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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 September 30, 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 Identification No.)
incorporation or organization)
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 November 13, 1998, there were 4,898,885 shares of the registrant's $.1875
par value Common Stock outstanding.
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PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
REUTER MANUFACTURING, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
For the three months ended For the nine months ended
September 30, September 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $2,852,428 $3,692,689 $9,556,998 $14,424,099
Cost of sales 2,666,611 3,111,560 8,840,235 10,468,999
----------- ----------- ----------- -----------
GROSS PROFIT 185,817 581,129 716,763 3,955,100
Selling, general and administrative expenses 454,499 659,468 1,691,241 2,320,463
Write-off of certain assets, principally intangible assets 447,327 447,327
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) (716,009) (78,339) (1,421,805) 1,634,637
----------- ----------- ----------- -----------
Other income (expense):
Interest expense (179,235) (115,125) (503,039) (336,354)
Other, net (2,156) 59,087 13,738 63,092
----------- ----------- ----------- -----------
TOTAL OTHER EXPENSE, NET (181,391) (56,038) (489,301) (273,262)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAX BENEFIT
AND EXTRAORDINARY ITEM (897,400) (134,377) (1,911,106) 1,361,375
Income tax benefit 31,411
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (897,400) (102,966) (1,911,106) 1,361,375
Extraordinary item - gain on debt restructuring 3,431,052
----------- ----------- ----------- -----------
NET INCOME (LOSS) ($897,400) ($102,966) ($1,911,106) $4,792,427
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</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>
(Unaudited) (Unaudited)
For the three months ended For the nine months ended
September 30, September 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BASIC NET INCOME (LOSS) PER SHARE:
Income (loss) per share before
extraordinary item ($0.18) ($0.02) ($0.39) $0.33
Extraordinary item - gain on debt restructuring 0.82
----------- ----------- ----------- -----------
BASIC NET INCOME (LOSS) PER SHARE ($0.18) ($0.02) ($0.39) $1.15
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
DILUTED NET INCOME (LOSS) PER SHARE:
Income (loss) per share before
extraordinary item ($0.18) ($0.02) ($0.39) $0.31
Extraordinary item - gain on debt restructuring 0.78
----------- ----------- ----------- -----------
DILUTED NET INCOME (LOSS) PER SHARE ($0.18) ($0.02) ($0.39) $1.09
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING:
Basic 4,905,539 4,823,698 4,878,426 4,175,708
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted 4,905,539 4,823,698 4,878,426 4,402,860
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</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,
1998 December 31,
(Unaudited) 1997
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 71,092 $ 113,234
Receivables, net of allowances of $25,000
at September 30, 1998 and December 31, 1997 1,684,132 1,894,419
Inventories 1,650,480 1,979,661
Other current assets 46,466 99,612
------------- ------------
TOTAL CURRENT ASSETS 3,452,170 4,086,926
Property, plant and equipment, net 4,176,180 4,624,678
Intangible assets, net 435,207
------------- ------------
TOTAL ASSETS $ 7,628,350 $ 9,146,811
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Asset-based line of credit and term obligations, bank $ 5,516,936 $ 5,313,512
Current maturities of long-term equipment financing 243,008 222,022
Accounts payable, trade 1,050,150 692,125
Accrued expenses 647,337 695,011
------------- ------------
TOTAL CURRENT LIABILITIES 7,457,431 6,922,670
Long-term equipment financing, less current maturities 623,357 740,507
Other long-term liabilities 50,869 88,496
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: 4,898,885 shares at September 30, 1998 and
4,863,496 shares at December 31, 1997, respectively 918,541 911,906
Additional paid-in capital 17,774,153 17,768,127
Accumulated deficit (19,196,001) (17,284,895)
------------- ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (503,307) 1,395,138
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $ 7,628,350 $ 9,146,811
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
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REUTER MANUFACTURING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
For the nine months ended September 30,
- ------------------------------------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($1,911,106) $4,792,427
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary item - gain on debt restructuring (3,431,052)
Depreciation 615,744 611,081
Amortization of intangible assets 61,476 42,032
Gain on sales of assets (32,415)
Write-off of certain assets, principally intangible assets 447,327
Provision for uncollectible accounts receivable 7,254
Provision for write-down of inventories 70,664 186,831
Changes in operating assets and liabilities:
Receivables 185,287 621,641
Inventories 214,648 (508,733)
Other current assets 53,146 (22,455)
Accounts payable, trade 358,025 141,308
Accrued expenses (47,674) 58,043
Other long-term liabilities (37,627) (41,742)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 9,910 2,424,220
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (110,758) (665,402)
Proceeds from sale of assets 63,500
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (110,758) (601,902)
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term equipment financing (167,448) (4,909,009)
Proceeds from asset-based line of credit 10,075,059 14,016,001
Repayment of asset-based line of credit and term obligations, bank (9,871,635) (15,058,743)
Net proceeds from private placement of common stock 4,151,780
Proceeds from exercise of stock options 22,730 21,430
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 58,706 (1,778,541)
- ------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash (42,142) 43,777
Cash, beginning of year 113,234 74,980
- ------------------------------------------------------------------------------------------------------------------
Cash, end of period $71,092 $118,757
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid for interest $494,222 $337,695
Noncash investing and financing activities:
Purchase of equipment in exchange for notes payable 71,284 448,296
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.
