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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-1561
REUTER MANUFACTURING, INC.
--------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-0780999
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
410 - 11th Avenue South, Hopkins, Minnesota 55343
- -------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
612/935-6921
- ------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X . No. .
--- ---
As of November 15, 1999, there were 4,899,385 shares of the registrant's $.1875
par value Common Stock outstanding.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
REUTER MANUFACTURING, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
1999 December 31,
(Unaudited) 1998
------------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash $ - $ 179,875
Receivables, net of allowances of $75,000 and $25,000
at September 30, 1999 and December 31, 1998, respectively 2,019,148 1,432,723
Inventories 1,911,324 2,027,040
Other current assets 17,986 44,685
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Total current assets 3,948,458 3,684,323
Property, plant and equipment, net 3,582,068 4,027,404
------------- ------------
Total assets $ 7,530,526 $ 7,711,727
============= ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Book overdraft $ 318,158 $ -
Asset-based line of credit and term obligations, bank 5,661,338 5,610,405
Current maturities of long-term equipment financing 394,647 240,483
Short term sale and leaseback advance 200,000
Accounts payable, trade 1,402,473 1,198,469
Accrued expenses 714,753 792,260
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Total current liabilities 8,691,369 7,841,617
Long-term equipment financing, less current maturities 501,471 657,045
Debentures payable 350,320 292,040
Other liabilities 21,269 50,160
Commitments and contingencies
Stockholders' deficiency:
Preferred stock, par value $.01 per share;
authorized 2,500,000 shares; none issued
Common stock, par value $.1875 per share;
authorized 9,000,000 shares; issued and outstanding
4,899,385 and 4,898,885 shares at September 30, 1999
and December 31, 1998, respectively 918,635 918,541
Additional paid-in capital 17,890,509 17,832,113
Accumulated deficit (20,809,715) (19,879,789)
Unearned stock compensation (33,332) -
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Total stockholders' deficiency (2,033,903) (1,129,135)
------------- ------------
Total liabilities and stockholders' deficiency $ 7,530,526 $ 7,711,727
============= ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
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REUTER MANUFACTURING, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
For the three months ended For the nine months ended
September 30, September 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 3,009,772 $ 2,852,428 $ 8,733,919 $ 9,556,998
Cost of sales 2,816,496 2,666,611 7,759,340 8,840,235
----------- ----------- ----------- -----------
Gross profit 193,276 185,817 974,579 716,763
Selling, general and administrative expenses 422,859 454,499 1,336,775 1,691,241
Write-off of certain assets, principally intangible assets 447,327 447,327
----------- ----------- ----------- -----------
Operating loss (229,583) (716,009) (362,196) (1,421,805)
----------- ----------- ----------- -----------
Other (expense) income:
Interest expense (192,861) (179,235) (572,084) (503,039)
Other, net (2,216) (2,156) 4,354 13,738
----------- ----------- ----------- -----------
Total other expense, net (195,077) (181,391) (567,730) (489,301)
----------- ----------- ----------- -----------
Net loss $ (424,660) $ (897,400) $ (929,926) $(1,911,106)
=========== =========== =========== ===========
Net loss per share (basic and diluted) $ (0.09) $ (0.18) $ (0.19) $ (0.39)
=========== =========== =========== ===========
Weighted average common shares outstanding
(basic and diluted) 4,899,385 4,905,539 4,899,066 4,878,426
=========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
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REUTER MANUFACTURING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
For the nine months ended September 30,
- -------------------------------------------------------------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (929,926) $(1,911,106)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation 597,291 615,744
Amortization of intangible assets 61,476
Write-off of certain assets, principally intangible assets 447,327
Accretion of debentures payable 16,560
Stock compensation 16,668
Provision for uncollectible accounts receivable 50,000
Provision for write-down of inventories 110,000 70,664
Changes in operating assets and liabilities:
Receivables (636,425) 185,287
Inventories 5,716 214,648
Other current assets 26,699 53,146
Accounts payable, trade 204,004 358,025
Accrued expenses (77,507) (47,674)
Other liabilities (28,891) (37,627)
----------- -----------
Net cash (used in) provided by operating activities (645,811) 9,910
----------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment (11,682) (110,758)
----------- -----------
Net cash used in investing activities (11,682) (110,758)
----------- -----------
Cash flows from financing activities:
Book overdraft 318,158
Repayment of long-term equipment financing (141,683) (167,448)
Proceeds from asset-based line of credit and term obligations, bank 8,536,512 10,075,059
Repayment of asset-based line of credit (8,485,579) (9,871,635)
Proceeds from sale and leaseback advance 200,000
Proceeds from private placement of debentures 50,000
Proceeds from exercise of stock options 210 22,730
----------- -----------
Net cash provided by financing activities 477,618 58,706
----------- -----------
Net decrease in cash (179,875) (42,142)
Cash, beginning of year 179,875 113,234
----------- -----------
Cash, end of period $ - $ 71,092
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 576,143 $ 494,222
Noncash investing and financing activities:
Purchase of equipment in exchange for notes payable 140,273 71,284
</TABLE>
The accompanying notes are an integral part of the financial statements.
