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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _____________________.
COMMISSION FILE NO.: 0-1561
____________________
REUTER MANUFACTURING, INC.
(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 55343
HOPKINS, MINNESOTA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 935-6921
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
____________________
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 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-K 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 amendment to
this Form 10-KSB. ___
The Registrant's revenues for the fiscal year ended December 31, 1996 were
$14,174,211.
As of March 18, 1997, 3,219,770 shares of Common Stock of the Registrant
were deemed outstanding, and the aggregate market value of the Common Stock of
the Registrant (based upon the average of the closing bid and asked prices of
the Common Stock at that date), excluding outstanding shares beneficially owned
by directors and executive officers, was approximately $9,211,455.
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, May 20, 1997, Annual Meeting of
Shareholders (the "1997 Proxy Statement").
Transitional Small Business Disclosure Format (Check one): YES ___ NO /X/
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PART I
FORWARD LOOKING STATEMENTS
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 PROVIDES A SAFE
HARBOR FOR FORWARD-LOOKING STATEMENTS. THIS REPORT MAY CONTAIN FORWARD-LOOKING
STATEMENTS RELATING TO SUCH MATTERS AS PLANS FOR FUTURE EXPANSION, OTHER
BUSINESS DEVELOPMENT ACTIVITIES, ANTICIPATED FINANCIAL PERFORMANCE, BUSINESS
PROSPECTS, AND SIMILAR MATTERS. SUCH FORWARD-LOOKING STATEMENTS BY THEIR NATURE
INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES, AND ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THE ANTICIPATED RESULTS OR OTHER EXPECTATIONS EXPRESSED IN THE
FORWARD-LOOKING STATEMENTS. THESE RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT
LIMITED TO, THE COMPANY'S ABILITY TO CONSUMMATE AN EQUITY FINANCING SUFFICIENT
TO RETIRE THE JUNIOR SUBORDINATED NOTE AND INCOME SHARING AGREEMENT WITH SANWA
BUSINESS CREDIT CORPORATION, EXPAND ITS PRODUCT OFFERING AND TO DEVELOP ITS
REPUTATION IN MANUFACTURING PRODUCTS FOR SELECT INDUSTRIES SUCH AS MEDICAL
INDUSTRIES, AND THE RISKS AND UNCERTAINTIES DESCRIBED IN "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" IN
THIS REPORT.
ITEM 1. DESCRIPTION OF BUSINESS.
INTRODUCTION
The Company is principally a contract manufacturer of precision
machined components, assemblies and devices for medical and industrial
original equipment manufacturers ("OEM"). The Company manufactures on a
contract basis, among other items, close tolerance bearing-related assemblies
for the medical device industry. In order to differentiate itself from its
competitors, the Company emphasizes its design engineering and manufacturing
engineering support. The Company also manufactures and sells under the
Reuter-Registered Trademark-name self-powered oil centrifuges and rotary vane
actuators which are sold by the Company's sales force directly to the OEM or
end user.
In 1986, the Company entered the waste processing business through
wholly owned subsidiaries in Florida and Minnesota. This business proved
unprofitable and by the end of 1995 the Company had divested the assets of
these subsidiaries. By 1996, the Company had refocused its efforts on
contract manufacturing and restructured certain debt obligations related to
EPR, Inc., the Company's Minnesota subsidiary. The restructuring of its
obligations with its subordinated lender and renewed focus on contract
manufacturing, coupled with an experienced and effective work force, forms
the basis for the Company's operations moving forward.
The Company's contract manufacturing business is concentrated in
the medical device field and includes production of blood centrifuges, blood
pumps, blood analyzers, thrombectomy proximal motors, and valves for medical
oxygen delivery. Other contract manufacturing includes gas regulators and
miscellaneous industrial parts. Contract manufacturing accounted for
approximately 97% of the Company's gross sales in 1996.
The Company also manufactures products under its own trade names,
which accounted for approximately 3% of the Company's gross sales in 1996. The
Company's trade name manufacturing business is concentrated in two principal
areas. The Company produces Envi-ro-fuge 2000-Registered Trademark-
self-powered oil centrifuges for stationary and mobile internal combustion
engines. The Company also sells a limited line of full flow oil filters as a
complement to the oil
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centrifuges. The Company's other principal trade name manufacturing product is
Reuter-Registered Trademark- rotary vane actuators, hydraulic and pneumatic,
which are used to impart motion in diverse industrial and special
applications. The Company's trade name manufacturing business requires
substantial engineering input, as most customers require application
modifications.
PRODUCTS AND MARKETS
CONTRACT MANUFACTURING. The Company manufactures to customer
specifications 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 other medical products, such as components for
patient oxygen delivery systems. The Company believes its engineering
cooperation on prototype development with its medical products customers will
result in future contract manufacturing 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, brake components and fluid power equipment. These efforts have
resulted in additional revenue growth for the Company.
The basic specifications and tolerances for the products
manufactured by the Company are initially provided by the customer. The
Company is involved early in design review and development to effect
potential long-term cost reductions and performance improvements. Upon
receipt of 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 disk drives because the Company's principal customer shifted its
sourcing overseas. The Company has continued to repair disk drive spindles
for a number of computer companies, but this business has dropped to a
minimal amount.
TRADE NAME PRODUCTS. In 1994, the Company decided to diversify its
contract manufacturing business by manufacturing and selling products
carrying the Company's trade names. 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 began negotiations 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.
STRATEGY
The Company's objective is to become indispensable to the customer
thereby ensuring that the Company will obtain subsequent production business.
The Company pursues this strategy by providing engineering input throughout
the development and production processes of its customers' products. This
requires the Company to maintain a strong engineering capability and
capacity. In addition, the Company generally designs, manufactures and owns
the tooling
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required to produce its customers' products. All fixtures and prototypes are
produced in the Company's tool and prototype department. This strategy makes
it more difficult for the customer to switch to another contract manufacturer
thus enabling the Company to create a long-term production relationship with
the customer. Capturing the customer in this manner is essential since the
Company does not sign long-term production contracts with its customers.
In addition to continuing to build strong customer relationships,
the Company also plans to pursue the following strategies:
- Expand the market for the Company's trade name products.
- Expand the Company's precision manufacturing medical device customer
base.
- Diversify into industrial parts and components markets.
- Make strategic acquisitions in an effort to enhance the growth of the
Company and complement or diversify the products and services that the
Company offers.
SALES AND MARKETING
The Company sells its manufacturing services and trade name
products through its own sales representatives, with the exception of one
exclusive agent in Europe. The Company has a director and assistant director
of marketing and sales for each of the following product areas: medical
products, oil centrifuges and filters, and rotary vane actuators. The Company
also has a director of marketing and sales for industrial components. All of
these individuals develop leads primarily through networking, and through
selected advertising and trade shows.
CUSTOMERS
The Company's medical device customers sell products for general
blood processing, including blood processing during surgery, blood analysis,
oxygen treatment of ambulatory patients and similar applications. The
Company's two largest customers accounted for approximately 64% and 7% of
gross sales in 1996, respectively. The Company believes that a significant
reduction of orders from these customers would have a material adverse effect
on its business.
