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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 September 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from ________ to _________
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 (IRS Employer Identification No.)
incorporation or organization)
410 - 11th Avenue South, Hopkins, Minnesota 55343
- ------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
612/935-6921
- -----------------------------------------------------------------
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X . No. .
----- ------
As of October 27, 1997 there were 4,828,246 shares outstanding of the
registrant's common stock, par value $.18-3/4 per share.
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PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
REUTER MANUFACTURING, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
1997 1996 1997 1996
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales $3,692,689 $4,038,677 $14,424,099 $10,118,277
Cost of sales 3,111,560 2,819,112 10,468,999 7,687,821
----------- ----------- ----------- ------------
GROSS PROFIT 581,129 1,219,565 3,955,100 2,430,456
Selling, general and administrative expenses 659,468 604,141 2,320,463 1,761,219
----------- ----------- ----------- ------------
OPERATING INCOME (LOSS) (78,339) 615,424 1,634,637 669,237
----------- ----------- ----------- ------------
Other income (expenses):
Interest income 11,817 2,314 26,003 14,088
Interest expense (115,125) (104,629) (336,354) (307,463)
Other, net 47,270 14,778 37,089 22,789
----------- ----------- ----------- ------------
TOTAL OTHER EXPENSE, NET (56,038) (87,537) (273,262) (270,586)
----------- ----------- ----------- ------------
INCOME (LOSS) FROM OPERATIONS BEFORE
INCOME TAX BENEFIT AND EXTRAORDINARY
ITEMS - GAINS ON DEBT RESTRUCTURING (134,377) 527,887 1,361,375 398,651
Income tax benefit 31,411
----------- ----------- ----------- ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS (102,966) 527,887 1,361,375 398,651
Extraordinary items - gains on debt restructuring (note 2) 3,431,052 7,249,018
----------- ----------- ----------- ------------
NET INCOME (LOSS) ($102,966) $527,887 $4,792,427 $7,647,669
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
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REUTER MANUFACTURING, INC.
STATEMENTS OF OPERATIONS
(CONTINUED)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
1997 1996 1997 1996
--------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss) per common and common
equivalent share data:
Primary:
INCOME (LOSS) PER SHARE BEFORE
EXTRAORDINARY ITEMS ($0.02) $0.15 $0.31 $0.12
Extraordinary items (note 2) 0.77 2.19
---------- ---------- ---------- ----------
NET INCOME (LOSS) PER SHARE ($0.02) $0.15 $1.08 $2.31
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Fully diluted:
INCOME (LOSS) PER SHARE BEFORE
EXTRAORDINARY ITEMS ($0.02) $0.08 $0.31 $0.08
Extraordinary items (note 2) 0.77 1.51
---------- ---------- ---------- ----------
NET INCOME (LOSS) PER SHARE ($0.02) $0.08 $1.08 $1.59
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average number of shares outstanding:
Primary 4,823,698 3,406,831 4,426,432 3,308,530
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Fully Diluted 4,823,698 6,658,086 4,428,946 4,800,810
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
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REUTER MANUFACTURING, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
1997 December 31,
(Unaudited) 1996
-------------- ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $118,757 $74,980
Investment, restricted 250,000 250,000
Accounts receivable, net of allowances of $25,000
at September 30, 1997 and December 31, 1996 1,235,472 1,839,367
Inventories 2,087,942 1,766,040
Other current assets 31,592 29,137
----------- -----------
TOTAL CURRENT ASSETS 3,723,763 3,959,524
Property, plant and equipment, net 4,593,273 4,176,741
Intangible assets, net 455,699 397,731
----------- -----------
TOTAL ASSETS $8,772,735 $8,533,996
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Current maturities of long-term debt $841,090 $4,312,071
Current borrowings under asset-based line of credit 1,339,755 2,900,097
Accounts payable, trade 904,803 763,495
Accrued expenses 850,226 792,183
----------- -----------
TOTAL CURRENT LIABILITIES 3,935,874 8,767,846
Long-term debt, less current maturities 3,661,559 7,689,725
Other long-term liabilities 102,256 143,998
Commitments and contingencies
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock, par value $.01 per share;
authorized 2,500,000 shares; none issued
Common stock, par value $.1875 per share;
authorized 9,000,000 shares; issued and
outstanding: 4,828,246 shares at September 30, 1997 and
3,208,020 shares at December 31, 1996, respectively 905,296 601,504
Additional paid-in capital 17,757,982 13,713,582
Accumulated deficit (17,590,232) (22,382,659)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) 1,073,046 (8,067,573)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $8,772,735 $8,533,996
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
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REUTER MANUFACTURING, INC.
