UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, NW
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended 9/30/02
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to___________
Commission file number 2-69336
CRAMER, INC.
A Kansas Corporation IRS Employment I.D. #48-0638707
1222 Quebec Street
North Kansas City, Missouri 64116 Telephone No. (816) 471-4433
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes / / No /X/ (The issuer's annual report on Form 10-KSB for the year ended
December 31, 2000 and the issuer's quarterly report on Form 10-QSB for the
quarter ended April 1, 2001 were filed late.)
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 4,039,607 shares of common stock, no
par value as of October 31, 2002.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CRAMER, INC.
BALANCE SHEET
(Amounts in Thousands, Except Share Data)
ASSETS
9/30/02 12/31/01
(unaudited)
----------- --------
Current assets:
Cash $ 58 $ 282
Accounts receivable, net of allowance of $30 932 563
Inventories, net of allowance of $105 954 721
Prepaid expenses and other current assets 175 325
------- -------
Total current assets 2,119 1,891
Property, plant and equipment
At cost 6,443 6,215
Accumulated depreciation (5,701) (5,585)
------- -------
742 630
Other assets:
Intangible pension asset 0 4
------- -------
Total Assets $ 2,861 $ 2,525
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Note payable $ 2,320 $ 2,320
Accounts payable 634 485
Accounts payable- related party 183 101
Accrued liabilities 865 769
------- -------
Total current liabilities 4,003 3,675
Noncurrent liabilities:
Pension benefits payable 263 326
Other 205 218
------- -------
Total noncurrent liabilities 468 544
Stockholders' Equity (Deficit):
Common stock, no par value; authorized, 6,000,000 shares; issued and
outstanding 4,039,607 shares at September 30, 2002
and 4,041,400 at December 31, 2001 3,820 3,820
Accumulated deficit (5,078) (5,166)
------- -------
(1,258) (1,346)
Minimum pension liability adjustment (352) (348)
------- -------
Net stockholders' equity (deficit) (1,610) (1,694)
------- -------
Total Liabilities and Stockholders' Equity (Deficit) $ 2,861 $ 2,525
======= =======
See Notes to Condensed Financial Statements
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CRAMER, INC.
STATEMENTS OF OPERATIONS
UNAUDITED
(Amounts in Thousands, Except Per Share Data)
QUARTER ENDED NINE MONTHS ENDED
9/30/02 9/30/01 9/30/02 9/30/01
---------- ---------- ---------- ----------
Net sales $ 2,344 $ 2,628 $ 6,594 $ 8,445
Cost of sales 1,620 1,888 4,417 6,291
---------- ---------- ---------- ----------
Gross profit 724 740 2,177 2,154
Operating expenses:
Selling expenses 305 435 1,020 1,499
General and administrative 368 337 1,008 980
---------- ---------- ---------- ----------
Total operating expenses 673 772 2,028 2,479
---------- ---------- ---------- ----------
Income (loss) from operations 51 (32) 149 (325)
Other income (expense):
Interest expense, net (33) (48) (91) (147)
Other, net 22 (17) 29 (56)
---------- ----------- ---------- -----------
Total other income (expense) (11) (65) (62) (203)
---------- ---------- ----------- ----------
Income (loss) before income taxes 40 (97) 87 (528)
Income tax expense (benefit) 0 0 0 0
---------- ---------- ---------- ----------
Net income (loss) $ 40 $ (97) $ 87 $ (528)
========== ========== ========== ==========
Net income (loss) per share based on weighted
average number of common equivalent
shares outstanding $ 0.01 $ (0.02) 0.02 $ (0.13)
Weighted Average Common Equivalent
Shares Outstanding Basic 4,039,607 4,041,400 4,040,802 4,041,400
Diluted 4,039,607 4,041,400 4,040,802 4,041,400
There is no difference between Net Income (Loss) and Total Comprehensive Income
(Loss) for the quarter or nine-month periods ending September 30, 2002 and
September 30, 2001.
These interim financial statements contain all adjustments required for them to
be comparable to the annual financial statements issued on Form 10-KSB. See Note
2 to the Condensed Financial Statements.
See Notes to Condensed Financial Statements
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CRAMER, INC.