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 materials 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 the types of products the Company manufactures
would be available from other suppliers.
The Company generally manufactures products to a customer's
specifications on a contract basis, and carries significant amounts of
inventory to meet rapid delivery requirements
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of customers or to assure a continuous allotment of goods from suppliers. The
Company does not provide extended payment terms to customers.
COMPETITION
The contract manufacturing business in which the Company engages is
highly competitive. Many of the competitors of the Company have greater sales
volume and resources than the Company. The principal elements of competition
are quality, service, delivery, price and meeting customer requirements. The
Company believes that it accounts for only a small portion of aggregate
national sales of the manufacturing service it provides. The Company
believes, however, that its strong engineering capability gives it a
competitive advantage. Approximately 10% of the Company's employees are
engineers.
RESEARCH AND DEVELOPMENT
The Company conducts research and development activities primarily
related to prototype development of customers' products and products sold
under its trade names. The Company provides engineering services to support
its customers in the development of new products including, enhancements to
current products.
BACKLOG
On March 18, 1997, the Company's backlog was approximately $10.0
million, compared to approximately $5.5 million on March 15, 1996. Management
expects that the backlog will be filled during the current year, and that
additional orders will be received during the current year. The Company's
backlog tends to fluctuate as a consequence of large orders being placed by
customers who schedule delivery of the product over future months. 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
subsequent orders generally is shorter than the period for the initial order.
The Company believes its backlog is firm; however, customers do not sign
production contracts, and customers can reduce, reschedule or cancel orders
without contractual penalty.
EMPLOYEES
As of December 31, 1996, the Company had 135 employees, all of whom
were employed full time, with the exception of one part-time employee.
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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 feet are devoted to manufacturing and
warehouse purposes and approximately 65% of the space is utilized. 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 substantial growth.
The Company owns sufficient manufacturing equipment to generally enable
it to meet its sales requirements. This equipment includes milling machines,
grinders, lathes, drilling machines, testing and inspection equipment, clean
room facilities, and storage and cooling equipment. The production machines
are computer controlled, which ensures that operations are repeatable. By
the end of 1995, the Company had successfully disposed of equipment that had
been used in its other unrelated businesses.
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
18, 1997 are as follows:
Name (age) Position with the Company
- -------------------------- or Principal Occupation
--------------------------
James W. Taylor (78) Director, Chief Executive Officer,
President and Chief Financial Officer
Edward E. Strickland (70) Chairman of the Board of Directors
Thomas L. Beltrand (37) Vice President - Manufacturing
William H. Johnson (39) Vice President - Controller and Secretary
Robert D. Klingberg (52) Vice President - Engineering
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 and a director of the Company since 1989. 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.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
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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1996: First Quarter 9/16 3/16
Second Quarter 3/4 9/16
Third Quarter 3 5/16 11/16
Fourth Quarter 4 2 5/8
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
As of March 29, 1997, there were approximately 1,316 record holders
of the Company's Common Stock.
No cash dividends were declared or paid by the Company during 1996
or 1995, and the Company does not intend to pay dividends on its Common Stock
in the foreseeable future. The Company is prohibited from paying dividends
on its Common Stock under agreements with its creditors.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company is principally engaged 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. By the end of 1995, the Company had
disposed of its other unrelated businesses, including waste processing and
plastic waste container manufacturing.
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 ("Sanwa"). The Company recognized an
extraordinary gain associated with discontinued operations of $7,249,018 or
$2.14 per share ($1.38 per share on a fully diluted basis) during 1996 in
connection with this transaction. EPR ceased operations on January 1, 1994
and had no operations or assets on December 31, 1995 and 1996.
As more fully described in Note 6 to the Consolidated Financial
Statements included herein, 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 obligation 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 obligation on the EPR Loan into
three separate obligations: a Senior Subordinated Secured Promissory Note
("Senior Note") in the amount of $2,780,000, a Junior Subordinated Promissory
Note ("Junior Note") in the amount of $1,000,000, and an Income Sharing
Agreement which generally requires the Company to make payments to Sanwa in
an amount equal to 40% of its income before taxes, as defined, if any, less
cash interest payments made by the Company under the $2,780,000 Senior Note.
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 Ten Dollars ($10.00), which will become exercisable if there is an
ownership change 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 W.
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 any stock of the Company, 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
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an aggregate of $600,000 based on increases in the market value of shares that
they hold and are unable to trade based on the provisions of the Sanwa
Standstill Agreements. In addition, these individuals will be paid an
aggregate $100,000 as a result of the Sanwa Standstill Agreements. See Notes
2 and 6 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 and assembly business, which
manufactures certain medical products and other precision machined parts on a
contract basis. In addition, the Company also began manufacturing and selling
tradename products (oil centrifuges and rotary vane actuators) in 1995.
The Company's net sales from continuing operations increased by 28.2%
in 1996 from 1995, compared to a decrease in net sales of 8.1% in 1995 from
1994. The improvement in net sales in 1996 as compared to 1995 was due
primarily to increased sales of its medical products. Revenues from
the medical, industrial, and tradename product segments were $11,155,714,
$2,590,105 and $428,392 respectively, for 1996 as compared to $7,815,005,
$2,734,239 and $502,814 respectively, for 1995. Sales to the Company's two
major medical product customers were $9,998,201 in 1996 compared to
$7,583,865 in 1995. While these customers accounted for 70.5% of net sales
in 1996 and 68.7% of net sales in 1995, one of the customers accounted for
63.7% and 44.9% of net sales in 1996 and 1995, respectively.
Gross profit was 24.8% in 1996 compared to 16.9% in 1995. The
improvement in gross profit in 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 $2,345,734 or 16.5%
of net sales in 1996, compared to $2,258,542 or 20.4% of net sales for 1995.
The net dollar increase in these expenses of $87,192 is due in part to an
increase in selling related expenses of approximately $67,000, principally to
market the Company's rotary vane actuators and oil centrifuges, including
trade shows, business travel and additional sales staff restructuring to
focus the effort of diversifying the Company's customer base. Administrative
expenses were approximately $20,000 higher in 1996 than in 1995.
Administrative salaries and benefits increased approximately $110,000 from
1995 resulting primarily from pay raises and bonus payments. In addition,
the Company instituted a profit sharing retirement plan in 1996 for all
eligible employees and accrued $80,000 for the Company's 1996 contribution to
be paid in 1997. The Company also made a 401(k) matching contribution of
$60,000 during 1996, which resulted in an increase of $155,000 in expenses
for 1996 compared to 1995. Computer supplies/services and office supplies
expenses increased approximately $40,000 in 1996 over 1995 as a result of
upgrading the Company's computer systems and general office supplies for new
employees. Other administrative expenses experienced a net increase of
approximately $15,000 in 1996 over 1995. The total of these individual
increases in administrative expenses were almost entirely offset by a
reduction during 1996 in legal and accounting expenses of approximately
$300,000,
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primarily related to the completion of the Sanwa debt restructuring and legal
and accounting expenses related to the sale of Reuter Recycling of Florida,
Inc. completed during 1995.
