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FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from to
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Commission File Number 0-1561
REUTER MANUFACTURING, INC.
--------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-0780999
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
410 - 11th Avenue South, Hopkins, Minnesota 55343
- -------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
612/935-6921
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(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X . No. .
--- ---
As of April 23, 1997 there were outstanding 4,741,603 shares of the registrant's
common stock, par value $.18-3/4 per share.
1
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PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
REUTER MANUFACTURING, INC.
STATEMENTS OF OPERATIONS
For the three months ended
March 31,
1997 1996
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Net sales $5,017,425 $2,719,912
Cost of sales 3,481,251 2,298,655
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GROSS PROFIT 1,536,174 421,257
Selling, general and administrative expenses 744,445 512,264
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OPERATING INCOME (LOSS) 791,729 (91,007)
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Other income (expenses):
Interest income 7,637 9,524
Interest expense (130,088) (101,843)
Other, net (6,490) (2,647)
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TOTAL OTHER EXPENSE,NET (128,941) (94,966)
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INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 662,788 (185,973)
Provision for income taxes (13,919)
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NET INCOME (LOSS) $648,869 ($185,973)
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-------------- -------------
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE $0.19 ($0.06)
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-------------- -------------
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 3,461,100 3,191,520
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The accompanying notes are an integral part of the financial statements.
2
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REUTER MANUFACTURING, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
-------------- --------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash $218,884 $74,980
Investments, restricted 250,000 250,000
Accounts receivable, net of allowances of $25,000
at March 31, 1997 and December 31, 1996 2,331,377 1,839,367
Inventories 1,928,165 1,766,040
Other current assets 47,933 29,137
-------------- --------------
TOTAL CURRENT ASSETS 4,776,359 3,959,524
Property, plant and equipment, net 4,157,012 4,176,741
Intangible assets, net 385,572 397,731
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TOTAL ASSETS $9,318,943 $8,533,996
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-------------- --------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current maturities of long-term debt $4,136,906 $4,312,071
Borrowings under asset-based line of credit 3,161,608 2,900,097
Accounts payable, trade 896,466 763,495
Accrued expenses 898,350 792,183
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TOTAL CURRENT LIABILITIES 9,093,330 8,767,846
Long-term debt, less current maturities 7,509,589 7,689,725
Other long-term liabilities 130,083 143,998
Commitments and contingencies
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: 3,219,770 shares at March 31, 1997
and 3,208,020 shares at December 31, 1996 603,707 601,504
Additional paid-in capital 13,716,024 13,713,582
Accumulated deficit (21,733,790) (22,382,659)
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TOTAL STOCKHOLDERS' DEFICIENCY (7,414,059) (8,067,573)
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TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $9,318,943 $8,533,996
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
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REUTER MANUFACTURING, INC.
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
For the three months ended March 31,
- ------------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $648,869 ($185,973)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation 188,669 177,835
Amortization of intangible assets 12,159 12,158
Gain on sales of assets (915)
Provision for writedown of inventories 55,000 15,000
Changes in operating assets and liabilities:
Accounts receivable (492,010) (87,906)
Inventories (217,125) (225,599)
Other assets (18,796) (33,911)
Accounts payable 132,971 173,800
Accrued expenses 106,167 22,441
Accrued retirement (13,915) (12,348)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 401,074 (144,503)
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 12,000
Additions to property, plant and equipment (180,025) (20,320)
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (168,025) (20,320)
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (355,301) (57,910)
Proceeds from asset-based line of credit 4,786,384 2,784,443
Repayment of asset-based line of credit (4,524,873) (2,628,186)
Proceeds from exercise of stock options 4,645
- ------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (89,145) 98,347
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 143,904 (66,476)
Cash, beginning of period 74,980 101,048
- ------------------------------------------------------------------------------------------------------------------
Cash, end of period $218,884 $34,572
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid for interest $111,854 $101,843
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
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Reuter Manufacturing, Inc.
Notes to Financial Statements
(Unaudited)
1. FINANCIAL STATEMENTS:
The unaudited financial statements of Reuter Manufacturing, Inc. (the
Company) for the three month periods ended March 31, 1997 and 1996,
reflect, in the opinion of management, all adjustments (which include only
normal recurring adjustments, except as described below) necessary to
fairly state the financial position at March 31, 1997, and the results of
operations and cash flows for the reported periods. The results of
operations for any interim period are not necessarily indicative of results
expected for the full year. These unaudited interim financial statements
should be read in conjunction with the consolidated financial statements
and notes thereto included in the Company's 1996 Annual Report on
Form 10-KSB.
USE OF ESTIMATES:
The preparation of the Company's 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.
RECLASSIFICATIONS:
Certain reclassifications have been made to the period ended March 31, 1996
statements of operations to conform to the current periods presentation.
These reclassifications had no impact on the previously reported loss from
operations.
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARES:
Net income (loss) per common and common equivalent share (EPS) is computed
by dividing the respective periods income (loss) by the weighted average
number of shares of common stock outstanding plus dilutive common
equivalent shares outstanding during the period. Common stock equivalents
result from dilutive stock options computed using the treasury stock
method. Fully diluted EPS is not presented, due to the termination of the
stock warrant to Sanwa as more fully described in Note 2 of this
Form 10-QSB.
5
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NEWLY ISSUED ACCOUNTING STANDARDS:
In March 1997, the Financial Accounting Standards Board issued Statement
No. 128 "Earnings per Share," which the Company will adopt effective for
its 1997 year end reporting. The Company will be required to report basic
net income per share based on weighted average common shares outstanding,
without considering common equivalent shares, and diluted net income per
share based on weighted average common and common equivalent shares
outstanding. Diluted net income per share would be equivalent to the
Company's current reporting of net income (loss) per common and common
equivalent share.
2. PRIVATE PLACEMENT OF COMPANY STOCK AND SUBSEQUENT DEBT RESTRUCTURING:
On April 18, 1997, the Company completed its Private Placement of 1,517,333
shares of the Company's common stock at $3.00 per share, raising gross
proceeds of $4,552,000. Proceeds of $3,750,000 from the private placement
were used to retire two debt instruments with Sanwa Business Credit
Corporation ("Sanwa"), the Junior Subordinated Promissory (Junior) Note and
the Income Sharing Agreement described in Note 6 to the consolidated
financial statements included in the Company's 1996 Annual Report on Form
10-KSB. The balance of the proceeds were used to pay expenses of the
private placement and the remaining excess cash was applied to general
Company funds. These debt instruments represented obligations carried over
from previous financing associated with the discontinued waste processing
operations. The two debt instruments had an aggregate carrying value of
approximately $6,924,000 at March 31, 1997. In addition, the Company owed
Sanwa approximately $252,500 under the two debt instruments for the first
quarter of 1997, which was also paid. The Company also granted John G.
Kinnard and Company, who assisted with the Private Placement, a five year
warrant for 50,000 shares of the Company's common stock with an exercise
price of $3.60 per share. In addition, the previously issued warrant to
Sanwa for 3,178,780 shares of Common Stock and the Trading Standstill
Agreements with certain directors of the Company were also terminated.
