REUTER MANUFACTURING INC, 10KSB, 1996-04-01

REUTER MANUFACTURING INC
10KSB, 1996-04-01
MISCELLANEOUS FABRICATED METAL PRODUCTS

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB

[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 OR THE FISCAL YEAR ENDED DECEMBER 31, 1995
or
[ ]Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ------- to -------

Commission file number: 0-1561
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REUTER MANUFACTURING, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0780999
(State of Incorporation) (I.R.S. Employer
Identification No.)
410 11TH AVENUE SOUTH
HOPKINS, MINNESOTA 55343
(Address of principal (Zip Code)
executive offices)

Registrant's telephone number, including area code: (612) 935-6921
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.1875 per share
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 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
---- ----

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendments to
this Form 10-KSB. [ ]

The Registrant's revenues for the fiscal year ended December 31, 1995 were
$11,052,058.

As of March 18, 1996, 3,191,520 shares of Common Stock of the Registrant
were outstanding, and the aggregate market value of the Common Stock of the
Registrant (based upon the average between the closing bid and asked prices for
the Common Stock on that date), excluding shares owned beneficially by executive
officers and directors, was approximately $1,108,688.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Annual Report on Form 10-KSB incorporates by reference
information (to the extent specific sections are referred to herein) from the
Registrant's Proxy Statement for its Annual Meeting to be held May 16, 1996 (the
"1996 Proxy Statement").

Transitional Small Business Disclosure Format (Check one): Yes No X
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PART I

ITEM 1. DESCRIPTION OF BUSINESS.

INTRODUCTION

Reuter Manufacturing, Inc. (f/k/a Green Isle Environmental Services, Inc.)
(the "Company") is currently engaged principally in the business of contract
manufacturing of precision machined products and assemblies. The Company
manufactures, among other items, close tolerance bearing-related assemblies for
the medical device industry. Since late 1992, the Company has been disposing of
its other unrelated businesses, including waste processing and plastic waste
container manufacturing. During 1995, the Company completed the disposition of
these other businesses, except for the sale of certain container manufacturing
equipment, which is expected to be completed in 1996.

In November 1992, the Company entered into an agreement with US WEST
Financial Services, Inc. ("US WEST"), the lender to the waste processing
facility in Pembroke Pines, Florida (the "Pembroke Pines Facility"), and a
management agreement with its wholly owned subsidiary, Reuter Recycling of
Florida, Inc. ("Reuter Florida"). As discussed in more detail in Notes 3 and 4
to the consolidated financial statements, the Company deconsolidated Reuter
Florida from its consolidated financial statements effective November 1, 1992.
On October 26, 1995, the Company sold all of the outstanding capital stock of
Reuter Florida to Waste Management, Inc. of Florida ("Waste Management") for the
payment of $1.00, pursuant to a purchase agreement among the Company, Waste
Management and US WEST. In connection with the sale, US WEST forgave that
portion of the outstanding indebtedness owed by Reuter Florida to US WEST in
excess of $18,249,999 plus certain adjustment amounts ("Reduced Indebtedness").
At the same time, Waste Management made a capital contribution to Reuter Florida
in an amount equal to the Reduced Indebtedness, and Reuter Florida paid to US
WEST an amount equal to the Reduced Indebtedness in full satisfaction of Reuter
Florida's outstanding obligations to US WEST. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Notes 3 and 4 to
the consolidated financial statements.

On January 1, 1994, EPR, Inc., a wholly owned subsidiary of the Company
("EPR), ceased operations of its waste processing facilities in Eden Prairie,
Minnesota. On September 1, 1994, EPR sold substantially all of its assets for
$3.8 million, which resulted in a gain of $1,914,534. The net proceeds of
$3,768,809 from the sale were used to repay a portion of the debt underlying the
EPR facility. The Company retained all liabilities of EPR, including the
balance of the loan underlying the facility from Sanwa Business Credit
Corporation ("Sanwa") to EPR (the "EPR Loan"), which was guaranteed by the
Company.

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obligation under the guarantee of the EPR Loan was reduced from approximately
$18.9 million to approximately $12.0 million. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Notes 2 and 7 to
the consolidated financial statements for a more detailed description of the
foregoing agreements.

The Company was incorporated in 1956 as a Minnesota corporation. The
principal executive offices of the Company are located at 410 - 11th Avenue
South, Hopkins, Minnesota 55343. Its telephone number is (612) 935-6921. On
August 25, 1995, the Company's shareholders approved an amendment to the
Company's Articles of Incorporation changing the Company's name from Green Isle
Environmental Services, Inc. to Reuter Manufacturing, Inc. The term "Company"
as used in this Report includes Reuter Manufacturing, Inc. and all of its
subsidiaries, unless the context otherwise requires.

PRODUCTS AND MARKETS

CONTRACT MANUFACTURING. The Company manufactures highly engineered
products and sub-assemblies on a contract basis. Since early 1994, the Company
has directed its emphasis toward the manufacture of bearing related assemblies
for the medical device industry, such as blood centrifuges, and toward other
medical products, such as components for patient oxygen delivery systems. The
Company continues its activity in prototype development for other medical
products which is expected to result in future orders. The Company also has
expanded its business of contract manufacturing of precision parts for
industrial use, such as gas pressure regulators and a wide range of piece parts
for paint equipment, brakes and fluid power equipment. These efforts have
resulted in additional revenue growth for the Company.

The basic specifications and tolerances for the products produced by the
Company are initially provided by the customer and the Company is involved early
in design review and development to effect potential long-term cost reductions
and performance improvements. Upon receiving an initial order from a customer,
the Company designs and manufactures the tooling required to produce the device
to the customer's specifications and tolerances. Castings, springs, bearings
and similar parts are purchased by the Company, and the parts are machined and
assembled at the Company's plant.

During 1994, the Company ceased production of most spindles for computer
rigid disk drives because the Company's principal customer shifted its sourcing
overseas; the Company continues, however, to repair disk drive spindles for a
number of computer companies.

PROPRIETARY PRODUCTS. In 1994, the Company decided to diversify its
contract manufacturing business by manufacturing and selling proprietary
products (those carrying the Company's name). The Company has developed and is
manufacturing and marketing centrifuges for continuous removal of contaminants
from lubricating oil in internal combustion engines and expects to add
additional products in this and related centrifuge fields. During late 1994,
the Company negotiated for the purchase of a line of rotary vane actuators,
which was completed in January 1995. The Company is now manufacturing and
marketing rotary vane actuators at its facility in Hopkins, Minnesota.

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MARKETING AND CUSTOMERS

The Company's precision machining manufacturing services are sold through
the Company's own sales representatives or manufacturer's representatives. The
Company usually enters into long-term production arrangements with most of its
customers. During the year ended December 31, 1994, sales to Haemonetics
Corporation and Caire Inc. accounted for approximately 44% and 18% of total
sales, respectively. In the year ended December 31, 1995, sales to these two
companies accounted for approximately 45% and 24% of total sales, respectively.
The Company believes that termination of orders from Haemonetics would have a
material adverse effect on its business. In addition, sales to Seagate
Technology, Inc. in 1994 amounted to approximately $1.7 million (approximately
14% of total sales) and is related to the computer industry sales of the
Company. Such sales effectively ceased after March 31, 1994.

SUPPLIES

The raw materials used by the Company in its manufacturing operations
generally are reasonably available. The Company seeks to maintain multiple
sources of the parts and material it purchases from suppliers; however, certain
significant customers limit and/or designate specific suppliers that may be used
for parts that are included in the final assembly. The availability of such
parts and materials could affect the Company's ability to fill customers' orders
on a timely basis. Management of the Company believes that interruption of its
relationships with suppliers would not have a material adverse effect over the
long-term, as parts and materials suitable for the production of its products
would be available from other suppliers.

The Company generally manufactures its products to a customer's
specifications on a contract basis, and does not carry significant amounts of
inventory to meet rapid delivery requirements of customers or to assure a
continuous allotment of goods from suppliers. The Company does not provide
extended payment terms to customers.

COMPETITION

Each of the manufacturing businesses in which the Company engages is highly
competitive. Many of the competitors of the Company have greater sales and
resources than the Company. The principal elements of competition are quality,
service, delivery, price and meeting customer requirements. Management believes
the Company accounts for only a small portion of aggregate national sales of
products of the type it produces.

RESEARCH AND DEVELOPMENT

The Company conducts research and development activities primarily related
to prototype development of its medical and industrial products. However, the
Company does not consider these research or development activities to be
material. The Company provides, however, engineering services to support
customers in the development of new products including reverse engineering and
improvements of current products.

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BACKLOG

On March 1, 1996 the Company's backlog was approximately $5.7 million,
compared to approximately $6.1 million on March 1, 1995. Management believes
the backlog can reasonably be expected to be filled during the current year, and
that additional orders will be received during the current year. The usual time
period between receipt of an order and the first delivery of the product by the
Company is approximately 3 to 6 months. The delivery period for repair orders
generally is shorter than the period for the initial order.

EMPLOYEES

As of March 1, 1996, the Company had 109 employees, all of whom were
employed full time.

ITEM 2. DESCRIPTION OF PROPERTY.

The Company's executive offices and principal manufacturing facilities are
located at 410-11th Avenue South, Hopkins, Minnesota. These facilities are
owned by the Company. The building has approximately 110,000 square feet of
which approximately 13,000 square feet are devoted to office space and
approximately 97,000 square fees are devoted to manufacturing and warehouse
purposes. The building is located on approximately 7.5 acres of land. The
Company considers this facility to be well maintained and in good operating
condition, and believes that such manufacturing facilities can accommodate its
present level of operations.

The Company owns sufficient manufacturing equipment to generally enable it
to meet its sales requirements. This equipment includes milling machines,
grinders, lathes, chucking machines, drilling machines, testing and inspection
equipment, clean room facilities, and storage and cooling equipment. The
Company has sold and is in the process of selling certain plastics manufacturing
equipment, which is expected to be completed in 1996.

ITEM 3. LEGAL PROCEEDINGS.

The Company is not currently involved in any material legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Report.

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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.

The executive officers of the Company, their ages, the year first elected
or appointed as an executive officer and the offices held as of March 15, 1996
are as follows:

Position with the Company
Name (age) Or Principal Occupation
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James W. Taylor (77) Director, Chief Executive Officer, President and
Chief Financial Officer

Edward E. Strickland (69) Chairman of the Board of Directors

Thomas L. Beltrand (36) Vice President - Manufacturing

William H. Johnson (38) Vice President - Controller and Secretary

Robert D. Klingberg (51) Vice President - Engineering

David D. Sorem (48) Vice President - Marketing & Sales

Mr. Taylor was elected Chief Executive Officer and President of the Company
in November 1992 and Chief Financial Officer in March 1994. He has also been
the President of Taylor Consultants, Inc., a management and financial consulting
firm, for more than five years. Mr. Taylor also is a director of Compositech
Ltd. and QC Solutions, Inc.

Mr. Strickland served on the Executive Committee of the Board of Directors,
which performed the duties of Chief Executive Officer, from October 1, 1990
until January 28, 1991. He has been Chairman of the Board of Directors since
that time. He has been an independent financial consultant for more than eight
years. Mr. Strickland also serves as a director of AVECOR Cardiovascular Inc.,
Bio-Vascular, Inc., Communication Systems Inc., Hector Communications Corp. and
Quantech, Ltd.

Mr. Beltrand has been employed by the Company since June 1977. He was
elected Vice President - Manufacturing in August 1995.

Mr. Johnson has been employed by the Company since June 1987. He was
elected Vice President - Controller in August 1995. He has served as Secretary
of the Company since October 1994.

Mr. Klingberg has been employed by the Company since October 1992. He was
elected Vice President - Engineering in August, 1995. From 1986 to October
1992, Mr. Klingberg was the principal of Klingberg Consulting, Inc., a
consulting firm engaged in the design, installation and testing of motion
control systems.

Mr. Sorem has been employed by the Company since June 1991, and has worked
in a number of positions. In August 1995, Mr. Sorem was elected
Vice President - Marketing and Sales.

5
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From July 1989 till June 1991, Mr. Sorem worked as a Customer Support Manager
for Hoffman Engineering Company, a materials and enclosures firm.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The Company's Common Stock is traded in the local over-the-counter market
under the symbol "RTMF." The following table sets forth, for each of the
calendar periods indicated, the quarterly high and low bid quotations for the
Company's Common Stock based on local over-the-counter "pink sheets." The
prices in this table represent prices between dealers, and do not include
adjustments for retail mark-ups, mark-downs or commissions and may not represent
actual transactions.

YEAR HIGH LOW
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1995: First Quarter 5/8 5/16
Second Quarter 5/8 1/2
Third Quarter 5/8 1/2
Fourth Quarter 3/16 3/16

1994: First Quarter 1/2 5/16
Second Quarter 5/16 7/32
Third Quarter 11/16 1/2
Fourth Quarter 3/8 3/16

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As of March 1, 1996, there were approximately 1,367 record holders of the
Company's Common Stock.

No cash dividends were declared or paid by the Company during 1994 or 1995.
Pursuant to the Restructuring Agreements, the Company is prohibited from paying
dividends on Common Stock.

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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL

The Company is currently engaged principally in the business of contract
manufacturing of precision machined products and assemblies. The Company
manufactures, among other items, close tolerance bearing-related assemblies for
the medical device industry. Since late 1992, the Company has been disposing of
its other unrelated businesses, including waste processing and plastic waste
container manufacturing. During 1995, the Company completed the disposition of
these other businesses, except for certain container manufacturing equipment
with a book value of $50,000, which the Company plans to sell in 1996.

As discussed in more detail in Notes 3 and 4 to the consolidated financial
statements, the Company deconsolidated its wholly owned subsidiary, Reuter
Recycling of Florida, Inc. ("Reuter Florida"), from its consolidated financial
statements effective November 1, 1992. On October 26, 1995, the Company sold
all of the outstanding capital stock of Reuter Florida to Waste Management,
Inc. of Florida ("Waste Management") for the payment of $1.00, pursuant to a
purchase agreement among the Company, Waste Management and US WEST Financial
Services, Inc. ("US WEST"). Accordingly, the sale of Reuter Florida had no
impact on the Company's financial statements.

As discussed in more detail in Notes 2 and 3 to the consolidated financial
statements, at December 31, 1995, the Company continued to guarantee
indebtedness of EPR, Inc., a wholly owned subsidiary of the Company ("EPR"), to
Sanwa Business Credit Corporation ("Sanwa") in the amount of approximately $18.9
million (the "EPR Loan"). EPR ceased operations on January 1, 1994 and had no
operations or assets on December 31, 1995.

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 are subject to an escrow arrangement whereby Sanwa has
the right to rescind the transaction should the Company seek protection under
U.S. Bankruptcy Laws on or before May 29, 1996. Pursuant to the Restructuring
Agreements, Sanwa agreed to restructure the Company's obligations to guarantee
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 pre-tax income, 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. As set forth in the Company's December 31, 1995, unaudited pro forma
consolidated balance sheet, presented as if the Restructuring Agreements were
effective on December 31, 1995, the Company's previous obligation under the
guarantee of the EPR Loan was reduced from approximately $18.9 million to
approximately $12.0 million. 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, 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

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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 shares of Common Stock of the
Company that they hold and are unable to trade due to the Sanwa Standstill
Agreements. See Notes 2 and 7 to the consolidated financial statements for a
more detailed description of the foregoing agreements.

RESULTS OF OPERATIONS

CONTINUING MANUFACTURING OPERATIONS

Continuing operations consist primarily of the precision machining
business, which manufactures certain medical products and other precision
machined parts on a contract basis. The Company also began development and
manufacturing of proprietary products (oil centrifuges and rotary vane
actuators) during 1994. The Company ceased its plastics manufacturing
operations in August 1994 and has sold most of the equipment used in its
plastics manufacturing operations.

The Company's net revenues from continuing operations decreased by 8.1% in
1995 from 1994, compared to a decrease of 31% in 1994 from 1993. The lower net
revenues in 1995 as compared to 1994 was due primarily to the loss of revenues
from sales of computer disk drive spindles to Seagate Technology, Inc.
("Seagate"), the Company's primary customer prior to 1994. Sales to Seagate
were approximately $14,000 and $1,700,000 for the years ended December 31, 1995
and 1994, respectively. Revenues from the plastics manufacturing operations
were approximately $200,000 and $1,000,000 for the years ended December 31, 1995
and 1994, respectively, which decreased because the Company discontinued this
line of business in 1994. Revenues from the Company's two major medical product
customers were approximately $7,400,000 in 1994 and $7,600,000 in 1995. These
customers accounted for 69% of net sales in 1995 and 62% of net sales in 1994.
The decrease in revenues was partially offset by increased sales of proprietary
products, other medical products and industrial products, with respective
increases in 1995 of approximately $500,000, $300,000 and $500,000.

Gross margin was 16.9% in 1995 compared to 19.1% in 1994. The lower gross
margin in 1995 was primarily due to lower production volumes in 1995 along with
staff increases in the engineering area to provide project development services
for new customers.

Selling, general and administrative expenses were $2,258,542 or 20.4% of
net revenues in 1995, compared to $1,972,302 or 16.4% of net revenues for 1994.
The net increase in these expenses are due in part to an increase in sales
salaries and benefits of approximately $115,000, principally resulting from the
addition of personnel in this area to attract new business and diversify the
Company's customer base. Travel and other selling expenses also increased
approximately $64,000 in 1995. Administrative expenses were approximately
$108,000 higher in 1995 over 1994. Administrative wages and benefits decreased
approximately $153,000 from 1994 due to cutbacks in administrative personnel in
conjunction with a wage freeze instituted in October 1995, along with a one-week
Company-wide furlough in November 1995. This decrease was offset by increases
in

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legal, accounting and other professional fees of $230,000 from 1994, relating
to the sale of Reuter Florida and the Sanwa debt restructuring.

In 1995, the Company had an operating loss from continuing operations of
$391,858, compared to operating income from continuing operations of $144,036 in
1994. The loss in 1995 was due to lower revenues as discussed above, coupled
with higher selling expenses and higher legal and accounting costs incurred in
connection with the negotiation and completion of the sale of Reuter Florida and
the Sanwa debt restructuring. The 1994 operating income includes valuation
writedowns of $177,752 for certain plastic manufacturing equipment held for
sale.

The Company had a loss from continuing operations of $609,605 or $.19 per
share compared with income from continuing operations of $57,210 or $.02 per
share in 1994. The 1995 loss from continuing operations resulted from the
reasons stated above, along with higher interest expense, and reduced management
fee income for managing the waste processing facility owned by Reuter Florida,
which, as discussed earlier, was sold in 1995.

The Company had no taxable income in 1995 or 1994, and accordingly,
recorded no provision for income taxes in 1995 or 1994.

The effect of inflation on the Company's consolidated results has not been
significant.

DISCONTINUED WASTE PROCESSING AND WASTE COLLECTION OPERATIONS

As described in Notes 2 and 3 to the consolidated financial statements, EPR
ceased operations effective January 1, 1994, and sold all of its assets for
approximately $3.8 million in September 1994. The net proceeds from the sale
exceeded the carrying value of the EPR assets by approximately $1.8 million,
resulting in a gain on disposal. The Company used the proceeds from the sale of
the EPR assets to repay a portion of the EPR Loan. The Company retained all
liabilities of EPR, including the balance of the EPR Loan, which was
guaranteed by the Company. As discussed above, in January 1996, the Company
restructured its obligations under its guarantee of the EPR Loan.

Total net losses from discontinued operations were $2,157,940 and $361,935
for the periods ending December 31, 1995, and 1994, respectively. The 1995 loss
from discontinued operations consists of accrued interest on the EPR note
guaranteed by the Company. The 1994 loss from discontinued operations consists
of accrued interest on the EPR note guaranteed by the Company, net of the gain
on the sale of the EPR facility, and $120,000 of holding period costs.

NET LOSS

The net loss in 1995 was $2,767,545 or $.87 per share compared to a net
loss of $304,725 or $.09 per share in 1994. The increase in the net loss was
due to the factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1995, the Company had negative working capital due to its
guarantee of the EPR Loan, which is discussed in Note 2 to the consolidated
financial statements. In addition,

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the Company is in violation of certain covenants of its asset-based short-term
financing arrangement. The working capital deficit includes the entire
remaining balance of the Company's guarantee of the EPR Loan at December 31,
1995, including associated accrued default interest, which has been classified
as a current liability, in addition to the indebtedness under the asset-based
short-term financing arrangement as a result of the foregoing defaults. The
Company had a working capital deficit of $19,905,557 at December 31, 1995,
compared to a working capital deficit of $17,219,561 at December 31, 1994. The
current ratio at December 31, 1995 was .13 compared to .14 at December 31, 1994.

As discussed in Note 2 to the consolidated financial statements, the
December 31, 1995 unaudited pro forma consolidated balance sheet reflects the
restructuring of the guarantee of the EPR Loan as if it had occurred on December
31, 1995. The Company's working capital deficit and current ratio at December
31, 1995, on a pro forma basis, after giving effect to the restructuring of the
guarantee, would have been $5,203,938 and .36, respectively. The pro forma
working capital deficit includes approximately $3,800,000 of the restructured
guarantee obligation due to technical default conditions that continue in 1996
with respect to the restructured guarantee obligation.