5
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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, 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 September 30, 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 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.
SALES AND EARNINGS DECLINE:
The Company's net sales for the nine months ended September 30, 1998, were
$9,556,998, compared to $14,424,099 for the comparable period in 1997, a
decrease of 33.7%. The decrease in net sales for the nine month period
ended September 30, 1998, compared to the same period in 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
proprietary products. Sales from the medical, industrial, and tradename
product lines for the nine month period ended September 30, 1998 were
$6,629,792, $2,334,486, and $592,720, respectively, compared to
$11,680,182, $2,285,259, and $458,658, respectively, for the comparable
period in 1997. The net loss for the nine month period ended September 30,
1998, was $1,911,106 compared to net income of $4,792,427 (including a gain
from an extraordinary item of $3,431,052) for the comparable period in
1997.
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 September
30, 1998 and 1997, in accordance with this standard. The Company incurred
a net loss for the three and nine month periods ended September 30, 1998,
and excluded common equivalent shares from the diluted earnings per share
computation as their effect is anti-dilutive. If the Company generates
income from operations in future periods the impact of common equivalent
shares may be dilutive. The Company had a net loss for the three months
ended September 30, 1998 and 1997, and for the nine months ended September
30, 1998. As a result of the net losses in those periods,
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common stock equivalent shares were excluded from the diluted earnings per
share computation as their effect is anti-dilutive. The Company generated
income from operations for the nine months ended September 30, 1997, and
the calculation for diluted net income per share included 223,017 of stock
options. At September 30, 1998, the Company had 398,500 stock options and
50,000 stock purchase warrants outstanding, which may be dilutive in future
periods.
2. SIGNIFICANT CUSTOMERS:
The Company has certain significant customers which comprise a significant
percentage of net sales as follows:
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Net sales for the three months Net sales for the nine months
ended September 30, ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Customer A 58.6% 52.4% 46.7% 67.0%
Customer B 15.2 - 10.3 -
Customer C - 11.9 10.9 -
</TABLE>
Accounts receivable concentrations associated with the Company's two
largest customers represented 63.5% of September 30, 1998 accounts
receivable. Inventory concentrations of work in process produced to
customer specifications for the Company's two largest customers at
September 30, 1998, was $500,108.
3. ASSET-BASED LINE OF CREDIT AMENDMENT:
The Company is in the process of amending its lending agreement (the
"agreement") with U.S. Bank National Association ("U.S. Bank"). U.S. Bank
has agreed to defer principal payments of approximately $46,166 per month
through March 1, 1999 contingent upon the Company raising a minimum of
$350,000 through an equity/debt offering and contingent upon the Company
successfully negotiating with its other machine tool vendors, whom the
Company has financing with, for the Company to defer making principal
repayments for the same amount of time as U.S. Bank. The Company has
received verbal commitments from machine tool vendors, who have agreed to
the same terms as the Bank, on seven of its nine equipment notes. The
aggregate machine tool vendor principal deferral is approximately $18,500
per month. The Company will be required to resume regular monthly principal
payments on April 1, 1999, and make double the monthly principal payment in
the amount of $92,333 beginning November 1, 1999 until the deferred
principal payments are paid. The Company is also required to pay
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U.S. Bank a fee of $2,500 for each month that the Company elects to defer
principal payments and to extending its lending arrangement until December
3, 2000. As of September 30, 1998, the Company had borrowed approximately
$5,517,000 and had additional availability of approximately $423,000 under
its line of credit facilities. There can be no assurance that the lender
will continue to provide credit to the Company. If the lender demanded
full payment of the credit facilities, the Company would need to obtain
financing from another source. There can be no assurance that the Company
would be able to obtain such financing on terms acceptable to the Company
or at all.