The Senior Subordinated Secured Promissory (Senior) Note with Sanwa and
associated future interest at 8% ($3,133,600) and approximately $227,450
due under the Trading Standstill Agreements will remain obligations of
the Company. The Company remains in technical default of the Senior Note
as a result of prior technical cross-default violations with the Company's
asset-based lender and Junior Note covenant violations with Sanwa for
which the Company has not obtained waivers. The Company is seeking
waivers for these pre-existing defaults although there can be no
assurance the Company will be successful in obtaining such waivers.
The pro forma effect of this transaction on certain balance sheet
information is presented below.
Unaudited pro forma Balance Sheet information as of March 31, 1997, is set
forth in the table below and has been presented with unaudited historical
Balance Sheet information as of March 31, 1997, as if the Company's
April 18,1997, private placement of 1,517,333 shares of common stock
and the retirement of the Sanwa Junior Note and Income Sharing Agreement,
as described above, had taken place on March 31, 1997.
6
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Unaudited Unaudited
Historical Pro Forma
March 31, 1997 March 31, 1997
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Total assets $ 9,318,943 $ 9,530,801
-------------- --------------
-------------- --------------
Trade payables and accrued expenses $ 1,794,816 $ 1,737,942
Other liabilities 130,083 130,083
Line of credit and debt obligations 14,808,103 7,411,477
Stockholders' equity (deficiency) ( 7,414,059) 251,299
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Total liabilities and stockholders'
equity (deficiency) $ 9,318,943 $ 9,530,801
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3. ASSET-BASED SHORT-TERM FINANCING ARRANGEMENT:
The Company is in violation of certain financial and technical covenants of
the Asset-Based short-term financing agreement and a cross-default covenant
due to the defaults described in this Form 10-QSB under the caption
"Liquidity and Capital Resources" and Note 6 of the notes to the
consolidated financial statements included in the Company's 1996 Annual
Report on Form 10-KSB. As a result of these default conditions, the lender
may, at its sole discretion declare the Company in default, discontinue
making advances to the Company and demand immediate repayment of borrowings
under the line of credit. If the lender were to continue making advances
to the Company, additional borrowing capacity under this line of credit was
approximately $710,269 at April 23, 1997.
4. SIGNIFICANT CUSTOMERS:
Sales to the Company's two largest medical product customers were
$3,883,486 or 77.4% of net sales for the first quarter of 1997, compared to
sales of $1,774,662 or 65.2% of net sales for the same period in 1996.
Accounts receivable concentrations associated with the two largest medical
product customers discussed above, represented 67.7% and 11.2%,
respectively, of March 31, 1997 accounts receivable.
7
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Item 2. 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 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") and entered into a
series of agreements as more fully described in Notes 2 and 6 of the notes to
the consolidated financial statements included in the Company's 1996 Annual
Report on Form 10-KSB. As discussed in Note 2 to the March 31, 1997, financial
statements included in this Form 10-QSB, the Company on April 18, 1997, retired
the Junior Subordinated Promissory Note and Income Sharing Agreement with Sanwa
for $3,750,000. The Company raised proceeds to retire the obligations through a
successful Private Placement of 1,517,333 shares of common stock of the Company
at $3.00 per share.
RESULTS OF OPERATIONS
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 operations for the first quarter of 1997
increased by approximately 84.5% from the same period in 1996. The Company's
net sales for the three months ended March 31, 1997 were $5,017,425 compared to
$2,719,912 for the same period in 1996. The improvement in net sales for the
first quarter of 1997 was due primarily to increased sales in the medical
product segment. Revenues from the medical, industrial, and tradename product
segments were $4,222,429, $661,557 and $133,439 respectively, for the first
quarter of 1997, as compared to $1,981,830, $647,774 and $90,308 respectively,
for the same period in 1996. Sales to the Company's two major medical product
customers were $3,883,486 for the first quarter of 1997, compared to $1,774,662
for the same period in 1996. While these major customers accounted for 77.4% of
net sales for the first quarter of 1997 and 65.2% of net sales for the same
period in 1996, one of the customers accounted for 69.0% and 58.1% of net sales
in the first quarter of 1997 and 1996, respectively.
Gross profit was 30.6% in the first quarter of 1997, compared to 15.5% for
the same period in 1996. The improvement in gross profit for the first quarter
of 1997 was primarily due to
8
<PAGE>
a substantial increase in higher margin medical product business over the same
quarter in 1996. 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 $744,445 or 14.8% of net
sales for the first quarter of 1997, compared to $512,264 or 18.8% of net sales
for the same period in 1996. The net dollar increase in these expenses of
$232,181 is due in part to an increase in selling related expenses of
approximately $68,000, principally to market the Company's rotary vane actuators
and oil centrifuges, including new Company product brochures. In addition, the
sales staff has increased over the comparable period in 1996 to support
continued diversification of the Company's customer base and to strengthen
current customer relations. Administrative expenses were approximately $164,000
higher in the first quarter of 1997, compared to the same quarter of 1996.
Administrative salaries and benefits increased approximately $40,000 compared to
the same quarter in 1996 primarily due to pay increases and a bonus accrual of
$15,000. In addition, the Company had a $56,000 incremental increase in benefit
plan accruals resulting from the Company's increased profitability. Computer
supplies/services and office supplies expenses increased approximately $20,000
over the comparable quarter in 1996 as a result of upgrading the Company's
computer systems and general office supplies for new employees. Other
administrative expenses increased approximately $48,000 in the first quarter of
1997 over the same period in 1996 due to increased costs to support increased
sales volume.
In the first quarter of 1997, the Company had operating income of $791,729,
compared to an operating loss of $91,007 in the same period of 1996. The
operating income in the first quarter of 1997 was due to higher margin medical
product sales as discussed above, along with increased operational efficiencies
as a result of the increased sales volume, coupled with a decrease (as a
percentage of sales) in selling, general and administrative expenses.
The increase in total other expense, net resulted from higher interest
expense due to increased utilization of the Company's asset-based short-term
financing arrangement, and the accrual of approximately $18,234 of default
interest related to defaults under the Sanwa Loan Agreement as discussed in Note
6 to the consolidated financial statements in the Company's 1996 Annual Report
on Form 10-KSB.
The Company was profitable during the first quarter of 1997 but generally
does not pay regular income taxes because of the utilization 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 $13,919
during the first quarter of 1997. The Company had no taxable income during the
first quarter of 1996, and accordingly, recorded no provision for income taxes.
9
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The effect of inflation on the Company's results has not been significant.
