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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 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 NO.: 0-1561
____________________
REUTER MANUFACTURING, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0780999
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
410 11TH AVENUE SOUTH 55343
HOPKINS, MINNESOTA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 935-6921
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act
COMMON STOCK, PAR VALUE $0.1875 PER SHARE
____________________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. / /
The Registrant's revenues for the fiscal year ended December 31, 1998
were $12,269,183.
As of March 23, 1999, 4,898,885 shares of Common Stock of the Registrant
were deemed outstanding, and the aggregate market value of the Common Stock of
the Registrant (based upon the average of the closing bid and asked prices of
the Common Stock at that date), excluding outstanding shares beneficially owned
by directors and executive officers, was approximately $2,141,417.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-KSB incorporates by reference
information (to the extent specific sections are referred to herein) from the
Registrant's Proxy Statement for its, May 11, 1999, Annual Meeting of
Shareholders (the "1999 Proxy Statement").
Transitional Small Business Disclosure Format (Check one): YES / / NO /X/
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PART I
FORWARD LOOKING STATEMENTS
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 PROVIDES A SAFE
HARBOR FOR FORWARD-LOOKING STATEMENTS. THIS REPORT MAY CONTAIN FORWARD-LOOKING
STATEMENTS, INCLUDING REFERENCES TO ANTICIPATED SALES VOLUME AND HIGHER MEDICAL
PRODUCT MARGINS AND ALSO RELATING TO SUCH MATTERS AS ESTABLISHING NEW OR
IMPROVING EXISTING RELATIONSHIPS WITH CUSTOMERS OF THE COMPANY, OTHER BUSINESS
DEVELOPMENT ACTIVITIES, ANTICIPATED FINANCIAL PERFORMANCE, BUSINESS PROSPECTS,
AND SIMILAR MATTERS. SUCH FORWARD-LOOKING STATEMENTS BY THEIR NATURE INVOLVE
SUBSTANTIAL RISKS AND UNCERTAINTIES, AND ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THE ANTICIPATED RESULTS OR OTHER EXPECTATIONS EXPRESSED IN THE
FORWARD-LOOKING STATEMENTS. 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 LOSS FROM CONTINUING OPERATIONS
DURING 1998. THERE CAN BE NO ASSURANCE THAT THIS CUSTOMER WILL RESUME SHIPMENTS
TO PRIOR OR EXPECTED LEVELS IN THE FUTURE. THESE RISKS AND UNCERTAINTIES
INCLUDE, BUT ARE NOT LIMITED TO, THE COMPANY'S ABILITY TO EXPAND ITS PRODUCT
OFFERINGS AND TO DEVELOP ITS REPUTATION IN MANUFACTURING PRODUCTS FOR SELECT
INDUSTRIES SUCH AS MEDICAL INDUSTRIES, AND THE RISKS AND UNCERTAINTIES DESCRIBED
IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" IN THIS REPORT.
ITEM 1. DESCRIPTION OF BUSINESS.
INTRODUCTION
The Company is principally a contract manufacturer of precision
machined components, assemblies and devices for medical and industrial
original equipment manufacturers ("OEM"). The Company manufactures on a
contract basis, among other items, close tolerance bearing-related assemblies
for the medical device industry. In order to differentiate itself from its
competitors, the Company emphasizes its design engineering and manufacturing
engineering capability and support. The Company also manufactures and sells,
under the Reuter-Registered Trademark- name, self-powered oil centrifuges and
laboratory centrifuges, which are sold by the Company's sales force and
distributor network to the OEM or end user, and to distributors.
The Company's contract manufacturing business is concentrated in the
medical device field and includes production of blood centrifuges, blood pumps,
blood analyzers, thrombectomy proximal motors, organic chemical synthesizers,
and valves for medical oxygen delivery. Other contract manufacturing includes
gas regulators, cryogenic parts, desk top book binding equipment and
miscellaneous industrial parts. Contract manufacturing accounted for
approximately 89% of the Company's net sales in 1998.
The Company also manufactures products under its own trade names,
which accounted for approximately 11% of the Company's net sales in 1998. The
Company's trade name manufacturing business is concentrated in two principal
areas. The Company produces Envi-ro-fuge 2000-Registered Trademark-
self-powered oil centrifuges for stationary and mobile internal combustion
engines. The Company also sells a limited line of full flow oil filters as a
complement to the oil centrifuges. The Company's other principal trade name
manufacturing products are Reuter/Sollami-Registered Trademark- rotary vane
actuators, hydraulic and pneumatic, which are used to impart motion in diverse
industrial and special applications. The Company decided to discontinue its
efforts related to the rotary vane actuator product and recorded a charge to
operations of approximately $477,000 during the quarter ended September 30,
1998, primarily related to intangible assets associated with the discontinued
product line. The Company also markets and
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sells a line of laboratory centrifuges on which sales began late in 1997.
The laboratory centrifuges are being sold through manufacturing
representatives and distributor networks of the Company. The Company also
began manufacturing prototype units of a desk top book binding machine in
late 1998. The Company's trade name manufacturing business requires
substantial design and development engineering input.
The Company was incorporated in 1956 as a Minnesota corporation. The
principal executive offices of the Company are located at 410 Eleventh Avenue
South, Hopkins, Minnesota 55343. The Company's telephone number is (612)
935-6921.
PRODUCTS AND MARKETS
CONTRACT MANUFACTURING. The Company manufactures to customer
specifications, highly engineered products and sub-assemblies on a contract
basis. Since early 1994, the Company has directed its emphasis toward the
manufacture of assemblies for the medical device industry, such as blood
centrifuges, molecular synthesizers, blood analysis equipment, and other medical
products. The Company believes its engineering cooperation on prototype
development with its medical and other product customers will result in future
manufacturing orders and will protect the business from competitors. The
Company also has expanded its business of contract manufacturing of precision
devices for industrial use, such as gas pressure regulators, cryogenic pumps,
desk top book binding equipment and a wide range of piece parts for industrial
applications.
The basic specifications and tolerances for the products manufactured
by the Company are initially provided by the customer. The Company is involved
early in design review and development to effect potential long-term cost
reductions and performance improvements. Upon receipt of an initial order from
a customer, the Company designs and manufactures the tooling required to produce
the device to the customer's specifications and tolerances. Raw material,
castings, springs, bearings and similar parts are purchased by the Company, and
the parts are machined and assembled at the Company's plant.
TRADE NAME PRODUCTS. The Company manufactures and sells products
carrying the Company's trade names. The Company has developed and is
manufacturing and marketing centrifuges for continuous removal of contaminants
from lubricating oil in internal combustion engines and expects to add
additional products to this and related centrifuge fields. In 1997, the
Company entered into a product development, licensing, manufacturing and
marketing agreement, including certain technology for a multi-product line of
personal laboratory centrifuges, and started production and sales of these items
during the fourth quarter of 1997. In September 1998, the Company terminated
the sales and marketing agreement for these products, and is now marketing and
selling these products through its own distributor network.
STRATEGY
The Company's objective is to become indispensable to the customer
thereby ensuring that the Company will obtain subsequent production business.
The Company pursues this strategy by providing engineering input throughout the
development and production processes of its customers' products. This requires
the Company to maintain a strong design, application, and manufacturing
engineering capability and capacity. In addition, the Company generally
designs,
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manufactures and owns the tooling required to produce its customers'
products. Essentially all fixtures and prototypes are produced in the
Company's tool and prototype department by highly trained and skilled
toolmakers. These strategies improve the ability of the Company to create a
long-term production relationship with the customer. Customers generally do
not sign long-term production contracts with the Company.
In addition to continuing to build strong customer relationships, the
Company also plans to pursue the following strategies:
- Continue to control costs and expenses commensurate with the Company's
current sales levels in an effort to generate cash flows from
operations.
- Expand the Company's precision manufacturing medical device customer
base and related sales.
- Expand the Company's product offerings to include spinning devices,
rotary assemblies and motion control devices.
- Expand the market for the Company's trade name products.
- Diversify selectively into industrial parts and components markets.
SALES AND MARKETING
The Company sells its manufacturing services and trade name
products through its own sales representatives and independent distributor
networks. The Company has its own inside sales force, in addition to
distributor networks, which markets and sells the Company's products. All of
these individuals develop leads primarily through networking, selected
advertising and trade shows.
CUSTOMERS
The Company's customers typically manufacture and sell complete
equipment in a wide range of industries including blood processing, blood
analysis, pharmaceutical laboratories, medical product distributors, internal
combustion engines, electronics, and cryogenics. The initial attraction of
the Company to potential customers is usually the Company's demonstrated
engineering support capability and its record of rapid development and
delivery of high quality products. The Company's record of maintaining
permanent customer relationships is strong. The Company's medical device
customers sell products for general blood processing and surgical
applications, blood analysis, oxygen treatment of ambulatory patients and
similar applications. The Company's two largest medical customers accounted
for approximately 57% and 68% of net sales in 1998 and 1997, respectively.
The Company believes that a significant reduction of orders from its largest
customer would have a material adverse effect on its business. During the
last half of 1997 and all of 1998, reductions in scheduled shipments to the
Company's largest customer were primarily responsible for the loss from
continuing operations. The reduction in scheduled shipments to this customer
began to come back mid-February, 1999, however, there can be no assurance
that sales will return to previous or expected levels from this customer.
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SUPPLIES
The raw materials used by the Company in its manufacturing
operations generally are reasonably available. The Company seeks to maintain
multiple sources of the parts and materials it purchases from suppliers;
however, certain significant customers limit and/or designate specific
suppliers. The availability of such parts and materials could affect the
Company's ability to fill customers' orders on a timely basis. Management of
the Company believes that the interruption of its relationships with
suppliers would not have a material adverse effect over the long-term, as
parts and materials suitable for the production of the types of products the
Company manufactures would be available from other suppliers.
The Company generally manufactures products to a customer's
specifications on a contract basis, and carries reasonable amounts of
inventory to meet rapid delivery requirements of customers and to assure a
continuous allotment of goods from suppliers. The Company generally does not
provide extended payment terms to customers.
COMPETITION
The contract manufacturing business in which the Company engages is
highly competitive. Many of the competitors of the Company have greater
sales volume and resources than the Company. The principal elements of
competition are quality, service, delivery, price and meeting customer
requirements. The Company believes that it accounts for only a small portion
of aggregate national sales of the manufacturing service it provides. The
Company believes, however, that its strong engineering capability gives it a
competitive advantage. Approximately 12% of the Company's employees are
engineers.