STATEMENTS OF CASH FLOWS
UNAUDITED
(Amounts in Thousands)
Nine Months Ended
9/30/02 9/30/01
------- -------
Cash flows from operating activities:
Net income (loss) $ 87 $ (528)
Adjustments to reconcile net income (loss) to net cash
flows from operating activities:
Depreciation 117 161
Changes in operating assets and liabilities:
Accounts receivable (369) 322
Inventories (233) 628
Prepaid expenses and other assets 150 31
Intangible pension asset -- --
Accounts payable and accrued expenses 328 (415)
Other noncurrent liabilities (76) (19)
------ ------
Net cash flows from operating activities 4 180
------ ------
Cash flows from investing activities:
Capital expenditures (228) (28)
------ ------
Net cash flows from investing activities (228) (28)
------ ------
Cash flows from financing activities:
Net change in notes payable 0 12
Retirement of common stock 0 (5)
------ ------
Net cash flows from financing activities 0 7
------ ------
Net increase (decrease) in cash (224) 159
Cash at beginning of year 282 0
------ ------
Cash at end of quarter $ 58 $ 159
====== ======
Supplemental disclosures:
Cash paid during the period for:
Interest $ 91 $ 147
====== ======
Income tax $ 0 $ 0
====== ======
See Notes to Condensed Financial Statements
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CRAMER, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Interim Financial Statements
The condensed interim financial statements included herein have been prepared by
Cramer, Inc. (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (the "Commission"). The
financial statements reflect adjustments of a normal recurring nature that are,
in the opinion of management, necessary to present fairly such information.
Although the Company believes that the disclosures are adequate to make the
interim information presented not misleading, certain information and footnote
disclosures, including significant accounting policies, normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. These interim financial statements should be read in conjunction
with the financial statements and the notes thereto included in the Annual
Report on Form 10-KSB/A for the fiscal year ended December 31, 2001 filed by the
Company with the Commission on October 22, 2002, as amended, and incorporated by
reference herein. Quarterly operating results may vary significantly and are not
necessarily indicative of the results for the full year or any future period.
2. Restatement of Accrued Loan Guaranty Expense
The Company accrued a loan guarantee expense of $40,000 for the fourth quarter
of 2001 and $40,000 in each of the first and second quarters of 2002
(aggregating $120,000). The Company has since determined that the loan guarantee
expense should have been accrued at $8,000 per quarter (aggregating $24,000) and
intends to file amendments to its 2001 Form 10-KSB/A and first and second
quarter 10-QSB's for the purpose of restating its earnings (loss) for the
affected periods to take such revised expense accrual into account (see Item 2
- -- "Management's Discussion and Analysis").
3. Legal Proceedings
The Company is a defendant in several lawsuits relating to product liability
claims arising from accidents allegedly occurring in connection with the use of
its products. The claims are covered by insurance and are being defended by the
Company's independent counsel or by counsel assigned by the Company's insurance
carriers. One such claim, which had previously been outstanding, alleged damages
of $375,000. This claim has been settled and is no longer pending. The Company
has included a more complete discussion of product liability claims and related
accruals in Part II, Item 1 "Legal Proceedings" below.
The Company believes its products are safe and reliable when assembled, used and
maintained in a reasonable manner, and believes it adequately reserves against
its reasonably likely exposure under these claims based upon past experience.
-5-
4. Use of Estimates
Accounting estimates are an integral part of the financial statements and are
based on management's knowledge and experience about past and current events and
assumptions about future events. Certain accounting estimates are particularly
sensitive because of their significance to the financial statements and because
of the possibility that future events affecting them may differ significantly
from those expected. The most sensitive estimates affecting the financial
statements were the warranty and product liability accruals, and the inventory
reserve.
The Company offers product warranties with terms of up to fifteen years. The
majority of the Company's warranty claims relate to failed seating parts. The
Company estimates its accrual for future warranty costs based on durability
testing, engineering studies, actual costs incurred in prior years and
historical sales data. The warranty accrual remained at $213,000 as of September
30, 2002. Warranty claims experience was consistent in the third quarter of 2002
and the underlying warranty accrual assumptions did not change.
The reserve for obsolete and slow-moving inventory is based on management's
analysis of inventory turns, historical write-offs, future production plans
including any product line changes, and sales trends. There were no changes to
the inventory reserve, which remained at $105,000.
