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FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from to
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Commission File Number 0-1561
REUTER MANUFACTURING, INC. (F/K/A GREEN ISLE ENVIRONMENTAL
----------------------------------------------------------
SERVICES, INC.)
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(Exact name of registrant as specified in its charter)
MINNESOTA 41-0780999
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
410 - 11TH AVENUE SOUTH, HOPKINS, MINNESOTA 55343
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(Address of principal executive offices) (Zip Code)
612/935-6921
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(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X . No. .
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As of August 8, 1996 there were outstanding 3,191,520 shares of the registrant's
common stock, par value $.18-3/4 per share.
1
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PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
REUTER MANUFACTURING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $3,359,688 $3,070,189 $6,079,600 $6,050,963
Less:
Cost of sales 2,441,867 2,383,060 4,581,889 4,593,294
Depreciation 137,544 149,309 286,820 298,479
---------- ---------- ---------- ----------
GROSS PROFIT 780,277 537,820 1,210,891 1,159,190
Selling, general and administrative expenses 616,596 594,003 1,100,301 1,147,138
Depreciation 28,218 28,605 56,777 55,560
---------- ---------- ---------- ----------
Operating income (loss) 135,463 (84,788) 53,813 (43,508)
Other income (expenses):
Interest income 2,250 2,346 11,774 4,621
Interest expense (100,991) (101,569) (202,834) (195,554)
Management fees 30,000 60,000
Other, net 20,015 9,007 8,011 26,641
---------- ---------- ---------- ----------
TOTAL OTHER EXPENSE (78,726) (60,216) (183,049) (104,292)
---------- ---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS 56,737 (145,004) (129,236) (147,800)
---------- ---------- ---------- ----------
Discontinued Operations:
Loss from discontinued waste processing operations,
primarily accrued interest during elongated debt
settlement negotiations (539,270) (1,077,678)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE EXTRORDINARY ITEM 56,737 (684,274) (129,236) (1,225,478)
Extraordinary item - gain on debt restructuring (note 3) 7,249,018 7,249,018
---------- ---------- ---------- ----------
NET INCOME (LOSS) $7,305,755 ($684,274) $7,119,782 ($1,225,478)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
The accompanying notes are an integral part of the consolidated financial statements.
2
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REUTER MANUFACTURING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(CONTINUED)
For the three months ended For the six months ended
June 30, June 30,
1996 1995 1996 1995
---------- ---------- ---------- ----------
Net income (loss) per common share data:
Primary:
Income (loss) from continuing operations $0.02 ($0.04) ($0.04) ($0.04)
Loss from discontinued operations (0.17) (0.34)
---------- ---------- ---------- ----------
INCOME (LOSS) PER SHARE BEFORE
EXTRAORDINARY ITEM $0.02 ($0.21) ($0.04) ($0.38)
---------- ---------- ---------- ----------
Extraordinary item (note 3) 2.27 2.27
---------- ---------- ---------- ----------
Net income (loss) per share $2.29 ($0.21) $2.23 ($0.38)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Fully diluted:
Income (loss) from continuing operations $0.01 ($0.04)
Loss from discontinued operations
---------- ----------
INCOME (LOSS) PER SHARE BEFORE
EXTRAORDINARY ITEM $0.01 ($0.04)
---------- ----------
Extraordinary item (note 3) 1.83 2.03
---------- ----------
NET INCOME (LOSS) PER SHARE $1.84 $1.99
---------- ----------
---------- ----------
Weighted average number of shares outstanding:
Primary 3,191,520 3,191,520 3,191,520 3,191,520
Fully Diluted 3,960,016 3,191,520 3,575,768 3,191,520
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
The accompanying notes are an integral part of the consolidated financial statements.