8
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is principally a contract manufacturer of precision machined
products and assemblies for medical and industrial original equipment
manufacturers ("OEM"). The Company manufactures on a contract basis, among
other items, close tolerance bearing-related assemblies for the medical device
industry. In order to differentiate itself from its competitors, the Company
emphasizes its design engineering and manufacturing engineering capability and
support. The Company also manufactures and sells under the Reuter name,
self-powered oil centrifuges and laboratory centrifuges, which are sold by the
Company's sales force to the OEM or end user, and to distributors. During the
third quarter ended September 30, 1998, the Company took a one time charge to
operations of $447,327, primarily related to the write-off of intangible assets
associated with a line of rotary vane actuators, which product line has been
discontinued. Although the Company has written-off these assets, management
believes that they may be successful in selling the rotary vane actuator line.
There can be no assurance that the Company will be successful in selling the
line of rotary vane actuators or related intangibles.
The Company continues to experience a decrease in sales of one of its blood
centrifuge models to the Company's largest customer, which until August 1997,
was being produced and shipped in large quantities to the Company's largest
customer. Based on information from this customer, the Company currently
expects this lower level of sales to continue into the first half of 1999. This
customer continues to order and take delivery of other products manufactured by
the Company. The Company expects the level of sales that it experienced during
the first nine months of the year to remain relatively consistent for the
remainder of 1998, due to the continuing softness of sales of its medical
products and the delay until 1999 in the commencement of production of a fuel
filter manifold for a large engine manufacturing customer. The Company's
efforts to attract industrial and cryogenic product customers may result in some
improvement in sales toward the end of 1998. Due to the lower sales and the
resulting impact on cash, the Company is exploring additional cash conservation
and generation strategies. The Company is also seeking to raise a minimum of
$350,000 through a private placement of debentures and believes that if the
minimum number of securities offered in the private placement are sold, the
Company will be able to meet its cash needs until the second quarter of 1999,
when management believes that sales will begin to increase. There can be no
assurance that sales to the Company's largest customer will return to expected
or previous levels or that sales of other products will be sufficient to achieve
positive cash flow or profitability. The Company's ability to continue
operations is dependent on its ability to increase sales and maintain adequate
margins on sales. If the Company is unable to raise at least $350,000 in the
private placement described above, increase sales from current levels and
generate positive cash flows from operations, it will be unable to meet its debt
service requirements and may be forced to cease operations and may need to seek
protection under U.S. bankruptcy laws.
9
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RESULTS OF OPERATIONS
The Company's net sales for the third quarter of 1998, were $2,852,428,
compared to $3,692,689 for the comparable period in 1997, a decrease of 22.7%.
The decrease in net sales for the third 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, a decrease in industrial product sales due to
the loss of production of an automobile bushing discontinued by the customer in
June 1998, and a small decrease in sales of proprietary products. Sales from
the medical, industrial, and tradename product lines were $2,315,629, $422,161
and $114,638, respectively, for the third quarter of 1998, compared to
$2,660,079, $837,447 and $195,163, respectively, for the comparable period in
1997. The Company's net sales for the nine months ended September 30, 1998,
were $9,556,998, compared to $14,424,099 for the comparable period in 1997, a
decrease of 33.7%. The decrease in net sales for the nine month period ended
September 30, 1998, compared to the same period in 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 proprietary products.