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
For the nine months ended September 30,
- ---------------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $4,792,427 $7,647,669
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary items - gains on debt restructuring (3,431,052) (7,249,018)
Depreciation 611,081 506,005
Amortization of intangible assets 42,032 36,476
Gain on sales of assets (32,415)
Provision for uncollectible accounts receivable 7,254 2,000
Provision for writedown of inventories 186,831 100,000
Changes in operating assets and liabilities:
Accounts receivable 621,641 (556,178)
Inventories (508,733) (653,471)
Other assets (22,455) 58,509
Accounts payable 141,308 225,990
Accrued expenses 58,043 107,974
Accrued retirement (41,742) (37,044)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,424,220 188,912
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 63,500
Acquisition of laboratory centrifuge technology and manufacturing rights (50,000)
Loan to Hill Bioscience, Inc. (note 5) (25,000)
Additions to property, plant and equipment (590,402) (101,957)
- ---------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (601,902) (101,957)
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (4,909,009) (317,744)
Proceeds from asset-based line of credit 14,016,001 9,881,315
Repayment of asset-based line of credit (15,058,743) (9,578,668)
Net proceeds from Private Placement of common stock 4,151,780
Proceeds from exercise of stock options 21,430 2,090
- ---------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,778,541) (13,007)
- ---------------------------------------------------------------------------------------------------------------
Net increase in cash 43,777 73,948
Cash, beginning of year 74,980 101,048
- ---------------------------------------------------------------------------------------------------------------
Cash, end of period $118,757 $174,996
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid for interest $337,695 $307,516
Noncash investing and financing activities:
Purchase of equipment in exchange for notes payable 448,296 157,588
Settlement of debt obligation in exchange for common stock 124,982
Purchase of technology and manufacturing rights in exchange
for common stock 50,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
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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 and nine-month periods ended September 30, 1997 and
1996, reflect, in the opinion of management, all adjustments (which include
only normal recurring adjustments, except as described in Note 2) necessary
to fairly state the financial position at September 30, 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.
RECLASSIFICATIONS:
Certain reclassifications have been made to the statements of operations
for the three and nine-month periods ended September 30, 1996, to conform
to the comparable 1997 presentations. These reclassifications had no
impact on previously reported operating income or net income.
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 primary net income (loss) per common and
common equivalent share for the nine months ended September 30, 1997.
Common stock equivalents were excluded from the loss per share computations
for the three months ended September 30, 1997 as their effect would be
anti-dilutive.
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 Agreements 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 while the remaining proceeds
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were applied to general Company operating requirements. The retired debt
instruments represented obligations associated with discontinued waste
processing operations. The two debt instruments, including associated
future interest at 8%, had an aggregate carrying value of $6,922,288 at
April 18, 1997. The Company owed Sanwa approximately $252,500 under the
two debt instruments for the first quarter of 1997, which was also paid
from gross proceeds of the Private Placement during the second quarter of
1997. In connection with the retirement of the Sanwa debt, the warrant
previously issued to Sanwa for 3,178,780 shares of Common Stock and the
Trading Standstill Agreements with certain directors of the Company were
terminated. As a result of the transactions described above, the Company
recognized an extraordinary item - gain on debt restructuring of
approximately $3.4 million in the second quarter ended June 30, 1997. In
connection with the Private Placement, the Company also granted the
underwriter a five year warrant to purchase 50,000 shares of the Company's
common stock with an exercise price of $3.60 per share. The Senior
Subordinated Secured Promissory (Senior) Note with Sanwa and associated
future interest at 8% (carrying value of $2,878,147 at September 30, 1997)
continues as an obligation of the Company. During the second quarter of
1997, the Company obtained waivers for its previous covenant violations
with Sanwa and its asset-based lender. As a result of these waivers, the
Company has reclassified the noncurrent portion of its obligations to Sanwa
and its asset-based lender, which were previously in default, to long-term
debt on the balance sheet.