3
</TABLE>
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REUTER MANUFACTURING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $17,110 $101,048
Investments, restricted 250,000 250,000
Accounts receivable, net of allowances of $17,000
at June 30, 1996 and $15,000 at December 31, 1995 1,573,214 1,248,697
Inventories 1,720,375 1,301,105
Other current assets 28,632 72,784
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TOTAL CURRENT ASSETS 3,589,331 2,973,634
Property, plant and equipment, net 3,776,505 4,082,318
Intangible assets, net 422,048 446,365
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TOTAL ASSETS $7,787,884 $7,502,317
------------ ------------
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Debt of Eden Prairie facility guaranteed by parent company,
including accrued interest of $3,275,656 at
December 31, 1995 $18,784,019
Current maturities of long-term debt $4,298,248 259,734
Borrowings under asset-based line of credit 2,740,461 2,589,575
Accounts payable, trade 865,077 530,991
Accrued expenses 886,273 714,872
------------ ------------
TOTAL CURRENT LIABILITIES 8,790,059 22,879,191
Long-term debt, less current maturities 7,775,328 495,715
Other long-term liabilities 174,958 199,654
Commitments and contingencies
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock, par value $.01 per share;
authorized 2,500,000 shares; none issued
Common stock, par value $.1875 per share;
authorized 9,000,000 shares; issued and
outstanding: 3,191,520 shares at
June 30, 1996 and December 31, 1995 598,410 598,410
Additional paid-in capital 13,710,596 13,710,596
Accumulated deficit (23,261,467) (30,381,249)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (8,952,461) (16,072,243)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $7,787,884 $7,502,317
------------ ------------
------------ ------------
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
4
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<TABLE>
<CAPTION>
REUTER MANUFACTURING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------
Increase (decrease) in cash For the six months ended June 30,
- ---------------------------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $7,119,782 ($1,225,478)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 34,3597 354,038
Amortization of intangible assets 24,317 39,318
Extraordinary gain on debt restructuring (note 3) (7,249,018)
Gain on sales of assets (10,204)
Provision for uncollectible accounts receivable 2,000
Sanwa interest accrued during elongated debt settlement negotiations 1,077,677
Provision for obsolete inventory 56,500 10,000
Changes in operating assets and liabilities:
Accounts receivable (326,517) (59,137)
Inventories (475,770) (315,371)
Other assets 44,152 (19,620)
Accounts payable 334,086 408,294
Accrued expenses 229,213 161,484
Accrued retirement (24,696) (24,636)
Other liabilities (57,812) 8,942
- ---------------------------------------------------------------------------------------------------
Net cash provided by operating activities 19,834 405,307
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 35,000
Acquisition of Sollami product line (248,447)
Additions to property, plant and equipment (37,784) (147,237)
- ---------------------------------------------------------------------------------------------------
Net cash used in investing activities (37,784) (360,684)
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (216,874) (85,469)
Proceeds from short-term borrowings 5,911,835 5,875,202
Repayment of short-term borrowings (5,760,949) (6,046,753)
- ---------------------------------------------------------------------------------------------------
Net cash used in financing activities (65,988) (257,020)
- ---------------------------------------------------------------------------------------------------
Net decrease in cash (83,938) (212,397)
Cash, beginning of year 101,048 209,192
- ---------------------------------------------------------------------------------------------------
Cash, end of period $17,110 ($3,205)
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid for interest $202,887 $192,970
Noncash investing and financing activities:
Purchase of equipment in exchange for notes payable 226,024
Purchase of Sollami in exchange for future minimum payments 385,760
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
5
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Reuter Manufacturing, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. FINANCIAL STATEMENTS:
The unaudited consolidated financial statements of Reuter Manufacturing,
Inc. (f/k/a Green Isle Environmental Services, Inc.), and Subsidiaries (the
Company) for the three and six month periods ended June 30, 1996 and 1995
reflect, in the opinion of management, all adjustments (which include only
normal recurring adjustments, except as described in Note 3 of this Form
10-QSB) necessary to fairly state the consolidated financial position at
June 30, 1996 and the consolidated results of operations (including
discontinued operations) and cash flows for the reported periods. The
consolidated results of operations for any interim period are not
necessarily indicative of results expected for the full year. These
unaudited consolidated interim financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's 1995 Form 10-KSB.
USE OF ESTIMATES:
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principals requires
management to make estimates and assumptions that affect the reported
amount of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates. The most significant areas
which require the use of management's estimates relate to allowances for
doubtful accounts receivable, inventory obsolescence, and the accrual for
container warranty.
NET INCOME (LOSS) PER SHARE:
Net income per common and common equivalent shares is computed by dividing
net income by the weighted average number of shares outstanding during each
period. Common stock equivalents for primary earnings per share purposes
represent stock options granted to employees. For purposes of computing
fully diluted earnings per share, common shares issuable in connection with
the contingent stock purchase warrant issued to Sanwa as part of the
restructuring of the Eden Prairie Facility debt and Loan and Security
agreement as discussed in Note 3 of this Form 10-QSB.