Sales from the medical, industrial, and tradename product lines for the nine
month period ended September 30, 1998, were $6,629,792, $2,334,486, and
$592,720, respectively, compared to $11,680,182, $2,285,259, and $458,658,
respectively, for the comparable period in 1997. Sales to the Company's largest
customer were $1,672,978 or 58.6% of net sales, for the third quarter of 1998,
compared to $1,934,132 or 52.4% of net sales, for the comparable period in 1997.
The Company's largest customer accounted for $4,459,182 or 46.7% of net sales
for the nine month period ended September 30, 1998, compared to $9,668,583 or
67.0% of net sales for the comparable period in 1997.
Gross profit as a percentage of sales declined to 6.5% in the third quarter
of 1998, compared to 15.7% for the comparable period in 1997. Gross profit as a
percentage of sales was 7.5% and 27.4% for the nine month periods ended
September 30, 1998 and 1997, respectively. The decline in gross profit for the
three and nine month periods ended September 30, 1998, was primarily due to a
decrease in higher margin medical product business relative to the comparable
periods in 1997. In addition, the Company lost certain operational efficiencies
as a result of the significant decrease in sales volume.
Selling, general and administrative expenses were $454,499 or 15.9% of net
sales for the third quarter of 1998, compared to $659,468 or 17.9% of net sales
for the comparable period in 1997. Selling, general and administrative expenses
were $1,691,241 or 17.7% of net sales for the nine month period ended September
30, 1998, compared to $2,320,463 or 16.1% of net sales for the comparable period
in 1997. For the third quarter ended September 30, 1998, the decrease in these
expenses of $204,969 compared to the third quarter of 1997, is due in part to a
decrease of approximately $68,000 in selling related expenses. In addition,
administrative expenses decreased approximately $137,000 for the third quarter
of 1998, compared to the third quarter of 1997, due to reductions in salaries
and benefits, computer and office supplies, and in employee training/education.
For the nine months ended September 30, 1998, the decrease in selling, general
and administrative expenses of approximately $629,000 compared to the nine
months ended September 30, 1997, is due in part to a decrease of approximately
$151,000 in selling
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related expenses. In addition, administrative expenses decreased approximately
$478,000 for the nine months ended September 30, 1998, compared to the same
period in 1997, primarily due to a $255,000 decrease in benefit plan expenses
resulting from the Company's lack of profitability during the nine months ended
September 30, 1998, compared to the same period in 1997, reductions in legal and
accounting fees, reductions in purchases of computer and office supplies, and
reductions from 1997 in employee training and education.
In the third quarter of 1998, the Company had an operating loss of
$716,009, compared to an operating loss of $78,339 in the comparable period of
1997. During the nine months ended September 30, 1998, the Company had an
operating loss of $1,421,805, compared to operating income of $1,634,637 in the
comparable period of 1997. Included in the operating losses in the three and
nine month periods ended September 30, 1998, was a write-off of approximately
$313,000 of intangible assets and $58,000 of certain identifiable assets related
to the Company's lack of success in producing and selling profitably, a line of
rotary vane actuators. The Company made the decision in the third quarter of
1998 to discontinue the production of this line of rotary vane actuators. In
addition, the Company wrote-off approximately $61,000 the remaining unamortized
cost of licensing and manufacturing rights and $15,000 of certain identifiable
assets related to an agreement covering the marketing and distribution rights to
a line of laboratory centrifuges, which agreement was terminated on September
25, 1998. The Company has written-off these assets, although management
believes it may be able to sell the line of rotary vane actuators. The
operating losses in 1998, was primarily due to a reduction in sales of higher
margin medical products as discussed above, along with the other factors
discussed above.
Other expense, net, increased $125,353 for the third quarter of 1998,
relative to the comparable period in 1997. For the nine month period ended
September 30, 1998, other expense, net, increased $216,039 from the comparable
period in 1997. The increase for the three and nine month periods ended
September 30, 1998, from the comparable periods in 1997, was due primarily to
higher interest expense from borrowings under the credit facilities with U.S.
Bank. Interest expense increased $64,110 and $166,685, respectively, for the
three and nine month periods ended September 30, 1998, from the comparable
periods in 1997. In addition, there were lower interest income and
miscellaneous other income items during 1998 as compared to 1997.
