholders in light of the current size of the Board, the
limited size and resources of the Company, the Board's determination to minimize
administrative expenses, and the value which Mr. Zicarelli's financial expertise
and judgment add to the Audit Committee.
The Audit Committee assists your Company in fulfilling its
responsibility for our accounting and financial reporting practices and our
annual audited financial statements. As part of these duties, the Audit
Committee:
o recommends the independent accounting firm to be retained each year
o reviews the audit and non-audit activities of the independent
accountants and our internal accounting staff
o reviews the scope and results of the quarterly unaudited financial
statements and the audit of our annual financial statements and any
auditor recommendations regarding the quarterly and annual financial
statements and our accounting practices
o evaluates the independence of the accountants from the Company and its
management
4
Compensation Committee
The Compensation Committee establishes the compensation for your
executive officers and approves and administers the Company's executive
compensation programs.
Committee Meetings
The Audit Committee and Compensation Committee did not meet separately
from the Board in 2001.
OFFICERS
Gregory Coward, 55, is President and Chief Executive Officer of the Company. Mr.
Coward was appointed CEO by the Board on January 24, 2001. Mr. Coward has been
charged with the responsibility to conduct a thorough review of the Company's
operations and implement a turnaround plan with the intention of achieving
positive cash flow and returning the Company to profitability. Mr. Coward joined
Rotherwood in January 2001 as a Vice President. Mr. Coward is employed by
Rotherwood but performs his duties at Cramer on a full-time basis. Previously he
held several positions, including President of HCW, Inc., a successful
turnaround in the foodservice industry, and ownership/executive positions with
two sporting goods manufacturing companies.
Nicholas Christianson, 31, was appointed Interim Chief Financial Officer on
April 1, 2002. Mr. Christianson has been assisting Mr. Coward with the Company's
turnaround plan and has assumed responsibility for finance and accounting
matters. Mr. Christianson is employed by an affiliate of Rotherwood and performs
his duties at Cramer on a part-time basis. Mr. Christianson served as CFO of two
application service providers, MetaFarms, Inc. and Scout Information Services,
from 1997 to 2001. He participated in the development and spin-off of several
Internet based start-up ventures at Scout and helped MetaFarms launch its
operations. Prior to his position at Scout, Mr. Christianson was an auditor at
PriceWaterhouse Coopers. Mr. Christianson is a licensed CPA.
EXECUTIVE COMPENSATION
DESCRIPTION OF COMPENSATION ARRANGEMENTS
Gregory Coward is compensated by Rotherwood and does not receive any
compensation from the Company for serving as President and Chief Executive
Officer. Mr. Coward's compensation from Rotherwood is not specifically related
to Cramer's performance. Rotherwood charges Cramer a monthly fee as compensation
for making Mr. Coward's services available to the Company. Rotherwood charged
fees to the Company for Mr. Coward's services and related travel expenses of
$103,900 in 2001. Cramer paid $48,000 of these fees during 2001 and recorded the
balance due of $55,900 as an accrued liability in the December 31, 2001
financial statements.
Mr. Christianson is compensated by a Rotherwood affiliate and does not
receive any compensation from the Company for serving as Interim Chief Financial
Officer. Mr. Christianson's compensation from the Rotherwood affiliate is not
related to Cramer's performance. Rotherwood charges Cramer a fee as compensation
for making Mr. Christianson's services available to the
5
Company, based upon the amount of time spent by him on the Company's business.
Rotherwood has charged fees to the Company for Mr. Christianson's services in
the amount of $21,600 for the period from April 1-June 30, 2002.
James R. Zicarelli served as CEO until the appointment of Mr. Coward on
January 24, 2001. Mr. Zicarelli is President of Rotherwood and did not receive
any compensation from the Company for serving as CEO. Mr. Zicarelli's
compensation from Rotherwood was not specifically related to Cramer's
performance or the time spent by him in Cramer management. Cramer was not
charged by Rotherwood for Mr. Zicarelli's services during 2001.
See "Relationships and Related Transactions Between Cramer and Directors,
Officers or their Affiliates" below for further discussion of Cramer's
transactions with Rotherwood.
SUMMARY COMPENSATION TABLE
The following table provides information regarding the compensation
paid in 2001, 2000 and 1999 to the persons who served as executive officers of
the Company until their termination in 2001 and whose annual compensation
exceeded $100,000 in any of those years.
<Table>
<Caption>
ANNUAL COMPENSATION
NAME AND PRINCIPAL -----------------------------
POSITION YEAR SALARY ($) BONUS ($)
(a) (b) (c) (d)
- --------------------- -------- ------------ ------------
ROBERT KOVACH(1) 2001 $ 23,138 $ 0
President and COO
2000 $ 128,000 $ 0
1999 $ 124,676 $ 12,000
JEFFREY MYER(2) 2001 $ 47,855 $ 0
Vice President, Sales
and Marketing 2000 $ 111,592 $ 10,000
1999 $ 107,945 $ 5,000
</Table>
(1) Mr. Kovach was terminated in January 2001
(2) Mr. Myer was terminated in March 2001
HOW ARE DIRECTORS COMPENSATED?
The Company's policy is to pay each director who is not an employee of
Cramer or Rotherwood $1,000 for each Board meeting attended and to reimburse his
expenses related to the meeting. However, both directors declined to accept any
fees or reimbursed expenses for Board meetings held in 2001.
6
RELATIONSHIPS AND RELATED TRANSACTIONS BETWEEN CRAMER
AND DIRECTORS, OFFICERS OR THEIR AFFILIATES
By virtue of its 51.6% ownership of the Company's common stock,
Rotherwood controls the Company and may be deemed a "parent" of the Company.
James R. Zicarelli, Chairman of the Board of Directors, served as
Cramer's CEO until Mr. Coward was appointed to that position in January 2001.
Mr. Zicarelli is President of Rotherwood.
Gregory Coward is compensated by Rotherwood and does not receive any
compensation from the Company for serving as President and Chief Executive
Officer. Mr. Christianson is compensated by an affiliate of Rotherwood and does
not receive any compensation from the Company for serving as Interim Chief
Financial Officer (See "Executive Compensation" for more information regarding
compensation arrangements for Mr. Coward and Mr. Christianson).
Cramer participates with Pacer Corporation as a co-borrower in a
combined credit facility with US Bank (formerly Firststar Bank). The credit
facility is secured by the assets of Pacer and Cramer and a pledge of $2,000,000
in securities by Rotherwood. The pledge replaces a $2,000,000 letter of credit
posted by Rotherwood which formerly guaranteed the loan. In exchange for
Rotherwood's financial accommodation to the Company, without which the Company
could not obtain financing and the loan would probably be called, the Company
has agreed to pay Rotherwood a quarterly fee of 2% of the letter of
credit/pledge amount ($40,000 per quarter), to be paid in shares of common
stock. The Company is seeking to amend its Articles to increase its authorized
common stock to enable the Company to pay this fee in common stock beyond the
first quarter of 2002. The Company also seeks to increase its authorized common
stock for the purpose of issuing common stock to Rotherwood in a proposed
$900,000 investment transaction described in Item III, "Amendment to Article 4
of the Articles of Incorporation - Issuance of Common Stock to Rotherwood for
Cash and Subsequent 'Going Private' Transaction." If Rotherwood makes the
proposed equity investment in the Company, the Company would become a 90%
subsidiary of Rotherwood, permitting Rotherwood to effect a short-form merger of
the Company into Rotherwood without the approval of Cramer's other shareholders.
The shareholders of the Company other than Rotherwood (the "Public
Shareholders") will receive $0.05 per share in cash in the short-form merger,
subject to proper exercise of their appraisal rights under Kansas law. Following
completion of the short-form merger, Rotherwood intends to take the Company
"private" by terminating its status as a reporting company under the Securities
Exchange Act of 1934 ("Exchange Act") (See Item III, "Amendment to Article 4 of
the Company's Articles of Incorporation" below, Item 6, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in our 2001
Annual Report on Form 10-KSB/A incorporated by reference herein, and the
Transaction Statement on Form 13E-3 filed jointly by the Company, Rotherwood and
Rotherwood's parent, Rotherwood Investments, LLC ("Rotherwood Investments" and
together with Rotherwood, the "Rotherwood Entities") incorporated by reference
herein).
From 1995 through December 31, 2001, Cramer paid fees to Rotherwood for
management services, including those provided by Mr. Zicarelli and Mr. Coward.
These fees totaled $103,900 (including expense reimbursements) in 2001 and
$28,000 in 2000. The Company recorded a total accrual of $101,000 at December
31, 2001 for amounts owed to Rotherwood, including the unpaid
7
portion of management services fees, fourth quarter 2001 letter of credit/pledge
fees and amounts related to tax preparation fees paid by Rotherwood. Management
believes the amounts paid and accrued for the services provided by Rotherwood
were no less favorable than those that would be charged by third parties for
comparable services.
AUDIT COMMITTEE REPORT
In 2001, the Board of Directors appointed an Audit Committee consisting
of two directors. Prior to 2001, the entire Board served as the Audit Committee.
The current members of the Audit Committee are James R. Zicarelli and David E.
Crandall, who are currently the only members of the Board. For information about
the "independence" of Messrs. Zicarelli and Crandall, as defined by NASDAQ Rule
4200(a)(15), see "Election of Directors - What Committees has the Board
Established?"
The primary responsibility of the Audit Committee is to oversee the
Company's financial reporting process on behalf of the Board of Directors.
Management has the primary responsibility for the financial statements and the
reporting process, including our system of internal controls. Our independent
auditors are responsible for auditing our financial statements and expressing an
opinion on the conformity of those audited financial statements with generally
accepted accounting principles.
The Board of Directors has adopted a written charter for the Audit
Committee which was attached as an Appendix to the 2000 proxy statement.
In fulfilling its oversight responsibilities, the Audit Committee
reviewed our 2001 audited financial statements with management and our
independent auditors. The Audit Committee held a meeting on April 8, 2002 with
management and the independent auditors to discuss the overall scope of the 2001
audit, the results of their examinations, their evaluations of the Company, our
internal controls, and the overall quality of our financial reporting. The Audit
Committee discussed with the independent auditors the matters required to be
discussed by Statement of Auditing Standards No. 61. This included a discussion
of the auditors' judgments regarding the quality, not just the acceptability, of
management's accounting principles and the other matters required to be
discussed with the Audit Committee under generally accepted auditing standards.
In addition, the Audit Committee received from the independent auditors the
written disclosures and letter required by Independence Standards Board Standard
No. 1. The Audit Committee also discussed with the independent auditors their
independence from management and the Company, including the matters covered by
the written disclosures and letter provided by the independent auditors.
The members of the Audit Committee are not professionally engaged in
the practice of accounting and are not experts in the field of accounting or
auditing, including auditor independence. Members of the Committee rely without
independent verification on the information provided to them and the
representations made by management and our independent auditors. Accordingly,
the Audit Committee's oversight does not provide an independent basis to
determine that management has maintained appropriate accounting and financial
reporting principles or appropriate internal controls and procedures designed to
ensure compliance with accounting standards and applicable laws and regulations.