RESEARCH AND DEVELOPMENT
The Company conducts research and development activities primarily
related to prototype development of customers' products and products sold
under its trade names. The Company provides engineering services to support
its customers in the development of new products including, enhancements to
current products.
BACKLOG
The Company makes product forecasts for future delivery based upon
frequently updated information from customers; such forecasts are then
adjusted or replaced by actual purchase orders or production releases. On
March 23, 1999, the Company's backlog of orders and releases was
approximately $3.7 million, compared to approximately $6.8 million on March
23, 1998. Management expects that the backlog will be filled during the
current year, and that additional orders will be received during the current
year. The Company's backlog tends to fluctuate as a consequence of large
orders or releases being placed by customers who schedule delivery of the
product over future months. The usual time period between receipt of an order
and the first delivery of the product by the Company is 2 to 6 months. The
delivery period for subsequent orders generally is shorter than the period
for the initial order. The Company believes its backlog is firm; however the
Company's customers do not sign production contracts and the customers can
reduce, reschedule, or cancel orders without contractual penalty.
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EMPLOYEES
As of December 31, 1998, the Company had 112 employees, which
includes 110 full time employees and 2 part time employees.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's executive offices and principal manufacturing
facilities are located at 410-11th Avenue South, Hopkins, Minnesota. These
facilities are owned by the Company. The building has approximately 110,000
square feet of which approximately 13,000 square feet are devoted to office
space, 97,000 square feet are devoted to manufacturing, and warehouse
purposes and approximately 65% of the space is being utilized. The building
is located on approximately 7.5 acres of land. The Company considers this
facility to be well maintained, in good operating condition, and believes
that such manufacturing facilities can accommodate substantial future growth.
The Company owns sufficient manufacturing equipment to generally enable
it to meet its sales requirements. This equipment includes horizontal and
vertical milling machines, grinders, lathes, chucking machines, drilling
machines, sawing equipment, testing and inspection equipment, clean room
facilities, and other close tolerance CNC machines. The production machines
are computer controlled, which ensures that operations are repeatable.
ITEM 3. LEGAL PROCEEDINGS.
During December 1997, in connection with obtaining new credit
facilities, the Company undertook an environmental inspection of its
manufacturing facility. As part of conducting a Phase I and Phase II
environmental assessment of the facility, soil boring and groundwater work
indicated the presence of potentially hazardous substances and petroleum
products within the soil and groundwater located beneath the site. The
Company notified the applicable regulatory agency (Minnesota Pollution
Control Agency), as required, and is working with that agency to resolve
these issues. However, because the results are still preliminary, the
Company is not able to assess whether the Company will ultimately be held
liable for the presence of these substances at the site nor the Company's
financial exposure if it is found liable. At December 31, 1998, the Company
had accrued $20,000 for the cost of additional environmental work scheduled
to commence during 1999, which will determine the magnitude of the problem
and what remediation efforts the Company must undertake to rectify the
problem.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this Annual Report on Form
10-KSB.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of the Company, their ages, the year first
elected or appointed as an executive officer and the offices held as of March
23, 1999, are as follows:
<TABLE>
<CAPTION>
Position (s) with the Company
Name (age) Or Principal Occupation
- ---------- -----------------------
<S> <C>
Michael J. Tate (59) Chief Executive Officer, President and
Chief Financial Officer
James W. Taylor (80) Chairman of the Board of Directors
Robert D. Klingberg (54) Senior Vice President - Chief Technical
Officer
William H. Johnson (41) Vice President - Controller and Secretary
Gary D. Gangstee (42) Vice President - Marketing and Sales
</TABLE>
Mr. Tate was elected Chief Executive Officer, President and Chief
Financial Officer and has been an employee director of the Company since
April 20, 1998. Prior to joining the Company, he was Vice President/Chief
Operating Officer of Minnesota Valley Engineering from August 1996. Prior to
1996, Mr. Tate held other positions at Minnesota Valley Engineering,
including Vice President/General Manager Industrial Business Unit from March
1993 to August 1996 and Vice President Finance/Treasurer from September 1989
to March 1993. Prior to 1989, Mr. Tate performed various consulting projects
with Peat Marwick Main & Co. from March 1986 to September 1989 and Coopers &
Lybrand LLP from March 1981 to March 1986. Prior to 1981, Mr. Tate held
various positions with companies in the private sector.
Mr. Taylor was elected Chairman of the Board of the Company on April 20,
1998. Mr. Taylor was elected Chief Executive Officer and President of the
Company in November 1992 and Chief Financial Officer in March 1994. He has
also been the President of Taylor Consultants, Inc., a management and
financial consulting firm, for more than five years. Mr. Taylor also is a
director of Compositech Ltd. and QC Solutions, Inc.
Mr. Klingberg has been employed by the Company since October 1992. He
was elected Senior Vice President - Chief Technical Officer in June 1997.
From 1986 to October 1992, Mr. Klingberg was the principal of Klingberg
Consulting, Inc., a consulting firm engaged in the design, installation and
testing of motion control systems.
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Mr. Johnson has been employed by the Company since June 1987. He was
elected Vice President - Controller in August 1995. Prior to 1987, Mr.
Johnson held various positions with companies in the private sector and has
also worked in public accounting. He has served as Secretary of the Company
since October 1994.
Mr. Gangstee has been employed by the Company since February 1994. He
was elected Vice President - Marketing and Sales in June 1997. From October
1990 until February 1994, Mr. Gangstee was employed by Kurt Manufacturing, a
contract manufacturer of precision components.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded in the local over-the-counter
market under the symbol "RTMF." The following table sets forth, for each of
the calendar periods indicated, the quarterly high and low bid quotations for
the Company's Common Stock quoted on the OTC Bulletin Board. The prices in
this table represent prices between dealers, and do not include adjustments
for retail mark-ups, mark-downs or commissions and may not represent actual
transactions.
<TABLE>
<CAPTION>
Year High Low
- ---- ---- ---
<S> <C> <C>
1998: First Quarter 2 1/2 2 1/8
Second Quarter 2 11/16 7/8
Third Quarter 1 1/4 1/2
Fourth Quarter 11/16 3/8
1997: First Quarter 3 3/4 3 1/8
Second Quarter 5 3 1/8
Third Quarter 4 7/8 3 1/8
Fourth Quarter 3 5/8 2 1/8
</TABLE>
As of March 23, 1999, there were approximately 1,304 registered record
holders of the Company's Common Stock.
No cash dividends were declared or paid by the Company during 1998 or 1997,
and the Company does not intend to pay dividends on its Common Stock in the
foreseeable future. The Company is prohibited from paying dividends on its
Common Stock under agreements with its lender.
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ITEM 6. 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.
Throughout 1998, the Company continued to experience a decrease in sales
for one of its blood centrifuge models to the Company's largest customer.
Until August 1997 this product was being produced and shipped in large
quantities to that customer. Beginning mid-February, 1999, sales of that
particular blood centrifuge model started to resume, however, 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
largest customer continues to order and take delivery of other products
manufactured by the Company. The Company's efforts to attract industrial and
cryogenic product customers resulted in some improvement in sales toward the
end of 1998. 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 increase sales from current levels and generate positive
cash flows from operations, it would be unable to meet its debt service
requirements and may be forced to cease operations or may need to seek
protection under U.S. bankruptcy laws. Due to the lower sales and the
resulting impact on cash, the Company is exploring additional cash
conservation and generation strategies. On December 22, 1998, the Company
completed a private placement of debentures with warrants and raised $350,000
in cash, which will be used to fund operations.
RESULTS OF OPERATIONS
The Company's net sales decreased by 31.9% in 1998 from 1997, compared to
an increase in net sales of 27.2% in 1997 from 1996. Net sales from the
medical, industrial, and tradename products were $8,425,567, $2,696,963 and
$1,146,653, respectively, for 1998, compared to $14,130,371, $3,245,479 and
$651,168, respectively, for 1997. The majority of the sales decrease for 1998
was attributable to decreased unit sales to the Company's largest customer.
Sales to the Company's two largest customers totaled $6,951,792 in 1998,
compared to $12,968,667 in 1997. While sales to the Company's two largest
customers accounted for 56.7% of net sales in 1998, and 71.9% of net sales in
1997, the Company's largest customer accounted for 43.5% and 63.0% of net sales
in 1998 and 1997, respectively. The Company's net sales in 1998 were adversely
affected by a reduction in scheduled shipments of one high volume product from
the Company's largest customer. The Company estimates that approximately $4.0
million and $1.5 million of sales and operating income, respectively, were lost
during 1998 as a result of this reduction. Although not unexpected, the Company
also lost an automotive fuel
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pump bushing subcontract (due to pricing and redesign) that had provided
about $1.6 million dollars of sales in 1997 and approximately $1.0 million
dollars of sales in 1998. The Company has taken corrective action to control
expenses and has explored opportunities to secure additional work during the
ongoing reduction in shipments.
Gross profit was 6.0% in 1998, compared to 23.9% in 1997. The decline in
gross profit as a percentage of sales in 1998 was primarily due to a decrease in
higher margin medical product business as a percentage of overall sales and the
loss of sales from the Company's largest customer and the automotive fuel pump
bushing contract. In addition, the Company's overhead structure did not
decrease proportionately to the decline in sales during 1998. During the
quarter ended September 30, 1998, the Company took a charge to operations of
$447,327, primarily related to the write-off of intangible assets associated
with a discontinued product line of rotary vane actuators.
Selling, general and administrative expenses were $2,211,954 or 18.0%
of net sales in 1998, compared to $2,879,676 or 16.0% of net sales in 1997.
The decrease in selling, general and administrative expenses is due in part
to a decrease in selling related expenses of approximately $200,000,
principally a reduction in sales salaries and benefits and a reduction in
advertising expenses to market the Company's oil centrifuges and rotary vane
actuators. Administrative expenses decreased approximately $468,000 in 1998.
Administrative salaries and benefits increased approximately $96,000 from
1997, resulting primarily from the hiring of a new President and Chief
Executive Officer in April 1998, which was offset by a decrease in Company
contributions to employee benefit plans of approximately $105,000 as a result
of losses from continuing operations during 1998. Also during 1998, there
was a decrease in computer supplies and services and office supplies expense
of approximately $86,000 as a result of tighter cost control. Training and
education expenses decreased approximately $80,000 in 1998 from 1997,
primarily from reduced management training and education related to ISO 9001
certification efforts on a Company wide basis. Professional fees and
services, including legal and accounting, decreased approximately $147,000
for 1998 from 1997. The decrease was primarily related to the completion of
the Sanwa debt restructuring transactions, bank line of credit restructuring,
and related legal and accounting costs. Other administrative expenses
decreased approximately $146,000 in 1998 from 1997, primarily resulting from
general decreases in expenses due do lower sales volume and increased cost
control.