NET INCOME (LOSS) The net income for the first quarter of 1997 was
$648,869 or $.19 per share compared to a net loss of $185,973 or $.06 per share
for the first quarter of 1996. The increase in the net income for the first
quarter of 1997 over the net loss for the same period in 1996 was due to the
factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES At March 31, 1997, the Company had
negative working capital due to its restructured guarantee of the EPR, Inc. loan
(Restructuring Agreements), which is discussed in Note 6 to the consolidated
financial statements included in the Company's 1996 Annual Report on Form 10-
KSB. In addition, the Company was at March 31, 1997, in violation of certain
technical covenants in its asset-based short-term financing arrangement and
Restructuring Agreements. The working capital deficit includes the principal
balance for the Senior and Junior Notes outstanding under the Restructuring
Agreements as of March 31, 1997, including accrued interest associated with the
Senior and Junior Notes and default interest, in addition to the indebtedness
under the asset-based short-term financing arrangement as a result of foregoing
defaults. The Company had a working capital deficit of $4,316,971 at March 31,
1997, compared to a working capital deficit of $4,808,322 at December 31, 1996.
The current ratio at March 31, 1997 was .53 compared to .45 at December 31,
1996.
As discussed in Note 2 to the financial statements included in this Form
10-QSB, the March 31, 1997 unaudited pro forma balance sheet information set
forth in Note 2 of this Form 10-QSB, reflects the retirement of the Junior Note
and Income Sharing Agreement, as if it had occurred at March 31, 1997. The
Company's working capital deficit and current ratio at March 31, 1997, on a pro
forma basis, after giving effect to the retirement of the Junior Note and Income
Sharing Agreement, would have been $3,030,070 and .62, respectively.
The improvement in the working capital deficit and current ratio for the
first quarter of 1997 resulted primarily from increases in cash, receivables and
inventories as a result of the increase in volume for the quarter.
As discussed in Notes 2 and 6 to the consolidated financial statements in
the Company's 1996 Annual Report on Form 10-KSB and in Note 3 of this Form 10-
QSB, 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 a cross-covenant
default under its asset-based short-term financing arrangement, which could
result in the lender discontinuing advances and demanding repayment of all
outstanding borrowings, which totaled $3,161,608 at March 31, 1997. As a result
of the asset-based short-term financing cross-covenant technical default and
prior technical payment defaults on the Sanwa Junior Note, the Company was at
March 31, 1997, 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 of credit with its asset-based lender to
meet all operating cash needs of the Company. In
10
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connection with the April 18, 1997 retirement of the two Sanwa debt instruments,
waivers of certain, but not all, covenant violations were obtained. The Company
is seeking a waiver of all default conditions under its asset-based short-term
financing agreement and Sanwa Restructuring Agreements, although there can be no
assurance that the Company will be successful in obtaining these waivers. As of
April 23, 1997, the Company had borrowed approximately $2,751,747 and had
additional availability, assuming the lender will continue making advances, of
approximately $710,269 under the asset-based line of credit financing
arrangement.
The Company generated positive cash flow from operations of $401,074 for
the quarter ended March 31, 1997, compared to incurring negative cash flow from
operations of $144,503 for the quarter ended March 31, 1996. The increase in
cash flow from operations for the first quarter of 1997 was due primarily to
higher sales volumes, and an increase in product-mix toward higher margin
medical products, while fixed overhead costs remained relatively constant. The
Company's ability to meet its continuing cash flow requirements in the future is
dependent on maintaining adequate sales and margins from its manufacturing
operations.
Management anticipates making capital expenditures to support
diversification and growth of the manufacturing operations. Near term capital
commitments for new manufacturing equipment total approximately $150,000. The
Company desires to raise capital for these requirements through bank financing
and from cash provided by 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 $168,025 for the first quarter of
1997, compared to cash used in investing activities of $20,320 for the same
period in 1996. The increase was due primarily to increased capital
expenditures during the first quarter of 1997.
Net cash used in financing activities was $89,145 for the first quarter of
1997, compared to cash provided by financing activities of $98,347 for the same
period in 1996. The change in the first quarter of 1997 was primarily due to
payments made to Sanwa pursuant to the Restructuring Agreements as discussed in
Note 2 to the consolidated financial statements in the Company's 1996 Annual
Report on Form 10-KSB. The restructured debt obligations, including future
interest payments, is recorded 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 the first quarter of 1997 under
the Restructuring Agreements were $249,823. The Company was able to obtain
sufficient funds under its asset-based financing arrangement to meet its
operating needs during the first quarter of 1997.
In summary, the Company achieved respectable profitability in the first
quarter of 1997. On April 18, 1997, the Company successfully completed a
Private Placement of 1,517,333 shares of the Company's common stock for gross
proceeds of $4,552,000. Proceeds of $3,750,000 were used to retire the Junior
Note and Income Sharing Agreement with Sanwa. The balance of the proceeds after
expenses of the Private Placement, were applied to general Company funds.
11
<PAGE>
The Company, subsequent to the April 18, 1997 retirement of the two Sanwa debt
instruments, remains in technical default under the Senior Note with Sanwa,
although certain but not all default waivers were obtained from Sanwa as part of
the April 18, 1997 retirement of the two Sanwa debt instruments. The Company is
currently seeking waivers for all defaults, although there can be no assurance
that the Company will be successful in obtaining such waivers from Sanwa and its
Asset-Based lender. Because of the aforementioned technical defaults, 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.
Forward looking statements in this Form 10-QSB, including references to
anticipated sales volume and higher medical product margins, involve risks and
uncertainties, with establishing new customers, and developing products to the
specifications of the Company's customers. In addition, the Company has a high
concentration of business with two major customers. Actual future results could
differ materially from those reflected in the forward looking statements.
12
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PART II - OTHER INFORMATION
Item 3. Defaults upon Senior Security
See Note 6 to the Notes to the Consolidated Financial Statements in
the Company's 1996 Annual Report on Form 10-KSB, Note 3 of this Form
10-QSB and Management's Discussion and Analysis, included in Items 1
and 2, respectively, of this report on Form 10-QSB, for a description
of the status of the defaults on the Restructuring Agreements and the
Company's asset-based short-term financing arrangement, which is
incorporated herein by reference.
Item 6. Exhibits and Reports
a) Exhibits.
Item No. Item Method of Filing
--------- ----------- ----------------
10.1 Amendment to Loan and Security
Agreement dated April 18, 1997,
between the Company and Sanwa
Business Credit Corporation . . . Filed herewith electronically
10.2 Release and Termination Agreement,
dated April 18, 1997 by Sanwa
Business Credit Corporation for
the benefit of the Company. . . . Filed herewith electronically
10.3 Release and Termination Agreement,
dated April 18, 1997, by Sanwa
Business Credit Corporation for
the benefit of James Taylor . . . Filed herewith electronically
10.4 Release and Termination Agreement,
dated April 18, 1997, by Sanwa
Business Credit Corporation for
the benefit of Edward E.
Strickland. . . . . . . . . . . . Filed herewith electronically
10.5 Release and Termination Agreement,
dated April 18, 1997, among Edward
E. Strickland, James W. Taylor and
the Company . . . . . . . . . . . Filed herewith electronically
11.1 Statement Regarding Computation
of Per Share Earnings . . . . . . Filed herewith electronically
27.1 Financial Data Schedule . . . . . Filed herewith electronically
13
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REUTER MANUFACTURING, INC.