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Reuter Manufacturing, Inc.
Notes to Financial Statements
(Unaudited)
1. Financial Statements:
The unaudited financial statements of Reuter Manufacturing, Inc. (the
"Company") for the three month and nine month periods ended September
30, 1999 and 1998, reflect, in the opinion of management, all
adjustments (which include only normal recurring adjustments),
necessary to fairly state the financial position at September 30, 1999,
and the results of operations and cash flows for the reported periods.
The results of operations for any interim period are not necessarily
indicative of results expected for the full year. The December 31,
1998, balance sheet data was derived from audited financial statements,
but does not include all disclosures required by generally accepted
accounting principles. These unaudited interim financial statements
should be read in conjunction with the financial statements and related
notes for the year ended December 31, 1998, which are included in the
Company's 1998 Annual Report on Form 10-KSB.
Earnings Per 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 dilutive
shares attributed to outstanding stock options under the Company's
stock option plans and stock purchase warrants.
The Company incurred a net loss for the three and nine month periods
ended September 30, 1999 and 1998, and as a result, incremental shares
attributable to the assumed exercise of stock options and warrants were
excluded from the computation of diluted earnings per share as the
effect would be antidilutive. At September 30, 1999, the Company had
391,390 stock options and 450,000 warrants outstanding, which may have
a dilutive effect on future earnings per share.
2. Significant Customer:
One customer accounted for 48.2% and 58.6% of net sales for the three
months ended September 30, 1999 and 1998, respectively and accounted
for 54.6% and 46.7% of net sales for the nine months ended September
30, 1999 and 1998, respectively. Accounts receivable credit
concentrations associated with this customer totaled $797,111 at
September 30, 1999, and inventory related to production in process
according to customers' specifications totaled $626,546 at September
30, 1999.
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3. Asset-Based Line of Credit:
At September 30, 1999, the Company had borrowed approximately
$5,661,000 and had additional availability of approximately $180,000
under its line of credit facilities with US Bancorp. There can be no
assurance that the lender will continue to provide credit to the
Company. In addition, the Company is in technical default under its
credit facilities with US Bancorp as a result of non payment of its
property taxes due on October 15, 1999 in the amount of $69,149.62. The
Company is trying to cure this default before year end although there
can be no assurance that the Company will be successful in
accomplishing this. If the lender demanded full payment of the credit
facilities, the Company would need to obtain financing from another
source. There can be no assurance that the Company would be able to
obtain such financing on terms acceptable to the Company or at all.
4. Private Placement of Debentures with Warrants
US Bancorp agreed to defer principal payments of approximately $46,166
per month for up to five months contingent upon the Company raising a
minimum of $350,000 through an equity/debt offering and contingent upon
the Company successfully negotiating with its other machine tool
vendors, with whom the Company has financing with, for the Company to
defer making principal repayments for the same amount of time as US
Bancorp. At December 31, 1998, the Company had raised $350,000 through
a private offering of debentures with warrants. In February 1999, the
Company received an additional $50,000 investment in the private
offering of debentures. The debentures bear interest at 13% per annum
and are due on December 31, 2001. In connection with the private
placement of debentures, the Company granted five-year warrants to
purchase 400,000 shares of the Company's common stock at an exercise
price of $0.6625 per share, exercisable immediately. The Company is
using the proceeds from the private offering to fund operations.