6
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2. SELECTED BALANCE SHEET INFORMATION:
Inventories:
June 30, December 31,
1996 1995
---------- ----------
Raw materials and supplies $ 468,150 $ 297,067
Work-in-process 1,252,225 1,004,038
---------- ----------
$1,720,375 $1,301,105
---------- ----------
---------- ----------
3. EDEN PRAIRIE FACILITY ASSETS SALE AND JANUARY 24, 1996 RESTRUCTURING OF
UNDERLYING DEBT GUARANTEE:
As described in Notes 2 and 3 of the notes to consolidated financial
statements in the Company's 1995 Form 10-KSB, on January 24, 1996, the
Company and Sanwa Business Credit Corporation (Sanwa) entered into a Loan
and Security Agreement (the Loan Agreement) to restructure the Company's
guarantee of the debt obligation underlying the Eden Prairie Facility (EPR
Facility), which included the following documents: a Senior Subordinated
Secured Promissory Note in the amount of $2,780,000; a Junior Subordinated
Secured Promissory Note in the amount of $1,000,000; a Mortgage, Assignment
of Leases and Rents, Security Agreement and Financing Statement; a Patent
Security Agreement; a $6,000,000 Income Sharing Agreement; and a Common
Stock Warrant Agreement (collectively, the Loan Documents). The
restructuring was subject to an escrow arrangement whereby the
restructuring agreement could be rescinded if the Company sought protection
under U.S. Bankruptcy laws on or before June 6, 1996. The documents were
released from escrow in June 1996, at which time the restructuring
transaction was recognized by the Company as an extraordinary item - gain
on debt restructuring of approximately $7.2 million. There was no income
tax effect related to the extraordinary gain, due to the net operating loss
carryforwards available to the Company, as well as the Company's continued
insolvency for tax purposes, subsequent to the debt restructuring.
Pursuant to the Loan Agreement, Sanwa agreed to restructure the Company's
obligations to guarantee repayment of a loan from Sanwa to EPR, Inc., into
three separate obligations as follows:
(a) The $2,780,000 term loan, evidenced by a Senior Subordinated Secured
Promissory Note in the amount of $2,780,000, executed by the Company in
favor of Sanwa. The note bears interest at the rate of 8% per year and
provides for 12 consecutive quarterly payments of $75,000 plus accrued
interest and a final payment of any unpaid principal and accrued interest
on December 31, 1999.
7
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EDEN PRAIRIE FACILITY ASSETS SALE AND JANUARY 24, 1996 RESTRUCTURING OF
UNDERLYING DEBT GUARANTEE, CONTINUED:
(b) The $1,000,000 term loan, evidenced by a Junior Subordinated Secured
Promissory Note in the amount of $1,000,000, executed by the Company in
favor of Sanwa. The note bears interest at the rate of 8% per year and
provides for quarterly payments of principal and interest, to the extent
that the Company generates cash flow after payment of certain indebtedness
and capital expenditures, and a final payment of any unpaid principal and
accrued interest on December 31, 1999.
(c) The Income Sharing Agreement, whereby the Company is required to make
payments to Sanwa in an amount equal to 40% of the Company's income before
taxes (prior to a change in control as defined in Section 382(g)(1) of the
Internal Revenue Code of 1986, as amended), less cash interest payments
made by the Company under the Senior Subordinated Secured Promissory Note.
However, if a change in control occurs, the Company is required to make
payments to Sanwa in an amount equal to the percentage of the long-term
tax-exempt rate, as defined in Section 382(f) of the Internal Revenue Code
of 1986, as amended, multiplied by the Company's income before taxes, less
cash interest payments made by the Company under the Senior Subordinated
Secured Promissory Note. The Income Sharing Agreement remains in effect
until the Company has made total payments of $6,000,000 under the
agreement, or it expires on December 31, 2010, whichever is earlier.
The Company's obligations under the Loan Documents are collateralized by a
security interest in substantially all of the Company's assets. The
security interest granted to Sanwa is subordinate to the security interest
previously granted in connection with the Asset-Based Short-Term Financing
Agreement (see Note 7 of the Company's 1995 10-KSB).
The Company also granted Sanwa a contingent stock purchase warrant to
purchase up to 3,178,780 shares of common stock of the Company for an
aggregate purchase price of $10 (see Note 8 of the Company's 1995 10-KSB).