(Registrant)
Date: May 1, 1997 By: /s/ James W. Taylor
----------------- -----------------------------------------
James W. Taylor
President, Chief Executive Officer and Chief
Financial Officer (principal executive and
financial officer)
Date: May 1, 1997 By: /s/ William H. Johnson
----------------- -----------------------------------------
William H. Johnson
Vice President, Controller and Secretary
(principal accounting officer)
14
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REUTER MANUFACTURING, INC.
EXHIBIT TO QUARTERLY
REPORT ON FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
Item No. Item Method of Filing
--------- ----------- ----------------
10.1 Amendment to Loan and Security
Agreement dated April 18, 1997,
between the Company and Sanwa
Business Credit Corporation . . . Filed herewith electronically
10.2 Release and Termination Agreement,
dated April 18, 1997 by Sanwa
Business Credit Corporation for
the benefit of the Company. . . . Filed herewith electronically
10.3 Release and Termination Agreement,
dated April 18, 1997, by Sanwa
Business Credit Corporation for
the benefit of James Taylor . . . Filed herewith electronically
10.4 Release and Termination Agreement,
dated April 18, 1997, by Sanwa
Business Credit Corporation for
the benefit of Edward E.
Strickland. . . . . . . . . . . . Filed herewith electronically
10.5 Release and Termination Agreement,
dated April 18, 1997, among Edward
E. Strickland, James W. Taylor and
the Company . . . . . . . . . . . Filed herewith electronically
11.1 Statement Regarding Computation
of Per Share Earnings . . . . . . Filed herewith electronically
27.1 Financial Data Schedule . . . . . Filed herewith electronically
15
<PAGE>
AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS AMENDMENT TO LOAN AND SECURITY AGREEMENT (together with all
appendices, exhibits, schedules and attachments hereto, collectively this
"AMENDMENT") is made and entered into as of April 18, 1997, by and between
REUTER MANUFACTURING, INC., a Minnesota corporation, with its principal place of
business at 410 Eleventh Street South, Hopkins, Minnesota 55343 ("BORROWER") and
SANWA BUSINESS CREDIT CORPORATION, a Delaware corporation, with its principal
place of business at One South Wacker Drive, Chicago, Illinois 60606 ("LENDER").
RECITALS
WHEREAS, Borrower and Lender entered into that certain Loan and Security
Agreement dated as of December 31, 1995 (the "LOAN AGREEMENT") together with
documents ancillary thereto;
WHEREAS, the Loan Agreement secures, among other things, Borrower's
obligations to Lender under that certain Junior Subordinated Secured Promissory
Note dated December 31, 1995 in the original principal amount of $1,000,000 (the
"JUNIOR NOTE") and that certain Income Sharing Agreement dated December 31, 1995
(the "INCOME SHARING AGREEMENT");
WHEREAS, Borrower and Lender have agreed to terminate the Junior Note
and the Income Sharing Agreement in exchange for a settlement payment by
Borrower to Lender of the Termination Fee (as defined in the Release and
Termination Agreement of even date herewith between Borrower and Lender);
WHEREAS, Borrower and Lender wish to amend the Loan Agreement to
incorporate certain changes due to the termination of the Junior Note and the
Income Sharing Agreement;
NOW THEREFORE, for and in consideration of the premises, the mutual
covenants hereinafter set forth and other good and valuable consideration, the
receipt and sufficiency of which the parties hereby acknowledge, the parties
hereby agree as follows:
ARTICLE
1.
RECITALS AND DEFINITIONS
1.1. Borrower represents and warrants that the foregoing recitals are
true and correct and constitute an integral part of this Amendment and Borrower
and Lender hereby agree that all of the recitals of this Amendment are hereby
incorporated herein and made a part hereof.
1.2. Unless otherwise defined herein or the context otherwise requires,
all capitalized terms used herein shall have the same meanings as ascribed to
them in the Loan Agreement.
<PAGE>
ARTICLE
2.
AMENDMENT OF THE LOAN AGREEMENT
2.1. Section 1.4 hereby is deleted in its entirety and the following
substituted therefor:
1.4 "ANCILLARY AGREEMENTS" SHALL MEAN ALL SECURITY DOCUMENTS AND
ALL AGREEMENTS, INSTRUMENTS, AND DOCUMENTS, INCLUDING WITHOUT
LIMITATION, THE SENIOR SUBORDINATED SECURED PROMISSORY NOTE, AND ANY AND
ALL OTHER NOTES, GUARANTIES, MORTGAGES, DEEDS OF TRUST, CHATTEL
MORTGAGES, PLEDGES, POWERS OF ATTORNEY, CONSENTS, ASSIGNMENTS,
CONTRACTS, NOTICES, SECURITY AGREEMENTS, LEASES, FINANCING STATEMENTS,
SUBORDINATION AGREEMENTS, TRUST ACCOUNT AGREEMENTS AND ALL OTHER WRITTEN
MATTER WHETHER HERETOFORE, NOW OR HEREAFTER EXECUTED BY OR ON BEHALF OF
BORROWER OR ANY OTHER PERSON OR DELIVERED TO LENDER OR ANY PARTICIPANT
WITH RESPECT TO THIS AGREEMENT OR WITH RESPECT TO ANY AGREEMENT ENTERED
INTO BY BORROWER.
2.2. Section 2.4 hereby is deleted in its entirety and the following
substituted therefor:
2.4 TERM OF AGREEMENT. THIS AGREEMENT SHALL BE IN EFFECT UNTIL
ALL OF THE LIABILITIES ARE PAID IN FULL, SUBJECT TO EARLIER TERMINATION
BY LENDER UPON THE OCCURRENCE OF AN EVENT OF DEFAULT AS PROVIDED IN
SECTION 11. UNTIL ALL OF THE LIABILITIES SHALL HAVE BEEN FULLY PAID AND
SATISFIED, LENDER SHALL BE ENTITLED TO RETAIN ITS SECURITY INTEREST IN
THE COLLATERAL.
2.3. Sections 10.1(C)(iv), (v) and (vi) hereby are deleted in their
entirety.
1.4.Section 10.1(F) is deleted in its entirety and the following
substituted therefor:
(F) NOTIFY LENDER ON THE FIRST DAY OF EACH CALENDAR QUARTER
DURING THE TERM HEREOF OF ANY PROPOSED EXPENDITURES NOT APPROVED IN THE
BUDGET;
2.5. Section 10.2(F) hereby is deleted in its entirety and the
following substituted therefor:
(F) ENTER INTO ANY TRANSACTION WHICH MATERIALLY AND ADVERSELY
AFFECTS THE COLLATERAL OR BORROWER'S ABILITY TO REPAY THE INDEBTEDNESS;
2.6. Section 10.1(J) is deleted in its entirety and the following
substituted therefor:
(J) MAKE CAPITAL EXPENDITURES (EXCLUDING THEREFROM THE ANNUAL
DEBT SERVICE PAYMENTS PERMITTED IN SECTION 7.3 HEREINBEFORE) WHICH, IN
THE AGGREGATE, EXCEED SIX HUNDRED THOUSAND AND NO/100 DOLLARS ($600,000)
DURING BORROWER'S 1997 FISCAL YEAR AND DURING EACH OF BORROWER'S FISCAL
YEARS THEREAFTER;
2.7. Section 10.2(K) hereby is deleted in its entirety.
2
<PAGE>
ARTICLE
3.
