<PAGE>
FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from to
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Commission File Number 0-1561
REUTER MANUFACTURING, INC.
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(Exact name of registrant as specified in its charter)
Minnesota 41-0780999
- ------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
410 - 11th Avenue South, Hopkins, Minnesota 55343
- ------------------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
612/935-6921
- --------------------------------------------------------------------------------
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X . No. .
--- ---
As of October 25, 1996 there were outstanding 3,198,520 shares of the
registrant's common stock, par value $.18-3/4 per share.
1
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PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
REUTER MANUFACTURING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $4,038,677 $2,703,830 $10,118,277 $8,754,793
Less:
Cost of sales 2,683,024 2,168,215 7,264,913 6,761,509
Depreciation 136,088 150,442 422,908 448,921
------------- ------------- ------------- -------------
GROSS PROFIT 1,219,565 385,173 2,430,456 1,544,363
Selling, general and administrative expenses 577,821 520,356 1,678,122 1,667,494
Depreciation 26,320 28,751 83,097 84,311
------------- ------------- ------------- -------------
OPERATING INCOME (LOSS) 615,424 (163,934) 669,237 (207,442)
Other income (expenses):
Interest income 2,314 2,951 14,088 7,572
Interest expense (104,629) (106,490) (307,463) (302,044)
Management fees 30,000 90,000
Other, net 14,778 16,988 22,789 43,629
------------- ------------- ------------- -------------
TOTAL OTHER EXPENSE (87,537) (56,551) (270,586) (160,843)
------------- ------------- ------------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 527,887 (220,485) 398,651 (368,285)
------------- ------------- ------------- -------------
Discontinued Operations:
Loss from discontinued waste processing operations,
primarily accrued interest during elongated debt
settlement negotiations (540,131) (1,617,809)
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE EXTRORDINARY ITEM 527,887 (760,616) 398,651 (1,986,094)
Extraordinary item - gain on debt restructuring (note 3) 7,249,018
------------- ------------- ------------- -------------
NET INCOME (LOSS) $527,887 ($760,616) $7,647,669 ($1,986,094)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
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REUTER MANUFACTURING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(CONTINUED)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) per common share data:
Primary:
Income (loss) from continuing operations $0.15 ($0.07) $0.12 ($0.11)
Loss from discontinued operations (0.17) (0.51)
------------ ------------ ------------ ------------
INCOME (LOSS) PER SHARE BEFORE
EXTRAORDINARY ITEM 0.15 (0.24) 0.12 (0.62)
------------ ------------ ------------ ------------
Extraordinary item (note 3) 2.19
------------ ------------ ------------ ------------
NET INCOME (LOSS) PER SHARE $0.15 ($0.24) $2.31 ($0.62)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Fully diluted:
Income from continuing operations $0.08 $0.08
Loss from discontinued operations
------------ ------------
INCOME PER SHARE BEFORE
EXTRAORDINARY ITEM 0.08 0.08
------------ ------------
Extraordinary item (note 3) 1.51
------------ ------------
NET INCOME PER SHARE $0.08 $1.59
------------ ------------
------------ ------------
Weighted average number of shares outstanding:
Primary 3,406,831 3,191,520 3,308,530 3,191,520
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Fully Diluted 6,658,086 3,191,520 4,800,810 3,191,520
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
REUTER MANUFACTURING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
--------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $174,996 $101,048
Investments, restricted 250,000 250,000
Accounts receivable, net of allowances of $17,000
at September 30, 1996 and $15,000 at December 31, 1995 1,802,875 1,248,697
Inventories 1,854,576 1,301,105
Other current assets 14,275 72,784
--------------- --------------
TOTAL CURRENT ASSETS 4,096,722 2,973,634
Property, plant and equipment, net 3,835,858 4,082,318
Intangible assets, net 409,889 446,365
--------------- --------------
TOTAL ASSETS $8,342,469 $7,502,317
--------------- --------------
--------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Debt of Eden Prairie facility guaranteed by parent company,
including accrued interest of $3,275,656 at
December 31, 1995 $18,784,019
Current maturities of long-term debt $4,311,846 259,734
Borrowings under asset-based line of credit 2,892,222 2,589,575
Accounts payable, trade 756,981 530,991
Accrued expenses 822,846 714,872
--------------- --------------
TOTAL CURRENT LIABILITIES 8,783,895 22,879,191
Long-term debt, less current maturities 7,818,448 495,715