In 1996, the Company had operating income from continuing operations of
$1,172,399, compared to an operating loss from continuing operations of $391,858
in 1995. The income in 1996 was due to higher margin medical product revenues
as discussed above, along with increased operational efficiencies as a result of
the increased sales volume, net of a modest increase in selling and
administrative expenses.
The Company had income from continuing operations before provision for
income taxes and extraordinary item - gain on debt restructuring of $769,572
or $.22 per share ($.14 per share on a fully diluted basis) compared to a
loss from continuing operations of $609,605 or $.87 per share in 1995. The
1996 income from continuing operations resulted from the reasons stated
above, along with higher interest expense due to increased utilization of the
Company's asset-based short-term financing arrangement, and the elimination
of management fee income for managing the waste processing facility owned by
Reuter Recycling of Florida, Inc., which was sold in October 1995.
The Company was profitable during 1996 but generally does not pay
regular income taxes because of the availability of its net operating loss
carryforwards. The Company is, however, subject to alternative minimum tax
under the Internal Revenue Code of 1986, as amended (the "Code"), because only
90% of the net operating loss carryforward is allowed as a deduction before
arriving at the alternative minimum taxable income. Therefore, 10% of the
Company's taxable income is subject to the flat alternative minimum tax rate
of 21%. The Company recorded a provision for income taxes of $20,000 during
1996, primarily related to state taxes. The Company had no taxable income in
1995, and accordingly, recorded no provision for income taxes during 1995.
The effect of inflation on the Company's consolidated results has not
been significant.
DISCONTINUED WASTE PROCESSING AND WASTE COLLECTION OPERATIONS. As
described in Note 3 to the Consolidated Financial Statements, the Company's
wholly owned subsidiary, EPR, Inc. ceased operations effective January 1,
1994, and the Company 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, Inc. assets by approximately $1.8 million, resulting in a
gain on disposal. The Company used the proceeds from the sale of the EPR,
Inc. assets to repay a portion of the EPR, Inc. Loan. The Company retained
all liabilities of EPR, Inc., including the balance of the EPR, Inc. Loan,
which was guaranteed by the Company. As discussed above, in January 1996,
the Company restructured its obligations under its guarantee of the EPR, Inc.
Loan.
Total net losses from discontinued operations were $2,157,940 for the
year ended December 31, 1995. The 1995 loss from discontinued operations
consists of accrued interest on the EPR, Inc. note which was guaranteed by
the Company. There was no loss from discontinued operations in 1996 as the
Company finalized its restructuring of its obligations under its guarantee of
the EPR, Inc. loan during 1996.
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NET INCOME (LOSS). The net income in 1996 was $7,998,590 or $2.36 per
share ($1.52 per share on a fully diluted basis) and included an
extraordinary gain associated with discoutinued operations on debt
restructuring of
$7,249,018 or $2.14 per share ($1.38 per share on a fully diluted basis)
compared to a net loss of $2,767,545 or $.87 per share in 1995. The increase
in the net income for 1996 over the loss for 1995 was due to the factors
discussed above.
LIQUIDITY AND CAPITAL RESOURCES. At December 31, 1996, the Company had
negative working capital due principally to the Company being in violation of
certain covenants of its asset-based short-term financing arrangement and
Sanwa Restructuring Agreements. The working capital deficit includes the
principal balance for the Senior and Junior Notes outstanding under the Sanwa
Restructuring Agreements as of December 31, 1996, including accrued interest
associated with the Senior and Junior Notes and default interest, in addition
to the indebtedness under the Company's asset-based short-term financing
arrangement as a result of foregoing defaults. The Company had a working
capital deficit of $4,808,302 at December 31, 1996, compared to a working
capital deficit of $19,905,557 at December 31, 1995. The current ratio at
December 31, 1996 was .45 compared to .13 at December 31, 1995.
The improvement in the working capital deficit and current ratio for
1996 resulted primarily from the debt restructuring of the EPR, Inc. Sanwa
Loan as discussed in Note 6 to the Consolidated Financial Statements.
As discussed in Notes 2 and 6 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 technical covenants, including solvency
(negative equity) covenants under the asset-based short-term financing
arrangement, which could result in the asset-based lender discontinuing
advances and demanding repayment of all outstanding borrowings, which totaled
$2,900,097 at December 31, 1996. As a result of the asset-based short-term
financing technical defaults and payment default under the Junior Note, the
Company remains in default under the Restructuring Agreements with Sanwa.
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 its line to meet all operating cash
needs of the Company. As of March 18, 1996, the Company had borrowed
approximately $3,001,000 and had additional availability, assuming the lender
will continue making advances, of approximately $520,500 under the
asset-based line of credit financing arrangement.
The Company generated positive cash flow from operations of $667,183 for
the year ended December 31, 1996 compared to negative cash flow from
operations of $32,832 for the year ended December 31, 1995. The impact of
discontinued operations in 1995 and the debt restructuring during 1996 was of
a non-cash nature (including discontinued operations). Accordingly, the
operations cash flow activity only reflects continuing operations. The
increase in cash flow from operations for 1996 was due primarily to higher
sales volumes, while fixed overhead costs remained relatively constant,
coupled with an increase in product mix toward higher margin medical products.
The Company's ability to meet its continuing cash flow
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requirements in the future is dependent on maintaining net revenues and
margins in its manufacturing business.
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 that exist under the asset-based short-term financing
arrangement and its Restructuring Agreements. In addition, the Company needs
to generate sufficient cash flows from continuing manufacturing operations to
meet debt service requirements.
Management's plans and objectives include the following:
1) Seek equity financing sufficient to retire the Junior Subordinated
Promissory Note and Income Sharing Agreement with Sanwa.
2) Rectify the technical default conditions under the asset-based
short-term financing agreement or, in addition to obtaining any equity
financing, obtain replacement financing that can support and be serviced by
the Company's manufacturing operations.
3) Expand the market for certain tradename products manufactured by the
Company and maintain and expand the precision manufacturing medical device
customer base. In addition, management plans to selectively 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. There can be no assurance that
the Company will be able to achieve any of the foregoing objectives or that
the Company will continue as a going concern in its current form. It is
possible that the Company would 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
$136,000. The Company desires to raise capital for these requirements
through bank financing and from cash provided by continuing operations,
although there can be no assurance that the Company will be able to obtain
financing, or obtain financing on terms that are satisfactory to the Company.
Net cash used in investing activities was $274,365 and $424,469 for the
years ended December 31, 1996 and 1995, respectively. The decrease in 1996
was due primarily to limited investment in capital equipment as a result of
the debt restructuring agreement as discussed in Note 6 to the Consolidated
Financial Statements.
Net cash used by financing activities was $418,886 for the year ended
December 31, 1996 as compared to cash provided by financing activities of
$349,157 for the period ended
13
<PAGE>
December 31, 1995. The change in 1996 was primarily due to payments made to
Sanwa pursuant to the Restructuring Agreements. The restructured debt
obligation, including future interest payments, was recognized as a balance
sheet liability, and consequently, any payments made toward the restructured
obligations do not effect the earnings of the Company. Payments made to Sanwa
during 1996 under the Restructuring Agreements were $527,523. The Company was
able to obtain sufficient funds under its asset-based financing arrangement to
meet its operating needs during 1996.
