<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(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, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 0-1561
REUTER MANUFACTURING, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-0780999
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
410 - 11th Avenue South, Hopkins, Minnesota 55343
- ----------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
612/935-6921
-----------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (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 May 13, 1998, there were 4,864,996 shares of the registrant's $.1875 par
value Common Stock outstanding.
1
<PAGE>
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
REUTER MANUFACTURING, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited)
For the three months ended
March 31,
1998 1997
------------- -------------
<S> <C> <C>
Net sales $3,658,120 $5,017,425
Cost of sales 3,279,858 3,481,251
------------- -------------
GROSS PROFIT 378,262 1,536,174
Selling, general and administrative expenses 673,590 744,445
------------- -------------
OPERATING INCOME (LOSS) (295,328) 791,729
------------- -------------
Other income (expense):
Interest expense (157,323) (130,088)
Other, net 13,698 1,147
------------- -------------
TOTAL OTHER EXPENSE, NET (143,625) (128,941)
------------- -------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (438,953) 662,788
Provision for income taxes 13,919
------------- -------------
NET INCOME (LOSS) ($438,953) $648,869
------------- -------------
------------- -------------
BASIC EARNINGS (LOSS) PER SHARE:
Net income (loss) per share ($0.09) $0.20
------------- -------------
------------- -------------
DILUTED EARNINGS (LOSS) PER SHARE:
Net income (loss) per share ($0.09) $0.10
------------- -------------
------------- -------------
WEIGHTED AVERAGE SHARES:
Common shares 4,863,557 3,211,931
------------- -------------
------------- -------------
Common and common equivalent shares 4,863,557 6,639,880
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------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
REUTER MANUFACTURING, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
1998 December 31,
(Unaudited) 1997
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $195,986 $113,234
Receivables, net of allowances of $25,000
at March 31, 1998 and December 31, 1997 2,355,653 1,894,419
Inventories 1,882,835 1,979,661
Other current assets 102,009 99,612
------------- ------------
TOTAL CURRENT ASSETS 4,536,483 4,086,926
Property, plant and equipment, net 4,549,637 4,624,678
Intangible assets, net 414,715 435,207
------------- ------------
TOTAL ASSETS $9,500,835 $9,146,811
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Asset-based line of credit and term obligations, bank $5,808,888 $5,313,512
Current maturities of long-term equipment financing 237,093 222,022
Accounts payable, trade 848,262 692,125
Accrued expenses 829,010 695,011
------------- ------------
TOTAL CURRENT LIABILITIES 7,723,253 6,922,670
Long-term equipment financing, less current maturities 746,566 740,507
Other long-term liabilities 74,621 88,496
Commitments and contingencies
STOCKHOLDERS' EQUITY:
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: 4,863,996 shares at March 31, 1998 and
4,863,496 shares at December 31, 1997, respectively 911,999 911,906
Additional paid-in capital 17,768,244 17,768,127
Accumulated deficit (17,723,848) (17,284,895)
------------- ------------
TOTAL STOCKHOLDERS' EQUITY 956,395 1,395,138
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $9,500,835 $9,146,811
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
REUTER MANUFACTURING, INC.
STATEMENTS OF CASH FLOWS
Increase in Cash
<TABLE>
<CAPTION>
(Unaudited)
For the three months ended March 31,
- -----------------------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($438,953) $648,869
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation 218,575 188,669
Amortization of intangible assets 20,492 12,159
Gain on sales of assets (915)
Provision for writedown of inventories (30,000) 55,000
Changes in operating assets and liabilities:
Receivables (461,234) (492,010)
Inventories 126,826 (217,125)
Other current assets (2,397) (18,796)
Accounts payable 156,137 132,971
Accrued expenses 133,999 106,167
Other long-term liabilities (13,875) (13,915)
- -----------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (290,430) 401,074
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (72,250) (180,025)
Proceeds from sale of assets 12,000
- -----------------------------------------------------------------------------------------------------
Net cash used in investing activities (72,250) (168,025)
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (50,154) (355,301)
Proceeds from asset-based line of credit 3,714,793 4,786,384
Repayment of asset-based line of credit and term
obligations, bank (3,219,417) (4,524,873)
Proceeds from exercise of stock options 210 4,645
- -----------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 445,432 (89,145)
- -----------------------------------------------------------------------------------------------------
Net increase in cash 82,752 143,904
Cash, beginning of year 113,234 74,980
- -----------------------------------------------------------------------------------------------------
Cash, end of period $195,986 $218,884
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid for interest $151,439 $111,854
Noncash investing and financing activities:
Purchase of equipment in exchange for notes payable 71,284
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
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, 1998 and 1997,
reflect, in the opinion of management, all adjustments (which include only
normal recurring adjustments), necessary to fairly state the financial
position at March 31, 1998, 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. The
December 31, 1997, balance sheet data was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles. These unaudited interim financial
statements should be read in conjunction with the consolidated financial
statements and related notes for the year ended December 31, 1997, which
were included in the Company's 1997 Annual Report on Form 10-KSB.