The Company was not profitable during the nine months ended September 30,
1998, and consequently did not record a provision for income taxes for the three
or nine month periods ended September 30, 1998. However, the Company was
profitable during the nine months ended September 30, 1997, but 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 reversed its cumulative provision for
income taxes of $31,411 during the third quarter ended September 30, 1997, due
to the Company generating additional tax deductions as a result of the timing of
the
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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 third quarter of 1998, was $897,400 or $.18 per share
(basic and diluted basis), compared to a net loss of $102,966 or $.02 per share
(basic and diluted basis) for the third quarter of 1997. The net loss for the
nine month period ended September 30, 1998, was $1,911,106 or $.39 per share
(basic and diluted basis), compared to net income of $4,792,427 or $1.15 per
basic share ($1.09 per share on a diluted basis), for the comparable period in
1997. The net loss for the three month period ended September 30, 1998, from the
comparable period in 1997, was due to the reasons discussed above. The net loss
for the nine month period ended September 30, 1998, compared to the net income
for the comparable period in 1997, was due primarily to the recognition of an
extraordinary item - gain on debt restructuring of $3,431,052 or $.82 per basic
share ($.78 per share on a diluted basis) and the reasons discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had a working capital deficiency of
$4,005,261, compared to a working capital deficiency of $2,835,744 at December
31, 1997. The current ratio was .46 at September 30, 1998, compared to .59 at
December 31, 1997. The increase in the working capital deficiency is
principally due to an increase in borrowings under the Company's asset-based
line of credit and term obligations and accounts payable, due to decreases in
net sales and cash flows from operating activities during the nine months ended
September 30, 1998. The Company's credit facilities with U.S. Bank consist of a
revolving line of credit and three term notes. Although the line of credit is
not due until December 3, 2000, U.S. Bank has the right to demand payment at any
time. In addition, although the term notes have scheduled repayment dates, the
term notes are due upon demand in the event that U.S. Bank demands repayment
under the credit facilities. Accordingly, the Company has classified all of the
amounts under the credit facilities at December 31, 1997 and September 30, 1998,
as current liabilities. On June 18, 1998, the Company signed an amendment to
its credit facilities with U.S. Bank, which increased the interest rate on all
borrowings by .90%. Effective June 1, 1998, interest started to accrue on the
unpaid balance of the notes and revolving line of credit at U.S. Bank's
Reference Rate plus 2.25%. The interest accrues on any outstanding
over-advances, as defined by the agreement, at U.S. Bank's Reference Rate plus
3.4%. U.S. Bank has agreed to defer principal payments of approximately $46,166
per month through March 1, 1999, contingent upon the Company raising a minimum
of $350,000 through an equity/debt offering and contingent upon the Company
successfully negotiating with its other machine tool vendors, whom the Company
has financing with, for the Company to defer making principal repayments for the
same amount of time as U.S. Bank. The Company will be required to resume
regular monthly principal payments on April 1, 1999, and make double the monthly
principal payment of $92,333 beginning November 1, 1999, until the deferred
principal payments are paid. The Company is also required to pay U.S. Bank a
fee of $2,500 for each month that the Company elects to defer principal
payments. There can be
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<PAGE>
no assurance that the lender will continue to provide credit to the Company.
If U.S. Bank demanded full payment of the credit facilities, the Company
would need to obtain financing from another source. There can be no assurance
that the Company would be able to obtain such financing on terms acceptable
to the Company or at all. As of September 30, 1998, the Company had borrowed
approximately $5,517,000 and had additional availability of approximately
$423,000 under the credit facilities.
The Company had cash flows from operations of $9,910 for the nine months
ended September 30, 1998, compared to cash flows from operations of $2,424,220
for the comparable period in 1997. The decrease in cash flows from operations
for the nine months ended September 30, 1998, from the comparable period in 1997
was due primarily to lower sales volume, and a decrease in sales of higher
margin medical products, while fixed overhead did not decrease in proportion to
the lower sales volume. The Company's ability to meet its continuing cash flow
requirements is dependent on achieving adequate sales and margins from its
operations and the ability to continue borrowing under its credit facilities
with U.S. Bank.