Furthermore, the Audit Committee's considerations and discussions referred to
above do
8
not assure that the audit of the Company's financial statements has been carried
out in accordance with generally accepted auditing standards, that the financial
statements are presented in accordance with generally accepted accounting
principles, or that the Company's auditors are in fact "independent."
Based on the reviews and discussions referred to above, the Audit
Committee recommended that the audited financial statements be included in our
annual report on Form 10-KSB/A for the year ended December 31, 2001 for filing
with the Securities and Exchange Commission ("SEC").
By the Audit Committee:
James R. Zicarelli
David E. Crandall
This Audit Committee report is not deemed "soliciting material" and is not
deemed filed with the SEC or subject to Regulation 14A or the liabilities under
Section 18 of the Exchange Act.
SHARE OWNERSHIP
WHO OWNS MORE THAN 5% OF OUR SHARES?
Except as set forth below, we know of no single person or group that is
the beneficial owner of more than 5% of your Company's outstanding stock:
<Table>
<Caption>
AMOUNT AND NATURE OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) CLASS (4)
------------------------------------ ------------------------ ----------
Rotherwood Ventures LLC 2,083,212(2)(3) 51.6%
301 Carlson Parkway
Minnetonka, Minnesota 55305
</Table>
(1) Based solely on disclosures made in Schedule 13D filed with the SEC.
(2) Mr. Zicarelli and the Chairman of Rotherwood have shared voting and
investment power over the shares.
(3) The Company is obligated to pay Rotherwood a fee in exchange for
Rotherwood's $2,000,000 letter of credit/securities pledge which
guarantees the Company's bank line of credit. The fee is equal to 2%
per quarter of the amount of the letter of credit/pledged securities
($40,000 per quarter) and is payable in shares of common stock at the
rate of $0.05 per share (800,000 shares per quarter). After the
issuance of common stock to Rotherwood for letter of credit/pledge fees
earned by Rotherwood in the fourth quarter of 2001 and the first two
quarters of 2002, Rotherwood will own 4,483,212 shares of common stock,
or 69.6% of the total outstanding shares.
(4) Percentage based on common and common equivalent shares.
9
HOW MANY SHARES DO THE DIRECTORS AND OFFICERS OWN?
This table shows as of December 31, 2001 the number of our shares
beneficially owned by the directors and officers of your Company and by the
directors and officers as a group. All information regarding beneficial
ownership was furnished by the persons listed below.
<Table>
<Caption>
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF SHARES OUTSTANDING(4)
- ------------------------ -------------------- --------------------------------
James R. Zicarelli(1) 0(2) 0%
David E. Crandall 125,341(3) 3.1%
Gregory Coward 0 0%
Nicholas Christianson 0 0%
All officers and directors
as a group (4 persons) 125,341 3.1%
</Table>
(1) Mr. Zicarelli is President of Rotherwood. Pursuant to Rule 13d-3 of the
SEC, the 2,083,212 shares held by Rotherwood and listed in the previous
table and the additional shares issuable to Rotherwood as described in
footnote 3 to the previous table and in Item III, "Amendment to Article
4 of the Articles of Incorporation" below may be attributed to Mr.
Zicarelli because of his shared voting and investment power over those
shares.
(2) Mr. Zicarelli shares voting and investment power over the shares with
Rotherwood's Chairman.
(3) Sole voting and investment power.
(4) Percentage based on common and common equivalent shares.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Based on its review of Forms 3 and 4 and amendments thereto furnished
to the Company under Rule 16a-3(d) of the SEC during the fiscal year ended
December 31, 2001, and any Form 5's and amendments thereto furnished with
respect to the 2001 fiscal year, we are not aware of any person who, at any time
during the 2001 fiscal year, was a director, officer or beneficial owner of more
than ten percent of the Company's common stock and who failed to file on a
timely basis, as disclosed in those Forms, the reports required by Section 16(a)
of the Securities Exchange Act of 1934, with the exception of the Form 3 for
Gregory Coward, which was filed late on January 16, 2002 and which confirmed
that Mr. Coward does not own any shares of Cramer stock.
II. APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has appointed the firm of Stirtz Bernards Boyden
Surdel & Larter, PA, Minneapolis, Minnesota ("SBBSL") as independent auditors of
the Company for the fiscal year ending December 31, 2002.
Our financial statements for the fiscal year ended December 31, 2001
were audited by SBBSL. Our financial statements for the fiscal year ended
December 31, 2000 were audited by Deloitte & Touche LLP ("D&T"). On August 14,
2002, we filed our amended annual report on Form 10-KSB/A for the fiscal year
ended December 31, 2001, which included a re-issuance of D&T's report dated May
4, 2001 on our 2000 financial statements, together with SBBSL's report dated
March 6, 2002 on our 2001 financial statements.
10
D&T's report on our 2000 financial statements included an unqualified opinion
with an explanatory paragraph that stated that our recurring losses from
operations, cash flow difficulties, negative working capital, stockholders'
capital deficiency and lack of compliance with debt covenants raised substantial
doubt about our ability to continue as a going concern. SBBSL issued a similar
"going concern" opinion on our 2001 financial statements.
During the two fiscal years ended December 31, 2000, and the subsequent
interim period preceding the end of D&T's engagement, there were no
disagreements between D&T and the Company, whether or not resolved, on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which, if not resolved to D&T's satisfaction, would
have caused D&T to make reference to the subject matter of the disagreement(s)
in connection with its reports, nor were there any reportable events as
contemplated under Item 304(a)(1)(iv)(B) of Regulation S-B.
We did not consult with SBBSL, prior to its engagement, regarding the
application of accounting principles to a specific completed or contemplated
transaction or the type of audit opinion that might be rendered on our financial
statements, and no written or oral advice was provided by SBBSL on any such
issue prior to its engagement that was a factor considered by us in reaching a
decision on any accounting, auditing or financial reporting issue. We informed
SBBSL prior to its engagement that D&T had issued a "going concern" opinion on
our 2000 financial statements, but did not consult with or obtain the views of
SBBSL prior to its engagement regarding the events or conditions forming the
basis of D&T's "going concern" opinion.
We authorized D&T to respond fully to any inquiries of SBBSL concerning
any issue related to our accounting principles or practices or financial
reporting, or our financial statements or D&T's audit thereof or audit opinion
thereon.
Representatives of SBBSL are expected to be present at the annual
meeting and are expected to be available to respond to appropriate questions
about their services.
AUDIT FEES
The Company paid D&T $49,350 in fees for professional services rendered
for the audit of our annual financial statements for the year ended December 31,
2000 and their review of the 2000 quarterly financial statements and the first
and second quarter 2001 financial statements included in our Form 10-QSB reports
for those quarters filed with the SEC. No fees were paid to SBBSL in 2001 for
professional services rendered for the audit of our annual financial statements
for the year ended December 31, 2001 or their review of the third quarter 2001
financial statements included in our Form 10-QSB report for that quarter filed
with the SEC. The Company accrued $22,289 for SBBSL's services in 2001.
11
III. AMENDMENT TO ARTICLE 4 OF
THE ARTICLES OF INCORPORATION
WHY IS THE COMPANY SEEKING TO AMEND ITS ARTICLES OF INCORPORATION?
The Board of Directors (Mr. Zicarelli abstaining) has unanimously
approved an amendment to the Company's Articles of Incorporation and recommends
that the shareholders approve the amendment by voting in favor of Proposal III.
This Proposal would amend the Company's Articles of Incorporation by deleting
the current Article 4 and replacing it with a new Article 4 which would increase
the authorized capital stock from 8,200,000 shares to 74,200,000 shares,
consisting entirely of 74,200,000 shares of no par value common stock.
Authorization of the additional common stock will permit the Company to
issue 2.4 million shares of common stock to Rotherwood as compensation for the
letter of credit/securities pledge described in "Issuance of Common Stock to
Rotherwood as Compensation for Rotherwood Guarantee" below, and to sell 18
million shares of common stock to Rotherwood as described in "Issuance of Common
Stock to Rotherwood for Cash and Subsequent 'Going Private' Transaction" below.
Because the proposed Articles amendment is the first step in a series of
transactions with Rotherwood that will result in a short-form cash-out merger of
the Company into Rotherwood and a termination of the Company's registration as a
reporting company under the Exchange Act, approval of the Articles amendment
will constitute approval of taking the Company private in the manner described
in this Proposal III.
The Public Shareholders will not vote as a class on Proposal III.
Because Rotherwood currently controls 51.6% of the Company's outstanding stock,
passage of Proposal III is assured. Rotherwood may effect the short-form merger
of the Company into Rotherwood without approval of the Board of Directors or
Public Shareholders of the Company.
THE BOARD WILL HAVE THE POWER TO ISSUE COMMON SHARES WITHOUT SHAREHOLDER
APPROVAL.
When Proposal III is adopted, the Board of Directors will have the
power, without shareholder approval, to issue common stock from time to time
(including the issuance of common stock to Rotherwood as described in this proxy
statement and accompanying Schedule 13E-3) in accordance with such terms as the
Board deems advisable, except in a transaction for which the Kansas Corporation
Code requires approval of the shareholders of the Company, such as a merger
(other than a short-form merger), consolidation or sale of all or substantially
all of the assets of the Company.
The Company has agreed to issue common stock to Rotherwood as
compensation for its guarantee (see "Issuance of Common Stock as Compensation
for Rotherwood Guarantee," below). Rotherwood also intends to make a $900,000
equity investment in the Company in an effort to improve the Company's financial
condition and take the Company private (see "Issuance of Common Stock to
Rotherwood for Cash and Subsequent 'Going Private' Transaction," below).
12
ISSUANCE OF COMMON STOCK AS COMPENSATION FOR ROTHERWOOD GUARANTEE
In exchange for Rotherwood's $2,000,000 letter of credit/securities
pledge as collateral for the Company's bank credit facility, without which the
lender would not have provided the Company with credit and would probably call
the loan, the Company has agreed to pay Rotherwood a fee equal to 2% per quarter
of the amount of the letter of credit/securities pledge (see "Relationships and
Related Transactions Between Cramer and Directors, Officers and Their
Affiliates" above). If the fee were paid in cash, it would equal $40,000 per
quarter. The Company is not generating sufficient cash flow to pay the fee in
cash. Rotherwood has agreed to accept payment in shares of common stock at the
rate of one share for each $0.05 of the 2% quarterly fee amount, or an aggregate
of 800,000 shares per quarter. The Company has sufficient authorized common
stock to pay the letter of credit/pledge fee for the fourth quarter of 2001 and
the first quarter of 2002 (an aggregate of 1,600,000 shares), but will not have
sufficient authorized common stock to pay the fee in common stock for any
additional quarters or to issue common stock to Rotherwood in exchange for its
proposed equity investment (see "Issuance of Common Stock to Rotherwood for Cash
and Subsequent 'Going Private' Transaction," below) without amending the
Articles to increase the Company's authorized common stock in accordance with
Proposal III. At December 31, 2001, the Company recorded a liability of $40,000
for Rotherwood letter of credit/pledge fees accruing in the fourth quarter of
2001. The Company plans in the future to issue 2.4 million shares of common
stock to Rotherwood for the fourth quarter 2001 and first and second quarter
2002 letter of credit/pledge fees, as well as 800,000 shares of common stock for
each subsequent quarter in which the pledge remains in effect.
