SCHEDULE 14A
PROXY STATEMENT
PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. 5)
Filed by the Registrant |X|
Filed by a party other than the registrant |_|
heck the appropriate box:
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
CRAMER, INC.
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(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)
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(4) Proposed maximum aggregate value of transaction
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(5) Total fee paid
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|_| Fee paid previously with preliminary materials
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|_| 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.
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(1) Amount previously paid:
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(2) Form Schedule or Registration Statement No.:
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(3) Filing party:
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(4) Date filed:
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PRELIMINARY COPY, SUBJECT TO COMPLETION
January 24, 2003
Cramer, Inc.
1222 Quebec Street
North Kansas City, Missouri 64116
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
__________, 2003
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To our shareholders:
The 2002 annual meeting of shareholders of Cramer, Inc. will be held at the
Cramer corporate headquarters, 1222 Quebec Street, North Kansas City, Missouri
64116 on ________, 2003 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 is
expected to 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 ________,
2003 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/ Nicholas Christianson
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Nicholas Christianson, Acting President and
Chief Executive Officer and Secretary
North Kansas City, Missouri
_________,2003
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PRELIMINARY COPY, SUBJECT TO COMPLETION
January 24, 2003
CRAMER, INC.
PROXY STATEMENT
2002 ANNUAL MEETING OF SHAREHOLDERS
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This proxy statement provides information regarding the 2002 annual meeting
of shareholders to be held at the Company's corporate headquarters at 1222
Quebec Street, North Kansas City, Missouri 64116 on ___________, 2003 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. The 2002 annual
meeting date was postponed from 2002 until _______, 2003.
Among the matters to be considered at the annual meeting is a proposal to
amend the Articles of Incorporation of the Company to increase the authorized
common stock to 74,200,000 shares, which is the first step in a series of
transactions that is expected to result in the termination of the Company's
status as a reporting company under the Securities Exchange Act of 1934
("Exchange Act") (the "Going Private Transaction").
SUMMARY TERM SHEET
The material terms of the Going Private Transaction 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 capital from 8,200,000 shares to
74,200,000 shares of common stock. Approval of Proposal III is assured
given the ownership by Rotherwood Ventures, LLC, the Company's parent
("Rotherwood") of 51.6% of the Company's common stock (See Item III -
"Purposes of the Transaction and Plans or Proposals" below).
o Rotherwood receives an aggregate of 4,000,000 shares of common stock
in exchange for Rotherwood's guarantee of, or pledge of collateral to
support, the Company's $2,000,000 bank loan for the fourth quarter of
2001 and the year 2002 (See Item III - "Purposes of the Transaction
and Plans or Proposals" below).
o Rotherwood purchases 18 million shares of common stock from the
Company for a price of $0.05 per share resulting in proceeds to the
Company of $900,000, including a $125,000 relocation expense advance
(See Item III - "Terms of the Transaction" below). Rotherwood will
then own in excess of 90% of the Company's common stock (See Item III
- "Purposes of the Transaction and Plans or Proposals" below).
o Rotherwood effects a short-form merger of the Company into Rotherwood
(the "Merger") under Kansas law (See Item III "Purposes of the
Transaction and Plans or Proposals" below). In the Merger every
shareholder of the Company other than Rotherwood (the "Public
Shareholders") will receive a cash payment of $0.05 per share,
representing an approximate aggregate consideration of $98,000,
subject to shareholders' statutory appraisal rights (See Item III -
"Terms of the Transaction" below).
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 determine the fair market
value of his or her shares (if the shareholder chooses to do so) (See
Item III - "Purposes of the Transaction and Plans or Proposals"
below).
This series of transactions would 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.
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 and
preliminary results for 2002, the progress of our turnaround plan for the
Company, and the Going Private Transaction, and respond to questions from
shareholders.
Who is entitled to vote at the meeting?
Shareholders of record at the close of business on ________, 2003 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.
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 person named as
proxy holder 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 the Going Private Transaction, as an affiliate of
Rotherwood, Mr. Zicarelli abstained from voting on Proposal III (see
"Relationships and Related Transactions Between Cramer and Directors,
Officers or their Affiliates," and "Share Ownership" below).
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. 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 proxy 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 Proposal III to amend the Articles
to increase the authorized shares. In light of this vote requirement,
abstentions and broker non-votes on Proposal III will have the same effect as
shares voted against Proposal III. Because Rotherwood owns 51.6% of the
Company's outstanding common stock, approval of the Articles amendment, and thus
approval of the Going Private Transaction, are assured.
The Public Shareholders will not vote as a class on Proposal III or the
Going Private Transaction. This means that Proposal III and the Going Private
Transaction may be approved without the separate approval of the Public
Shareholders. The Board has elected not to submit Proposal III or the Going
Private Transaction to a class vote of the Public Shareholders for the following
reasons:
o Kansas law does not require a class vote on Proposal III or the Going
Private Transaction
o Rotherwood and the Company did not wish to commit the resources
required for compliance with the SEC's going private rules unless
approval of Proposal III and thereby the Going Private Transaction was
assured.
o The price payable by Rotherwood for the 18 million shares and the cash
consideration payable to the Public Shareholders in the Merger are
substantially greater than the fair market value per share of the
Company's common stock established in an independent appraisal
conducted by Meara King & Co. ("Meara King"), a Kansas City accounting
and valuation firm (see Item III - "Reports, Opinions, Appraisals and
Negotiations" below).
o Public Shareholders who believe that the Merger consideration of $0.05
per share is inadequate have the right to an appraisal of their stock
pursuant to the shareholder appraisal rights under Kansas Law
summarized in Item III - "Issuance of Common Stock to Rotherwood for
Cash and Subsequent `Going Private' Transaction - Appraisal Rights"
below.
ITEM I
ELECTION OF DIRECTORS
Your Company's Board of Directors is currently comprised of two members
whose terms expire at the annual meeting for 2002.
Here is some information about the persons nominated for election as
directors.
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James R. Zicarelli Director since 1992
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James R. Zicarelli, 50, is President of Rotherwood, a Minnesota holding company
and majority shareholder of your Company. He owns a 6% ownership interest in
Rotherwood. Mr. Zicarelli serves as CEO of Sagebrush Corporation, a library
services and publishing company affiliated with Rotherwood. Previously, he
served as CEO of Cramer, Inc. (1995 to 2001); CEO of Pacer Corporation (1992 to
2001) an affiliate of Rotherwood; 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.
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David E. Crandall Director since 1992
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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.
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(1)PPA Industries filed for reorganization under the Bankruptcy Code in February
2000. The case was subsequently dismissed.
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 person named as
proxy 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. Neither 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." The Company believes Mr. Crandall is "independent"
as defined by NASDAQ Rule 4200(a)(15). In light of Mr. Zicarelli's status as
President of Rotherwood, his 6% ownership interest in Rotherwood, his
affiliation with other Rotherwood Parties, 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, the difficulty of
recruiting additional independent directors to serve on the Board 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 engages the independent accounting firm to be retained each year
o approves the performance of audit and permitted non-audit services by
the independent accountants
o reviews the activities of 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
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
Nicholas Christianson, 32, was appointed Interim Chief Financial Officer on
April 1, 2002, and was appointed Acting President and Chief Executive Officer
and Acting Secretary on September 3, 2002. Gregory Coward served as President
and Chief Executive Officer of Cramer from January 24, 2001 until September 3,
2002. Mr. Coward was retained by Cramer's Board of Directors to conduct a
thorough review of the Company's operations and to implement a turnaround plan
with the objective of achieving positive cash flow and returning the Company to
profitability. Mr. Coward's assignment concluded upon completing that review and
putting in place the major components of the turnaround plan. Mr. Coward's
departure from the Company was not the result of any disagreement between Mr.
Coward and Rotherwood or the Company over the Going Private Transaction. Mr.
Christianson is employed by an affiliate of Rotherwood and performs his duties
at Cramer on a part-time basis. Rotherwood intends to name a permanent CEO of
the Company upon completion of the Going Private Transaction. 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 was compensated by Rotherwood and did not receive any
compensation from the Company for serving as President and Chief Executive
Officer. Mr. Coward's compensation from Rotherwood was not specifically related
to Cramer's performance. Rotherwood has charged Cramer a monthly fee as
compensation for making Mr. Coward's services available to the Company, which
will be payable through December 31, 2002. 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 or Acting President and Chief Executive Officer or Acting Secretary. 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 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 $64,800 for the period
from April 1-December 31, 2002.
James R. Zicarelli served as CEO of Cramer 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
$100,000 in any of those years.
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Annual Compensation
Name and Principal ----------------------------------------
Position Year Salary ($) Bonus ($)
(a) (b) (c) (d)
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Robert Kovach(1) 2001 $ 23,138 $0
President and COO
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2000 $128,000 $0
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1999 $124,676 $12,000
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Jeffrey Myer(2) 2001 $ 47,855 $0
Vice President, Sales
and Marketing
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2000 $111,592 $10,000
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1999 $107,945 $ 5,000
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(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, Mr. Crandall declined to accept any
fees or reimbursed expenses for Board meetings held in 2001.
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.
Rotherwood is a majority-owned subsidiary of Rotherwood Investments, LLC
("Rotherwood Investments"). By virtue of its control of Rotherwood, Rotherwood
Investments also controls the Company and may be deemed a "parent" of the
Company.
James R. Zicarelli, Chairman of Cramer's 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 and owns a 6% ownership interest in
Rotherwood. Mr. Zicarelli would be entitled to a portion of any dividends paid
by the Company and a portion of the proceeds from any sale or liquidation of the
Company after the Going Private Transaction is consummated to the extent of his
6% interest in Rotherwood.
Gregory Coward was an officer of Rotherwood during his tenure as the
Company's President and Chief Executive Officer. He was compensated by
Rotherwood and did not receive any compensation from the Company for serving as
President and CEO. 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, Acting President and Chief Executive Officer or
Secretary (See "Executive Compensation" for more information regarding
compensation arrangements for Mr. Coward and Mr. Christianson).
Cramer participates with Pacer Corporation, an affiliate of Rotherwood, as
a co-borrower in a combined $2,320,000 credit facility with US Bank (formerly
Firststar Bank). The credit facility consists of a loan in the maximum amount of
$2,000,000 with interest payable monthly at the bank's prime rate and a $320,000
revolving line of credit with interest payable monthly at prime plus 2%. The
Company accounts for 100% of the current borrowings under the credit facility.