In 1998, the Company had an operating loss of $1,924,049, compared to
operating income of $1,429,345 in 1997. The decrease in operating income in
1998 was due to lower medical product and industrial sales and the rotary vane
actuator write-off charge to operations along with decreased operational
efficiencies as a result of the decreased sales volume, net of the decrease in
selling and administrative expenses.
The Company had a loss from continuing operations of $2,594,894 or $.53
per share, compared to income from continuing operations of $1,027,349 or $.24
per share ($.23 per share on a diluted basis) in 1997. The 1998 loss from
continuing operations resulted from the reasons stated above, along with higher
interest expense of approximately $200,000 due to increased utilization of the
Company's asset-based short-term financing arrangement and higher interest rates
during 1998.
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The Company recorded a net loss for 1998 and consequently did not record a
provision for income taxes. The Company was profitable during 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 generated additional tax deductions for
1997 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. These costs were not deductible for tax reporting purposes until
1997. Because these additional tax deductions resulted in a tax loss for the
Company during 1997, the Company did not record a provision for alternative
minimum taxes for 1997.
The net income for the period ended December 31, 1997 was $5,097,764 or
$1.17 per share ($1.12 per share on a diluted basis) and included a gain from
discontinued operations of $275,936, or $0.06 per share, and an extraordinary
gain on debt restructuring of $3,794,479, or $0.87 per share, ($0.83 per share
on a diluted basis). The gain from discontinued operations in 1997 resulted
from the receipt of funds from an escrow account related to the Company's
previously deconsolidated subsidiary, Reuter Recycling of Florida, Inc. ("RRF"),
which was sold October 25, 1995. The funds were previously placed in escrow to
fund any future liability related to this deconsolidated subsidiary. Under the
agreement, the remaining funds were to be distributed equally between the lender
to RRF and the Company after the passing of a two-year period which ended
October 26, 1997.
The effect of inflation on the Company's results has not been significant.
LIQUIDITY AND CAPITAL RESOURCES. At December 31, 1998, the Company had a
working capital deficiency of $4,099,333, compared to a working capital
deficiency of $2,835,744 at December 31, 1997. The current ratio was .48 at
December 31, 1998, compared to .59 at December 31, 1997. The increase in the
working capital deficiency and the decrease in the current ratio are
primarily due to a decrease in cash generated from operations, and an
increase in borrowing under the Company's asset-based line of credit and term
obligations. The Company's credit facilities with US Bancorp consist of a
revolving line of credit and three term notes. Although the line of credit
is not due until December 3, 2000, US Bancorp has the right to demand payment
at any time. In addition, although the term notes have scheduled repayment
dates, the term notes may be due upon demand in the event that US Bancorp
requires demand repayment under the credit facilities. Accordingly, the
Company has classified all of the amounts owing under the credit facilities,
at December 31, 1998 and 1997, as current liabilities. The credit facilities
agreement includes a subjective material adverse change clause under which
the borrowings could become due and payable.
On June 18, 1998, the Company signed an amendment to its credit facilities
with US Bancorp, 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 US Bancorp's Reference Rate (as defined in
the agreement with US Bancorp) plus 2.25%. The
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interest accrues on any outstanding over-advances, as defined by the
agreement, at US Bancorp's Reference Rate plus 3.4%. US Bancorp has agreed
to defer principal payments of approximately $46,166 per month through March
1999. 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 US Bancorp a fee of $2,500 for
each month that the Company elects to defer principal payments. There can be
no assurance that the lender will continue to provide credit to the Company.
If US Bancorp 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 December 31, 1998, the Company had
borrowed approximately $5,510,000 and had additional availability of
approximately $98,000 under the credit facilities.
On December 22, 1998, the Company completed a $350,000 private placement
of debentures with warrants. The proceeds are being used to fund operating
activities.
The Company had negative cash flow from operations of $309,043 for the
year ended December 31, 1998, compared to positive cash flow from operations of
$1,600,781 for the year ended December 31, 1997. The decrease in cash flow from
operations for the year ended December 31, 1998, was due primarily to lower
sales volume and a decrease in sales of higher margin medical products, while
overhead costs did not decrease in proportion to the lower sales volume.
Throughout 1998, the Company continued to experience a decrease in sales
for one of its blood centrifuge models to the Company's largest customer. Until
August 1997 this product was being produced and shipped in large quantities to
that customer. Beginning mid-February, 1999, sales of that particular blood
centrifuge model started to resume. In addition, this customer continues to
order and take delivery of other products manufactured by the Company. The
Company's efforts to attract industrial and cryogenic product customers resulted
in some improvement in sales toward the end of 1998. 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 and the ability to continue borrowing under its credit facilities with US
Bancorp. If the Company is unable to increase sales from current levels and
generate positive cash flows from operations, it would be unable to meet its
debt service requirements and may be forced to cease operations or may need to
seek protection under U.S. bankruptcy laws. Due to the lower sales and the
resulting impact on cash, the Company is exploring additional cash conservation
and generation strategies.
Net cash used in investing activities was $106,265 and $426,714 for the
years ended December 31, 1998 and 1997, respectively. The decrease in 1998 was
primarily due to a reduction in capital expenditures during the year.
Net cash provided by financing activities was $481,949 for the year ended
December 31, 1998, compared to cash used in financing activities of $1,135,813
for the year ended December 31, 1997. The increase in net cash provided by
financing activities in 1998 was
12
<PAGE>
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 $505,000. The
Company also made principal payments of approximately $188,000 on other
financed equipment debt.
Management anticipates making capital expenditures to support
diversification and growth of the manufacturing operations. Near term capital
commitments for new manufacturing equipment total approximately $170,000. The
Company anticipates obtaining sufficient amounts of capital for these
requirements through bank financing and deferred payment terms.
During December 1997, in connection with obtaining new credit
facilities, the Company undertook an environmental inspection of its
manufacturing facility. As part of conducting a Phase I and Phase II
environmental assessment of the facility, soil boring and groundwater work
indicated the presence of potentially hazardous substances and petroleum
products within the soil and groundwater located beneath the site. The
Company notified the applicable regulatory agency (Minnesota Pollution
Control Agency), as required, and is working with that agency to resolve
these issues. However, because the results are still preliminary, the
Company is not able to assess whether the Company will ultimately be held
liable for the presence of these substances at the site nor the Company's
financial exposure if it is found liable. At December 31, 1998, the Company
had accrued $20,000 for the cost of additional environmental work scheduled
to commence during 1999, to determine the magnitude of the problem and what
remediation efforts the Company must undertake to rectify the problem.
GOING CONCERN UNCERTAINTY The accompanying financial statements have been
prepared on a going concern basis, which contemplates the realization of
assets and satisfaction of liabilities in the normal course of business. As
shown in the financial statements, the Company incurred a net loss from
continuing operations of $2,594,894 for the year ended December 31, 1998, and
has a working capital deficit and stockholders' deficiency of $4,157,294 and
$1,129,135, respectively, at December 31, 1998. These factors, among others,
indicate the Company may not be able to continue as a going concern for a
reasonable period of time.
Management's plans and objectives include the following:
- Continue to control costs and expenses commensurate with the Company's
current sales levels in an effort to generate cash flows from operations.
- Expand the Company's precision manufacturing medical device customer
base and related sales.
- Expand the Company's product offerings to include spinning devices,
rotary assemblies and motion control devices.
- Expand the market for the Company's trade name products.
- Diversify selectively into industrial parts and components markets.
13
<PAGE>
The Company's ability to continue operations is dependent on its
ability to increase sales and maintain adequate margins on sales, as well as
its ability to maintain its current credit facilities with U.S. Bancorp (Note
5). In addition, if the Company is unable to increase sales from current
levels and generate positive cash flows from operations, it would be unable
to meet its debt service requirements and may be forced to cease operations
or seek protection under U.S. bankruptcy laws. Accordingly, there can be no
assurance that the Company will continue as a going concern in its current
form. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
YEAR 2000 ISSUE
STATE OF READINESS The Company has been addressing the Year 2000 issue
since May 1997. In the ordinary course of business, the Company has replaced,
or is in the process of replacing, many of its major computer systems with new
systems that have been designated to be Year 2000 compliant. The Company's plan
for Year 2000 readiness involves four phases: inventory, evaluation,
remediation, and contingency planning. Testing is an ongoing and integral part
of the evaluation, remediation and contingency planning phases.
Inventory - The Company has performed an extensive inventory of its
information technology systems and other systems that use embedded
microprocessors (collectively, "Systems"). The business processes
supported by each System have been prioritized based on the degree of
impact business operations would encounter if the Systems were disrupted.
The inventory phase also includes identifying third parties with whom the
Company has material relationships. Where a third party is critical to a
business process, efforts have been initiated to obtain Year 2000
compliance information to identify the degree of risk exposure the Company
may encounter. During the quarter ended June 30, 1998, the Company sent a
Year 2000 compliance survey to critical business partners. The Company is
working with its significant customers to share Year 2000 information and
determine their readiness. In addition, the Company is working with its
suppliers in an effort to ensure adequate supplies of raw materials.
The internal inventory phase was substantially completed in December 1998.
Regular contact with third parties with whom the Company has material
relationships will continue through 1999.
Evaluation - This phase involves computer program code review and
testing, vendor contacts and System testing. Some Systems, upon
inspection, are determined to be non-compliant and are immediately placed
on the remediation schedule. Some Systems require testing to determine
compliance status. As of March 12, 1999, the evaluation phase was 85%
complete.
Remediation - In this phase each System is either fixed, replaced or
removed. The Company's financial and manufacturing software has been
tested and found to be Year 2000 compliant. The Company's operating system
and office product software is not compliant and the Company plans to
replace these systems when it is available and
14
<PAGE>
deemed compliant by the manufacturer. This compliant software is
anticipated to be available in the second or third quarter of 1999.
The Company estimates that as of March 12, 1999, the remediation
planning phase was approximately 75% complete.