REPRESENTATIONS AND WARRANTIES
3.1. Borrower hereby makes the following representations and warranties
to Lender, which representations and warranties shall constitute the continuing
covenants of Borrower and shall remain true and correct until all of Borrower's
liabilities are paid and performed in full:
a. The representations and warranties of Borrower contained in
the Loan Agreement are true and correct on and as of the date hereof as
though made on and as of such date;
b. No Event of Default or event which, but for the lapse of
time or the giving of notice, or both, would constitute an Event of
Default under the Loan Agreement has occurred and is continuing or would
result from the execution and delivery of this Amendment;
c. Borrower is in full compliance with all of the terms,
conditions and all provisions of the Loan Agreement and the other
agreements;
d. This Amendment and all other agreements required hereunder
to be executed by Borrower and delivered to Lender, have been duly
authorized, executed and delivered on Borrower's behalf pursuant to all
requisite corporate authority and this Amendment and each of the other
agreements required hereunder to be executed and delivered by Borrower
to Lender constitute the legal, valid and binding obligations of
Borrower enforceable in accordance with their terms, except as
enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to creditors'
rights; and
e. Borrower hereby acknowledges and agrees that Borrower has no
defense, offset or counterclaim to the payment of said principal,
interest, fees or other liabilities and hereby waives and relinquishes
any such defense, offset or counterclaim and Borrower hereby releases
Lender and its respective officers, directors, agents, affiliates,
successors and assigns from any claim, demand or cause of action, known
or unknown, contingent or liquidated, which may exist or hereafter be
known to exist relating to any matter prior to the date hereof.
ARTICLE
4.
RATIFICATION
Except as expressly amended hereby, the Loan Agreement and all other
agreements executed in connection therewith shall remain in full force and
effect. The Loan Agreement, as amended hereby, and all rights and powers
created thereby and thereunder or under such other agreements, are in all
respects ratified and confirmed. From and after the date hereof, the Loan
Agreement shall be deemed amended and modified as herein provided but, except as
so amended and modified, the Loan Agreement shall continue in full force and
effect and the Loan Agreement and this Amendment shall be read, taken and
construed as one and the same
3
<PAGE>
instrument. On and after the date hereof, the term "Agreement" as used in the
Loan Agreement and all other references to the Loan Agreement therein, in any
other instrument, document or writing executed by Borrower or any guarantor or
furnished to Lender by Borrower or any guarantor in connection therewith or
herewith shall mean the Loan Agreement as amended by this Amendment.
ARTICLE
5.
WAIVER OF EVENTS OF DEFAULT
Borrower represents and warrants to Lender that CIT Group/Credit
Finance, Inc. ("CIT") has waived certain defaults more fully set forth on
EXHIBIT A attached hereto (the "WAIVED DEFAULTS"). To the extent that the
Waived Defaults now constitute or have previously constituted an Event(s) of
Default pursuant to Section 11.1(B) and/or 11.1(D) of the Loan Agreement, Lender
hereby waives such Events of Default. Further, Lender acknowledges that the
Events of Default, if any, that occurred or existed under the Junior Note or the
Income Sharing Agreement are not considered as continuing under or with respect
to the Loan Agreement or Senior Subordinated Secured Promissory Note. Lender's
waiver herein shall not be construed as a bar to or waiver of any such right or
remedy which Lender would otherwise have on any future occasion, whether similar
in kind or otherwise.
ARTICLE
6.
MISCELLANEOUS
6.1. Borrower agrees to promptly pay or reimburse all out-of-pocket
costs and expenses of Lender, including without limitation, reasonable
attorneys' fees, costs, expenses incurred by Lender in connection with the
negotiation, preparation, execution and delivery of this Amendment and all other
matters pertaining hereto.
6.2. This Amendment may be signed in any number of counterparts, each
of which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
6.3. Except as otherwise specified herein, this Amendment embodies the
entire agreement and understanding between Lender and Borrower with respect to
the subject matter hereof and supersedes all prior agreements, consents and
understandings relating to such subject matter.
6.4. The headings in this Amendment have been inserted for convenience
only and shall be given no substantive meaning or significance in construing the
terms of this Amendment.
4
<PAGE>
6.5. This Amendment shall inure to the benefit of Lender and its
successors and assigns and shall be binding upon and inure to the successors and
assigns of Borrower, except that Borrower may not assign any of its rights in
and to this Amendment.
6.6. This Amendment may be executed in any number of counterparts, each
of which shall be deemed to be an original, but all of which together shall
constitute one in the same document.
IN WITNESS WHEREOF, Borrower and Lender have caused this Amendment to
Loan and Security Agreement to be executed and delivered as of the day and year
written above.
REUTER MANUFACTURING, INC.
By: /s/ James W. Taylor
--------------------------------
Name: James W. Taylor
------------------------------
Title: President
------------------------------
SANWA BUSINESS CREDIT CORPORATION
By: /s/ Frank Sterdjevich
--------------------------------
Name: Frank Sterdjevich
------------------------------
Title: Vice President
------------------------------
5
<PAGE>
RELEASE AND TERMINATION AGREEMENT
THIS RELEASE AND TERMINATION AGREEMENT (this "RELEASE") is made as of
April 18, 1997, by SANWA BUSINESS CREDIT CORPORATION ("SANWA") for the benefit
of REUTER MANUFACTURING, INC. ("REUTER").
WITNESSETH:
WHEREAS, on or about December 31, 1995 Reuter and Sanwa entered into a Loan
and Security Agreement (the "LOAN AGREEMENT") and certain Ancillary Agreements
(as such term is defined in the Loan Agreement) pursuant to which Sanwa and
Reuter restructured the guaranty obligations of Reuter to Sanwa which arose in
connection with Sanwa's loan to EPR, Inc.;
WHEREAS, as part of the Ancillary Agreements, Reuter executed and delivered
to Sanwa a Junior Subordinated Secured Promissory Note in the original principal
amount of $1,000,000 (the "JUNIOR NOTE"), an Income Sharing Agreement (the
"INCOME SHARING AGREEMENT") and a Common Stock Warrant Agreement (the
"WARRANT"), each of which was dated as of December 31, 1995 (the Junior Note,
the Income Sharing Agreement and the Warrant are collectively referred to herein
as the "RELEASED DOCUMENTS");
WHEREAS, Reuter has requested that Sanwa terminate the Junior Note, the
Income Sharing Agreement and the Warrant in consideration of the payment of the
Termination Fee (defined herein); and
WHEREAS, Sanwa is willing to terminate the Released Documents in exchange
for the above consideration.