The warrant is exercisable only following the occurrence of an "ownership
change" in respect of the Company, as defined in Section 382(g)(1) of the
Internal Revenue Code of 1986, as amended. The warrant expires upon
payment in full by the Company of all amounts due under the Income Sharing
Agreement.
In addition, the Company and Sanwa entered into separate Standstill
Agreements with the Company's Chief Executive Officer (the CEO) and its
Chairman of the Board of Directors (the Chairman) who agreed not to,
directly or indirectly, acquire, dispose of, or exercise any option or
other right to acquire any capital stock or option of the Company. The
Standstill Agreements remain in effect until the earlier of (a) the
expiration of the Income Sharing Agreement, (b) the death of the CEO or the
Chairman,
8
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EDEN PRAIRIE FACILITY ASSETS SALE AND JANUARY 24, 1996 RESTRUCTURING OF
UNDERLYING DEBT GUARANTEE, CONTINUED:
or (c) the occurrence of an "ownership change" in respect of the Company,
as defined in Section 382(g)(1) of the Internal Revenue Code of 1986, as
amended.
As a result of the Sanwa Standstill Agreements described above, the Company
has entered into an agreement (the Management Standstill Agreement) with
the CEO and the Chairman whereby, under a predetermined formula, these two
individuals can earn up to an aggregate $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.
4. ASSET-BASED SHORT-TERM FINANCING ARRANGEMENT:
The Company is in violation of certain financial and technical covenants of
the Asset-Based short-term financing agreement and a cross-default covenant
due to the defaults described in this Form 10-QSB under the caption
"Liquidity and Capital Resources" and Note 7 of the notes to the
consolidated financial statements in the Company's 1995 Form 10-KSB. As a
result of these default conditions, the lender may, at its sole discretion
declare the Company in default, discontinue making advances to the Company
and demand immediate repayment of borrowings under the line of credit. If
the lender will continue making advances to the Company, additional
borrowing capacity under this line of credit is approximately $75,000 at
August 8, 1996.
5. RECLASSIFICATIONS:
Certain reclassifications have been made to the periods ended June 30, 1995
consolidated statements of operations to conform to the current periods
presentation. These reclassifications had no impact on previously reported
losses from continuing operations.
9
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
GENERAL:
In June 1996, the "Restructuring Agreements" (described below) were
released from escrow and the Company was released from its guarantee of the
indebtedness of EPR, Inc. ("EPR") a wholly owned subsidiary of the Company
to Sanwa Business Credit Corporation. The Company recognized an
extraordinary gain of $7,249,018 or $2.27 per share ($1.83 per share on a
fully diluted basis) during the second quarter of 1996 in connection with
this transaction. EPR ceased operations on January 1, 1994 and had no
operations or assets on December 31, 1995.
As more fully described in Note 3 to the consolidated financial statements
included in this report on Form 10-QSB, in January 1996, the Company and
Sanwa entered into a series of agreements (the "Restructuring Agreements"),
pursuant to which Sanwa agreed to restructure the Company's obligations to
guarantee repayment of the EPR Loan. The Restructuring Agreements were
subject to an escrow arrangement whereby Sanwa had the right to rescind the
transaction if the Company sought protection under U.S. Bankruptcy Laws on
or before June 6, 1996. As described above, the Restructuring Agreements
were released from escrow and the Company was released from its guarantee
of the indebtedness of the EPR debt during June 1996. Pursuant to the
Restructuring Agreements, Sanwa agreed to restructure the Company's
obligations on the EPR Loan into three separate obligations: a term loan
in the amount of $2,780,000, a term loan in the amount of $1,000,000, and
payment obligations under an Income Sharing Agreement which generally
requires the Company to make payments to Sanwa in an amount equal to 40% of
its 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. 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 of the Company, under which Mr. Taylor and Mr. Strickland have
agreed not to, directly or indirectly, acquire, dispose of, or exercise any
option or other right to acquire any capital stock or options of the
Company. As a result of the Sanwa Standstill Agreements described above,
the Company has agreed to pay these individuals, under a predetermined
formula, up to an aggregate of $600,000 based on the increases in the
market value of the shares of Common Stock of the Company that they hold
and are
10
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unable to trade due to the Sanwa Standstill Agreements.