EARNINGS PER SHARE:
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share," and has disclosed basic
and diluted net income (loss) per share for the quarters ended March 31,
1998 and 1997, in accordance with this standard. The Company incurred a
net loss for the first quarter of 1998 and excluded common equivalent
shares from the diluted earnings per share computation as their effect is
anti-dilutive. If the Company generates earnings in future periods the
impact of common equivalent shares may be dilutive. The Company was
profitable for the first quarter of 1997, and the calculation for diluted
earnings per share includes 249,169 stock options and 3,178,780 contingent
stock purchase warrants. At March 31, 1998, the Company had 422,000
outstanding stock options and 50,000 stock purchase warrants which may
be dilutive in future periods.
2. SIGNIFICANT CUSTOMERS:
Sales to the Company's two largest customers were $1,537,993 and $683,536,
or 42.0% and 18.7%, respectively, of net sales for the first quarter of
1998, compared to net sales of $3,462,306 and $421,180, or 69.0% and 8.4%,
respectively, of net sales for the same period in 1997. Accounts
receivable concentrations associated with the Company's two largest
customers represented 45.0% and 12.4%, respectively, of March 31, 1998
accounts receivable. Inventory concentrations of work in process produced
to customer specifications for the Company's two largest customers at
March 31, 1998, was $660,998.
5
<PAGE>
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, oil centrifuges and rotary vane actuators.
The poor performance in the first quarter of 1998 was due principally to
decreased revenues from the Company's largest customer resulting from reductions
in sales of one of their blood centrifuges, which last year at this time was
being produced and shipped in large quantities. The Company expects that the
customer's inventory correction on the blood centrifuge unit will result in
decreased revenues for the balance of 1998, according to the latest information
from the customer, who continues to order and take delivery of other items.
Additionally, in recent weeks, several of the Company's other customers have
reduced or pushed back their shipping requirements, although the Company has not
lost any of these orders. The Company anticipates that this decrease in
revenues will continue over the next six months, after which the Company
believes that sales volume will increase.
RESULTS OF OPERATIONS
The Company's net sales for the first quarter of 1998 decreased by
approximately 27.1% from the same period in 1997. The Company's net sales
for the three months ended March 31, 1998 were $3,658,120, compared to
$5,017,425 for the same period in 1997. The decrease in net sales for the
first quarter of 1998, compared to the same quarter for 1997, was due
primarily to decreased sales of medical products to the Company's largest
customer, which was partially offset by increased sales of industrial and
propriety products. Sales from the medical, industrial, and tradename
product lines were $2,232,197, $1,179,408 and $246,515, respectively, for the
first quarter of 1998, as compared to $4,222,429, $661,557 and $133,439,
respectively, for the same period in 1997. Sales to the Company's largest
medical product customer were $1,537,993 for the first quarter of 1998,
compared to $3,462,306 for the same period in 1997. The Company's largest
customer accounted for 42.0% of net sales for the first quarter of 1998 and
69.0% of net sales for the same period in 1997.
Gross profit was 10.3% in the first quarter of 1998, compared to 30.6% for
the same period in 1997. The decline in gross profit for the first quarter of
1998 was primarily due to a decrease in higher margin medical product business
over the same quarter in 1997. In addition, the Company was not able to obtain
operational efficiencies as a result of the decrease in sales volume.