In summary, the Company achieved profitability in 1996; however, the
Company still has negative working capital and remains in technical default
under the terms of its asset-based short-term financing arrangement (negative
equity provision). As a result of the asset-based short-term financing
technical covenant defaults and payment defaults under the Junior
Subordinated Promissory Note, the Company 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 would 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.
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. . . . . . . . . . . . . . . . . . . . 18
Consolidated Balance Sheets as of December 31, 1996 and 1995 . . . . . . 20
Consolidated Statements of Operations for the years
ended December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . 21
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . 23
Consolidated Statement of Cash Flows for the years ended
December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . 24
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 26
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
14
<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
1997 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.
(c) COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's 1997 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 1997 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 1997 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 1997 Proxy
Statement is incorporated herein by reference.
15
<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
44 to 51 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 31, 1997, 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
16
<PAGE>
(11) Independent Contractor Agreement dated as of November 2, 1992,
between Taylor Consultants, Inc. and the Company
(b) REPORTS ON FORM 8-K
None.
17
<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. and Subsidiaries (the Company)
included on pages 20 to 42 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 3, 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, 1996 or 1995. 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 3).
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Reuter
Manufacturing, Inc. and Subsidiaries as of December 31, 1996 and 1995, 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.
18
<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 and 6, the Company is in violation of certain
covenants included in its Sanwa Loan and Security Agreement, including
payment default. These violations could result in the lender demanding
repayment of approximately $3.7 million of outstanding borrowings under
the Loan and Security Agreement.
- As discussed in Notes 2 and 6, the Company is in violation of certain
covenants included 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 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.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
February 28, 1997, except as to
the last paragraph of Note 6,
for which the date is
March 20, 1997
19
<PAGE>
REUTER MANUFACTURING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
Current assets:
Cash $ 74,980 $ 101,048
Investments, restricted 250,000 250,000
Accounts receivable, net of allowances of $25,000 and $15,000 at
December 31, 1996 and 1995, respectively 1,839,367 1,248,697
Inventories 1,766,040 1,301,105
Other current assets 29,137 72,784
----------- ----------
Total current assets 3,959,524 2,973,634
Property, plant and equipment, net 4,176,741 4,082,318
Intangible assets, net 397,731 446,365
----------- ----------
Total assets $ 8,533,996 $ 7,502,317
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Debt of Eden Prairie facility guaranteed by the Company, including
accrued interest of $3,275,656 in 1995 $ 18,784,019
Current maturities of long-term debt $ 4,312,071 259,734
Borrowings under asset-based line of credit 2,900,097 2,589,575
Accounts payable, trade 763,495 530,991
Accrued expenses 792,183 714,872
----------- ----------
Total current liabilities 8,767,846 22,879,191
Long-term debt, less current maturities 7,689,725 495,715
Other long-term liabilities 143,998 199,654
Commitments and contingencies (Notes 4, 7, 8 and 9)
Stockholders' 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: 3,208,020 and 3,191,520 shares
in 1996 and 1995, respectively 601,504 598,410
Additional paid-in capital 13,713,582 13,710,596
Accumulated deficit (22,382,659) (30,381,249)
----------- ----------
Total stockholders' deficiency (8,067,573) (16,072,243)
----------- ----------
Total liabilities and stockholders' deficiency $ 8,533,996 $ 7,502,317
----------- ----------
----------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
20
<PAGE>
REUTER MANUFACTURING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Net sales $14,174,211 $11,052,058
Less:
Cost of sales 10,091,199 8,587,370
Depreciation 564,879 598,004
---------- ----------
Gross profit 3,518,133 1,866,684
Selling, general and administrative expenses 2,236,837 2,145,545
Depreciation 108,897 112,997
---------- ----------
Operating income (loss) 1,172,399 (391,858)
---------- ----------
Other income (expenses):
Interest income 17,625 10,039
Interest expense (455,567) (403,627)
Management fees 100,000
Other, net 35,115 75,841
---------- ----------
Total other expense (402,827) (217,747)
---------- ----------
Income (loss) from continuing operations before provision for income
taxes and extraordinary item - gain on debt restructuring 769,572 (609,605)
Provision for income taxes (20,000)
---------- ----------
Income (loss) from continuing operations 749,572 (609,605)
Discontinued operations:
Loss from discontinued operations (2,157,940)
Extraordinary item - gain on debt restructuring (Note 6) 7,249,018
---------- ----------
Net income (loss) $ 7,998,590 $(2,767,545)
---------- ----------
---------- ----------
Net income (loss) per common and common equivalent share:
Primary:
Income (loss) from continuing operations $ .22 $ (.19)
Discontinued operations:
Loss from discontinued operations (.68)
Extraordinary item - gain on debt restructuring (Note 6) 2.14
---------- ----------
Net income (loss) per common and common equivalent share $ 2.36 $ (.87)
---------- ----------
---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
21
<PAGE>
REUTER MANUFACTURING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Fully diluted:
Income (loss) from continuing operations $ .14 $ (.19)
Discontinued operations:
Loss from discontinued operations (.68)
Extraordinary item - gain on debt restructuring (Note 6) 1.38
---------- ----------
Net income per common and common equivalent share $ 1.52 $ (.87)
---------- ----------
---------- ----------
Weighted average number of common and common equivalent shares
outstanding:
Primary 3,384,526 3,191,520
---------- ----------
---------- ----------
Fully diluted 5,242,275 3,191,520
---------- ----------
---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS
22
<PAGE>
REUTER MANUFACTURING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES PAR VALUE CAPITAL DEFICIT DEFICIENCY
<S> <C> <C> <C> <C> <C>
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)
Exercise of stock options 16,500 3,094 2,986 6,080
Net income 7,998,590 7,998,590
--------- -------- ----------- ------------ ------------
Balances, December 31, 1996 3,208,020 $601,504 $13,713,582 $(22,382,659) $ (8,067,573)
--------- -------- ----------- ------------ ------------
--------- -------- ----------- ------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
23
<PAGE>
REUTER MANUFACTURING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 7,998,590 $ (2,767,545)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Extraordinary item - gain on debt restructuring (7,249,018)
Depreciation 673,776 711,001
Amortization of intangible assets 48,634 48,635
Gain on sales of assets (9,636)
Provision for uncollectible accounts receivable 11,740 12,925
Sanwa interest accrued during elongated settlement negotiations 2,157,940
Provision for writedown of other assets and inventories 175,000 25,000
Changes in operating assets and liabilities:
Accounts receivable (602,410) 125,502
Inventories (609,935) (301,438)
Other assets 13,647 1,044
Accounts payable 185,504 (71,349)
Accrued expenses 103,647 59,391
Accrued retirement (49,392) (27,450)
Other liabilities (32,600) 3,148
------------ ------------
Net cash provided by (used in) operating activities 667,183 (32,832)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of property and equipment 35,125
Acquisition of Sollami product line (323,937)
Additions to property, plant and equipment (274,365) (135,657)
------------ ------------
Net cash used in investing activities (274,365) (424,469)
------------ ------------
Cash flows from financing activities:
Repayment of long-term debt (735,488) (176,941)
Proceeds from asset-based line of credit 13,905,651 11,713,984
Repayment of asset-based line of credit (13,595,129) (11,187,886)
Proceeds from exercise of stock options 6,080
------------ ------------
Net cash (used in) provided by financing activities (418,886) 349,157
------------ ------------
Net decrease in cash (26,068) (108,144)
Cash, beginning of year 101,048 209,192
------------ ------------
Cash, end of year $ 74,980 $ 101,048
------------ ------------
------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
24
<PAGE>
REUTER MANUFACTURING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
INCREASE (DECREASE) IN CASH
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $416,260 $401,804
Noncash investing and financing activities, in addition to that described
in Note 6:
Purchase of equipment in exchange for notes payable 446,834 226,024
Purchase of Sollami in exchange for future minimum payments 310,271
Purchase of equipment in exchange for accounts payable 47,000
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
25
<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 subsidiary, EPR, Inc. (Eden
Prairie Waste Processing Facility) (Note 3). 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.