5. Sale/Leaseback Agreement for Land and Building.
In July 1999, the Company entered into a purchase agreement for the
sale and leaseback of the Company's building and land for a purchase
price of $3,225,000. Pursuant to the agreement, the buyer advanced
$200,000 as earnest money to the Company. The earnest money may be used
in the Company's operations or in any other manner the Company
determines in its sole discretion. The advance of the earnest money to
the Company is evidenced by a promissory note and is collateralized by
a second mortgage on the building and land. The promissory note bears
interest at 12% per annum and will be repaid when the closing occurs
which is estimated occur by the end of the year. After payment of its
mortgage obligation and repayment of the earnest money loan, the
Company expects to obtain approximately $725,000 in net cash from the
transaction. Approximately $500,000 of cash will be used to pay down
over-advances that US
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Bancorp made to the Company under its asset-based credit facilities
during 1999 and the balance will be used for working capital. The lease
term will be for ten (10) years and the Company will have two five-year
renewal options. The Company also agreed to provide 150,000 warrants of
Company stock to buyer at an exercise price of $0.50 per share. If the
purchase of the property is not completed by the buyer, then the
earnest money with the interest owed will be paid back to the buyer no
later than January 18, 2000. On November 1, 1999, the previous
transaction was terminated by the Company due to a delay in the closing
of the contemplated transaction within a time frame that was
unacceptable to the Company. The Company has entered into a similar
transaction with another buyer, this transaction is anticipated to
close within forty-five (45) days from the signing of a purchase
agreement. As of November 15, 1999 a purchase agreement had not yet
been signed, however the Company anticipates doing so within the next
few weeks.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is principally a contract manufacturer of precision
machined products and assemblies for medical and industrial original equipment
manufacturers ("OEM"). The Company manufactures on a contract basis, among other
items, close tolerance bearing-related assemblies for the medical device
industry. In order to differentiate itself from its competitors, the Company
emphasizes its design engineering and manufacturing engineering capability and
support. The Company continues to manufacture and sell, under the Reuter name,
self-powered oil centrifuges and laboratory centrifuges, which are sold by the
Company's sales force to OEM's, end users, and to distributors. In late 1998,
the Company began to manufacture and ship specialized cryogenic parts that work
in temperature sensitive environments. During 1999, management is exploring
several opportunities to expand its high-speed spinning capabilities in the
industries of wastewater treatment, cooking oil extension and machine coolant
cleaning. Management is also expanding its manufacturing of custom high-speed
spindles and associated components, such as motors, bearings and customized
machine parts.
Throughout 1998, the Company experienced a decrease in sales for one of
its blood centrifuge models to the Company's largest customer. Beginning
mid-February 1999, sales of this particular blood centrifuge model resumed. 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 during the
first nine months of 1999. The Company has also been successful in getting new
industrial business via outsourcing from other companies. 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 continues to explore
additional cash conservation and generation strategies.
RESULTS OF OPERATIONS
The Company's net sales of $3,009,772 for the third quarter ended
September 30, 1999 increased by approximately 5.5% or $157,344 from $2,852,428
for the same period in 1998. The increase in net sales for the third quarter of
1999 compared to the same quarter for 1998 was due primarily to increased sales
of industrial products (cryogenic products and other contract manufactured
parts) and engine products (oil centrifuges and filters), partially offset by a
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decrease in sales of medical products. Net sales from medical, industrial, and
proprietary products were $1,937,080, $711,774, and $360,918, respectively, for
the third quarter ended September 30, 1999 compared to $2,315,629, $422,161, and
$114,638, respectively, for the comparable period in 1998. Sales to the
Company's largest medical product customer were $1,451,524 or 48.2% of net sales
for the third quarter of 1999 compared to $1,672,978 or 58.6% of net sales for
the same period in 1998. The Company's net sales of $8,733,919 for the nine
months ended September 30, 1999 decreased by approximately 8.6% or $823,079 from
$9,556,998 for the same period in 1998. The decrease in net sales for the nine
months ended September 30, 1999 compared to the same period in 1998 was due
primarily to decreased sales of medical products (blood centrifuges) and
industrial products (automotive fuel pump bushing and refurbished spindles),
partially offset by a small increase in sales of engine products (oil
centrifuges). Net sales from medical, industrial, and proprietary products were
$6,270,141, $1,839,465, and $624,313, respectively, for the nine months ended
September 30, 1999 compared to $6,629,792, $2,334,486, and $592,720,
respectively, for the comparable period in 1998. Sales to the Company's largest
medical product customer were $4,766,349 or 54.6% of net sales for the nine
months ended September 30, 1999 compared to $4,459,182 or 46.7% of net sales for
the same period in 1998.