Contingeny Planning - The Company is currently developing a contingency
and disaster recovery program designed to continue critical processes in
the event the Company experiences Year 2000 disruptions despite remediation
and testing. Contingency plans are expected to be completed during the
quarter ending September 30, 1999. The Company estimates that as of March
12, 1999, the contingency planning phase is approximately 25% complete.
COSTS Preliminary cost estimates for achieving Year 2000 compliance of the
Company are approximately $50,000, including $40,000 in capital costs and
$10,000 of operating expense, with approximately $7,000 of expenses having
been incurred to date. A majority of the remaining costs are anticipated
to be incurred in 1999. No material resource contraints have been
encountered to date. Although management believes this estimate to be
reasonable, there can be no assurance that this amount will be adequate to
address the matter on a timely basis.
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. Year 2000 could result
in abnormal operating conditions, such as short-term interruption in the
manufacturing process and system monitor and control functions. These
conditions could result in the temporary delay in the manufacturing and
delivery of finished products. 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.
In summary, the Company had a disappointing fiscal 1998 and has
experienced a reduction in scheduled shipments to its largest customer, which
resulted in a loss from continuing operations for 1998 and the last six months
of 1997. The Company has taken action to control its operating expenses, reduce
overhead, restructure payment terms with its asset-based lender and other
equipment vendors, and has secured an infusion of $350,000 in proceeds from a
private placement of debentures with warrants to fund operating activities until
sales recover. There can be no assurance that these actions and future actions,
if necessary, will be sufficient for the Company to continue to meet its
continuing cash flow requirements in the future.
FACTORS THAT MAY AFFECT FUTURE RESULTS.
DEPENDENCE ON MAJOR CUSTOMER. The Company's largest customer accounted
for 43.5% and 63.0% of net sales in 1998 and 1997, respectively. The Company's
net sales in 1998 decreased $5,757,835, or 31.9%, from 1997, and sales were
primarily affected by a reduction in scheduled shipments of one high volume
product to this customer. The Company continues to sell and take orders of
other products from this customer. Sales of a previously high volume
15
<PAGE>
product from the Company's largest customer began to resume in mid-February
1999, however, no assurance can be given that sales of this product will
resume to previous or expected levels. The Company has no production
contracts with this customer and believes that further reductions in orders
from this customer would have a material adverse effect on its future
operating results.
DEPENDENCE ON NEW PRODUCTS AND CONTINUED GROWTH IN SALES VOLUME. The
Company's future success will depend on its ability to secure additional
contract manufacturing business, enhance the products it currently manufactures
under its own trade names, increase sales volume of oil centrifuges, obtain
production orders for prototype products including desk top book binding
equipment, spindle assemblies, and maintain a satisfactory volume of orders for
industrial parts.
COMPETITION. The Company believes that the principal elements of
competition are quality, service, delivery, price and meeting customer
requirements. The contract manufacturing business in which the Company engages
is highly competitive and many of the competitors of the Company have greater
sales volume and resources than the Company. Although the Company believes its
engineering capability is a competitive advantage, customers may change to other
contract manufacturers. Company management believes the Company represents only
a small portion of the aggregate national sales of contract manufacturing
services.
16
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
The following Financial Statements and Report of Independent
Accountants thereon are included herein (page numbers refer to pages in this
Report):
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants............................ 20
Balance Sheets as of December 31, 1998 and 1997.............. 21
Statements of Operations for the years
ended December 31, 1998 and 1997............................. 22
Statements of Stockholders' Equity for the years
ended December 31, 1998 and 1997............................. 23
Statements of Cash Flows for the years ended
December 31, 1998 and 1997................................... 24
Notes to the Financial Statements............................ 26
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
(a) DIRECTORS OF THE REGISTRANT.
The information under the caption "Election of Directors" in the
Company's 1999 Proxy Statement is incorporated herein by reference.
(b) EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning Executive Officers of the Company is
included in this Report under Item 4A, Executive Officers of the Registrant.
(c) COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's 1999 Proxy Statement is
incorporated herein by reference.
17
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
The information under the captions "Election of Directors --
Director Compensation" and "Executive Compensation and Other Benefits" in the
Company's 1999 Proxy Statement is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under the caption "Principal Shareholders and
Beneficial Ownership of Management" in the Company's 1999 Proxy Statement is
incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under the captions "Election of Directors -- Director
Compensation" and "Certain Transactions" in the Company's 1999 Proxy Statement
is incorporated herein by reference.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
The exhibits to this Report are listed in the Exhibit Index on pages 40
to 46 of this Report.
A copy of any of the exhibits listed or referred to above will be
furnished at a reasonable cost to any person who was a shareholder of the
Company as of March 23, 1999, upon receipt from any such person of a written
request for any such exhibit. Such request should be sent to Reuter
Manufacturing, Inc., 410 11th Avenue South, Hopkins, Minnesota 55343, Attention:
Secretary, William H. Johnson.
The following is a list of each management contract or compensatory plan
or arrangement required to be filed as an Exhibit to this Report, the location
of which is indicated in the Exhibit Index of this Report:
(1) Incentive Stock Option Plan of the Company, as amended effective
December 17, 1987
(2) Directors Stock Option Plan of the Company
(3) Summary of options granted under Directors Stock Option Plan
(4) 1991 Non-Employee Director Stock Option Plan
(5) Summary of options granted under 1991 Non-Employee Director Stock
Option Plan
18
<PAGE>
(6) 1991 Stock Option Plan, as amended
(7) Summary of Options granted under 1991 Stock Option Plan
(8) Option Agreement between Edward E. Strickland and the Company
(9) Consulting Agreement with Edward E. Strickland
(10) Independent Contractor Agreement dated as of May 16, 1991, between
Taylor Consultants, Inc. and the Company
(11) Independent Contractor Agreement dated as of November 2, 1992, between
Taylor Consultants, Inc. and the Company
(12) 1997 Non-Employee Director Stock Option Plan
(b) REPORTS ON FORM 8-K
No reports were filed under Form 8-K during 1998.
19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Reuter Manufacturing, Inc.:
In our opinion, the accompanying balance sheets and the related statements of
operations, stockholders' equity (deficiency) and cash flows present fairly,
in all material respects, the financial position of Reuter Manufacturing,
Inc. (the "Company") at December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1, the Company
has suffered a net loss from continuing operations of approximately
$2,600,000 in 1998 and has a working capital deficit in excess of $4,000,000
and stockholders' deficiency of approximately $1,100,000 at December 31,
1998, that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
February 26, 1999
<PAGE>
REUTER MANUFACTURING, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
Current assets:
Cash $ 179,875 $ 113,234
Receivables, net of allowances of $25,000 at December 31,
1998 and 1997 1,432,723 1,894,419
Inventories 2,027,040 1,979,661
Other current assets 44,685 99,612
----------------- -----------------
Total current assets 3,684,323 4,086,926
Property, plant and equipment, net 4,027,404 4,624,678
Intangible assets, net 435,207
----------------- -----------------
Total assets $ 7,711,727 $ 9,146,811
----------------- -----------------
----------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Asset-based line of credit and term obligations, bank $ 5,610,405 $ 5,313,512
Current maturities of long-term equipment financing 240,483 222,022
Accounts payable, trade 1,198,469 692,125
Accrued expenses 792,260 695,011
----------------- -----------------
Total current liabilities 7,841,617 6,922,670
Long-term equipment financing, less current maturities 657,045 740,507
Debentures payable 292,040
Other liabilities 50,160 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 and 4,863,496
shares in 1998 and 1997, respectively 918,541 911,906
Additional paid-in capital 17,832,113 17,768,127
Accumulated deficit (19,879,789) (17,284,895)
----------------- -----------------
Total stockholders' equity (deficiency) (1,129,135) 1,395,138
----------------- -----------------
Total liabilities and stockholders' equity (deficiency) $ 7,711,727 $ 9,146,811
----------------- -----------------
----------------- -----------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
21
<PAGE>
REUTER MANUFACTURING, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net sales $ 12,269,183 $ 18,027,018
Cost of sales 11,533,951 13,717,997
---------------- ----------------
Gross profit 735,232 4,309,021
Selling, general and administrative expenses 2,211,954 2,879,676
Write-off of certain assets, principally intangible assets 447,327
---------------- ----------------
Operating (loss) income (1,924,049) 1,429,345
---------------- ----------------
Other income (expense)
Interest income 946 28,558
Interest expense (677,198) (472,808)
Other, net 5,407 42,254
---------------- ----------------
Total other expense, net (670,845) (401,996)
---------------- ----------------
(Loss) income from continuing operations before discontinued
operations (2,594,894) 1,027,349
Discontinued operations:
Extraordinary gain on debt restructuring 3,794,479
Gain from discontinued operations 275,936
----------------- -----------------
Net (loss) income $ (2,594,894) $ 5,097,764
----------------- -----------------
----------------- -----------------
Basic earnings per share:
(Loss) income from continuing operations $ (0.53) $ 0.24
Discontinued operations:
Extraordinary gain on debt restructuring 0.87
Gain from discontinued operations 0.06
---------------- ----------------
Net (loss) income per share $ (0.53) $ 1.17
----------------- -----------------
----------------- -----------------
Diluted earnings per share:
(Loss) income from continuing operations $ (0.53) $ 0.23
Discontinued operations:
Extraordinary gain on debt restructuring 0.83
Gain from discontinued operations 0.06
---------------- ----------------
Net (loss) income per share $ (0.53) $ 1.12
----------------- -----------------
----------------- -----------------
Weighted average common shares outstanding:
Basic 4,883,431 4,342,328
----------------- -----------------
----------------- -----------------
Diluted 4,883,431 4,548,926
----------------- -----------------
----------------- -----------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
22
<PAGE>
REUTER MANUFACTURING, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL STOCKHOLDERS'
PAID-IN ACCUMULATED EQUITY
SHARES PAR VALUE CAPITAL DEFICIT (DEFICIENCY)
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1996 3,208,020 $ 601,504 $ 13,713,582 $ (22,382,659) $ (8,067,573)
Proceeds from private placement of
common stock, net of $400,000
of private placement costs 1,517,333 284,500 3,867,280 4,151,780
Payment of certain obligations in
exchange for common stock 37,032 6,944 118,038 124,982
Purchase of license and manufacturing
rights in exchange for common
stock 11,111 2,083 47,917 50,000
Exercise of stock options 90,000 16,875 21,310 38,185
Net income 5,097,764 5,097,764
----------- ----------- -------------- --------------- ----------------
Balances, December 31, 1997 4,863,496 911,906 17,768,127 (17,284,895) 1,395,138
Cancellation of common stock (11,111) (2,083) (7,986) (10,069)
Exercise of stock options 46,500 8,718 14,012 22,730
Issuance of warrants 57,960 57,960
Net loss (2,594,894) (2,594,894)
----------- ----------- -------------- --------------- ----------------
Balances, December 31, 1998 4,898,885 $ 918,541 $ 17,832,113 $ (19,879,789) $ (1,129,135)
----------- ----------- -------------- --------------- ----------------
----------- ----------- -------------- --------------- ----------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
23
<PAGE>
REUTER MANUFACTURING, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (2,594,894) $ 5,097,764
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Extraordinary gain on debt restructuring (3,794,479)
Depreciation 811,416 830,743
Amortization of intangible assets 61,476 62,524
Write-off of certain assets, principally intangible assets 447,327
Gain on sales of assets (37,579)
Provision for uncollectible accounts receivable 641 7,254
Provision for writedown of inventories 125,664 81,831
Changes in operating assets and liabilities:
Receivables 436,055 (37,306)
Inventories (216,912) (295,452)
Other current assets 54,927 (90,475)
Accounts payable, trade 506,344 (71,370)
Accrued expenses 97,249 (97,172)
Other liabilities (38,336) (55,502)
----------------- -----------------
Net cash (used in) provided by operating activities (309,043) 1,600,781
----------------- -----------------
Cash flows from investing activities:
Redemption of investment 250,000
Additions to property, plant and equipment (106,265) (670,378)
Purchase of license and manufacturing rights (50,000)
Proceeds from sale of assets 68,664
Other (25,000)
----------------- -----------------
Net cash used in investing activities (106,265) (426,714)
----------------- -----------------
Cash flows from financing activities:
Payment of long-term equipment financing (187,674) (7,739,193)
Proceeds from asset-based line of credit and term obligations, bank 13,509,582 22,774,695
Repayment of asset-based line of credit (13,212,689) (20,361,280)
Proceeds from private placement of debentures and common stock 350,000 4,151,780
Proceeds from exercise of stock options 22,730 38,185
----------------- -----------------
Net cash provided by (used in) financing activities 481,949 (1,135,813)
----------------- -----------------
Net increase in cash 66,641 38,254
Cash, beginning of year 113,234 74,980
----------------- -----------------
Cash, end of year $ 179,875 $ 113,234
----------------- -----------------
----------------- -----------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
24
</TABLE>
<PAGE>
REUTER MANUFACTURING, INC.