Rotherwood currently owns 2,083,212 shares of common stock of the
Company, or 51.6% of the outstanding common stock.
The following table shows Rotherwood's percentage ownership of the
Company's common stock assuming payment of the quarterly letter of credit/pledge
fee in common stock at $0.05 per share (800,000 shares per quarter) and assuming
no additional common stock is acquired by Rotherwood or any other party.
<Table>
<Caption>
QUARTER NO. OF SHARES PERCENTAGE
------- ------------- ----------
2001
Fourth Quarter 2,883,212 59.6%
2002
First Quarter 3,683,212 65.3%
Second Quarter 4,483,212 69.6%
Third Quarter 5,283,212 73.0%
Fourth Quarter 6,083,212 75.6%
</Table>
The Company has obtained an independent appraisal of its common stock
(see "Issuance of Common Stock to Rotherwood for Cash and Subsequent 'Going
Private' Transaction" below) which stated that the fair market value of the
Company's common stock was $0.01 per share as of May 31, 2002, or $0.04 per
share less than the $0.05 per share letter of credit/pledge fee exchange value.
If the letter of credit/pledge fee payable to Rotherwood were paid in common
stock at the rate of $0.01 per
13
share, an aggregate of 4,000,000 shares of common stock would be issued to
Rotherwood each quarter during the remaining term of the bank credit facility.
ISSUANCE OF COMMON STOCK TO ROTHERWOOD FOR CASH AND SUBSEQUENT "GOING PRIVATE"
TRANSACTION
Introduction
When Proposal III is approved by the shareholders, the Company intends
to issue 18 million shares of common stock to Rotherwood for cash at a price of
$0.05 per share, resulting in cash proceeds to the Company of $900,000. The
proceeds of the equity investment by Rotherwood would be used to support
operations, reduce amounts owed under the bank line of credit, enable the
Company to move to a smaller, more efficient facility, and pursue a number of
marketing and other initiatives in connection with its turn-around plan. There
can be no assurance that this equity investment will support the turn-around.
The equity investment by Rotherwood will enable Rotherwood to complete a
short-form merger of the Company into Rotherwood as described below.
The Company does not have a sufficient number of authorized shares of
common stock to complete the investment transaction with Rotherwood. For this
reason, the Board of Directors recommends increasing the authorized shares of
common stock in accordance with Proposal III.
Assuming the issuance of 2.4 million shares of common stock to
Rotherwood as letter of credit/pledge fees for the fourth quarter of 2001 and
the first and second quarters of 2002 (See "Issuance of Common Stock as
Compensation for Rotherwood Guarantee," above), consummation of the $900,000
equity investment by Rotherwood will result in Rotherwood owning 22,483,212
shares of the Company's common stock, or 92% of the outstanding common stock of
the Company. The Kansas Corporation Code provides that if a parent company owns
at least 90% of each class of stock of a subsidiary, the parent can effect a
"short-form" merger of the subsidiary into the parent without a shareholder
vote. Accordingly, when Proposal III is approved and if the contemplated
investment by Rotherwood is consummated, Rotherwood will own at least 90% of the
Company's outstanding shares and intends to effect a short-form cash-out merger
of the Company into Rotherwood (the "Merger") at some time during 2002 without
the consent of, or any action by, the Board of Directors or Public Shareholders.
Notice of the Merger will be delivered to each shareholder prior to consummation
of the Merger.
As a result of the Merger, each share of the Company's common stock
owned by the Public Shareholders will be cancelled and automatically converted
into the right to receive $0.05 per share in cash, or an aggregate cash merger
consideration of approximately $98,000.
Completion of the Merger will entitle the Company to terminate its
registration and status as a reporting company under the Exchange Act. For this
reason, the Merger is subject to the "going private" provisions of Rule 13e-3
under the Exchange Act. Rule 13e-3 requires, among other things, that certain
financial information concerning the fairness of the proposed transaction,
background of the persons involved in the transaction and purpose of the
transaction be filed with the SEC and disclosed to shareholders prior to the
consummation of the "going private" transaction. The Company and the Rotherwood
Entities have filed a joint Schedule 13E-3 with the SEC in connection with the
going
14
private transaction, which has been mailed to shareholders with this proxy
statement and is incorporated by reference herein.
The equity investment by Rotherwood will dilute the percentage of the
Company's equity held by the Public Shareholders and will dilute the earnings
per share (if any) and book value per share of the existing outstanding common
stock. If Rotherwood does not make the proposed $900,000 investment, the
uncertainty regarding the Company's ability to continue as a going concern
described in "Purposes, Alternatives Reasons and Effects" below will continue
and may increase.
Except as described in this proxy statement and the Schedule 13E-3,
neither the Company nor Rotherwood has any present plans or proposals that would
relate to or would result in (i) an extraordinary corporate transaction, such as
a merger, reorganization or liquidation, involving the Company or Rotherwood,
(ii) a sale or transfer of a material amount of assets of the Company, (iii) any
change in the present Board of Directors or management of the Company, (iv) any
material change in the present capitalization or dividend policy of the Company,
(v) any other material change in the Company's corporate structure or business,
or (vii) causing a class of equity securities of the Company becoming eligible
for termination of registration pursuant to Section 12(g)(4) of the Exchange
Act.
Summary Term Sheet
The material terms of the series of transactions that will result in the Company
going private are:
o The Company 's shareholders are asked to approve an amendment to
the Company's Articles of Incorporation pursuant to Proposal III
to increase the Company's authorized shares of common stock from
8,200,000 shares to 74,200,000 shares, which will enable the
Company to sell 18 million shares to Rotherwood, increasing
Rotherwood's ownership to over 90% of the then outstanding shares.
Approval of Proposal III is assured given Rotherwood's current
ownership of 51.6% of the Company's common stock (See "Purposes of
the Transaction and Plans or Proposals" below);
o Rotherwood receives an aggregate of 2.4 million shares of common
stock at $.05 per share in exchange for Rotherwood's guarantee of,
or pledge of collateral to support, the Company's bank debt for
the fourth quarter of 2001 and the first two quarters of 2002 (See
"Purposes of the Transaction and Plans or Proposals" below);
o Rotherwood purchases 18 million shares of common stock for cash at
a price of $.05 per share resulting in proceeds to the Company of
$900,000 (See "Terms of the Transaction" below). Rotherwood will
then own in excess of 90% of the Company's common stock (See
"Purposes of the Transaction and Plans or Proposals" below);
o Rotherwood effects a short-form merger of the Company into
Rotherwood under Kansas law (See "Purposes of the Transaction and
Plans or Proposals" below). In the Merger every Public Shareholder
will receive a cash payment of $.05 per share, representing an
approximate aggregate consideration of $98,000, subject to
shareholders' statutory appraisal rights (See "Terms of the
Transaction" below); and
o Rotherwood and the Company will notify the Public Shareholders of
the Merger and of the procedures for any shareholder of the
Company to exercise appraisal rights to have a court
15
determine the fair market value of his or her shares (if the
shareholder chooses to do so) (See "Purposes of the Transaction
and Plans or Proposals" below).
This series of transactions will result in the Company's common stock
being held solely by Rotherwood, permitting the Company to terminate its status
as a public company required to file reports under the Exchange Act.
Terms of the Transaction.
Following the amendment to the Company's Articles of Incorporation,
Rotherwood intends to purchase 18 million shares of newly authorized common
stock for cash at a purchase price of $.05 per share and an aggregate purchase
price of $900,000. Upon Rotherwood's purchase of the shares, combined with the
issuance of 2.4 million shares of common stock as compensation for the letter of
credit/securities pledge, Rotherwood would own more than 90% of the Company's
outstanding shares of common stock. Rotherwood would then cause a "short-form"
merger to occur during 2002 in which each outstanding share of the Company's
common stock owned by the Public Shareholders would be converted into the right
to receive a cash payment of $.05 per share. As a result of such transaction,
each share of common stock would be converted into the right to receive the
short-form merger consideration, except for shareholders (if any) who properly
exercise appraisal rights. Rotherwood intends to enter into such a transaction,
but is not subject to any binding obligation to do so and reserves the right not
to pursue such a transaction.
Merger Consideration.
If Rotherwood proceeds with the Merger, the Public Shareholders would
receive $.05 per share, which would represent the aggregate amount of
approximately $98,000.
Reasons for the Transaction.
See "Purposes, Alternatives, Reasons and Effects" below.
Vote Required.
No vote of the Public Shareholders or Board of Directors will be
required to approve the Merger.
Material Differences in Rights of Security Holders.
If the Merger is consummated, Public Shareholders would have no right
to participate in the future prospects of the Company. Public Shareholders would
only receive $.05 per share in cash, unless they properly exercise appraisal
rights, in which case they would receive the consideration determined by a court
in accordance with Kansas law.
16
Federal Income Tax Consequences.
The following is a general summary of the material U.S. federal income
tax consequences if a merger is consummated to beneficial owners of shares of
common stock. This summary is based upon the provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), applicable treasury regulations
thereunder, judicial decisions and current administrative rulings as in effect
on the date of this proxy statement. This discussion does not address all
aspects of U.S. federal income taxation that may be relevant to particular
taxpayers in light of their personal circumstances or to taxpayers subject to
special treatment under the Code (for example, life insurance companies, foreign
corporations, foreign partnerships, foreign estates or trusts, or individuals
who are not citizens or residents of the United States and beneficial owners
whose shares of common stock were acquired pursuant to the exercise of warrants,
employee stock options or otherwise as compensation) and does not address any
aspect of state, local, foreign or other taxation.
A shareholder whose shares of common stock are converted, pursuant to a
short-form merger, into a right to receive cash will recognize gain or loss
equal to the difference between (i) the amount of cash that such shareholder
receives in the short-form merger and (ii) such shareholder's adjusted tax basis
in such shares of common stock. Such gain or loss will be capital gain or loss,
and generally will be long-term capital gain or loss if at the closing or
effective date of the short-form merger the shareholder's holding period for the
shares of common stock is more than one year. Holders of shares of common stock
could be subject to back-up withholding. Backup withholding in not an additional
tax, but rather may be credited against the taxpayer's tax liability for the
year.