A discussion of the product liability accrual is included in Part II, Item 1,
Legal Proceedings.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Quarter ended September 30, 2002, compared to the quarter ended
September 30, 2001:
Sales for the third quarter were $2,344,000, a decrease of 11% from
2001 third quarter sales of $2,628,000. The recent recession and
related reductions in capital expenditures by potential customers
resulted in a decline in seating sales of over $220,000. According to
industry sources, the furniture industry as a whole has experienced a
downturn in sales over the past twelve months. Utility sales declined
approximately $70,000, due to the discontinuation of a ladder product
and lower Kik-Step sales. The decline in Kik-Step sales can be
attributed to the overall weakness in catalog sales in 2002 compared to
2001.
Gross margins decreased from $740,000 in the third quarter of 2001 to
$724,000 in the third quarter of 2002, but the gross margin percentage
increased from 28% of sales in the third quarter of 2001 to 31% of
sales in the third quarter of 2002. Increased margins as a percent of
sales were the combined result of lower material costs and significant
overhead reductions. These overhead reductions included a decrease in
utilities, indirect labor and maintenance costs, due in part to
increased outsourcing of the manufacture of certain products in 2002.
Selling expenses decreased from $435,000 in the third quarter of 2001
to $305,000 in the third quarter of 2002, a reduction of approximately
$130,000. A decrease in commissions and catalog program costs due to
lower sales contributed to approximately $25,000 of the decline. The
remaining decrease was related primarily to staff reductions and lower
travel costs.
General and administrative expenses increased $31,000 to $368,000
during the third quarter of 2002, compared to $337,000 in the third
quarter of 2001. The increase in G&A was the combined effect of costs
associated with the Company's September 2002 facilities relocation and
higher legal costs. The increase in legal costs was primarily
associated with filing an amended Form 10-KSB for 2001 and the proposed
going private transaction referred to in "Financial Condition,
Liquidity and Capital Resources" below. The Company incurred $27,000 of
moving expenses in the third quarter of 2002.
Interest expense totaled $33,000 in the third quarter of 2002, compared
to $48,000 in the comparable period last year. This reduction was the
result of lower interest rates in 2002.
The Company had net income before tax of $40,000 in the third quarter
of 2002, compared to a loss of $97,000 in the third quarter of 2001.
Operating results improved, despite declining sales, due to reductions
in overhead and
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improved margins.
Nine months ended September 30, 2002, compared to the nine months ended
September 30 2001:
Sales for the first nine months of 2002 were $6,594,000, a decrease of
22% from $8,445,000 in the first nine months of 2001. The majority of
the decline related to reduced seating sales, particularly in the first
quarter of 2002. According to industry sources, the recent recession
and related reductions in capital expenditures have resulted in a
significant sales decline across the industry. In addition, the seating
business is highly competitive. Ladder sales experienced a modest
decline due to weakening catalog performance. Kik-Step sales increased
by approximately $111,000 in the first nine months of 2002, compared to
the same period in 2001, reflecting the continued strength of this
product and its strong brand recognition. However, Kik-Step sales in
the third quarter of 2002 were lower than the comparable period in 2001
as discussed above.
Gross margins increased from $2,154,000, or 26% of sales, in the first
nine months of 2001 to $2,177,000, or 33% of sales, in the first nine
months of 2002. Lower material costs and significant overhead
reductions resulted in an increase in margins in each of the first
three quarters of 2002, compared to 2001. The overhead reductions
included a decrease in utilities, indirect labor, supplies and
maintenance, due in part to increased outsourcing of the manufacture of
certain products in 2002. The Company also focused on streamlining
production processes, which contributed to the decrease in indirect
labor.
Selling expenses decreased from $1,499,000 in the first nine months of
2001 to $1,020,000 in the first nine months of 2002, a reduction of
approximately $470,000. The decrease in selling costs can be attributed
to a decline in commissions and catalog program costs as a result of
lower sales, in addition to staff reductions and lower travel costs.
Selling expenses were lower in each of the first three quarters of 2002
compared to the prior year.