STATEMENTS OF CASH FLOWS, CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 664,655 $ 461,410
Noncash investing and financing activities:
Purchase of equipment in exchange for notes payable 122,673 619,387
Settlement of certain obligations in exchange for common stock 124,982
Purchase of license and manufacturing rights in exchange
for common stock 50,000
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
25
<PAGE>
REUTER MANUFACTURING, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION AND BASIS OF PRESENTATION:
BUSINESS DESCRIPTION:
The Company, which operates in a single business segment, is principally a
contract manufacturer of precision machined components, assemblies and
devices for medical and industrial original equipment manufacturers (OEM).
The Company manufactures on a contract basis, among other items, close
tolerance bearing-related assemblies for the medical device industry. In
order to differentiate itself from its competitors, the Company emphasizes
its design engineering and manufacturing engineering capability and
support. The Company also manufactures and sells under the Reuter
-Registered Trademark- 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.
GOING CONCERN UNCERTAINTY:
The accompanying financial statements have been prepared on a going-concern
basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, the Company incurred a net loss from continuing operations of
$2,594,894 for the year ended December 31, 1998, and has a working capital
deficit and stockholders' deficiency of $4,157,294 and $1,129,135,
respectively, at December 31, 1998. These factors, among others, indicate
that the Company may not be able to continue as a going concern for a
reasonable period of time.
Management's plans and objectives include the following:
- Continue to control costs and expenses commensurate with the
Company's current sales levels in an effort to generate cash flows from
operations.
- Expand the Company's precision manufacturing medical device customer base
and related sales.
- Expand the Company's product offerings to include spinning devices,
rotary assemblies and motion control devices.
- Expand the market for the Company's trade name products.
- Diversify selectively into industrial parts and components markets.
The Company's ability to continue operations is dependent on its ability to
increase sales and maintain adequate margins on sales, as well as its
ability to maintain its current credit facilities with US Bancorp (Note 5).
In addition, if the Company is unable to increase sales from current levels
and generate positive cash flows from operations, it would be unable to
meet its debt service requirements and may be forced to cease operations or
seek protection under U.S. bankruptcy laws.
Accordingly, there can be no assurance that the Company will continue as a
going concern in its current form. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
26
<PAGE>
REUTER MANUFACTURING, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION:
The financial statements include the accounts of Reuter Manufacturing, Inc.
and its precision manufacturing operations (the Company). For 1997, the
financial statements include, as discontinued operations, extraordinary
gains on debt restructuring associated with its inactive wholly-owned
subsidiary, EPR, Inc. (Eden Prairie Waste Processing Facility) (Note 3) and
gains from discontinued operations associated with its previously
deconsolidated subsidiary, Reuter Recycling of Florida, Inc. (Note 3).
ACCOUNTS RECEIVABLE:
A significant portion of the Company's accounts receivable is due primarily
from one customer (see Note 9). The Company performs ongoing credit
evaluations of its customers and generally does not require collateral for
the outstanding receivable balances.
INVENTORIES:
Inventories are valued at the lower of cost or market with cost determined
on a first-in, first-out basis.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are recorded at cost. Depreciation is
provided for by the straight-line method based on the estimated useful
lives of the related assets. Useful lives range from 15 to 40 for buildings
and building improvements and 5 to 7 for machinery and equipment.
Expenditures for major renewals and betterments are capitalized, and
expenditures for maintenance and repairs are charged to operations as
incurred. Upon retirement or other disposition of property, plant or
equipment, the applicable cost and accumulated depreciation are eliminated
from the accounts, and the resulting gain or loss is included in
operations.
REVENUE RECOGNITION:
The Company recognizes sales of precision manufacturing products when these
products are shipped.
INCOME TAXES:
The Company utilizes the asset and liability method of accounting for
income taxes whereby deferred taxes are determined based on the difference
between the financial statement and tax bases of assets and liabilities
using enacted tax rates in effect in the years in which the differences are
expected to reverse. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income
tax expense is the sum of the tax currently payable and the change in the
deferred tax assets and liabilities during the period.
27
<PAGE>
REUTER MANUFACTURING, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
INTANGIBLE ASSETS:
Intangible assets include patents, noncompete agreements and goodwill being
amortized on the straight-line method over their estimated useful lives of
seven to fifteen years. Also included are licensing and manufacturing
rights being amortized on the straight-line method over their estimated
useful lives of three years.
In connection with losses relating to the manufacture of two products, the
Company analyzed the carrying amount of the intangible assets and
determined that the carrying values would not be recoverable through future
cash flows. Accordingly, in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for Long-Lived Assets," the
Company wrote off its intangible assets and recorded a charge of $447,327
in the Statement of Operations for the year ended December 31, 1998.
EARNINGS (LOSS) PER COMMON SHARE:
Basic earnings per common share is computed using the weighted average
number of shares outstanding for the period. Diluted earnings per common
share is computed using the weighted average number of shares outstanding
per common share adjusted for the incremental shares attributed to
outstanding stock options under the Company's stock option plans and stock
purchase warrants.
Incremental shares attributable to the assumed exercise of stock options
and warrants for the year ended December 31, 1998 were excluded from the
computation of diluted earnings per share as the effect would be
antidilutive. For the year ended December 31, 1997, the denominator used to
calculate diluted earnings per share includes the dilutive impact of
171,392 stock options and 35,206 stock purchase warrants.
STOCK-BASED COMPENSATION:
In accordance with the provisions of Statement of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock Based Compensation",
the Company has elected to apply the provisions of APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock option plans.
USE OF ESTIMATES:
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from
those estimates.
28
<PAGE>
REUTER MANUFACTURING, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. DISCONTINUED OPERATIONS:
Effective January 1, 1994, the county in which the Eden Prairie waste
processing facility (the facility) operated substantially reduced the fees
at competing county-owned waste processing facilities. As a result, the
Company could no longer attract waste haulers using its existing fee
structure and could not generate sufficient cash to fund operations using
the county's fee structure. Accordingly, the Company ceased operation of
the facility effective January 1, 1994, and on September 1, 1994, finalized
a sale of all assets of EPR, Inc.
The net proceeds of $3,768,809 from the sale were used to repay a portion
of the debt underlying the EPR, Inc. facility. The Company retained all
liabilities of EPR, Inc., including the balance of the loan and accrued
interest underlying the facility which was guaranteed by the Company. On
January 24, 1996, and April 18, 1997, the Company entered into agreements
to restructure its guarantee of the debt obligation underlying the EPR,
Inc. facility (see Note 5).
During the fourth quarter of 1997, the Company received proceeds of
$275,936 from the release of funds that were held in an escrow account
related to the Company's previously deconsolidated subsidiary, Reuter
Recycling of Florida, Inc. (RRF), which was sold on October 25, 1995. The
funds were previously placed in escrow to fund any future liability related
to this deconsolidated subsidiary. Under the agreement, the remaining funds
were distributed equally between the lender to RRF and the Company after
the completion of a two-year period ended October 26, 1997.