In general, cash received by shareholders who exercise statutory
appraisal rights will result in the recognition of gain or loss to the
dissenting shareholder. Any such dissenting shareholder should consult with its
tax advisor for a full understanding of the tax consequences of the receipt of
cash in respect of appraisal rights pursuant to a short-form merger.
Neither Rotherwood nor the Company expects to recognize any gain, loss
or income by reason of a short-form merger.
EACH BENEFICIAL OWNER OF SHARES IS URGED TO CONSULT SUCH BENEFICIAL
OWNER'S TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH BENEFICIAL OWNER
OF THE MERGER, INCLUDING THE APPLICATION OF STATE, LOCAL, FOREIGN AND OTHER TAX
LAWS.
Appraisal Rights.
A short-form merger will give rise to appraisal rights for any Public
Shareholder who exercises those rights properly. Appropriate notice will be
provided to shareholders at the appropriate time and Rotherwood will amend the
Schedule 13E-3 being filed by the Rotherwood Entities and the Company in
connection with the Merger as appropriate to describe the appraisal rights.
17
Past Contracts, Transactions, Negotiations and Agreements
By virtue of its 51.6% ownership of the Company's common stock,
Rotherwood controls the Company and is thus an affiliate of the Company.
James R. Zicarelli, Chairman of the Company's Board of Directors,
served as the Company's CEO until Mr. Gregory Coward was appointed to that
position in January 2001. Mr. Zicarelli is President of Rotherwood.
Gregory Coward is compensated by Rotherwood and does not receive any
compensation from the Company for serving as President and Chief Executive
Officer. Mr. Coward receives a salary of $125,000 that is paid by Rotherwood,
and Rotherwood receives a management fee from the Company equal to Mr. Coward's
salary. Mr. Nicholas Christianson, the Company's Interim Chief Financial
Officer, is compensated by an affiliate of Rotherwood and does not receive any
compensation from the Company for serving as Interim Chief Financial Officer. He
receives a salary of $100,000. Rotherwood has charged $21,600 for Mr.
Christianson's services from April 1, 2002 through June 30, 2002.
From 1995 through December 31, 2001, the Company paid fees to
Rotherwood or a related company for management services, including those
provided by Mr. Zicarelli and Mr. Coward. The cost to the Company for these
services was approximately $91,500 in 2001 and $28,000 in 2000. In addition, the
Company incurred expense of $40,000 for a loan guarantee fee by Rotherwood
described below. At December 31, 2001, the Company owed Rotherwood $100,900 for
these expenses along with other expenses incurred by Rotherwood for the benefit
of the Company.
The Company participates with Pacer Corporation, an affiliate of
Rotherwood, in a combined credit facility. The credit facility provides the
Company and Pacer with access to a revolving line of credit of $2.0 million with
interest payable monthly at the bank's prime rate and a $320,000 line of credit
with interest payable monthly at the prime rate plus 2%. The combined credit
facility is secured by substantially all of the assets of the Company and of
Pacer. As described in "Purposes of the Transaction and Plans or Proposals"
below, Rotherwood initially provided the lender with a $2 million letter of
credit as additional collateral for the loan and subsequently provided a pledge
of $2 million of securities as collateral for the loan.
In the fourth quarter of 2001, the Company's Board approved an
"Odd-Lot" Tender Offer, in which the Company offered to purchase the shares held
by shareholders owning fewer than 100 shares. The Company undertook this offer
for two reasons. First, since there has been no trading in the Company's common
stock, shareholders have not had a way to trade their shares. Second, the
Company sought to reduce its expenses of reporting to odd-lot shareholders,
which represented 35% of all shareholders.
The Company engaged the firm of Meara, King & Co., a Kansas City
accounting firm to analyze the current value of the Company and its common stock
(See "Reports, Opinions, Appraisals and Negotiations" below for more discussion
of this appraisal). The results of their study, which included, among other
considerations, earnings tests and asset appraisals, valued the common stock at
$.01 per
18
share as of July 19, 2001. The Company offered to pay $.015 per share in cash to
each "odd lot" shareholder. In recognition for this low value, the Company also
agreed to send a Company product to every shareholder that accepted the offer.
Forty eight "odd lot" shareholders holding an aggregate 1,889 shares accepted
the offer and tendered their shares to the Company for an aggregate purchase
price of $28.34 plus products valued at $2,400.
Purposes, Alternatives, Reasons and Effects.
Purposes
The purpose of the Merger is to enable Rotherwood to acquire all of the
outstanding equity interest in the Company as part of Rotherwood's overall
reorganization plan for the Company and to provide consideration of $.05 per
share in cash to the Public Shareholders.
Reasons
As described in the Company's Annual Report on Form 10-KSB/A for the
year ended December 31, 2001 filed by the Company with the SEC and incorporated
by reference herein, the Company is facing a number of serious challenges. The
Company reported a loss in 2001 of $1,202,000, which is in addition to losses
aggregating $1,309,000 during 2000 and 1999. As of June 30, 2002, the Company
had a working capital deficit (which means the Company's current liabilities
exceed its current assets) of ($1,820,000), and a negative net worth of
($1,747,000). The Company's bank credit line expired on January 27, 2002 and was
temporarily extended to October 3, 2002. However, that extension was granted
only on the condition that Rotherwood extend its own pledge of $2,000,000 in
securities to support the credit line (see "Issuance of Common Stock as
Compensation for Rotherwood Guarantee," above). SBBSL issued a "going concern"
opinion on our 2001 financial statements, indicating substantial doubt about the
Company's ability to continue as a going concern.
In determining whether to effect the series of transactions described
in this Proposal III, Rotherwood and the Company considered several factors,
including the historical financial performance and significant losses of the
Company and the potential benefits to the Company's business if the Company were
to cease being a public reporting company. Rotherwood and the Company also
considered:
o the elimination of additional burdens on management associated
with public reporting and other tasks resulting from the Company's
public company status;
o the Company's small size in terms of revenues, employees and
number of managers;
o the expense associated with being a public company (for example,
as a privately-held entity, the Company would no longer be
required to prepare, file, print and distribute quarterly, annual
or other periodic reports and proxy statements);
o the past and current absence of any trading market or liquidity
for the Company's common stock;
19
o the greater flexibility that the Company's management would have
to focus on long-term business goals as a non-reporting company;
o the availability of the Company's net operating losses carry
forwards in the event that the Company were to become profitable;
and
o recent public capital market trends affecting micro-cap companies,
including lack of interest by institutional investors in companies
with a limited public float and no trading.
Alternatives
Rotherwood and the Company believe that the series of transactions
described in this proxy statement, including the payment to Rotherwood of
800,000 shares of common stock per quarter in exchange for guaranteeing the
Company's bank debt, investing $900,000 for 18 million shares of common stock
and consummating the Merger, represents a cost effective way for Rotherwood to
acquire the outstanding public minority equity interest in the Company while
providing the Company with the capital it needs to attempt to turn its business
around and providing Public Shareholders with liquidity for their shares.
Rotherwood and the Company considered and rejected other alternatives including
a long-form merger because of the cost and delay of obtaining the approvals of
the Company's Public Shareholders and of seeking approval of the Board of
Directors, including the possibility of seeking independent directors.
Rotherwood and the Company also rejected the alternative of a tender offer as it
entailed additional costs and its success was uncertain and because the Company
would still need a cash infusion from Rotherwood, and a subsequent short-form
merger would in all likelihood still be required in order to accomplish the
Company's and Rotherwood's objective of becoming a private company.
Rotherwood and the Company also considered the advantages and
disadvantages of other alternatives to acquiring the minority interest in the
Company, including:
o a sale of new equity securities in the Company to a new investor
or investors;
o a sale by Rotherwood of its equity interests in the Company; and
o leaving the Company as a majority-owned, public subsidiary of
Rotherwood.
The first alternative, seeking outside capital from a new investor, was
not considered feasible given the Company's financial condition and history of
substantial losses and the current market conditions for micro-cap companies
with no trading market.
The second alternative, selling Rotherwood Ventures' equity interest in
the Company, was briefly considered. It was not an alternative that was pursued
at length, given the Company's dependence on Rotherwood and the belief that the
Company would likely not survive without Rotherwood's guarantee or collateral
support, because the bank would likely call the loan and the Company does not
have sufficient cash or assets to satisfy the loan.
20
In the view of Rotherwood and the Company, there is no advantage to
Rotherwood, the Company or the Public Shareholders in the Company being a
majority-owned, public subsidiary of Rotherwood. The disadvantages of that
status, which were considered by Rotherwood and the Company, included the
inability to achieve many of the benefits of taking the Company private
discussed above. Rotherwood and the Company concluded that the advantages of
leaving the Company as a majority-owned, public subsidiary were significantly
outweighed by the disadvantages of doing so, and accordingly that alternative
was rejected.
Rotherwood and the Company also considered the lack of a trading market
for the Company's common stock and considered that if the series of transactions
described in this Proposal III, including the Merger, were consummated, it would
result in immediate liquidity for the Public Shareholders.
Effects
General. Upon completion of the series of transactions described in
this Proposal III, Rotherwood will have complete control over the conduct of the
Company's business and will have a 100% interest in the net book value and net
earnings of the Company. In addition, Rotherwood will receive sole benefit of
any future increase in value of the Company and will bear the sole risk of any
continuing losses and further decrease in value of the Company.
Public Shareholders. Upon completion of the series of transactions
described in this Proposal III, the Public Shareholders would no longer have any
interest in, and would not be shareholders of, the Company and therefore would
not participate in any future earnings or potential growth of the Company, and
would no longer bear the risk of any further decreases in value of the Company.
In addition, the Public Shareholders would not share in any proceeds of any sale
of the Company which Rotherwood may elect to accomplish in the future. All of
the Public Shareholders' other incidents of stock ownership, such as the rights
to vote on certain corporate decisions, to elect directors, to receive
distributions upon the sale or liquidation of the Company and to receive
appraisal rights upon certain mergers or consolidations of the Company, as well
as the benefit of any potential increase in the value of a Public Shareholder's
holdings in the Company based on any improvements in the Company's future
performance, will be extinguished upon completion of the Merger.
If the Merger is completed, the Public Shareholders will also not bear
the risks of any further decreases in the value of their holdings in the Company
based on any continuing downturns in the Company's future performance. Instead,
the Public Shareholders will have liquidity in the form of the cash Merger
consideration paid by Rotherwood in place of an ongoing equity interest in the
Company in the form of shares.
The Shares of Common Stock. If the Merger is consummated, Rotherwood
intends to deregister the shares under the Exchange Act. As a result, the
Company will no longer be required under the federal securities laws to file
reports with the SEC and will no longer be subject to the proxy rules under the
Exchange Act.
21
For a discussion of certain federal income tax consequences of the
Merger, see "Terms of the Transaction - Federal Income Tax Consequences," above.