As described in Note 3, 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.
ACCOUNTS RECEIVABLE:
A significant portion of the Company's accounts receivable are due
primarily from two customers (see Note 10). 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 the estimated useful
lives of the assets which range 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, plant or equipment, the
applicable cost and accumulated depreciation are eliminated from the
accounts and the resulting gain or loss is included in operations.
REVENUE RECOGNITION:
The Company recognizes sales of precision manufacturing and container
manufacturing products when these products are shipped.
26
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
INCOME TAXES:
The Company utilizes the asset and liability method of accounting for
income taxes whereby deferred taxes are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is the sum of the tax
currently payable and the change in the deferred tax assets and
liabilities during the period.
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.
INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE:
Primary income (loss) per common and common equivalent share data is
computed by dividing income (loss) data by the weighted average number
of shares of common stock outstanding plus dilutive common equivalent
shares outstanding during the year. Common stock equivalents result
from dilutive stock options computed using the treasury stock method.
In addition to considering the dilutive impact of stock options, the
fully diluted weighted average common and common equivalent shares also
includes the dilutive impact of the exercise of the contingent stock
purchase warrant which was granted in 1996 to Sanwa (Note 6). Common
stock equivalents were excluded from the 1995 loss per share
computations as their effect would be antidilutive.
NEWLY ISSUED ACCOUNTING STANDARDS:
In March 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" (SFAS No. 121) was issued. SFAS No. 121
establishes accounting standards for long-lived assets and certain
identifiable intangibles to be disposed of. The Company adopted SFAS No.
121 in the first quarter of 1996. The adoption had no impact on the
Company's financial position or results of operations.
27
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
NEWLY ISSUED ACCOUNTING STANDARDS, CONTINUED:
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123) was issued. In
accordance with SFAS No. 123, the Company has chosen to continue to
account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. The
Company accounts for stock-based compensation to nonemployees using the
fair value method prescribed by SFAS No. 123. Accordingly, compensation
costs for stock options granted to employees is measured as the excess,
if any, of the value of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. Compensation
cost for stock options granted to nonemployees is measured as the excess
of the fair value of the option over the amount the holder must pay to
acquire the stock. Such compensation costs, if any, are amortized on a
straight-line basis over the underlying option vesting terms.
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. Actual results could differ from those estimates.
2. BASIS OF PRESENTATION:
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.
SENIOR NOTE, JUNIOR NOTE AND INCOME-SHARING AGREEMENT (THE RESTRUCTURED
SUBORDINATED SANWA DEBT):
As described in Note 6, the Company is in violation of certain covenants
included in its Loan and Security Agreement. As a result of these
violations, the lender may, at its sole discretion, demand repayment of
approximately $3.7 million of the restructured debt, which has been
reclassified as a current liability at December 31, 1996.
28
<PAGE>
2. BASIS OF PRESENTATION, CONTINUED:
CORPORATE DEMAND LINE OF CREDIT:
As described in Note 6, the Company is in violation of certain covenants
included 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 a stockholders' deficiency of $8,067,573 at December 31,
1996.
The Company's continued existence is dependent on the Company's ability
to rectify the restructured subordinated Sanwa debt and asset-based
short-term line of credit agreement (the agreements) payment and
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:
- Seek equity financing sufficient to retire the Junior Subordinated
Promissory Note and Income-Sharing Agreement with Sanwa.
- Rectify the technical default conditions under the asset-based
short-term financing agreement or, in addition to obtaining any equity
financing, obtain replacement debt 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. In addition, management plans to selectively
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. There can be no assurance that
the Company will be able to achieve any of the foregoing objectives or
that the Company will continue as a going concern in its current form.
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.
29
<PAGE>
3. DISCONTINUED OPERATIONS AND DECONSOLIDATION OF REUTER RECYCLING OF
FLORIDA, INC.:
WASTE PROCESSING OPERATIONS:
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. 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. On
January 24, 1996, the Company entered into an agreement to restructure
its guarantee of the debt obligation underlying the EPR facility (see
"Restructured Subordinated Sanwa Debt" Note 6).
In late 1992, the Company 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. Accordingly, the assets and
liabilities of Reuter Recycling of Florida, Inc. are not included in the
Company's Consolidated Balance Sheet as of December 31, 1996 or 1995.
In an agreement between the Company and Reuter Recycling of Florida that
was entered into on November 1, 1992, 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. Management fees of $100,000 are included in the Company's 1995
Consolidated Statements of Operations. Direct costs incurred by the
Company and reimbursed by Reuter Recycling of Florida were $252,522 for
the year ended December 31, 1995.
In connection with the November 1, 1992 agreements described above, the
Company issued to the lender a warrant to purchase 150,000 shares of
common stock of the Company.
30
<PAGE>
3. DISCONTINUED OPERATIONS AND DECONSOLIDATION OF REUTER RECYCLING OF
FLORIDA, INC., CONTINUED:
WASTE PROCESSING OPERATIONS, CONTINUED:
On October 26, 1995, the Company sold all outstanding shares of Reuter
Recycling of Florida, Inc. common stock to Waste Management, Inc. of
Florida. 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 had 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.
4. 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 6) or 8% of net sales of rotary vane actuators
and related parts for the 48 months beginning in February 1995, whichever
is greater. The minimum royalty requirement was recorded as part of the
accounting for the product line acquisition. The Company paid $39,458 and
$7,669 of minimum royalty payments to The Sollami Company in 1996 and
1995, respectively.