As discussed in Notes 2 and 7 to the consolidated financial statements, the
Company has an asset-based short-term financing arrangement with an asset-based
lender which is collateralized by the Company's assets. The Company is in
violation of certain financial and technical covenants under the asset-based
short-term financing arrangement which could result in the lender discontinuing
advances and demanding repayment of all outstanding borrowings, which totalled
$2,589,575 at December 31, 1995. Due to the previously discussed default
conditions 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 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 described in Note 7 to the consolidated financial
statements, the Company amended its asset-based short-term financing arrangement
in January 1995 to borrow an additional $125,000 to finance the Company's
acquisition in January 1995 of a line of rotary vane actuators. The Company
further amended this financing arrangement to borrow an additional $300,000 in
October 1995 and approximately $500,000 in December 1995 to fund operations
in the third and fourth quarter of 1995. As of March 11, 1996, the Company had
borrowed approximately $2,560,936 and had additional availability, assuming the
lender will continue making advances, of approximately $121,037 under this
financing arrangement.

The Company had negative cash flow from operations of $32,832 (including
discontinued operations) for the year ended December 31, 1995 compared to
positive cash flow from operations of $614,306 (including discontinued
operations) for the year ended December 31, 1994. The impact of discontinued
operations in 1995 and 1994 was of a non-cash nature. Accordingly, the
operational cash flow activity only reflects continuing operations. The
decrease in cash flow was due primarily to lower sales volumes, while fixed
overhead costs remained constant. The $32,832 of negative cash flow from
operations in 1995 is after approximately $230,000 of ongoing professional fees
and expenses related to the sale of Reuter Florida and the restructuring of the
Company's guarantee of the EPR Loan. The Company's ability to meet its
continuing cash flow requirements in the future is dependent on increasing net
revenues and margins in the manufacturing business.

<PAGE>

The foregoing matters raise substantial doubt about the Company's ability
to continue as a going concern. The Company's ability to continue as a going
concern is dependent on its ability to cure or obtain waivers of the default
conditions under the asset-based short-term financing arrangement and to
generate sufficient cash flows from the continuing manufacturing operations
to meet debt service requirements.

Management's plans and objectives include the following:

- Obtain waivers of the default conditions under the asset-based short-term
financing arrangement or obtain replacement financing that can support
and be serviced by the Company's manufacturing operations.

- Expand the market for certain proprietary products manufactured by the
Company and maintain and expand the precision manufacturing medical
device customer base further and diversify into the industrial parts and
components markets.

Management believes that the successful execution of these plans and
attainment of these objectives will allow the Company to fund operations and
service its new and remaining debts. Actual results could materially differ
from those expressed in the foregoing forward looking statements depending on
a number of factors, primarily the ability of the Company to expand its
product offering and to develop its reputation in manufacturing products for
select industries such as medical industries. However, there can be no
assurance that the Company will continue as a going concern in its current
form, and it is possible that the Company could be forced to seek protection
under U.S. bankruptcy laws. The Company's consolidated financial statements
do not include any adjustments that might result from the outcome of these
uncertainties.

Management anticipates making capital expenditures to support
diversification and growth of the manufacturing operations. Near term capital
commitments for new manufacturing equipment total approximately $140,000. The
Company desires to raise capital for these requirements through bank financing,
although 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.

Cash used in investing activities was $424,469 and $13,382 for the years
ended December 31, 1995 and 1994, respectively. The increase was due primarily
to the purchase of the rotary vane actuator product line in January 1995, as
well as additions to property, plant and equipment. See Notes 5 and 7 to the
consolidated financial statements.

Net cash provided by financing activities was $349,157 for the year ended
December 31, 1995 as compared to cash used in financing activities of $713,695
for the period ended December 31, 1994. The change in 1995 was primarily due to
additional borrowings under the Company's asset-based short-term financing
arrangement discussed above. As discussed earlier, the EPR facility was sold
for $3.8 million in September 1994. The proceeds from this sale were used to
repay a portion of the accrued interest on the EPR Loan.

In summary, the Company currently has negative working capital and
remains in default under the terms of its asset-based short-term financing
arrangement and, as a result of this default, remains in default under the
Restructuring Agreements 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. The Company is currently attempting
to obtain waivers of the previously discussed debt covenant violations.
There can be no assurance that the Company will be able to obtain such
waivers.

<PAGE>

ITEM 7. FINANCIAL STATEMENTS.

The following Financial Statements and Independent Accountants Report
thereon are included herein (page numbers refer to pages in this Report):

PAGE
----
Report of Independent Accountants 16

Consolidated Balance Sheets as of December 31, 1995 and 1994 18

Consolidated Statements of Operations for the years
ended December 31, 1995 and 1994 19

Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1995 and 1994 20

Consolidated Statement of Cash Flows for the years ended
December 31, 1995 and 1994 21

Notes to Consolidated Financial Statements 23

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

<PAGE>

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

(a) DIRECTORS OF THE REGISTRANT.

The information under the caption "Election of Directors" in the Company's
1996 Proxy Statement is incorporated herein by reference.

(b) EXECUTIVE OFFICERS OF THE REGISTRANT.

The information concerning Executive Officers of the Company is included in
this Report under Item 4A, Executive Officers of the Registrant.

The information under the caption "Section 16 Compliance" in the Company's
1996 Proxy Statement is incorporated herein by reference.

ITEM 10. EXECUTIVE COMPENSATION.

The information under the captions "Election of Directors -- Director
Compensation" and "Executive Compensation and Other Benefits" in the Company's
1996 Proxy Statement is incorporated herein by reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information under the caption "Principal Shareholders and Beneficial
Ownership of Management" in the Company's 1996 Proxy Statement is incorporated
herein by reference.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information under the captions "Election of Directors -- Director
Compensation" and "Certain Transactions" in the Company's 1996 Proxy Statement
is incorporated herein by reference.

<PAGE>

PART IV

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

(a) EXHIBITS

The exhibits to this Report are listed in the Exhibit Index on pages 42
to 48 of this Report.

A copy of any of the exhibits listed or referred to above will be
furnished at a reasonable cost to any person who was a shareholder of the
Company as of March 18, 1996, upon receipt from any such person of a written
request for any such exhibit. Such request should be sent to Reuter
Manufacturing, Inc., 410 11th Avenue South, Hopkins, Minnesota 55343, Attention:
Secretary, William H. Johnson.

The following is a list of each management contract or compensatory plan
or arrangement required to be filed as an Exhibit to this Report, the location
of which is indicated in the Exhibit Index of this Report:

(1) Incentive Stock Option Plan of the Company, as amended effective December
17, 1987

(2) Directors Stock Option Plan of the Company

(3) Summary of options granted under Directors Stock Option Plan

(4) 1991 Non-Employee Director Stock Option Plan

(5) Summary of options granted under 1991 Non-Employee Director Stock Option
Plan

(6) 1991 Stock Option Plan, as amended

(7) Summary of Options granted under 1991 Stock Option Plan

(8) Option Agreement between Edward E. Strickland and the Company

(9) Consulting Agreement with Edward E. Strickland

(10) Independent Contractor Agreement dated as of May 16, 1991, between Taylor
Consultants, Inc. and the Company

(11) Independent Contractor Agreement dated as of November 2, 1992, between
Taylor Consultants, Inc. and the Company

<PAGE>

(b) REPORTS ON FORM 8-K

On November 13, 1995, the Company filed a Report on Form 8-K disclosing
under Item 2 of such Report the sale of Reuter Recycling of Florida, Inc.,
which was completed on October 26, 1995. No financial statements were filed
with such Report.

On February 16, 1996, the Company filed a Report on Form 8-K disclosing
under Item 5 of such Report the execution on January 24, 1996 of a series of
agreements with Sanwa Business Credit Corporation, pursuant to which the
Company's loan guarantee obligations to Sanwa were restructured. No financial
statements were filed with such Report.

15
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors of
Reuter Manufacturing, Inc.:

We have audited the consolidated financial statements and financial statement
schedule of Reuter Manufacturing, Inc. (f/k/a Green Isle Environmental Services,
Inc.) and Subsidiaries (the Company) included on pages 18 to 40 of this Form 10-
KSB. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 4, effective November 1, 1992, the Company entered into an
agreement with a lender to one of its subsidiaries (Reuter Recycling of Florida,
Inc.) pursuant to which the Company effectively gave up any future
economic interest in or management control associated with ownership of Reuter
Recycling of Florida. In connection with this agreement, the Company
deconsolidated the accounts of Reuter Recycling of Florida effective November 1,
1992. Accordingly, the assets and liabilities of Reuter Recycling of Florida
are not included in the Company's consolidated balance sheets as of December
31, 1995 or 1994. Subsequent to October 31, 1992, the Company did not record
further losses of Reuter Recycling of Florida. On October 26, 1995, the Company
sold all outstanding shares of Reuter Recycling of Florida to an unaffiliated
third party (Note 4).

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Reuter
Manufacturing, Inc. (f/k/a Green Isle Environmental Services, Inc.) and
Subsidiaries as of December 31, 1995 and 1994, and the consolidated results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.

<PAGE>

These consolidated financial statements and financial statement schedule have
been prepared assuming that the Company will continue as a going concern. The
following matters raise substantial doubt about the Company's ability to
continue as a going concern:

- - As discussed in Notes 2, 3 and 7, at December 31, 1995, a subsidiary of the
Company (EPR, Inc.) was in payment default and was in violation of a
technical covenant and certain other covenants in connection with financing
underlying the Eden Prairie waste processing facility. These violations
could result in acceleration of the scheduled repayment of the Eden Prairie
facility loan, which is guaranteed by the Company. On September 1, 1994,
all assets of the Eden Prairie facility were sold. Proceeds from the sale
were used to repay a portion of the debt underlying the facility. The
Company has retained all liabilities of the facility including the balance
of the loan and accrued interest underlying the facility. On January 24,
1996, the Company entered into an agreement to restructure its guarantee of
the debt obligation underlying the Eden Prairie facility. The restructuring
is subject to an escrow arrangement whereby the restructuring agreement can
be rescinded should the Company seek protection under U.S. Bankruptcy
statutes within 100 days from February 19, 1996. Should the restructured
guarantee (as discussed in Note 2) be rescinded, the lender could foreclose
the loan and exercise its rights under the guarantee agreement.

- - As discussed in Notes 2 and 7, the Company is in violation of certain
covenants contained in its Asset-Based Short-Term Financing Agreement (the
Agreement). These violations could result in the lender discontinuing
advances to the Company and demanding immediate repayment of all outstanding
borrowings under the Agreement.

- - The Company has suffered significant losses in each of the two years ended
December 31, 1995, and has a significant excess of current liabilities over
current assets and a stockholders' deficiency.

Management's plans concerning these matters are also described in Note 2. The
financial statements and financial statement schedule do not include any
adjustments that might result from the outcome of these uncertainties.

COOPERS & LYBRAND L.L.P.

Minneapolis, Minnesota
March 11, 1996

<PAGE>

REUTER MANUFACTURING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
UNAUDITED PRO FORMA DECEMBER 31, 1995
AND HISTORICAL DECEMBER 31, 1995 AND 1994

UNAUDITED
HISTORICAL PRO FORMA
ASSETS --------------------------------- (NOTE 2)
1995 1994 1995

<S> <C> <C> <C>
Current assets:
Cash $ 101,048 $ 209,192 $ 101,048
Investments, restricted 250,000 250,000 250,000
Accounts receivable, net of allowances
of $15,000 at December 31, 1995
and $20,685 at December 31, 1994 1,248,697 1,387,124 1,248,697
Inventories 1,301,105 917,329 1,301,105
Other current assets 72,784 73,828 72,784
------------- ------------- -------------

Total current assets 2,973,634 2,837,473 2,973,634

Property, plant and equipment, net 4,082,318 4,425,257 4,082,318
Intangible assets, net 446,365 446,365
------------- ------------- -------------

Total assets $ 7,502,317 $ 7,262,730 $ 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 and $1,117,716
in 1995 and 1994, respectively $ 18,784,019 $ 16,626,079
Current maturities of long-term debt 259,734 151,981 $ 4,342,134
Borrowings under asset-based line of credit 2,589,575 2,063,477 2,589,575
Accounts payable, trade 530,991 602,340 530,991
Accrued expenses 714,872 613,157 714,872
------------ ------------ ------------

Total current liabilities 22,879,191 20,057,034 8,177,572

Long-term debt, less current maturities 495,715 267,385 7,948,315
Other long-term liabilities 199,654 243,009 199,654

Commitments and contingencies (Notes 5, 7, 8 and 9)

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: 3,191,520 shares in 1995
and 1994 598,410 598,410 598,410
Additional paid-in capital 13,710,596 13,710,596 13,710,596
Accumulated deficit (30,381,249) (27,613,704) (23,132,230)
------------ ------------- -------------

Total stockholders' equity (deficiency)
(16,072,243) (13,304,698) (8,823,224)
Total liabilities and stockholders' equity ------------- ------------- -------------

(deficiency) $ 7,502,317 $ 7,262,730 $ 7,502,317
------------- ------------- -------------
------------- ------------- -------------

</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS

18
<PAGE>

REUTER MANUFACTURING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994

1995 1994
<S> <C> <C>
Net sales $ 11,052,058 $ 12,026,221
Less:
Cost of sales 8,587,370 9,121,078
Depreciation 598,004 611,053
-------------- --------------

Gross profit 1,866,684 2,294,090

Selling, general and administrative
expenses 2,145,545 1,881,313
Depreciation 112,997 90,989
Valuation writedown, other assets held
for sale
177,752
-------------- --------------
Operating (loss) income (391,858) 144,036
-------------- --------------

Other income (expenses):
Interest income 10,039 13,013
Interest expense (403,627) (366,789)
Management fees 100,000 120,000
Other, net, principally gain on sale of
assets in 1994 75,841 146,950
-------------- --------------

Total other expense (217,747) (86,826)
-------------- --------------

(Loss) income from continuing operations (609,605) 57,210
-------------- --------------

Discontinued operations:
Loss from discontinued waste processing
operations, primarily accrued interest
during elongated debt settlement
negotiations (2,157,940) (2,276,469)
Gain on disposal of waste processing
assets, including provision of
$120,000 in 1994 for operating losses
during the phase-out period 1,914,534
-------------- --------------

Loss from discontinued operations (2,157,940) (361,935)
-------------- --------------

Net loss $ (2,767,545) $ (304,725)
-------------- --------------
-------------- --------------

Net loss per common share data:
(Loss) income from continuing operations $ (.19) $ .02
Loss from discontinued operations (.68) (.11)
-------------- --------------

Net loss per share $ (.87) $ (.09)
-------------- --------------
-------------- --------------

Weighted average number of shares 3,191,520 3,191,520
outstanding -------------- --------------
-------------- --------------

</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS

<PAGE>

REUTER MANUFACTURING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994

RETAINED TOTAL
ADDITIONAL EARNINGS STOCKHOLDERS'
PAID-IN (ACCUMULATED EQUITY
SHARES PAR VALUE CAPITAL DEFICIT) (DEFICIENCY)
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1993 3,191,520 $ 598,410 $ 13,710,596 $ (27,308,979) $ (12,999,973)

Net loss (304,725) (304,725)
--------- --------- ------------ -------------- -------------

Balances, December 31, 1994 3,191,520 598,410 13,710,596 (27,613,704) (13,304,698)

Net loss (2,767,545) (2,767,545)
--------- --------- ------------ -------------- -------------

Balances, December 31, 1995 3,191,520 $ 598,410 $ 13,710,596 $ (30,381,249) $ (16,072,243)
--------- --------- ------------ -------------- --------------
--------- --------- ------------ -------------- --------------

</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS

<PAGE>

REUTER MANUFACTURING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994

1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,767,545) $(304,725)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation 711,001 701,442
Amortization of intangible assets 48,635
Gain on sales of assets (9,636) (148,612)
Provision for uncollectible accounts receivable 12,925 12,685
Sanwa interest accrued during elongated settlement
negotiations 2,157,940 2,276,469
Adjustment of writedown and phase-out costs for assets of
discontinued operations held for sale (1,794,534)
Provision for writedown of other asset held for sale and
inventories 25,000 244,125
Changes in operating assets and liabilities:
Accounts receivable 125,502 25,560
Inventories (301,438) 310,618
Other assets 1,044 96,305
Accounts payable (71,349) (436,307)
Accrued expenses 59,391 (71,865)
Accrued retirement and severance (27,450) (307,109)
Other liabilities 3,148 10,254
--------- ----------
Net cash (used in) provided by operating activities (32,832) 614,306
--------- ----------
Cash flows from investing activities:
Proceeds from sale of property and equipment 35,125 387,250
Acquisition of Sollami product line (323,937)
Additions to property, plant and equipment (135,657) (400,632)
--------- ----------
Net cash used in investing activities (424,469) (13,382)
--------- ----------
Cash flows from financing activities:
Repayment of long-term debt (176,941) (126,822)
Proceeds from short-term borrowings 11,713,984 11,904,429
Repayment of short-term borrowings (11,187,886) (12,491,302)
--------- ----------
Net cash provided by (used in) financing activities 349,157 (713,695)
--------- ----------
Net decrease in cash (108,144) (112,771)

Cash, beginning of year 209,192 321,963
--------- ----------
Cash, end of year $101,048 $209,192
--------- ----------
--------- ----------

</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.

<PAGE>

REUTER MANUFACTURING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
INCREASE (DECREASE) IN CASH
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994

1995 1994
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $401,804 $4,137,160
Noncash investing and financing activities:
Purchase of equipment in exchange for notes payable 226,024 266,498
Proceeds from sale of EPR assets paid directly to EPR lender 3,768,809
Purchase of Sollami in exchange for future minimum payments 310,271

</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.

<PAGE>
REUTER MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES:

CONSOLIDATED FINANCIAL STATEMENTS:

The consolidated financial statements include, as continuing operations,
the accounts of Reuter Manufacturing, Inc. and its precision manufacturing
and container manufacturing operations (the Company), and as discontinued
operations, its wholly owned subsidiaries, EPR, Inc. (Eden Prairie Waste
Processing Facility) (Note 3). As described in Note 4, the accounts of
Reuter Recycling of Florida, Inc., a wholly owned subsidiary (Reuter
Recycling of Florida), were deconsolidated effective November 1, 1992,
followed by the sale of all outstanding common stock in October 1995. All
significant intercompany accounts and transactions have been eliminated in
consolidation. As discussed in Note 3, the waste processing operations of
the Company were discontinued in 1994 and the results of their operations
are presented separately as a component of the loss from discontinued
operations in the Consolidated Statements of Operations.

ACCOUNTS RECEIVABLE:

A significant portion of the Company's accounts receivable are due
primarily from two customers (see Note 11). The Company performs ongoing
credit evaluations of its customers and generally does not require
collateral for the outstanding receivable balances.

INVENTORIES:

Inventories are valued at the lower of cost or market with cost determined
on a first-in, first-out basis.

PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment are recorded at cost. Depreciation is
provided for by the straight-line method based on estimated useful lives
ranging from 3 to 40 years. Expenditures for major renewals and betterments
are capitalized, and expenditures for maintenance and repairs are charged
to operations as incurred. Upon retirement or other disposition of
property, the applicable cost and accumulated depreciation are eliminated
from the accounts. Any gains or losses are included in operations.

REVENUE RECOGNITION:

The Company recognizes sales revenues associated with precision
manufacturing and container manufacturing products when these products are
shipped to customers.

INCOME TAXES:

The Company accounts for income taxes using the liability method. The
liability method provides that deferred tax assets and liabilities are
recorded based on differences between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes
using enacted tax rates in effect in the years in which the differences are
expected to reverse.

<PAGE>

REUTER MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

1. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

INTANGIBLE ASSETS:

Intangible assets comprised of purchased intangibles acquired with the
acquisition of Sollami product line include patents, noncompete agreements
and goodwill. Those assets are being amortized on the straight-line method
over their estimated lives of seven to fifteen years.

LOSS PER SHARE:

Loss per common share data is computed by dividing loss data by the
weighted average number of shares of common stock outstanding during each
period. Common stock equivalents were excluded from loss per share
computations as their effect would be antidilutive.

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
amounts of assets and liabilities and 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. The most
significant areas which require the use of management's estimates relate to
allowances for doubtful accounts receivable and inventory obsolescence and
the accrual for container warranty. Actual results could differ from those
estimates.

2. BASIS OF PRESENTATION:

HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS:

The Company's consolidated financial statements have been presented on the
basis that it will continue as a going concern which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business. Conditions and uncertainties associated with this basis
of presentation as well as management's plans concerning these matters are
described in the following paragraphs.

UNAUDITED PRO FORMA INFORMATION:

An unaudited pro forma Consolidated Balance Sheet as of December 31, 1995
has been presented in conjunction with the historical Consolidated Balance
Sheets as of December 31, 1995 and 1994, as if the January 24, 1996,
restructuring of the Company's debt guarantee (discussed below) associated
with the debt of the Eden Prairie facility was completed and effective
(including the lapse of the 100-day escrow arrangement) on December 31,
1995.

<PAGE>

REUTER MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

2. BASIS OF PRESENTATION, CONTINUED:

EDEN PRAIRIE FACILITY ASSETS SALE AND JANUARY 24, 1996 RESTRUCTURING OF
UNDERLYING DEBT GUARANTEE:

Effective January 1, 1994, the county in which the Eden Prairie waste
processing facility (the facility) operated substantially reduced the fees
at competing county-owned waste processing facilities. As a result, the
Company could no longer attract waste haulers using its existing fee
structure and could not generate sufficient cash to fund operations using
the county's fee structure. Accordingly, the Company ceased operation of
the facility effective January 1, 1994, and on September 1, 1994, finalized
a sale of all assets of EPR, Inc. for $3,800,000.