The credit facility has been fully drawn by the Company, and no additional funds
are available for borrowing under the credit facility. The credit facility is
secured by the general intangibles, inventory, accounts receivable and equipment
of the Company and Pacer. The $2,000,000 loan is also secured by a pledge of
$2,000,000 in securities by Rotherwood. Rotherwood is required under the terms
of its collateral pledge agreement to maintain the value of the collateral at
$2,000,000 and to pledge additional securities if required to meet that
obligation. A default by the Company under the loan agreement would constitute a
default by Rotherwood under its collateral pledge agreement. The pledge replaces
a $2,000,000 letter of credit posted by Rotherwood which formerly secured the
$2,000,000 loan. Among the covenants in the loan agreement is a requirement that
Pacer and Cramer maintain a $500,000 minimum net worth. Cramer and Pacer are not
in compliance with this net worth covenant, and are thus in default under both
loans. The $320,000 line of credit has been classified as non-performing. The
credit facility expired on January 27, 2002 but has been temporarily extended at
periodic intervals, with the latest extension expiring on May 3, 2003. Although
the loans have been extended, the bank has not given the Company a standstill
agreement and could call and accelerate the loans at any time. The Company does
not have sufficient assets to pay off the loans, so any such action by the bank
could force the Company to declare bankruptcy, cease operations and liquidate.
If the bank were to call the $2,000,000 loan and foreclose upon the collateral
posted by Rotherwood, Rotherwood could succeed to the bank's position as the
lender, call that loan and proceed against the Company's assets in satisfaction
of the loan. The Company does not believe the lender will call the $2,000,000
loan so long as Rotherwood maintains the $2,000,000 securities pledge. The bank
has requested that the Company either reduce the principal balance of the
$320,000 revolving credit line or provide additional collateral in the form of a
guaranty or additional security by May 3, 2003. If the 18 million share purchase
by Rotherwood is not consummated for any reason, the Company does not believe it
will be able to pay down the loan or provide a guaranty or additional security
by that date, and believes the lender may call that loan if the Company does not
meet one of those conditions by that date.
In exchange for Rotherwood's financial accommodations to the Company,
without which the Company could not have obtained the $2,000,000 loan and the
$2,000,000 loan would probably be called, the Company has agreed to pay
Rotherwood a quarterly fee of 2% of the letter of credit/pledge amount.
Rotherwood has agreed to accept payment of the fee in common stock at the rate
of 800,000 shares per quarter for each quarter during which the pledge remains
in effect. 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
the proposed $900,000 investment transaction (see Item III - "Issuance of Common
Stock to Rotherwood for Cash and Subsequent `Going Private' Transaction"). It is
expected that approximately $775,000 from this investment would be used to
reduce the principal balance of the loan(s), with the remaining $125,000
credited to Rotherwood in reimbursement of an advance made by Rotherwood to
enable the Company to pay relocation expenses.
Rotherwood has advised the Company that it does not wish to keep the
$2,000,000 securities pledge in place indefinitely. Rotherwood is not
contractually obligated to the Company to maintain the securities pledge for any
given period of time.
The loan agreement provides that the bank may declare a default and call
and accelerate the loans if there is a material adverse change in the business,
properties, financial condition or affairs of Cramer, Pacer or Rotherwood. The
bank also has the right to call the loans if the bank in good faith deems itself
"insecure." In light of these provisions in the loan agreement (the
"MAC/Insecurity Clause") and the Company's financial condition, declining sales
and history of losses, the bank could call the loans at any time even if Cramer
is current on its debt service obligations and Cramer and Pacer have not
violated any other provisions of the loan documents.
If Rotherwood makes the proposed equity investment in the Company, the
Company would become a more than 90% subsidiary of Rotherwood, permitting
Rotherwood to effect a short-form merger of the Company into Rotherwood without
the approval of the Public Shareholders. The Public Shareholders would receive
$0.05 per share in cash in the Merger, subject to proper exercise of their
appraisal rights under Kansas law. Following completion of the Merger,
Rotherwood intends to take the Company "private" by terminating its status as a
reporting company under the Exchange Act (See Item III 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 Investments (collectively, the "Rotherwood
Entities") and Mr. Zicarelli (the Rotherwood Entities and Mr. Zicarelli are
collectively referred to as the "Rotherwood Parties") 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 $69,000 at December 31,
2001 for amounts owed to Rotherwood, including the unpaid 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.
The Company has incurred substantial expenses in connection with its recent
relocation to a smaller, more efficient facility. The Company has not had
sufficient cash to pay those expenses in full. In November 2002, Rotherwood
advanced $125,000 to the Company to enable the Company to pay relocation
expenses. Upon consummation of the 18 million share purchase by Rotherwood, the
$125,000 advance will be credited against the $900,000 purchase price for the
shares.
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 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 restated 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:
- --------------------------------------- --------------------------- ------------
Amount and Nature of Percent of
Name and Address of Beneficial Owner Beneficial Ownership (1) Class (6)
- --------------------------------------- --------------------------- ------------
Rotherwood Ventures LLC(4) 2,083,212(2)(3) 51.6%
301 Carlson Parkway
Minnetonka, Minnesota 55305
- --------------------------------------- --------------------------- ------------
James R. Zicarelli(2)(3)(4) 2,083,212(2)(3)(5) 51.6%
301 Carlson Parkway
Minnetonka, Minnesota 55305
- --------------------------------------- --------------------------- ------------
(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. Mr. Zicarelli may also be deemed to have
an indirect beneficial ownership of such shares to the extent of his 6%
ownership interest in Rotherwood.
(3) The Company is obligated to pay Rotherwood a fee in exchange for
Rotherwood's $2,000,000 letter of credit/securities pledge which supports
the Company's $2,000,000 bank loan. The fee is equal to 2% per quarter of
the amount of the letter of credit/pledged securities. Rotherwood has
elected to accept payment of the fee in shares of common stock at the rate
of 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 year 2002, Rotherwood will own 6,083,212
shares of common stock, or 75.6% of the total outstanding shares. Mr.
Zicarelli may be deemed to beneficially own such additional shares for the
reasons described in footnote 2 above.
(4) Except as described in footnote 3 above, no Rotherwood Party has acquired
any shares of common stock of the Company during the last two years.
(5) Includes the 2,083,212 shares held by Rotherwood. (6) Percentage based on
common and common equivalent shares.
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.
- ------------------------------- -------------------------- ---------------------
Amount and Nature of Percent of Shares
Name of Beneficial Owner Beneficial Ownership Outstanding (4)
- ------------------------------- -------------------------- ---------------------
James R. Zicarelli(1) 2,083,212(2) 51.6%
- ------------------------------- -------------------------- ---------------------
David E. Crandall 125,341(3) 3.1%
- ------------------------------- -------------------------- ---------------------
Nicholas Christianson 0 0%
- ------------------------------- -------------------------- ---------------------
All officers and directors
as a group (3 persons) 2,208,553 54.7%
- ------------------------------- -------------------------- ---------------------
(1) Includes the 2,083,212 shares held by Rotherwood. Mr. Zicarelli is
President and a 6% owner of Rotherwood. Pursuant to Rule 13d-3 of the SEC,
the 2,083,212 shares held by Rotherwood and the additional shares issuable
to Rotherwood as described in footnote 3 to the previous table and in Item
III below may be attributed to Mr. Zicarelli because of his shared voting
and investment power over those shares and his 6% ownership interest in
Rotherwood.
(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 did not own any shares of Cramer stock.
ITEM II
APPOINTMENT OF INDEPENDENT AUDITORS
The Audit Committee has appointed the firm of Stirtz Bernards Boyden Surdel
& Larter, PA, Minneapolis, Minnesota ("SBBSL") as independent auditors of the
Company for the fiscal year ended 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, October 22
and December 26, 2002, we filed Amendments 1, 2 and 3, respectively, to our
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. On January 24, 2003 we filed Amendment 4 to our
annual report on Form 10-KSB/A for the fiscal year ended December 31, 2001,
which included D&T's report dated May 4, 2001 on our 2000 financial statements,
together with SBBSL's revised report dated November 25, 2003 on our restated
2001 financial statements.
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 (including its revised November 25, 2003 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 original 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.
ITEM 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 4,000,000 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 the Going Private
Transaction, approval of the Articles amendment will constitute approval of the
Going Private Transaction.
Because Rotherwood controls 51.6% of the Company's common stock, approval
of the Articles amendment, and thus approval of the Going Private Transaction,
are assured.
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 the short-form Merger) or any consolidation or sale of all or substantially
all of the assets of the Company prior to consummation of the Going Private
Transaction.
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 $2,000,000 loan, without which the lender would
not have made the $2,000,000 loan 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 or 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 800,000 shares per
quarter for each quarter during which the pledge remains in effect. Rotherwood's
agreement to accept common stock in payment of the fee was based on an assumed
exchange value of $0.05 per share. 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 does 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. The Company originally accrued guaranty fees of $40,000 for the
fourth quarter of 2001 and each of the first and second quarters of 2002 based
upon the $0.05 per share exchange value. The independent appraisal obtained by
the Company and summarized below 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 value would be less dilutive to the
Public Shareholders, because it would result in fewer shares being issued to
Rotherwood (800,000 shares per quarter) than if the shares were determined at an
exchange value of $0.01 (4,000,000 shares per quarter). The $0.05 per share
exchange value was also consistent with the price being paid by Rotherwood for
18 million new shares of the Company, and the price being paid to the Public
Shareholders in the Merger. 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 per
quarter, or 800,000 shares times $0.01 per share) rather than on the basis of
the exchange rate agreed to by Rotherwood ($40,000 per quarter, or 800,000
shares times $0.05 per share). The effect of this accounting change was to
decrease accrued expense and decrease net loss by $32,000 for the fourth quarter
of 2001 and to decrease expenses and increase net income by $32,000 in each of
the first two quarters of 2002. The Company has filed Amendment 4 to its 2001
Form 10-KSB/A and Amendment 2 to its first and second quarter 2002 Form
10-QSB's, incorporated by reference herein, and restated the 2001 financial
statements contained in the Form 10-KSB/A and first and second quarter 2002
financial statements contained in the Form 10-QSBs for those quarters, to
reflect this change in accounting treatment. The Company plans in the future to
issue 4,000,000 shares of common stock to Rotherwood for the fourth quarter 2001
and year 2002 letter of credit/pledge fees, as well as 800,000 shares of common
stock for each subsequent quarter during which the pledge remains in effect
prior to consummation of the Going Private Transaction.
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 issuance of 800,000 shares of common stock per
quarter in payment of the quarterly letter of credit/pledge fee and assuming no
additional common stock is acquired by Rotherwood or any other party.