General and administrative expenses increased from $980,000 in the
first nine months of 2001 to $1,008,000 in the first nine months of
2002, an increase of $28,000. Accrued fees related to Rotherwood's
provision of a securities pledge as security for the Company's
$2,000,000 bank loan contributed to the increase. These accrued pledge
fees totaled $24,000 in the first nine months of 2002 and were not in
effect during the first nine months of 2001. Rotherwood has agreed to
accept common stock in payment of these fees. (See Note 2 to the
Condensed Financial Statements, and "Financial Condition, Liquidity and
Capital Resources" below). An increase in legal fees during the first
nine months of 2002 was offset in part by reduced labor costs. In
addition, the Company incurred $27,000 in moving expenses associated
with its relocation to a new facility in September 2002.
Interest expense totaled $91,000 in the first six months of 2002,
compared to
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$147,000 in the comparable period last year. This reduction was the
result of lower interest rates in 2002.
The Company had a net profit before tax of $87,000 in the first nine
months of 2002, compared to a loss of $528,000 in the first nine months
of 2001. Profitability improved, despite declining sales, due to
reductions in overhead and improved margins.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash flow activity for the first nine months of 2002 is presented in
the Statement of Cash Flows. During the first nine months of 2002, the
Company used $224,000 in cash from its operating activities.
Accounts receivable totaled $932,000 at September 30, 2002 compared to
$563,000 at December 31, 2001. The increase was a result of higher
sales in September 2002 compared to December 2001.
Inventories increased from $721,000 at December 31, 2001 to $954,000 at
September 30, 2002, a 32% increase. This increase related to several
large seating orders that were in production as of September 30, 2002
and a build up of ladder inventory associated with the transition to
outsourced manufacturing.
Accounts payable increased by $149,000 from December 31, 2001 to
September 30, 2002. An increase in inventories in connection with
several large production orders mentioned above contributed to the
increase in accounts payable, as well as an overall increase in
production in September 2002 compared to December 2001.
Accrued liabilities increased by $96,000 from December 31, 2001 to
September 30, 2002. This increase was due primarily to an accrual at
September 30, 2002 associated with the build-out of the new production
facility and related equipment purchases of over $150,000. The majority
of such costs had been paid as of November 20, 2002 (see additional
discussion below).
Accounts payable, related party increased from $101,000 at December 31,
2001 to $183,000 at September 30, 2002. This increase was the result of
accrued loan guarantee fees aggregating $24,000 payable to Rotherwood
for the first three quarters of 2002, in addition to fees charged by
Rotherwood for the services of Greg Coward, the Company's former CEO,
who was not compensated directly by the Company, and Nick Christianson,
the Company's Acting CEO and Interim CFO, who is not compensated
directly by the Company.
Capital expenditures of $228,000 during the third quarter of 2002
related primarily to leasehold improvements at the new 34,000 square
foot production
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facility and offices, along with the purchase of additional equipment
associated with the transition to the new, one-level production
environment. The Company relocated to the new plant in September 2002.
The minimum lease term is three years with the right to extend for an
additional eight years. Annual rent during the initial term is
$111,000/ year. The Company anticipates that relocating the business
could reduce operating overhead significantly and improve production
efficiency. However, there is no assurance we can sell or lease the
facility that we own and previously occupied without spending
significantly on renovation.