The net proceeds of $3,768,809 from the sale were used to repay a portion
of the debt underlying the EPR, Inc. facility. These net proceeds exceeded
the adjusted carrying value (adjusted in 1993, to its estimated net
realizable value) of the EPR, Inc. assets by $1,794,534, resulting in a
gain on disposal included in 1994 discontinued operations, net of an
additional $120,000 of holding period costs accrued prior to the
disposition in 1994, as described in Note 3. The Company retained all
liabilities of EPR, Inc., including the balance of the loan and accrued
interest underlying the facility which is guaranteed by the Company.

At December 31, 1995, the Company was in payment default and was in
violation of a technical debt covenant and certain other covenants of the
debt agreement underlying the Eden Prairie facility, and was not able to
obtain a waiver of these defaults from the lender. Under terms of the debt
agreement, the lender may, at its discretion, demand repayment of the
entire outstanding loan balance and exercise its rights under the guarantee
agreement with the Company.

On January 24, 1996, the Company and Sanwa Business Credit Corporation
(Sanwa) entered into a Loan and Security Agreement (the Loan Agreement) to
restructure its guarantee of the debt obligation underlying the Eden
Prairie 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; an Income Sharing Agreement; and a
Common Stock Warrant Agreement (collectively, the Loan Documents). The
restructuring is subject to an escrow arrangement whereby the restructuring
agreement can be rescinded should the Company seek protection under U.S.
Bankruptcy statutes within 100 days of February 19, 1996. Pursuant to the
Loan Agreement, Sanwa agreed to restructure the Company's obligations to
guarantee repayment of a loan from Sanwa to EPR, Inc. (see Note 7), 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.*

<PAGE>

REUTER MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

2. BASIS OF PRESENTATION, CONTINUED:

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.*

* For purposes of the pro forma balance sheet, the term loan
obligations have been classified as current liabilities due
to cross-default conditions, as a result of the ongoing
asset-based short-term financing agreement financial and
technical covenant violations. The pro forma long-term debt
includes total interest required to be paid in the future
associated with the new term loan obligations totaling
approximately $1.1 million (of which approximately $302,000
has been classified as current, pursuant to the new term loan
agreements), and the maximum amount payable under the management
standstill agreement and other related costs aggregating
approximately $700,000.

(c) 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 (prior to a change in control), less cash interest
payments made by the Company under the Senior Subordinated Secured
Promissory Note. However, if a change in control occurs, as defined,
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 Code, times the Company's income before taxes,
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 effectively lapses 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 an Asset-Based Short-Term Financing Agreement (see
Note 7).

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 (Note 8). 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.

<PAGE>

REUTER MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

2. BASIS OF PRESENTATION, CONTINUED:

EDEN PRAIRIE FACILITY ASSETS SALE AND JANUARY 24, 1996 RESTRUCTURING OF
UNDERLYING DEBT GUARANTEE, CONTINUED:

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, under the Standstill
Agreements, 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, or (c) the occurrence of an "ownership
change" in respect of the Company, as defined in Section 382(g)(81) of the
Internal Revenue Code of 1986, as amended.

Should the restructured guarantee be rescinded, the Company's obligation to
guarantee repayment of the loan from Sanwa to EPR, Inc. will remain in
effect, and the lender could foreclose the loan and exercise its rights
under the guarantee agreement.

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 $600,000 based on increases in the
market value of shares they hold, that they are unable to trade based on
the provisions of the Sanwa Standstill Agreement.

CORPORATE DEMAND LINE OF CREDIT:

As described in Note 7, the Company is in violation of certain covenants
contained in its Asset-Based Short-Term Financing Agreement. As a result
of these violations, the lender may, at its sole discretion, discontinue
making advances to the Company and demand repayment of all borrowings under
the line of credit.

GENERAL:

The Company has also suffered significant losses in each of the last two
years ended December 31, 1995, which have increased stockholders'
deficiency to $16,072,243 at December 31, 1995.

The Company's continued existence is dependent on the Company's ability to
rectify the asset-based short-term line of credit agreement technical
default conditions and to generate sufficient cash flows from continuing
manufacturing operations to meet debt service requirements.

Management's plans and objectives include the following:

- Rectify the asset-based short-term line of credit agreement technical
default conditions or obtain replacement financing that can support
and be serviced by the manufacturing operations.

<PAGE>

REUTER MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

2. BASIS OF PRESENTATION, CONTINUED:

GENERAL, CONTINUED:

- Expand the market for certain proprietary products manufactured by the
Company and maintain and expand the Precision Manufacturing medical
device customer base further and diversify into the industrial parts
and components markets.

Management believes that the successful execution of these plans and
attainment of these objectives will allow the Company to fund operations
and service its new and remaining debts. However, there can be no assurance
that the Company will continue as a going concern in its current form and
it is possible that the Company could be forced to seek protection under
U.S. bankruptcy laws. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.

3. DISCONTINUED OPERATIONS:

WASTE PROCESSING OPERATIONS:

As described in Note 2, 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. As described
in Note 4, the Company in late 1992 relinquished any future economic
interest in or management control associated with ownership of Reuter
Recycling of Florida (the Company's only other waste processing and
recycling operation) to the underlying lender and the operations were
deconsolidated effective November 1, 1992. On October 26, 1995, the Company
sold all outstanding shares of Reuter Recycling of Florida, Inc. common
stock to an unaffiliated third party (Note 4).

4. DECONSOLIDATION OF REUTER RECYCLING OF FLORIDA, INC.:

During 1992, the Company's subsidiary, Reuter Recycling of Florida, Inc.
("Reuter Recycling of Florida") was in payment default with respect to the
construction loan underlying the Florida waste processing facility and, in
1991, was notified of a violation of a subjective covenant of the
construction loan agreement which constituted a continuing default
condition.

28
<PAGE>

REUTER MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

4. DECONSOLIDATION OF REUTER RECYCLING OF FLORIDA, INC., CONTINUED:

Effective November 1, 1992, the Company and Reuter Recycling of Florida
entered into an agreement with the construction lender to Reuter Recycling
of Florida, which provides that, following a $2.4 million equity
contribution made by the Company to Reuter Recycling of Florida in November
1992, the Company has no further financial obligation to make equity
contributions to Reuter Recycling of Florida or to fund operating losses or
construction costs of Reuter Recycling of Florida. In connection with this
agreement, the Company acknowledged a continuing pledge of all Reuter
Recycling of Florida stock to the construction lender. In another
agreement between the Company and Reuter Recycling of Florida that was
entered into concurrently with the November 1, 1992, agreement described
above, the Company continued to manage and administer the Florida waste
processing facility (the Management Agreement) subject to and in accordance
with the standards and limitations provided for in the Management
Agreement. This Management Agreement also specified that the Company was
no longer obligated to fund the operations of Reuter Recycling of Florida.
The Management Agreement required the Company to obtain the prior approval
and consent of the construction lender for any significant management
decisions, as defined. As a result of these agreements, the Company
effectively gave up any future economic interest and management control
associated with ownership of the Florida waste processing facility.

As a result of these agreements, the Company deconsolidated Reuter
Recycling of Florida effective November 1, 1992. Accordingly, the assets
and liabilities of Reuter Recycling of Florida are not included in the
Company's Consolidated Balance Sheet as of December 31, 1995 or 1994.

Management fees of $100,000 and $120,000 are included in the Company's 1995
and 1994 Consolidated Statements of Operations, respectively. Direct costs
incurred by the Company and reimbursed by Reuter Recycling of Florida were
$252,522 and $197,019 for the years ended December 31, 1995 and 1994,
respectively.

In connection with the November 1, 1992 agreements described above, the
Company has issued to the lender a warrant to purchase 150,000 shares of
common stock of the Company as described in Note 8.

On October 26, 1995, the Company sold for $1 all of the outstanding shares
of capital stock of Reuter Recycling of Florida to Waste Management, Inc.
of Florida (Waste Management), pursuant to the Purchase Agreement, dated
June 1, 1995 (the Agreement), between the Company, Waste Management and the
construction lender. The warrant described above lapsed as a result of
this transaction.

Because Reuter Recycling of Florida had previously been deconsolidated from
the Company's consolidated financial statements and the Company received no
proceeds from the sale, the transaction will have no impact on the
Company's financial position or results of operations. The Management
Agreement between the Company and Reuter Recycling of Florida terminated
upon the close of the sale.

<PAGE>

REUTER MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

5. PRODUCT LINE ACQUISITION:

Effective January 9, 1995, the Company purchased the assets, inventory,
patents and patent applications, trademarks, goodwill and a noncompete
agreement associated with the rotary vane actuator business of The Sollami
Company. The purchase price was $326,154 plus minimum royalty payments of
$295,000 (Note 7) or 8% of net sales of rotary vane actuators and related
parts for the 48 months beginning in February 1995, whichever is greater.
In 1995, the Company paid $8,000 of minimum royalty payments to the Sollami
Company.

6. SELECTED BALANCE SHEET INFORMATION:

INVENTORIES:

Inventories are comprised of the following:

1995 1994

<S> <C> <C>
Raw materials and supplies $ 297,067 $ 340,631
Work-in-process 1,004,038 576,698
---------- ---------
$ 1,301,105 $ 917,329
---------- ---------
---------- ---------

</TABLE>

PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment at December 31, 1995 and 1994, was comprised
of the following:

1995 1994

<S> <C> <C>
Land and related improvements $ 206,995 $ 206,995
Buildings 3,044,441 2,980,608
Machinery and equipment 7,940,637 7,716,254
----------- -----------
Total 11,192,073 10,903,857
Less accumulated depreciation 7,109,755 6,478,600
----------- -----------
Total property, plant and
equipment, net $ 4,082,318 $ 4,425,257
----------- -----------
----------- -----------

</TABLE>
30

<PAGE>

REUTER MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

6. SELECTED BALANCE SHEET INFORMATION, CONTINUED:

INTANGIBLE ASSETS:

Intangible assets at December 31, 1995, was comprised of the following:

Patents $300,000
Noncompete agreements 100,000
Goodwill 95,000
--------
495,000
Less accumulated amortization 48,635
--------
$446,365
--------
--------

OTHER SELECTED BALANCE SHEET INFORMATION:

1995 1994
<S> <C> <C>
Accrued expenses:
Interest, excluding accrued interest
associated with the Eden Prairie debt $ 30,066 $ 28,243
Payroll, benefits and related taxes 314,032 291,699
Legal and accounting 135,000 104,850
Accrued container warranty 50,000 140,000
Accrued retirement 49,393 38,496
Other 136,381 9,869
--------- ---------
$ 714,872 $ 613,157
--------- ---------
--------- ---------

</TABLE>

<PAGE>

REUTER MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

7. NOTES PAYABLE AND OTHER FINANCING ARRANGEMENTS:

Notes payable and long-term debt at December 31, 1995 and 1994, consisted
of the following:

1995 1994
<S> <C> <C>
Installment note payable by EPR and guaranteed by the Company
(see related Company covenant violation discussed below
under the caption "Asset-Based Short-Term Financing
Arrangement"). The note is payable in monthly principal
and interest payments of $251,560 with interest at 11.85%,
with the remaining principal balance of $9.7 million
due in May 1996. (a) $15,508,363 $15,508,363

Notes payable in monthly principal and interest installments,
with interest ranging from 4.9% to 12%. Notes mature from
January 1996 to May 2001, collateralized by vehicles and
equipment with an aggregate carrying value of $637,237 at
December 31, 1995. 468,449 419,366

Other obligations 287,000
------------ -----------
Total notes payable and other obligations, including
long-term debt 16,263,812 15,927,729

Less current maturities, principally installment note 15,768,097 15,660,344
------------ -----------
Long-term debt, less current maturities $495,715 $267,385
------------ -----------
------------ -----------

</TABLE>

(a) In connection with this note, the Company is in payment default and is
in violation of the debt ratio covenant and certain other covenants
and has not been able to obtain a waiver from the lender. Under terms
of the agreement, the lender may, at its discretion, demand repayment
of the entire outstanding note, plus accrued interest (see Note 2).
Accordingly, the entire principal balance of this note of $15,508,363
at December 31, 1995 and 1994, has been reflected as a current
liability. During the period of default, the lender may elect to
increase the interest rate charged on this note to 13.85% (default
rate). The lender did not waive its right to charge the Company
interest at the default rate. Accordingly, the Company's interest
expense and accrued but unpaid interest for the years ended December
31, 1995 and 1994 of $3,275,656 and $1,117,716, respectively, includes
$314,475 of incremental default rate interest incurred during 1995 and
1994. In addition, the lender has the right pursuant to terms of the
agreement to demand payment for certain transaction costs and to
assess additional late charges for delinquent payments. The lender
has not made such a demand. Accordingly, no such transaction costs or
late charges have been accrued by the Company. As discussed in Note
3, the Company discontinued its waste processing and recycling
operations during 1994. The loan agreement contains restrictive
covenants which, among other things, requires the Company to maintain
a debt to equity ratio of no more than 2.0, as defined, restricts the
payment of cash dividends to the parent, and restricts the purchase,
redemption or retirement of the subsidiary's stock.

32
<PAGE>

REUTER MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

7. NOTES PAYABLE AND OTHER FINANCING ARRANGEMENTS, CONTINUED:

Principal repayment obligations as of December 31, 1995, including amounts
reclassified to currently payable and principal payments in arrears (see
Note 7(a)) are as follows:

<TABLE>
<S> <C> <C>
1996 $ 15,768,097 *
1997 195,308
1998 187,702
1999 92,148
2000 20,557
----------------
Total $ 16,263,812
----------------
----------------

</TABLE>

* As more fully described in Note 2 under the caption "Eden Prairie
Facility Assets Sale and January 24, 1996 Restructuring of Underlying
Debt Guarantee" and as reflected in the unaudited pro forma
consolidated balance sheet as of December 31, 1995, approximately $5.9
million of this debt will effectively be relieved from the Company's
consolidated balance sheet in May of 1996 due to the agreement to
restructure the Company's guarantee of this EPR debt obligation.

Other obligations are comprised of minimum royalty payments related to the
Sollami product line acquisition (Note 5).

<PAGE>

REUTER MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

7. NOTES PAYABLE AND OTHER FINANCING ARRANGEMENTS, CONTINUED:

ASSET-BASED SHORT-TERM FINANCING AGREEMENT:

In February 1991, the Company entered into a $6 million (subsequently
reduced to $4.5 million) short-term demand line of credit arrangement with
an asset-based lender. In January 1993, the term of the demand line of
credit agreement was renewed for a two-year period. This demand line of
credit is collateralized by a $250,000 certificate of deposit which is
invested with a financial services company and is classified as a
restricted investment on the Company's Consolidated Balance Sheets. The
line of credit is also collateralized by all receivables, inventories and
property, plant and equipment of the Company. Interest on borrowings under
the line were computed at the prime rate plus 3.75% (prime rate was 8.5% at
December 31, 1995 and 1994). In October 1995, the Company amended its loan
and security agreement through a modification of the term loan associated
with the line of credit. Under this agreement, the Company received
approximately $300,000 in additional borrowing capacity. The terms of this
amended agreement call for a new term loan in the amount of $1,007,200 to
be amortized over a period of 60 months and a one-year extension of the
loan agreement. In December 1995, the Company amended its loan and
security agreement to obtain additional borrowing capacity. The terms of
the amended agreement increased the amount of the term loan from $1,007,200
to $1,507,000. All other terms and conditions of the loan agreement remain
the same as set forth above. Funds available to the Company pursuant to
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 of
this agreement and a cross-default covenant due to the defaults described
in Note 7(a). 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, borrowing capacity under this line of credit is approximately
$121,037 at March 11, 1996. The weighted average interest rate was 12.46%
and 12.95% for the years ended December 31, 1995 and 1994, respectively.

8. STOCKHOLDERS' EQUITY:

EMPLOYEE STOCK OPTION PLAN:

The Company had an Incentive Stock Option Plan, that was terminated in
1991, through which options had been granted to employees to purchase
common stock. Under the Plan, 350,000 shares of common stock were
available for grant at exercise prices not less than the fair market value
on the date of grant.

<PAGE>

REUTER MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

8. STOCKHOLDERS' EQUITY, CONTINUED:

EMPLOYEE STOCK OPTION PLAN, CONTINUED:

The options vest over periods ranging from two to five years as determined
by the Board of Directors. The options expire ten years from the date of
grant or earlier if the participant's employment is terminated.

1991 STOCK OPTION PLAN:

In 1991, the Board of Directors approved a new stock option plan (1991
Plan) to grant nonstatutory stock options to eligible employees, directors,
consultants and independent contractors of the Company. A total of 200,000
shares of common stock are available for grant under this plan at exercise
prices not less than 50% of the fair market value on the date of grant for
non-incentive stock options and not less than 100% of fair market value on
the date of grant for incentive stock options. In August 1995, the
stockholders approved an increase in the number of common shares reserved
for issuance to 500,000 shares. The Board of Directors determine vesting
provisions for each option granted. The options expire ten years from the
date of grant or earlier if the participant's employment is terminated.

DIRECTORS' STOCK OPTION PLAN:

In 1991, the Board of Directors adopted a new Directors' Stock Option Plan
(new plan) which was approved at the 1992 stockholders' meeting. The Board
reserved 125,000 shares of common stock for grant under this plan to
nonemployee directors at exercise prices not less than the fair value on
the date of grant. Under terms of the new plan, the nonemployee directors
terminated their options under the previous directors' stock option plan
and exchanged them for options issued under the new plan. Options under
the new plan vest over periods ranging from immediately to three years,
based on the directors' term of office, and generally expire one year after
a participating director leaves the Board of Directors.

This plan was terminated in 1995. Pursuant to the termination of the plan,
no new options may be issued, however, options previously issued under the
plan vest under the terms of the original option agreements.

<PAGE>

REUTER MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

8. STOCKHOLDERS' EQUITY, CONTINUED:

DIRECTORS' STOCK OPTION PLAN, CONTINUED:

The following summarizes all option activity under the plans:

OPTIONS OPTIONS PRICE
OUTSTANDING EXERCISABLE PER SHARE
<S> <C> <C> <C>
Balances, December 31, 1993 279,000 176,583 $.1875 - $7.00

Options cancelled (105,000) (68,750) $.1875 - $7.00
Options granted 140,000 13,333 $.31 - $.50
Options vested 120,000 $.1875 - $5.13
--------- ----------

Balances, December 31, 1994 314,000 241,166 $.1875 - $7.00

Options cancelled (5,000) (5,000) $7.00
Options granted
Options vested 28,834 $.1875 - $5.13
--------- ----------

Balances, December 31, 1995 309,000 265,000 $.1875 - $7.00
--------- ----------
--------- ----------

</TABLE>

In April 1991, the Company granted a director an option, which expires if
not exercised by 2001, to purchase up to 20,000 shares of common stock at
$4.88 per share, the fair market value of common stock on the date of
grant. As of December 31, 1995, all of these options are exercisable.

No options were exercised under any of the Company's plans during 1995 or
1994.

ACCOUNTING FOR STOCK BASED COMPENSATION:

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards, "Accounting for Stock Based
Compensation" (SFAS No. 123). As permitted by SFAS No. 123, the Company
will adopt the new standard in 1996, and management has not selected from
the implementation alternatives and therefore has not determined the impact
of this standard on the Company's 1996 financial position or results of
operations.

WARRANTS:

In June 1995, the Company granted a contingent stock purchase warrant to
Sanwa, which would enable Sanwa to become a significant, if not the
majority stockholder, in circumstances more fully described in Note 2.

<PAGE>

REUTER MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

8. STOCKHOLDERS' EQUITY, CONTINUED:

WARRANTS, CONTINUED:

In connection with the November 1, 1992, agreements between the Company and
the Reuter Recycling of Florida construction lender, as described in Note
4, the Company issued the lender warrants to purchase 150,000 shares of
common stock of the Company at a price of $1.5625 per share (fair market
value at the date of issuance). Warrants previously issued by the Company
to this lender, to acquire 85,000 shares of common stock at $10.00 per
share were cancelled. The new warrants became exercisable in 1993. The
warrant previously issued in 1992 to a lender lapsed in connection with the
termination of a management agreement (Note 4).

9. INCOME TAXES:

The following table sets forth the components of the deferred tax assets
and liabilities as of December 31, 1995 and 1994, assuming an effective tax
rate of 35% and 40%, respectively.

UNAUDITED
PRO FORMA
1995 1994 1995
<S> <C> <C> <C>
Tax credits available for carryforward (expire 1999
to 2001) $ 1,330,000 $ 1,330,000
Net operating losses available for carryforward
(expire 2001 to 2009) 10,150,000 13,928,000 $8,553,000
Accelerated depreciation for tax reporting purposes (227,000) (344,000) (227,000)
Other future deductible temporary differences, net 211,000 353,000 211,000
------------- ------------- -----------
Deferred tax assets and liabilities before valuation
allowance 11,464,000 15,267,000 8,537,000

Valuation allowance (11,464,000) (15,267,000) (8,537,000)
------------- ------------- -----------
Net deferred income taxes - - -
------------- ------------- -----------
------------- ------------- -----------

</TABLE>

The majority of net operating losses were incurred in states
where the Company operated in prior years, but no longer
operates. Accordingly, the 1995 effective tax rate does not
include a provision for recoverability of these state taxes, if
any.