--------------------------- ---------------------- ------------------------
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%
--------------------------- ---------------------- ------------------------
Mr. Zicarelli may be deemed to beneficially own such shares by virtue of
his shared voting and investment power over the shares and his 6% ownership
interest in Rotherwood.
Issuance of Common Stock to Rotherwood for Cash and Subsequent "Going Private"
Transaction
Introduction
When Proposal III is approved, the Company intends to issue 18 million
shares of common stock to Rotherwood at a price of $0.05 per share and an
aggregate price of $900,000. Of this amount, $775,000 will be paid in cash, and
the remaining $125,000 will be credited to Rotherwood in repayment of an advance
made by Rotherwood to the Company to cover relocation expenses. The Company
intends to use the $775,000 cash proceeds to reduce the principal balance of the
bank loan(s).
The Company's lender has requested that the Company either reduce the
principle balance of the $320,000 revolving line of credit or provide additional
collateral in the form of a guaranty or additional security by May 3, 2003. The
Company does not have the funds to pay down the line of credit or the additional
assets to pledge as security, and neither Rotherwood nor its principals have
expressed a willingness to assume an additional guaranty obligation on behalf of
the Company. The bank could exercise its right to call the $2,000,000 loan
and/or $320,000 line of credit at any time pursuant to the MAC/Insecurity Clause
in the loan agreement. The Company intends to use the $775,000 cash proceeds
from Rotherwood's proposed investment in the Company to reduce the principal
balance of the loan(s). This will enable the Company to reduce its interest
expense and thus improve the operating results and cash flow of the Company. The
Company does not believe it will have the funds to reduce the principal balance
of or further secure the line of credit by May 3, 2003 unless the 18 million
share stock purchase transaction with Rotherwood is consummated. If Rotherwood
does not make the proposed equity investment and the Company does not reduce the
principle balance of the $320,000 credit line or provide the requested guaranty
or additional security by May 3, 2003, the Company believes the bank may call
that loan after that date. The Company does not believe the bank will call the
$2,000,000 loan so long as Rotherwood maintains its $2,000,000 securities pledge
as collateral for that loan. However, Rotherwood has advised the Company that it
does not wish to maintain that pledge indefinitely and is not contractually
obligated to the Company to maintain the pledge. If Rotherwood terminates the
securities pledge, the Company believes the bank would call the $2,000,000 loan
as well. If either the $320,000 credit line or $2,000,000 loan is called by the
lender, the uncertainty regarding the Company's ability to continue as a going
concern described in "Purposes, Alternatives, Reasons and Effects" below will
worsen. However, there can be no assurance the Company will remain viable as a
going concern or that the bank will not call the loans even if the Rotherwood
investment is consummated.
Upon issuance of 4,000,000 shares of common stock to Rotherwood as letter
of credit/pledge fees for the fourth quarter of 2001 and the year 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 24,083,212 shares of the Company's common stock, or 92.5% 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, upon consummation of the
investment transaction, Rotherwood intends to effect a short-form cash-out
merger of the Company into Rotherwood (the "Merger") 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
Parties have filed a joint Schedule 13E-3 with the SEC in connection with the
Going Private Transaction, which has been mailed to shareholders with this proxy
statement and is incorporated by reference herein.
Except as described in this proxy statement and the Schedule 13E-3, neither
the Company nor the Rotherwood Parties have 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.
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 at a purchase price of $0.05 per share and an aggregate purchase price of
$900,000. Rotherwood would then 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, subject to statutory appraisal rights. Upon completion of the
Merger, Rotherwood would own 100% of the Company's common stock and would cause
the Company to terminate its registration and status as a reporting company
under the Exchange Act.
Reasons for the Transaction.
See "Purposes, Alternatives, Reasons and Effects" below.
Vote Required.
The Articles Amendment requires the approval of a majority of the
outstanding shares of common stock of the Company. Because Rotherwood controls
51.6% of the Company's outstanding common stock, approval of the Articles
amendment is assured. The Articles amendment does not require the separate
approval of the Public Shareholders, voting as a class, under Kansas law, and
the Company does not intend to submit the Articles amendment to a class vote of
the Public Shareholders. In addition, no vote of the Public Shareholders or
Board of Directors will be required to approve the Merger.
Rotherwood's Commitment to Proceed
Rotherwood intends to purchase the 18 million shares and to consummate the
Merger, but is not contractually obligated to do so and reserves the right not
to purchase the shares or consummate the Merger. Rotherwood also reserves the
right to purchase the 18 million shares and not consummate the Merger.
Rotherwood has advised the Company that it would elect not to purchase the
shares or consummate the Merger only if there was a further material adverse
change in the Company's business or financial condition or a further adverse and
unforeseen change in the Company's industry or general economic conditions.
Because Rotherwood's failure to purchase the 18 million shares would deepen the
Company's liquidity crisis and could induce the bank to call the $320,000 line
of credit, which could adversely affect the credit status of Rotherwood and
potentially cause Rotherwood to write off its interest in the Company, and
because a failure to consummate the Merger would mean that the Company would
continue to be a reporting company at substantial expense and with little
perceived benefit to Rotherwood, the Company believes it is highly unlikely that
Rotherwood will not purchase the shares or consummate 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
receive $0.05 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.
Federal Income Tax Consequences.
The following is a general summary of the material U.S. federal income tax
consequences if the 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 his or her tax
advisor for a full understanding of the tax consequences of the receipt of cash
upon exercise of appraisal rights pursuant to the Merger.
Neither Rotherwood nor the Company expects to recognize any gain, loss or
income by reason of the 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.
Under Kansas law, the intended short-form merger of the Company into
Rotherwood would entitle record holders of the Company's common stock who follow
the procedures described in Kansas Corporation Code Section 17-6712 to have
their shares appraised by an appraiser or appraisers appointed by a district
court in the State of Kansas and to receive payment of the fair value of such
shares together with a fair rate of interest, if any, as determined by such
court. The following is a summary of certain of the provisions of Section
17-6712 of the Kansas Corporation Code and is qualified in its entirety by
reference to the full text of Section 17-6712, a copy of which is attached as
Exhibit A to this proxy statement.
Notice of the effective date of the Merger (the "Effective Date") and the
availability of appraisal rights under Section 17-6712 (the "Merger Notice")
will be mailed to record holders of the shares within 10 days after the
Effective Date and should be reviewed by each shareholder. Any shareholder
receiving a Merger Notice shall have the right, within 20 days after the date of
mailing of the Merger Notice, to demand in writing from the Company payment of
the value of such shareholder's shares. The Company shall pay to the
shareholder, within 30 days after the expiration of such 20-day period, the
value of the shareholder's shares on the Effective Date, exclusive of any
element of value arising from the expectation or accomplishment of the Merger.
If during such 30 day period, the Company and such shareholder fail to agree
upon the value of such shares, the shareholder or the Company may demand a
determination of the value of the shares of all such shareholders by an
appraiser or appraisers to be appointed by the district court, by filing a
petition with the court within four months. Failure to follow the foregoing
procedures may foreclose a shareholder's right to appraisal.
The Company is not under any obligation, and has no present intention, to
file a petition for the appraisal of the Public Shareholders' shares.
Accordingly, it is the obligation of the Public Shareholders to initiate all
necessary action to perfect their appraisal rights within the time prescribed in
Section 17-6712. If a shareholder files a petition, a copy of such petition must
be served on the Company.
Upon service of a copy of the petition upon the Company, the Company shall
within 10 days file with the clerk of such court a duly verified list containing
the names and addresses of all shareholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the Company. The clerk of the court will give notice of the time and
place fixed for a hearing of such petition by registered or certified mail to
the Company and to the shareholders shown upon the list at the addresses therein
stated and notice shall also be given by publishing a notice at least once, at
least one week before the day of the hearing, in a newspaper of general
circulation in the county in which the court is located and such other places as
the court determines.
After a hearing on such petition, the court will determine the shareholders
entitled to valuation and payment for their shares and shall appoint an
appraiser or appraisers to determine such value. At the time of appointing the
appraiser or appraisers, the court will require the shareholders who hold
certificated shares and who demanded payment for their shares to submit their
certificates to the clerk of the court, to be held pending the appraisal
proceedings. Failure to a shareholder to submit his or her certificate(s) may
cause the court to dismiss the proceedings as to such shareholder. Shareholders
considering seeking appraisal should be aware that the fair value of their
shares as determined under Section 17-6712 could be more than, the same as or
less than the amount per share that they would otherwise receive if they did not
seek appraisal of their shares. The costs of the action may be determined by the
court and taxed upon the parties as the court deems equitable, except that the
costs of delivering and publishing notice of the hearing will be paid by the
Company.
Any shareholder who has duly demanded payment for his or her shares in
compliance with Section 17-6712 will not, after the Effective Date, be entitled
to vote the shares subject to such demand for any purpose or be entitled to the
payment of dividends or other distributions on those shares (except dividends or
other distributions, if any, payable to holders of record of shares as of a date
prior to the Effective Date).
For federal income tax purposes, shareholders who receive cash for their
shares upon exercise of their statutory appraisal rights will realize taxable
gain or loss. See "Federal Income Tax Consequences" above.
The foregoing discussion is a summary of the material provisions of Section
17-6712 of the Kansas Corporation Code. This summary does not purport to be a
complete statement of the procedures to be followed by shareholders desiring to
exercise their appraisal rights and is qualified in its entirety by reference to
Section 17-6712 of the Kansas Corporation Code, the full text of which is
attached hereto as Exhibit A. SHAREHOLDERS ARE URGED TO READ EXHIBIT A IN ITS
ENTIRETY SINCE FAILURE TO COMPLY WITH THE PROCEDURES SET FORTH THEREIN WILL
RESULT IN THE LOSS OF APPRAISAL RIGHTS.
Past Contracts, Transactions, Negotiations and Agreements
By virtue of its 51.6% ownership of the Company's common stock and
Rotherwood Investments' control of Rotherwood, Rotherwood and Rotherwood
Investments control the Company and are thus affiliates of the Company.
By virtue of his shared voting and investment power over Rotherwood's
shares in the Company, his status as President of Rotherwood and his 6%
ownership interest in Rotherwood, Mr. Zicarelli may also be deemed to control
the Company, and is an affiliate of the Company by virtue of those relationships
and his service as one of the Company's two Board members. Mr. Zicarelli
abstained from voting on Proposal III and the Rotherwood stock purchase in light
of his affiliation with Rotherwood.