The outstanding balance under the Company's bank line of credit
remained at $2,320,000, the maximum amount allowed under the facility,
throughout the third quarter of 2002. The facility consists of a
$2,000,000 loan and a $320,000 line of credit. The $2,000,000 loan is
secured by a pledge of $2,000,000 in securities by Rotherwood, the
Company's parent. The combined credit facility is also secured by
security interests in the assets of both Cramer and Pacer Corporation,
a company owned by Rotherwood. Cramer and Pacer are co-borrowers on the
total amount of the credit facility. In exchange for Rotherwood's
financial accommodation to the Company, without which the bank would
probably call the $2,000,000 loan, the Company agreed to pay Rotherwood
a fee equal to 2% per quarter of the total amount of the pledge until
the pledge agreement expires. Rotherwood agreed to accept 800,000
shares of common stock per quarter in payment of the guarantee fee at
an agreed upon exchange value of $0.05 per share. The Company
originally accrued guarantee fees of $40,000 for the fourth quarter of
2001 and $40,000 in each of the first and second quarters of 2002 based
upon that exchange rate. The Company has obtained an independent
appraisal which determined that the fair market value of the Company's
common stock is $0.01 per share. The Company determined that the $0.05
per share exchange rate would be less dilutive to the Company's
shareholders other than Rotherwood (the "Public Shareholders"), because
it would result in fewer shares being issued to Rotherwood each quarter
(800,000 shares) than if the shares were valued at an exchange rate of
$0.01 (4,000,000 shares). The $0.05 per share exchange value was also
consistent with the price per share being paid by Rotherwood for 18
million new shares of the Company, and the price being paid by
Rotherwood to the Public Shareholders in a proposed cash-out merger, as
described below. The Company has since determined that the guarantee
fee should have been recorded on the basis of the fair market value of
the consideration being paid to Rotherwood in the form of common stock
($8,000, or 800,000 shares x $0.01 per share) rather than on the basis
of the exchange rate agreed to by Rotherwood ($40,000, or 800,000
shares x $0.05 per share). The effect of this accounting change is to
decrease accrued expenses and decrease net loss by $32,000 for the
fourth quarter of 2001 and to decrease accrued expenses and decrease
net loss or increase net income, as applicable, by $32,000 in each of
the first two quarters of 2002. The Company intends to amend its 2001
Form 10-KSB/A and its first and second quarter 2002 Form 10-QSB's to
reflect this change in accounting treatment related to the guarantee
fee.
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The Company has no additional borrowing capacity under the credit
facility, and the lender has requested that the principal balance of
the $320,000 line of credit either be reduced or collateralized by
additional security. The Company does not believe it could obtain
substitute or additional debt financing, nor is there any assurance the
bank will extend the line of credit beyond the February 2003 maturity
date. Rotherwood has advised the Company that it does not wish to
continue the securities pledge indefinitely. The Company intends to
obtain needed additional capital by selling shares of common stock to
Rotherwood. Although the Company has no definitive agreement with
Rotherwood, the Company is planning to sell 18 million shares of common
stock to Rotherwood for cash at a purchase price of $0.05 per share.
This transaction would provide $900,000 in much needed capital to the
Company to reduce amounts owed under the bank credit facility and
credit Rotherwood for a $125,000 advance used by the Company to pay
relocation expenses. If Rotherwood makes the equity investment in the
Company, Rotherwood plans to take the Company private following a
short-form cash-out merger of the Company into Rotherwood. See Item 6-
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the 2001 Form 10-KSB/A filed on October 22,
2002 and incorporated by reference herein for additional discussion of
the credit facility and the proposed transactions with Rotherwood.
In November 2002 the Company borrowed $125,000 from Rotherwood in the
form of a demand note bearing interest at 7% to cover a portion of its
relocation expenses. Rotherwood intends to convert this $125,000 demand
note into common stock as part of the $900,000 proposed investment
discussed above.
Although the Company earned net income of $40,000 in the third quarter
of 2002 and net income of $87,000 in the first nine months of 2002, the
Company remains in a liquidity crisis, and there remains substantial
doubt about the Company's ability to continue as a going concern.
On October 3, 2002, the Company obtained an extension of the credit
facility through February 3, 2003. The Company is not in compliance
with the financial net worth covenant in the loan agreement governing
the credit facility. For this and other reasons, the Company is unable
to predict whether the bank will renew the credit facility when it
matures in February 2003. If Rotherwood does not make the proposed
equity investment in the Company and the Company does not reduce the
principal balance of the $320,000 line of credit, the bank may not
renew the line of credit and the Company could be required to seek
bankruptcy protection or to cease operations.
FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, this report on
Form 10-QSB contains forward-looking statements that involve risk and
uncertainties. The Company's actual results could differ materially. In
connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, Cramer, Inc. reminds readers that there
are many important factors that could
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cause the Company's actual results to differ materially from those
projected in forward-looking statements of the Company made by, or on
behalf of, the Company. When used in this Form 10-QSB and in other
filings by the Company with the Securities and Exchange Commission, in
the Company's press releases and in oral statements made with the
approval of an authorized executive officer, words or phrases such as
"will likely result", "expects", "are expected to", "will continue",
"is anticipated", "estimate", "project" or similar expressions are
intended to identify forward-looking statements. The Company wishes to
caution readers not to place undue reliance on such forward-looking
statements.