4. SELECTED BALANCE SHEET INFORMATION:
INVENTORIES:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Raw materials and supplies $ 682,357 $ 736,312
Work-in-process 1,344,683 1,243,349
----------------- -----------------
$ 2,027,040 $ 1,979,661
----------------- -----------------
----------------- -----------------
PROPERTY, PLANT AND EQUIPMENT, NET:
1998 1997
Land and related improvements $ 206,995 $ 206,995
Buildings and building improvements 3,375,198 3,366,494
Machinery and equipment 9,375,749 9,374,973
----------------- -----------------
12,957,942 12,948,462
Less accumulated depreciation 8,930,538 8,323,784
----------------- -----------------
$ 4,027,404 $ 4,624,678
----------------- -----------------
----------------- -----------------
</TABLE>
29
<PAGE>
REUTER MANUFACTURING, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. SELECTED BALANCE SHEET INFORMATION, CONTINUED:
ACCRUED EXPENSES:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Interest $ 54,674 $ 42,131
Payroll, benefits and related taxes 371,586 325,740
Legal and accounting 115,000 115,000
Property taxes 142,000 45,000
Accrued retirement 38,335 55,502
Other 70,665 111,638
----------------- -----------------
$ 792,260 $ 695,011
----------------- -----------------
----------------- -----------------
</TABLE>
5. FINANCING ARRANGEMENTS:
Financing arrangements at December 31, 1998 and 1997, consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Asset-based line of credit, payable to bank, due on demand, interest at the
bank's reference rate (reference rate was 7.75% and 8.5% at December 31,
1998 and 1997, respectively) plus 2.25% for 1998 (1.35% for 1997), however,
certain asset-based line of credit over-advances to the Company accrue
interest at the reference rate plus 3.4%. Approximately $1,700,000 of
borrowings under the asset-based line of credit provide for monthly
payments of $28,333 plus accrued interest and a final payment of unpaid
principal and accrued interest on March 1, 2003. Funds available to the
Company pursuant to the terms of the asset-based line of credit are
dependent upon the level of eligible accounts receivable, inventories and
plant and equipment, as defined. The line of credit is collateralized by
substantially all of the Company's assets, except for certain equipment
purchased with notes payable. The weighted average interest rate of
asset-based line of credit borrowings was 10.23% and 12.00% for
the years ended December 31, 1998 and 1997, respectively. $ 3,136,572 (a) $ 2,643,512 (a)
Term note, payable to bank, interest at the bank's reference rate plus 2.25%
for 1998 (1.35% for 1997), however, the Company may make a one- time
election to have interest accrue on this note at a rate which Approximates
the yield on U.S. Treasury securities, as defined, plus 3.0%; monthly
principal payments of $13,333 plus interest and a final payment of unpaid
principal and accrued interest on December 1, 2002; Collateralized by a
first mortgage on the Company's manufacturing facility and substantially
all of the Company's assets, except for certain equipment purchased with
notes payable. 2,253,333 (a) 2,400,000 (a)
</TABLE>
30
<PAGE>
REUTER MANUFACTURING, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
5. FINANCING ARRANGEMENTS, CONTINUED:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Term note, payable to bank, interest at the bank's reference rate plus
2.25% for 1998 (1.35% for 1997); monthly principal payments of $4,500
plus interest and a final payment of unpaid principal and interest on
December 1, 2002; collateralized by substantially all of the Company's
assets, except for certain equipment purchased with notes payable. $ 220,500(a) $ 270,000(a)
Debentures payable (primarily due to the Company's key management and
members of the Board of Directors), interest at 13%, payable monthly
beginning March 1999; principal due December 2001. 292,040 -
Notes payable in monthly principal and interest installments, with interest
ranging from 5.9% to 11.8%. Notes mature from August 1999 to February
2003, and are collateralized by equipment with an aggregate carrying
value of approximately $1,000,000 at December 31, 1998. Certain of
these notes payable agreements contain subjective material adverse
change clauses under which the notes could become due and payable.
897,528 962,529
------------- -------------
Total debt 6,799,973 6,276,041
Less asset-based line of credit and term obligations, bank 5,610,405 5,313,512
Less current maturities of long-term equipment financing 240,483 222,022
------------- -------------
------------- -------------
Long-term debt, less current maturities $ 949,085 $ 740,507
------------- -------------
------------- -------------
</TABLE>
(a) Although the term notes and certain borrowings under the asset-based
line of credit have scheduled repayment dates, these borrowings may be
due upon demand in the event US Bancorp (formerly U.S. Bank) requires
demand repayment on the asset-based line of credit. Accordingly, these
borrowings have been classified as current obligations in the December
31, 1998 and 1997 balance sheets. Scheduled payments on the U.S.
Bancorp credit facilities in 1999 through 2002 range from $497,333 to
$554,000 annually and a scheduled payment of $1,656,667 in 2003.
On January 24, 1996, the Company and Sanwa Business Credit Corporation
(Sanwa) entered into a Loan and Security Agreement to restructure its
guarantee of the debt obligation underlying the Eden Prairie Facility,
which included the following agreements: a Senior Subordinated Secured
Promissory Note (Senior Note) in the amount of $2,780,000; a Junior
Subordinated Secured Promissory Note (Junior Note) in the amount of
$1,000,000; a Mortgage, Assignment of Leases and Rents, Security Agreement
and Financing Statement; a Patent Security Agreement; an Income-Sharing
Agreement; and a Common Stock Warrant Agreement.
31
<PAGE>
REUTER MANUFACTURING, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
5. FINANCING ARRANGEMENTS, CONTINUED:
On April 18, 1997, the Company completed a 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 the Junior Note and the Income-Sharing Agreement with
Sanwa. The balance of the proceeds were used to pay expenses of the private
placement and the remaining proceeds were applied to general Company
operating requirements. The two debt instruments, including associated
future interest at 8%, had an aggregate carrying value of $6,922,288 at
April 18, 1997. In connection with the retirement of the Sanwa debt, the
warrant previously issued to Sanwa for 3,178,780 shares of common stock was
terminated and the management standstill agreements with the CEO and
Chairman of the Company were settled for $102,479 cash and 37,032 shares of
the Company's common stock with a fair value of $124,982 on the settlement
date.
As a result of the transactions described above, the Company recognized an
extraordinary gain on debt restructuring of approximately $3,400,000 in the
second quarter of 1997. There was no income tax effect related to the
extraordinary gain due to the net operating loss carryforwards available to
the Company, as well as the Company's continued insolvency for tax purposes
subsequent to the debt restructuring.
On December 3, 1997, the Company entered into an agreement with US Bancorp,
pursuant to which US Bancorp made credit facilities of up to $8,670,000
available to the Company. The credit facilities consist of an asset-based
line of credit with availability of up to $5,000,000, as defined, and three
term notes of $2,400,000, $1,000,000 and $270,000, respectively. The credit
facilities were used to repay the Company's previous asset-based line of
credit of approximately $2,200,000 and the remaining balance of
approximately $2,500,000 owed to Sanwa under the Senior Note. As a result
of this refinancing, the Company recognized an extraordinary gain on debt
restructuring of approximately $363,000 in the fourth quarter of 1997.
In June 1998, the Company amended the US Bancorp agreement to increase the
interest rate to the US Bancorp reference rate plus 2.25% and extend the
agreement an additional year, expiring in December 2000. Furthermore, in
December 1998, the agreement was amended to defer principal payments to
April 1, 1999. The Company will be required to resume regular monthly
principal payments of $46,166 on April 1, 1999, and increase the monthly
principal payments to $92,333 beginning November 1, 1999 until the
previously deferred principal is paid.
The credit facilities with US Bancorp prohibit the payment of dividends and
limit capital expenditures. The credit facilities agreement includes a
subjective material adverse change clause under which the borrowings could
become due and payable.
32
<PAGE>
REUTER MANUFACTURING, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
5. FINANCING ARRANGEMENTS, CONTINUED:
The aggregate maturities of long-term equipment financing, excluding
scheduled payments of the US Bancorp credit facilities as set forth in (a)
above, are as follows:
<TABLE>
<S> <C>
1999 $ 240,483
2000 313,687
2001 237,028
2002 105,596
2003 734
---------------
Total maturities of long-term equipment financing $ 897,528
===============
</TABLE>
CARRYING VALUE OF FINANCIAL INSTRUMENTS:
The carrying value of the Company's financial instruments approximates fair
value at December 31, 1998.
6. STOCKHOLDERS' EQUITY (DEFICIENCY):
The Company's Stock Option Plans (the Plans) provide for grants of stock
options. The number of common shares available for grant pursuant to the
Plans were 344,583 and 439,500 as of December 31, 1998 and 1997,
respectively. Options become exercisable over periods of up to four years
from the date of grant and expire 10 years from the date of grant.
The following summarizes all option activity under the Plans:
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS AVERAGE
OUTSTANDING EXERCISE PRICE
<S> <C> <C>
Balances, December 31, 1996 353,500 $1.04
Options cancelled (4,000) 2.49
Options granted 114,000 4.41
Options exercised (90,000) .42
-----------------
Balances, December 31, 1997 373,500 2.20
Options cancelled (147,007) 2.40
Options granted 227,924 1.97
Options exercised (46,500) .49
-----------------
Balances, December 31, 1998 407,917 1.96
-----------------
-----------------
Options exercisable at December 31, 1998 276,250 1.84
-----------------
-----------------
</TABLE>
33
<PAGE>
REUTER MANUFACTURING, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. STOCKHOLDERS' EQUITY (DEFICIENCY), CONTINUED:
The following table summarizes information about fixed price stock
options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ -----------------------------------
WEIGHTED
SHARES UNDER AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OPTIONS AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL LIFE EXERCISE DECEMBER 31, EXERCISE
PRICES 1998 (MONTHS) PRICE 1998 PRICE
<S> <C> <C> <C> <C> <C>
$ .1875 - .50 93,500 85 $ .42 93,500 $ .42
.6250 - .8281 131,917 114 .81 71,917 .78
1.50 - 2.4688 66,000 103 1.96 30,000 1.65
3.375 - 4.4375 86,000 95 4.34 50,333 4.27
4.875 - 5.1875 30,500 95 4.90 30,500 4.90
</TABLE>
STOCK-BASED COMPENSATION:
Had compensation cost for the Plans been determined based on the fair
value of options at the grant date for awards in 1998 and 1997, the
Company's pro forma net income (loss) and net income (loss) per share
would have been as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net income (loss) $ (2,717,631) $ 4,921,100
Basic net income (loss) per share $(.56) $1.13
Diluted net income (loss) per share $(.56) $1.08
The pro forma effect on net income (loss) for 1998 and 1997 is not fully
representative of the pro forma effect on net income (loss) in future
years because these years do not take into consideration pro forma
compensation expense related to grants made prior to 1995.
Stock-based compensation costs computed in accordance with SFAS 123 for
options granted during 1998 and 1997 were $299,443 and $412,260,
respectively, for the Plans. The aggregate fair value was estimated at
the date of grant, utilizing the Black-Scholes option pricing model with
the following key assumptions:
</TABLE>
<TABLE>
<CAPTION>
ASSUMPTIONS 1998 1997
<S> <C> <C>
Risk free interest rates 4.8% - 5.7% 6.2% - 6.6%
Volatility 111% 99%
Expected lives (months) 72 72
</TABLE>
The Company does not anticipate paying dividends in the near future.