3. SIGNIFICANT CUSTOMERS:
Sales to the Company's two largest medical product customers were
$2,077,817 or 56.3% of net sales for the third quarter of 1997, compared to
sales of $3,106,609 or 76.9% of net sales for the same period in 1996.
Sales to the Company's two largest medical product customers were
$10,501,858 or 72.8% of net sales and $7,334,739 or 72.5% of net sales for
the nine-month periods ended September 30, 1997 and 1996, respectively.
One of these major customers accounted for 52.4% and 68.4% of net sales in
the third quarter of 1997 and 1996, respectively. For the nine-month
periods ended September 30, 1997 and 1996, the Company's largest customer
accounted for 67.0% and 65.9% of net sales, respectively. Accounts
receivable concentrations associated with the Company's two largest medical
product customers discussed above, represented 25.8% and 5.1%, of September
30, 1997 accounts receivable, respectively. Inventory concentrations, for
work in process produced to customer specifications for the Company's two
largest customers at September 30, 1997, were $914,586 and $104,264,
respectively.
4. DIRECTORS STOCK OPTION PLAN:
On May 20, 1997, the Board of Directors approved a new director stock
option plan to grant nonstatutory stock options to non-employee directors
of the Company. Under the plan, a maximum of 125,000 shares of the
Company's common stock is available for grant to new and current non-
employee directors of the Company. The plan provides that new non-employee
directors of the Company be granted 10,000 shares, which vest equally over
three years, upon election as a director. Current non-employee directors
are automatically granted options for
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2,000 shares on June 30 of each year, which vest over a one-year period.
All options are granted at prices equal to or exceeding the fair market
value of the Company's common stock on the date of grant. The options
generally expire ten years from the date of grant.
5. ACQUISITION OF TECHNOLOGY AND MANUFACTURING RIGHTS FOR LABORATORY
CENTRIFUGES:
On July 25, 1997, the Company and Hill Bioscience, Inc. (Hill) entered into
a product development, manufacturing and marketing agreement covering
certain inventions, trade secrets and confidential proprietary know-how
related to three personal micro-centrifuges. Terms of the agreement
require the Company to pay Hill $50,000 of cash and issue $50,000 of Reuter
Manufacturing, Inc. common stock (11,111 shares). In return, Hill will
issue the Company 10% of its stock. The agreement also requires the
Company to loan Hill $25,000 to be paid back in five quarterly installments
of $5,000, commencing in July, 1998. Either party may terminate the
agreement, in its sole discretion, at any time upon 90 days' written notice
for any reason whatsoever. Under the agreement, the Company will be
responsible for the development and manufacturing of the various centrifuge
models and Hill will be responsible for the distribution and marketing
effort. As a result of this transaction, the Company has recorded an
intangible asset in the amount of $100,000 during the third quarter ended
September 30, 1997. The intangible asset will be amortized over a three
year period. The Company has not assigned a value to the common stock
received from Hill, since Hill is privately held and the fair value is not
considered to be material to the Company's financial position.
8
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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. In addition, the Company also began
manufacturing and selling tradename products (oil centrifuges and rotary vane
actuators) in 1995. The Company received notification in August, 1997, of a
temporary reduction in scheduled shipments of one high volume product from
its largest customer. The Company issued a press release disclosing this
fact and the potential negative effect on its third quarter results. The
Company subsequently found out that the reduction in scheduled shipments to
this customer will continue throughout the fourth quarter of 1997 and
possibly continue into the first quarter of 1998. The Company has taken
corrective action to control expenses and secure additional work during this
period. Concurrently the Company has been negotiating with alternative
banking sources to replace its line of credit agreement with its asset-based
lender, which agreement terminates on February 28, 1998, to include some
additional funding commitments. Although there can be no assurance that the
Company can obtain such financing on satisfactory terms, the asset-based
lender has expressed willingness to extend its agreement for an additional
year (to February 28, 1999) and to provide some additional short term funds.