CONTINUING MANUFACTURING OPERATIONS:
Continuing operations consist primarily of the precision machining
business, which manufactures and assembles medical devices and other
precision machined parts on a contract basis. The Company also
manufactures proprietary products (oil centrifuges and rotary vane
actuators). The Company ceased its plastics manufacturing operations
during 1994 and has sold most of the equipment used in its plastics
manufacturing operations. The Company currently has no involvement in the
waste processing business.
The Company's net sales from continuing operations for the second quarter
of 1996 increased by approximately 9.4% from the same period in 1995. The
Company's net sales for the six months ended June 30, 1996 were $6,079,600
compared to $6,050,963 for the same period in 1995. The increase in sales
was due primarily to increased sales to one of the Company's major medical
customers in the second quarter, which offset a decrease in sales to the
Company's other major medical customer of approximately $880,000 and
$1,500,000 for the three and six month periods ended June 30, 1996,
respectively, from the comparable three and six month periods ended June 30,
1995. Sales to the Company's two major medical product customers were
$2,453,468 or 73.0% of net sales for the second quarter of 1996, compared to
sales of $2,090,946 or 68.1% of net sales for the same period in 1995.
Sales to the Company's two major medical product customers were $4,228,130
or 69.6% of net sales and $4,268,518 or 70.5% of net sales for the
six-months ended June 30, 1996 and 1995, respectively. Medical product
orders substantially increased during the second quarter of 1996, and rotary
vane actuator volume continued its positive growth during these months.
Gross profit was 23.2% of net sales for the second quarter of 1996,
compared to 17.5% of net sales for the second quarter of 1995. Gross
profit was 19.9% and 19.2% of net sales for the six month periods ended
June 30, 1996 and 1995, respectively. The improvement in gross profit for
the quarter and six-months ended June 30, 1996, was primarily due to an
increase in higher margin medical product business. In addition, the
Company was able to obtain operational efficiencies as a result of the
increase in sales volume.
Selling, general and administrative expenses were $644,814, or 19.2% of net
sales for the second quarter of 1996, compared to $622,608, or 20.3% of net
sales for the same period in 1995. The dollar increase in these expenses
for the second quarter of approximately $22,000 is primarily due to
increases in selling related expenses of approximately $49,000 to market
Company products (rotary vane actuators and oil centrifuges) including
trade shows, business travel and additional sales personnel. These
increases in selling expenses were partially offset by a reduction in
administrative expenses of approximately $27,000, primarily in legal and
accounting costs incurred
11
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during the three-months ended June 30, 1995 related to restructuring of the
debt underlying the EPR facility. Selling, general and administrative
expenses were $1,157,078, or 19.0% of net sales for the six-month period
ended June 30, 1996, compared to $1,202,698, or 19.9% of net sales for the
same period in 1995. The decrease in these expenses for the six-month
period ended June 30, 1996 is primarily due to a reduction in legal and
accounting costs related to the restructuring of the debt underlying the
EPR facility.
The Company had operating income from continuing operations of $135,463 for
the second quarter of 1996, compared to an operating loss from continuing
operations of $84,788 for the same period in 1995. The operating income
from continuing operations for the three-months ended June 30, 1996 was
attributable to increased volume, primarily in medical products, partially
offset with a small increase of approximately $22,000 in selling and
administrative expenses. The Company had operating income from continuing
operations of $53,813 for the six-month period ended June 30, 1996,
compared to an operating loss from continuing operations of $43,508 for the
same period in 1995. The improvement in income from continuing operations
for the six-month period ended June 30, 1996 is due to increased sales of
higher margin medical products, coupled with a net decrease of $45,620 in
selling, general and administrative expenses, primarily related to reduced
legal and accounting expenses, as discussed above.
The Company had income from continuing operations of $56,737, or $.02 per
share ($.01 per share on a fully diluted basis) for the second quarter of
1996, compared to a loss from continuing operations of $145,004 or $.04 per
share for the same period in 1995. The second quarter 1996 income from
continuing operations resulted from the reasons stated above, along with
the loss of management fee income of approximately $30,000 for managing the
waste processing facility (Reuter Recycling of Florida, Inc.), which as
described in Notes 3 and 4 to the consolidated financial statements in the
Company's 1995 Form 10-KSB, was sold in October 1995. The Company had a
loss from continuing operations of $129,236, or $.04 per share (primary and
fully diluted basis) for the six-month period ended June 30, 1996, compared
to a loss from continuing operations of $147,800 or $.04 per share for the
same period in 1995. The improvement in loss from continuing operations
for the six-month period ended June 30, 1996 is due to the reasons stated
above, net of lost management fee income of $60,000.