Fairness of the Transaction
Rotherwood and the Company believe that the series of transactions
described in this Proposal III is fair to the Public Shareholders. Only one of
the Company's two directors is independent and thus the series of transactions
described in this Proposal III was not approved by a majority of directors who
are independent of Rotherwood. Other than the appraisal of Meara King & Co.
summarized in this Proposal III, the directors have not obtained a fairness
opinion in connection with these transactions, or appointed a special committee
of unaffiliated persons to approve the transactions. The $.05 per share value to
Public Shareholders was determined by Rotherwood and was not the result of
independent negotiation.
The following are the material factors considered by Rotherwood and the
Company in determining the fairness of the transactions described in this
Proposal III:
o Financial Condition. Rotherwood and the Company considered the fact
that there exists substantial doubt about the Company's ability to continue as a
going concern, given its history of substantial losses, negative working
capital, and net worth covenant default under its bank credit agreement.
Rotherwood also considered the fact that the Company's survival is almost
totally dependent upon Rotherwood providing a letter of credit or pledge of
collateral to secure the Company's credit facility. Rotherwood and the Company
also considered that given the Company's financial condition it was not likely
that the Company would obtain substitute or additional debt or equity financing
from a third party lender or investor.
o Limitations as a Public Company. Rotherwood and the Company
considered the fact that the Company's negligible trading volume, its virtual
non-recognition among its public competitors, its lack of institutional
sponsorship and limited public float, its majority control by Rotherwood, the
lack of any firms making a market in its common stock, and lack of research
attention from market analysts, had adversely affected the trading market for,
and the value of, the Company's common stock. Rotherwood and the Company also
considered the valuation appraisal performed by Meara King which determined the
fair market value of the common stock to be $.01 per share. Rotherwood and the
Company also considered the fact that the Company would not have sufficient
independent directors to comply with the rules of the NASDAQ stock market and
could not be listed without recruiting independent board members who would be
difficult to attract in the current environment, given the Company's financial
situation. Rotherwood and the Company concluded that under the circumstances,
the $.05 per share cash consideration to be received by the Public Shareholders
if a short-form merger was consummated was preferable to continuing with the
status quo. Accordingly, Rotherwood and the Company concluded that shareholder
value was not likely to be maximized were the Company to remain a public
company.
o Future Prospects. Rotherwood and the Company considered the condition
of the Company's industry, including the fact that the furniture business has
been suffering very challenging
22
conditions in recent years. Sales by major manufacturers have declined
significantly over the past year, and it is unclear when industry conditions
will improve. This situation is exacerbated by a decline in corporate
construction and reductions in capital acquisition budgets by industry customers
as part of general economic conditions.
o Financial Performance and Future Prospects. Rotherwood and the
Company considered Rotherwood's knowledge of the Company's business, operations,
assets, financial condition, and the going concern opinions of the Company's
external auditors. With respect to prospects, Rotherwood and the Company
considered the projections and uncertainties related to adoption of a
turn-around plan and the significant debt facing the Company. While management's
restructuring efforts have contributed to the Company's operating income of
$33,000 in the first two quarters of 2002, the Company's debt service
obligations continue to keep the Company in a loss position. Rotherwood and the
Company also considered that if the transactions described herein are not
completed, the Company could suffer adverse impacts including possible
withdrawal of the collateral deposit provided by Rotherwood which would likely
lead to the bank calling the loan and bankruptcy and liquidation of the Company.
This would affect cash flow, access to capital, and retention of management
personnel. Rotherwood and the Company also considered the impact that these
factors had and could have on the value of the common stock.
o Appraisal of Meara King. Rotherwood and the Company also reviewed
Meara King's initial appraisal which was delivered on October 19, 2001 and an
updated appraisal dated May 31, 2002, including the opinion of Meara King that
the fair market value of the Company is $0.01 per share. A SUMMARY OF MEARA
KING'S APPRAISAL DATED JUNE 12, 2002, IS ATTACHED AS AN EXHIBIT TO THIS PROXY
STATEMENT. In addition, the presentation of and the factors considered by Meara
King in its appraisal are discussed under "Reports, Opinions, Appraisals, and
Negotiations" supported Rotherwood's and the Company's determination.
o Market Price and Premium. Rotherwood and the Company considered that
(i) the $.05 per share to be received by the Public Shareholders if a short-form
merger is consummated is five times higher than the $.01 per share value
determined by the Meara King appraisal; (ii) the withdrawal of Rotherwood's
transactions could have an adverse impact on the survival of the Company and the
value of the Company's common stock and any future liquidity of the Company's
common stock; (iii) the consideration to be received by the Public Shareholders
will consist entirely of cash; and (iv) the $.05 per share consideration is
higher than the Company's negative net worth as of June 30, 2002.
o Other Potential Investors and Buyers. Rotherwood and the Company also
considered that no third party has ever indicated any interest in purchasing or
investing in the Company in many years. Rotherwood and the Company also
considered the fact that no other bidder is likely to emerge, given that
Rotherwood currently owns 51.6% of the outstanding common stock of the Company,
and given the Company's financial condition. Accordingly, Rotherwood and the
Company believe that it is not likely that any party other than Rotherwood would
propose and complete a transaction on terms more favorable to the Public
Shareholders.
23
o Risks of Turn-around Strategy. Rotherwood and the Company considered
the risks in embarking on a turn-around plan and the likelihood that without
additional investment by Rotherwood there could be no restructuring, and no
future to the Company.
o Availability of Appraisal Rights. Rotherwood and the Company
considered the fact that Kansas law will entitle shareholders who file a written
notice of intent with the Company to obtain the "fair value" of their shares, as
determined by a court, if the Merger is completed.
Rotherwood and the Company also considered a variety of risks and other
potential negative factors concerning the series of transactions described in
this Proposal III. These included the following:
o Independence. Rotherwood and the Company considered the fact that the
Company does not have a majority of independent directors, and that there have
been no independent financial or legal advisers appointed to represent the
Public Shareholders.
o Loss of Equity Interest. Rotherwood and the Company considered that
if a short-form merger is carried out, the Public Shareholders will not
participate in any future growth of the Company. Consequently, if the Company is
able to turn itself around, any future growth or potential sale of the Company
would be for the benefit of Rotherwood only. Because of the risks and
uncertainties associated with the Company's future prospects, Rotherwood and the
Company have concluded that the immediate liquidity provided by going private
will be preferable to enabling the Public Shareholders to have a speculative
potential future return.
o Conflicts of Interests. Rotherwood and the Company considered the
conflicts of interests of Mr. Zicarelli and the Company's senior management, who
are affiliated with Rotherwood.
o Taxation of Transaction. Rotherwood and the Company considered that
cash consideration to be received by the Public Shareholders will result in a
taxable transaction to the Public Shareholders.
o Recourse Against Rotherwood. Rotherwood and the Company considered
that it would be difficult for the Company to enforce any commitment against
Rotherwood, in the event of its breach, due to its control of the Company.
In considering the series of transactions described in this Proposal
III, Rotherwood and the Company considered Meara King's analyses to determine
the going concern value of the Company. Rotherwood and the Company also reviewed
internal financial analyses prepared by management and reviewed with the
officers of the Company its historical and projected results, but neither
Rotherwood nor the Company independently generated its own separate financial
analysis of the transaction.
Rotherwood and the Company concluded that the positive factors
outweighed the negative factors. Because of the variety of the factors
considered, Rotherwood and the Company did not make specific assessments of,
quantify or otherwise assign relative weights to the specific factors considered
24
in reaching the determination to proceed with the transaction. The determination
was made after consideration of all of the factors together.
The series of transactions described in this Proposal III are not
structured so that approval of holders of the majority of the shares held by the
Public Shareholders will be sought. Rotherwood and the Company elected not to
submit the amendment to the Company's Articles of Incorporation or other
transactions described in this Proposal III for approval by holders of a
majority of the shares held by the Public Shareholders. The board of directors
of the Company has not retained an unaffiliated representative to act on behalf
of the Public Shareholders. Only one of the Company's directors is independent.
The Company and Rotherwood believed it would be very difficult to recruit new
outside directors. Rotherwood and the Company believe there are sufficient
procedural safeguards in place to ensure the procedural fairness of the
transaction. These safeguards include:
o an independent appraisal from Meara King; and
o Kansas law entitles shareholders who file a written notice of intent
with the Company to obtain the fair value of their shares, as determined by a
court, if the Merger is completed.
Reports, Opinions, Appraisals and Negotiations
In September 2001, the Company retained the firm of Meara, King & Co.
to appraise the value of the Company's common stock. That firm's appraisal
report dated October 19, 2001 states their opinion that the value of the common
stock is $.01 per share. In May of 2002, the Company asked Meara King to update
its appraisal report. Meara King delivered an updated appraisal on June 12,
2002. The updated appraisal states that in that firm's opinion the fair market
value of the Company's common stock as of May 31, 2002 is $.01 per share.
Neither the Company nor the Rotherwood entities suggested a value for the
Company's common stock.
Neither the Company nor Rotherwood or their affiliates had any prior
relationships or engagements with Meara King until Meara King was engaged by the
Company to appraise the value of the Company's common stock, except that in
1998, Meara King performed a valuation for Sagebrush Corporation, a subsidiary
of Rotherwood Corporation, the predecessor to Rotherwood. This appraisal was
performed in connection with the merger of an entity called Econo-Clad into
Sagebrush Corporation. Meara King was paid $12,518 for this appraisal.
Meara King provides business valuation services for such purposes as
general business planning; determining income, estate and gift taxes;
establishing the value of employer securities held by ESOP plans; completing
mergers, acquisitions and divestitures; and resolving litigation. The firm's
industry experience includes manufacturing, retailing, construction, insurance,
distribution, utilities, computer software, trucking, automobile and restaurant
franchises and service businesses such as advertising, law, medicine,
architecture and printing. The firm has been engaged by judges, attorneys and
litigants to assist in valuation issues in legal matters in federal, state and
county courts throughout the United States. The firm's professional staff
numbers 20, most of whom are certified public accountants.
25
Introduction
The Company identified two other appraisal firms in the Kansas City
area to undertake this engagement, but chose the Meara King firm. The engagement
letter stated that the objective of the appraisal was to determine the fair
market value of the Company to assist the Company's Board of Directors or
shareholders considering various alternatives for a restructuring or strategic
transaction.
Meara King reported that the appraisals were conducted in accordance
with Internal Revenue Ruling 59-60, which provides guidelines for valuing
closely held businesses for income, estate and gift tax purposes. Meara King
advised the Company that the appraisals were also conducted in accordance with
Uniform Standards of Professional Appraisal Practice. Meara King engaged Dan
Craig MAI at the Company's expense to appraise the Company's real estate. Meara
King also engaged Kenneth Fowler, ASA at the Company's expense to appraise the
Company's equipment and machinery. The Company paid Meara King consideration of
$12,611, and paid $3,000 to Mr. Craig and $2,800 to Mr. Fowler. The Company paid
$5,575 to Meara King in connection with the updated appraisal, for aggregate
fees of $18,186 to Meara King and $5,800 to the two other appraisers.