5. SELECTED BALANCE SHEET INFORMATION AS OF DECEMBER 31, 1996 AND 1995:
INVENTORIES:
1996 1995
Raw materials and supplies $ 417,579 $ 297,067
Work-in-process 1,348,461 1,004,038
---------- ----------
$1,766,040 $1,301,105
---------- ----------
---------- ----------
31
<PAGE>
5. SELECTED BALANCE SHEET INFORMATION AS OF DECEMBER 31, 1996 AND 1995,
CONTINUED:
PROPERTY, PLANT AND EQUIPMENT:
1996 1995
Land and related improvements $ 206,995 $ 206,995
Buildings 3,119,442 3,044,441
Machinery and equipment 8,633,835 7,940,637
----------- -----------
Total 11,960,272 11,192,073
Less accumulated depreciation 7,783,531 7,109,755
----------- -----------
$ 4,176,741 $ 4,082,318
----------- -----------
----------- -----------
INTANGIBLE ASSETS:
1996 1995
Patents $300,000 $300,000
Noncompete agreements 100,000 100,000
Goodwill 95,000 95,000
-------- --------
495,000 495,000
Less accumulated amortization 97,269 48,635
-------- --------
$397,731 $446,365
-------- --------
-------- --------
ACCRUED EXPENSES:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Interest, excluding accrued interest associated with the Eden Prairie debt $ 69,373 $ 30,066
Payroll, benefits and related taxes 388,372 314,032
Legal and accounting 150,000 135,000
Accrued container warranty 25,000 50,000
Accrued retirement 55,657 49,393
Other 103,781 136,381
-------- --------
$792,183 $714,872
-------- --------
-------- --------
</TABLE>
32
<PAGE>
6. NOTES PAYABLE AND OTHER FINANCING ARRANGEMENTS:
Notes payable and long-term debt at December 31, 1996 and 1995, consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Restructured Subordinated Sanwa Debt:
Senior Note which bears interest at the rate of 8% annually,
presently in technical default. The note 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. $ 3,217,600 (a)
Junior Note which bears interest at the rate of 8% annually,
presently in payment default. The note 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 or upon termination of any loan
agreement between the Company and Sanwa, whichever
is earlier. 1,181,629 (a)
Income-Sharing Agreement, whereby the Company is required
to make payments to Sanwa in an amount equal to 40% of
the Company's quarterly income before taxes (prior to a
change in control), less cash interest payments made by
the Company under the Senior Note (b). 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. 5,908,248
-----------
Aggregate amounts due to Sanwa 10,307,477
Management Standstill Agreements (c) 700,000
Installment note payable by EPR and guaranteed by the Company.
As described below, this obligation was restructured in 1996. $15,508,363
Notes payable in monthly principal and interest installments, with
interest ranging from 4.9% to 12%. Notes mature from
January 1997 to January 2002, collateralized by equipment
with an aggregate carrying value of $992,092 at
December 31, 1996. 746,747 468,449
Other obligations, commissions payable to The Sollami Company
(see Note 4). 247,572 287,000
----------- -----------
Total notes payable and other obligations 12,001,796 16,263,812
Less current maturities, including amounts reclassified to
current due to default matters 4,312,071 15,768,097
----------- -----------
Long-term debt, less current maturities $ 7,689,725 $ 495,715
----------- -----------
----------- -----------
</TABLE>
33
<PAGE>
6. NOTES PAYABLE AND OTHER FINANCING ARRANGEMENTS, CONTINUED:
(a) The Senior and Junior Notes Payable (the Notes) balances
include total future interest payments of $512,600 and
$234,960, respectively. The principal balance of the
Notes at December 31, 1996 is $3,651,669.
(b) 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
Internal Revenue Code, multiplied by the Company's income
before taxes, less cash interest payments made by the
Company under the Senior Note.
(c) As a result of the Sanwa Standstill Agreements described
below, 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. In
addition, these individuals will be paid an aggregate
$100,000 as a result of the Sanwa Standstill Agreements.
On January 24, 1996, the Company and Sanwa Business Credit Corporation
(Sanwa) entered into a Loan and Security Agreement (the Restructured
Subordinated Sanwa Debt) to restructure its guarantee of the debt
obligation underlying the Eden Prairie Facility, which included the
following documents: a Senior Subordinated Secured Promissory (Senior)
Note in the amount of $2,780,000; a Junior Subordinated Secured
Promissory (Junior) 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 became effective on June 6, 1996, at which time the
restructuring transaction was recognized by the Company as an
extraordinary item - gain on debt restructuring of approximately $7.2
million. There was no income tax effect related to the extraordinary
item, 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's obligations under the Loan Documents are collateralized by
an interest in substantially all of the Company's assets, subordinate to
an Asset-Based Short-Term Financing Agreement with outstanding
borrowings of $2,900,097 at December 31, 1996.
The Company also granted Sanwa a contingent stock purchase warrant to
purchase up to 3,178,780 shares of common stock of the Company for an
aggregate purchase price of $10 (ten dollars) (Note 7). 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.
34
<PAGE>
6. NOTES PAYABLE AND OTHER FINANCING ARRANGEMENTS, 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)(1) of the Internal Revenue Code of 1986, as
amended.
The Loan Documents contain restrictive covenants which, among other
things, restrict the declaration and payment of cash dividends to
stockholders and place limits on the Company's annual capital
expenditures. In addition, the Loan Documents include a subjective
acceleration clause in which Sanwa may declare these agreements to be in
default if it considers an event or occurrence to be a "material adverse
change" in the Company's business or financial condition. The Company
is in default of certain covenants within the Loan Documents, as a
result of covenant violations under the Company's Asset-Based Short-Term
financing agreement. In addition, the Company is in payment default of
the Junior Note. The Company has not been able to obtain a waiver from
the lender. Under terms of the Loan Documents, the lender may, at its
discretion, demand repayment of certain portions of the restructured
debt, plus accrued interest (see Note 2). Accordingly, the principal
balance of the Senior and Junior Notes ($3,651,669), along with interest
of $302,400 at December 31, 1996, have been reflected as current
liabilities. During the period of default, the lender may elect to
increase the interest rate charged on this note to 2% in excess of the
interest rate then in effect on the respective liabilities (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,
1996 and 1995, of $455,567 and $3,275,656, respectively, includes
$38,640 and $314,475 of incremental default rate interest incurred
during 1996 and 1995, respectively. In addition, the lender has the
right pursuant to terms of the agreement to demand payment for certain
transaction costs. The lender has not made such a demand. Accordingly,
no such transaction costs have been accrued by the Company.
As of December 31, 1996, scheduled repayment obligations, which excludes
the unscheduled Income-Sharing and Management Standstill Agreements
(described in the following paragraph), including amounts reclassified
to currently payable due to default matter discussed above and principal
payments in arrears are as follows:
1997 $4,312,071
1998 548,365
1999 369,778
2000 98,496
2001 64,838
------------
Total scheduled maturities of long-term debt $5,393,548
------------
------------
35
<PAGE>
6. NOTES PAYABLE AND OTHER FINANCING ARRANGEMENTS, CONTINUED:
Unscheduled payment obligations, which are classified as noncurrent in
the Consolidated Balance Sheets, as of December 31, 1996, include the
following components which are due based only on the occurrence of
certain events, as described in the respective agreements, and do not
include acceleration clauses associated with default or cross-default
conditions:
Income-Sharing Agreement $5,908,248
Management Standstill Agreement 700,000
----------
Total unscheduled maturities of long-term debt $6,608,248
----------
----------
Other obligations are comprised of minimum royalty payments related to
the Sollami product line acquisition (Note 4).