The Company did not recognize a tax provision during the periods ended June
30, 1996, due to the net operating loss carryforwards available to the
Company as well as the Company's continued insolvency for tax purposes,
subsequent to the debt restructuring. The Company had no taxable income,
and accordingly, recorded no provision for income taxes for the periods
ended June 30, 1995.
The effect of inflation on the Company's consolidated results has not been
significant.
12
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DISCONTINUED WASTE PROCESSING OPERATIONS:
As described in Notes 2 and 3 of the notes to consolidated financial
statements in the Company's 1995 Form 10-KSB, the Company ceased operation
of its EPR facility effective January 1, 1994, sold all assets of EPR
effective September 1, 1994, and on January 24, 1996, entered into an
agreement to restructure its guarantee of the debt obligation underlying
the EPR facility.
Losses from discontinued operations were $0 and $539,270 for the quarters
ended June 30, 1996 and 1995, respectively, and $0 and $1,077,678 for the
six-month periods ended June 30, 1996 and 1995, respectively. The loss
from discontinued operations for the quarter and six-month periods ended
June 30, 1995, consists of accrued interest on the EPR note guaranteed by
the Company. There was no additional accrual of losses associated with
financing underlying discontinued operations for the first and second
quarters of 1996, due to the signing of a debt restructuring agreement on
January 24, 1996, and the subsequent release of the documents from escrow
on June 6, 1996.
NET INCOME (LOSS):
The net income for the quarter ended June 30, 1996 was $7,305,755 or $2.29
per share ($1.84 per share on a fully diluted basis), compared to a net
loss of $684,274 or $.21 per share for the quarter ended June 30, 1995.
The net income for the six-month period ended June 30, 1996 was $7,119,782
or $2.23 per share ($1.99 per share on a fully diluted basis), compared to
a net loss of $1,225,478 or $.38 per share for the same period in 1995.
The improvement in 1996 is due primarily to recognition of an extraordinary
gain from debt restructuring of $7,249,018 or $2.27 per share ($1.83 and
$2.03 per share on a fully diluted basis for the three and six-month
periods ended June 30, 1996, respectively) and not accruing interest on the
EPR loan (as discussed above).
LIQUIDITY AND CAPITAL RESOURCES:
At June 30, 1996, the working capital deficit includes the current portion
of the restructured debt obligation, in addition to the indebtedness under
the asset-based short-term financing arrangement. With the exception of
the balance of the Income Sharing Agreement (see Note 3 to this Form
10-QSB), debt associated with these agreements has been classified as a
current liability due to ongoing covenant violations disclosed in the
following paragraph and in notes 2 and 7 to the consolidated financial
statements in the Company's 1995 Form 10-KSB. The Company had a working
capital deficit of $5,200,728 at June 30, 1996, compared to a working
capital deficit of $19,905,557 at December 31, 1995. The current ratio at
June 30, 1996 was .41, compared to .13 at December 31, 1995. The
improvement in the working capital deficit and current ratio is due
primarily to the recognition of the debt restructuring which reduced the
amount of debt previously carried that was classified as a current
liability.
13
<PAGE>
The Company has a $4.5 million line of credit arrangement with an
asset-based lender, which is collateralized by assets associated with the
manufacturing operations. The Company generally borrows funds up to the
maximum available because the line of credit agreement has a minimum
borrowing requirement of $2.75 million, upon which the Company pays
interest. Funds available to the Company pursuant to the terms of the line
of credit agreement are dependent upon the level of eligible accounts
receivable and plant and equipment, as defined. The Company is in
violation of certain financial and technical covenants contained in this
line of credit agreement, which could result in the lender discontinuing
advances and demanding repayment of all outstanding borrowings. Due to the
default conditions discussed above, and borrowing limits related to
available collateral, it is possible that the Company will not be able to
borrow sufficient amounts against this line to meet all the operating cash
needs of the Company. In addition, there can be no assurance that the
asset-based lender will continue to disregard these covenant violations in
the future. If the lender takes any action to reduce the availability of
funds to the Company, there may not be sufficient liquidity to continue
operations. As of August 8, 1996, the Company had borrowed approximately
$2,830,000 and if the lender agrees to advance additional funds, had
additional availability of approximately $75,000 under this line of credit.