Mr. Zicarelli served as the Company's CEO until Gregory Coward was
appointed to that position in January 2001.
Nicholas Christianson, the Company's Acting President and Chief Executive
Officer, Interim Chief Financial Officer and Acting Secretary, is compensated by
an affiliate of Rotherwood and does not receive any compensation from the
Company for serving in those capacities. He receives a salary of $100,000.
Rotherwood has charged $64,800 for Mr. Christianson's services from April 1,
2002 through December 31, 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 an expense of $8,000 in 2001 for a letter of credit fee to Rotherwood
described below. At December 31, 2001, the Company owed Rotherwood $69,000 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 of $2,320,000 (consisting of a
$320,000 revolving line of credit and a $2,000,000 loan) which is secured by
substantially all of the assets of the Company and Pacer. The $2,000,000 loan is
also secured by Rotherwood's pledge of $2,000,000 in securities as collateral
for the loan. Cramer and Pacer are jointly liable for principal and interest
under the loans, and each company may obtain advances under the loans. However,
because all existing advances under the loans have been made to Cramer, Cramer
is currently making all interest payments under the loans. The loans are fully
drawn, and thus neither company may obtain any further advances under the loans
unless and until the principal amounts are reduced. The loans matured on January
27, 2002 and have been temporarily extended at periodic intervals, with the
latest extension expiring on May 3, 2003. Cramer and Pacer are not in compliance
with the $500,000 financial net worth covenant under the loans, and the $320,000
credit line has been classified as non-performing. The lender has requested that
the Company either reduce the principal balance of the $320,000 credit line or
provide additional collateral in the form of a guaranty or additional security
by May 3, 2003. The Company believes the lender may call the $320,000 credit
line if the Company does not substantially reduce the principal balance or
provide such guaranty or additional security by that date. The Company does not
believe the lender will call the $2,000,000 loan so long as Rotherwood maintains
its securities pledge as collateral for that loan; however, Rotherwood is not
contractually obligated to the Company to maintain the securities pledge and has
advised the Company that it does not wish to continue the securities pledge
indefinitely. Neither Rotherwood nor its principals have indicated a willingness
to guaranty or further secure the $320,000 line of credit and the Company does
not believe it will have the funds to reduce the principal balance of the line
of credit unless the 18 million share purchase by Rotherwood is consummated. The
bank may call either or both loans at any time by exercising its rights under
the MAC/Insecurity Clause. The Company does not have sufficient assets to pay
off the loans, so any acceleration of either or both loans by the bank could
force the Company to declare bankruptcy, cease operations and liquidate. If the
bank were to call the $2,000,000 loan and foreclose upon the collateral posted
by Rotherwood, Rotherwood could succeed to the bank's position as the lender on
that loan, call the loan and proceed against the Company's assets in
satisfaction of the loan. Rotherwood has no personal liability under the
$2,000,000 loan in excess of the value of its pledged collateral.
In the fourth quarter of 2001, the Company made 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, "odd lot"
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 offered to pay $0.015 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.
Benefits and Detriments to Going Private Transaction
The following table summarizes the benefits and detriments to Cramer,
Rotherwood and the Public Shareholders from the Going Private Transaction.
- ----------------------------------------------------------------------------------------------------------------------
CRAMER
- ----------------------------------------------------------------------------------------------------------------------
Benefits Detriments
- ------------------------------------------------------------ ---------------------------------------------------------
o Additional $900,000 in equity o The $900,000 investment by Rotherwood may not
o Reduce the principal balance of the bank loan(s), be sufficient to support the turnaround plan
which will reduce interest expense and hopefully
induce the bank not to call the loans
o Repay a $125,000 relocation expense advance by
issuing common stock to Rotherwood
o Cramer will no longer bear the cost of being a
reporting company under the Exchange Act,
estimated to be approximately $100,000 per year
o Management will be able to devote their full time
and attention to the turnaround plan and the
Company's operations and will be freed from the
time required to comply with the Company's
reporting obligations under the Exchange Act
- ----------------------------------------------------------------------------------------------------------------------
ROTHERWOOD
- ----------------------------------------------------------------------------------------------------------------------
Benefits Detriments
- ------------------------------------------------------------ ---------------------------------------------------------
o Rotherwood will no longer be required to support o Rotherwood will be required to invest $900,000
the expense of the Company's status as a in new funds (including the $125,000 expense
reporting company under the Exchange Act advance) in a financially troubled company whose
o Rotherwood and Mr. Zicarelli will have no further continued viability as a going concern is
fiduciary responsibility to the Public Shareholders uncertain
o Rotherwood and Mr. Zicarelli will have no further o Rotherwood will be required to pay approximately
liability to Public Shareholders under the federal $98,000 to the Public Shareholders in the Merger
securities laws, other than any liability in o The $900,000 investment may not be sufficient to
connection with this transaction to support a turnaround of the Company, and
o Rotherwood will receive the full benefit from any Rotherwood may have to continue advancing funds
improvement in the Company's business and financial to or investing in the Company to enable it to
condition survive.
o 100% of all net income and cash flow of the o Rotherwood will bear all risk of any continuing
Company would flow through to Rotherwood declines in the Company's business and financial
o Rotherwood may be able to reduce its securities condition and may be required to write off its
pledge to the lender to the extent the principal investment in the Company if the Company's business
balance of the $2,000,000 loan is reduced with doesn't improve
proceeds invested by Rotherwood o Any write-off of Rotherwood's investment in
o Rotherwood would receive the full benefit of any the Compnay, and any continuing losses of the
future appreciation in value of the Company Company that would be booked on Rotherwood's income
o Public Shareholders will receive immediate statement as a pass-through entity, would adversely
liquidity in the form of $0.05 per share in affect Rotherwood's financial statements
which there has been no trading market o Public Shareholders will have statutory appraisal
o Public Shareholders will not be exposed to the rights in connection with the Marger, which may
risk of any further declines in the Company's increase the amount of Merger consideration payable
business or financial condition by Rotherwood and require that Rotherwood bear the
o Public Shareholders will no longer be minority expenses connected with the appraisal process
shareholders in a corporation controlled by o The Merger consideration or cash payable on
Rotherwood exercise of statutory appraisal rights will
o Public Shareholders will no longer bear the constitute taxable income to Public Shareholders
risk of the bank calling the loans, which whose adjusted tax basis in their shares is less
would result in the Company ceasing operations than that amount, and will constitute a loss to
and declaring bankruptcy Public Shareholders whose adjusted tax basis in
o The $0.05 per share Merger consideration is their shares is greater than that amount
substantially greater than the appraised value o Public Shareholders will receive no benefit from
of the shares any future improvement in the Company's business
o Public Shareholders will have appraisal rights or financial condition
under Kansas law o Public Shareholders will have no interest in any
future appreciation in value of the Company
o Public Shareholders must comply with the procedural
requirements of Kansas law to exercise their
appraisal rights
Purposes
The purposes of the Going Private Transaction are:
o 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
o To provide the Company with much needed equity capital, which will
enable the company to reduce the principal balance of the bank credit
facility
o To provide immediate liquidity to the Public Shareholders, who have
not been able to sell or realize any value for their shares
o To relieve the Company and its management from the expense and burden
of being a reporting company under the Exchange Act
Reasons
As described in Amendment 4 to 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's net sales in 2001 were $2,650,000, or 20% less than
2000 net sales, and the Company's industry has been adversely affected by the
recent recession and declines in capital spending. The Company reported a loss
in 2001 of $1,170,000 , which was in addition to losses aggregating $1,309,000
during 2000 and 1999. Although management's restructuring efforts and the change
in accounting treatment of the Rotherwood guaranty fee have contributed to net
income of $87,000 in the first three quarters of 2002, the Company remains in a
liquidity crisis. As of September 30, 2002, the Company had a working capital
deficit (which means the Company's current liabilities exceed its current
assets) of ($1,884,000), and a negative net worth of ($1,610,000). The Company
has no borrowing capacity under the bank credit facility and insufficient cash
flow to finance operations over the next 12 months. The Company's bank credit
facility expired on January 27, 2002 and has been temporarily extended to May 3,
2003. However, the bank has requested that the Company either reduce the
principal balance of the $320,000 credit line or provide a guaranty or
additional security by that date (see "Issuance of Common Stock as Compensation
for Rotherwood Guarantee," above). The Company is not in compliance with the
financial net worth covenant in the credit agreement and the $320,000 credit
line has been classified as non-conforming. The bank has the right to call
either or both loans at any time by exercising its rights under the
MAC/Insecurity Clause. SBBSL issued a revised "going concern" opinion on our
restated 2001 financial statements, indicating substantial doubt about the
Company's ability to continue as a going concern.
Although the Company does not believe the bank would call the $2,000,000
loan so long as Rotherwood's $2,000,000 securities pledge remains in place,
Rotherwood has advised the Company it does not wish to keep the pledge in place
indefinitely and is not contractually obligated to the Company to maintain the
securities pledge. If Rotherwood were to terminate the securities pledge, the
Company believes the bank would call the $2,000,000 loan.
Neither Rotherwood nor its principals have expressed a willingness to
guaranty or provide additional security for the $320,000 line of credit, which
could be called by the bank if the principal balance of the credit line is not
substantially reduced or such guaranty or additional security provided by May 3,
2003.
The Company does not have sufficient liquid assets to pay off the $320,000
credit line or sufficient assets to pay off the $2,000,000 loan if either loan
is called or not extended further. Accordingly, if either loan is called, the
Company would probably have to declare bankruptcy, cease operations and
liquidate.
The Company does not believe it is reasonable to expect Rotherwood to
continue supporting the $2,000,000 loan, invest more equity into the Company and
assume the risk of any continuing declines in the Company's business or
financial condition if Rotherwood owns less than 100% of the Company's common
stock.
As a public company, Cramer is required to prepare and file periodic
reports, proxy statements and other information with the SEC under the Exchange
Act. For a company of Cramer's small size, history of losses, liquidity crisis
and limited resources, the cost of compliance with the Company's Exchange Act
obligations, both in expenses and management time, is prohibitive.
There has been no market for the Company's common stock for many years, and
Public Shareholders have had no liquidity in their shares.
The Company is not believed to be a legitimate candidate for outside
investment or a sale that would provide comparable or greater value to the
Public Shareholders than the Going Private Transaction, due to its high secured
leverage, control by Rotherwood, lack of trading market and current financial
condition and results of operations, and the current adverse conditions in its
industry.