Other long-term liabilities 162,610 199,654
Commitments and contingencies
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock, par value $.01 per share;
authorized 2,500,000 shares; none issued
Common stock, par value $.1875 per share;
authorized 9,000,000 shares; issued and
outstanding: 3,198,520 shares at September 30,1996
and 3,191,520 shares at December 31, 1995 599,722 598,410
Additional paid-in capital 13,711,374 13,710,596
Accumulated deficit (22,733,580) (30,381,249)
--------------- --------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (8,422,484) (16,072,243)
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $8,342,469 $7,502,317
--------------- --------------
--------------- --------------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
4
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REUTER MANUFACTURING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash For the nine months ended September 30,
- ----------------------------------------------------------------------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $7,647,669 ($1,986,094)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 506,005 533,232
Amortization of intangible assets 36,476 58,976
Extraordinary gain on debt restructuring (note 3) (7,249,018)
Gain on sales of assets (9,636)
Provision for uncollectible accounts receivable 2,000 7,907
Sanwa interest accrued during elongated debt settlement negotiations 1,617,809
Provision for obsolete inventory 100,000 15,000
Changes in operating assets and liabilities:
Accounts receivable (556,178) 143,224
Inventories (653,471) (277,849)
Other assets 58,509 (20,153)
Accounts payable 225,990 247,284
Accrued expenses 158,691 178,859
Accrued retirement (37,044) (32,750)
Other liabilities (50,717) (18,849)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 188,912 456,960
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 35,124
Acquisition of Sollami product line (287,921)
Additions to property, plant and equipment (101,957) (133,455)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (101,957) (386,252)
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (317,744) (131,057)
Proceeds from short-term borrowings 9,881,315 8,758,977
Repayment of short-term borrowings (9,578,668) (8,906,480)
Proceeds from issuance of stock 2,090
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (13,007) (278,560)
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 73,948 (207,852)
Cash, beginning of year 101,048 209,192
- ----------------------------------------------------------------------------------------------------------------------------
Cash, end of period $174,996 $1,340
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid for interest $307,516 $299,460
Noncash investing and financing activities:
Purchase of equipment in exchange for notes payable 157,588 226,024
Purchase of Sollami in exchange for future minimum payments 346,285
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
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Reuter Manufacturing, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. FINANCIAL STATEMENTS:
The unaudited consolidated financial statements of Reuter Manufacturing,
Inc., and Subsidiaries (the Company) for the three and nine-month periods
ended September 30, 1996 and 1995 reflect, in the opinion of management,
all adjustments (which include only normal recurring adjustments, except as
described in Note 3 of this Form 10-QSB) necessary to fairly state the
consolidated financial position at September 30, 1996 and the consolidated
results of operations (including discontinued operations) and cash flows
for the reported periods. The consolidated results of operations for any
interim period are not necessarily indicative of results expected for the
full year. These unaudited consolidated interim financial statements
should be read in conjunction with the consolidated financial statements
and notes thereto included in the Company's 1995 Form 10-KSB.
USE OF ESTIMATES:
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amount of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates. The most significant areas
which require the use of management's estimates relate to allowances for
doubtful accounts receivable, inventory obsolescence, and the accrual for
container warranty.
NET INCOME (LOSS) PER SHARE:
Net income per common and common equivalent shares is computed by dividing
net income by the weighted average number of shares outstanding during each
period. Common stock equivalents for primary earnings per share purposes
represent stock options granted to employees. For purposes of computing
fully diluted earnings per share, common shares issuable in connection with
the contingent stock purchase warrant issued to Sanwa Business Credit
Corporation (Sanwa) as part of the restructuring of the Eden Prairie
Facility debt (as discussed in Note 3(c) of this Form 10-QSB), are
considered issued and outstanding.
