UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, NW
Washington, D.C. 20549
Amendment No. 2 to
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 6/30/02
[ ] 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, MO 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 December 31, 2002.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CRAMER, INC.
BALANCE SHEET
(Amounts in Thousands, Except Share Data)
ASSETS
6/30/02 12/31/01
(Unaudited)
---------------------
(Restated) (Restated)
Current assets:
Cash 35 282
Accounts receivable, net of allowance of $30 884 563
Inventories, net of allowance of $105 897 721
Prepaid expenses and other current assets 264 325
------- -------
Total current assets 2,080 1,891
Property, plant and equipment
At cost 6,233 6,215
Accumulated depreciation (5,662) (5,595)
------- -------
571 630
Other assets:
Intangible pension asset 0 4
------- -------
Total Assets $ 2,651 $ 2,525
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Note payable 2,320 2,320
Accounts payable 750 485
Accounts payable- related party 133 69
Accrued liabilities 602 801
------- -------
Total current liabilities 3,805 3,675
Noncurrent liabilities:
Pension benefits payable 279 326
Other 218 218
------- -------
Total noncurrent liabilities 497 544
Stockholders' Equity (Deficit):
Common stock, no par value; authorized, 6,000,000
shares; issued and outstanding 4,039,607 shares
at July 31, 2002 and 4,041,400 at December 31, 2001 3,820 3,820
Accumulated deficit (5,119) (5,166)
------- -------
(1,299) (1,346)
Minimum pension liability adjustment (352) (348)
------- -------
Net stockholders' equity (deficit) (1,651) (1,694)
------- -------
Total Liabilities and Stockholders' Equity
(Deficit) $ 2,651 $ 2,525
======= =======
See Notes to Condensed Financial Statements
CRAMER, INC.
STATEMENTS OF OPERATIONS
UNAUDITED
(Amounts in Thousands, Except Per Share Data)
QUARTER ENDED SIX MONTHS ENDED
6/30/02 7/1/01 6/30/02 7/1/01
--------------- -------------- --------------- --------------
(Restated) (Restated)
--------------------------------------------------------------------
Net sales $ 2,217 $ 2,519 $ 4,249 $ 5,817
Cost of sales 1,471 1,807 2,796 4,381
--------------- -------------- --------------- --------------
Gross profit 746 712 1,453 1,436
Operating expenses:
Selling expenses 338 497 716 1,021
General and administrative 358 341 639 638
--------------- -------------- --------------- -------------
Total operating expenses 696 838 1,355 1,659
--------------- -------------- --------------- -------------
Income (loss) from operations 50 (126) 98 (223)
Other income (expense):
Interest expense, net (28) (45) (58) (99)
Other, net 6 (126) 7 (126)
--------------- -------------- --------------- --------------
Total other income (expense) (22) (171) (51) (225)
--------------- -------------- --------------- --------------
Income (loss) before income taxes 28 (297) 47 (448)
Income tax expense (benefit) 0 0 0 0
--------------- -------------- --------------- --------------
Net income (loss) $ 28 $ (297) $ 47 $ (448)
=============== ============== =============== ==============
Net income (loss) per share based on weighted
average number of common equivalent
shares outstanding $ 0.01 $ (0.07) $ 0.01 $ (0.11)
Weighted Average Common Equivalent
Shares Outstanding Basic 4,039,607 4,041,400 4,040,504 4,041,400
Diluted 4,039,607 4,041,400 4,040,504 4,041,400
There is no difference between Net Income (loss) and Total Comprehensive Income
(loss) for the quarter or six-month periods ending June 30, 2002 and July 1,
2001.
These interim financial statements contain all adjustments required for them to
be comparable to the annual financial statements issued on Form 10KSB.
See Notes to Condensed Financial Statements
CRAMER, INC.