As discussed in Note 2 to the September 30, 1997, financial statements
included in this Form 10-QSB, on April 18, 1997, the Company retired the
Junior Subordinated Promissory Note and Income Sharing Agreement with Sanwa
for $3,750,000, with proceeds from the Private Placement of 1,517,333 shares
of common stock of the Company at $3.00 per share. The retirement of these
obligations resulted in an extraordinary gain of approximately $3.4 million.
RESULTS OF OPERATIONS
The Company's net sales from operations for the third quarter of 1997
decreased by approximately 8.6% or $345,988 from the same period in 1996. The
Company's net sales for the nine-months ended September 30, 1997, were
$14,424,099 compared to $10,118,277 for the same period in 1996, an increase of
42.6%. The decrease in net sales for the three-month period ended September 30,
1997, compared to the same period in 1996, was attributable to a reduction in
scheduled shipments of one product from the Company's largest customer. This
customer has informed the Company that the reduction is expected to continue
into the first quarter of 1998. Other products that the Company manufactures for
that customer were not influenced. The improvement in net sales for the nine-
month period ended September 30, 1997, as compared to the same period in 1996,
was due primarily to an overall increase in sales of medical products, offset by
the reductions described above. Sales from the medical, industrial and
tradename product lines were $2,660,079, $837,447 and $195,163 respectively, for
the third quarter of 1997, as compared to $3,518,872, $504,476 and $15,329
respectively, for the same period in 1996. Sales from the medical, industrial,
and tradename product lines for the nine-month period ended September 30, 1997,
were $11,680,182, $2,285,259 and $458,658 respectively,
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as compared to $8,070,077, $1,811,845 and $236,355 respectively, for the same
period in 1996. Sales to the Company's two major medical product customers
were $2,077,817 for the third quarter of 1997, compared to $3,106,609 for the
same period in 1996. While these majorcustomers accounted for 56.3% of net
sales for the third quarter of 1997 and 76.9% of net sales for the same
period in 1996, one of the customers accounted for 52.4% and 68.4% of net
sales in the third quarter of 1997 and 1996, respectively. Sales to the
Company's two largest medical product customers were $10,501,858 or 72.8% of
net sales and $7,334,739 or 72.5% of net sales for the nine-month periods
ended September 30, 1997, and 1996, respectively.
Gross profit was 15.7% in the third quarter of 1997, compared to 30.2% for
the same period in 1996. Gross profit was 27.4% and 24.0% for the nine-month
periods ended September 30, 1997 and 1996, respectively. The decrease in gross
profit for the three-month period ended September 30, 1997, from the same period
in 1996, was due to a reduction in scheduled shipments of a higher margin
product from the Company's largest customer. The improvement in gross profit
for the nine-month period ended September 30, 1997, was due primarily to an
overall increase in sales of higher margin medical products over the same period
in 1996. In addition, the Company achieved operational efficiencies as a result
of the increase in sales volume.
Selling, general and administrative expenses were $659,468 or 17.9% of net
sales for the third quarter of 1997, compared to $604,141 or 15.0% of net sales
for the same period in 1996. Selling, general and administrative expenses were
$2,320,463 or 16.1% of net sales for the nine-month period ended September 30,
1997, compared to $1,761,219 or 17.4% of net sales for the same period in 1996.
The dollar increase in these expenses were $55,327 and $559,244 for the three
and nine-month periods ended September 30, 1997, respectively, from the same
periods in 1996. Selling expenses increased approximately $42,000 and $153,000
for the respective three and nine-month periods ended September 30, 1997, from
the same periods in 1996, principally to enhance the marketing of the Company's
rotary vane actuators and oil centrifuges. In addition, the sales staff has
increased over the comparable periods in 1996 to support continued
diversification of the Company's customer base and to strengthen current
customer relations. Administrative expenses increased approximately $13,000 and
$406,000 for the three and nine-month periods ended September 30, 1997, from the
same periods in 1996, principally resulting from increases in benefit plan
accruals resulting from the Company's increased profitability. Also
contributing to the increase in administrative expenses for the nine-month
period ended September 30, 1997 were general pay increases and staffing
additions to support the increased growth, increases in computer supplies and
services to enhance the Company's computer systems, and general increases in
administrative expenses to support increased sales volume.