NOW, THEREFORE, FOR VALUE RECEIVED, in consideration of the recitals and
for other good and valuable consideration, the receipt and adequacy of which is
hereby acknowledged, Sanwa hereby agrees as follows:
1. RELEASE FROM OBLIGATIONS. Subject to the provisions of Section 2
herein and the payment to Sanwa of the Termination Fee, Sanwa hereby absolutely,
unconditionally, and irrevocably releases and forever discharges Reuter from any
and all of its respective debts, duties, obligations and liabilities arising
under the Released Documents and terminates the Released Documents. For
purposes hereof, the term "TERMINATION FEE" shall be defined as the sum of (a)
Three Million Seven Hundred Fifty Thousand and no/100 Dollars ($3,750,000); plus
(b) Two Hundred Fifty-Two Thousand Four Hundred Fourteen and 50/100 Dollars
($252,414.50), representing the amount due under the Junior Note and the Income
Sharing Agreement as of March 31, 1997; plus (c) One Thousand Six Hundred
Sixty-Six and 67/100 Dollars ($1,666.67) MULTIPLIED by the number of days
between April 10, 1997 and the date on which Sanwa has received the Termination
Fee. Sanwa does not release or discharge Reuter from any other debts, duties,
claims, obligations or liabilities that may be owing to Sanwa, which
<PAGE>
continuing obligations and liabilities include, without limitation, those
liabilities and obligations contained in the Loan Agreement, the Senior
Subordinated Secured Promissory Note dated as of December 31, 1995 in the
original principal amount of $2,780,000, the Mortgage, Security Agreement and
Fixture Filing Statement dated as of December 31, 1995, the Patent Security
Agreement dated as of December 31, 1995, and the Intercreditor and Subordination
Agreement dated as of December 31, 1995 with the CIT Group/Credit Finance, Inc.
2. RETURN OF PAYMENTS. Reuter agrees that, if at any time all or any
part of the Termination Fee applied by Sanwa to any of the Liabilities (as
defined in the Loan Agreement), is rescinded or returned by Sanwa or Sanwa is
required to pay any amount thereof to any other party for any reason whatsoever
(including, without limitation, the insolvency, bankruptcy, liquidation or
reorganization of any party or the determination that such payment is held to
constitute a preference under the bankruptcy laws or to be fraudulent or both),
but excluding any payments made to any participant of Sanwa arising from this
Release pursuant to any participation agreement entered into with regard to the
Loan Agreement and the Ancillary Agreements and the transactions contemplated
thereby, this Release shall be deemed null and void and shall have no further
force and effect and all liabilities and obligations released hereunder shall be
enforceable as if this Release had never been granted and such indebtedness
and/or obligations shall, for the purposes of the Released Documents, be deemed
to have continued in existence to the extent of such payment, notwithstanding
such application by Sanwa, and the Released Documents shall be reinstated as to
such indebtedness and/or obligations, all as though this Release had not been
executed and such application by Sanwa had not been made.
3. NO MODIFICATION WITHOUT WRITING. This Release may not be modified,
amended, revised, revoked, terminated, changed or varied in any way whatsoever
except in accordance with Section 2 hereof or expressly by a written instrument
signed by the party or parties sought to be bound thereby.
4. GOVERNING LAW. This Release shall be governed and controlled as to
interpretation, enforcement, validity, construction, effect and in all other
respects by the internal laws, statutes and decisions of the State of Illinois.
5. COUNTERPARTS. This Release may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same document.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Release as of the
day and year first above written.
SANWA BUSINESS CREDIT CORPORATION
By: Frank Sterdjevich
----------------------------------
Its: Vice President
----------------------------------
REUTER MANUFACTURING, INC.
By: James W. Taylor
----------------------------------
Its: President
----------------------------------
3
<PAGE>
RELEASE AND TERMINATION AGREEMENT
THIS RELEASE AND TERMINATION AGREEMENT (this "RELEASE") is made as of
April 18, 1997, by SANWA BUSINESS CREDIT CORPORATION ("SANWA") for the benefit
of JAMES TAYLOR ("TAYLOR").
WITNESSETH:
WHEREAS, on or about December 31, 1995 Reuter Manufacturing, Inc.
("Reuter") and Sanwa entered into a Loan and Security Agreement (the "LOAN
AGREEMENT") and certain Ancillary Agreements (as such term is defined in the
Loan Agreement) pursuant to which Sanwa and Reuter restructured the guaranty
obligations of Reuter to Sanwa which arose in connection with Sanwa's loan to
EPR, Inc.;
WHEREAS, as part of the Ancillary Agreements, Reuter executed and delivered
to Sanwa a Junior Subordinated Secured Promissory Note in the original principal
amount of $1,000,000 (the "JUNIOR NOTE"), an Income Sharing Agreement (the
"INCOME SHARING AGREEMENT") and a Common Stock Warrant Agreement (the
"WARRANT"), each of which was dated as of December 31, 1995 (the Junior Note,
the Income Sharing Agreement and the Warrant are collectively referred to herein
as the "RELEASED DOCUMENTS");
WHEREAS, Reuter has requested that Sanwa terminate the Junior Note, the
Income Sharing Agreement and the Warrant in consideration of the payment of the
Termination Fee (defined herein);
WHEREAS, Sanwa is willing to terminate the Released Documents and the
Warrant in exchange for the above consideration;
WHEREAS, in connection with the Income Sharing Agreement, Taylor entered
into a Standstill Agreement with Sanwa dated as of December 31, 1995 (the
"STANDSTILL AGREEMENT");
WHEREAS, the Standstill Agreement, by its terms, terminates upon the
expiration of the Income Sharing Agreement;
WHEREAS, Taylor has requested and Sanwa has agreed to formally terminate
the Standstill Agreement;
NOW, THEREFORE, FOR VALUE RECEIVED, in consideration of the recitals and
for other good and valuable consideration, the receipt and adequacy of which is
hereby acknowledged, Sanwa hereby agrees as follows:
1. RELEASE FROM OBLIGATIONS. Subject to the provisions of Section 2
herein and the payment to Sanwa of the Termination Fee, Sanwa hereby absolutely,
unconditionally, and
<PAGE>
irrevocably releases and forever discharges Taylor from any and all of his
respective debts, duties, obligations and liabilities arising under the
Standstill Agreement and terminates the Standstill Agreement. For purposes
hereof, the term "TERMINATION FEE" shall be defined as the sum of (a) Three
Million Seven Hundred Fifty Thousand and no/100 Dollars ($3,750,000); PLUS (b)
Two Hundred Fifty-Two Thousand Four Hundred Fourteen and 50/100 Dollars
($252,414.50), representing the amount due under the Junior Note and the Income
Sharing Agreement as of March 31, 1997; PLUS (c) One Thousand Six Hundred
Sixty-Six and 67/100 Dollars ($1,666.67) MULTIPLIED by the number of days
between April 10, 1997 and the date on which Sanwa has received the Termination
Fee. Sanwa does not release or discharge Taylor from any other debts, duties,
claims, obligations or liabilities that may be owing to Sanwa.