The Company continues to experience a decrease in sales of one of its blood
centrifuge models to the Company's largest customer, which until August 1997,
was being produced and shipped in large quantities to the Company's largest
customer. Based on information from this customer, the Company currently
expects this lower level of sales to continue into the first half of 1999. This
customer continues to order and take delivery of other products manufactured by
the Company. The Company expects the level of sales that it experienced during
the first nine months of the year to remain relatively consistent for the
remainder of 1998, due to the continuing softness of sales of its medical
products and the delay in the commencement of production of a fuel filter
manifold for a large engine manufacturing customer until 1999. The Company's
efforts to attract industrial and cryogenic product customers may result in some
improvement in sales toward the end of 1998. Due to the lower sales and the
resulting impact on cash, the Company is exploring additional cash conservation
and generation strategies. There can be no assurance that sales to the
Company's largest customer will return to expected or previous levels or that
sales of other products will be sufficient to achieve positive cash flow or
profitability. The Company's ability to continue operations is dependent on its
ability to increase sales and maintain adequate margins on sales. In addition,
if the Company's is unable to increase sales from current levels and generate
positive cash flows from operations, it will be unable to meet its debt service
requirements and may be forced to cease operations and may need to seek
protection under U.S. bankruptcy laws.
Net cash used in investing activities was $110,758 for the nine months
ended September 30, 1998, compared to cash used in investing activities of
$601,902 for the comparable period in 1997. The decrease was due primarily to a
reduction in capital expenditures during the first nine months of 1998.
Net cash provided by financing activities was $58,706 for the nine months
ended September 30, 1998, compared to cash used in financing activities of
$1,778,541 for the comparable period in 1997. The cash provided by financing
activities during the nine months
13
<PAGE>
ended September 30, 1998, was primarily due to increased borrowings under the
Company's asset-based line of credit to fund operating activities, partially
offset by principal repayment of term debt under the credit facilities of
approximately $360,000. The Company also made principal payments of $167,448
toward financed equipment debt for the nine months ended September 30, 1998.
Although the Company was able to obtain sufficient funds under its asset-based
financing arrangement to meet its operating needs during the nine months ended
September 30, 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 November 11, 1998, the Company had borrowed approximately
$5,582,000, and had additional availability of approximately $32,000 under its
asset-based line credit facilities.
As discussed above, the Company has experienced a decrease in sales volume,
an increase in operating and net losses, and an increase in its working capital
deficit during the nine months ended September 30, 1998. Although management is
seeking to increase sales, reduce costs, modify debt repayment terms and to
raise additional funds through a equity/debt offering, there can be no assurance
that management's efforts will be sufficient to allow the Company to continue
operations. If these efforts are not successful, the Company could seek
protection under the U.S. Bankruptcy Code. None of the financial data presented
above or the related discussion has been modified to reflect the effects, if
any, that would result if such protection is sought by the Company.
The Company is in the process of amending its lending agreement (the
"agreement") with U.S. Bank National Association ("U.S. Bank"). U.S. Bank has
agreed to defer principal payments of approximately $46,166 per month through
March 1, 1999 contingent upon the Company raising a minimum of $350,000 through
an equity/debt offering and contingent upon the Company successfully negotiating
with its other machine tool vendors, whom the Company has financing with, for
the Company to defer making principal repayments for the same amount of time as
U.S. Bank. The Company has received verbal commitments from machine tool
vendors, who have agreed to the same terms as the Bank, on seven of its nine
equipment notes. The aggregate machine tool vendor principal deferral is
approximately $18,500 per month. The Company will be required to resume regular
monthly principal payments on April 1, 1999, and make double the monthly
principal payment in the amount of $92,333 beginning November 1, 1999 until the
deferred principal payments are paid. The Company is also required to pay U.S.
Bank a fee of $2,500 for each month that the Company elects to defer principal
payments and to extending its lending arrangement until December 3, 2000. As of
September 30, 1998, the Company had borrowed approximately $5,517,000 and had
additional availability of approximately $423,000 under its line of credit
facilities. There can be no assurance that the lender will continue to provide
credit to the Company. If the lender demanded full payment of the credit
facilities, the Company would need to obtain financing from another source.
There can be no assurance that the Company would be able to obtain such
financing on terms acceptable to the Company or at all.