The Company has implemented many of the components of management's
turnaround plan, including a series of product line and marketing changes and
relocating to a smaller, more efficient facility. Although the Company has begun
to see some operating improvements as a result of these efforts, there can be no
assurance these changes will result in any meaningful improvement in the
Company's business or profitability and thus no assurance the Company will
remain viable, especially if the Company is not able to significantly reduce its
interest expense. The Company may have to make a significant investment in the
manufacturing facility in Kansas City, Kansas from which it has relocated in
order to sell or lease it.
Although the Board considered several alternatives to the Going Private
Transaction, the Company did not take any steps to obtain alternative financing
for the reasons discussed in "Alternatives," below.
Interest of Rotherwood and Affiliates in Net Book Value and Net Earnings
The following table describes the interest of Rotherwood and Mr. Zicarelli
in the restated net book value and net earnings of the Company as of December
31, 2001, in dollar amounts and percentages, and as adjusted to take into
account the Going Private Transaction (dollars in thousands).
-----------------------------------------------------------------------------------------
December 31, 2001
-----------------------------------------------------------------------------------------
Actual As Adjusted(1)
-------------------------------------------- --------------------------------------------
Net Book Value Net Earnings Net Book Value Net Earnings
---------------------- --------------------- ---------------------- ---------------------
$ % $ % $ % $ %
- ---------------------------- ---------- ----------- ---------- ---------- ---------- ----------- ---------- ----------
Rotherwood(2) (874) 51.6% (604) 51.6% (1,694) 100% (1,170) 100%
- ---------------------------- ---------- ----------- ---------- ---------- ---------- ----------- ---------- ----------
James R. Zicarelli(3) (53) 3.1% (36) 3.1% (102) 6% (70) 6%
- ---------------------------- ---------- ----------- ---------- ---------- ---------- ----------- ---------- ----------
(1) Taking into account the issuance of 4 million shares to Rotherwood as
letter of credit/pledge fees, Rotherwood's purchase of 18 million shares of
common stock for $900,000, cancellation of the Public Shareholders' shares,
and payment of the Merger consideration to the Public Shareholders in the
aggregate amount of $98,000
(2) Rotherwood's interest in these items is attributable to Rotherwood
Investments as Rotherwood's parent
(3) Mr. Zicarelli owns a 6% interest in Rotherwood, which results in a deemed
3.1% interest in the net book value and net earnings of the Company prior
to consummation of the Going Private Transaction.
Factors Considered
In determining whether to complete the Going Private Transaction, the
Rotherwood Parties and the Company considered several factors, including the
historical financial performance and historical losses of the Company and the
potential benefits to the Company's business if the Company were to cease being
a public reporting company. The Rotherwood Parties 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
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 loss carry forwards in
the event that the Company were to become profitable
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
The Rotherwood Parties and the Company believe the Going Private
Transaction represents a cost effective way for Rotherwood to acquire the
outstanding public minority equity interest in the Company while providing the
Company with needed capital to attempt to turn its business around and providing
Public Shareholders with immediate liquidity for their shares. The Rotherwood
Parties and the Company considered and rejected other alternatives, including a
long-form merger because it would have added to the cost of this proxy statement
and the Going Private Transaction and would not have increased value for the
Public Shareholders, and because shareholder approval of a long-form merger
would have been assured given Rotherwood's 51.6% control over the Company's
outstanding shares. The Rotherwood Parties and the Company also rejected the
alternative of a tender offer because it would have entailed additional costs,
100% acceptance of a tender offer was uncertain, the Company would still have
needed a cash infusion from Rotherwood, and a subsequent short-form merger may
still have been required in order to accomplish the objective of becoming a
private company.
The Rotherwood Parties and the Company also considered the advantages and
disadvantages of other alternatives to Rotherwood's acquisition of 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 interest in the Company
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, Rotherwood's control of the Company, and the current market
conditions for micro-cap companies with no trading market. The Company also
believes no other lender would agree to provide credit to the Company without
substantial new incentives from Rotherwood, which Rotherwood has advised it is
not willing to provide.
The second alternative, selling Rotherwood's equity interest in the
Company, was briefly considered. It was not an alternative that was seriously
considered, given the Company's dependence on Rotherwood and the belief that the
Company would likely not survive without Rotherwood's collateral support of the
$2,000,000 loan.
Obtaining outside capital from a new investor or a sale of Rotherwood's
interest would also provide no liquidity to the Public Shareholders.
In the view of the Rotherwood Parties and the Company, there is no
advantage to Rotherwood, the Company or the Public Shareholders in the Company
remaining as a majority-owned, public subsidiary of Rotherwood. The
disadvantages of that status, which were considered by the Rotherwood Parties
and the Company, include the inability to achieve many of the benefits of taking
the Company private discussed above. The Rotherwood Parties 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.
The Rotherwood Parties and the Company also considered the lack of a
trading market for the Company's common stock and considered that if the Going
Private Transaction was consummated, it would result in immediate liquidity for
the Public Shareholders.
Although the Company has implemented a number of elements of management's
turnaround plan and the Company earned $87,000 in net income in the first three
quarters of 2002, the ultimate success of the turnaround plan remains
speculative and may depend on a substantial increase in sales, which cannot be
assured. There can be no assurance of any substantial improvement in the
Company's business or financial condition even after the Going Private
Transaction is consummated. The Company remains in a liquidity crisis.
Management has not taken any steps to seek alternative financing for the Company
because management did not believe the turnaround plan would, at least in the
foreseeable future, eliminate any of the adverse factors described above and
therefore believed any attempt to obtain such financing would be fruitless.
Although the Meara King appraisal described below considered management's
projections of revenue growth and positive operating income for the years
2002-2005, those projections were substantially discounted by Meara King in
arriving at an appraised value of $0.01 per share. Management believes the
discount applied by Meara King was appropriate in light of
o the speculative nature of revenue and cash flow projections
o the current adverse conditions in the Company's industry
o the Company's history of losses and shareholders' deficits
o the Company's liquidity crisis and need for equity capital to reduce
debt and sustain operations
o the Company's high leverage
Effects
For a discussion of the impact of the Going Private Transaction on
Rotherwood and the Public Shareholders, see "Benefits and Detriments to Going
Private Transaction" above and "Fairness of the Transaction" below.
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
The following table summarizes the impact of the Going Private Transaction
on the Rotherwood Parties and the Public Shareholders:
- --------------------------------------------------------------------------------
ROTHERWOOD PARTIES
- --------------------------------------------------------------------------------
o Rotherwood will have complete control over the Company's business
o The Company will be freed from the time and expense of being a
reporting company under the Exchange Act o Rotherwood will have a 100%
interest in any improvement in the business and financial condition of
the Company
o Rotherwood will have a 100% interest in any appreciation in value of
the Company
o Rotherwood will bear the sole risk of any continuing decline in the
Company's business or financial condition
o Rotherwood and Mr. Zicarelli will have no further fiduciary
responsibility to the Public Shareholders o Rotherwood will no longer
be required to submit any issues for approval of the Public
Shareholders and will no longer be required to maintain any
independent directors on Cramer's Board
o Rotherwood will be required to invest $900,000 in the Company
(including the November 2002 $125,000 relocation expense advance) and
pay approximately $98,000 in Merger consideration to the Public
Shareholders
o Rotherwood will be required to pay the expenses of the Gong Private
Transaction
o Rotherwood will assume the risk that a Kansas court may award greater
than $0.05 per share to Public Shareholders properly exercising their
appraisal rights
o Rotherwood will derive the sole benefit from the tax loss
carry-forwards of the Company if the Company generates taxable income
in the future
- --------------------------------------------------------------------------------
PUBLIC SHAREHOLDERS
- --------------------------------------------------------------------------------
o The Public Shareholders will no longer own any stock in the Company
o The Public Shareholders will have no voting rights in the Company
o The Public Shareholders will have immediate liquidity in the form of
the $0.05 per share cash Merger consideration
o The Public Shareholders will have statutory appraisal rights
o The Public Shareholders will have no interest in any improvement in
the Company's business or financial condition
o The Public Shareholders will have no interest in any appreciation in
value of the Company
o The Public Shareholders will have no further risk of any continuing
declines in the Company's business or financial condition
o The Public Shareholders will receive no further reports or proxy
statements from the Company under the Exchange Act
- --------------------------------------------------------------------------------
The Rotherwood Parties and the Company believe that the Going Private
Transaction is fair to the Public Shareholders. The following are the material
factors considered by the Rotherwood Parties and the Company in determining the
fairness of the Going Private Transaction to the Public Shareholders:
o Financial Condition. The Rotherwood Parties 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. Although the Company earned
net income of $87,000 in the first three quarters of 2002, there can
be no assurance this trend will continue, especially if the Company is
not able to generate significant increases in sales. The Rotherwood
Parties also considered the fact that the Company's survival is almost
totally dependent upon Rotherwood providing a pledge of collateral to
secure the Company's $2,000,000 bank loan. The Rotherwood Parties and
the Company also considered that given the Company's financial
condition it was not likely that the Company could obtain substitute
or additional debt or equity financing from a third party lender or
investor.
o Limitations as a Public Company. The Rotherwood Parties 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. The Rotherwood Parties and the Company
also considered the valuation appraisal performed by Meara King which
determined the fair market value of the common stock to be $0.01 per
share. The Rotherwood Parties 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. The Rotherwood Parties and the Company concluded
that under the circumstances, the $0.05 per share cash consideration
to be received by the Public Shareholders was preferable to continuing
with the status quo. Accordingly, The Rotherwood Parties and the
Company concluded that shareholder value was not likely to be
maximized were the Company to remain a public company.
o Future Prospects. The Rotherwood Parties and the Company considered
the adverse conditions in the Company's industry. Over the past two
years, the office furniture industry has experienced a substantial
decline in shipments. This decline has been related to weaknesses in
corporate profits, white-collar employment growth, corporate
construction and capital expenditures, all primary drivers of this
industry. According to the Business and Institutional Furniture
Manufacturer's Association (BIFMA), total volume for the U.S. office
furniture market totaled $10.9 billion in 2001, a decrease of 17.4%
over 2000. That figure represents the largest decline in the industry
since the association began recording statistics in 1971. Moreover,
the Association projected volume for 2002 to further decrease to
approximately $8.8 billion, which represents a 20.3% decline compared
to 2001. Although BIFMA is forecasting a 7.8% increase in volume for
2003, the Company's outlook for the industry remains cautious. The
Company believes it is unclear when industry conditions will improve.
o Financial Performance and Future Prospects. The Rotherwood Parties and
the Company considered the Rotherwood Parties' knowledge of the
Company's business, operations, assets and financial condition, and
the going concern opinions of the Company's independent auditors. With
respect to prospects, the Rotherwood Parties and the Company
considered the projections and uncertainties related to adoption of
the turn-around plan and the significant debt facing the Company.