STATEMENTS OF CASH FLOWS
UNAUDITED
(Amounts in Thousands)
Six Months Ended
6/30/02 7/1/01
---------- ----------
(Restated)
Cash flows from operating activities:
Net income (loss)$ 47 (448)
Adjustments to reconcile net income (loss) to net
cash flows from operating activities:
Depreciation and amortization 78 106
Changes in operating assets and liabilities:
Accounts receivable (321) 385
Inventories (178) 451
Prepaid expenses and other assets 61 (57)
Intangible pension asset 4 0
Accounts payable and accrued expenses 130 (223)
Other noncurrent liabilities (49) (29)
---------- ----------
Net cash flows from operating activities (228) 185
---------- ----------
Cash flows from investing activities:
Capital expenditures (19) (28)
---------- ----------
Net cash flows from investing activities (19) (28)
---------- ----------
Cash flows from financing activities:
Principal payments on notes payable 0 (157)
---------- ----------
Net cash flows from financing activities 0 (157)
---------- ----------
Net increase (decrease) in cash (247) 0
Cash at beginning of year 282 0
---------- ----------
Cash at end of quarter $ 35 $ 0
========== ==========
Supplemental disclosures:
Cash paid during the period for:
Interest $ 58 $ 99
========== ==========
Income tax $ 0 $ 0
========== ==========
See Notes to Condensed Financial Statements
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 April 1, 2002 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 Rotherwood loan guarantee fee of $40,000 for the fourth
quarter of 2001 and $40,000 in each of the first and second quarters of 2002.
Rotherwood had agreed to accept 800,000 shares of common stock per quarter as
payment for the guarantee fee. The Company recorded the transactions using the
exchange value agreed to by Rotherwood of $.05 per share, resulting in an
expense of $40,000 per quarter (800,000 shares X $.05/share). The Company has
since determined that the loan guarantee fee should have been recorded using a
fair value of $.01 per share, resulting in an expense of $8,000 per quarter
(800,000 shares X $.01/share = $8,000). Accordingly, the Company has filed
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
the revised expense accrual into account (see Item 2 - "Management's Discussion
and Analysis"). The effect of the restatement was to increase the previously
reported earnings and reduce the accumulated deficit and accounts
payable-related party by $32,000 and $64,000 for the three and six months ended
June 30, 2002, respectively. The restatement also increased the basic and
diluted net income per common share from $0.00 to $0.01 for the three and six
months ended June 30, 2002.
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 had alleged damages of $375,000. 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.
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 decreased from $218,000 at March 31,
2002 to $213,000 at June 30, 2002. This decrease was the result of continued
declining warranty costs in the second quarter of 2002. This decrease can be
attributed to more aggressive management of warranty claims, which has resulted
in fewer claims and lower costs.
The reserve for obsolete and slow-moving inventory is based on management's
analysis of inventory turns, historical write-offs, future production plans
including any product line changes, and sales trends. 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.
Item 2. Management's Discussion and Analysis
Results of Operations
Quarter ended June 30, 2002, compared to the quarter ended July 1, 2001:
Sales for the second quarter were $2,217,000, a decrease of 12% from 2001
second quarter sales of $2,519,000. The recent recession and related
reductions in capital expenditures by potential customers resulted in a
decline in seating sales of over $250,000. The furniture industry as a
whole has experienced a downturn in sales over the past twelve months.
Utility sales remained consistent, with a modest decline in ladder sales
offset by a slight increase in Kik-Step sales, reflecting the continued
strength of this product.
Gross margins increased from $712,000, or 28%, in the second quarter of
2001 to $746,000, or 34% in the second 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 $497,000 in the second quarter of 2001 to
$338,000 in the second quarter of 2002, a reduction of approximately
$159,000. A decrease in commissions and catalog program costs due to lower
sales contributed to over $50,000 of the decline. The remaining decrease
was related primarily to staff reductions and lower travel costs.
General and administrative expenses increased $17,000 to $358,000 during
the second quarter of 2002, compared to $341,000 in the second quarter of
2001. The increase was primarily the result of higher legal costs in the
second quarter of 2002, due in part to favorable resolution of an
employment matter and costs associated with filing an amended Form 10-KSB
and the proposed going private transaction referred to in "Financial
Condition, Liquidity and Capital Resources". In addition, guarantee fees
related to Rotherwood's provision of a $2M letter of credit/securities
pledge totaled $8,000 in the second quarter of 2002 and were not in effect
during the second quarter of 2001.
Interest expense totaled $28,000 in the second quarter of 2002, compared to
$45,000 in the comparable period last year. This reduction was the result
of lower interest rates in 2002.