As discussed in Note 2, the Company's future utilization, if
any, of the net operating loss carryforwards results in payments
to the EPR, Inc. lender, pursuant to terms of the Loan
Agreement/Restructured Guarantee. Accordingly, approximately
$6,000,000 of the tax effected net operating loss carryforwards
will not be available to the Company. The unaudited pro forma
deferred tax assets and liabilities at December 31, 1995
(disclosed above) have been presented as if the January 24,
1996, restructuring of the Company's debt guarantee associated
with the debt of the EPR facility was completed and effective
(including the lapse of the 100-day escrow arrangement) on
December 31, 1995 (Note 2).

<PAGE>

REUTER MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

9. INCOME TAXES, CONTINUED:

The Company has established a valuation allowance for any tax
benefits for which management believes, based on the relative
weight of currently available evidence, that it is "more likely
than not" that the related net deferred tax asset will not be
realized.

Under the Internal Revenue Code, certain stock transactions,
including sales of stock and the granting of warrants to
purchase stock, may limit the amount of net operating loss
carryforwards that may be utilized on an annual basis to offset
taxable income in future periods.

Reconciliation of the income tax computed at the Federal
statutory rate to the actual income tax provision is as follows:

1995 1994
<S> <C> <C>
Benefit at Federal statutory rate $(940,965) $(103,607)
Limitation of net operating loss
carryforward benefit 940,965 103,607
---------- ----------

Income tax provision - -
---------- ----------
---------- ----------
</TABLE>

10. EMPLOYEE SAVINGS PLAN:

All employees who are at least 21 years of age and have
completed six months of service and have worked at least 1,000
hours are eligible to participate in the Company's 401(k)
Retirement Savings Plan, which was established in 1991.
Effective January 1, 1995, a profit-sharing provision was added
to the Plan, which allows for Company contributions to the Plan,
at the discretion of the Company's Board of Directors.
Employees may contribute from 1% to 20% of their gross annual
wages to the plan. Participants vest in the Company
contributions at a rate of 33% annually beginning one year after
their date of employment. The Company may make matching
contributions at the discretion of the Board of Directors.
There were no discretionary Company contributions in 1995. The
Company made a discretionary contribution of $60,000 in 1994.

<PAGE>

REUTER MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

11. SIGNIFICANT CUSTOMER INFORMATION:

Three customers account for net aggregate revenues, expressed as
percentages of total consolidated net sales and revenues, as follows:

1995 1994
-------------------- --------------------
Amount % Amount %

Customer A $ 4,958,260 44.9% $ 5,231,481 43.5%
Customer B 2,625,605 23.8% 2,179,833 18.1%
Customer C (1) 13,962 .1% 1,685,554 14.0%

</TABLE>

(1) Customer C (Seagate Technology, Inc.) stopped purchasing a significant
portion of products from the Company effective March 31, 1994.

Accounts receivable credit concentrations associated with customers A
(Haemonetics Corporation), B (Caire) and C (Seagate Technology, Inc.) at
December 31, 1995, were $558,918, $152,200 and $13,962, respectively.

For the year ended December 31, 1994, export product sales associated with
the manufacturing segment, principally to Singapore, comprised
approximately 10.7% of consolidated net sales. There were no export sales
of any significance in 1995.

<PAGE>

REUTER MANUFACTURING, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

COLUMN C
COLUMN B --------- COLUMN E
---------- ADDITIONS ---------
COLUMN A BALANCE AT CHARGED TO COLUMN D BALANCE
- --------------------------------- BEGINNING COSTS AND ----------- AT END
CLASSIFICATION OF PERIOD EXPENSES RETIREMENTS OF PERIOD

Year ended December 31, 1994:
Valuation allowance:
Inventories $ 125,034 $ 60,411 $ 105,445 $ 80,000
Allowance for doubtful accounts 14,000(3) 15,337 8,652(1) 20,685
Accrued warranties 116,635 110,042 86,677 140,000
---------- ---------- ---------- ----------
$ 255,669 $ 185,790 $ 200,774 $ 240,685
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------

Year ended December 31, 1995:
Valuation allowance:
Inventories 80,000 25,000 105,000
Allowance for doubtful accounts 20,685 12,925 18,610(1) 15,000
Accrued warranties 140,000 (90,000)(2) 50,000
---------- ----------- --------- ----------
$ 240,685 $ (52,075) $ 18,610 $ 170,000
---------- ----------- --------- ----------
---------- ----------- --------- ----------

</TABLE>

(1) Write-off of accounts receivable.

(2) Reversal of estimated warranty reserve liability.

(3) Includes allowance of $6,000 on accounts receivable of discontinued
operations.

40
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Dated: March 29, 1996 REUTER MANUFACTURING, INC.

By:/s/ JAMES W. TAYLOR
--------------------------
James W. Taylor, President and Chief
Executive Officer

Pursuant to the requirements of the Securities and Exchange Act of 1934, this
Report has been signed below on March 29, 1996 by the following persons on
behalf of the Registrant and in the capacities indicated.

SIGNATURE TITLE

/s/ EDWARD E. STRICKLAND Chairman of the Board and Director
- ------------------------
Edward E. Strickland

/s/JAMES W. TAYLOR President, Chief Executive Officer,
- ------------------
James W. Taylor Chief Financial Officer and Director
(principal executive and financial officer)

/s/ WILLIAM H. JOHNSON Vice President, Controller and Secretary
- ----------------------
William H. Johnson (principal accounting officer)

/s/ CAROLINE C. AVEY Director
- --------------------
Caroline C. Avey

/s/ KENNETH E. DAUGHERTY Director
- ------------------------
Kenneth E. Daugherty

/s/ GARY W. LAIDIG Director
- ------------------
Gary W. Laidig

/s/ JAMES H. MCGUIRE Director
- --------------------
James H. McGuire

<PAGE>

REUTER MANUFACTURING, INC.

EXHIBIT INDEX TO ANNUAL REPORT
ON FORM 10-KSB
For the Fiscal Year Ended December 31, 1995

ITEM NO. ITEM METHOD OF FILING

3.1 Restated Articles of Incorporation,
as amended. . . . . . . . . . . . . . . . . Filed herewith

3.2 Amended Bylaws. . . . . . . . . . . . . . . Incorporated by reference
to Exhibit 3.2 to the
Company's Annual Report
on Form 10-K for the year
ended December 31, 1990
(File No. 0-1561)

4.1 Form of the Company's Common Stock. . . . . Certificate Incorporated
by reference to Exhibit
4.1 to the Company's
Annual Report on Form 10-K
for the year ended
December 31, 1990 (File
No. 0-1561)

10.1 Incentive Stock Option Plan of Reuter,
Inc., as amended effective December 17,
1987. . . . . . . . . . . . . . . . . . . . Incorporated by reference
to Exhibit 10(a) to the
Company's Annual Report
on Form 10-K for the year
ended December 31, 1987
(File No. 0-1561)

10.2 Directors Stock Option Plan of
Reuter, Inc.. . . . . . . . . . . . . . . . Incorporated by reference
to Exhibit 10(c) to the
Company's Annual Report
on Form 10-K for the year
ended December 31, 1987
(File No. 0-1561)

10.3 Summary of options granted under
Directors Stock Option Plan . . . . . . . . Incorporated by reference
to Exhibit 10.4 to the
Company's Annual Report
on Form 10-KSB for the
year ended December 31,
1994 (File No. 0-1561)

10.4 1991 Non-Employee Director Stock
Option Plan . . . . . . . . . . . . . . . . Incorporated by reference
to Exhibit 10.4 to the
Company's Annual Report
on Form 10-K for the year
ended December 31, 1993
(File No. 0-1561)

<PAGE>

10.5 Summary of options granted under
1991 Non-Employee Director
Stock Option Plan . . . . . . . . . . . . . Incorporated by reference
to Exhibit 10.5 to the
Company's Annual Report
on Form 10-K for the year
ended December 31, 1993
(File No. 0-1561)

10.6 1991 Stock Option Plan, as amended. . . . . Filed herewith

10.7 Summary of Options granted
under 1991 Stock Option Plan. . . . . . . . Incorporated by reference
to Exhibit 10.9 to the
Company's Annual Report
on Form 10-KSB for the
year ended December 31,
1994 (File No. 0-1561)

10.8 Option Agreement between Edward E.
Strickland and the Company. . . . . . . . . Incorporated by reference
to Exhibit 10.10 to the
Company's Annual Report
on Form 10-K for the year
ended December 31, 1991
(File No. 0-1561)

10.9 Consulting Agreement with
Edward E. Strickland. . . . . . . . . . . . Incorporated by reference
to Exhibit 10.6 to the
Company's Annual Report
on Form 10-K for the year
ended December 31, 1990
(File No. 0-1561)

10.10 Installment Note payable by Reuter
Recycling, Inc. to Sanwa Business
Credit Corporation and Term Loan
and Security Agreement between
Reuter Recycling, Inc., the
Company and Sanwa Business Credit
Corporation, both dated May 6, 1988 . . . . Incorporated by reference
to Exhibit 28(a) to the
Company's Current Report
on Form 8-K dated May 6,
1988 (File No. 0-1561)

10.11 Guaranty by the Company and Debtor's
Security and Pledge Agreement between
the Company and Sanwa Business
Credit Corporation, both dated
May 6, 1988 . . . . . . . . . . . . . . . . Incorporated by reference
to Exhibit 28(b) to the
Company's Current Report
on Form 8-K dated May 6,
1988 (File No. 0-1561)

43
<PAGE>

10.12 Loan and Security Agreement,
dated February 15, 1991, between
the Company and The CIT Group/
Credit Finance, Inc. . . . . . . . . Incorporated by reference to
Exhibit 28(a) to the Company's
Current Report on Form 8-K
dated February 15, 1991 (File
No. 0-1561)

10.13 Promissory Note, dated February 15,
1991, payable by the Company to
The CIT Group/Credit Finance, Inc. . Incorporated by reference to
Exhibit 28(b) to the Company's
Current Report on Form 8-K
dated February 15, 1991 (File
No. 0-1561)

10.14 Mortgage and Security Agreement and
Fixture Financing Statement, dated
February 15, 1991, between the Company
and The CIT Group/Credit Finance,
Inc. . . . . . . . . . . . . . . . . Incorporated by reference to
Exhibit 28(c) to the Company's
Current Report on Form 8-K
dated February 15, 1991 (File
No. 0-1561)

10.15 Patent, Trademark and License
Mortgage, dated February 15, 1991,
between the Company and The CIT
Group/Credit Finance, Inc. . . . . . Incorporated by reference to
Exhibit 28(d) to the Company's
Current Report on Form 8-K
dated February 15, 1991 (File
No. 0-1561)

10.16 Independent Contractor Agreement
dated as of November 2, 1992,
between Taylor Consultants, Inc.
and the Company. . . . . . . . . . . Incorporated by reference to
Exhibit 10.30 to the Company's
Annual Report on Form 10-K for
the year ended December 31,
1992 (File No. 0-1561)

10.17 Amendment to Loan and Security
Agreement, dated December 31, 1992,
between the Company and The CIT Group/
Credit Finance, Inc. . . . . . . . . Incorporated by reference to
Exhibit 10.31 to the Company's
Annual Report on Form 10-K for
the year ended December 31,
1992 (File No. 0-1561)

<PAGE>

10.18 Amended Promissory Note dated as
of December 30, 1992 between
the Company and The CIT Group/Credit
Finance, Inc. . . . . . . . . . . . . Incorporated by reference to
Exhibit 10.32 to the Company's
Annual Report on Form 10-K for
the year ended December 31,
1992 (File No. 0-1561)

10.19 Letter Agreement, dated July 26,
1994 amending Loan Agreement with
The CIT Group/Credit Finance, Inc. . Incorporated by reference to
Exhibit 10.32 to the Company's
Annual Report on Form 10-KSB
for the year ended December
31, 1994 (File No. 0-1561)

10.20 Letter Agreement, dated December 15,
1994 amending Loan Agreement with
The CIT Group/Credit Finance, Inc. . Incorporated by reference to
Exhibit 10.33 to the Company's
Annual Report on Form 10-KSB
for the year ended December
31, 1994 (File No. 0-1561)

10.21 Letter Agreement, dated January 11,
1995 amending Loan Agreement with
The CIT Group/Credit Finance, Inc. . Incorporated by reference to
Exhibit 10.34 to the Company's
Annual Report on Form 10-KSB
for the year ended December
31, 1994 (File No. 0-1561)

10.22 Letter Agreement, dated October 12,
1995, amending Loan Agreement with
The CIT Group/Credit Finance, Inc. . Filed herewith

10.23 Amended Promissory Note, dated
October 12, 1995, from the Company
to The CIT Group/Credit Finance,
Inc. . . . . . . . . . . . . . . . . Filed herewith

10.24 Letter Agreement, dated December 22,
1995, amending Loan Agreement with
The CIT Group/Credit Finance, Inc. . Filed herewith

10.25 Fourth Amended and Restated Amended
Promissory Note, dated December 22,
1995, from the Company to The CIT
Group/Credit Finance, Inc. . . . . . Filed herewith

10.26 Purchase Agreement, dated August 22,
1994, by and between EPR, Inc., Green
Isle Environmental Services, Inc. and
BFI Recycling Systems of Minnesota,
Inc. . . . . . . . . . . . . . . . Incorporated by reference to
Exhibit 2.1 to the Company's
Current Report on Form 8-K,
dated September 19, 1994 (File
No. 0-1561)

<PAGE>

10.27 Purchase Agreement, dated June 1, 1995,
and among the Company, Waste Management
Inc. of Florida and US West Financial
Services, Inc. . . . . . . . . . . Incorporated by reference to
Exhibit 2.1 to the Company's
Current Report on Form- 8-K,
dated October 26, 1995 (File
No. 0-1561)

10.28 Amendment No. 1 to Purchase Agreement,
dated as of June 1, 1995, by and among
the Company, Waste Management Inc. of
Florida and US West Financial
Services, Inc. . . . . . . . . . . Incorporated by reference to
Exhibit 2.2 to the Company's
Current Report on Form 8-K,
dated October 26, 1995 (File
No. 0-1561)

10.29 Loan and Security Agreement, dated
December 31, 1995, between Sanwa
Business Credit Corporation and
the Company. . . . . . . . . . . . Incorporated by reference to
Exhibit 2.1 to the Company's
Current Report on Form 8-K,
dated January 24, 1996 (File
No. 0-1561)

10.30 Senior Subordinated Secured Promissory
Note, dated December 31, 1995, between
the Company and Sanwa Business Credit
Corporation . . . . . . . . . . . . Incorporated by reference to
Exhibit 2.2 to the Company's
Current Report on Form 8-K,
dated January 24, 1996 (File
No. 0-1561)

10.31 Junior Subordinated Secured Promissory
Note, dated December 31, 1995, between
the Company and Sanwa Business Credit
Corporation . . . . . . . . . . . . Incorporated by reference to
Exhibit 2.3 to the Company's
Current Report on Form 8-K,
dated January 24, 1996 (File
No. 0-1561)

10.32 Mortgage, Security Agreement and Fixture
Financing Statement, dated December 31,
1995, between the Company and Sanwa
Business Credit Corporation . . . . Incorporated by reference to
Exhibit 2.4 to the Company's
Current Report on Form 8-K,
dated January 24, 1996 (File
No. 0-1561)

<PAGE>

10.33 Patent Security Agreement, dated
December 31, 1995, between the
Company and Sanwa Business
Credit Corporation . . . . . . . . . Incorporated by reference to
Exhibit 2.5 to the Company's
Current Report on Form 8-K,
dated January 24, 1996 (File
No. 0-1561)

10.34 Income Sharing Agreement, dated
December 31, 1995, between the
Company and Sanwa Business
Credit Corporation . . . . . . . . . Incorporated by reference to
Exhibit 2.6 to the Company's
Current Report on Form 8-K,
dated January 24, 1996 (File
No. 0-1561)

10.35 Intercreditor and Subordination
Agreement, dated December 31, 1995,
among the Company, The CIT Group/Credit
Finance, Inc. and Sanwa Business Credit
Corporation . . . . . . . . . . . . Incorporated by reference to
Exhibit 2.7 to the Company's
Current Report on Form 8-K,
dated January 24, 1996 (File
No. 0-1561)

10.36 Common Stock Warrant Agreement
dated December 31, 1995, between
the Company and Sanwa Business
Credit Corporation . . . . . . . . Incorporated by reference to
Exhibit 2.8 to the Company's
Current Report on Form 8-K,
dated January 24, 1996 (File
No. 0-1561)

10.37 Standstill Agreement, dated December 31,
1995, among Edward E. Strickland, the
Company and Sanwa Business Credit
Corporation . . . . . . . . . . . . Incorporated by reference to
Exhibit 2.9 to the Company's
Current Report on Form 8-K,
dated January 24, 1996 (File
No. 0-1561)

10.38 Standstill Agreement, dated December 31,
1995, among James Taylor, the Company
and Sanwa Business Credit Corporation Incorporated by reference to
Exhibit 2.10 to the Company's
Current Report on Form 8-K,
dated January 24, 1996 (File
No. 0-1561)

21.1 Subsidiaries of the Company . . . . . Filed herewith

<PAGE>

23.1 Consent of Coopers & Lybrand L.L.P. Filed herewith

27.1 Financial Data Schedule . . . . . . . Filed herewith

<PAGE>

ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
REUTER, INC.

--------------

We, the undersigned, Edward J. Reuter and Winston E. Munson, respectively
the President and Secretary of Reuter, Inc., a corporation subject to the
provisions of Chapter 302A, Minnesota Statutes, do hereby certify that at a
meeting of the shareholders of said corporation, duly held on the 8th day of
May, 1984, pursuant to notice duly mailed to all shareholders of record, the
following resolutions were duly adopted by the affirmative vote of the holders
of more than a majority of the voting power of all shares entitled to vote:

RESOLVED, that the shareholders of Reuter, Inc., do hereby adopt the
following 1984 Restated Articles of Incorporation, which 1984 Restated
Articles of Incorporation shall, and hereby do, supersede and take the
place of the existing Restated Articles of Incorporation of Reuter,
Inc., and all amendments thereto.

"Text of 1984 Restated
Articles of Incorporation
of Reuter, Inc.

ARTICLE I

The name of the corporation is Reuter, Inc.

ARTICLE II

The corporation shall have the following purposes:

To design, develop, research, produce, manufacture, fabricate, assemble,
and sell machinery, equipment, and parts and other devices and otherwise deal in
goods, wares, and merchandise of every class and description;

To hold, buy, sell, lease, mortgage or otherwise encumber real and personal
property on any interest therein, of all kinds and descriptions;

<PAGE>

To hold, buy, sell, and invest in notes, stocks, bonds, or other
investments of all kinds; and

To engage in such other activities as in the judgment of the Board of
Directors are reasonably necessary to carry out any of the foregoing purposes.

In addition, the corporation shall have general business purposes and shall
have unlimited power to engage in, and to do any lawful acts concerning, any and
all lawful business for which corporations may be organized under the Minnesota
Business Corporation Act and all amendments thereto.

ARTICLE III

The duration of the corporation shall be perpetual.

ARTICLE IV

The location and post office address of the corporation's registered office
in the State of Minnesota shall be 410 - 11th Avenue South, Hopkins, Minnesota
55343.

ARTICLE V

The Board of Directors shall have the power and authority to make and alter
the Bylaws of the corporation subject to the power of the shareholders to change
or repeal such Bylaws.

ARTICLE VI

The shareholders of the corporation shall not have the preemptive right to
subscribe for or to purchase any of the shares or other securities, warrants, or
rights of the corporation, now or hereafter authorized, including any of the
same which may, from time to time, be in the treasury of the corporation. The
shareholders of the corporation are hereby denied the right of cumulative
voting.

ARTICLE VII

The authorized number of shares of the corporation is Nine Million
(9,000,000) shares of common stock with a par value of eighteen and three-
fourths cents (18-3/4CENTS) per share.

ARTICLE VIII

A. The authorized number of directors of this corporation shall be not
less than three (3) nor more than fifteen (15), the exact number to be fixed by
a resolution adopted by the affirmative vote of at least two-thirds of the
directors. The exact number of directors shall be six (6) until so increased or
decreased. Effective as of the annual meeting of shareholders in 1984, the
Board of Directors shall be divided into three classes, designated

<PAGE>

Class I, Class II and Class III, as nearly equal in number as possible and the
term of office of directors of one class shall expire at each annual meeting of
shareholders, provided that in all cases each director shall serve until his or
her successor shall be elected, or until his or her earlier resignation, removal
from office, death or incapacity. Additional directorships resulting from an
increase in number of directors shall be apportioned among the classes as
equally as possible. The initial term of office of directors of Class I shall
expire at the annual meeting of shareholders in 1985, that of Class II shall
expire at the annual meeting in 1986, and that of Class III shall expire at the
annual meeting in 1987, provided that in all cases each director shall serve
until his or her successor shall be elected, or until his or her earlier
resignation, removal from office, death or incapacity. At each annual meeting
of shareholders the number of directors equal to the number of directors of the
class whose term expires at the time of such meeting (or, if less, the number of
directors properly nominated and qualified for election) shall be elected to
hold office until the third succeeding annual meeting of shareholders after
their election.

B. Newly created directorships resulting from any increase in the number
of directors and any vacancies in the Board of Directors resulting from death,
resignation, retirement, removal from office or other cause may be filled only
by the affirmative vote of a majority of the directors then in office, and
directors so chosen shall hold office for a term expiring at the annual meeting
of shareholders at which the term of the class to which they have been elected
expires.