In the third quarter of 1997, the Company had an operating loss of
$78,339, compared to operating income of $615,424 in the same period of 1996.
The Company had operating income of $1,634,637 for the nine-month period ended
September 30, 1997, compared to operating income of $669,237 for the same period
in 1996. The operating loss in the three-month period ended September 30, 1997,
was due to a decrease in sales of higher margin medical products as a result of
a reduction in scheduled shipments from the Company's largest customer. The
higher operating income in the nine-month period ended September 30, 1997, was
due to the overall increase in higher margin medical product sales as discussed
above, along with increased
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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 decrease of $31,499 in total other expense, net for the third quarter
of 1997, from the comparable period in 1996, resulted primarily from a gain of
$30,000 on the sale of an asset held for sale. Other expense, net, increased
$2,676 for the nine-months ended September 30, 1997 from the same period in
1996. Interest expense increased approximately $32,000 due to increased
utilization of the Company's asset-based short-term financing arrangement,
coupled with higher interest rates on borrowings. The increase in interest
expense was partially offset by a decrease in rental income and gains on asset
sales for the nine-months ended September 30, 1997, from the same period in
1996.
As a result of a number of factors, including lower anticipated earnings
for all of fiscal 1997, the Company has reversed its 1997 estimated tax
provision as part of finalizing reported earnings in the third quarter of 1997.
As a result, during the third quarter the Company reversed the nominal tax
provision related to estimated alternative minimum taxes recognized in the first
two quarters of 1997. The Company did not recognize a provision for income
taxes during the comparable three and nine-month periods in 1996.
The effect of inflation on the Company's results has not been significant.
NET INCOME (LOSS) Net loss for the third quarter of 1997 was $102,966, or
$.02 per share (primary and fully diluted basis), compared to net income of
$527,887 or $.15 per share ($.08 per share on a fully diluted basis), for the
same period of 1996. Net income for the nine-month period ended September 30,
1997 was $4,792,427 or $1.08 per share (primary and fully diluted basis),
compared to net income of $7,647,669 or $2.31 per share ($1.59 per share on a
fully diluted basis), for the same period of 1996. The decrease in the net
income for the three-month period ended September 30, 1997, from the same period
in 1996, was due to the reasons discussed above. The decrease in the net income
for the nine-month period ended September 30, 1997, from the net income for the
same period in 1996, was due primarily to the recognition of an extraordinary
item - gain on debt restructuring of $3,431,052 or $.77 per share (primary and
fully diluted basis), compared to the recognition of an extraordinary item -
gain on debt restructuring of $7,249,018 or $2.19 per share ($1.51 per share on
a fully diluted basis) for the nine-month period ended September 30, 1996. The
decrease in net income was partially offset by higher income from operations for
the nine-month period ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES The Company had a working capital deficit
of $212,111 at September 30, 1997, compared to a working capital deficit of
$4,808,322 at December 31, 1996. The current ratio at September 30, 1997 was
.95 compared to .45 at December 31, 1996. The improvement in working capital
and the current ratio is due primarily to cash generated from operations, the
debt restructuring transactions with Sanwa, and the reclassification of certain
debt to long-term debt that was previously classified as a current liability.
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As of October 21, 1997, the Company had an outstanding balance of
approximately $2,160,000 and had additional availability of approximately
$60,000 under its asset-based line of credit financing arrangement.
The Company generated positive cash flow from operations of $2,424,220 for
the nine-months ended September 30, 1997, compared to cash flow from operations
of $188,912 for the same period of 1996, due to the increase in income from
operations. 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, as well as resuming past levels of production and
sales.