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. 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 certain property,
plant and equipment of the Company. However, the asset-based lender has
a subordinated interest in certain equipment purchased with notes
payable. Interest on borrowings under the line were computed at the
prime rate plus 3.75% (prime rate was 8.25% and 8.5% at December 31,
1996 and 1995, respectively). During 1995, the Company amended its loan
and security agreement through a modification of the term loan
associated with the line of credit. The terms of these amended
agreements call for a new term loan in the amount of $1,507,200 to be
amortized over a period of 60 months and a one-year extension of the
loan agreement. All other terms and conditions of the loan agreement
remained 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 under the restructured subordinated Sanwa debt. 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 $520,000 at March 18,
1997. The weighted average interest rate was 12.02% and 12.46% for the
years ended December 31, 1996 and 1995, respectively.
CARRYING VALUE OF FINANCIAL INSTRUMENTS:
The carrying value of the asset-based line of credit approximates fair
value at December 31, 1996. The carrying value of the Sanwa Senior Note
is not determinable at December 31, 1996, due to the Company's capital
structure at the timing of the debt restructuring. The Sanwa Junior
Note and Income-Sharing Agreement (aggregate carry value at December 31,
1996 of $7,089,877) are currently subject to a proposed settlement with
Sanwa for $3.75 million, pending the Company's Ability to raise equity
financing as described in Note 2.
36
<PAGE>
7. 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.
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 incentive and 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.
37
<PAGE>
7. STOCKHOLDERS' EQUITY, CONTINUED:
The following summarizes all option activity under the plans:
<TABLE>
<CAPTION>
OPTIONS PRICE WEIGHTED
OUTSTANDING PER SHARE AVERAGE PRICE
<S> <C> <C> <C>
Balances, December 31, 1994 314,000 $.1875 - 7.00 $2.05
Options cancelled (5,000) 7.00 7.00
Options granted
--------
Balances, December 31, 1995 309,000 .1875 - 7.00 1.97
Options cancelled (97,000) .3125 - 7.00 4.01
Options granted 138,000 .42 - .72 .42
Options exercised (16,500) .1875 - .42 .37
--------
Balances, December 31, 1996 333,500 .1875 - 4.25 .81
--------
--------
Options exercisable at December 31, 1996 316,000 .1875 - 4.25 .83
--------
--------
</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, 1996, all of these options are
exercisable.
There were no options exercised during 1995.
STOCK-BASED COMPENSATION:
No compensation cost has been recognized for the Incentive Stock Option
Plan or the Directors' Stock Option Plan (collectively referred to as
"the Plans"). Had compensation cost for the Plans been determined based
on the fair value of options at the grant date for awards in 1996, the
Company's net income and net income per share would have been equal to
the pro forma amounts indicated below (in thousands, except per share
amounts):
Net income:
As reported $7,998,590
Pro forma 7,948,199
Net income per share:
Primary:
As reported $2.36
Pro forma 2.35
Fully diluted:
As reported 1.52
Pro forma 1.52
38
<PAGE>
7. STOCKHOLDERS' EQUITY, CONTINUED:
STOCK-BASED COMPENSATION, CONTINUED:
There were no options granted during 1995. The pro forma effect on net
earnings for 1996 is not fully representative of the pro forma effect on
net earnings in future years because it does not take into consideration
pro forma compensation expense related to grants made prior to 1996.
The aggregate fair value of options granted during 1996 was $44,500 for
the Incentive Stock Option Plan and $5,891 for the Directors' Stock
Option Plan. The aggregate fair value was calculated by using the fair
value of each option grant on the date of grant, utilizing the
Black-Scholes option pricing model and the following key assumptions for
the Plans:
ASSUMPTIONS 1996
Risk free interest rates 5.6%
Volatility 179%
Expected lives (months) 48
The Company does not anticipate paying dividends in the near future.
The following table summarizes information about fixed price stock
options outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL LIFE EXERCISE DECEMBER 31, EXERCISE
PRICES 1996 (MONTHS) PRICE 1996 PRICE
$.1875 - .42 149,500 101 $ .39 135,750 $ .40
.50 - .72 122,000 86 .52 122,000 .52
1.50 - 2.25 42,000 71 1.54 38,250 1.54
4.25 - 4.88 40,000 54 4.57 40,000 4.57
</TABLE>
WARRANTS:
In June 1996, 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 6.
39
<PAGE>
8. INCOME TAXES:
The following table sets forth the components of the deferred tax assets
and liabilities as of December 31, 1996 and 1995, assuming an effective
tax rate of 35%.
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Tax credits available for carryforward (expire 1999 to 2001) $ 1,330,000
Net operating losses available for carryforward
(expire 2004 to 2011) $ 9,073,000 12,450,000
Restructured debt basis for books in excess of tax 2,500,000
Accelerated depreciation for tax reporting purposes (162,000) (227,000)
Other future deductible temporary differences, net 225,000 211,000
------------ ------------
Deferred tax assets and liabilities before valuation allowance 11,636,000 13,764,000
Valuation allowance (11,636,000) (13,764,000)
------------ ------------
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,
net operating loss carryforwards do not include any associated state tax
benefit, as no benefit is anticipated to be realized.
As discussed in Note 6, the Company's future utilization, if any, of the
net operating loss carryforwards results in payments to Sanwa, pursuant
to terms of the Loan Documents. Accordingly, approximately $6,000,000
of the tax effected net operating loss carryforwards will not be
available to the Company.
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:
<TABLE>
<CAPTION>
1996
<S> <C>
Provision (benefit) at Federal statutory rate $ 2,799,507
(Utilization) limitation of net operating loss carryforward benefit (2,779,507)
----------
Income tax provision $ 20,000
----------
----------
</TABLE>
40
<PAGE>
9. EMPLOYEE BENEFIT PLANS:
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, and Profit
Sharing Plan. Employees may contribute from 1% to 15% of their gross
annual wages to the 401(k) plan. Participants vest in the Company's
401(k) contributions at a rate of 33% annually beginning one year after
their date of employment, and at a rate of 20% annually beginning one
year after their second year of service for the Company's Profit Sharing
Plan. The Company may make 401(k) matching contributions and profit
sharing contributions at the discretion of the Board of Directors. The
Company made a $60,000 matching contribution to its 401(k) plan during
1996. The Company also accrued $80,000 for its profit sharing
contribution as of December 31, 1996. There were no discretionary
Company 401(k) matching or profit sharing contributions in 1995.