C. At a meeting of shareholders called expressly for that purpose, any
director, or the entire Board of Directors, may be removed from office at any
time; however, such removal must be for cause and must be approved by the
affirmative vote of the greater of (1) at least 66.1% of the voting power of the
shares of the corporation then present and voting on such removal, and (2) at
least 51.4% of the voting power of all shares of the corporation entitled to
vote.

D. Nominations for the election of directors may be made by the Board of
Directors or by any shareholder entitled to vote for the election of directors.
Nominations shall be made by notice in writing, delivered or mailed by first
class United States mail, postage prepaid, to the Secretary of the corporation
not less than 10 days nor more than 60 days prior to any meeting of the
shareholders called for the election of directors; provided, however, that if
less than 21 days' notice of the meeting is given to shareholders, such written
notice shall be delivered or mailed, as prescribed, to the Secretary not later
than the close of the fifth day following the day on which notice of the meeting
was mailed to shareholders. Notice of nominations which are proposed by the
Board of Directors shall be given by the Chairman of the Board of President on
behalf of the Board. Each notice hereunder

<PAGE>

shall set forth the name, age, business address, and principal occupation of
each nominee.

E. This Article VIII may neither be altered, amended, or repealed, nor
may any provision inconsistent with this Article VIII be adopted, except upon
the affirmative vote of the greater of (1) at least 66.1% of the voting power of
the shares of the corporation then present and voting on such alteration,
amendment, repeal, or inconsistent provision, and (2) at least 51.4% of the
voting power of all shares of the corporation entitled to vote.

ARTICLE IX

A. Except as set forth in paragraph B of this Article IX:

1. any merger of the corporation or any of its subsidiaries with or
into any other corporation; or

2. any plan of exchange of shares of the corporation or any of its
subsidiaries with or involving the shares of any other corporation;

3. any sale, lease, transfer, or other disposition of all or a
Substantial Part (as hereinafter defined) of the property and assets of the
corporation or any of its subsidiaries; or

4. voluntary dissolution of the corporation;

shall require the affirmative vote of the greater of (1) at least 66.1% of the
voting power of the shares of the corporation then present and voting on any
such transaction described in clauses 1 through 4 of this paragraph A, and (2)
at least 51.4% of the voting power of all shares of the corporation entitled to
vote.

B. The provisions of this Article IX shall not apply to any transaction
described in clauses 1 through 4 of paragraph A of this Article IX if:

1. a majority of the Board of Directors of the corporation shall
have approved such transaction prior to the time that any person,
corporation, or entity became the beneficial owner of more than ten percent
of the voting power of all shares of the corporation entitled to vote, or

2. a majority of the Continuing Directors (as hereinafter defined in
this Article IX) of the corporation shall have approved such transaction,
it being understood that this condition shall not be capable of
satisfaction unless there is at least one Continuing Director.

3. For the purposes of this Article IX:

<PAGE>

1. Continuing Director means a member of the Board of Directors who
either (a) was first elected a director prior to the date on which any
person, corporation, or entity acquired more than ten percent of the voting
power of all shares of the corporation entitled to vote, or (b) was
designated (before his or her initial election as a director) as a
Continuing Director by a majority of the then Continuing Directors.

2. Substantial Part shall mean more than ten percent of the total
assets of the corporation in question, as shown on its certified balance
sheet as of the end of the most recent fiscal year ending prior to the time
that the determination is being made.

D. This Article IX may neither be altered, amended, or repealed, nor may
any provision inconsistent with this Article IX be adopted, except upon the
affirmative vote of the greater of (1) at least 66.1% of the voting power of the
shares of the corporation then present and voting on such alteration, amendment,
repeal, or inconsistent provision, and (2) at least 51.4% of the voting power of
all shares of the corporation entitled to vote.

ARTICLE X

A. 1. In addition to any affirmative vote required by law or these 1984
Restated Articles of Incorporation, and except as otherwise expressly provided
in paragraph B of this Article X:

(a) any merger of the corporation or any of its subsidiaries
with (i) any Related Person (as hereinafter defined) or (ii) any other
corporation (whether or not itself a Related Person) which is, or
after such merger would be, an Affiliate (as hereinafter defined) of a
Related Person; or

(b) any sale, lease, exchange, mortgage, pledge, transfer, or
other disposition (in one transaction or a series of transactions) to
or with any Related Person or any Affiliate of any Related Person of
all or a Substantial part (as hereinafter defined) of the assets of
the corporation or any of its subsidiaries; or

(c) the issuance or transfer by the corporation or any of its
subsidiaries (in one transaction or a series of transactions) of any
securities of the corporation or any of its subsidiaries to any
Related Person or any Affiliate of any Related Person in exchange for
cash, securities, or other property (or a combination thereof) having
an aggregate fair market value in excess of two percent of the total
consolidated assets of the corporation; or

(d) the adoption of any plan of exchange of the shares of the
corporation on any of its subsidiaries with

<PAGE>

or involving a Related Person or any Affiliate of any Related Person;
or

(e) the adoption of any plan or proposal for the liquidation or
dissolution of the corporation proposed by or on behalf of a Related
Person or any Affiliate of any Related Person; or

(f) any reclassification of securities (including any reverse
stock split), or recapitalization of the corporation, or any merger of
the corporation with any of its subsidiaries or any other transaction
(whether or not with or into or otherwise involving a Related Person)
which has the effect, directly or indirectly, of increasing the
proportionate share of the outstanding shares of any class of equity
or convertible securities of the corporation or any of its
subsidiaries which is directly or indirectly owned by any Related
Person or any Affiliate of any Related Person,

shall require the affirmative vote of at least 66.1% of the voting power of
the shares of the corporation that are then present and voting on any such
transaction and which are not Beneficially Owned by the Related Person who
or which proposes to enter into or be involved in any such transaction.

2. The term "Business Combination" as used in this Article X shall
mean any transaction which is referred to in any one or more of clauses (a)
through (f) of subparagraph 1 of this paragraph A.

B. The provisions of paragraph A of this Article X shall not be
applicable to any particular Business Combination, and such Business Combination
shall require only such affirmative vote as is required by law and any other
provision of these 1984 Restated Articles of Incorporation, if, (a) in the case
of a Business Combination that does not involve cash or other consideration
being received by the common shareholders of the corporation, solely in their
respective capacities as shareholders of the corporation, the condition
specified in the following subparagraph 1 is met, or, (b) in the case of any
other Business Combination, all of the conditions specified in either of the
following subparagraphs 1 or 2 are met:

1. The Business Combination shall have been approved by a majority
of the Continuing Directors (as hereinafter defined in this Article X), it
being understood that this condition shall not be capable of satisfaction
unless there is at least one Continuing Director.

2. All of the following conditions shall have been met:

(a) The aggregate amount of (x) cash and (y) fair market value
as of the date of the consummation of the

<PAGE>

Business Combination of consideration other than cash, to be received
per share in such Business Combination by holders of the voting common
stock of the corporation shall be at least equal to the highest amount
determined under subclauses (i), (ii), and (iii) below:

(i) the highest per share price (including any brokerage
commissions, transfer taxes, and soliciting dealers' fees) paid
by the Related Person for any share of the corporation's voting
common stock acquired by it (A) within the two-year period
immediately prior to the first public announcement of the
proposal of the Business Combination (the "Announcement Date") or
(B) in the transaction in which it became a Related Person,
whichever is higher;

(ii) the fair market value per share of the corporation's
voting common stock on the Announcement Date or on the date on
which the Related Person became a Related Person (such latter
date is referred to in this Article X as the "Determination
Date"), whichever is higher; and

(iii) (if applicable) the price per share equal to the
fair market value per share of the corporation's voting common
stock determined pursuant to subparagraph 2(a)(ii) above,
multiplied by a fraction, the numerator of which is (A) the
highest per share price (including any brokerage commissions,
transfer taxes, and soliciting dealers' fees) paid by the Related
Person for any shares of the corporation's voting common stock
acquired by it within the two-year period immediately prior to
the Announcement Date, and the denominator of which is (B) the
fair market value per share of the corporation's voting common
stock on the first day in such two-year period on which the
Related Person acquired any shares of such stock.

(b) The consideration to be received by holders of the
corporation's voting common stock shall be in cash or in the same form
as the Related Person has previously paid for shares of such voting
common stock. If the Related Person has paid for shares of such
voting common stock with varying forms of consideration, the form of
consideration for such voting common stock shall be either cash or the
form used to acquire the largest number of shares of such voting
common stock previously acquired by it.

<PAGE>

requirements of the Securities Exchange Act of 1934 and the rules and
regulations thereunder (or any subsequent provisions replacing such
Act, rules, or regulations) shall be mailed to public shareholders of
the corporation at least 30 days prior to the consummation of such
Business Combination (whether or not such proxy or information
statement is required to be mailed pursuant to such Act or subsequent
provisions).

C. For the purposes of this Article X:

1. "Affiliate" or "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as in effect on May 8, 1984.

2. A person shall be the "Beneficial Owner" of any shares of the
corporation's voting stock.

(a) which such person or any of its Affiliates or Associates
beneficially owns, directly or indirectly; or

(b) which such person or any of its Affiliates or Associates has
(i) the right to acquire (whether such right is exercisable
immediately or only after the passage of time), pursuant to any
agreement, arrangement, or understanding or upon the exercise of
conversion rights, exchange rights, warrants, or options, or
otherwise, or (ii) the right to vote pursuant to any agreement,
arrangement, or understanding; or

(c) which are beneficially owned, directly or indirectly, by any
other person with which such person or any of its Affiliates or
Associates has any agreement, arrangement, or understanding (including
without limitation any written or unwritten agreement to act in
concert) for the purpose of acquiring, holding, voting, or disposing
of any shares of the corporation's voting stock.

3. "Continuing Director" means a member of the Board of Directors
who either (a) was first elected as a director prior to the date as of
which a Related Person who or which proposes to enter into or be a party to
or involved in a Business Combination became the Beneficial Owner of more
than ten percent of the voting power of all shares of the corporation
entitled to vote, or (ii) was designated (before his or her initial
election as a director) as a Continuing Director by a majority of the then
Continuing Directors.

4. "Person" means any individual, firm, corporation, or other
entity.

<PAGE>

5. "Related Person" means any person who is the Beneficial Owner of
more than ten percent of the voting power of all shares of the corporation
entitled to vote.

6. "Substantial Part" means more than ten percent of the total
assets of the corporation in question, as shown on its certified balance
sheet as of the end of the most recent fiscal year ending prior to the time
the determination is being made.

D. A majority of the Continuing Directors shall have the power and duty
to determine, on the basis of information known to them after reasonable
inquiry, all facts necessary to determine compliance with this Article X,
including, without limitation, (1) whether a person is a Related Person, (2) the
number of shares of voting stock of the corporation Beneficially Owned by any
person, (3) whether a person is an Affiliate or Associate of another, (4)
whether the applicable conditions set forth in subparagraph 2 of paragraph B of
this Article X have been met with respect to any Business Combination, and (5)
whether the consideration to be received for the issuance or transfer of
securities by the corporation or its subsidiary in any Business Combination
referred to in subparagraph 1(c) of paragraph A of this Article X has an
aggregate fair market value in excess of two percent of the total consolidated
assets of the corporation.

E. Nothing contained in this Article X shall be construed to relieve any
Related Person from any fiduciary obligation imposed by law.

F. This Article X shall neither be altered, amended, or repealed, nor
shall any provision inconsistent with this Article X be adopted, except upon the
affirmative vote of at least 66.1% of the voting power of the shares of the
corporation not Beneficially Owned by Related Persons that are then present and
voting on such alteration, amendment, repeal, or inconsistent provision.

ARTICLE XI

In connection with the exercise of its judgment in determining what is in
the best interest of the corporation and its shareholders when evaluating any
offer of another party to (a) make a tender or exchange offer for any equity
security of the corporation, (b) merge the corporation with or into another
corporation, or (c) purchase or otherwise acquire all or substantially all of
the property and assets of the corporation, the Board of Directors of the
corporation shall, in addition to considering the adequacy of the amount to be
paid in connection with any such transaction, give due consideration to all of
the following factors and any other factors which it deems relevant: (1) the
social and economic effects of the transaction on the corporation, its
employees, suppliers, customers, and other elements of the communities in which
the corporation operates or is located; (2) the fairness of the consideration
offered in relation

<PAGE>

not only to the current market price for the corporation's voting stock but also
to the market price for such voting stock over a period of years; (3) the
fairness of the consideration offered in relation to the then current value of
the corporation in a freely negotiated transaction and in relation to the Board
of Directors' then estimate of the future value of the corporation as an
independent entity; and 94) the premiums over market price offered to
shareholders of other corporations in similar transactions.

ARTICLE XII

Except as otherwise provided in these 1984 Restated Articles of
Incorporation,

A. The power and authority to accept and reject subscriptions for shares
and other securities, and to allot shares and other securities, and to otherwise
issue, sell, transfer, and otherwise dispose of the shares and other securities
of the corporation, whether authorized and unissued or in the treasury of the
corporation, is hereby granted to and vested in the Board of Directors of the
corporation.

B. The Board of Directors, without action by the shareholders, may from
time to time, offer for subscription, or otherwise issue or sell, or grant
rights, warrants, or options for the subscription to or purchase of any of the
authorized shares or other securities of the corporation not then issued or
which may have been issued and reacquired as treasury shares or other securities
by the corporation, and any or all of any increased shares or other securities
of any class that may hereafter be authorized for such consideration as the
directors may determine. In connection with any rights, warrants, or options
granted by the Board of Directors, the Board of Directors is authorized to fix
the terms, provisions, and conditions of such rights, warrants, or options,
including the conversion basis or bases and the option of warrant price or
prices at which shares may be purchased or subscribed for and to authorize the
issuance thereof. The Board of Directors may specify in amount or value the
proportions of the consideration over and above the par value of any share, on
its issue or sale, which shall be capital and which shall be surplus.

C. Bonds, debentures, certificates of indebtedness, bonds convertible
into shares, debentures convertible into shares, or other debt securities, may
be issued, sold or disposed of pursuant to resolution of the Board of Director,
without action by the shareholders, for such consideration and upon such terms
and conditions as may be deemed advisable by the Board of Directors in the
exercise of its discretion.

D. The Board of Directors is hereby authorized and empowered to fix or
alter, as to shares unallotted at the time, any or all of the following matters,
to wit: (1) the dividend rate; (2) the redemption price; (3) the liquidation
price; (4) the conversion rights; (5) the voting rights; (6) the sinking or
purchase fund

<PAGE>

rights of any shares or other securities; or (7) the number of shares in any
series of any class, all in the manner and in accordance with the statutes.

ARTICLE XIII

A. Articles VIII, IX, and X of these 1984 Restated Articles of
Incorporation may neither be altered, amended, or repealed, nor may any
provision inconsistent with said Articles VIII, IX, and X be adopted, except as
expressly provided in paragraphs E, D, and F of said Articles VIII, IX, and X,
respectively.

B. Except as provided in paragraph A of this Article XIII, any
alteration, amendment, or repeal of, or the adoption of a provision inconsistent
with, these 1984 Restated Articles of Incorporation shall require the
affirmative vote of the greater of (1) at least 66.1% of the voting power of the
shares of the corporation then present and voting on such alteration, amendment,
repeal, or inconsistent provision, and (2) at least 51.4% of the voting power of
all shares of the corporation entitled to vote; provided, however, that in the
event that the Board of Directors of the corporation shall have approved any
such alteration, amendment, repeal, or inconsistent provision by a resolution
adopted by a majority of the members of the Board of Directors, such alteration,
amendment, repeal, or inconsistent provision shall require only such shareholder
vote as is required under the applicable provisions of the Minnesota Business
Corporation Act.

FURTHER RESOLVED, that the President and Secretary of the corporation
are hereby authorized and directed to prepare, execute, and file for
record proper Articles of Amendment of the Articles of Incorporation,
setting forth the 1984 Restated Articles of Incorporation, setting
forth the 1984 Restated Articles of Incorporation of Reuter, Inc., and
reciting that the 1984 Restated Articles of Incorporation supersede
and take the place of the existing Restated Articles of Incorporation
of Reuter, Inc., and all amendments thereto, and the officers and
directors of the corporation are hereby authorized and directed to pay
all fees in connection therewith, and to do all other acts and things
necessary, required or convenient to carry out the purposes hereof,
including, but not limited to, adoption of new bylaws consistent with
said Articles.

<PAGE>

IN WITNESS WHEREOF, we have subscribed our names this 11th day of June,
1984.

/s/ Edward J. Reuter
--------------------------------
Edward J. Reuter, President

/s/ Winston E. Munson
--------------------------------
Winston E. Munson, Secretary

(CORPORATE SEAL)

STATE OF MINNESOTA )
) ss.
COUNTY OF HENNEPIN )

The foregoing instrument was acknowledged before me this 4th day of June,
1984, by Edward J. Reuter and Winston E. Munson, respectively the president and
the secretary of Reuter, Inc., a Minnesota corporation, on behalf of said
corporation.

/s/ Notary Public
--------------------------------
Notary Public

(NOTARIAL SEAL)

<PAGE>

ARTICLES OF AMENDMENT
OF
1984 RESTATED ARTICLES OF INCORPORATION
OF
REUTER, INC.

We, the undersigned, Edward J. Reuter and Winston E. Munson, respectively
the President and Secretary of Reuter, Inc., a corporation subject to the
provisions of Chapter 302A, Minnesota Statutes, do hereby certify that at a
meeting of the shareholders of said corporation, duly held on the 19th day of
May, 1987, pursuant to notice duly mailed to all shareholders of record, the
following resolutions were duly adopted by the affirmative vote of the holders
of more than a majority of the voting power of the shares outstanding and
entitled to vote:

RESOLVED, that the 1984 Restated Articles of Incorporation of Reuter,
Inc. shall be hereby amended by adding thereto a new Article XIV which
shall read as follows:

"ARTICLE XIV

A director of the corporation shall not be personally liable to
the corporation or its shareholders for monetary damages for breach of
fiduciary duty as a director, except for liability (a) for any breach
of the director's duty of loyalty to the corporation or its
shareholders, (b) for acts or omissions not in good faith or that
involved intentional misconduct or a knowing violation of law, (c)
under section 302A.559 of the Minnesota Business Corporation Act or
section 80A.23 of the Minnesota Securities Act, or (d) for any
transaction from which the director derived an improper personal
benefit. If the Minnesota Business Corporation Act is amended after
approval by the shareholders of this Article to authorize corporate
action further eliminating or limiting the personal liability of
directors, then the liability of a director of the corporation shall
be eliminated or limited to the fullest extent permitted by the
Minnesota Business Corporation Act, as so amended.

Any repeal or modification of the foregoing paragraph by the
shareholders of the corporation shall not adversely affect any right
or protection of a director of the corporation existing at the time of
such repeal or modification."

<PAGE>

FURTHER RESOLVED, That the President and the Secretary of the
corporation are hereby authorized and directed to prepare, execute,
and file for record with the Secretary of State of the State of
Minnesota proper Articles of Amendment of the 1984 Restated Articles
of Incorporation, setting forth the foregoing amendment, and to pay
all fees in connection therewith, all as required by law, and to do
all other acts and things necessary, required or convenient to carry
out the purposes hereof.

IN WITNESS WHEREOF, we have subscribed our names this 19th day of May,
1987.

/s/ Edward J. Reuter
--------------------------------
Edward J. Reuter, President

/s/ Winston E. Munson
--------------------------------
Winston E. Munson, Secretary

(CORPORATE SEAL)

STATE OF MINNESOTA )
)ss.
COUNTY OF HENNEPIN )

The foregoing instrument was acknowledged before me this 19th day of May,
1987, by Edward J. Reuter and Winston E. Munson, respectively the president and
the secretary of Reuter, Inc., a Minnesota corporation, on behalf of said
corporation.

/s/ Diana L. McGrail
--------------------------------
Notary Public

(NOTARIAL SEAL)

<PAGE>

STATE OF MINNESOTA
OFFICE OF THE SECRETARY OF STATE

MODIFICATION OF STATUTORY REQUIREMENTS
OR AMENDMENT OF ARTICLES

Corporate Name: Reuter, Inc.
Date of Adoption of Amendments/Modifications: June 13, 1991
Amendments/Modifications Approved by Corporate: Directors and
Shareholders

Pursuant to the provisions of Minnesota Statutes, Section 302A.135, the
following amendments of articles or modifications to the statutory requirements
regulating the above-named corporation were adopted by the shareholders upon the
approval and recommendation of the Board of Directors of the above corporation:

Article VII of the Restated Articles of Incorporation of the Corporation (as
amended), be amended, in its entirety, to read as follows:

The corporation shall be authorized to issue two classes of shares of
capital stock to be designated respectively, "preferred stock" and "common
stock." The total number of shares of capital stock which the corporation
shall be authorized to issue is eleven million five hundred thousand
(11,500,000), of which two million five hundred thousand (2,500,000) shall
be shares of preferred stock of the par value of one cent ($0.01) per share
and nine million (9,000,000) shall be shares of common stock of the par
value of eighteen and three-fourths cents ($0.1875) per share. Shares of
preferred stock of the corporation may be issued from time to time in one
or more series, each of which series shall have such distinctive
designation or title and such number of shares as shall be fixed by the
Board of Directors prior to the issuance of any shares thereof. Each such
series of preferred stock shall have such voting powers, full or limited,
or no voting powers, and such preferences and relative, participating,
optional or other special rights and such qualifications, limitations or
restrictions thereof, as shall be stated and expressed in the resolution or
resolutions providing for the issue of such series of preferred stock as
may be adopted from time to time by the Board of Directors prior to the
issuance of any shares thereof pursuant to the authority hereby expressly
vested in it. The Board of Directors is further authorized to increase or
decrease (but not below the number of shares then outstanding) the number
of shares of any series of preferred stock subsequent to the issuance of
shares of that series. Except as provided in the resolution or resolutions
of the Board of Directors creating any series of preferred stock, the
shares of common stock shall have the exclusive right to vote for the
election and removal of directors and for all other purposes. Each holder
of common stock shall be entitled to one vote for each share held.