2. RETURN OF PAYMENTS. Taylor agrees that, if at any time all or any
part of the Termination Fee applied by Sanwa to any of the Liabilities (as
defined in the Loan Agreement), is rescinded or returned by Sanwa or Sanwa is
required to pay any amount thereof to any other party for any reason whatsoever
(including, without limitation, the insolvency, bankruptcy, liquidation or
reorganization of any party or the determination that such payment is held to
constitute a preference under the bankruptcy laws or to be fraudulent or both),
but excluding any payments made to any participant of Sanwa arising from this
Release pursuant to any participation agreement entered into with regard to the
Loan Agreement and the Ancillary Agreements and the transactions contemplated
thereby, this Release shall be deemed null and void and shall have no further
force and effect and all liabilities and obligations released hereunder shall be
enforceable as if this Release had never been granted and such indebtedness
and/or obligations shall, for the purposes of the Standstill Agreement, be
deemed to have continued in existence to the extent of such payment,
notwithstanding such application by Sanwa, and the Standstill Agreement shall be
reinstated as to such indebtedness and/or obligations, all as though this
Release had not been executed and such application by Sanwa had not been made.
3. NO MODIFICATION WITHOUT WRITING. This Release may not be modified,
amended, revised, revoked, terminated, changed or varied in any way whatsoever
except in accordance with Section 2 hereof or expressly by a written instrument
signed by the party or parties sought to be bound thereby.
4. GOVERNING LAW. This Release shall be governed and controlled as to
interpretation, enforcement, validity, construction, effect and in all other
respects by the internal laws, statutes and decisions of the State of Illinois.
5. COUNTERPARTS. This Release may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same document.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Release as of the
day and year first above written.
SANWA BUSINESS CREDIT CORPORATION
By: /s/ Frank Sterdjevich
----------------------------------
Its: Vice President
----------------------------------
/s/ James W. Taylor
----------------------------------
JAMES W. TAYLOR
3
<PAGE>
RELEASE AND TERMINATION AGREEMENT
THIS RELEASE AND TERMINATION AGREEMENT (this "RELEASE") is made as of
April 18, 1997, by SANWA BUSINESS CREDIT CORPORATION ("SANWA") for the benefit
of EDWARD E. STRICKLAND ("STRICKLAND").
WITNESSETH:
WHEREAS, on or about December 31, 1995 Reuter Manufacturing, Inc.
("Reuter") and Sanwa entered into a Loan and Security Agreement (the "LOAN
AGREEMENT") and certain Ancillary Agreements (as such term is defined in the
Loan Agreement) pursuant to which Sanwa and Reuter restructured the guaranty
obligations of Reuter to Sanwa which arose in connection with Sanwa's loan to
EPR, Inc.;
WHEREAS, as part of the Ancillary Agreements, Reuter executed and delivered
to Sanwa a Junior Subordinated Secured Promissory Note in the original principal
amount of $1,000,000 (the "JUNIOR NOTE"), an Income Sharing Agreement (the
"INCOME SHARING AGREEMENT") and a Common Stock Warrant Agreement (the
"WARRANT"), each of which was dated as of December 31, 1995 (the Junior Note,
the Income Sharing Agreement and the Warrant are collectively referred to herein
as the "RELEASED DOCUMENTS");
WHEREAS, Reuter has requested that Sanwa terminate the Junior Note, the
Income Sharing Agreement and the Warrant in consideration of the payment of the
Termination Fee (defined herein);
WHEREAS, Sanwa is willing to terminate the Released Documents and the
Warrant in exchange for the above consideration;
WHEREAS, in connection with the Income Sharing Agreement, Strickland
entered into a Standstill Agreement with Sanwa dated as of December 31, 1995
(the "STANDSTILL AGREEMENT");
WHEREAS, the Standstill Agreement, by its terms, terminates upon the
expiration of the Income Sharing Agreement;
WHEREAS, Strickland has requested and Sanwa has agreed to formally
terminate the Standstill Agreement;
NOW, THEREFORE, FOR VALUE RECEIVED, in consideration of the recitals and
for other good and valuable consideration, the receipt and adequacy of which is
hereby acknowledged, Sanwa hereby agrees as follows:
1. RELEASE FROM OBLIGATIONS. Subject to the provisions of Section 2
herein and the payment to Sanwa of the Termination Fee, Sanwa hereby absolutely,
unconditionally, and
<PAGE>
irrevocably releases and forever discharges Strickland from any and all of his
respective debts, duties, obligations and liabilities arising under the
Standstill Agreement and terminates the Standstill Agreement. For purposes
hereof, the term "TERMINATION FEE" shall be defined as the sum of (a) Three
Million Seven Hundred Fifty Thousand and no/100 Dollars ($3,750,000); plus (b)
Two Hundred Fifty-Two Thousand Four Hundred Fourteen and 50/100 Dollars
($252,414.50), representing the amount due under the Junior Note and the Income
Sharing Agreement as of March 31, 1997; plus (c) One Thousand Six Hundred
Sixty-Six and 67/100 Dollars ($1,666.67) MULTIPLIED by the number of days
between April 10, 1997 and the date on which Sanwa has received the Termination
Fee. Sanwa does not release or discharge Strickland from any other debts,
duties, claims, obligations or liabilities that may be owing to Sanwa.
2. RETURN OF PAYMENTS. Strickland agrees that, if at any time all or any
part of the Termination Fee applied by Sanwa to any of the Liabilities (as
defined in the Loan Agreement), is rescinded or returned by Sanwa or Sanwa is
required to pay any amount thereof to any other party for any reason whatsoever
(including, without limitation, the insolvency, bankruptcy, liquidation or
reorganization of any party or the determination that such payment is held to
constitute a preference under the bankruptcy laws or to be fraudulent or both),
but excluding any payments made to any participant of Sanwa arising from this
Release pursuant to any participation agreement entered into with regard to the
Loan Agreement and the Ancillary Agreements and the transactions contemplated
thereby, this Release shall be deemed null and void and shall have no further
force and effect and all liabilities and obligations released hereunder shall be
enforceable as if this Release had never been granted and such indebtedness
and/or obligations shall, for the purposes of the Standstill Agreement, be
deemed to have continued in existence to the extent of such payment,
notwithstanding such application by Sanwa, and the Standstill Agreement shall be
reinstated as to such indebtedness and/or obligations, all as though this
Release had not been executed and such application by Sanwa had not been made.
3. NO MODIFICATION WITHOUT WRITING. This Release may not be modified,
amended, revised, revoked, terminated, changed or varied in any way whatsoever
except in accordance with Section 2 hereof or expressly by a written instrument
signed by the party or parties sought to be bound thereby.
4. GOVERNING LAW. This Release shall be governed and controlled as to
interpretation, enforcement, validity, construction, effect and in all other
respects by the internal laws, statutes and decisions of the State of Illinois.