Gross profit was 6.4% in the third quarter of 1999, compared to 6.5%
for the same period in 1998. Gross profit was 11.2% for the nine months ended
September 30, 1999, compared to 7.5% for the same period in 1998. The decline in
gross profit for the third quarter of 1999 was due primarily to an increase in
lower margin industrial and proprietary sales during the period over the
comparable quarter of 1998, and an inventory adjustment of approximately
$130,000 resulting from a physical inventory cycle count adjustment during the
quarter ended September 30, 1999. The gross profit improvement for the nine
months ended September 30, 1999 from the comparable period of 1998 was primarily
due to lower wages and related lower benefit costs resulting from a reduction of
approximately 40 direct and indirect manufacturing employees and tighter cost
control.
Selling, general and administrative expenses were $422,859 or 14.0% of
net sales for the third quarter of 1999, compared to $454,499 or 15.9% of net
sales for the same period in 1998. For the nine months ended September 30, 1999,
selling, general and administrative expenses were $1,336,775 or 15.3% of net
sales, compared to $1,691,241 or 17.7% of net sales for the same period in 1998.
The decrease for the quarter ended September 30, 1999 in selling, general and
administrative expenses of $31,640, from the comparable quarter in 1998 is due
to an increase in selling related expenses of $13,600 due primarily to an
increase in wages and benefits, and a reduction in administrative expenses of
$45,240. The reduction in administrative expenses are primarily due to lower
wages and related lower benefit costs resulting from the reduction of eight
employees and a decrease in legal and accounting expenses. In addition, expenses
are generally lower due to increased cost control and lower sales volume. For
the nine months ended September 30, 1999, selling, general and administrative
expenses decreased $354,466 from the comparable period in 1998. The decrease in
these expenses is due to a reduction in selling related expenses of $73,603 due
to lower wages and lower travel expenses and a decrease in administrative
expenses of $280,863. The decrease in administrative expenses
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is due to lower wages and related benefits and a decrease in professional fees
and services including a reduction in legal and accounting expenses.
In the third quarter of 1999, the Company had an operating loss of
$229,583, compared to an operating loss of $716,009 in the same period of 1998.
For the nine months ended September 30, 1999, the Company had an operating loss
of $362,196 compared to an operating loss of $1,421,805 for the same period in
1998. The improvement in the operating results for the third quarter and nine
month periods ended September 30, 1999 compared to 1998 was due principally to
the aforementioned headcount reductions and lower benefit costs and reduced
selling, general and administrative expenses resulting in improved operational
efficiencies through of a better matching of its workforce requirements with
sales volume. Included in the operating losses for the three and nine month
periods ended September 30, 1998, was a write-off of approximately $313,000 of
intangible assets and $58,000 of certain identifiable assets related to the
Company's lack of success in producing and selling profitably, a line of rotary
vane actuators. The Company made the decision in the third quarter of 1998 to
discontinue the production of this line of rotary vane actuators. In addition,
the Company wrote-off approximately $61,000 of the remaining unamortized cost of
licensing and manufacturing rights and $15,000 of certain identifiable assets
related to an agreement covering the marketing and distribution rights related
to a line of laboratory centrifuges, which agreement was terminated on September
25, 1998.
Other expenses, net, increased $13,686 for the third quarter of 1999
compared to the same period in 1998. For the nine month period ended September
30, 1999, other expenses, net, increased $78,429 compared to the same period in
1998. The increase for the third quarter resulted primarily from an increase in
interest expense on debentures related to a private placement closed during
1999. For the nine months ended September 30, 1999, the increase in other
expenses, net, over the comparable period in 1998 was due to higher interest on
borrowings under the Company's asset-based financing arrangement of
approximately $12,000, debentures payable interest of approximately $57,000 at
September 30, 1999, and a net decrease in other income of approximately $9,000.
The Company incurred a net loss during the three and nine month periods
ended September 30, 1999 and 1998, and consequently did not record a provision
for income taxes for these periods. The Company generally does not pay regular
income taxes because of the availability of its net operating loss
carryforwards. The Company is, however, generally subject to the 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%. Because the Company did not generate taxable income
during the three and nine month periods ended September 30, 1999 and 1998, no
provision for income taxes was recorded.
The effect of inflation on the Company's results has not been
significant.