<PAGE>

I swear the foregoing is true and accurate and that I have the authority to sign
this document on behalf of the corporation.

/s/ Anwar H. Bhimani
--------------------------------
Anwar H. Bhimani
Secretary

<PAGE>

STATE OF MINNESOTA
OFFICE OF THE SECRETARY OF STATE

MODIFICATION OF STATUTORY REQUIREMENTS
OR AMENDMENT OF ARTICLES

Corporate Name: Reuter, Inc.
Date of Adoption of Amendments/Modifications: June 23, 1992
Amendments/Modifications Approved by Corporate: Directors and
Shareholders

Article I of the Restated Articles of Incorporation of the Corporation (as
amended), be amended, in its entirety, to read as follows:

The name of the Corporation is Green Isle Environmental Services, Inc.

I swear the foregoing is true and accurate and that I have the authority to sign
this document on behalf of the corporation.

/s/ Anwar H. Bhimani
--------------------------------
Anwar H. Bhimani
Secretary

<PAGE>

ARTICLES OF MERGER
OF
REUTER MANUFACTURING, INC.
WITH AND INTO
GREEN ISLE ENVIRONMENTAL SERVICES, INC.

Pursuant to Section 302A.621 of the Minnesota Business Corporation Act, as
amended, Green Isle Environmental Services, Inc., a Minnesota corporation (the
"Surviving Corporation"), hereby adopts the following Articles of Merger for the
purpose of merging Reuter Manufacturing, Inc., a Minnesota corporation and a
wholly-owned subsidiary of the Surviving Corporation (the "Merging
Corporation"), into the Surviving Corporation.

ARTICLE ONE

The laws of Minnesota, the state under which the Surviving Corporation is
organized, permit such merger.

ARTICLE TWO

The Surviving Corporation shall be Green Isle Environmental Services, Inc., and
it shall be governed by the laws of the State of Minnesota.

ARTICLE THREE

SECTION 1. The Plan of Merger, dated May 15, 1995, by the Surviving
Corporation, attached hereto as Exhibit A and incorporated herein by reference
(the "Plan of Merger") sets forth the terms and conditions of the merger.

SECTION 2. The Plan of Merger was approved by the Surviving Corporation
pursuant to Minnesota Statutes Section 302A.621.

ARTICLE FOUR

SECTION 1. The number of shares of Common Stock, par value $.01, of the
Merging Corporation issued and outstanding at the time of the merger is 1,000
shares, all of which are owned by the Surviving Corporation.

ARTICLE FIVE

The merger shall be effective on the date hereof or, if later, at the time
when these Articles of Merger are filed with the Secretary of State of
Minnesota.

<PAGE>

IN WITNESS WHEREOF the Surviving Corporation has caused these Articles of
Merger to be executed in its name, as of the 15th day of May, 1995.

GREEN ISLE ENVIRONMENTAL SERVICES, INC.

By: /s/ James W. Taylor
------------------------------------

Its:President & Chief Executive Officer
-----------------------------------

- 19 -

<PAGE>

EXHIBIT A
PLAN OF MERGER

This plan of merger (the "Plan of Merger") is dated May 15, 1995 and is
entered into by Green Isle Environmental Services, Inc., a Minnesota corporation
and the parent corporation (the "Surviving Corporation"), pursuant to Section
302A.621 of the Minnesota Business Corporation Act.

WITNESSETH

WHEREAS, the Board of Directors of the Surviving Corporation has determined
that it is in the best interest of each corporation that Reuter Manufacturing,
Inc., a Minnesota corporation and a wholly-owned subsidiary of the Surviving
Corporation (the "Merging Corporation") be merged with and into the Surviving
Corporation pursuant to the terms and conditions contained in this Plan of
Merger (the "Merger"), and in accordance with the applicable laws of the State
of Minnesota.

NOW, THEREFORE, the Surviving Corporation sets forth the following Plan of
Merger:

ARTICLE 1
MERGER

A. MERGER OF MERGING CORPORATION INTO SURVIVING CORPORATION. In
accordance with the provisions of the Minnesota Business Corporation Act,
Sections 302A.601 ET. SEQ., (the "Minnesota Act"), the Merging Corporation shall
be merged with and into the Surviving Corporation (the "Merger"). Such Merger
shall be structured consistent with the requirements for a tax-free
reorganization described in Section 368(a)(1) of the Internal Revenue Code of
1986, as amended (the "Code") and is intended to qualify as a complete
liquidation within the meaning of Section 332 of the Code.

B. RIGHTS AND LIABILITIES OF SURVIVING CORPORATION. At the Effective
Time of the Merger, as defined in Article 3 below, the Merging Corporation shall
be merged with and into the Surviving Corporation, and the separate existence of
the Merging Corporation shall cease and the Surviving Corporation shall continue
its corporate existence under the laws of the State of Minnesota. The Surviving
Corporation (i) shall continue possessed of all of its rights and property as
constituted immediately prior to the Effective Time of the Merger and succeed
without other transfer to all rights and property of the Merging Corporation,
(ii) shall continue subject to all of its debts and liabilities as the same
shall have existed immediately prior to the Effective Time of the Merger, and
(iii) shall become subject to any debts and liabilities of the Merging
Corporation, all as more fully provided in Section 302A.641 of the Minnesota
Act.

- 20 -

<PAGE>

C. ARTICLES OF INCORPORATION AND BYLAWS OF SURVIVING CORPORATION. The
Articles of Incorporation and Bylaws of Green Isle Environmental Services, Inc.
in effect at the Effective Time of the Merger shall remain in effect after the
Effective Time of the Merger and shall be the Articles of Incorporation and
Bylaws of the Surviving Corporation following the Merger and shall remain in
full force and effect until amended or repealed in accordance with law.

ARTICLE 2
CONVERSION OF SHARES

A. EXISTING CAPITAL. The authorized capital stock and number of shares
of capital stock of the Merging Corporation that are issued and outstanding are
1,000 shares of Common Stock, par value $.01, all of which are owned by the
Surviving Corporation.

B. CONVERSION OF SHARES. All issued and outstanding common stock of the
Merging Corporation, all of which is held by the Surviving Corporation, shall be
cancelled at the Effective Time of the Merger, by virtue of the Merger and
without any further action of the Surviving Corporation. Shares of Surviving
Corporation common stock issued and outstanding at the Effective Time of the
Merger shall not be converted or exchanged, but shall remain outstanding as
shares of common stock of the Surviving Corporation.

ARTICLE 3
EFFECTIVE TIME OF THE MERGER

This Plan of Merger, along with Articles of Merger meeting the requirements
of Section 302A.621 of the Minnesota Act shall be filed with the Secretary of
State of the State of Minnesota in accordance with the applicable laws of
Minnesota. The Merger shall become effective as of the date hereof or, if
later, the time when the Articles of Merger are filed with the Secretary of
State of Minnesota. (The date and time when the Merger shall become effective
is herein referred to as the "Effective Time of the Merger.")

At the Effective Time of the Merger, all respective property, assets,
rights, privileges, powers, franchises and immunities of the Merging Corporation
shall vest in the Surviving Corporation and all of the respective debts,
liabilities and obligations of the Merging Corporation shall vest in the
Surviving Corporation.

ARTICLE 4
TERMINATION OF MERGER

Prior to the filing of the Articles of Merger, this Plan of Merger may be
terminated by the Board of Directors of the Surviving Corporation.

<PAGE>

ARTICLE 5
REGISTERED ADDRESS

After the Effective Time of the Merger, the registered office of the
Surviving Corporation shall be 410 11th Avenue South, Hopkins, Minnesota 55343.

ARTICLE 6
DIRECTORS AND OFFICERS

The directors and officers of Surviving Corporation at the Effective Time of the
Merger shall continue as directors and officers of the Surviving Corporation
after the Effective Time of the Merger.

IN WITNESS WHEREOF, the undersigned corporation has caused this Plan of
Merger to be executed effective as of this 15th day of May, 1995.

GREEN ISLE ENVIRONMENTAL SERVICES, INC.

By: /s/ James W. Taylor
------------------------------------

Its:President & Chief Executive Officer
-----------------------------------

- 22 -

<PAGE>

STATE OF MINNESOTA

SECRETARY OF STATE

CERTIFICATE OF MERGER

I, Joan Anderson Growe, Secretary of State of Minnesota, certify that: the
documents required to effectuate a merger between the entities listed below and
designating the surviving entity have been filed in this office on the date
noted on this certificate; and the qualification of the individual merging
entities to do business in Minnesota is terminated on the effective date of this
merger.

Merger Filed Pursuant to Minnesota Statutes, Chapter: 302A

State of Formation and Names of Merging Entities:

MN: REUTER MANUFACTURING, INC.

MN: GREEN ISLE ENVIRONMENTAL SERVICES, INC.

State of Formation and Name of Surviving Entity:

MN: GREEN ISLE ENVIRONMENTAL SERVICES, INC.

Effective Date of Merger: MAY 19, 1995

Name of Surviving Entity After Effective Date of Merger:

GREEN ISLE ENVIRONMENT SERVICES, INC.

This certificate has been issued on: MAY 19, 1995

[SEAL OF THE STATE OF MINNESOTA]

/s/ Joan Anderson Growe
-----------------------------
Secretary of State

- 23 -

<PAGE>

MINNESOTA SECRETARY OF STATE
AMENDMENT OF ARTICLES OF INCORPORATION

BEFORE COMPLETING THIS FORM, PLEASE READ INSTRUCTIONS LISTED BELOW.

CORPORATE NAME: (List the name of the company prior to any desired name
change.)

GREEN ISLE ENVIRONMENTAL SERVICES, INC.
- ---------------------------------------

This amendment is effective on the day it is filed with the Secretary of State,
unless you indicate another date, no later than 30 days after filing with the
Secretary of State.

The following amendment(s) of articles regulating the above corporation were
adopted: (Insert full text of newly amended article(s) indicating which
article(s) is (are) being amended or added.) If the full text of the amendment
will not fit in the space provided, attach additional numbered pages. (Total
number of pages including this form 1.)

ARTICLE I

The Name of the Corporation is Reuter Manufacturing, Inc.

This amendment has been approved pursuant to MINNESOTA STATUTES CHAPTER 302A OR
317A. I certify that I am authorized to execute this amendment and I further
certify that I understand that by signing this amendment, I am subject to the
penalties of perjury as set forth in section 609.48 as if I had signed this
amendment under oath.

/s/ William H. Johnson
--------------------------------
[Signature of Authorized Person]

- --------------------------------------------------------------------------------

INSTRUCTIONS FOR OFFICE USE ONLY

1. Type or print with black ink. STATE OF MINNESOTA
2. A Filing Fee of: $35.00, DEPARTMENT OF STATE
made payable to the Secretary FILED SEP. 01, 1995
of State. /s/ Joan Anderson Growe
3. Return completed forms to: Secretary of State

Secretary of State
180 State Office Building
St. Paul, MN 55155-1299
(612) 296-2803

- 24 -

<PAGE>

REUTER MANUFACTURING, INC.

1991 STOCK OPTION PLAN
(as amended as of August 25, 1995)

ARTICLE 1. ESTABLISHMENT AND PURPOSE.

1.1 ESTABLISHMENT. Reuter Manufacturing, Inc. (the "Company") hereby
establishes a plan providing for the grant of stock options to certain employees
and other individuals who provide services to the Company and its subsidiaries.
This plan shall be known as the Reuter 1991 Stock Option Plan (the "Plan").

1.2 PURPOSE. The purpose of the Plan is to advance the interests of the
Company and its shareholders by enabling the Company and its subsidiaries to
attract and retain persons of ability as employees or non-employees who provide
services to the Company, by providing an incentive to such persons through
equity participation in the Company and by rewarding such persons who contribute
to the achievement by the Company of its long-term economic objectives.

ARTICLE 2. DEFINITIONS.

The following terms shall have the meanings set forth below, unless the
context clearly otherwise requires:

2.1 "BOARD" means the Board of Directors of the Company.

2.2 "CODE" means the Internal Revenue Code of 1986, as amended.

2.3 "COMMITTEE" means the persons administering the Plan, as provided in
Article 3 of the Plan.

2.4 "COMMON STOCK" means the common stock of the Company, par value $.01
per share, or the number and kind of shares of stock or other securities into
which such Common Stock may be changed in accordance with Section 4.3 of the
Plan.

2.5 "DISABILITY" means, as to an Optionee, the disability of the Optionee
as defined in the long-term disability plan of the Company or a Subsidiary then
covering the Optionee or, if no such plan exists, the permanent and total
disability of the Optionee within the meaning of Section 22(e)(3) of the Code.

2.6 "ELIGIBLE RECIPIENT" means all employees (including, without
limitation, officers and directors who are also employees) and nonemployee
directors, consultants and independent contractors of the Company or any
Subsidiary.

2.7 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.

<PAGE>

2.8 "FAIR MARKET VALUE" means, with respect to the Common Stock, as of any
date:

(a) if the Common Stock is listed or admitted to unlisted trading
privileges on any national securities exchange or is not so listed or
admitted but transactions in the Common Stock are reported on the NASDAQ
National Market System, the mean between the reported high and low sale
prices of the Common Stock on such exchange or by the NASDAQ National
Market System as of such date (or, if no shares were traded on such day, as
of the next preceding day on which there was such a trade); or

(b) if the Common Stock is not so listed or admitted to unlisted
trading privileges or reported on the NASDAQ National Market System, and
bid and asked prices therefor in the over-the-counter market are reported
by the NASDAQ System or the National Quotation Bureau, Inc. (or any
comparable reporting service), the mean of the closing bid and asked prices
as of such date, as so reported by the NASDAQ System, or, if not so
reported thereon, as reported by the National Quotation Bureau, Inc. (or
such comparable reporting service); or

(c) if the Common Stock is not so listed or admitted to unlisted
trading privileges, or reported on the NASDAQ National Market System, and
such bid and asked prices are not so reported, such price as the Committee
determines in good faith in the exercise of its reasonable discretion.

2.9 "INCENTIVE STOCK OPTION" means a right to purchase Common Stock
granted to an Optionee pursuant to Article 6 of the Plan that qualifies as an
"incentive stock option" within the meaning of Section 422 of the Code.

2.10 "NON-STATUTORY STOCK OPTION" means a right to purchase Common Stock
granted to an Optionee pursuant to Article 6 of the Plan that does not qualify
as an Incentive Stock Option.

2.11 "OPTION" means an Incentive Stock Option or a Non-Statutory Stock
Option.

2.12 "OPTIONEE" means an Eligible Recipient who has been granted one or
more currently outstanding Options under the Plan.

2.13 "PERSON" means any individual, corporation, partnership, group,
association or other "person" (as such term is used in Section 14(d) of the
Exchange Act), other than the Company, a wholly owned subsidiary of the Company
or any employee benefit plan sponsored by the Company or a wholly owned
subsidiary of the Company.

2.14 "PREVIOUSLY ACQUIRED SHARES" means shares of Common Stock that are
already owned by the Optionee and shares of Common

<PAGE>

Stock that are to be acquired by the Optionee pursuant to the exercise of an
Option.

2.15 "RETIREMENT" means the normal and approved early retirement of an
Optionee pursuant to and in accordance with the regular retirement/pension plan
or practice of the Company or Subsidiary then covering the Optionee.

2.16 "SECURITIES ACT" means the Securities Act of 1933, as amended.

2.17 "SUBSIDIARY" means any subsidiary corporation of the Company within
the meaning of Section 424(f) of the Code.

2.18 "TAX DATE" means the date any withholding tax obligation arises under
the Code for an Optionee with respect to an Option.

ARTICLE 3. PLAN ADMINISTRATION.

3.1 THE COMMITTEE. The Plan shall be administered by the Board, all of
whom shall be "disinterested persons" within the meaning of Rule 16b-3 under the
Exchange Act, or by a committee consisting solely of not fewer than two members
of the Board who are such "disinterested persons." Members of such a committee,
if established, shall be appointed from time to time by the Board, shall serve
at the pleasure of the Board and may resign at any time upon written notice to
the Board. A majority of the members of such a committee shall constitute a
quorum, and the act of a majority of a quorum shall constitute the act of such a
committee. Action of such a committee may be taken without a meeting if
unanimous written consent is given. A member of such a committee may attend
meetings in person or by means of telephone or other electronic communication
whereby all committee members and attendants can simultaneously hear each other.
Such a committee shall keep minutes of its meetings or actions by written
consent and shall provide copies thereof to the Board to be kept with the
corporate records of the Company. As used in this Plan, the term "Committee"
will refer to the Board or to such a committee, if established.

3.2 AUTHORITY OF THE COMMITTEE.

(a) In accordance with and subject to the provisions of the Plan, the
Committee shall have the authority to determine the following: (i) the
Eligible Recipients who shall be selected as Optionees, (ii) the terms of
the Options granted to Eligible Recipients (including the number of shares
of Common Stock to be subject to each Option, the Option exercise price,
the duration of each Option, the manner in which each Option will become
exercisable and the restrictions and other conditions on the exercisability
of each Option), (iii) the time or times when Options will be granted, and
(iv) such other provisions of the Options as the Committee may deem

<PAGE>

necessary or desirable and is consistent with the terms of the Plan. The
Committee shall determine the form or forms of the agreements with
Optionees which shall evidence the particular terms, conditions, rights and
duties of the Company and the Optionees with respect to Options granted
pursuant to the Plan, which agreements shall be consistent with the
provisions of the Plan.

(b) With the consent of the Optionee affected thereby, the Committee
may amend or modify the terms of any outstanding Option in any manner,
provided that the amended or modified terms are permitted by the Plan as
then in effect. Without limiting the generality of the foregoing sentence,
the Committee may, with the consent of the Optionee affected thereby,
modify the exercise price, number of shares or other terms and conditions
of an Option, extend the term of an Option, accelerate, modify or terminate
the exercisability or vesting or otherwise terminate any restrictions
relating to an Option, accept the surrender of any outstanding Option or,
to the extent not previously exercised or vested, authorize the grant of
new Options in substitution for surrendered Options.

(c) The Committee shall have the authority, subject to the provisions
of the Plan, to establish, adopt and revise such rules and regulations
relating to the Plan as it may deem necessary or advisable for the
administration of the Plan. The Committee's decisions and determinations
under the Plan need not be uniform and may be made selectively among
Optionees whether or not such Optionees are similarly situated. Each
determination, interpretation or other action made or taken by the
Committee pursuant to the provisions of the Plan shall be conclusive and
binding for all purposes and on all persons, including, without limitation,
the Company and its Subsidiaries, the shareholders of the Company, the
Committee and each of its members, the directors, officers and employees of
the Company and its Subsidiaries, and the Optionees and their respective
successors in interest. No member of the Committee shall be liable for any
action or determination made in good faith with respect to the Plan or any
Option granted under the Plan.

ARTICLE 4. STOCK SUBJECT TO THE PLAN.

4.1 NUMBER OF SHARES. Subject to adjustment as provided in Section 4.3
below, the maximum number of shares of Common Stock that shall be authorized and
reserved for issuance under the Plan shall be 500,000 shares of Common Stock.
The maximum number of shares authorized may be increased from time to time by
approval of the Board and, if required pursuant to Rule 16b-3 under the Exchange
Act, Section 422 of the Code, or the applicable rules of any securities exchange
or the NASDAQ National Market System, the shareholders of the Company.

<PAGE>

4.2 SHARES AVAILABLE FOR USE. Shares of Common Stock that may be issued
upon exercise of Options shall be applied to reduce the maximum number of shares
of Common Stock remaining available for use under the Plan. Any shares of
Common Stock that are subject to an Option (or any portion thereof) that lapses,
expires or for any reason is terminated unexercised shall automatically again
become available for use under the Plan.

4.3 ADJUSTMENTS TO SHARES. In the event of (a) any reorganization,
merger, consolidation, recapitalization, liquidation, reclassification, stock
dividend, stock split, combination of shares or divestiture (including a spin-
off) or any other change in the corporate structure or shares of the Company or
any other corporation whose performance is relevant to the grant or vesting of
an Option, (b) any purchase, acquisition, sale or disposition of a significant
amount of assets or a significant business, any extraordinary dividend or any
other similar transaction or, (c) any substitution by the Company of Options
for, or assumption by the Company of, Options of any other corporation,, the
Committee (or, if the Company is not the surviving corporation in any such
transaction, the board of directors of the surviving corporation) shall make
appropriate adjustment (which determination shall be conclusive) as to the
number and kind of securities subject to and reserved under the Plan and, in
order to prevent dilution or enlargement of the rights of Optionees, the number,
kind and exercise price of securities subject to outstanding Options. No
adjustment shall be made in connection with the issuance by the Company of any
warrants, rights or options to acquire additional shares of Common Stock or of
securities convertible into Common Stock. Without limiting the generality of
the foregoing, in the event that any of such transactions are effected in such a
way that holders of Common Stock shall be entitled to receive stock, securities
or assets, including cash, with respect to or in exchange for such Common Stock,
all Optionees holding outstanding Options shall upon the exercise of such
Options receive, in lieu of any shares of Common Stock they may be entitled to
receive, such stock, securities or assets, including cash, as would have been
issued to such Optionees if their Options had been exercised and such Optionees
had received Common Stock prior to such transaction.