6
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2. SELECTED BALANCE SHEET INFORMATION:
Inventories:
September 30, December 31,
1996 1995
------------- ------------
Raw materials and supplies $ 427,183 $ 297,067
Work-in-process 1,427,393 1,004,038
------------- ------------
$ 1,854,576 $1,301,105
------------- ------------
------------- ------------
3. EDEN PRAIRIE FACILITY ASSETS SALE AND JANUARY 24, 1996 RESTRUCTURING OF
UNDERLYING DEBT GUARANTEE:
As described in Notes 2 and 3 of the notes to consolidated financial
statements in the Company's 1995 Form 10-KSB, on January 24, 1996, the
Company and Sanwa Business Credit Corporation (Sanwa) entered into a Loan
and Security Agreement (the Loan Agreement) to restructure the Company's
guarantee of the debt obligation underlying the Eden Prairie Facility (EPR
Facility), which included the following documents: a Senior Subordinated
Secured Promissory Note in the amount of $2,780,000; a Junior Subordinated
Secured Promissory Note in the amount of $1,000,000; a Mortgage, Assignment
of Leases and Rents, Security Agreement and Financing Statement; a Patent
Security Agreement; a $6,000,000 Income Sharing Agreement; and a Common
Stock Warrant Agreement (collectively, the Loan Documents). The
restructuring became effective on June 6, 1996, at which time the
restructuring transaction was recognized by the Company as an extraordinary
item - gain on debt restructuring of approximately $7.2 million. There was
no income tax effect related to the extraordinary gain, due to the net
operating loss carryforwards available to the Company, as well as the
Company's continued insolvency for tax purposes, subsequent to the debt
restructuring.
Pursuant to the Loan Agreement, Sanwa agreed to restructure the Company's
obligations to guarantee repayment of a loan from Sanwa to EPR, Inc., into
three separate obligations as follows:
(a) The $2,780,000 term loan, evidenced by a Senior Subordinated Secured
Promissory Note in the amount of $2,780,000, executed by the Company in
favor of Sanwa. The note bears interest at the rate of 8% per year and
provides for 12 consecutive quarterly payments of $75,000 plus accrued
interest and a final payment of any unpaid principal and accrued interest
on December 31, 1999.
7
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EDEN PRAIRIE FACILITY ASSETS SALE AND JANUARY 24, 1996 RESTRUCTURING OF
UNDERLYING DEBT GUARANTEE, CONTINUED:
(b) The $1,000,000 term loan, evidenced by a Junior Subordinated Secured
Promissory Note in the amount of $1,000,000, executed by the Company in
favor of Sanwa. The note bears interest at the rate of 8% per year and
provides for quarterly payments of principal and interest, to the extent
that the Company generates cash flow after payment of certain indebtedness
and capital expenditures, and a final payment of any unpaid principal and
accrued interest on December 31, 1999.
(c) The Income Sharing Agreement, whereby the Company is required to make
payments to Sanwa in an amount equal to 40% of the Company's income before
taxes, as defined, (prior to a change in control as defined in Section
382(g)(1) of the Internal Revenue Code of 1986, as amended), less cash
interest payments made by the Company under the Senior Subordinated Secured
Promissory Note. However, if a change in control occurs, the Company is
required to make payments to Sanwa in an amount equal to the percentage of
the long-term tax-exempt rate, as defined in Section 382(f) of the Internal
Revenue Code of 1986, as amended, multiplied by the Company's income before
taxes, as defined, less cash interest payments made by the Company under
the Senior Subordinated Secured Promissory Note. The Income Sharing
Agreement remains in effect until the Company has made total payments of
$6,000,000 under the agreement, or it expires on December 31, 2010,
whichever is earlier.