6
<PAGE>
Selling, general and administrative expenses were $673,590 or 18.4% of
net sales for the first quarter of 1998, compared to $744,445 or 14.8% of net
sales for the same period in 1997. The net dollar decrease in these expenses
of $70,855 is due in part to a decrease in selling related expenses of
approximately $11,000, primarily a reduction in advertising related expenses.
In addition, administrative expenses were approximately $60,000 lower in the
first quarter of 1998, compared to the same quarter of 1997, primarily due to
an $86,000 decrease in benefit plan accruals resulting from the Company's
lack of profitability during the first quarter of 1998, as compared to the
same period in 1997, net of approximately $26,000 of increases due to
increased staffing, general pay increases and administrative promotions.
In the first quarter of 1998, the Company had an operating loss of
$295,328, compared to operating income of $791,729 in the same period of 1997.
The operating loss in the first quarter of 1998 was due to a reduction in sales
of higher margin medical products as discussed above, along with a decrease in
operational efficiencies as a result of the decreased sales volume.
Other expenses, net increased $14,684 for the first quarter of 1998
compared to the same period in 1997. The increase resulted primarily from
higher interest expense due to increased utilization of the Company's
asset-based short-term financing arrangement of approximately $27,000, net of
approximately $12,000 of other income.
The Company was not profitable during the first quarter of 1998, and
consequently did not record a provision for income taxes for this period.
However, the Company was profitable during the first quarter of 1997, but
generally does not pay regular income taxes because of the availability of
its net operating loss carryforwards. The Company is, however, generally
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
generally 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. This provision was reversed in a subsequent quarter during
1997, due to the Company generating additional tax deductions as a result of
the timing of the deduction of certain costs associated with the Company's
1996 and 1997 Sanwa debt restructuring transactions and ultimate settlement,
since such costs were deducted for tax reporting purposes in 1997.
The effect of inflation on the Company's results has not been significant.
The net loss for the first quarter of 1998 was $438,953 or $.09 per share
(basic and diluted basis), compared to net income of $648,869 or $.20 per share
($.10 per share on a diluted basis) for the first quarter of 1997. The net loss
for the first quarter of 1998 compared to the net income for the same period in
1997 was due to the factors discussed above.
7
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had a working capital deficit of
$3,186,770, compared to a working capital deficit of $2,835,744 at December
31, 1997. The increase in the deficit is principally due to the decrease in
cash flows resulting from the down turn of sales and operations, as discussed
below. The current ratio was .59 at March 31, 1998 and December 31, 1997.
The dollar increase in the working capital deficit is principally due to an
increase in borrowings under the Company's asset-based line of credit. In
December 1997, the Company entered into a new financing agreement with a new
asset-based lender; the financing agreement is comprised of a revolving line
of credit and three term notes (the "credit facilities"). Although the term
notes have scheduled repayment dates, the term notes may be due upon demand
in the event that the asset-based lender demands repayment under the
asset-based line of credit. Accordingly, the Company has classified all of
the amounts under the credit facilities at March 31, 1998 as a current
liability.
The Company had negative cash flows from operations of $290,618 for the
quarter ended March 31, 1998, compared to positive cash flows from operations of
$401,074 for the quarter ended March 31, 1997. The decrease in cash flows from
operations for the first quarter of 1998 was due primarily to lower sales
volumes, and a decrease in sales of 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 achieving
adequate sales and margins from its manufacturing operations.
The Company is currently experiencing a decrease in sales from the
Company's largest customer, resulting from reductions in sales of one of
their blood centrifuges, which last year at this time was being produced and
shipped in large quantities. The Company expects that the customer's
inventory correction on the blood centrifuge unit will result in decreased
sales for the balance of 1998, according to the latest information from the
customer, who continues to order and take delivery of other items.
Additionally, in recent weeks, several of the Company's other customers have
reduced or pushed back their shipping requirements, although the Company has
not lost any of these orders. The Company anticipates that this decrease in
revenues will continue over the next six months, after which the Company
believes that sales volume will increase. The Company has taken corrective
action to control expenses and secure additional work during this period.