Net cash used in investing activities was $601,902 for the nine-months
ended September 30, 1997, compared to cash used in investing activities of
$101,957 for the same period in 1996. The increase was due primarily to an
increase in capital expenditures during 1997.
Net cash used in financing activities was $1,778,541 for the nine-months
ended September 30, 1997, compared to cash used in financing activities of
$13,007 for the same period in 1996. The change is primarily due to payments
made to Sanwa of $720,817 under the Restructuring Agreements and net cash used
to pay down the Company's line of credit of $1,042,742. In addition, the
Company retired the Junior Subordinated Promissory Note and Income Sharing
Agreements with Sanwa for $3,750,000, with funds raised through a Private
Placement of the Company's common stock which is discussed in Note 2 of this
Form 10-QSB. The Company was also able to obtain sufficient funds under its
asset-based financing arrangement to meet its operating needs.
Management anticipates making capital expenditures to support
diversification and growth of the manufacturing operations. The Company has
capital commitments of approximately $100,000 for a new roof and building
upgrades that are to be completed during the fourth quarter of 1997. The
Company intends 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.
In summary, the Company is currently experiencing a reduction in scheduled
shipments to its largest customer, which resulted in a loss for the third
quarter ended September 30, 1997. The Company has taken corrective action to
control its operating expenses and is concurrently negotiating with alternative
banking sources to replace its line of credit agreement with its asset-based
lender, which agreement terminates on February 28, 1998, to include some
additional funding commitments. Although there can be no assurance that the
Company can obtain such financing on satisfactory terms, the asset-based lender
has expressed willingness to extend its agreement and provide some additional
short term funds. On April 18, 1997, the Company 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
12
<PAGE>
Sharing Agreement with Sanwa. The balance of the proceeds after expenses of
the Private Placement was applied to general Company funds. The Company has
also obtained waivers for its previous covenant violations with Sanwa and its
asset-based lender. As a result of these waivers, the Company reclassified
the noncurrent portion of the obligations, which were previously in default,
to long-term debt on the balance sheet effective June 30, 1997. 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, or improving existing relationships
with customers of the Company, business development activities, developing
products to the specifications of the Company's customers, and similar
matters. In addition, the Company has a high concentration of business with
one major customer and reductions in scheduled shipments to this customer
were primarily responsible for the net loss in the third quarter of 1997.
There can be no assurance that this customer will resume shipments at
expected levels. Because of these uncertainties, actual future results could
differ materially from those reflected in the forward-looking statements.
13
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports
a) Exhibits.
Item No. Item Method of Filing
--------- ---- ----------------
11.1 Statement Regarding Computation of Per
Share Earnings Filed herewith electronically
27.1 Financial Data Schedule Filed herewith electronically
(b) Reports on Form 8-K.
There were no reports on Form 8-K which were filed during the third
quarter of 1997.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REUTER MANUFACTURING, INC.
(Registrant)
Date: October 27, 1997 By: /s/ James W. Taylor
---------------------------------------------
James W. Taylor
President, Chief Executive Officer and Chief
Financial Officer (principal executive and
financial officer)
Date: October 27, 1997 By: /s/ William H. Johnson
--------------------------------------------
William H. Johnson
Vice President, Controller and Secretary
(principal accounting officer)
15
<PAGE>
REUTER MANUFACTURING, INC.
EXHIBIT TO QUARTERLY
REPORT ON FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
Item No. Item Method of Filing
- ---------- --------------- ----------------
11.1 Statement Regarding Computation
of Per Share Earnings Filed herewith electronically
27.1 Financial Data Schedule Filed herewith electronically
16
<PAGE>
REUTER MANUFACTURING, INC.