The Company's obligations under the Loan Documents are collateralized by a
security interest in substantially all of the Company's assets. The
security interest granted to Sanwa is subordinate to the security interest
previously granted in connection with the Asset-Based Short-Term Financing
Agreement (see Note 7 of the Company's 1995 10-KSB).
The Company also granted Sanwa a contingent stock purchase warrant to
purchase up to 3,178,780 shares of common stock of the Company for an
aggregate purchase price of $10 (ten dollars) (see Note 8 of the Company's
1995 10-KSB). The warrant is exercisable only following the occurrence of
an "ownership change" in respect of the Company, as defined in
Section 382(g)(1) of the Internal Revenue Code of 1986, as amended. The
warrant expires upon payment in full by the Company of all amounts due
under the Income Sharing Agreement.
In addition, the Company and Sanwa entered into separate Standstill
Agreements with the Company's Chief Executive Officer (the CEO) and its
Chairman of the Board of Directors (the Chairman) who agreed not to,
directly or indirectly, acquire, dispose of, or exercise any option or
other right to acquire any capital stock or option of the Company. The
Standstill Agreements remain in effect until the earlier of (a) the
expiration of the Income Sharing Agreement, (b) the death of the CEO or the
Chairman,
8
<PAGE>
EDEN PRAIRIE FACILITY ASSETS SALE AND JANUARY 24, 1996 RESTRUCTURING OF
UNDERLYING DEBT GUARANTEE, CONTINUED:
or (c) the occurrence of an "ownership change" in respect of the Company,
as defined in Section 382(g)(1) of the Internal Revenue Code of 1986, as
amended.
As a result of the Sanwa Standstill Agreements described above, the Company
has entered into an agreement (the Management Standstill Agreement) with
the CEO and the Chairman whereby, under a predetermined formula, these two
individuals can earn up to an aggregate of $600,000 based on increases in
the market value of shares they hold, that they are unable to trade due to
the provisions of the Sanwa Standstill Agreement.
4. ASSET-BASED SHORT-TERM FINANCING ARRANGEMENT:
The Company is in violation of certain financial and technical covenants of
the Asset-Based short-term financing agreement and a cross-default covenant
due to the defaults described in this Form 10-QSB under the caption
"Liquidity and Capital Resources" and Note 7 of the notes to the
consolidated financial statements in the Company's 1995 Form 10-KSB. As a
result of these default conditions, the lender may, at its sole discretion
declare the Company in default, discontinue making advances to the Company
and demand immediate repayment of borrowings under the line of credit. If
the lender will continue making advances to the Company, additional
borrowing capacity under this line of credit is approximately $158,000 at
October 25, 1996.
5. RECLASSIFICATIONS:
Certain reclassifications have been made to the periods ended September 30,
1995 consolidated statements of operations to conform to the current
periods presentation. These reclassifications had no impact on previously
reported losses from continuing operations.
6. SIGNIFICANT CUSTOMERS:
Sales to the Company's two largest medical product customers were
$3,106,609 or 76.9% of net sales for the third quarter of 1996, compared to
sales of $1,949,674 or 72.1% of net sales for the same period in 1995.
Sales to the Company's two largest medical product customers were
$7,334,739 or 72.5% of net sales and $6,218,192 or 71.0% of net sales for
the nine-months ended September 30, 1996 and 1995, respectively.
Accounts receivable concentrations associated with the two largest medical
customers discussed above, represented 55.6% and 11.4% of September 30,
1996 total customer accounts receivable.
9
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
GENERAL:
In June 1996, the "Restructuring Agreements" (described below) were
released from escrow and the Company was released from its guarantee of the
indebtedness of EPR, Inc. ("EPR") a wholly owned subsidiary of the Company
to Sanwa Business Credit Corporation. The Company recognized an
extraordinary gain of $7,249,018 or $2.19 per share ($1.51 per share on a
fully diluted basis) during the second quarter of 1996 in connection with
this transaction. EPR ceased operations on January 1, 1994 and had no
operations or assets on December 31, 1995.