5. COUNTERPARTS. This Release may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same document.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Release as of the
day and year first above written.
SANWA BUSINESS CREDIT CORPORATION
By: /s/ Frank Sterdjevich
----------------------------------
Its: Vice President
----------------------------------
/s/ Edward E. Strickland
---------------------------------------
EDWARD E. STRICKLAND
3
<PAGE>
TERMINATION AND RELEASE AGREEMENT
THIS RELEASE AGREEMENT (this "Release") is made as of April 18, 1997, by
Edward E. Strickland ("Strickland"), James W. Taylor ("Taylor") and Reuter
Manufacturing, Inc. ("Reuter").
WITNESSETH
WHEREAS, on or about December 31, 1995, Reuter and Sanwa Business Credit
Corporation ("Sanwa") entered into a Loan and Restructuring Agreement (the "Loan
Agreement") and certain Ancillary Agreements (as such term is defined in the
Loan Agreement) pursuant to which Sanwa and Reuter restructured the guarantee
obligations of Reuter to Sanwa which arose in connection with Sanwa's loan to
EPR, Inc.;
WHEREAS, in connection with the Loan Agreement, Sanwa, Reuter, Strickland
and Taylor entered into Standstill Agreements pursuant to which Messrs.
Strickland and Taylor agreed (i) not to acquire, offer to acquire or agree to
acquire; (ii) exercise any option or right to acquire; or (iii) transfer, offer
to transfer or agree to transfer any Reuter stock or option or right to acquire
any Reuter stock or otherwise take any similar steps to diminish the net
operating losses of Reuter;
WHEREAS, in connection with the Standstill Agreements, Reuter entered into
a Compensation Agreement (the "Compensation Agreement") with Messrs. Strickland
and Taylor, a true and correct copy of which is attached hereto as EXHIBIT A,
pursuant to which Reuter agreed to pay to each of Messrs. Strickland and Taylor
$50,000.00 in cash on the date of the Compensation Agreement and to compensate
Messrs. Strickland and Taylor for the loss of future financial opportunities as
a result of their entering into the Standstill Agreements;
WHEREAS, Messrs. Strickland and Taylor have not received any payments under
the Compensation Agreement;
WHEREAS, Sanwa, Reuter and Messrs. Strickland and Taylor have agreed to
terminate the Standstill Agreements as of the same date as this Release;
WHEREAS, the Company's total obligation to compensate Mr. Strickland under
the Compensation Agreement is $116,873.75 as of the date of this Release;
<PAGE>
WHEREAS, the Company's total obligation to compensate Mr. Taylor under the
Compensation Agreement is $110,588.00 as of the date of this Release;
NOW THEREFORE, FOR VALUE RECEIVED, in consideration of the recitals and for
other good and valuable consideration the receipt and adequacy of which is
hereby acknowledged, the parties hereby agree as follows:
SECTION 1. TERMINATION AND RELEASE FROM OBLIGATIONS.
Except as set forth in Section 2, the Compensation Agreement is hereby
terminated, and Strickland and Taylor hereby absolutely, unconditionally,
and irrevocably release and forever discharge Reuter from any and all of
its respective debts, duties, obligations and liabilities arising under the
Compensation Agreement.
SECTION 2. PAYMENTS TO STRICKLAND AND TAYLOR.
Reuter acknowledges, agrees and reaffirms that it shall be and remain
obligated to Strickland and Taylor in the amounts of $116,873.75 and
$110,588.00, respectively, and that this obligation shall survive the
termination of the Compensation Agreement and shall not be subject to the
release and discharge by Taylor and Strickland set forth in Section 2
hereof.
SECTION 3. MISCELLANEOUS.
a. EXECUTION. This Release may be executed in any number of
counterparts, which, when taken together, will constitute one
original.
b. NO MODIFICATION WITHOUT WRITING. This Release may not be modified,
amended, revised, revoked, terminated, changed or varied in any way
whatsoever except expressly by a written instrument signed by the
party or parties sought to be bound thereby.
c. GOVERNING LAW. This Release shall be governed and controlled as to
interpretation, enforcement, validity, construction, effect and in all
other respects by the internal laws, statutes and decisions of the
State of Minnesota.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Release as of the
day and year first above written.
REUTER MANUFACTURING, INC.
By: /s/ James W. Taylor
-----------------------------
Its: President
-----------------------------
EDWARD E. STRICKLAND
/s/ Edward E. Strickland
----------------------------------
JAMES W. TAYLOR
/s/ James W. Taylor
----------------------------------
-3-
<PAGE>
Exhibit 11.1
REUTER MANUFACTURING, INC.
DETAIL COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
March 31, 1997 March 31, 1996
------------------ -----------------
<S> <C> <C>
Net income (loss) $ 648,869 $ (185,973)
---------------- ---------------
---------------- ---------------
Net income (loss) per common and common
equivalent share, primary $ .19 $ (.06)
---------------- ---------------
---------------- ---------------
Net income (loss) per common and common
equivalent share, fully diluted $ .19 $ (.06)
---------------- ---------------
---------------- ---------------
Primary:
Weighted average number of common shares
outstanding during the quarter 3,211,931 3,191,520
Add common equivalent shares relating to
outstanding options to purchase common stock
using the treasury stock method 249,169
---------------- ---------------
Weighted average number of common and
common equivalent shares outstanding 3,461,100 3,191,520
---------------- ---------------
---------------- ---------------
Fully Diluted: (1)
Weighted average number of common shares
outstanding during the quarter 3,211,931 3,191,520
Add common equivalent shares relating to
outstanding options to purchase common stock
using the treasury stock method 249,169
---------------- ---------------
Weighted average number of common and
common equivalent shares outstanding 3,461,100 3,191,520
---------------- ---------------
---------------- ---------------
(1) Excludes the dilutive impact of the stock warrant issued to Sanwa during
1996, due to the Company's termination of the stock warrant in connection
with the April 1997 Private Placement of the Company's common stock and
subsequent debt restructuring with Sanwa, described in Note 2 of the
Company's Form 10-QSB.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 218,884
<SECURITIES> 0
<RECEIVABLES> 2,331,377
<ALLOWANCES> 0
<INVENTORY> 1,928,165
<CURRENT-ASSETS> 4,776,359
<PP&E> 11,879,090
<DEPRECIATION> 7,722,078
<TOTAL-ASSETS> 9,318,943
<CURRENT-LIABILITIES> 9,093,330
<BONDS> 0
0
0
<COMMON> 603,707
<OTHER-SE> 13,716,024
<TOTAL-LIABILITY-AND-EQUITY> 9,318,943
<SALES> 5,017,425
<TOTAL-REVENUES> 5,017,425
<CGS> 3,481,251
<TOTAL-COSTS> 4,225,696
<OTHER-EXPENSES> 128,941
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 130,088
<INCOME-PRETAX> 662,788
<INCOME-TAX> 13,919
<INCOME-CONTINUING> 648,869
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 648,869
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
</TABLE>