ARTICLE 5. PARTICIPATION.

Optionees shall be those Eligible Recipients who, in the judgment of the
Committee, have performed, are performing, or during the term of an Option will
perform, services in the management, operation and development of the Company or
any Subsidiary, and significantly contributed, are significantly contributing or
are expected to significantly contribute to the achievement of long-term
corporate economic objectives. Eligible Recipients may be granted from time to
time one or more Options, as may be determined by the Committee in its sole
discretion. The number, type, terms and conditions of Options granted to
various Eligible Recipients need not be uniform, consistent or in

<PAGE>

accordance with any plan, regardless of whether such Eligible Recipients are
similarly situated. Upon determination by the Committee that an Option is to be
granted to an Eligible Recipients, written notice shall be given such person,
specifying the terms, conditions, rights and duties related thereto. Each
Eligible Recipient to whom an Option is to be granted shall, if requested by the
Committee, enter into an agreement with the Company, in such form as the
Committee shall determine and which is consistent with the provisions of the
Plan, specifying such terms, conditions, rights and duties. Options shall be
deemed to be granted as of the date specified in the grant resolution of the
Committee, which date shall be the date of the related agreement with the
Optionee.

ARTICLE 6. TERMS OF OPTIONS.

6.1 GRANT. An Eligible Recipient may be granted one or more Options under
the Plan, and such Options shall be subject to such terms and conditions,
consistent with the other provisions of the Plan, as shall be determined by the
Committee in its sole discretion. The Committee may designate whether an Option
is to be considered an Incentive Stock Option or a Non-Statutory Stock Option;
provided, however, that an Incentive Stock Option shall be granted only to an
Eligible Recipient who is an employee of the Company or a Subsidiary. The terms
of the agreement relating to a Non-Statutory Stock Option shall expressly
provide that such Option shall not be treated as an Incentive Stock Option.

6.2 EXERCISE. An Option shall become exercisable at such times and in
such installments (which may be cumulative) as shall be determined by the
Committee in its sole discretion at the time the Option is granted; provided,
however, that no Options shall be exercisable prior to six months from its date
of grant. Upon the completion of its exercise period, an Option, to the extent
not then exercised, shall expire.

6.3 EXERCISE PRICE.

(a) INCENTIVE STOCK OPTIONS. The per share price to be paid by the
Optionee at the time an Incentive Stock Option is exercised shall be
determined by the Committee, in its discretion, at the date of its grant;
provided, however, that such price shall not be less than (i) 100% of the
Fair Market Value of one share of Common Stock on the date the Option is
granted, or (ii) 110% of the Fair Market Value of one share of Common Stock
on the date the Option is granted if, at that time the Option is granted,
the Optionee owns, directly or indirectly (as determined pursuant to
Section 424(d) of the Code), more than 10% of the total combined voting
power of all classes of stock of the Company or any subsidiary or parent
corporation of the Company (within the meaning of Sections 424(f) and
424(e), respectively, of the Code).

<PAGE>

(b) NON-STATUTORY STOCK OPTIONS. The per share price to be paid by
the Optionee at the time a Non-Statutory Stock Option is exercised shall be
determined by the Committee in its sole discretion at the time the Option
is granted; provided, however, that such price shall not be less than 50%
of the Fair Market Value of one share of Common Stock on the date the
Option is granted.

6.4 DURATION.

(a) INCENTIVE STOCK OPTIONS. The period during which an Incentive
Stock Option may be exercised shall be fixed by the Committee in its sole
discretion at the time such Option is granted; provided, however, that in
no event shall such period exceed 10 years from its date of grant or, in
the case of an Optionee who owns, directly or indirectly (as determined
pursuant to Section 424(d) of the Code), more than 10% of the total
combined voting power of all classes of stock of the Company or any
subsidiary or parent corporation of the Company (within the meaning of
Sections 424(f) and 424(e), respectively, of the Code), five years from its
date of grant.

(b) NON-STATUTORY STOCK OPTIONS. The period during which a Non-
Statutory Stock Option may be exercised shall be fixed by the Committee in its
sole discretion at its date of grant.

(c) EFFECT OF TERMINATION OF EMPLOYMENT OR OTHER SERVICE.
Notwithstanding this Section 6.4, except as provided in Article 8 of the
Plan, all Options granted to an Optionee shall terminate and may no longer
be exercised if the Optionee's employment or other service with the Company
and all Subsidiaries ceases.

6.5 MANNER OF EXERCISE. An Option may be exercised by an Optionee in
whole or in part from time to time, subject to the conditions contained herein
and in the agreement evidencing such Option, by delivery, in person or through
certified or registered mail, of written notice of exercise to the Company at
its principal executive office in Hopkins, Minnesota (Attention: Secretary), and
by paying in full the total Option exercise price for the shares of Common Stock
purchased. Such notice shall be in a form satisfactory to the Committee and
shall specify the particular Option (or portion thereof) that is being exercised
and the number of shares with respect to which the Option is being exercised.
Subject to compliance with Section 11.1 of the Plan, the exercise of the Option
shall be deemed effective upon receipt of such notice and payment complying with
the terms of the Plan and the agreement evidencing such Option. As soon as
practicable after the effective exercise of the Option, the Optionee shall be
recorded on the stock transfer books of the Company as the owner of the shares
purchased, and the Company shall deliver to the Optionee one or more duly issued
stock certificates evidencing such ownership. If an Optionee exercises any
Option with respect to some, but not all, of

<PAGE>

the shares of Common Stock subject to such Option, the right to exercise such
Option with respect to the remaining shares shall continue until it expires or
terminates in accordance with its terms. An Option shall only be exercisable
with respect to whole shares.

6.6 PAYMENT OF EXERCISE PRICE.

(a) The total purchase price of the shares to be purchased upon
exercise of an Option shall be paid entirely in cash (including check, bank
draft or money order); provided, however, that the Committee, in its sole
discretion, may allow such payments to be made, in whole or in part, by
delivery of a Broker Exercise Notice or a promissory note (containing such
terms and conditions as the Committee may in its discretion determine), by
transfer from the Optionee to the Company of Previously Acquired Shares, or
by a combination thereof. In determining whether or upon what terms and
conditions an Optionee will be permitted to pay the purchase price of an
Option in a form other than cash, the Committee may consider all relevant
facts and circumstances, including, without limitation, the tax and
securities law consequences to the Optionee and the Company and the
financial accounting consequences to the Company. In the event the
Optionee is permitted to pay the total purchase price of an Option in whole
or in part with Previously Acquired Shares, the value of such shares shall
be equal to their Fair Market Value on the date of exercise of the Option.

(b) For purposes of this Section 6.6, a "Broker Exercise Notice"
shall mean a written notice from an Optionee to the Company at its
principal executive office in Hopkins, Minnesota (Attention: Secretary),
made on a form and in the manner as the Committee may from time to time
determine, pursuant to which the Optionee irrevocably elects to exercise
all or any portion of an Option and irrevocably directs the Company to
deliver the Optionee's stock certificates to be issued to such Optionee
upon such Option exercise directly to a broker or dealer. A Broker
Exercise Notice must be accompanied by or contain irrevocable instructions
to the broker or dealer (i) to promptly sell a sufficient number of shares
of such Common Stock or to loan the Optionee a sufficient amount of money
to pay the exercise price for the Options and, if not otherwise satisfied
by the Optionee, to fund any related employment and withholding tax
obligations due upon such exercise, and (ii) to promptly remit such sums to
the Company upon the broker's or dealer's receipt of the stock
certificates.

<PAGE>

6.7 RIGHTS AS A SHAREHOLDER. The Optionee shall have no rights as a
shareholder with respect to any shares of Common Stock covered by an Option
until the Optionee shall have become the holder of record of such shares, and no
adjustments shall be made for dividends or other distributions or other rights
as to which there is a record date preceding the date the Optionee becomes the
holder of record of such shares, except as the Committee may determine pursuant
to Section 4.3 of the Plan.

6.8 DISPOSITION OF COMMON STOCK ACQUIRED PURSUANT TO THE EXERCISE OF
INCENTIVE STOCK OPTIONS. Prior to making a disposition (as defined in Section
424(c) of the Code) of any shares of Common Stock acquired pursuant to the
exercise of an Incentive Stock Option granted under the Plan before the
expiration of two years after its date of grant or before the expiration of one
year after its date of exercise and the date on which such shares of Common
Stock were transferred to the Optionee pursuant to exercise of the Option, the
Optionee shall send written notice to the Company of the proposed date of such
disposition, the number of shares to be disposed of, the amount of proceeds to
be received from such disposition and any other information relating to such
disposition that the Company may reasonably request. The right of an Optionee
to make any such disposition shall be conditioned on the receipt by the Company
of all amounts necessary to satisfy any federal, state or local withholding and
employment-related tax requirements attributable to such disposition. The
Committee shall have the right, in its sole discretion, to endorse the
certificates representing such shares with a legend restricting transfer and to
cause a stop transfer order to be entered with the Company's transfer agent
until such time as the Company receives the amounts necessary to satisfy such
withholding and employment-related tax requirements or until the later of the
expiration of two years from its date of grant or one year from its date of
exercise and the date on which such shares were transferred to the Optionee
pursuant to the exercise of the Option.

6.9 AGGREGATE LIMITATION OF STOCK SUBJECT TO INCENTIVE STOCK OPTIONS. To
the extent that the aggregate Fair Market Value (determined as of the date an
Incentive Stock Option is granted) of the shares of Common Stock with respect to
which incentive stock options (within the meaning of Section 422 of the Code)
are exercisable for the first time by an Optionee during any calendar year
(under the Plan and any other incentive stock option plans of the Company or any
subsidiary or any parent corporation of the Company (within the meaning of
Sections 424(f) and 424(e), respectively, of the Code)) exceeds $100,000 (or
such other amount as may be prescribed by the Code from time to time), such
excess Options shall be treated as Non-Statutory Stock Options. The
determination shall be made by taking incentive stock options into account in
the order in which they were granted. If such excess only applies to a portion
of an incentive stock option, the Committee, in its discretion, shall designate
which shares shall be treated as shares to be acquired upon exercise of an
incentive stock option.

<PAGE>

ARTICLE 7. CASH BONUSES.

In connection with any grant of Options or at any time thereafter, the
Committee may, in its sole discretion, grant a cash bonus to an Optionee in
connection with the grant or vesting or exercise of an Option. The
determination of whether to grant such a cash bonus, the nature and amount of
any such cash bonus and the terms and conditions of such cash bonus shall be
within the sole discretion of the Committee.

ARTICLE 8. EFFECT OF TERMINATION OF EMPLOYMENT OR OTHER SERVICE.

8.1 TERMINATION OF EMPLOYMENT OR OTHER SERVICE DUE TO DEATH, DISABILITY OR
RETIREMENT. In the event an Optionee's employment or other service with the
Company and all Subsidiaries is terminated by reason of such Optionee's death,
Disability or Retirement, all outstanding Options then held by the Optionee
shall become immediately exercisable in full and remain exercisable to the
extent exercisable as of such termination for a period of thirty (30) days after
such termination (but in no event after the expiration date of any such Option).

8.2 TERMINATION OF EMPLOYMENT OR OTHER SERVICE FOR REASONS OTHER THAN
DEATH, DISABILITY OR RETIREMENT. In the event an Optionee's employment or other
service is terminated with the Company and all Subsidiaries for any reason other
than death, Disability or Retirement, all rights of the Optionee under the Plan
shall immediately terminate without notice of any kind and no options then held
by the Optionee shall thereafter be exercisable.

8.3 MODIFICATION OF EFFECT OF TERMINATION. Notwithstanding the provisions
of this Article 8, upon an Optionee's termination of employment or other service
with the Company and all Subsidiaries, the Committee may, in its sole discretion
(which may be exercised before or following such termination), cause Options, or
any portions thereof, then held by such Optionee to become exercisable and
remain exercisable following such termination in the manner determined by the
Committee; provided, however, that no Option shall be exercisable after the
expiration date thereof and any Incentive Stock Option that remains unexercised
more than three months following employment termination by reason of Retirement
or more than one year following employment termination by reason of Disability
shall thereafter be deemed to be a Non-Statutory Stock Option.

<PAGE>

8.4 DATE OF TERMINATION. Unless the Committee shall otherwise determine
in its sole discretion, an Optionee's employment or other service shall, for
purposes of the Plan, be deemed to have terminated on the date such Optionee
ceases to perform services for the Company and all Subsidiaries, as determined
in good faith by the Committee.

ARTICLE 9. RIGHT TO WITHHOLD; PAYMENT OF WITHHOLDING TAXES.

9.1 GENERAL RULES. The Company is entitled to (a) withhold and deduct from
future wages of the Optionee (or from other amounts which may be due and owing
to the Optionee from the Company), or make other arrangements for the collection
of, all legally required amounts necessary to satisfy any and all federal, state
and local withholding and employment-related tax requirements (i) attributable
to the grant or exercise of an Option or to a disqualifying disposition of stock
received upon exercise of an Incentive Stock Option, or (ii) otherwise incurred
with respect to an Option, or (b) require the Optionee promptly to remit the
amount of such withholding to the Company before taking any action with respect
to an Option.

9.2 SPECIAL RULES.

(a) Without limiting the generality of Section 9.1 above, the
Committee may, in its sole discretion and subject to such rules as the
Committee may adopt, permit an Optionee to satisfy, in whole or in part,
any withholding or employment-related tax obligations described in Section
9.1 above by electing to use Previously Acquired Shares or by electing to
have the Company accept a Broker Exercise Notice with respect to that
number of shares, in any such case, having a Fair Market Value, on the Tax
Date, equal to the amount necessary to satisfy the withholding or
employment-related taxes due, or by agreeing to deliver to the Company a
promissory note in payment for some or all of the necessary amounts
(containing such terms and conditions as the Committee in its sole
discretion may determine).

(b) An Optionee's election to use Previously Acquired Shares, a
Broker Exercise Notice or a promissory note must be made on or prior to the
Tax Date, is irrevocable and is subject to the consent or disapproval of
the Committee. If the Optionee is an officer, director or beneficial owner
of more than 10% of the outstanding Common Stock of the Company and the
Company has a class of equity securities registered under Section 12 of the
Exchange Act, an election to use Previously Acquired Shares may not be made
within six months of the date the Option is granted (unless the death or
Disability of the Optionee occurs prior to the expiration of such six-month
period), and (unless otherwise permitted by the Committee in its sole
discretion) must be made either six months prior to the Tax Date or at any
time prior to the Tax Date between the third and twelfth business days
following

<PAGE>

public release of any of the Company's quarterly or annual summary earnings
statements. When shares of Common stock are issued prior to the Tax Date
to an Optionee making an election to use Previously Acquired Shares, the
Optionee shall agree in writing to surrender that number of shares on the
Tax Date having an aggregate Fair Market Value equal to the tax due.

ARTICLE 10. RIGHTS OF ELIGIBLE RECIPIENTS AND OPTIONEES; TRANSFERABILITY.

10.1 EMPLOYMENT OR SERVICE. Nothing in the Plan shall interfere with
or limit in any way the right of the Company or any Subsidiary to terminate the
employment or service of any Eligible Recipient or Optionee at any time, nor
confer upon any Eligible Recipient or Optionee any right to continue in the
employ or service of the Company or any Subsidiary.

10.2 RESTRICTIONS ON TRANSFER. Other than pursuant to a qualified
domestic relations order (as defined by the Code), no right or interest of any
Optionee in an Option prior to the exercise of such Options shall be assignable
or transferrable, or subjected to any lien, during the lifetime of the Optionee,
either voluntarily or involuntarily, directly or indirectly, by operation of law
or otherwise, including execution, levy, garnishment, attachment, pledge,
divorce or bankruptcy. An Optionee shall, however, be entitled to designate a
beneficiary to receive an Option upon such Optionee's death. In the event of an
Optionee's death, such Optionee's rights and interest in Options shall be
transferrable by testamentary will or the laws of descent and distribution, and
payment of any amounts due under the Plan shall be made to, and exercise of any
Options (to the extent permitted pursuant to Article 8 of the Plan) may be made
by, the Optionee's legal representatives, heirs or legatees. If, in the opinion
of the Committee, an Optionee holding an Option is disabled from caring for his
or her affairs because of mental condition, physical condition or age, any
payments due the Optionee may be made to, and any rights of the Optionee under
the Plan shall be exercised by, such Optionee's guardian, conservator or other
legal personal representative upon furnishing the Committee with evidence
satisfactory to the Committee of such status.

10.3 NON-EXCLUSIVITY OF THE PLAN. Nothing contained in the Plan is
intended to amend, modify or rescind any previously approved compensation plans
or programs entered into by the Company. The Plan will be construed to be in
addition to any and all such other plans or programs. Neither the adoption of
the Plan nor the submission of the Plan to the shareholders of the Company for
approval will be construed as creating any limitations on the power or authority
of the Board to adopt such additional or other compensation arrangements as the
Board may deem necessary or desirable.

<PAGE>

ARTICLE 11. SECURITIES LAW RESTRICTIONS

11.1 SHARE ISSUANCES. Notwithstanding any other provision of the Plan
or any agreements entered into pursuant hereto, the Company shall not be
required to issue or deliver any certificate for shares of Common Stock under
this Plan, and an Option shall not be considered to be exercised notwithstanding
the tender by the Optionee of any consideration therefor, unless and until each
of the following conditions has been fulfilled:

(a) (i) There shall be in effect with respect to such shares a
registration statement under the Securities Act and any applicable state
securities laws if the Committee, in its sole discretion, shall have
determined to file, cause to become effective and maintain the
effectiveness of such registration statement; or (ii) if the Committee has
determined not to so register the shares of Common Stock to be issued under
the Plan, (A) exemptions from registration under the Securities Act and
applicable state securities laws shall be available for such issuance (as
determined by counsel to the Company) and (B) there shall have been
received from the Optionee (or, in the event of death or disability, the
Optionee's heir(s) or legal representative(s)) any representations or
agreements requested by the Company in order to permit such issuance to be
made pursuant to such exemptions; and

(b) There shall have been obtained any other consent, approval or
permit from any state or federal governmental agency which the Committee
shall, in its sole discretion upon the advice of counsel, deem necessary or
advisable.

11.2 SHARE TRANSFERS. Shares of Common Stock issued pursuant to
Options granted under the Plan may not be sold, assigned, transferred, pledged,
encumbered or otherwise disposed of, whether voluntarily or involuntarily,
directly or indirectly, by operation of law or otherwise, except pursuant to
registration under the Securities Act and applicable state securities laws or
pursuant to exemptions from such registrations. The Company may condition the
sale, assignment, transfer, pledge, encumbrance or other disposition of such
shares not issued pursuant to an effective and current registration statement
under the Securities Act and all applicable state securities laws on the receipt
from the party to whom the shares of Common Stock are to be so transferred of
any representations or agreements requested by the Company in order to permit
such transfer to be made pursuant to exemptions from registration under the
Securities Act and applicable state securities laws.

11.3 LEGENDS.

(a) Unless a registration statement under the Securities Act is
in effect with respect to the issuance or Transfer of shares of Common
Stock under the Plan, each

<PAGE>

certificate representing any such shares shall be endorsed with a legend in
substantially the following form, unless counsel for the Company is of the
opinion as to any such certificate that such legend is unnecessary:

THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED ("THE ACT"), OR UNDER
APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED
OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE ACT AND SUCH STATE LAWS OR PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE ACT AND SUCH STATE LAWS, THE AVAILABILITY
OF WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF THE COMPANY.

(b) The Committee, in its sole discretion, may endorse certificates
representing shares issued pursuant to the exercise of Incentive Stock
Options with a legend in substantially the following form:

THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD,
TRANSFERRED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF ON OR
BEFORE [THE LATER OF THE ONE-YEAR OR TWO-YEAR INCENTIVE STOCK OPTION
HOLDING PERIODS], WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMPANY.

ARTICLE 12. PLAN AMENDMENT, MODIFICATION AND TERMINATION

The Board may suspend or terminate the Plan or any portion thereof at any
time, and may amend the Plan from time to time in such respects as the Board may
deem advisable in order that Options under the Plan shall conform to any change
in applicable laws or regulations or in any other respect the Board may deem to
be in the best interests of the Company; provided, however, that no such
amendment shall be effective, without approval of the shareholders of the
Company, if shareholder approval of the amendment is then required pursuant to
Rule 16b-3 under the Exchange Act or any successor rule or Section 422 of the
Code or under the applicable rules or regulations of any securities exchange or
the NASDAQ National Market System. No termination, suspension or amendment of
the Plan shall alter or impair any outstanding Option without the consent of the
Optionee affected thereby; provided, however, that this sentence shall not
impair the right of the Committee to take whatever action it deems appropriate
under Section 4.3 of the Plan.

ARTICLE 13 EFFECTIVE DATE OF THE PLAN

2.1 EFFECTIVE DATE. The Plan is effective as of September 23, 1991,
the date it was adopted by the Board.

<PAGE>

13.2 DURATION OF THE PLAN. The Plan shall terminate at midnight on
September 22, 2001, and may be terminated prior thereto by Board action, and no
Option shall be granted after such termination. Options outstanding upon
termination of the Plan may continue to be exercised in accordance with their
terms.