34
<PAGE>
REUTER MANUFACTURING, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. STOCKHOLDERS' EQUITY (DEFICIENCY), CONTINUED:
WARRANTS:
In April 1997, in connection with the private placement of common stock
(Note 5), the Company 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, exercisable immediately.
In December 1998, in connection with the private placement of debentures
(Note 5), the Company granted five-year warrants to purchase 350,000
shares of the Company's common stock at an exercise price of $.6625 per
share, exercisable immediately.
7. INCOME TAXES:
The following table sets forth the components of the tax-effected
deferred tax assets and liabilities as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net operating losses available for carryforward
(expire 2004 to 2018) $ 10,195,000 $ 10,192,000
Accelerated depreciation for tax reporting purposes (124,000) (143,000)
Other future deductible temporary differences, net 224,000 273,000
----------------- -----------------
Net deferred tax asset before valuation allowance 10,295,000 10,322,000
Valuation allowance (10,295,000) (10,322,000)
----------------- -----------------
$ - $ -
----------------- -----------------
----------------- -----------------
</TABLE>
The Company has established a valuation allowance for any tax benefits for
which management believes, based on the relative weight of currently
available evidence, that it is "more likely than not" that the related net
deferred tax asset will not be realized. As a result, no tax benefit has
been provided for the net loss incurred during the year ended December 31,
1998.
Under the Internal Revenue Code, certain stock transactions, including
sales of stock and the granting of warrants to purchase stock, may limit
the amount of net operating loss carryforwards that may be utilized on an
annual basis to offset taxable income in future periods.
35
<PAGE>
REUTER MANUFACTURING, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. INCOME TAXES, CONTINUED:
Reconciliation of the income tax computed at the federal statutory rate to
the actual income tax provision is as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
(Benefit) provision at federal statutory rate $ (882,264) $ 1,784,217
Limitation of net operating loss carryforward benefit 882,264
Utilization of net operating loss carryforward benefit and deduction
of other items for tax purposes - (1,784,217)
----------------- -----------------
Income tax provision $ - $ -
----------------- -----------------
</TABLE>
8. EMPLOYEE BENEFIT PLANS:
All employees who are at least 21 years of age and have completed six
months of service and have worked at least 1,000 hours are eligible to
participate in the Company's 401(k) Retirement Savings Plan and Profit
Sharing Plan. The Company may make 401(k) matching contributions and profit
sharing contributions at the discretion of the Board of Directors. The
Company accrued 401(k) matching contributions and profit sharing
contributions of $60,000 as of December 31, 1997.
9. SIGNIFICANT CUSTOMER INFORMATION:
Two of the Company's customers account for the following percentage of net
sales:
<TABLE>
<CAPTION>
1998 1997
----------------------------------- -----------------------------------
<S> <C> <C>
AMOUNT % AMOUNT %
Customer A $ 5,332,516 43.5% $ 11,363,249 63.0%
Customer B 1,619,276 13.2% 206,570 1.2%
</TABLE>
Accounts receivable credit concentrations associated with these customers
at December 31, 1998 and 1997, totaled $708,401 and $937,042, respectively.
Inventories related to production in process according to these customers'
specifications at December 31, 1998 and 1997, were $931,372 and $758,436,
respectively.
The Company received notification from Customer A in August 1997 of a
temporary reduction in scheduled shipments of one high-volume product,
which constitutes a substantial portion of sales to the customer. This
reduction in scheduled shipments to this customer continued in 1998.
36
<PAGE>
REUTER MANUFACTURING, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
10. ENVIRONMENTAL CONTINGENCY:
During December 1997, in connection with obtaining the Company's new credit
facilities described in Note 5, the Company was required to have an
environmental inspection of its manufacturing facility. As part of
conducting a Phase I and Phase II investigation of this facility, soil
boring and groundwater work indicated the presence of hazardous substances
and petroleum products within the soil and groundwater located beneath the
site. The Company notified the applicable regulatory agency and is working
with that agency to resolve these issues. However, because the results are
still preliminary, the Company is not able to assess whether the Company
will ultimately be held liable for the presence of these substances at the
site nor the Company's exposure if it is found liable. There can be no
assurance that the outcome of these matters and associated costs will not
have a material adverse effect on the Company's business, financial
condition, results of operations and liquidity in any future period. The
Company accrued $20,000 during 1997 for the cost of further investigation
and remediation action which has been postponed until 1999.
11. ACQUISITION OF LICENSING AND MANUFACTURING RIGHTS FOR LABORATORY
CENTRIFUGES:
On July 25, 1997, the Company and Hill Bioscience, Inc. (Hill) entered into
a product development, licensing, manufacturing and marketing agreement
(the Agreement) covering certain micro-centrifuges technology. Terms of the
Agreement required the Company to pay Hill $50,000 of cash and issue to
Hill $50,000 of Reuter Manufacturing, Inc. common stock (11,111 shares).
The Agreement also requires the Company to loan Hill $25,000 to be repaid
in five quarterly installments of $5,000, commencing in July 1998. The
Company recorded an intangible asset of $100,000 during the third quarter
of 1997, to be amortized over three years. In return, Hill issued the
Company 10% of its outstanding common stock. 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. Due to losses relating to this product, the Agreement
was cancelled in September 1998, accordingly, during the third quarter of
1998, the 11,111 shares originally issued to Hill were returned to the
Company, and the note receivable and related intangibles were written off.
37
<PAGE>
REUTER MANUFACTURING, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
ADDITIONS
BALANCE AT CHARGED TO DEDUCTIONS BALANCE
BEGINNING COSTS AND FROM AT END
CLASSIFICATION OF PERIOD EXPENSES ALLOWANCE OF PERIOD
Year ended December 31, 1997:
Inventories $ 250,000 $ 81,831 $ (26,831) (2) $ 305,000
Allowance for doubtful accounts 25,000 7,254 (7,254) (1) 25,000
Year ended December 31, 1998:
Inventories 305,000 125,664 (225,664) (2) 205,000
Allowance for doubtful accounts 25,000 641 (641) (1) 25,000
(1) Write-off of accounts receivable
(2) Write-off of inventories
</TABLE>
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 24, 1999 REUTER MANUFACTURING, INC.
By: /s/ Michael J. Tate
-----------------------------
Michael J. Tate, President, Chief
Executive Officer and Chief
Financial Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this Report has been signed below on March 24, 1999 by the following persons on
behalf of the Registrant and in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ James W. Taylor Chairman of the Board and Director
- -----------------------------
James W. Taylor
/s/Michael J. Tate President, Chief Executive Officer
- ----------------------------- Chief Financial Officer and Director
Michael J. Tate (principal executive and financial
officer)
/s/ William H. Johnson Vice President, Controller and Secretary
- ------------------------------ (principal accounting officer)
William H. Johnson
/s/ Robert E. Cieslukowski Director
- ------------------------------
Robert E. Cieslukowski
/s/ Kenneth E. Daugherty Director
- ------------------------------
Kenneth E. Daugherty
/s/ M. Karen Gilles Director
- ------------------------------
M. Karen Gilles
/s/ Robert W. Heller Director
- ------------------------------
Robert W. Heller
/s/ Edward E. Strickland Director
- ------------------------------
Edward E. Strickland
</TABLE>
39
<PAGE>
REUTER MANUFACTURING, INC.
EXHIBIT INDEX TO ANNUAL REPORT
ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Item No. Item Method of Filing
- ------- ---- ----------------
<S> <C> <C>
3.1 Restated Articles of Incorporation,
As amended. . . . . . . . . . . . . . Incorporated by reference to
Exhibit 3.1 to the Company's
Annual Report on Form 10-KSB for
the year ended December 31, 1995
(File No. 0-1561)
3.2 Amended Bylaws. . . . . . . . . . . . Incorporated by reference to
Exhibit 3.2 to the Company's
Annual Report on Form 10-K for
the year ended December 31, 1990
(File No. 0-1561)
4.1 Form of the Company's Common Stock
Certificate . . . . . . . . . . . . . Incorporated by reference to
Exhibit 4.1 to the Company's
Annual Report on Form 10-K for
the year ended December 31, 1990
(File No. 0-1561)
10.1 Incentive Stock Option Plan of Reuter,
Inc., as amended effective
December 17, 1987 . . . . . . . . . . Incorporated by reference to
Exhibit 10(a) to the Company's
Annual Report on Form 10-K for
the year ended December 31, 1987
(File No. 0-1561)
10.2 Directors Stock Option Plan of
Reuter, Inc.. . . . . . . . . . . . . Incorporated by reference to
Exhibit 10(c) to the Company's
Annual Report on Form 10-K for
the year ended December 31, 1987
(File No. 0-1561)
10.3 Summary of options granted under
Directors Stock Option Plan. . . . . Incorporated by reference to
Exhibit 10.4 to the Company's
Annual Report on Form 10-KSB for
the year ended December 31, 1994
(File No. 0-1561)
40
<PAGE>
10.4 1991 Non-Employee Director Stock
Option Plan . . . . . . . . . . . . . Incorporated by reference to
Exhibit 10.4 to the Company's
Annual Report on Form 10-K for
the year ended December 31, 1993
(File No. 0-1561)
10.5 Summary of options granted under
1991 Non-Employee Director
Stock Option Plan . . . . . . . . . . Incorporated by reference to
Exhibit 10.5 to the Company's
Annual Report on Form 10-K for
the year ended December 31, 1993
(File No. 0-1561)
10.6 1991 Stock Option Plan, as amended. . Incorporated by reference to
Exhibit 10.6 to the Company's
Annual Report on Form 10-KSB for
the year ended December 31, 1995
(File No. 0-1561)
10.7 Summary of Options granted
Under 1991 Stock Option Plan . . . . Incorporated by reference to
Exhibit 10.9 to the Company's
Annual Report on Form 10-KSB for
the year ended December 31, 1994
(File No. 0-1561)
10.8 1997 Non-Employee Director Stock
Option Plan . . . . . . . . . . . . . . Incorporated by reference to
Exhibit 10.8 to the Company's
Annual Report on Form 10-KSB for
the year ended December 31, 1997
(File No. 0-1561)
10.9 Option Agreement between Edward E.
Strickland and the Company. . . . . . . Incorporated by reference to
Exhibit 10.10 to the Company's
Annual Report on Form 10-K for
the year ended December 31, 1991
(File No. 0-1561)
10.10 Consulting Agreement with
Edward E. Strickland. . . . . . . . . . Incorporated by reference to
Exhibit 10.6 to the Company's
Annual Report on Form 10-K for
the year ended December 31, 1990
(File No. 0-1561)
41
<PAGE>
10.11 Installment Note payable by Reuter
Recycling, Inc. to Sanwa Business
Credit Corporation and Term Loan
And Security Agreement between
Reuter Recycling, Inc., the Company
And Sanwa Business Credit Corporation,
Both dated May 6, 1988. . . . . . . . . . Incorporated by reference to
Exhibit 28(a) to the Company's
Current Report on Form 8-K dated
May 6, 1988 (File No. 0-1561)
10.12 Guaranty by the Company and Debtor's
Security and Pledge Agreement between
The Company and Sanwa Business
Credit Corporation, both dated
May 6, 1988 . . . . . . . . . . . . . . . Incorporated by reference to
Exhibit 28(b) to the Company's
Current Report on Form 8-K dated
May 6, 1988 (File No. 0-1561)
10.13 Independent Contractor Agreement
Dated as of November 2, 1992,
Between Taylor Consultants, Inc.