As more fully described in Note 3 to the consolidated financial statements
included in this report on Form 10-QSB, in January 1996, the Company and
Sanwa entered into a series of agreements (the "Restructuring Agreements"),
pursuant to which Sanwa agreed to restructure the Company's obligations to
guarantee repayment of the EPR Loan. The Restructuring Agreements were
subject to an escrow arrangement whereby Sanwa had the right to rescind the
transaction if the Company sought protection under U.S. Bankruptcy Laws on
or before June 6, 1996. As described above, the Restructuring Agreements
were released from escrow and the Company was released from its guarantee
of the indebtedness of the EPR debt during June 1996. Pursuant to the
Restructuring Agreements, Sanwa agreed to restructure the Company's
obligations on the EPR Loan into three separate obligations: a term loan
in the amount of $2,780,000, a term loan in the amount of $1,000,000, and
payment obligations under an Income Sharing Agreement which generally
requires the Company to make payments to Sanwa in an amount equal to 40% of
its income before taxes, as defined, if any, less cash interest payments
made by the Company under the $2,780,000 term loan. The Income Sharing
Agreement remains in effect until the Company has made total payments of
$6,000,000 under the agreement or December 31, 2010, whichever is earlier.
The Company also granted Sanwa a warrant to purchase up to 3,178,780 shares
of Common Stock of the Company for an aggregate purchase price of $10.00
(ten dollars), which will become exercisable if there is a change in
control of the Company as defined in Section 382(g)(1) of the Internal
Revenue Code of 1986, as amended. In addition, the Company and Sanwa
entered into separate Standstill Agreements with each of James Taylor, the
Chief Executive Officer and a Director of the Company, and Edward E.
Strickland, the Chairman of the Board of Directors of the Company, under
which Mr. Taylor and Mr. Strickland have agreed not to, directly or
indirectly, acquire, dispose of, or exercise any option or other right to
acquire any capital stock or options of the Company. As a result of the
Sanwa Standstill Agreements described above, the Company has agreed to pay
these individuals, under a predetermined formula, up to an aggregate of
$600,000 based on the increases in the market value of the shares of Common
Stock of the Company that
10
<PAGE>
they hold and are unable to trade due to the Sanwa Standstill Agreements.
CONTINUING MANUFACTURING OPERATIONS:
Continuing operations consist primarily of the precision machining
business, which manufactures and assembles medical devices and other
precision machined parts on a contract basis. The Company also
manufactures proprietary products (oil centrifuges and rotary vane
actuators). The Company ceased its plastics manufacturing operations
during 1994 and has sold most of the equipment used in its plastics
manufacturing operations. The Company currently has no involvement in the
waste processing business.
The Company's net sales from continuing operations for the third quarter of
1996 increased by approximately 49.4% or $1,334,847 from the same period in
1995. The Company's net sales for the nine-months ended September 30, 1996
were $10,118,277 compared to $8,754,793 for the same period in 1995, an
increase of 15.6%. The increase in sales was due primarily to increased
sales to one of the Company's largest medical customers in the third
quarter, which offset a decrease in sales to the Company's other largest
medical customer of approximately $135,000 and $1,635,000 for the three and
nine-month periods ended September 30, 1996, respectively, from the same
periods in 1995. Sales to the Company's two largest medical product
customers were $3,106,609 or 76.9% of net sales for the third quarter of
1996, compared to sales of $1,949,674 or 72.1% of net sales for the same
period in 1995. Sales to the Company's two largest medical product
customers were $7,334,739 or 72.5% of net sales and $6,218,192 or 71.0% of
net sales for the nine-months ended September 30, 1996 and 1995,
respectively. Medical product orders substantially increased during the
third quarter of 1996, and rotary vane actuator volume continued its
positive growth during these months.
Gross profit was 30.2% of net sales for the third quarter of 1996, compared
to 14.2% of net sales for the third quarter of 1995. Gross profit was
24.0% and 17.6% of net sales for the nine-month periods ended September 30,
1996 and 1995, respectively. The improvement in gross profit for the
quarter and nine-months ended September 30, 1996, was primarily due to an
increase in higher margin medical product business. In addition, the
Company was able to obtain operational efficiencies as a result of the
increase in sales volume.