10. SIGNIFICANT CUSTOMER INFORMATION:
Two customers account for net aggregate revenues, expressed as
percentages of total consolidated net sales and revenues, as follows:
1996 1995
---------------- ------------------
AMOUNT % AMOUNT %
Customer A $9,034,647 63.7% $4,958,260 44.9%
Customer B 963,554 6.8% 2,625,605 23.8%
Accounts receivable credit concentrations associated with customers A
(Haemonetics Corporation) and B (Caire) at December 31, 1996, were
$915,865 and $163,918, respectively. Inventory concentrations, for
production in process to customer specifications associated with
customers A and B at December 31, 1996, were $734,970 and $145,354,
respectively.
41
<PAGE>
Reuter Manufacturing, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
COLUMN C
COLUMN B --------- COLUMN D COLUMN E
---------- ADDITIONS ---------- -------
COLUMN A BALANCE AT CHARGED TO DEDUCTIONS BALANCE
- ---------------------------------- BEGINNING COSTS AND FROM AT END
CLASSIFICATION OF PERIOD EXPENSES ALLOWANCE OF PERIOD
<S> <C> <C> <C> <C>
Year ended December 31, 1995:
Inventories $ 80,000 $ 25,000 $105,000
Allowance for doubtful accounts 20,685 12,925 $(18,610) (1) 15,000
Year ended December 31, 1996:
Inventories 105,000 145,000 250,000
Allowance for doubtful accounts 15,000 11,740 (1,740) (1) 25,000
</TABLE>
(1) Write-off of accounts receivable.
42
<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 24, 1997 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 24, 1997 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
- ------------------------------- Chief Financial Officer and Director
James W. Taylor (principal executive and financial officer)
/s/ William H. Johnson Vice President, Controller and Secretary
- ------------------------------- (principal accounting officer)
William H. Johnson
/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/ Robert W. Heller Director
- -------------------------------
Robert W. Heller
43
<PAGE>
REUTER MANUFACTURING, INC.
EXHIBIT INDEX TO ANNUAL REPORT
ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Item No. Item Method of Filing
- -------- ---- ----------------
<C> <S> <C>
3.1 Restated Articles of Incorporation,
as amended . . . . . . . . . . . . . . . . . . . . . Incorporated by reference to Exhibit 3.1 to the Company's
Annual Report on Form 10-KSB for the year ended December
31, 1995 (File No. 0-1561)
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)
44
<PAGE>
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)
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 . . . . . . . . . Incorporated by reference to Exhibit 10.6 to the Company's
Annual Report on Form 10-KSB for the year ended December
31, 1995 (File No. 0-1561)
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)
45
<PAGE>
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)
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)
46
<PAGE>
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)
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)
47
<PAGE>
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. . . . . . . . . . Incorporated by reference to Exhibit 10.22 to the Company's
Annual Report on Form 10-KSB for the year ended December
31, 1995 (File No. 0-1561)
10.23 Letter Agreement, dated December 22,
1995, amending Loan Agreement with
The CIT Group/Credit Finance, Inc. . . . . . . . . . Incorporated by reference to Exhibit 10.23 to the Company's
Annual Report on Form 10-KSB for the year ended December
31, 1995 (File No. 0-1561)
10.24 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)
48
<PAGE>
10.25 Purchase Agreement, dated June 1, 1995, by and among
the Company, Waste Management Inc. of Florida and US
West 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)
10.26 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)
10.27 Loan and Security Agreement, dated
December 31, 1995, between the Company and Sanwa
Business Credit Corporation. . . . . . . . . . . . . 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)
10.28 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)
10.29 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)
49
<PAGE>
10.30 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)
10.31 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)
10.32 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)
10.33 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)
10.34 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)
10.35 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)
50
<PAGE>
10.36 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)
11.1 Statement regarding Computation of
Per Share Earnings . . . . . . . . . . . . . . . . . Filed herewith electronically
21.1 Subsidiaries of the Company . . . . . . . . . . . . . Filed herewith electronically
23.1 Consent of Coopers & Lybrand L.L.P. . . . . . . . . . Filed herewith electronically
27.1 Financial Data Schedule . . . . . . . . . . . . . . . Filed herewith electronically
</TABLE>
51
<PAGE>
Exhibit 11.1
REUTER MANUFACTURING AND SUBSIDIARIES
DETAIL COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Income (loss) from continuing operations 749,572 (609,605)
Discontinued Operations:
Loss from discontinued operations (2,157,940)
Extraordinary item - gain on debt restructuring (Note 6) 7,249,018
----------- -------------
Net income (loss) $ 7,998,590 $ (2,767,545)
----------- -------------
----------- -------------
Net income (loss) per common and common equivalent share:
Primary:
Income (loss) from continuing operations $ .22 $ (.19)
Discontinued Operations:
Loss from discontinued operations (.68)
----------- -------------
Extraordinary item - gain on debt restructuring (Note 6) 2.14
----------- -------------
Net income (loss) per common and common equivalent share $ 2.36 $ (.87)
----------- -------------
----------- -------------
Primary:
Weighted average number of common shares outstanding during the year 3,203,227 3,191,520
Add common equivalent shares relating to outstanding options to
purchase common stock using the treasury stock method 181,299
----------- -------------
Weighted average number of common and common equivalent shares
outstanding 3,384,526 3,191,520
----------- -------------
----------- -------------
Fully Diluted:
Weighted average number of common shares outstanding during the year 3,203,227 3,191,520
Add common equivalent shares relating to outstanding options to
purchase common stock using the treasury stock method 258,264
Add dilutive impact of the exercise of the contingent stock purchase
warrant which was granted to Sanwa in 1996 1,780,784
----------- -------------
Weighted average number of common and common equivalent shares
outstanding 5,242,275 3,191,520
----------- -------------
----------- -------------
</TABLE>
<PAGE>
Exhibit 21.1
Subsidiaries of the Company
EPR, Inc.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
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 February 28, 1997, except as to the last paragraph of
Note 6, for which the date is March 20, 1997, on our audits of the consolidated
financial statements and financial statement schedule of Reuter Manufacturing,
Inc. and Subsidiaries as of December 31, 1996 and 1995, and for the years then
ended, which report is included in this Annual Report on Form 10-KSB.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
March 27, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 74,980
<SECURITIES> 0
<RECEIVABLES> 1,839,367
<ALLOWANCES> 0
<INVENTORY> 1,766,040
<CURRENT-ASSETS> 3,959,524
<PP&E> 11,960,272
<DEPRECIATION> 7,783,531
<TOTAL-ASSETS> 8,533,996
<CURRENT-LIABILITIES> 8,767,846
<BONDS> 0
0
0
<COMMON> 601,504
<OTHER-SE> 13,713,582
<TOTAL-LIABILITY-AND-EQUITY> 8,533,996
<SALES> 14,174,211
<TOTAL-REVENUES> 14,174,211
<CGS> 10,656,078
<TOTAL-COSTS> 13,001,812
<OTHER-EXPENSES> 402,827
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 455,567
<INCOME-PRETAX> 769,572
<INCOME-TAX> 20,000
<INCOME-CONTINUING> 749,572
<DISCONTINUED> 0
<EXTRAORDINARY> 7,249,018
<CHANGES> 0
<NET-INCOME> 7,998,590
<EPS-PRIMARY> 2.36
<EPS-DILUTED> 1.52
</TABLE>