DETAIL COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
------------------ ------------------
Three Months Ended Three Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Net income (loss) ($ 102,966) $ 527,887
------------ ------------
------------ ------------
Net income (loss) per common and common equivalent share:
Primary:
Net income (loss) per common and common equivalent
share ($ .02) $ .15
Fully diluted: ------------ ------------
------------ ------------
Net income (loss) per common and common equivalent share ($ .02) $ .08
------------ ------------
------------ ------------
Primary:
Weighted average number of common shares outstanding
during the year 4,823,698 3,193,107
Add common equivalent shares relating to outstanding
options to purchase common stock using the treasury stock
method 213,724
------------ ------------
Weighted average number of common and common
equivalent shares outstanding 4,823,698 3,406,831
------------ ------------
------------ ------------
Fully Diluted:
Weighted average number of common shares outstanding
during the year 4,823,698 3,193,107
Add common equivalent shares relating to outstanding
options to purchase common stock using the treasury
stock method 286,199
Add dilutive impact of the exercise of the contingent
stock purchase warrant which was granted to Sanwa Business
Credit Corporation on June 8, 1996 3,178,780
------------ ------------
Weighted average number of common and common equivalent
shares outstanding 4,823,698 6,658,086
------------ ------------
------------ ------------
</TABLE>
<PAGE>
REUTER MANUFACTURING, INC.
DETAIL COMPUTATION OF NET INCOME PER SHARE
(Continued)
<TABLE>
<CAPTION>
------------------ ------------------
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Income before extraordinary item $ 1,361,375 $ 398,651
Extraordinary item - gain on debt restructuring (Note 2) 3,431,052 7,249,018
------------ ------------
Net income $ 4,792,427 $ 7,647,669
------------ ------------
------------ ------------
Net income per common and common equivalent share:
Primary:
Income before extraordinary item $ .31 $ .12
Extraordinary item - gain on debt restructuring (Note 2) .77 2.19
------------ ------------
Net income per common and common equivalent share $ 1.08 $ 2.31
------------ ------------
------------ ------------
Fully diluted:
Income before extraordinary item $ .31 $ .08
Extraordinary item - gain on debt restructuring (Note 2) .77 1.51
------------ ------------
Net income per common and common equivalent share $ 1.08 $ 1.59
------------ ------------
------------ ------------
Primary:
Weighted average number of common shares outstanding
during the year 4,175,708 3,192,053
Add common equivalent shares relating to outstanding
options to purchase common stock using the treasury
stock method 220,504 116,477
Add dilutive impact of the exercise of a stock purchase
warrant which was granted to John G. Kinnard Company 30,220
------------ ------------
Weighted average number of common and common
equivalent shares outstanding 4,426,432 3,308,530
------------ ------------
------------ ------------
Fully Diluted:
Weighted average number of common shares outstanding
during the year 4,175,708 3,192,053
Add common equivalent shares relating to outstanding
options to purchase common stock using the treasury
stock method 223,018 286,199
Add dilutive impact of the exercise of the contingent
stock purchase warrant which was granted to Sanwa
Business Credit Corporation on June 8, 1996 1,322,558
Add dilutive impact of the exercise of a stock purchase
warrant which was granted to John G. Kinnard Company 30,220
------------ ------------
Weighted average number of common and common
equivalent shares outstanding 4,428,946 4,800,810
------------ ------------
------------ ------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 118,757
<SECURITIES> 0
<RECEIVABLES> 1,235,472
<ALLOWANCES> 0
<INVENTORY> 2,087,942
<CURRENT-ASSETS> 3,723,763
<PP&E> 12,697,394
<DEPRECIATION> 8,104,121
<TOTAL-ASSETS> 8,772,735
<CURRENT-LIABILITIES> 3,935,874
<BONDS> 0
0
0
<COMMON> 905,296
<OTHER-SE> 17,757,982
<TOTAL-LIABILITY-AND-EQUITY> 8,772,735
<SALES> 14,424,099
<TOTAL-REVENUES> 14,424,099
<CGS> 10,468,999
<TOTAL-COSTS> 12,789,462
<OTHER-EXPENSES> 273,262
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 336,354
<INCOME-PRETAX> 1,361,375
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,361,375
<DISCONTINUED> 0
<EXTRAORDINARY> 3,431,052<F1>
<CHANGES> 0
<NET-INCOME> 4,792,427
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.08
<FN>
<F1>EXTRAORDINARY ITEM-GAIN ON DEBT RESTRUCTURING
</FN>
</TABLE>