Selling, general and administrative expenses were $604,141, or 15.0% of net
sales for the third quarter of 1996, compared to $549,107, or 20.3% of net
sales for the same period in 1995. The dollar increase in these expenses
for the third quarter of approximately $55,000 is primarily due to
increases in selling related expenses of approximately $9,000 to market the
Company's rotary vane actuators and oil centrifuges, including trade shows,
business travel and additional sales personnel. Administrative expenses
increased approximately $46,000, primarily for salaries and benefits
($51,000) and corporate insurance ($15,000), along with an increase in the
Company's profit
11
<PAGE>
sharing contribution accrual of approximately $28,000. These increases in
administrative expenses were partially offset by a reduction in legal and
accounting expenses of approximately $48,000, primarily related to
restructuring of the debt underlying the EPR facility. Selling, general
and administrative expenses were $1,761,219, or 17.4% of net sales for the
nine-month period ended September 30, 1996, compared to $1,751,805, or
20.0% of net sales for the same period in 1995. The increase in these
expenses for the nine-month period ended September 30, 1996 is primarily
due to increases in selling related expenses of approximately $32,000,
increases in administrative salaries and benefits of approximately $51,000,
and an increase in the Company's profit sharing contribution accrual of
approximately $47,000. These increases were mostly offset by a reduction
in legal and accounting costs of approximately $121,000, related to the
restructuring of the debt underlying the EPR facility.
The Company had operating income from continuing operations of $615,424 for
the third quarter of 1996, compared to an operating loss from continuing
operations of ($163,934) for the same period in 1995. The operating income
from continuing operations for the three-months ended September 30, 1996
was attributed to increased volume, primarily in medical products,
partially offset by an increase of approximately $55,000 in selling and
administrative expenses. The Company had operating income from continuing
operations of $669,237 for the nine-month period ended September 30, 1996,
compared to an operating loss from continuing operations of ($207,442) for
the same period in 1995. The improvement in income from continuing
operations for the nine-month period ended September 30, 1996 is due to
increased sales of higher margin medical products, coupled with a modest
increase of $9,414 in selling, general and administrative expenses, as
discussed above.
The Company had income from continuing operations of $527,887, or $.15 per
share ($.08 per share on a fully diluted basis) for the third quarter of
1996, compared to a loss from continuing operations of ($220,485) or ($.07)
per share for the same period in 1995. The increase in the third quarter
1996 income from continuing operations, compared to the loss from
continuing operations for the same period in 1995, resulted from the
reasons stated above, along with the loss of management fee income of
approximately $30,000 for managing the waste processing facility that was
present in the same period last year (Reuter Recycling of Florida, Inc.),
which as described in Notes 3 and 4 to the consolidated financial
statements in the Company's 1995 Form 10-KSB, was sold in October 1995.
The Company had income from continuing operations of $398,651, or $.12 per
share ($.08 per share on a fully diluted basis) for the nine-month period
ended September 30, 1996, compared to a loss from continuing operations of
($368,285) or ($.11) per share for the same period in 1995. The improvement
in income from continuing operations for the nine-month period ended
September 30, 1996 is due to the reasons stated above, net of lost
management fee income of $90,000.
The Company did not recognize a tax provision during the periods ended
September 30, 1996, due to the net operating loss carryforwards available
to the Company as well as
12
<PAGE>
the Company's continued insolvency for tax purposes, subsequent to the debt
restructuring. The Company had no taxable income, and accordingly,
recorded no provision for income taxes for the periods ended September 30,
1995.
The effect of inflation on the Company's consolidated results has not been
significant.
DISCONTINUED WASTE PROCESSING OPERATIONS:
As described in Notes 2 and 3 of the notes to consolidated financial
statements in the Company's 1995 Form 10-KSB, the Company ceased operation
of its EPR facility effective January 1, 1994, sold all assets of EPR
effective September 1, 1994, and on January 24, 1996, entered into an
agreement to restructure its guarantee of the debt obligation underlying
the EPR facility.