The Company had a net operating profit before tax of $28,000 in the second
quarter of 2002, compared to a loss of $297,000 in the second quarter of
2001. Operating results improved, despite declining sales, due to
reductions in overhead and improved margins.
Six months ended June 30, 2002, compared to the six months ended July 1,
2001:
Sales for the first six months of 2002 were $4,249,000, a decrease of 27%
from $5,817,000 in the first six months of 2001. The majority of the
decline related to reduced seating sales, particularly in the first quarter
of 2002. The recent recession and related reductions in capital
expenditures by potential customers 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 $50,000 in
the first six months of 2002, compared to the same period in 2001,
reflecting the continued strength of this product.
Gross margins increased from $1,436,000 or 25% of sales, in the first six
months of 2001 to $1,453,000 or 34% of sales in the first six months of
2002. Lower material costs and significant overhead reductions resulted in
a substantial increase in margins for both the first and second quarters of
2002, compared to the first two quarters of 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 $1,021,000 in the first six months of 2001
to $716,000 in the first six months of 2002, a reduction of over $300,000.
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 both the
first and second quarters of 2002 compared to the prior year.
General and administrative expenses increased from $638,000 in the first
six months of 2001 to $639,000 in the first six months of 2002. An increase
in legal fees during the first six months of 2002 was offset in part by
reduced labor costs. In addition, fees related to Rotherwood's provision of
a letter of credit/securities pledge as security for the $2M bank loan
totaled $16,000 in the first six months of 2002 and were not in effect
during the first six months of 2001.
Interest expense totaled $58,000 in the first six months of 2002, compared
to $99,000 in the comparable period last year. This reduction was the
result of lower interest rates in 2002.
The Company had a net operating profit before tax of $47,000 in the first
six months of 2002, compared to a loss of $448,000 in the first six months
of 2001. Operating results improved, despite declining sales, due to
reductions in overhead and improved margins.
Financial Condition, Liquidity and Capital Resources
Cash flow activity for the first six months of 2002 is presented in the
Statement of Cash Flows. During the first six months of 2002, the Company
used $228,000 in cash from its operating activities.
Accounts receivable totaled $884,000 at June 30, 2002 compared to $563,000
at December 31, 2001. The increase was a result of higher sales in June
2002 compared to December 2001. In addition, the June 30, 2002 balance
included a $150,000 order that was collected in July 2002.
Inventories increased from $721,000 at December 31, 2001 to $897,000 at
June 30, 2002, a 24% increase. This increase related primarily to a large
seating order that was in production as of June 30, 2002.
Accounts payable increased $265,000 from December 31, 2001 to June 30,
2002. An increase in inventories in connection with several large
production orders mentioned above contributed to the increase in accounts
payable.
Accrued liabilities decreased $199,000 from December 31, 2001 to June 30,
2002. This decrease was due in part to a decline in accrued catalog program
costs and accrued insurance premiums.
Accounts payable, related party increased from $69,000 at December 31, 2001
to $133,000 at June 30, 2002. This increase was the result of combined loan
guarantee fees of $16,000 charged by Rotherwood for the first two quarters
of 2002, in addition to fees charged by Rotherwood for the services of Greg
Coward and Nick Christianson, who were not compensated directly by the
Company.
Capital expenditures of $19,000 during the second quarter of 2002 related
to the purchase of additional plant equipment. In the first quarter of
2002, management began exploring the feasibility of relocating to a new
facility that more closely matches the Company's current size and
manufacturing needs. The Company has signed a lease for a 34,000 square
foot facility and is planning to relocate 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 our existing facility 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
second 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 in 2001 obtained an independent appraisal which
determined that the fair market value of the Company's common stock was
$0.01 per share. The Company and Rotherwood 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 increase
earnings by $32,000 in each of the first two quarters of 2002. The Company
has restated the financial results reported in 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.
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
by May 3, 2003. The Company does not believe it will be able to reduce the
$320,000 line of credit balance or provide additional security by that
date. 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 May 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 April 1, 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 $28,000 in the second quarter of
2002 and net income of $47,000 in the first six 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.