The following is a summary of Meara King's appraisal dated June 12,
2002. Because the firm concluded that the value of Company was $.01 per share in
September 2001 and $.01 as of May 31, 2002 and because the later appraisal
relies on more current data, this summary only covers the most recent appraisal.
In the October 2001 appraisal, Meara King used both a net asset value
method and a discounted future earnings method and reconciled the two
methodologies to reach a value. The more recent appraisal, as summarized below,
also uses a net asset value method, but because the value derived was a negative
number, Meara King concluded that result was not meaningful, and that method was
not used to derive an ultimate value.
Summary of Information Reviewed by Meara King and Overview of Valuation
Assumptions
In reaching its conclusion of fair market value, Meara King analyzed,
among other things, the historical financial statements of the Company for the
past three fiscal years, for the three month period ended March 31, 2002 and the
four-month period ended April 30, 2002. The firm also analyzed management
documents and forecasts and industry, market, economic and capital market data.
The appraisal firm also visited the Company's facilities and interviewed the
Company's management team. The appraisal firm viewed the Company as a privately
held business because although the Company is a reporting company, the common
stock is not publicly traded. Under Revenue Ruling 59-60, Meara King considered
the nature of the Company's business since inception; economic outlook in
general and the conditions of the Company's industry; book value of the stock
and the financial condition of the business; earnings capacity of the Company;
dividend paying capacity of the Company; goodwill and intangible value; sales of
stock and size of block to be valued; and market price of stocks of public
competitors. Meara King's objective was to determine fair market value, which it
defined as the cash price in which property would change hands between a willing
hypothetical uncoerced buyer and seller. The appraisals were conducted in
accordance with the Uniform Standards of Professional Appraisal Practice
("USPAP").
26
Summary of Approaches to Value Deemed Appropriate by Meara King
Meara King determined that the appropriate approaches for the Company
were to use the cost approach and the income approach. The cost approach relies
on a valuation of the Company's assets and liabilities as adjusted to reach the
fair market value. The income approach is an earnings-based method of
discounting the Company's potential future earnings to present value and was
deemed appropriate because of management's plan to turn the Company around.
Review of Business, Restructuring Efforts, Company, Industry, Market and
Economic Factors, Financial Statement Analysis
Meara King reviewed the Company's industry and business history,
observing that the Company has suffered significant losses from 1999 to 2001.
The appraisal firm did note that the Company has undertaken a restructuring
plan, which commenced in early 2001. The restructuring plan has included
workforce reductions, including management replacement and implementing several
changes including redirecting marketing efforts toward core products and sales
channels that have performed well in the past and discontinuing non-performing
products. The restructuring effort also includes re-evaluating manufacturing and
inventory practices. The Company has begun outsourcing certain products and has
leased a smaller, more efficient facility.
Meara King reviewed the background of the management team and reviewed
the status of the Company's labor relations. Meara King also studied the
Company's revenues by product, its trademarks, its marketing strategies,
customers and distribution channels. Meara King also examined the Company's
competitive environment, noting that the Company's six biggest competitors have
a 60% market share. Meara King also reviewed the Company's facilities and recent
divestitures.
As a result of this review, Meara King observed that key strengths were
the Company's established workforce, patents and trademarks. However, the firm
also noted that key weaknesses were significant product inefficiencies a highly
leveraged balance sheet, lack of capital a severe competitive environment and
poor economic outlook. Meara King next looked at economic conditions generally
and competitive conditions in the office furniture market. The firm noted that
the industry was experiencing difficult conditions and that demand for the
Company's products could remain flat. Meara King did note that despite the
difficult conditions, the Company's restructuring plan has contributed to a
first quarter of 2002 operating profit of $16,000. However, debt service
obligations have kept the Company in a loss position.
Meara King also examined the Company's stock ownership, stock sales and
dividend history. The firm noted that the Company is public, but the last public
trade was in 1998. Accordingly, the Company would be valued as a closely held
business. The firm also reviewed the Company's largely unsuccessful odd-lot
tender offer in 2001 in which eligible shareholders that chose to participate
could receive $.015 per share plus a Kik-Step product. Because the Company has
not paid dividends on its common stock in recent years, the firm placed little
or no emphasis on dividends.
Meara King next analyzed the Company's balance sheet and income
statement items for the last three years and as of April 30, 2002. The firm
noted a significant decline in total assets, a working
27
capital deficit, and decreases in intangible assets. Stockholders' equity has
decreased from $648,000 at December 31, 1999 to negative $1.7 million at April
30, 2002. There have also been significant increases in current liabilities.
Meara King also studied the Company's highly leveraged condition and the
Company's debt obligation that has increased by $600,000 over last three years.
The firm also analyzed the income statements going back three years and for the
four months of 2002, and examined trends in the line items of the income
statement. Meara King noted that total revenues decreased 6.5% per year since
1998, gross profit has decreased from 28.6% in 1998 to 22.1% in 2001, operating
expenses as a percentage of revenue has increased from 27.6% in 1998 to 31.9% in
2001, and other expense significantly increased due to the use of credit
facility. The Company recorded a marginal profit in 1998, but has recorded net
losses in each year since then, including a $1.2 million net loss in 2001.
Meara King studied the first quarter of 2002 income statement and noted
significant trends: total revenues decreased 38% compared to the same period in
2001 due to competition and economic conditions; margins are improving and the
cost of goods sold as a percentage of revenue significantly decreased to 65.4%
compared to 77.9% in the same period in 2001 due to lower material costs and
overhead reductions; operating expenses as a percentage of revenues increased to
34% compared to 31.9% in 2001; net operating income of $16,000 and a net loss of
$14,000 were recorded; net profit margin was a negative .7%, but this was a
significant improvement over the negative 11.5% recorded in the first quarter or
2001. Meara King observed that these trends reflected the Company's
restructuring efforts and if the Company focused on generating sales, it could
lead to future stability in operations.
Meara King also examined traditional valuation ratios including the
Company's quick ratio, current ratio, solvency ratio, efficiency ratio, and
profitability ratio and compared these to competitors with the same standard
industrial code. Meara King noted that the Company was essentially insolvent and
these ratios did not compare favorably with typical members of the industry. The
firm observed that these negative measurements hindered value and significantly
increase the risk associated with the Company. Meara King also looked at
investment performance and profitability ratios for the Company as compared to
SIC competitors and noted that the Company's investors have experienced
significant negative returns compared to positive returns for investors in other
members of the industry.
As a result of this analysis of the Company's historical financial
results, the appraisal firm noted a downward operating trend resulting in net
losses and a very weak financial position. The appraisal firm concluded that no
meaningful indications of value could be derived from a valuation method based
on historical earnings. However, the restructuring plan is working and
therefore, an earnings-based method valuation using estimated future earnings
was deemed appropriate. Due to uncertainties surrounding operations, an
asset-based method was also used, but this was ultimately found not to be
meaningful.
Summary of Income Approach--Discounted Future Earnings Method
The first method of valuation that Meara King relied upon was the
discounted earnings method. Although the Company's operations are currently
unprofitable, Meara King determined that this method was appropriate because of
management's restructuring plan. Under the discounted future earnings method,
Meara King forecasted earnings and discounted these earnings to present value to
determine the value of the Company.
28
Meara King first developed a forecasted return based on management's
forecasts through December 31, 2005. The appraiser selected pre-tax income
available to equity owners as an appropriate return. The firm noted that the
Company has a significant deferred tax asset in net operating loss carry
forwards that will only be realized if the Company is able to generate taxable
income in the future. Based on discussions with management, Meara King
determined to apply an after-tax discount rate to pre-tax income to account for
the value of the net operating losses. The following is a summary of
management's assumptions and resulting projected balance sheets and income
statements from 2002 to 2005.
Management Assumptions
Revenues. Meara King relied on management's estimate that revenue is
projected to grow at a rate of 3% per year up to 2005. This rate of growth is
expected to occur from stabilizing product pricing and volume increases from
improved marketing and increasing product awareness.
Cost of goods sold. Management estimates that cost of goods sold as a
percentage of revenues should improve from 77.9% in 2001 to approximately 67% in
2002. By 2005, these costs are expected to be 65% of revenue. These improvements
are expected to occur from improving production processes, outsourcing products
and moving to a new facility.
Operating expenses. Operating expenses as a percentage of revenue are
projected to remain 29% of revenue for 2002 and increase to 33% of revenue by
2005 due to increased sales and marketing expenditures.
Other expenses. These consist of interest, cash discounts and other
income and expense. These were estimated to remain constant at 2% of revenue.
Income taxes. Income taxes were not estimated due to the effect of the
net operating loss carry forwards.
Debt. Meara King's model assumes that Rotherwood does not contribute to
reduce the Company's debt, and therefore interest and guarantee fees will keep
the Company from profitability. Rotherwood is planning an equity investment in
2002 which would enable the Company to reduce interest expense and fee
obligations, which could result in net income to the Company. Meara King
concluded that to assess value today, the equity investment would not be
included. The value of the investment is reflected in determining the
appropriate discount rate.
The following charts show management's projected balance sheets and
income statements from 2002 to 2005 that Meara King used to derive a net income
number:
29
CRAMER, INC.
PROJECTED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31,
------------------------------------------------------------------
ASSETS 2002 2003 2004 2005
------------ ------------ ------------ ------------
Current assets 1,879,246 1,988,361 2,051,548 2,140,397
Net fixed assets 765,325 619,875 623,204 683,282
Total assets 2,644,571 2,608,236 2,674,752 2,823,679
</Table>
<Table>
<Caption>
LIABILITIES 2002 2003 2004 2005
------------ ------------ ------------ ------------
Current liabilities 3,905,053 4,014,354 4,213,746 4,425,894
Pension benefits payable 241,496 218,496 188,496 158,496
Other 222,500 220,000 210,000 210,000
Total liabilities 4,369,049 4,452,850 4,612,242 4,794,390
STOCKHOLDERS' EQUITY
Common stock 3,819,538 3,819,538 3,819,538 3,819,538
Retained earnings (5,544,016) (5,664,152) (5,757,028) (5,790,249)
Stockholders' equity (1,724,478) (1,844,614) (1,937,490) (1,970,711)
Total liabilities and equity 2,644,571 2,608,236 2,674,752 2,823,679
WORKING CAPITAL (2,025,807) (2,025,993) (2,162,198) (2,285,497)
</Table>
<Table>
<Caption>
3-YEAR
COMPOUND
GROWTH RATE ANALYSIS GROWTH 2003 2004 2005
------------ ------------ ------------ ------------
Working capital NM 0.0% (6.7)% (5.7)%
Stockholders' equity NM (7.0)% (5.0)% (1.7)%
Total assets 2.2% (1.4)% 2.6% 5.6%
</Table>
CRAMER, INC.