The Company had positive cash flow from operations for the six-months ended
June 30, 1996 of $19,834, compared to positive cash flow from operations of
$405,307 for the six-months ended June 30, 1995. The decrease in cash flow
from operations is primarily due to inventory build-up in anticipation of
higher production volumes for the third and fourth quarters of 1996 and an
increase in accounts receivable from the beginning of the year. The
Company's ability to meet its continuing manufacturing operations cash flow
requirements during the remainder of 1996 and beyond, is dependent on
continuing adequate sales and margins in the manufacturing business.
Management expects a need for capital expenditures to support equipment
upgrading and growth in the manufacturing division. Near term capital
commitments for new manufacturing equipment total approximately $175,000.
Any future expenditures will depend on cash availability. In addition to
cash flows from operations, if any, the Company expects to seek needed
capital through bank financing or asset-based lending arrangements.
However, there can be no assurance that the Company will be able to obtain
such financing, or obtain financing on terms that are satisfactory to the
Company.
In summary, the Company currently has negative working capital and is in
default under the terms of its asset-based short-term financing arrangement
and, as a result of this default, is in default under the restructured Loan
Agreement with Sanwa. Either of these two lenders could, at any time,
demand full payment of the underlying debt, which the Company would be
unable to satisfy, in which case the Company may be forced to seek
protection under U.S. Bankruptcy laws. The Company is attempting to obtain
waivers for the previously discussed debt covenant violations, however,
there can be no assurance that the Company will be able to obtain such
waivers.
14
<PAGE>
PART II - OTHER INFORMATION
Item 3. Defaults upon Senior Security
See Footnotes 3 and 4 to Notes to the Consolidated Financial Statements and
Management's Discussion and Analysis, included in Item 1 and 2 of this
report on Form 10-QSB, for a description of the status of the defaults on
the loan underlying the Eden Prairie facility and the Company's line of
credit, which is incorporated herein by reference.
As of August 8, 1996, the Company had borrowed approximately $2,830,000
and had additional availability of approximately $75,000 under its line of
credit agreement.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Item No. Item Method of Filing
-------- ---- ----------------
27.1 Financial Data Schedule Filed herewith
(b) Reports on Form 8-K.
None.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REUTER MANUFACTURING, INC.
-----------------------------
(Registrant)
Date: August 13, 1996 By: /s/ James W. Taylor
-------------------- ----------------------------
James W. Taylor
President, Chief Executive
Officer and Chief Financial
Officer (principal executive
and financial officer)
Date: August 13, 1996 By: /s/ William H. Johnson
--------------------- ----------------------------
William H. Johnson
Vice President, Controller and
Secretary (principal accounting
officer)
16
<PAGE>
REUTER MANUFACTURING, INC.
EXHIBIT TO QUARTERLY
REPORT ON FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
Item No. Item Method of Filing
- -------- ---- ----------------
27.1 Financial Data Schedule Filed herewith.
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 17,110
<SECURITIES> 0
<RECEIVABLES> 1,573,214
<ALLOWANCES> 0
<INVENTORY> 1,720,375
<CURRENT-ASSETS> 3,589,331
<PP&E> 11,229,857
<DEPRECIATION> 7,453,352
<TOTAL-ASSETS> 7,787,884
<CURRENT-LIABILITIES> 8,790,059
<BONDS> 0
0
0
<COMMON> 598,410
<OTHER-SE> 13,710,596
<TOTAL-LIABILITY-AND-EQUITY> 7,787,884
<SALES> 6,079,600
<TOTAL-REVENUES> 6,079,600
<CGS> 4,868,709
<TOTAL-COSTS> 6,025,787
<OTHER-EXPENSES> 183,049
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 202,834
<INCOME-PRETAX> 7,119,782
<INCOME-TAX> 0
<INCOME-CONTINUING> (129,236)
<DISCONTINUED> 0
<EXTRAORDINARY> 7,249,018 <F1>
<CHANGES> 0
<NET-INCOME> 7,119,782
<EPS-PRIMARY> 2.23
<EPS-DILUTED> 1.99
<FN>
<F1>EXTRAORDINARY ITEM - GAIN ON DEBT RESTRUCTURING
</FN>
</TABLE>