The Company's credit facility has been extended through May 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 May 2003. If Rotherwood does not make the
proposed equity investment in the Company and the Company does not reduce
the principal balance of or further collateralize the $320,000 line of
credit, the bank may not renew the credit facility 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 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:
o 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
o The Company's continuing declines in revenues, history of losses and
uncertain future profitability
o Questions about the Company's continuing viability as a going concern
and management's plans to address that issue
o Any failure of the Company's turnaround plan to achieve its objectives
o The lack of borrowing capacity under the Company's bank credit
facility
o The possibility that the bank will not renew the Company's credit
facility
o The Company's lack of prospects for obtaining substitute or additional
debt financing or any equity financing from a party other than
Rotherwood
o 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
o Rotherwood's intention to take the Company private
o Fluctuations or reductions in product demand and market acceptance
o Continued adverse conditions in the office furniture industry
o The level of product development by the Company
o Capacity and supply constraints or difficulties
o The effect of new laws and regulations
o Unexpected additional expenses or operating losses
o Strong competition
o Reliance on certain vendors for key products and components
o Deferred 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
o If product and warranty liability claims exceed the amounts reserved
o Control by insiders
The foregoing list of risks and uncertainties is not meant to be complete.
Item 3. Controls and Procedures
A review and evaluation was performed by the Company's Acting Chief
Executive Officer and Interim Chief Financial Officer (the "Executive
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 amended quarterly report. Based on that review and
evaluation, the Executive Officer has concluded that the Company's current
disclosure controls and procedures, as designed and implemented by him,
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 June 30, 2002. During the second quarter of 2002, no new claims were
filed against the Company. On April 22, 2002, the Company settled one of
the six claims for $7,500. The total cost of legal fees and settlement
costs for this claim was $49,500. The Company does not believe the
remaining open claims will have materially different average results than
historical experience described above. None of the claims allege damages in
excess of policy limits. One of the claimants 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 at June
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 second quarter of 2002. The Company maintained
a reserve for unasserted claims of $113,000 at December 31, 2001 and at
June 30, 2002. The underlying assumptions regarding claims history and
average costs per claim did not change during the second quarter of 2002.
Accordingly, the Company did not change its reserve for unasserted claims.
Although the Company's claims history has stabilized in recent years, the
Company cannot be certain that future claims experience will be consistent
with historical claims experience. An increase in the frequency or average
cost of future claims could increase the Company's exposure to product
liability expense. However, the maximum total legal defense and settlement
costs for each claim is limited to the $50,000 deductible.
On February 25, 1998, the Company was served with a suit filed by Pauline
and Daniel Robitaille in the Superior Court of Massachusetts, Norfolk
County. The claim alleged damages of $375,000 due to personal injury. 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 from OSHA
which calls for scheduled payments totaling $23,000 through February 1,
2004 (see "Patents, Trademarks and Government Regulation" in Item 1 of the
2001 10-KSB/A filed on August 14, 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 execute its restructuring plans, 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 the amount owed under its bank
line of credit and credit Rotherwod for a $125,000 advance used by the
Company to pay relocation expenses. 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
shareholders other than Rotherwood 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 a transaction, but
is not subject to any binding obligation to do so.
Item 6. Exhibits and Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CRAMER, INC.
(Registrant)
Date: ___________, 2003 /s/ Nicholas M. Christianson
---------------------------------------------
Nicholas M. Christianson
Acting Chief Executive Officer and Secretary
and Interim Chief Financial Officer
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: __________, 2003 By: /s/ Nicholas Christianson
--------------------------------------------
Nicholas Christianson
Acting Chief Executive Officer and Secretary
and Interim Chief Financial Officer
In connection with this quarterly report on Form 10-QSB of Cramer, Inc., I,
Nicholas Christianson, Acting Chief Executive Officer and Secretary and Interim
Chief Financial Officer of the registrant, hereby certify to the best of my
knowledge and belief, that:
(1) This quarterly report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in this quarterly report fairly presents, in
all material respects, the financial condition and results of
operations of the registrant for and as of the end of such quarter.
By: /s/ Nicholas Christianson
--------------------------------------------
Nicholas Christianson
Acting Chief Executive Officer and Secretary
and Interim Chief Financial Officer
Date: __________, 2003