There can be no assurance that sales to the Company's largest customer will
return to expected or previous levels. The Company's future success is
dependent on its ability to secure additional work during the schedule
reduction period and maintain adequate margins on sales. In addition, the
Company's continuing inability to generate sufficient positive cash flows
from operations would result in the Company being unable to meet debt service
requirements.
Net cash used in investing activities was $72,062 for the first quarter of
1998, compared to cash used in investing activities of $168,025 for the same
period in 1997. The decrease was due primarily to a reduction in capital
expenditures during the first quarter of 1998.
8
<PAGE>
Net cash provided by financing activities was $445,432 for the first
quarter of 1998, compared to cash used in financing activities of $89,145 for
the same period in 1997. The change in the first quarter of 1998 was primarily
due to increased borrowings under the Company's asset-based line of credit to
fund operating activities. The Company made principal payments of $50,154
toward financed equipment debt and also made principal repayments of $81,834
toward the term debt under the Company's asset-based line of credit for the
first quarter of 1998. Although the Company was able to obtain sufficient funds
under its asset-based financing arrangement to meet its operating needs during
the first quarter of 1998, there can be no assurance that the Company will
continue to obtain sufficient funds under its asset-based line of credit
facilities in future periods. As of May 7, 1998, the Company had borrowed
approximately $5,237,000 and had additional availability of approximately
$144,000 under its asset-based line of credit financing arrangement.
The Company began conducting an internal review of its computer systems
in May 1997 to identify the systems that could be affected by the "Year 2000"
issue. This internal review is still in progress, and the Company is
developing an implementation plan to resolve the issue. The Year 2000
problem is the result of computer programs being written using two digits
rather than four to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000, resulting in miscalculations. The
Company presently believes that, with modifications to existing software and
hardware, and conversions to new software, the Year 2000 problem will not
pose significant operational problems for the Company's computer systems.
The Company has set an objective to have all systems Year 2000 compliant by
the first quarter of 1999, at a budgeted expense of approximately $50,000,
although there is no assurance that this amount will be adequate to address
the matter on a timely basis. Failure of the Company's and/or third parties'
computer systems could have a material adverse impact on the operations of
the Company.
Except for the historical financial information reported above, this Form
10-QSB contains forward-looking statements that involve risk and uncertainties,
including the risks associated with establishing new or improving existing
relationships with customers of the Company, business development activities,
anticipated financial performance, 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 have been the primary reason for the loss
in the first quarter of 1998. There can be no assurance that this customer will
resume shipments at expected or historical levels. Because of these
uncertainties, actual results could differ materially from those reflected in
the forward-looking statements.
9
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports
a) Exhibits.
Item No. Item Method of Filing
--------- ------ ----------------
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 first quarter
of 1998.
10
<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: May 14, 1998 By: /s/ Michael J. Tate
---------------- --------------------------------------------
Michael J. Tate
President, Chief Executive Officer and Chief
Financial Officer (principal executive and
financial officer)
Date: May 14, 1998 By: /s/ William H. Johnson
--------------- --------------------------------------------
William H. Johnson
Vice President, Controller and Secretary
(principal accounting officer)
11
<PAGE>
REUTER MANUFACTURING, INC.
EXHIBIT TO QUARTERLY
REPORT ON FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
Item No. Item Method of Filing
- --------- --------- ----------------
27.1 Financial Data Schedule Filed herewith electronically
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 195,986
<SECURITIES> 0
<RECEIVABLES> 2,355,653
<ALLOWANCES> 0
<INVENTORY> 1,882,835
<CURRENT-ASSETS> 4,536,483
<PP&E> 12,904,406
<DEPRECIATION> 8,354,769
<TOTAL-ASSETS> 9,500,835
<CURRENT-LIABILITIES> 7,723,253
<BONDS> 0
0
0
<COMMON> 911,999
<OTHER-SE> 17,768,244
<TOTAL-LIABILITY-AND-EQUITY> 9,500,835
<SALES> 3,658,120
<TOTAL-REVENUES> 3,658,120
<CGS> 3,279,858
<TOTAL-COSTS> 3,953,448
<OTHER-EXPENSES> 143,625
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 157,323
<INCOME-PRETAX> (438,953)
<INCOME-TAX> 0
<INCOME-CONTINUING> (438,953)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (438,953)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