and the Company . . . . . . . . . . . . . Incorporated by reference to
Exhibit 10.30 to the Company's
Annual Report on Form 10-K for
the year ended December 31, 1992
(File No. 0-1561)
10.14 Loan and Security Agreement, dated
December 31, 1995, between the
Company and Sanwa Business
Credit Corporation. . . . . . . . . . . . Incorporated by reference to
Exhibit 2.1 to the Company's
Current Report on Form 8-K,
dated January 24, 1996 (File
No. 0-1561)
10.15 Senior Subordinated Secured Promissory
Note, dated December 31, 1995, between
The Company and Sanwa Business Credit
Corporation.. . . . . . . . . . . . . . . . Incorporated by reference to
Exhibit 2.2 to the Company's
Current Report on Form 8-K,
dated January 24, 1996 (File No.
0-1561)
42
<PAGE>
10.16 Junior Subordinated Secured Promissory
Note, dated December 31, 1995, between
The Company and Sanwa Business Credit
Corporation . . . . . . . . . . . . . . . . Incorporated by reference to
Exhibit 2.3 to the Company's
Current Report on Form 8-K,
dated January 24, 1996 (File No.
0-1561)
10.17 Mortgage, Security Agreement and
Fixture Financing Statement, dated
December 31, 1995, between the
Company and Sanwa Business
Credit Corporation. . . . . . . . . . . . . Incorporated by reference to
Exhibit 2.4 to the Company's
Current Report on Form 8-K,
dated January 24, 1996 (File No.
0-1561)
10.18 Patent Security Agreement, dated
December 31, 1995, between the
Company and Sanwa Business
Credit Corporation. . . . . . . . . . . . . Incorporated by reference to
Exhibit 2.5 to the Company's
Current Report on Form 8-K,
dated January 24, 1996 (File No.
0-1561)
10.19 Income Sharing Agreement, dated
December 31, 1995, between the
Company and Sanwa Business
Credit Corporation. . . . . . . . . . . . . Incorporated by reference to
Exhibit 2.6 to the Company's
Current Report on Form 8-K,
dated January 24, 1996 (File No.
0-1561)
10.20 Intercreditor and Subordination
Agreement, dated December 31, 1995,
Among the Company, The CIT
Group/Credit Finance, Inc. and
Sanwa Business Credit Corporation. . . . . . Incorporated by reference to
Exhibit 2.7 to the Company's
Current Report on Form 8-K,
dated January 24, 1996 (File No.
0-1561)
10.21 Common Stock Warrant Agreement,
Dated December 31, 1995, between
The Company and Sanwa Business
Credit Corporation. . . . . . . . . . . . . Incorporated by reference to
Exhibit 2.8 to the Company's
Current Report on Form 8-K,
dated January 24, 1996 (File No.
0-1561)
43
<PAGE>
10.22 Standstill Agreement, dated
December 31, 1995, among
Edward E. Strickland, the
Company and Sanwa Business
Credit Corporation. . . . . . . . . . . . . Incorporated by reference to
Exhibit 2.9 to the Company's
Current Report on Form 8-K,
dated January 24, 1996 (File No.
0-1561)
10.23 Standstill Agreement, dated
December 31,1995, among James
Taylor, the Company And Sanwa
Business Credit Corporation . . . . . . . . Incorporated by reference to
Exhibit 2.10 to the Company's
Current Report on Form 8-K,
dated January 24, 1996 (File No.
0-1561)
10.24 Amendment to Loan and
Security Agreement dated
April 18, 1997, between the
Company and Sanwa Business Credit
Corporation . . . . . . . . . . . . . . . . Incorporated by reference to
Exhibit 10.1 to the Company's
Quarterly Report on Form 10-QSB,
for the quarter ended March 31,
1997 (File No. 0-1561)
10.25 Release and Termination
Agreement, dated April 18, 1997,
by Sanwa Business Credit
Corporation for the benefit of
the Company . . . . . . . . . . . . . . . . Incorporated by reference to
Exhibit 10.2 to the Company's
Quarterly Report on Form 10-QSB,
for the quarter ended March 31,
1997 (File No. 0-1561)
10.26 Release and Termination
Agreement, dated April 18, 1997,
by Sanwa Business Credit Corporation
for the benefit of James W. Taylor . . . . . Incorporated by reference to
Exhibit 10.3 to the Company's
Quarterly Report on Form 10-QSB,
for the quarter ended March 31,
1997 (File No. 0-1561)
10.27 Release and Termination
Agreement, dated April 18, 1997,
by Sanwa Business Credit Corporation
for the benefit of
Edward E. Strickland. . . . . . . . . . . . Incorporated by reference to
Exhibit 10.4 to the Company's
Quarterly Report on Form 10-QSB,
for the quarter ended March 31,
1997 (File No. 0-1561)
44
<PAGE>
10.28 Release and Termination Agreement,
dated April 18, 1997, among
Edward E. Strickland,
James W. Taylor and the Company . . . . . . Incorporated by reference to
Exhibit 10.5 to the Company's
Quarterly Report on Form 10-QSB,
for the quarter ended March 31,
1997 (File No. 0-1561)
10.29 Financing Agreement, dated
December 3, 1997, between Reuter
Manufacturing, Inc. and U.S. Bank
National Association. . . . . . . . . . . . Incorporated by reference to
Exhibit 10.1 to the Company's
Current Report on Form 8-K,
dated December 18, 1997 (File
No. 0-1561)
10.30 Promissory Note for $270,000,
dated December 3, 1997, between
Reuter Manufacturing, Inc. and
U.S. Bank National Association. . . . . . . Incorporated by reference to
Exhibit 10.2 to the Company's
Current Report on Form 8-K,
dated December 18, 1997 (File
No. 0-1561)
10.31 Promissory Note for $1,000,000,
dated December 3, 1997, between
Reuter Manufacturing, Inc. and
U.S. Bank National Association. . . . . . . Incorporated by reference to
Exhibit 10.3 to the Company's
Current Report on Form 8-K,
dated December 18, 1997 (File
No. 0-1561)
10.32 Promissory Note for $2,400,000,
dated December 3, 1997, between
Reuter Manufacturing, Inc. and
U.S. Bank National Association. . . . . . . Incorporated by reference to
Exhibit 10.4 to the Company's
Current Report on Form 8-K,
dated December 18, 1997 (File
No. 0-1561)
10.33 Security Agreement, dated
December 3, 1997, between Reuter
Manufacturing, Inc. and U.S. Bank
National Association. . . . . . . . . . . . Incorporated by reference to
Exhibit 10.5 to the Company's
Current Report on Form 8-K,
dated December 18, 1997 (File
No. 0-1561)
45
<PAGE>
10.34 Mortgage, Security Agreement,
Assignment of Leases and Rents
and Fixture Financing Statement
Security Agreement, dated
December 3, 1997, between Reuter
Manufacturing, Inc. and U.S. Bank
National Association. . . . . . . . . . . . Incorporated by reference to
Exhibit 10.6 to the Company's
Current Report on Form 8-K,
dated December 18, 1997 (File
No. 0-1561)
10.35 Environmental and ADA Indemnification
Agreement, dated December 3, 1997,
between Reuter Manufacturing, Inc.
and U.S. Bank National Association. . . . . Incorporated by reference to
Exhibit 10.7 to the Company's
Current Report on Form 8-K,
dated December 18, 1997 (File
No. 0-1561)
10.36 Environmental Letter of
Undertaking, dated December 3, 1997,
between Reuter Manufacturing, Inc.
and U.S. Bank National Association. . . . . Incorporated by reference to
Exhibit 10.8 to the Company's
Current Report on Form 8-K,
dated December 18, 1997 (File
No. 0-1561)
21.1 Subsidiaries of the Company. . . . . . . . . Incorporated by reference to
Exhibit 21.1 to the Company's
Annual Report on Form 10-KSB,
for the year ended December 31,
1996 (File No. 0-1561)
23.1 Consent of PricewaterhouseCoopers LLP. . . . Filed herewith electronically
27.1 Financial Data Schedule. . . . . . . . . . . Filed herewith electronically
</TABLE>
46
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Reuter Manufacturing, Inc. on Form S-8 (File Nos. 33-15293, 33-33107, 33-44304,
33-44281 and 333-61927) of our report, which includes an explanatory paragraph
addressing substantial doubt about the Company's ability to continue as a going
concern, dated February 26, 1999, on our audits of the financial statements and
the financial statement schedule of Reuter Manufacturing, Inc. as of December
31, 1998 and 1997, and for the years then ended, which report is included in
this Annual Report on Form 10-KSB.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, MN
March 22, 1999
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 179,875
<SECURITIES> 0
<RECEIVABLES> 1,432,723
<ALLOWANCES> 0
<INVENTORY> 2,027,040
<CURRENT-ASSETS> 3,684,323
<PP&E> 12,957,942
<DEPRECIATION> 8,930,538
<TOTAL-ASSETS> 7,711,727
<CURRENT-LIABILITIES> 7,841,617
<BONDS> 0
0
0
<COMMON> 918,541
<OTHER-SE> (2,047,676)
<TOTAL-LIABILITY-AND-EQUITY> 7,711,727
<SALES> 12,269,183
<TOTAL-REVENUES> 12,269,183
<CGS> 11,533,951
<TOTAL-COSTS> 14,193,232
<OTHER-EXPENSES> 670,845
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 677,198
<INCOME-PRETAX> (2,594,894)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,594,894)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (2,594,894)
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