While management's restructuring efforts and the revised accounting
treatment of the Rotherwood guaranty fee contributed to net income of
$87,000 in the first three quarters of 2002, the Company remains in a
liquidity crisis, and believes it will require significantly increased
sales in order to sustain profitability. The Rotherwood Parties and
the Company also considered that if the Going Private Transaction is
not completed, the bank may call the $320,000 line of credit, which
could result in the bankruptcy and liquidation of the Company. The
Rotherwood Parties and the Company also considered the impact that
these factors had and could have on the value of the common stock.
o Meara King Appraisal. The Rotherwood Parties 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. Summaries of Meara King's appraisal reports dated
October 19, 2001 and June 12, 2002, are attached as Exhibit B to this
proxy statement. In addition, the presentation of and the factors
considered by Meara King in its appraisal as discussed under "Reports,
Opinions, Appraisals, and Negotiations" supported the Rotherwood
Parties' and the Company's determination.
o Market Price and Premium. The Rotherwood Parties and the Company
considered that (i) the $0.05 per share to be received by the Public
Shareholders in the Merger is substantially higher than the $0.01 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 $0.05 per share consideration
is higher than the Company's negative net worth as of September 30,
2002.
o Other Potential Investors and Buyers. The Rotherwood Parties and the
Company also considered that no third party has indicated any interest
in purchasing or investing in the Company in many years. The
Rotherwood Parties 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, the Rotherwood Parties and
the Company believe that it is not likely that any party other than
Rotherwood would propose and complete a transaction on comparable or
more favorable terms to the Public Shareholders. The Company did not
take any steps to obtain alternate debt or equity financing or to find
a buyer for the Company because management did not believe such
efforts would be fruitful.
o Risks of Turn-around Strategy. The Rotherwood Parties 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 thus the Company's future will remain
uncertain. The Rotherwood Parties and the Company also considered the
risk that the turnaround plan may not be successful even with
Rotherwood's investment.
o Availability of Appraisal Rights. The Rotherwood Parties and the
Company considered the fact that Kansas law will entitle Public
Shareholders who file a written notice of intent with the Company to
obtain the "fair value" of their shares, as determined by a court, in
connection with the Merger.
The Rotherwood Parties and the Company also considered a variety of risks
and other potential negative factors concerning the Going Private Transaction.
These included the following:
o Independence. The Rotherwood Parties 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. The Rotherwood Parties and the Company
considered that upon completion of the Merger, the Public Shareholders
will not participate in any future net income or growth of the
Company. Consequently, if the Company is able to turn itself around,
any future appreciation in value of the Company would be for the
benefit of the Rotherwood Parties only. Because of the risks and
uncertainties associated with the Company's future prospects, the
Rotherwood Parties and the Company have concluded that the immediate
liquidity provided by going private will be more favorable to the
Public Shareholders than enabling them to have a speculative potential
future return.
o Conflicts of Interest. The Rotherwood Parties 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. The Rotherwood Parties and the Company
considered that the cash consideration to be received by the Public
Shareholders will result in taxable income or loss to the Public
Shareholders.
o Recourse Against Rotherwood. The Rotherwood Parties 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 Going Private Transaction, the Rotherwood Parties and
the Company considered Meara King's analyses to determine the fair market value
of the Company. The Rotherwood Parties 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 the Rotherwood Parties
nor the Company independently generated their own separate financial analysis of
the transaction.
The Rotherwood Parties and the Company concluded that the positive factors
outweighed the negative factors. Because of the variety of the factors
considered, the Rotherwood Parties and the Company did not make specific
assessments of, quantify or otherwise assign relative weights to the specific
factors considered in reaching the determination to proceed with the Going
Private Transaction. The determination was made after consideration of all of
the factors together.
Approval of the Going Private Transaction is assured given Rotherwood's
51.6% control of the Company. The Going Private Transaction is not subject to a
class vote of the Public Shareholders. The Company did not retain an
unaffiliated representative to act solely on behalf of the Public Shareholders
for the purpose of negotiating the terms of the Going Private Transaction and/or
preparing a report concerning the fairness of the Going Private Transaction.
Because only one of the Company's two directors is not affiliated with
Rotherwood, the Going Private Transaction has not been approved by a majority of
directors who are not employed by the Company or affiliated with Rotherwood. The
Board did not appoint a special committee of Public Shareholders to negotiate or
consider the fairness of the Going Private Transaction to the Public
Shareholders.
The Company and the Rotherwood Parties did not implement any of the
foregoing procedures because it was not believed the Company could afford the
additional time and expense required to do so, because it was not believed the
Company could recruit additional independent directors, because Rotherwood did
not wish to incur the expense of the Going Private Transaction and risk a
negative class vote by the Public Shareholders, and because Rotherwood did not
believe the time and expense of these procedural safeguards were supported by
the value of the Company or the size of the Going Private Transaction.
Nevertheless, the Rotherwood Parties and the Company believe there are
sufficient procedural safeguards to ensure the procedural fairness of the Going
Private Transaction to the Public Shareholders, including:
o Mr. Zicarelli abstained from voting on the Going Private Transaction,
and the Going Private Transaction was approved by the Company's
independent director
o The Company obtained the Meara King appraisal, which Meara King
advised was performed in accordance with Internal Revenue Ruling 5-60
and Uniform Standards of Professional Appraisal Practice
o The purchase price for the 18 million shares and the cash Merger
consideration are substantially higher than the fair value of the
Company's shares determined by Meara King
o Public Shareholders who believe that the $0.05 per share Merger
consideration is inadequate have the right to petition a Kansas court
to determine the appraised value of their shares
The Board carefully considered all of the factors described in this proxy
statement and decided, based upon such factors, that the Merger consideration is
fair to the Public Shareholders and that the procedural safeguards summarized
above were sufficient under the circumstances to protect the interests of the
Public Shareholders. In making such determination, the Board placed special
emphasis on management's and the Board's belief that if the Going Private
Transaction is not consummated, the Company may not be able to remain in
business indefinitely and the Public Shareholders could receive nothing for
their interest in the Company.
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 $0.01 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 $0.01 per share. Neither the
Company nor the Rotherwood Parties suggested a value for the Company's common
stock.
Neither the Company nor the Rotherwood Parties or their respective
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.
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 the Company was $0.01 per share in
September 2001 and $0.01 per share as of May 31, 2002 and because the later
appraisal relies on more current data, this summary only covers the most recent
appraisal.
The updated appraisal was delivered on June 12, 2002. As described in this
proxy statement, the Company recently revised its accounting treatment of the 2%
quarterly letter of credit/securities pledge fee payable to Rotherwood in the
form of common stock. The Company originally accrued $40,000 in guaranty fees
for the fourth quarter of 2001 and $40,000 in each of the first and second
quarters of 2002, based on the $0.05 per share exchange value agreed to by the
Company and Rotherwood. The Company has since determined that the fee should
have been recorded on the basis of the $0.01 per share fair market value of the
common stock being issued to Rotherwood established in the Meara King appraisal,
or $8,000 per quarter. The effect of this accounting change was to decrease
expenses and decrease net loss by $32,000 in 2001 and to decrease expenses and
increase net income by $32,000 in each of the first two quarters of 2002. The
Company has amended its December 31, 2001 Form 10-KSB/A and March 31 and June
30, 2002 Form 10-QSB's and restated the financial statements for 2001 and the
first and second quarters of 2002 contained in those reports to reflect this
accounting change. Meara King relied on the prior treatment in preparing its
updated appraisal, and did not rely on the revised treatment or restated
financials in creating its forecasted earnings and other estimates. The Company
has discussed the accounting change with Meara King. On December 9, 2002, Meara
King advised the Company that the accounting change would not alter its opinion
that the fair market value of the Company's common stock is $0.01 per share.
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 arch 31, 2002 and the
four-month period ended April 30, 2002, in each case before restatement. 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.
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 had contributed to a
first quarter 2002 operating profit (before restatement) of $16,000. However,
interest obligations under the bank credit facility had (before restatement)
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 $0.015 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 capital deficit, and decreases in
intangible assets. Stockholders' equity (before restatement) decreased from
$648,000 at December 31, 1999 to a 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 (before restatement) and examined trends in the line items of the income
statements. Meara King noted that total revenues decreased 6.5% per year since
1998, gross profit decreased from 28.6% in 1998 to 22.1% in 2001, operating
expenses as a percentage of revenue increased from 27.6% in 1998 to 31.9% in
2001, and other expense significantly increased due to the use of credit
facility (all before restatement). The Company recorded a marginal profit in
1998, but had recorded net losses in each year since then, including a $1.2
million net loss in 2001 (before restatement).
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 (before
restatement) increased to 34% compared to 31.9% in 2001; net operating income of
$16,000 and a net loss of $14,000 (both before restatement) 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 classification 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
(before restatement) 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
appears to be achieving results 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 (before
restatement) were 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.
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's equity investment would enable the
Company to reduce interest expense and fee obligations, which could at some
point in the future 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:
- -----------------------------------------------------------------------------------------------------------------------------
Cramer, Inc.
Projected Balance Sheets
- -----------------------------------------------------------------------------------------------------------------------------
December 31(1)
======================================== ====================================================================================
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
======================================== ====================== ==================== ==================== ===================
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)
======================================== ====================== ==================== ==================== ===================
======================================== ====================== ==================== ==================== ===================
3-Year
Growth Rate Analysis Compound 2003 2004 2005
Growth
======================================== ====================== ==================== ==================== ===================
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%
- ---------------------------------------- ---------------------- -------------------- -------------------- -------------------
- -----------------------------------------------------------------------------------------------------------------------------
Cramer, Inc.
Projected Income Statements(1)
- -----------------------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------- ---------------------- -------------------- -------------------- -------------------
- -----------------------------------------------------------------------------------------------------------------------------
Earnings Before The Effect of Debt
- -----------------------------------------------------------------------------------------------------------------------------
EBIT 121,307 36,489 69,326 139,086
- ---------------------------------------- ---------------------- -------------------- -------------------- -------------------
EBITDA 276,627 236,939 275,998 364,008
- ---------------------------------------- ---------------------- -------------------- -------------------- -------------------
- ---------------------------------------- ---------------------- -------------------- -------------------- -------------------
3-Year
Growth Rate Analysis Compound 2003 2004 2005
Growth
- ---------------------------------------- ---------------------- -------------------- -------------------- -------------------
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%
- ---------------------------------------- ---------------------- -------------------- -------------------- -------------------
(1) Before the change in accounting treatment of the Rotherwood guaranty fee
(see "Reports, Opinions, Appraisals and Negotiations - Introduction").