PROJECTED INCOME STATEMENTS
<Table>
<Caption>
FOR THE YEARS ENDING DECEMBER 31,
------------------------------------------------------------------
CATEGORY 2002 2003 2004 2005
------------ ------------ ------------ ------------
Revenue 8,346,686 8,416,970 8,718,036 9,153,665
Cost of goods sold 5,614,140 5,639,370 5,771,340 5,977,344
Gross profit 2,732,546 2,777,600 2,946,696 3,176,321
Operating expenses 2,612,251 2,716,111 2,877,370 3,037,235
Operating income 120,295 61,489 69,326 139,086
Other income (expenses) (133,366) (181,625) (162,203) (172,308)
Income before income taxes (13,071) (120,136) (92,877) (33,222)
Income taxes -- -- -- --
Net income (13,071) (120,136) (92,877) (33,222)
Depreciation Expense 155,320 200,450 206,671 224,921
Interest Expense 134,378 156,625 162,203 172,308
</Table>
30
<Table>
EARNINGS BEFORE THE EFFECT OF DEBT
EBIT 121,307 36,489 69,326 139,086
EBITDA 276,627 236,939 275,998 364,008
</Table>
<Table>
<Caption>
3-YEAR
COMPOUND
GROWTH RATE ANALYSIS GROWTH 2003 2004 2005
---------- ---------- ---------- ----------
Revenue 0.8% 3.6% 5.0%
Operating income 5.0% (48.9)% 12.7% 100.6%
Net income (819.1)% 22.7% 64.2%
</Table>
Terminal Value
Meara King next determined an appropriate terminal value for the
discrete forecast period. The firm assumed that by 2005, the Company will have
been restructured and be in a position for a liquidity event such as a sale or
public offering. After analyzing similar companies reported with the same
standard industrial classification ("SIC"), the firm concluded that a
relationship between price and revenues existed. Therefore, Meara King
determined a terminal value using a multiple of revenues. Because this value
results in an indication of value before debt, long-term debt is subtracted to
derive an estimated equity value. Meara King concluded that the price to revenue
multiple for similar transactions of firms with the same SIC as the Company is
approximately 42%. The Company's revenue base therefore commanded a 30-40%
multiple. This assumes control, and Meara King deemed it was valuing a minority
interest. Accordingly, Meara King determined that 30-32% is appropriate, which
results in a value of $3 million. Assuming long-term debt of $2.5 million is
subtracted, the result is a terminal equity value of approximately $500,000.
Discount Rate
Meara King developed a discount rate using the summation or "build-up"
method. The rate begins with a risk free rate of return based on a U.S.
government security. To this base rate are added additional factors to reach a
rate of return that an investor must earn to be persuaded to invest in the
Company. Meara King determined that the discount rate was 29% and the
capitalization rate was 26%.
Using the discount rate of 29%, Meara King calculated the present value
of terminal earnings of the Company to be $500,000, which was discounted to a
present value of $68,000. The following chart shows Meara King's analysis using
the discounted earnings method:
31
CRAMER, INC.
DISCOUNTED FUTURE EARNINGS
<Table>
<Caption>
DECEMBER 31,
NOTE ----------------------------------------------------------------- TERMINAL
ITEM NO. 2002(1) 2003 2004 2005 YEAR
-------- ------------ ------------ ------------ ------------ ------------
Projected revenue 4,874,710 8,416,970 8,718,036 9,153,665
Normalized net income -- (120,136) (92,876) (33,221)
</Table>
(1) Seven months of operating results
<Table>
<Caption>
TERMINAL VALUE
LOW HIGH
------------ ------------
Projected revenue in 2006 9,611,000 9,611,000
Price/revenue factor 30% 40%
Estimated range of terminal values 2,883,000 3,844,000
Estimated terminal value for subject company before debt 3,000,000
Less long-term debt at 2005 (2,500,000)
Estimated terminal value 500,000
CALCULATION OF PRESENT VALUE OF NET EARNINGS AND TERMINAL VALUE
Net earnings and terminal value -- (120,136) (92,876) (33,221) 500,000
Present value factor 0.88736 0.69871 0.55016 0.43320 0.43320
Present value of net earnings -- (83,940) (51,097) (14,391) 217,000
ESTIMATED FAIR MARKET VALUE AS IF FREELY TRADED (ROUNDED) 68,000
</Table>
Summary of Cost Approach--Net Asset Value Method
One of the methods that the appraisal firm also used was the net asset
value method. This approach estimates the value of the business based on the
value of the assets and liabilities shown on the balance sheet as adjusted for
their fair market value.
Meara King examined the value the Company's land and building, and
determined that the market value of those assets was $510,000 as of September
2001, based on the real estate appraisal of Dan Craig. Mr. Craig analyzed the
Company's building and compared its features to four other similar properties
that sold in the prior two years to reach a value of $510,000. Meara King
reduced this value to $500,000 due to changes in market conditions since
September 2001.
The appraisal also took into account the value of the Company's
machinery and equipment. Meara King did not appraise this property, instead it
relied on the appraisal of Kenneth Fowler. Mr. Fowler determined the market
value of the personal property in September 2001 to be $250,000. The net book
value at April 30, 2002 was determined to be $300,000. Meara King concluded that
the market value of these assets was $400,000 based on an in-place going concern
analysis. Meara King also concluded that furnitures and fixtures, based on Mr.
Fowler's analysis, had a value of $50,000.
Meara King also analyzed the value of the Company's intangible assets,
both recorded and unrecorded. The Company's unrecorded intangible assets
included the Company's assembled workforce, trademarks, patents, customer list
and relationships with distributors and manufacturers'
32
representatives. The appraiser valued the Company's workforce using the
replacement method at $407,000. The replacement method involves estimating the
costs to replace an assembled workforce, including costs of recruiting, hiring
and training. The firm examined the workforce's tenure, wage base, historical
costs, and the collective bargaining agreement to reach the value of $407,000.
The Company's trademarks, patents, customer list and other intangibles
were also analyzed. The appraisal firm used the capitalized excess economic
method in which an estimate of the excess income attributable to the intangible
assets is determined and then capitalized to reach the intangibles' fair market
value. The appraisal firm concluded that the value of trademarks, patents and
customer list was $150,000.
Meara King determined that the fair market value of the Company's
assets was $3,381,928. The firm subtracted the value of the Company's
liabilities of $4,205,644 to reach a control value of ($824,000). The following
schedule summarizes the appraisal firm's analysis of the Company's balance sheet
and the adjustments made under the net asset value method:
CRAMER, INC.
NET ASSET VALUE
<Table>
<Caption>
FAIR MARKET NOTE
BOOK VALUE ADJUSTMENT VALUE NO.
------------ ------------ ------------ ------------
LINE ITEM
ASSETS
Cash 108,136 -- 108,136
Accounts receivable, net 743,923 -- 743,923
Inventories 774,902 -- 774,902
Prepaid expenses 247,968 -- 247,968
Total current assets 1,874,928 -- 1,874,928
FIXED ASSETS:
Land 28,900
Building 916,500 500,000 1
Machinery and equipment 3,870,485 400,000 2
Furniture and office equipment 1,409,516 50,000 3
Allowance for depreciation (5,636,321)
Net property, plant and equipment 589,080 360,920 950,000
Intangible assets -- 557,000 557,000 4
Total assets 2,464,008 917,920 3,381,928
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable 737,028 -- 737,028
Notes payable 2,320,000 -- 2,320,000
Accrued expenses 644,619 -- 644,619
Total current liabilities 3,701,647 -- 3,701,647
Pension benefits payable 281,496 -- 281,496
Other 222,500 -- 222,500
Total liabilities 4,205,644 -- 4,205,644
(1,741,635) 917,920 (823,715)
</Table>
33
<Table>
STOCKHOLDERS' EQUITY
Liabilities and equity 2,464,008 917,920 3,381,928
INDICATED CONTROL VALUE AS IF FREELY TRADED (ROUNDED) (824,000)
</Table>
NOTES ON ADJUSTMENTS - SEE REPORT FOR DETAILED DESCRIPTION
1. Real estate appraisal by David Craig & Co. as of 9/4/01, adjusted
downward to reflect current market conditions per discussions with
management.
2. & 3. Machinery and equipment appraisal by Appraisal Consulting
Services, Inc. as of 9/11/01.
4. Estimated value of identified intangibles:
<Table>
Assembled and trained workforce $ 407,000
Trademarks, patents, customer list and other intangibles 150,000
---------
Total: 557,000
</Table>
Meara King concluded that this method results in a value that is not
meaningful, and was not considered in the final estimate of value.
Lack of Marketability Discount to the Earnings Method of Value
Meara King next concluded that the $68,000 present value of the Company
based on the discounted future earnings should be discounted due to a lack of
marketability because the Company's common stock does not trade on a public
market, even though the Company is a publicly reporting entity. Meara King
determined the lack of marketability discount based on a review of studies of
transactions comparing the prices of restricted stock of publicly traded
companies with prices of freely traded shares and studies of transactions
comparing the process before companies made public offerings with prices after
public offerings. The firm also looked at a number of factors including:
o No dividends have been paid in the last five years, which supports
a discount equal to the benchmarks;
o The Company has a history of unprofitable results over the last
five years and the outlook is marginal at best, which supports a
discount equal to or greater than the benchmarks;
o The interests to be valued represent small blocks with little
influence over the Company's direction which supports a discount
equal to the benchmarks;
o Lack of restrictions on transferability, which supports a discount
equal to or lower than the benchmarks;
o A history of redemption, which supports a discount equal to or
lower than the benchmarks; and
o That the Company is small and although traded in the past, it is
unlikely that it will trade in the near future, which supports a
discount equal to the benchmarks.
Based on an analysis of these and other factors as compared to a
discount benchmark range of 32-44%, Meara King selected a discount of
approximately 40%.
34
Valuation Conclusion--Fair Market Value
Using the discount rate of 40%, Meara King multiplied the discount rate
of 40% by the per share value of $.01 and subtracted that value from the per
share value to reach an estimated fair market value of $.01 per share as of May
31, 2002.
A summary of the appraisal without exhibits is included with this proxy
statement. A copy of the appraisal with exhibits will be made available for
inspection and copying at the principal executive offices of the Company during
its regular business hours by any interested shareholder or its representative.
A copy of the report will also be provided to any interested shareholder of the
Company upon written request at the expense of the requesting shareholder.
Source and Amount of Funds or Other Consideration
If the Merger is consummated as intended by Rotherwood at a
consideration of $.05 per share, the Public Shareholders holding the 1,958,034
shares of Company common stock not held by Rotherwood would receive an aggregate
of approximately $98,000 in cash. The source of these funds would be the
operating funds of Rotherwood.
HOW MANY SHARES OF COMMON STOCK AND PREFERRED STOCK DOES THE COMPANY HAVE ISSUED
AND OUTSTANDING PRIOR TO THE AMENDMENT TO THE ARTICLES OF INCORPORATION?