There are a number of reasons why investors should not place undue
reliance on forward-looking statements. Among the risks and
uncertainties that could cause the Company's actual results for future
periods to differ materially from any forward-looking statements made
are the following:
* The inability of shareholders other than Rotherwood to
participate in any future improvement in the Company's
operations or financial condition, if the short-form
merger and going private transaction are consummated
* The Company's continuing declines in revenues, history of
losses and uncertain future profitability
* Questions about the Company's continuing viability as a
going concern and management's plans to address that
issue
* Any failure of the Company's turnaround plan to achieve
its objectives
* The lack of borrowing capacity under the Company's bank
credit facility
* The possibility that the bank will not renew the
Company's credit facility
* The Company's lack of prospects for obtaining substitute
or additional debt financing or any equity financing from
a party other than Rotherwood
* The possibility that the bank may call the credit
facility if Rotherwood does not make the proposed
investment in the Company or Rotherwood decides not to
continue the securities pledge
* Rotherwood's intention to take the Company private
* Fluctuations or reductions in product demand and market
acceptance
* Continued adverse conditions in the office furniture
industry
* The level of product development by the Company
* Capacity and supply constraints or difficulties
* The effect of new laws and regulations
* Unexpected additional expenses or operating losses
* Strong competition
* Reliance on certain vendors for key products and
components
* Deferred maintenance at the Company's owned facility
from which it recently relocated, the potential need to
renovate the facility in order to sell or lease it and
the cost of future maintenance of that facility
* If product and warranty liability claims exceed the
amounts reserved
* Control by insiders
The foregoing list of risks and uncertainties is not meant to be complete.
-12-
ITEM 3. CONTROLS AND PROCEDURES
A review and evaluation was performed by the Company's management, including the
Company's Acting Chief Executive Officer and Interim Chief Financial Officer, of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures as of a date within 90 days prior to the filing of this
quarterly report. Based on that review and evaluation, the Acting CEO/Interim
CFO has concluded that the Company's current disclosure controls and procedures,
as designed and implemented, were effective. There have been no significant
changes in the Company's internal controls subsequent to the date of his
evaluation. There were no significant material weaknesses identified in the
course of such review and evaluation and, therefore, no corrective measures were
taken by the Company.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in several lawsuits relating to product
liability claims arising from accidents allegedly occurring in
connection with the use of its products. The claims are covered by
insurance and are being defended by the Company's independent counsel
or by counsel assigned by the Company's insurance carriers. These
claims are subject to a $50,000 deductible. The Company maintains
product liability insurance coverage with limits of $1 million per
occurrence and $2 million aggregate, plus $10 million in umbrella
coverage. After the Company has exhausted its deductible by paying a
total of $50,000 (whether in legal fees and expenses, settlement
amounts, damages awards, or any combination thereof) on any single
claim, its liability insurance carrier is obligated to pay any sums
owed for legal fees and expenses, settlement amounts and damages awards
in excess of $50,000 for that claim. The Company has been able to
offset settlement costs through amounts paid by co-defendants in
certain cases historically.
Over the last five fiscal years, the Company has averaged 3.7 new
claims per year. An average of approximately 50% of those claims
resulted in defense costs and settlement amounts or awards exceeding
$50,000. The average total cost of defense and settlement awards paid
by the Company over that period was $35,000 per claim. The number of
new claims made or lawsuits filed against the Company during years 2000
and 2001 were two and three, respectively. The Company's claims history
has leveled out over the past three years at two to three claims per
year.
The Company had six open claims at December 31, 2001 and five open
claims at September 30, 2002. During the third quarter of 2002, no new
claims were filed against the Company. On April 22, 2002, the Company
settled one of the six claims for $7,500. The total cost of legal fees
and settlement costs for this claim was $49,500. The Company does not
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believe the remaining open claims will have materially different
average results than the historical experience described above. None of
the claims allege damages in excess of policy limits. One of the
claimants had alleged damages of $375,000 and is discussed below. While
management believes the Company has substantial defenses with respect
to these claims, the ultimate outcome of such litigation cannot be
predicted with certainty. Such claims are an ordinary aspect of the
Company's business and industry. The Company believes its products are
safe and reliable when assembled, used and maintained in a reasonable
manner, and believes it adequately reserves against its reasonably
likely exposure under these claims based upon past experience.