Losses from discontinued operations were ($0) and ($540,131) for the
quarters ended September 30, 1996 and 1995, respectively, and ($0) and
($1,617,809) for the nine-month periods ended September 30, 1996 and 1995,
respectively. The loss from discontinued operations for the quarter and
nine-month periods ended September 30, 1995, consists of accrued interest
on the EPR note guaranteed by the Company. There was no additional accrual
of interest associated with financing underlying discontinued operations
for the first, second or third quarters of 1996, due to the signing of a
debt restructuring agreement on January 24, 1996, which became effective on
June 6, 1996.
NET INCOME (LOSS):
The net income for the quarter ended September 30, 1996 was $527,887 or
$.15 per share ($.08 per share on a fully diluted basis), compared to a net
loss of ($760,616) or ($.24) per share for the quarter ended September 30,
1995. The net income for the nine-month period ended September 30, 1996
was $7,647,669 or $2.31 per share ($1.59 per share on a fully diluted
basis), compared to a net loss of ($1,986,094) or ($.62) per share for the
same period in 1995. The improvement in 1996 is due primarily to
recognition of an extraordinary item - gain on debt restructuring of
$7,249,018 or $2.19 per share ($1.51 per share on a fully diluted basis)
for the nine-month period ended September 30, 1996, and the absence of
interest charges associated with the EPR loan (as discussed above), as well
as the income from continuing operations of $527,887 in the third quarter
of 1996.
LIQUIDITY AND CAPITAL RESOURCES:
At September 30, 1996, the working capital deficit includes the current
portion of the restructured debt obligation, in addition to the
indebtedness under the asset-based short-term financing arrangement. With
the exception of the balance of the Income Sharing Agreement (see Note 3 to
this Form 10-QSB), debt associated with these agreements has been
classified as a current liability due to ongoing covenant violations
disclosed in the
13
<PAGE>
following paragraph and notes 2 and 7 to the consolidated financial
statements in the Company's 1995 Form 10-KSB, accordingly the Company had a
working capital deficit of ($4,687,173) at September 30, 1996, compared to
a working capital deficit of ($19,905,557) at December 31, 1995. The
current ratio at September 30, 1996 was .47, compared to .13 at December
31, 1995. The improvement in the working capital deficit and current ratio
is due primarily to the recognition of the debt restructuring, during the
second quarter of 1996, which reduced the amount of debt previously owed by
the Company that was classified as a current liability.
The Company has a $4.5 million line of credit arrangement with an asset-
based lender, which is collateralized by assets associated with the
manufacturing operations. The Company generally borrows funds up to the
maximum available because the line of credit agreement has a minimum
borrowing requirement of $2.75 million, upon which the Company pays
interest. Funds available to the Company pursuant to the terms of the line
of credit agreement are dependent upon the level of eligible accounts
receivable and plant and equipment, as defined. The Company is in
violation of certain financial and technical covenants contained in this
line of credit agreement, which could result in the lender discontinuing
advances and demanding repayment of all outstanding borrowings. Due to the
default conditions discussed above, and borrowing limits related to
available collateral, it is possible that the Company will not be able to
borrow sufficient amounts against this line to meet all the operating cash
needs of the Company. In addition, there can be no assurance that the
asset-based lender will continue to disregard these covenant violations in
the future. If the lender takes any action to reduce the availability of
funds to the Company, there may not be sufficient liquidity to continue
operations. As of October 25, 1996, the Company had borrowed approximately
$3.1 million and assuming the lender agrees to advance additional funds,
had additional availability of approximately $158,000 under this line of
credit.