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 reporting under the same standard
industrial classification ("SIC") code, 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 was 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 a multiple of 30-32% was appropriate,
which resulted in a value of $3 million. Assuming long-term debt of $2.5 million
is subtracted, the result was 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 an appropriate discount rate was 29% and an
appropriate capitalization rate was 26%. The appropriateness of these rates was
determined by Meara King without input from the Company or the Rotherwood
Parties.
Using the discount rate of 29%, Meara King calculated the present value of
the projected earnings and fair market value of the Company to be $68,000. The
following chart shows Meara King's analysis using the discounted earnings
method:
- -----------------------------------------------------------------------------------------------------------------------------
Cramer, Inc.
Discounted Future Earnings(1)
- -----------------------------------------------------------------------------------------------------------------------------
Note December 31 Terminal Year
Item No.
- ------------------------------ -------- ----------------- ---------------- --------------- ---------------- -----------------
2002(1) 2003 2004 2005
- ------------------------------ -------- ----------------- ---------------- --------------- ----------------
Projected revenue 4,874,710 8,416,970 8,718,036 9,153,665
- ------------------------------ -------- ----------------- ---------------- --------------- ----------------
Normalized net income - (120,136) (92,876) (33,221)
- -----------------------------------------------------------------------------------------------------------
(1) Seven months of operating results
===========================================================================================================
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 (rounded) 68,000
- -----------------------------------------------------------------------------------------------------------------------------
(1) Before the change in accounting treatment of the Rotherwood guaranty fee
(see "Reports, Opinions, Appraisals and Negotiations - Introduction").
If a discount rate other than 29% had been used, it would have led to a
different estimated fair market value of the Company. The following table
projects the estimated fair market value of the Company using discount rates of
20%, 15% and 10%, both before and after a 40% lack of marketability discount
applied to the Company's common stock. The following table is for illustration
purposes only and is not intended as a representation by the Company or the
Rotherwood Parties regarding the appropriate discount rate to be used or the
estimated fair market value of the Company.
-------------------------------------------------------
Estimated Value(1)
-------------------------------------------------------
$ $ /share(2) $ /share(3)
------------------ ----------------- ----------------- -------------------
29% 68,000 0.010 0.017
------------------ ----------------- ----------------- -------------------
20% 97,000 0.014 0.024
------------------ ----------------- ----------------- -------------------
15% 124,000 0.018 0.031
------------------ ----------------- ----------------- -------------------
10% 158,000 0.023 0.039
------------------ ----------------- ----------------- -------------------
(1) Before the change in accounting treatment of the Rotherwood guaranty fee
(see "Reports, Opinions, Appraisals and Negotiations - Introduction").
(2) After 40% discount for lack of marketability (3) Before 40% discount for
lack of marketability.
As the foregoing table illustrates, the $0.05 per share price being paid by
Rotherwood for the 18 million shares and the $0.05 per share cash Merger
consideration being paid to the Public Shareholders is greater than the
estimated fair market value per share of the Company using the most favorable
discount rate displayed and before deduction of the 40% lack of marketability
discount.
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 of 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' 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.(1)
Net Asset Value
---------------------------------------------------------------------------------------------------------------------
Fair Market Value Note
Line Item Book Value Adjustment No.
---------------------------------------------------- ------------------- ---------------- ------------------
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)
Stockholders' equity
---------------------------------------------------- ------------------- ---------------- ------------------
Liabilities and equity 2,464,008 917,920 3,381,928
----------------------------------------------------------------------------------------- ------------------ --------
Indicated control value as if freely traded (rounded) (824,000)
----------------------------------------------------------------------------------------- ------------------ --------
Notes on Adjustments - See report for detailed description
1. Real estate appraisal by David Craig & Co. as of September 4, 2001,
adjusted downward to reflect current market conditions per discussions with
management.
2. & 3. Machinery and equipment appraisal by Appraisal Consulting Services,
Inc. as of September 11, 2001.
4. Estimated value of identified intangibles:
Assembled and trained workforce $407,000
Trademarks, patents, customer list and other intangibles 150,000
---------
Total: $557,000
========
- --------------------------------------------------------------------------------
(1) Before the change in accounting treatment of the Rotherwood guaranty fee
(see "Reports, Opinions, Appraisals and Negotiations - Introduction."
Meara King concluded that this method resulted in a value that was not
meaningful, and was therefore 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 fair market value of the Company
based on the discounted future earnings method 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 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 lack of marketability discount
of approximately 40%.
Valuation Conclusion--Fair Market Value
Using the lack of marketability discount of 40%, Meara King multiplied the
40% discount rate by the per share value of $0.017 and subtracted the product
from the $0.017 per share value to reach an estimated fair market value of $0.01
per share as of May 31, 2002.
A summary of the appraisal without exhibits is attached as Exhibit B to
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 his
or her 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
Upon consummation of the Merger, the Public Shareholders holding the
1,958,034 shares of common stock not held by Rotherwood will receive $0.05 per
share and an aggregate of approximately $98,000 in cash. The source of these
funds will be the operating funds of Rotherwood.
The following table shows the estimated expenses incurred by the Company in
connection with the Going Private Transaction.
Accounting fees $ 3,500
Legal fees 65,000
Printing costs 18,000
Mailing expenses 6,000
Appraisal fees 24,000
Transfer Agent Fees 12,000
-----------
Total $ 128,500
===========
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 equity 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 and book value per share of
the common stock held by the Public Shareholders. (The Company incurred a net
loss per share (after restatement) in 2001 and its book value per share was a
negative number at September 30, 2002.) Such additional shares could also be
used to dilute the share ownership of persons seeking to obtain control of the
Company. The Board and its 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. Irrespective of the adoption of
Proposal III, the Board could determine to implement a shareholders' rights plan
in the 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.
When 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 issuance of
common stock to Rotherwood as compensation for its $2,000,000 securities pledge
and in exchange for Rotherwood's $900,000 equity investment, 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 6% interest in Rotherwood. Mr. Zicarelli has
shared voting and investment power over Rotherwood's shares in the Company and
is deemed to have an interest in those shares by virtue of his ownership
interest in 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.
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
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 and Quarterly Reports
Amendment 4 to our annual report on Form 10-KSB/A, containing restated
financial statements for the year ended December 31, 2001, Amendment 2 to our
quarterly reports on Form 10-QSB/A, containing restated financial statements for
the quarters ended March 31 and June 30, 2002, and our quarterly report on Form
10-QSB, containing financial statements for the quarter ended September 30,
2002, were mailed with this proxy statement to all shareholders entitled to vote
at the annual meeting. You must not regard the annual report or quarterly
reports 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 AMENDED ANNUAL REPORT ON FORM 10-KSB/A, INCLUDING THE RESTATED FINANCIAL
STATEMENTS AND FINANCIAL STATEMENT SCHEDULES, FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION FOR THE YEAR ENDED DECEMBER 31, 2001, AS WELL AS A COPY OF
OUR AMENDED QUARTERLY REPORTS ON FORM 10-QSB/A, INCLUDING THE RESTATED FINANCIAL
STATEMENTS, FILED WITH THE SEC FOR THE QUARTERS ENDED MARCH 31 AND JUNE 30, 2002
AND OUR QUARTERLY REPORT ON FORM 10-QSB, INCLUDING THE FINANCIAL STATEMENTS,
FILED WITH THE SEC FOR THE QUARTER ENDED SEPTEMBER 30, 2002.
Householding
A single copy of our amended annual report on Form 10-KSB/A, amended
quarterly reports on Form 10-QSB/A, quarterly report on Form 10-QSB 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, Form 10-QSB/A's and Form 10-QSB 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, Form 10-QSB/A's and Form 10-QSB and proxy statement for the 2002
or any future annual meeting by contacting us at 1222 Quebec Street, North
Kansas City, Missouri 64116 (816) 471-4433, attention Nicholas Christianson.
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/ Nicholas Christianson
-------------------------------------------
Nicholas Christianson, Acting President and
Chief Executive Officer and Secretary
DOCUMENTS AND INFORMATION INCORPORATED BY REFERENCE
Amendment 4 to our annual report on Form 10-KSB/A for the year ended December
31, 2001, Amendment 2 to our quarterly reports on Form 10-QSB/A for the quarters
ended March 31 and June 30, 2002, our quarterly report on Form 10-QSB for the
quarter ended September 30, 2002 and the joint Transaction Statement of the
Company, Rotherwood, Rotherwood Investments and James R. Zicarelli on Schedule
13E-3, being sent to shareholders with this proxy statement, are incorporated in
this proxy statement by reference.
EXHIBIT A
Kansas Corporation Code Section 17-6712
17-6712. Payment for stock of stockholder objecting to merger or consolidation;
definitions; notice to objecting stockholders; demand for payment; appraisal and
determination of value by district court, when; taxation of costs; rights of
objecting stockholders; status of stock; section inapplicable to certain shares
of stock.
(a) When used in this section, the word "stockholder" means a holder of record
of stock in a stock corporation and also a member of record of a nonstock
corporation; the words "stock" and "share" mean and include what is ordinarily
meant by those words and also membership or membership interest of a member of a
nonstock corporation.
(b) The corporation surviving or resulting from any merger or consolidation,
within 10 days after the effective date of the merger or consolidation, shall
notify each stockholder of any corporation of this state so merging or
consolidating who objected thereto in writing and whose shares either were not
entitled to vote or were not voted in favor of the merger or consolidation, and
who filed such written objection with the corporation before the taking of the
vote on the merger or consolidation, that the merger or consolidation has become
effective. If any such stockholder, within 20 days after the date of mailing of
the notice, shall demand in writing, from the corporation surviving or resulting
from the merger or consolidation, payment of the value of the stockholder's
stock, the surviving or resulting corporation shall pay to the stockholder,
within 30 days after the expiration of the period of 20 days, the value of the
stockholder's stock on the effective date of the merger or consolidation,
exclusive of any element of value arising from the expectation or accomplishment
of the merger or consolidation.