The Company discusses each claim with its product liability counsel to
determine the merits of the case and the most likely outcome. In some
cases, it is too early to make that assessment. The Company determines
a reserve for specific claims based on average claims history, the
specific merits of the case, the amount of damages alleged, the costs
incurred to date and the amount of the insurance deductible. The
Company recorded a reserve for specific claims of $105,000 at December
31, 2001 and $83,000 at September 30, 2002.
In addition to reserves for specific cases, the Company estimates its
exposure for unasserted claims and records additional reserves using
the claims history discussed above as well as recent trend insights.
The Company had received notice of six incidents for which no claims
had been asserted at December 31, 2001 and did not receive notice of
any additional unasserted claims during the third quarter of 2002. The
Company maintained a reserve for unasserted claims of $113,000 at
December 31, 2001 and $122,000 at September 30, 2002. The underlying
assumptions regarding claims history and average costs per claim did
not change materially during the third quarter of 2002. Although the
Company's claims history has stabilized in recent years, the Company
cannot be certain that future claims experience will be consistent with
historical claims experience. An increase in the frequency or average
cost of future claims could increase the Company's exposure to product
liability expense. However, the maximum total legal defense and
settlement costs for each claim is limited to the $50,000 deductible.
On February 25, 1998, the Company was served with a suit filed by
Pauline and Daniel Robitaille in the Superior Court of Massachusetts,
Norfolk County. The claim alleged damages due to personal injury in the
amount of $375,000. The Company's $50,000 self-insured retention was
exhausted and the Company's insurance carrier assumed defense of the
claim. The Company therefore has no further financial responsibility
for this claim. The case was recently settled by the carrier.
The Company was assessed $117,500 in penalties by OSHA as a result of
an inspection conducted in 2000 and signed a settlement agreement with
OSHA which calls for scheduled payments totaling $23,000 through
February 1, 2004 (see "Patents, Trademarks and Government Regulation"
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in Item 1 of the 2001 Form 10-KSB/A filed on October 22, 2002 and
incorporated by reference herein).
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Going Private Transaction
As a result of the Company's tenuous cash/liquidity position and its need for
additional capital to reduce indebtedness, the Company plans to enter into an
investment transaction with Rotherwood. Rotherwood intends to purchase 18
million shares of newly issued Company common stock for a cash purchase price of
$0.05 per share. This equity investment of $900,000 would allow the Company to
reduce its bank debt and issue common stock in repayment of a $125,000
relocation expense loan previously made by Rotherwood, but there can be no
assurance this equity investment will support a turnaround of the Company. Upon
Rotherwood's purchase of the shares, combined with the issuance of 800,000
shares of common stock per quarter in payment of a letter of credit/pledge fee
to Rotherwood, Rotherwood would own more than 90% of the Company's outstanding
shares of common stock. Rotherwood then plans to cause a "short-form" merger to
occur 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 $0.05 per share for an aggregate cash consideration of $98,000, after which
Rotherwood plans to take the Company private. The Company plans to amend its
articles of incorporation to increase its authorized shares of common stock from
8,200,000 to 74,200,000 shares to permit Rotherwood to acquire the 18 million
shares of common stock and permit Cramer to pay the 800,000 share quarterly
letter of credit/pledge fee. Rotherwood intends to enter into such transactions,
but is not subject to any binding obligation to do so.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
99.1 Certification pursuant to 18 U.S.C. Section 1350
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CRAMER, INC.
(Registrant)
Date: November 20, 2002
/s/ Nicholas Christianson
------------------------------------------
Acting Chief Executive Officer and Secretary
and Interim Chief Financial Officer
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CERTIFICATIONS
I, Nicholas Christianson, Acting Chief Executive Officer and Secretary and
Interim Chief Financial Officer of Cramer, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Cramer,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the periods covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 20, 2002 By: /s/ Nicholas Christianson
----------------------------------------
Nicholas Christianson
Acting Chief Executive Officer and Secretary
and Interim Chief Financial Officer
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