The Company currently has 8,200,000 shares authorized, consisting of
6,000,000 shares of no par value common stock, of which 4,039,607 shares are
outstanding (prior to the issuance of common stock to Rotherwood in payment of
accrued letter of credit/pledge fees and in consideration of Rotherwood's
$900,000 cash investment) and 2,200,000 shares of designated preferred stock, of
which no shares are outstanding. Proposal III will eliminate the designated
preferred stock.
WHAT ARE THE FEATURES OF THE NEWLY AUTHORIZED COMMON STOCK?
The newly authorized common stock will have the same voting rights,
dividend rights, and rights on liquidation or dissolution as the current issued
and outstanding common stock.
COULD THE AVAILABILITY OF ADDITIONAL SHARES OF COMMON STOCK MAKE A HOSTILE
TAKEOVER OF THE COMPANY MORE DIFFICULT?
Although the Board of Directors has no present plans to do so,
authorized and unissued common stock could be issued in one or more transactions
with terms, provisions and rights which would make more difficult and,
therefore, less likely, a takeover of the Company. Any such issuance of
additional shares could have the effect of diluting the earnings per share (if
any) and book value per share of existing shares of common stock, and such
additional shares could be used to dilute the share ownership of persons seeking
to obtain control of the Company. The Board and its financial and legal advisers
are aware that a number of corporations have adopted special "shareholders'
rights plans" or "poison pills" with a view toward creating significant
defensive mechanisms against the possibilities of hostile takeover actions.
Whether or not the proposed amendment to the Articles of Incorporation is
adopted by shareholders, the Board could determine to implement a shareholders'
rights plan in the
35
future. The Board has no present intention to propose any other amendments to
the Company's Articles or Bylaws which might be considered anti-takeover
devices.
In addition, if Proposal III is adopted, the Board of Directors could
authorize the issuance of common stock to a holder who might thereby obtain
sufficient voting power to ensure that any proposal to remove directors, or to
alter, amend or repeal the Articles, would not receive the requisite shareholder
vote required to remove the directors or amend the Articles. The contemplated
issuances of common stock to Rotherwood as compensation for its guarantee of the
Company's bank line of credit and for Rotherwood's investment of $900,000, each
as described above, will give Rotherwood sufficient voting power to effect a
short-form merger of the Company into Rotherwood without Board or Public
Shareholder approval.
Because a majority of the Company's outstanding common stock is
controlled by Rotherwood and the percentage of common stock owned by Rotherwood
will increase as a result of the transactions described in this proxy statement,
it is highly unlikely that any person could effect a takeover of the Company
without the concurrence of Rotherwood.
DO ANY OF OUR OFFICERS OR DIRECTORS HAVE AN INTEREST IN PROPOSAL III?
James R. Zicarelli, one of two members of the Board of Directors of the
Company, is President of and owns a membership interest in Rotherwood. Mr.
Zicarelli has no direct personal beneficial interest in any common stock owned
or which may in the future be acquired by Rotherwood. Mr. Zicarelli abstained
from voting as a director on Proposal III.
THE BOARD OF DIRECTORS (MR. ZICARELLI ABSTAINING) RECOMMENDS A VOTE "FOR" THE
FOLLOWING RESOLUTION THAT WILL BE PRESENTED AT THE ANNUAL MEETING:
RESOLVED, that the existing text of Article 4 of the Articles of
Incorporation of the Company is deleted in its entirety and be, and it
hereby is, amended to read as follows:
The corporation shall have authority to issue Seventy Four
Million Two Hundred Thousand (74,200,000) shares of common
stock, all of which shall be without par value, and when such
shares are issued, they shall be fully paid and
non-assessable.
36
IV. OTHER BUSINESS
As of the date of this proxy statement, the Board of Directors knows of
no other business that will be presented at the meeting. If any other matters
should be properly brought before the meeting, it is the intention of the
persons named in the accompanying form of proxy to vote on those matters in
accordance with their best judgment.
SUBMISSION OF SHAREHOLDER PROPOSALS AND NOMINATIONS
DO I HAVE A RIGHT TO NOMINATE DIRECTORS OR MAKE PROPOSALS FOR CONSIDERATION BY
THE SHAREHOLDERS AT THE 2003 ANNUAL MEETING?
Yes. You must comply with the following procedures if you wish to
nominate directors or make other proposals for consideration at the 2003 or any
subsequent annual shareholders meeting.
HOW DO I MAKE A NOMINATION?
If you are a shareholder of record and wish to nominate someone to the
Board of Directors for election in 2003 or any subsequent year, you must give
written notice to the Secretary of the Company. Your notice must be given not
less than 60 days and not more than 90 days prior to the first anniversary of
the date of the previous year's meeting. A nomination received less than 60 days
prior to the first anniversary of the date of the previous year's meeting will
be deemed untimely and will not be considered. Your notice must include:
o for each person you intend to nominate for election as a director,
all information related to that person that is required to be
disclosed in solicitations of proxies for the election of
directors in an election contest, or is otherwise required,
pursuant to Regulation 14A under the Exchange Act (including the
person's written consent to being named in the proxy statement as
a nominee and to serve as a director if elected)
o your name and address and the name and address of any person on
whose behalf you made the nomination, as they appear on our books
o the number of shares owned beneficially and of record by you and
any person on whose behalf you made the nominations
HOW DO I MAKE A PROPOSAL?
If you are a shareholder of record and wish to make a proposal to our
shareholders at the 2002 or any subsequent meeting, you must give written notice
to the Secretary of the Company. Pursuant to Rule 14a-8 of the SEC, your notice
must be received at our offices not less than 120 calendar days before the first
anniversary of the date our proxy statement was mailed to shareholders in
connection with the previous year's annual meeting. Any proposal received less
than 120 days before that date will be deemed untimely and will not be
considered. Your notice must include:
o a brief description of your proposal and your reasons for making
the proposal
37
o your name and address and the name and address of any person on
whose behalf you made the proposal, as they appear on our books
o any material interest you or any person on whose behalf you made
the proposal have in the proposal
o the number of shares owned beneficially and of record by you and
any person on whose behalf you made the proposal
CAN THE BOARD REJECT MY PROPOSAL?
Yes. SEC Rule 14a-8 describes the circumstances under which the Board
may reject a shareholder proposal.
ARE THERE ANY EXCEPTIONS TO THE DEADLINE FOR MAKING A NOMINATION OR PROPOSAL?
Yes. If the date of the annual meeting is scheduled more than 30 days
prior to or more than 60 days after the anniversary date of the previous year's
meeting, your notice must be delivered:
o not earlier than 90 days prior to the meeting; and
o not later than (a) 60 days before the meeting or (b) the 10th day
after the date we make our first public announcement of the
meeting date, whichever is earlier
If the Board increases the number of directors to be elected but we do
not make a public announcement of the increased Board or the identity of the
additional nominees within 70 days prior to the first anniversary of the date of
the previous year's meeting, your notice will be considered timely (but only
with respect to nominees for the new positions created by the increase) if it is
delivered to the Secretary not later than the close of business on the 10th day
following the date of our public announcement.
MISCELLANEOUS
ANNUAL REPORT
Our Annual Report on Form 10-KSB/A, containing financial statements for
the year ended December 31, 2001, was mailed with this proxy statement to all
shareholders entitled to vote at the annual meeting. You must not regard the
annual report as additional proxy solicitation material.
WE WILL PROVIDE WITHOUT CHARGE, UPON WRITTEN REQUEST TO THE SECRETARY OF THE
COMPANY AT THE ADDRESS LISTED ON THE COVER PAGE OF THIS PROXY STATEMENT, A COPY
OF OUR ANNUAL REPORT ON FORM 10-KSB/A, INCLUDING THE FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001.
38
HOUSEHOLDING
A single copy of our Annual Report on Form 10-KSB/A and proxy statement
are being delivered to any multiple shareholders sharing the same address
pursuant to SEC Rule 14a-3(e)(1), unless we or our transfer agent have received
contrary instructions from one or more of those shareholders. We agree to
deliver promptly upon written or oral request a separate copy of our Form
10-KSB/A and proxy statement to any shareholder at a shared address to which a
single copy of those documents has been delivered. You may notify us that you
wish to receive a separate copy of the Form 10-KSB/A and proxy statement for the
2002 or any future annual meeting by contacting us at 625 Adams Street, Kansas
City, Kansas 66105 (913) 621-6700, attention Gregory Coward. Shareholders who
are members of a single household receiving multiple copies of those documents
and who wish to receive a single copy may contact us at the same address or
telephone number.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Gregory Coward
------------------------------------------
Gregory Coward, President and Chief
Executive Officer
DOCUMENTS AND INFORMATION INCORPORATED BY REFERENCE
Our Annual Report on Form 10-KSB/A for the fiscal year ended December 31, 2001
and the joint Transaction Statement of the Company, Rotherwood and Rotherwood
Investments on Schedule 13E-3, being sent to shareholders with this proxy
statement, and our quarterly reports on Form 10-QSB for the quarters ended March
31 and June 30, 2002, are incorporated in this proxy statement by reference.
39
CRAMER, INC.
PROXY FOR THE ANNUAL MEETING OF SHAREHOLDERS ____ __, 2002
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
As a shareholder of Cramer, Inc. (the "Company"), I appoint Gregory
Coward as my attorney-in-fact and proxy (with full power of substitution), and
authorize him to represent me at the Annual Meeting of Shareholders of the
Company to be held at 625 Adams Street, Kansas City, Kansas 66105 on ____ __,
2002 at eleven o'clock a.m., and at any adjournment of the meeting, and to vote
the common stock in the Company held by me as designated below on proposals 1, 2
and 3.
<Table>
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR PROPOSALS 1, 2 AND 3.
Proposal #1. Election of Directors: James R. Zicarelli and David E. Crandall
[ ] FOR the nominees listed above [ ] WITHHOLD AUTHORITY to vote for the nominees listed above.
(If you do not check this box, your shares will be vote in
favor of both nominees)
TO WITHHOLD AUTHORITY TO VOTE FOR EITHER NOMINEE, STRIKE THROUGH THAT NOMINEE'S NAME ABOVE.
Proposal #2. Proposal to ratify the appointment of Stirtz Bernards Boyden Surdell & Larter, PA as the Company's
independent accountants for 2002.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Proposal #3. Proposal to amend the Company's Articles of Incorporation to increase the authorized capital stock
from 8,200,000 shares to 74,200,000 shares.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
To act upon any other matters that may properly come before the meeting.
</Table>
IF NO CHOICE IS INDICATED ON THE PROXY, THE PERSONS NAMED AS PROXIES INTEND
TO VOTE FOR ALL THREE PROPOSALS.
Please sign exactly as your name appears on this proxy. When shares are held by
joint tenants, both should sign. When signing as attorney, executor, trustee or
other representative capacity, please give your full title. If a corporation,
please sign in full corporate name by President or other authorized officer.
-------------------------------------
Signature of Shareholder
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Title
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Signature of Shareholder
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Title
-------------------------------------
Dated