(c) If during a period of 30 days following the period of 20 days provided for
in subsection (b), the corporation and any such stockholder fail to agree upon
the value of such stock, any such stockholder, or the corporation surviving or
resulting from the merger or consolidation, may demand a determination of the
value of the stock of all such stockholders by an appraiser or appraisers to be
appointed by the district court, by filing a petition with the court within four
months after the expiration of the thirty-day period.
(d) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the corporation, which shall file with the clerk of
such court, within 10 days after such service, a duly verified list containing
the names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the corporation. If the petition shall be filed by the corporation,
the petition shall be accompanied by such duly verified list. The clerk of the
court shall give notice of the time and place fixed for the hearing of such
petition by registered or certified mail to the corporation and to the
stockholders shown upon the list at the addresses therein stated and notice
shall also be given by publishing a notice at least once, at least one week
before the day of the hearing, in a newspaper of general circulation in the
county in which the court is located. The court may direct such additional
publication of notice as it deems advisable. The forms of the notices by mail
and by publication shall be approved by the court.
(e) After the hearing on such petition the court shall determine the
stockholders who have complied with the provisions of this section and become
entitled to the valuation of and payment for their shares, and shall appoint an
appraiser or appraisers to determine such value. Any such appraiser may examine
any of the books and records of the corporation or corporations the stock of
which such appraiser is charged with the duty of valuing, and such appraiser
shall make a determination of the value of the shares upon such investigation as
seems proper to the appraiser. The appraiser or appraisers shall also afford a
reasonable opportunity to the parties interested to submit to the appraiser or
appraisers pertinent evidence on the value of the shares. The appraiser or
appraisers, also, shall have the powers and authority conferred upon masters by
K.S.A. 60-253 and amendments thereto.
(f) The appraiser or appraisers shall determine the value of the stock of the
stockholders adjudged by the court to be entitled to payment therefor and shall
file a report respecting such value in the office of the clerk of the court, and
notice of the filing of such report shall be given by the clerk of the court to
the parties in interest. Such report shall be subject to exceptions to be heard
before the court both upon the law and facts. The court by its decree shall
determine the value of the stock of the stockholders entitled to payment
therefor and shall direct the payment of such value, together with interest, if
any, as hereinafter provided, to the stockholders entitled thereto by the
surviving or resulting corporation. Upon payment of the judgment by the
surviving or resulting corporation, the clerk of the district court shall
surrender to the corporation the certificates of shares of stock held by the
clerk pursuant to subsection (g). The decree may be enforced as other judgments
of the district court may be enforced, whether such surviving or resulting
corporation be a corporation of this state or of any other state.
(g) At the time of appointing the appraiser or appraisers, the court shall
require the stockholders who hold certificated shares and who demanded payment
for their shares to submit their certificates of stock to the clerk of the
court, to be held by the clerk pending the appraisal proceedings. If any
stockholder fails to comply with such direction, the court shall dismiss the
proceedings as to such stockholder.
(h) The cost of any such appraisal, including a reasonable fee to and the
reasonable expenses of the appraiser, but exclusive of fees of counsel or of
experts retained by any party, shall be determined by the court and taxed upon
the parties to such appraisal or any of them as appears to be equitable, except
that the cost of giving the notice by publication and by registered or certified
mail hereinabove provided for shall be paid by the corporation. The court, on
application of any party in interest, shall determine the amount of interest, if
any, to be paid upon the value of the stock of the stockholders entitled
thereto.
(i) Any stockholder who has demanded payment of the stockholder's stock as
herein provided shall not thereafter be entitled to vote such stock for any
purpose or be entitled to the payment of dividends or other distribution on the
stock, except dividends or other distributions payable to stockholders of record
at a date which is prior to the effective date of the merger or consolidation,
unless the appointment of an appraiser or appraisers shall not be applied for
within the time herein provided, or the proceeding be dismissed as to such
stockholder, or unless such stockholder with the written approval of the
corporation shall deliver to the corporation a written withdrawal of the
stockholder's objections to and an acceptance of the merger or consolidation, in
any of which cases the right of such stockholder to payment for the
stockholder's stock shall cease.
(j) The shares of the surviving or resulting corporation into which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
(k) This section shall not apply to the shares of any class or series of a class
of stock, which, at the record date fixed to determine the stockholders entitled
to receive notice of and to vote at the meeting of stockholders at which the
agreement of merger or consolidation is to be acted on, were either (1)
registered on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc., or (2) held of record by not less than 2,000
stockholders, unless the articles of incorporation of the corporation issuing
such stock shall otherwise provide; nor shall this section apply to any of the
shares of stock of the constituent corporation surviving a merger, if the merger
did not require for its approval the vote of the stockholders of the surviving
corporation, as provided in subsection (f) of K.S.A. 17-6701 and amendments
thereto. This subsection shall not be applicable to the holders of a class or
series of a class of stock of a constituent corporation if under the terms of a
merger or consolidation pursuant to K.S.A. 17-6701 or 17-6702, and amendments
thereto, such holders are required to accept for such stock anything except (i)
stock or stock and cash in lieu of fractional shares of the corporation
surviving or resulting from such merger or consolidation, or (ii) stock or stock
and cash in lieu of fractional shares of any other corporation, which at the
record date fixed to determine the stockholders entitled to receive notice of
and to vote at the meeting of stockholders at which the agreement of merger or
consolidation is to be acted on, were either registered on a national securities
exchange or held of record by not less than 2,000 stockholders, or (iii) a
combination of stock or stock and cash in lieu of fractional shares as set forth
in (i) and (ii) of this subsection.
EXHIBIT B
SUMMARIES OF MEARA KING REPORTS
MEARA, KING & CO.
CERTIFIED PUBLIC ACCOUNTANTS
800 West 47th Street o Suite 430 o Kansas City, MO
64112-1246o(816)561-1400 oFacsimile (816)561-6926 oE-Mail info@meara.com
- --------------------------------------------------------------------------------
Board of Directors
Cramer, Inc.
The purpose of this study is to establish a reasonable estimate of the fair
market value of Cramer, Inc., a Kansas corporation (herein referred to as Cramer
or Company), as of July 29, 2001. Specifically, we are valuing the Company's
common stock for the Company's Board of Directors or shareholders considering
various alternatives.
Cramer's common stock is not listed on NASDAQ or any exchange and there is no
public trading market for the stock. Therefor, for valuation purposes, the
subject Company is treated as a closely-held business.
The standard of value utilized in this valuation is fair market value. Fair
market value is defined as: the hypothetical cash price at which property would
change hands between a willing buyer and seller when the former is under no
compulsion to buy and the latter is under no compulsion to sell with both
parties having reasonable knowledge of relevant facts.
Our valuation is conducted with reference to Internal Revenue Service Ruling
59-60 (C.B. 1959-1, 237), as modified and amplified, which provides guidelines
for the valuation of closely-held corporate stock for federal income, estate and
gift tax purposes. This valuation is also performed in compliance with the
applicable Uniform Standards of Professional Appraisal Practice (USPAP).
In performing our valuation, we rely on the accuracy and reliability of
historical financial statements and other financial data and oral
representations of Company representatives. We did not audit or review such
financial statements or other data, and we do not express an opinion or any
other form of assurance on them. This engagement was not and should not be
relied on to disclose errors, irregularities, or illegal acts, including fraud
or defalcations, that may exist.
It is our understanding that the valuation is to be used solely for the purpose
of the Company's Board of Directors or shareholders. It is also our
understanding that the distribution of this report will be restricted to this
use and, accordingly, this report will not be distributed to outside parties for
any other purpose.
- --------------------------------------------------------------------------------
Utilizing the valuation methods described and subject to the assumptions and
limiting conditions incorporated herein, it is our opinion that the fair market
value of the common stock of Cramer, Inc. as of May 31, 2002 is $0.01 per share.
- --------------------------------------------------------------------------------
October 19, 2001
Kansas City, Missouri
Meara, King & Co.
MEARA, KING & CO.
CERTIFIED PUBLIC ACCOUNTANTS
800 West 47th Street o Suite 430 o Kansas City, MO
64112-1246o(816)561-1400 oFacsimile (816)561-6926 oE-Mail info@meara.com
- --------------------------------------------------------------------------------
Board of Directors
Cramer, Inc.
The purpose of this study is to establish a reasonable estimate of the fair
market value of Cramer, Inc., a Kansas corporation (herein referred to as Cramer
or Company), as of May 31, 2002. Specifically, we are valuing the Company's
common stock for shareholder purposes.
Cramer's common stock is not listed on NASDAQ or any exchange and there is no
public trading market for the stock. Therefore, for valuation purposes, the
subject Company is treated as a closely-held business.
The standard of value utilized in this valuation is fair market value. Fair
market value is defined as: the hypothetical cash price at which property would
change hands between a willing buyer and seller when the former is under no
compulsion to buy and the latter is under no compulsion to sell with both
parties having reasonable knowledge of relevant facts.
Our valuation is conducted with reference to Internal Revenue Service Ruling
59-60 (C.B. 1959-1,237), as modified and amplified, which provides guidelines
for the valuation of closely-held corporate stock for federal income, estate and
gift tax purposes. This valuation is also performed in compliance with the
applicable Uniform Standards of Professional Appraisal Practice (USPAP).
In performing our valuation, we rely on the accuracy and reliability of
historical financial statements and other financial data and oral
representations of Company representatives. We did not audit or review such
financial statements or other data, and we do not express an opinion or any
other form of assurance on them. This engagement was not and should not be
relied on to disclose errors, irregularities, or illegal acts, including fraud
or defalcations that may exist.
It is our understanding that the valuation is to be used solely for shareholder
purposes. It is also our understanding that the distribution of this report will
be restricted to this use and, accordingly, this report will not be distributed
to outside parties for any other purpose.
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Utilizing the valuation methods described and subject to the assumptions and
limiting conditions incorporated herein, it is our opinion that the fair market
value of the common stock of Cramer, Inc. as of May 31, 2001 is $0.01 per share.
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June 12, 2002
Kansas City, Missouri
Cramer, Inc.
Proxy for the 2002 Annual Meeting of Shareholders, to be held ____ __, 2003
This Proxy is solicited by the Board of Directors
As a shareholder of Cramer, Inc. (the "Company"), I appoint Nicholas
Christianson as my attorney-in-fact and proxy (with full power of substitution),
and authorize him to represent me at the 2002 Annual Meeting of Shareholders of
the Company to be held at 1222 Quebec Street, North Kansas City, Missouri 64116
on ____ __, 2003 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.
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 voted 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.
If no choice is indicated on the proxy, the person named as proxy intends
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.
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Signature of Shareholder
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Title
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Signature of Shareholder
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Title
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Dated