14
<PAGE>
YEAR 2000 ISSUES
The Company began conducting an internal review of its information
technology systems and non-information technology systems with embedded
technology applications in May 1997, to identify the systems that could be
affected by the "Year 2000" issue. This internal review is ongoing, 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 information technology systems. In
addition, during the second quarter ended June 30, 1998, the Company began to
address potential third party information system problems by sending out a Year
2000 compliance survey. The Company has also sent this survey to critical
business partners to reasonably assure that they are adequately prepared. After
review of responses from parties the Company considers critical, the Company
will be able to determine the probability that the failure of a third party
system will have an adverse effect on the Company. The Company expects to have
the results of this survey summarized and implement any preventative measures by
the end of 1998. The Company plans to evaluate every piece of equipment in its
facilities. Equipment that is non-compliant will be brought into compliance,
replaced or taken out of service. The Company's Year 2000 Committee is also
concurrently developing a contingency and disaster recovery program to resolve
issues that may result from failure of the Year 2000 implementation plan. As
part of its Year 2000 compliance program, the Company plans to identify
alternate vendor sources for vendors who do not respond to our questionnaires or
who appear to not be in compliance. Although no assurance can be made, given the
nature of its major customers, the Company does not expect that it will
encounter significant problems with respect to customer compliance with Year
2000 issues. The Company has set an objective to have all systems Year 2000
compliant by the second 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. The Securities and Exchange Commission's
recent guidance for Year 2000 disclosure also urges companies to describe their
most likely worst case Year 2000 scenario. The Company believes that the most
likely worst case scenario is that the Company will have to add additional staff
and/or reassign existing staff and/or acquire additional equipment or software
during the time period leading up to and immediately following December 31,
1999, in order to address Year 2000 issues that unexpectedly arise. Management
believes that failure of the Company's and/or third parties' information
technology systems could have a material adverse impact on the operations of the
Company.
15
<PAGE>
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, strong efforts to attract new business 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 losses generated for the nine months ended
September 30, 1998. There can be no assurance that this customer or other
customers who have reduced or delayed shipments 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.
16
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports
(a) Exhibits
<TABLE>
<CAPTION>
ITEM NO. DESCRIPTION METHOD OF FILING
-------- ----------- ----------------
<C> <S> <C>
27.1 Financial Data Schedule Filed herewith electronically.
for the nine months ended
September 30, 1998
</TABLE>
(b) Reports on Form 8-K.
There were no reports on Form 8-K which were filed during the third quarter
of 1998.
17
<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: November 13, 1998 By: /s/ Michael J. Tate
----------------- ----------------------------------------
Michael J. Tate
President, Chief Executive Officer and
Chief Financial Officer (principal
executive and financial officer)
Date: November 13, 1998 By: /s/ William H. Johnson
----------------- ----------------------------------------
William H. Johnson
Vice President, Controller and Secretary
(principal accounting officer)
18
<PAGE>
REUTER MANUFACTURING, INC.
EXHIBIT TO QUARTERLY
REPORT ON FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
ITEM NO. DESCRIPTION METHOD OF FILING
-------- ----------- ----------------
<C> <S> <C>
27.1 Financial Data Schedule Filed herewith electronically.
for the nine months ended
September 30, 1998
</TABLE>
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 71,092
<SECURITIES> 0
<RECEIVABLES> 1,684,132
<ALLOWANCES> 0
<INVENTORY> 1,650,480
<CURRENT-ASSETS> 3,452,170
<PP&E> 12,911,046
<DEPRECIATION> 8,734,866
<TOTAL-ASSETS> 7,628,350
<CURRENT-LIABILITIES> 7,457,431
<BONDS> 0
0
0
<COMMON> 918,541
<OTHER-SE> 17,774,153
<TOTAL-LIABILITY-AND-EQUITY> 7,628,350
<SALES> 2,852,428
<TOTAL-REVENUES> 2,852,428
<CGS> 2,666,611
<TOTAL-COSTS> 3,568,437
<OTHER-EXPENSES> 181,391
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 179,235
<INCOME-PRETAX> (897,400)
<INCOME-TAX> 0
<INCOME-CONTINUING> (897,400)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (897,400)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
</TABLE>