The Company generated cash flow from operations for the nine-months ended
September 30, 1996 of $188,912, compared to, $456,960 for the nine-months
ended September 30, 1995. The decrease in cash flow from operations is
primarily due to inventory build-up resulting from higher production
volumes, anticipated during the second half of 1996 and an increase in
accounts receivable from the beginning of the year. The Company's ability
to meet its continuing cash flow requirements during the remainder of 1996
and beyond, is dependent on continuing adequate sales and margins in the
manufacturing business. Management anticipates making capital expenditures
to support equipment upgrading and growth in the manufacturing division.
Near term capital commitments for new manufacturing equipment total
approximately $240,000. Any future expenditures will depend on cash
availability. In addition to cash flows from operations, if any, the
Company expects to seek needed capital through bank financing or asset-
based lending arrangements. However, there can be no assurance that the
Company will be able to obtain such financing, or obtain financing on terms
that are satisfactory to the Company.
14
<PAGE>
In summary, the Company currently has negative working capital and is in
default under the terms of its asset-based short-term financing arrangement
and, as a result of this default, is in default under the restructured Loan
Agreement with Sanwa. Either of these two lenders could, at any time,
demand full payment of the underlying debt, which the Company would be
unable to satisfy, in which case the Company may be forced to seek
protection under U.S. Bankruptcy laws.
Forward looking statements in this Form 10-QSB, including references to
anticipated sales volume and higher medical product margins, involve risks
and uncertainties, with establishing new customers, and developing products
to the specifications of our customers. In addition, the Company has a
high concentration of business with two customers, even though this
concentration is being steadily reduced by new business with other
customers. Actual future results could differ materially from those
reflected in the forward looking statements.
15
<PAGE>
PART II - OTHER INFORMATION
Item 3. Defaults upon Senior Security
See Footnotes 3 and 4 to Notes to the Consolidated Financial Statements and
Management's Discussion and Analysis, included in Item 1 and 2 of this
report on Form 10-QSB, for a description of the status of the defaults on
the loan underlying the Eden Prairie facility and the Company's asset-based
short-term financing arrangement, which is incorporated herein by
reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Item No. Item Method of Filing
-------- ---- ----------------
27.1 Financial Data Schedule Filed herewith
(b) Reports on Form 8-K.
None.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REUTER MANUFACTURING, INC.
-----------------------------
(Registrant)
Date: October 25, 1996 By: /s/ James W. Taylor
---------------------- -------------------
James W. Taylor
President, Chief Executive
Officer and Chief Financial
Officer (principal executive
and financial officer)
Date: October 25, 1996 By: /s/ William H. Johnson
----------------------- ----------------------
William H. Johnson
Vice President, Controller and
Secretary (principal
accounting officer)
17
<PAGE>
REUTER MANUFACTURING, INC.
EXHIBIT TO QUARTERLY
REPORT ON FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
Item No. Item Method of Filing
- -------- ---- ----------------
27.1 Financial Data Schedule Filed herewith.
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 174,996
<SECURITIES> 0
<RECEIVABLES> 1,802,875
<ALLOWANCES> 0
<INVENTORY> 1,854,576
<CURRENT-ASSETS> 4,096,722
<PP&E> 11,451,619
<DEPRECIATION> 7,615,761
<TOTAL-ASSETS> 8,342,469
<CURRENT-LIABILITIES> 8,783,895
<BONDS> 0
0
0
<COMMON> 599,722
<OTHER-SE> 13,711,374
<TOTAL-LIABILITY-AND-EQUITY> 8,342,469
<SALES> 10,118,277
<TOTAL-REVENUES> 10,118,277
<CGS> 7,687,821
<TOTAL-COSTS> 9,449,040
<OTHER-EXPENSES> 270,586
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 307,463
<INCOME-PRETAX> 7,647,669
<INCOME-TAX> 0
<INCOME-CONTINUING> 398,651
<DISCONTINUED> 0
<EXTRAORDINARY> 7,249,018<F1>
<CHANGES> 0
<NET-INCOME> 7,647,669
<EPS-PRIMARY> 2.31
<EPS-DILUTED> 1.59
<FN>
<F1>EXTRAORDINARY ITEM - GAIN ON DEBT RESTRUCTURING
</FN>
</TABLE>