ARTICLE 14. MISCELLANEOUS

14.1 CONSTRUCTION AND HEADINGS. The use of the masculine gender shall
also include within its meaning the feminine, and the singular may include the
plural and the plural may include the singular, unless the context clearly
indicates to the contrary. The headings of the Articles, Sections and subparts
of the Plan are for convenience of reading only and are not meant to be of
substantive significance and shall not add or detract from the meaning of such
Article, Section or subpart.

14.2 PUBLIC POLICY. No person shall have any claim or right to
receipt of an Option if, in the opinion of counsel to the Company, such receipt
conflicts with law or is opposed to governmental or public policy.

14.3 GOVERNING LAW. The place of administration of the Plan shall be
conclusively deemed to be within the State of Minnesota, and the rights and
obligations of any and all persons having or claiming to have had an interest
under the Plan or under any agreements evidencing Options shall be governed by
and construed exclusively and solely in accordance with the laws of the State of
Minnesota without regard to the conflict of laws provisions of any
jurisdictions. All parties agree to submit to the jurisdiction of the state and
federal courts of Minnesota with respect to matters relating to the Plan and
agree not to raise or assert the defense that such forum is not convenient for
such party.

14.4 SUCCESSORS AND ASSIGNS. This Plan shall be binding upon and
inure to the benefit of the successors and permitted assigns of the Company,
including, without limitation, whether by way of merger, consolidation,
operation of law, assignment, purchase or other acquisition of substantially all
of the assets or business of the Company, and any and all such successors and
assigns shall absolutely and unconditionally assume all of the Company's
obligations under the Plan.

14.5 SURVIVAL OF PROVISIONS. The rights, remedies, agreements,
obligations and covenants contained in or made pursuant to the Plan, any
agreement evidencing an Option and any other notices or agreements in connection
therewith, including, without limitation, any notice of exercise of an Option,
shall survive the execution and delivery of such notices and agreements and the
delivery and receipt of shares of Common Stock and shall remain in full force
and effect.

<PAGE>

[LETTERHEAD OF
THE CIT GROUP/CREDIT FINANCE
STAR DIVISION
10 SOUTH LASALLE STREET
CHICAGO, IL 80603]

October 12, 1995

Green Isle Environmental Services, Inc.
d/b/a Reuter Manufacturing, Inc.
410 11th Avenue South
Hopkins, MN 55343

Re: Loan and Security Agreement dated February 15, 1991 and subsequent
amendments thereto, between The CIT Group/Credit Finance as "Lender"
and Green Isle Environmental Services, Inc., d/b/a Reuter
Manufacturing, Inc., as "Borrower" (the "Loan and Security Agreement")

Gentlemen:

The Loan and Security Agreement is amended as follows:

1. Section 9.1 of the Loan and Security Agreement is amended by deleting
the term "February 28, 1997" and adding in its place the term
"February 28, 1998".

2. Section 10.2 of the Loan and Security Agreement is amended by deleting
the term "$2,361,800" and adding in its place the term "$1,007,200".

In all other respects, the Loan and Security Agreement remains unchanged and in
full force and effect.

In consideration of Lender's agreements herein, Borrower agrees to pay Lender a
fee of $15,000, which fee is fully earned and payable as of this date. At
Lender's option, Lender may charge this fee to any loan account of Borrower
maintained by Lender.

Very truly yours,

The CIT Group/Credit Finance, Inc.

By: /s/
--------------------------------

Title: V.P.
-----------------------------

<PAGE>

Reuter Manufacturing, Inc.
October 12, 1995
Page 2

AGREED AND ACCEPTED:

Green Isle Environmental Services, Inc.
d/b/a Reuter Manufacturing, Inc.

By: /s/ Robert D. Klingberg
--------------------------------

Title: V.P. Engineering
-----------------------------

<PAGE>

AMENDED PROMISSORY NOTE

$1,007,200.00 October 12, 1995

FOR VALUE RECEIVED, the undersigned, Green Isle Environmental Services,
Inc., d/b/a Reuter Manufacturing, Inc., a Minnesota corporation, 410 Eleventh
Avenue South, Hopkins, Minnesota 55343 ("Maker"), hereby unconditionally
promises to pay to the order of THE CIT GROUP/CREDIT FINANCE, INC. (the "Payee")
at its offices located at 10 South LaSalle Street, Chicago, Illinois 60603, or
at such other place as the Payee or any holder hereof may from time to time
designate, the principal sum of One Million Seven Thousand Two Hundred and
00/100 Dollars ($1,007,200.00) in lawful money of the United States and in
immediately available funds, in fifty-nine (59) consecutive monthly installments
(or earlier, as hereinafter provided), each in the amount of Sixteen Thousand
Seven Hundred Eighty-Six and 66/100 Dollars ($16,786.66), commencing November 1,
1995, and on the first day of each month thereafter through September 1, 2000,
and a final sixtieth (60th) installment shall be made on October 1, 2000 in the
amount of the then unpaid balance hereof.

Maker hereby further promises to pay interest to Payee in like money at
said office or place on the unpaid principal balance hereof computed at a rate
of three and 75/100 percent (3.75%) per annum in excess of the Prime Rate (as
hereinafter defined), and at a rate, upon and after an Event of Default (as
hereinafter defined) and during the continuance thereof, or termination or non-
renewal of the Financing Agreements (as hereinafter defined), of five and 75/100
percent (5.75%) per annum in excess of the Prime Rate. Such interest shall be
payable commencing on the same day as the first payment of principal set forth
above and on the first day of each month thereafter. Interest shall be
calculated on the basis of a three hundred sixty (360) day year and actual days
elapsed. In no event shall the interest charged hereunder exceed the maximum
permitted under the laws of the state in which the office of Payee set forth
above is located.

As used herein, the term "Prime Rate" shall mean the interest rate (the
prime rate is not intended to be the lowest rate of interest charged by Chemical
Bank to its borrowers), and the term "Event of Default" shall mean an Event of
Default under the Financing Agreements.

This Note is issued as evidence of certain indebtedness arising pursuant to
the terms and provisions of the Loan of Security Agreement, dated February 15,
1991, executed and delivered by Maker and/or related parties in favor of Payee
(the foregoing, together with all agreements, documents and instruments now or
at any time hereafter executed and/or delivered in connection therewith or
otherwise related thereto, as the same now exist or may hereafter be amended,
modified, supplemented, extended,

<PAGE>

renewed, restated or replaced, being collectively referred to herein as the
"Financing Agreements"). This Note is entitled to the benefits of the Financing
Agreements and is secured by, and entitled to the benefits of, any and all
collateral security pledged or granted by Maker or related parties to Payee as
set forth in the Financing Agreements or otherwise.

At the time any payment is due hereunder, at its option, Payee may charge
the amount thereof to any account(s) of Maker, or any guarantors thereof,
maintained by Payee.

If any principal or interest payment is not made when due hereunder or if
any Event of Default shall occur for any reason under the Financing Agreements,
or if the Financing Agreements shall be terminable or be terminated or not
renewed for any reason, then and in any such event, in addition to all rights
and remedies of the Payee under the Financing Agreements, applicable law and
otherwise, all such rights and remedies being cumulative, not exclusive and
enforceable alternatively, successively and concurrently, Payee may, at its
option, declare any or all of Maker's obligations, liabilities and indebtedness
owing Payee under the Financing Agreements, including, without limitation, any
or all amounts owing under this Note, to be due and payable, whereupon the then
unpaid balance hereof together with all interest accrued thereon shall forthwith
become due and payable, together with interest accruing thereafter at the
highest rate provided for herein until this Note is paid, plus the costs and
expenses of collection hereof, including attorneys' fees and legal expenses.

Maker hereby waives diligence, demand, presentment, protest and notice of
any kind and assents to extensions of the time of payment, release, surrender or
substitution of collateral security of forbearance or other indulgence, without
notice. Payee shall not be required to attempt to realize upon any collateral
security for payment, but may proceed against Maker and any guarantors in such
order or manner as Payee may choose.

The provisions of this Note may not be changed, modified or terminated
orally, but only by an agreement in writing signed by the party to be charged,
nor shall any waiver be applicable except in the specific instance for which it
is given.

MAKER HEREBY WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING
INSTITUTED BY EITHER MAKER OR PAYEE AGAINST THE OTHER ARISING ON, OUT OF OR BY
REASON OF THIS NOTE, ANY ALLEGED TORTIOUS CONDUCT BY MAKER OR PAYEE OR IN ANY
WAY, DIRECTLY OR INDIRECTLY, ARISING OUT OF OR RELATED TO THE RELATIONSHIP
BETWEEN MAKER AND PAYEE. IN NO EVENT WILL PAYEE BE LIABLE FOR LOST PROFITS OR
OTHER SPECIAL OR CONSEQUENTIAL DAMAGES.

Maker hereby waives all rights to interpose any claims, deductions, setoffs
or counterclaims of any kind, nature or

<PAGE>

description in any action or proceeding instituted by Maker with respect to this
Note or any matter arising herefrom or relating hereto, except compulsory
counterclaims. MAKER HEREBY IRREVOCABLY SUBMITS AND CONSENTS TO THE NON-
EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN THE STATE IN
WHICH THE OFFICE OF PAYEE INDICATED ABOVE IS LOCATED WITH RESPECT TO ANY ACTION
OR PROCEEDING ARISING OUT OF THIS NOTE OR ANY MATTER ARISING HEREFROM OR
RELATING HERETO. ANY SUCH ACTION OR PROCEEDING COMMENCED BY MAKER AGAINST PAYEE
WILL BE LITIGATED ONLY IN A FEDERAL COURT LOCATED IN THE DISTRICT, OR A STATE
COURT IN THE STATE AND COUNTY IN WHICH THE OFFICE OF LENDER SET FORTH ABOVE IS
LOCATED.

SERVICE OF PROCESS OR NOTICE IN CONNECTION WITH ANY PROCEEDING MAY BE
SERVED (I) INSIDE OR OUTSIDE THE STATE IN WHICH THE OFFICE OF PAYEE INDICATED
ABOVE IS LOCATED BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED,
ADDRESSED TO THE MAKER AT THE ADDRESS SET FORTH ABOVE OR OF WHICH MAKER HAS
ADVISED PAYEE IN WRITING, AS INDICATED IN THE RECORDS OF PAYEE, AND SERVICE OR
NOTICE SO SERVED SHALL BE DEEMED COMPLETE FIVE (5) DAYS AFTER THE SAME SHALL
HAVE BEEN POSTED, OR (II) IN SUCH MANNER AS MAY BE PERMISSIBLE UNDER THE RULES
OF SAID COURTS.

The execution and delivery of this Note has been authorized by the Board of
Directors of Maker. This Note and the other Financing Agreements, shall be
governed by and construed, and all rights and obligations hereunder determined,
in accordance with the laws of the state in which the office of Payee indicated
above is located and shall be binding upon the successors and assigns of the
Maker and inure to the benefit of the Payee, its successors, endorsees and
assigns. If the undersigned are more than one, this Note shall be binding
jointly and severally upon the undersigned and their respective successors and
assigns and the term "Maker" shall mean all the undersigned and any one or more
of them and their successors and assigns. If any term or provision of this Note
shall be held invalid, illegal or unenforceable, the validity of all other terms
and provisions hereof shall in no way be affected thereby.

On February 15, 1991, the Maker, f/k/a Reuter, Inc., executed and delivered
to Payee a Note in the sum of $2,800,000.00 ("1st Note"). On December 30, 1992,
the Maker, now known as Green Isle Environmental Services, Inc., executed an
Amended Promissory Note in the sum of $1,260,000.00 ("2nd Note") and combined
such new loan with the present balance of the 1st Note. This Second Amended and
Restated Promissory Note amends and restates the terms and conditions of the 1st
Note and 2nd Note. This Amended and Restated Promissory Note shall be secured
by the same collateral as set forth in the 1st Note and 2nd Note, and Make is
granted a security interest in Maker's present and future accounts, general
intangibles, inventory, and equipment as more fully set forth in the Financing
Agreements.

<PAGE>

GREEN ISLE ENVIRONMENTAL SERVICES, INC.
d/b/a Reuter Manufacturing, Inc.

By:/s/ Robert D. Klingberg
--------------------------------

Title: Vice President-Engineering
-----------------------------

<PAGE>

[LETTERHEAD OF
THE CIT GROUP/CREDIT FINANCE
STAR DIVISION
10 SOUTH LASALLE STREET
CHICAGO, IL 80603]

December 22, 1995

Reuter Manufacturing, Inc.
f/k/a Green Isle Environmental Services, Inc.
410 11th Avenue South
Hopkins, MN 55343

Re: Loan and Security Agreement dated February 15, 1991 and subsequent
Amendments thereto, between The CIT Group/Credit Finance, Inc. as
Lender and Reuter Manufacturing, Inc., f/k/a Green Isle Environmental
Services, Inc., and f/k/a Reuter, Inc., and f/k/a Reuter
Manufacturing, Inc., as Borrower (the "Loan and Security Agreement")

Gentlemen:

The Loan and Security Agreement is amended as follows:

1. Section 10.2 of the Loan and Security Agreement is amended by deleting
the term "$1,007,200.00" and adding in its place the term
"$1,507,000.00".

2. Section 10.6(b) of the Loan and Security Agreement is amended to read
as follows:

(b) Borrower: Reuter Manufacturing, Inc., a Minnesota
corporation.

In all other respects, the Loan and Security Agreement remains unchanged and in
full force and effect.

In consideration of Lender's agreements herein, Borrower agrees to pay Lender a
fee of $25,000, which fee is fully earned and payable as of this date. At
Lender's option, Lender may charge this fee to any loan account of Borrower
maintained by Lender.

Very truly yours,

The CIT Group/Credit Finance, Inc.

By: /s/ Richard A. Simons
--------------------------------

Title: Vice President
-----------------------------

<PAGE>

Reuter Manufacturing, Inc.
December 22, 1995
Page 2

AGREED AND ACCEPTED:

Reuter Manufacturing, Inc.
f/k/a Green Isle Environmental Services, Inc.

By: /s/ William H. Johnson
--------------------------------

Title: Vice President, Controller &
-----------------------------
Secretary 1/2/96
-----------------------------

<PAGE>

FOURTH AMENDED AND RESTATED
AMENDED PROMISSORY NOTE

$1,500,693.09 December 22, 1995

FOR VALUE RECEIVED, the undersigned, Reuter Manufacturing, Inc., f/k/a
Green Isle Environmental Services, Inc., and f/k/a Reuter, Inc., a Minnesota
corporation, 410 Eleventh Avenue South, Hopkins, Minnesota 55343 ("Maker"),
hereby unconditionally promises to pay to the order of THE CIT GROUP/CREDIT
FINANCE, INC. (the "Payee") at its offices located at 10 South LaSalle Street,
Chicago, Illinois 60603, or at such other place as the Payee or any holder
hereof may from time to time designate, the principal sum of One Million Five
Hundred Thousand Six Hundred Ninety-Three and 09/100 Dollars ($1,500,693.09) in
lawful money of the United States and in immediately available funds, in (i) six
(6) consecutive monthly installments (or earlier, as hereinafter provided), each
in the amount of Seventeen Thousand Two Hundred Fifty-Three and 33/100
($17,253.33) commencing January 1, 1996 and on the first day of each month
thereafter through June 1, 1996, followed by (ii) fifteen (15) consecutive
monthly installments (or earlier, as hereinafter provided), each in the amount
of Fifty Thousand Five Hundred Eighty-Six and 66/100 (450,586.66) commencing
July 1, 1996 and on the first day of each month thereafter through September 1,
1997, followed by (iii) thirty-six (36) consecutive monthly installments (or
earlier, as hereinafter provided), each in the amount of Seventeen Thousand Two
Hundred Fifty-Three and 33/100 ($17,253.33) commencing October 1, 1997 and on
the first day of each month thereafter through August 1, 2000, and a final
fifty-eighth (58th) installment shall be made on ___________ in the amount of
the then unpaid balance hereof.

As used herein, the term "Prime Rate" shall mean the interest rate publicly
announced by Chemical Bank in New York, New York, from time to time, as its
prime rate (the prime rate is not intended to be the lowest rate of interest
charged by Chemical Bank

<PAGE>

to its borrowers), and the term "Event of Default" shall mean an Event of
Default under the Financing Agreements.

This Note is issued as evidence of certain indebtedness arising pursuant to
the terms and provisions of the Loan and Security Agreement, dated February 15,
1991, and all amendments thereto, executed and delivered by Maker and/or related
parties in favor of Payee (the foregoing, together with all agreements,
documents and instruments now or at any time hereafter executed and/or delivered
in connection therewith or otherwise related thereto, as the same now exist or
may hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced, being collectively referred to herein as the "Financing Agreements").
This Note is entitled to the benefits of the Financing Agreements and is secured
by, and entitled to the benefits of, any and all collateral security pledged or
granted by Maker or related parties to Payee as set forth in the Financing
Agreements or otherwise.

At the time any payment is due hereunder, at its option, Payee may charge
the amount thereof to any account(s) of Maker, or any guarantors thereof,
maintained by Payee.

If any principal or interest is not made when due hereunder or if any Event
of Default shall occur for any reason under the Financing Agreements, or if the
Financing Agreements shall be terminable or be terminated or not renewed for any
reason, then and in any such event, in addition to all rights and remedies of
the Payee under the Financing Agreements, applicable law and otherwise, all such
rights and remedies being cumulative, not exclusive and enforceable
alternatively, successively and concurrently, Payee may, at its option, declare
any or all of Maker's obligations, liabilities and indebtedness owing Payee
under the Financing Agreements, including, without limitation, any or all
amounts owing under this Note, to be due and payable, whereupon the then unpaid
balance hereof together with all interest accrued thereon shall forthwith become
due and payable, together with interest accruing thereafter at the highest rate
provided for herein until this Note is paid, plus the costs and expenses of
collection hereof, including attorneys' fees and legal expenses.

The provisions of this Note may not be changed, modified or terminated
orally, but only by an agreement in writing signed by

<PAGE>

the party to be charged, nor shall any waiver be applicable except in the
specific instance for which it is given.

Maker hereby waives all rights to interpose any claims, deductions, setoffs
or counterclaims of any kind, nature or description in any action or proceeding
instituted by Maker with respect to this Note or any matter arising herefrom or
relating hereto, except compulsory counterclaims. MAKER HEREBY IRREVOCABLY
SUBMITS AND CONSENTS TO THE NON-EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL
COURTS LOCATED IN THE STATE IN WHICH THE OFFICE OF PAYEE INDICATED ABOVE IS
LOCATED WITH RESPECT TO ANY ACTION OR PROCEEDING ARISING OUT OF THIS NOTE OR ANY
MATTER ARISING HEREFROM OR RELATING HERETO. ANY SUCH ACTION OR PROCEEDING
COMMENCED BY MAKER AGAINST PAYEE WILL BE LITIGATED ONLY IN A FEDERAL COURT
LOCATED IN THE DISTRICT, OR A STATE COURT IN THE STATE AND COUNTY IN WHICH THE
OFFICE OF LENDER SET FORTH ABOVE IS LOCATED.

<PAGE>

On February 15, 1991, the Maker, then known as Reuter, Inc., executed and
delivered to Payee a Note in the sum of $2,800,000.00 ("1st Note"). On December
30, 1992, the Maker, now known as Reuter Manufacturing, Inc., executed an
Amended Promissory Note in the sum of $1,260,000.00 ("2nd Note") and combined
such new loan with the then present balance of the 1st Note. On October 12,
1995, the Maker executed an Amended Promissory Note in the sum of $1,007,200.00
("3rd Note") and combined such new loan with the then present balance of the 2nd
Note. This Fourth Amended and Restated Promissory Note combines a new loan and
other out-of-formula advances with the present balance of the 3rd Note and
further amends and restates the terms and conditions of the 1st Note, 2nd Note
and 3rd Note, and all other out-of-formula advances made to Maker, which as of
this date have not been repaid to Payee. This Fourth Amended and Restated
Promissory Note shall be secured by the same collateral as set forth in the 1st
Note, 2nd Note and 3rd Note, and Payee is granted a security interest in Maker's
present and future accounts, general intangibles, inventory and equipment as
more fully set forth in the Financing Agreements.

REUTER MANUFACTURING, INC.
f/k/a Green Isle Environmental Services, Inc.
and f/k/a Reuter, Inc.

By:William H. Johnson
-------------------------------------------

Title:Vice President, Controller and Secretary
----------------------------------------

<PAGE>

Subsidiaries of the Company Exhibit 21.1

EPR, Inc.

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in the registration statements of
Green Isle Environmental Services, Inc. (now known as Reuter Manufacturing,
Inc.) and Subsidiaries on Form S-8 (File Nos. 33-15293, 33-33107, 33-44304 and
33-44281) of our report, which includes an explanatory paragraph addressing
substantial doubt about the Company's ability to continue as a going concern,
dated March 11, 1996, on our audits of the consolidated financial statements and
financial statement schedule of Reuter Manufacturing, Inc. (f/k/a Green Isle
Environmental Services, Inc.) and Subsidiaries as of December 31, 1995 and 1994,
and for the years then ended, which report is included in this Annual Report on
Form 10-KSB.

COOPERS & LYBRAND L.L.P.

Minneapolis, Minnesota
March 28, 1996

<PAGE>
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