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The net loss for the third quarter of 1999 was $424,660 or $0.09 per
basic and diluted share, compared to a net loss of $897,400 or $0.18 per basic
and diluted share for the third quarter of 1998. The net loss for the nine month
period ended September 30, 1999 was $929,926 or $0.19 per basic and diluted
share, compared to a net loss of $1,911,106 or $0.39 per basic and diluted share
for the comparable period in 1998. The net loss for the three and nine month
periods ended September 30, 1999 compared to the same periods in 1998 was due to
the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had a working capital deficiency of
$4,742,911, compared to a working capital deficiency of $4,157,294 at December
31, 1998. The current ratio was .45 at September 30, 1999, compared to .47 at
December 31, 1998. The increase in the working capital deficiency and decline in
the current ratio is principally due to continuing operating losses. Although
the term notes under the Company's asset-based line of credit have scheduled
repayment dates, the term notes may be due upon demand in the event that the
asset-based lender demands repayment. Accordingly, the Company has classified
all of the amounts owing under the credit facilities at September 30, 1999 and
December 31, 1998, as current liabilities. The credit facilities agreement
includes a subjective material adverse change clause under which the borrowings
could become due and payable.
In July 1999, the Company entered into a purchase agreement for the
sale and leaseback of the Company's building and land for a purchase price of
$3,225,000. Pursuant to the agreement, the buyer advanced $200,000 as earnest
money to the Company. The earnest money may be used in the Company's operations
or in any other manner the Company determines in its sole discretion. The
advance of the earnest money to the Company is evidenced by a promissory note
and is collateralized by a second mortgage on the building and land. The
promissory note bears interest at 12% per annum and will be repaid when the
closing occurs which is estimated to be in December 1999. After payment of its
mortgage obligation and repayment of the earnest money loan, the Company expects
to obtain approximately $725,000 in net cash from the transaction. Approximately
$500,000 of cash will be used to pay down overadvances that US Bancorp made to
the Company under is asset-based credit facilities during 1999 and the balance
will be used for working capital. The lease term will be for ten (10) years and
the Company will have two five-year renewal options. The Company also agreed to
provide 150,000 warrants of Company stock to buyer at an exercise price of $0.50
per share. If the purchase of the property is not completed by the buyer, then
the earnest money with the interest owed will be paid back to the buyer no later
than January 18, 2000. On November 1, 1999, the previous transaction was
terminated by the Company due to a delay in the closing of the contemplated
transaction within a time frame that was unacceptable to the Company. The
Company has entered into a similar transaction with another buyer, this
transaction is anticipated to close within forty-five (45) days from the signing
of a purchase agreement. As of November 15, 1999 a purchase agreement had not
yet been signed, however the Company anticipates doing so within the next few
weeks.
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Net cash used in operating activities was $645,811 for the nine months
ended September 30, 1999, compared to net cash provided by operating activities
of $9,910 for the comparable period in 1998. The decrease in cash flows from
operating activities for the nine months ended September 30, 1999, from the
comparable period in 1998 was due primarily to changes in operating assets and
liabilities including increases in receivables and accounts payable in addition
to continuing losses from operations. The Company's ability to meet its
continuing cash flow requirements in the future is dependent on achieving
adequate sales and margins from its manufacturing operations.
Net cash used in investing activities was $11,682 for the nine month
period ended September 30, 1999, compared to cash used in investing activities
of $110,758 for the same period in 1998. The decrease was due to a reduction in
capital expenditures during the first nine months of 1999 and the recovery of
prior sales and use tax paid on equipment acquired of approximately $46,000
which was received during the third quarter ended September 30, 1999.
Net cash provided by financing activities was $477,618 for the nine
month period ended September 30, 1999, compared to cash provided by financing
activities of $58,706 for the same period in 1998. The change was primarily due
to proceeds received from a sale and leaseback advance of $200,000, a book
overdraft of approximately $315,000 (related to the timing of cash borrowed
under the Company's asset-based line of credit to cover trade payable
disbursements and payroll occurring on the last day of the quarter), and
decreased borrowings under the Company's asset-based line of credit to fund
operating activities. At September 30, 1999, the Company had borrowed
approximately $5,661,000 and had additional availability of approximately
$180,000 under its credit facilities. In February 1999, the Company received the
final investment of $50,000 from the private placement offering of debentures
with warrants. The total liability relating to the debentures issued in this
offering was $350,320 at September 30, 1999. These debentures are due on
December 31, 2001, although the Company has the right to prepay the debentures
before this time. The proceeds are being used to fund operating activities.
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 of $929,926 for the nine months
ended September 30, 1999 and has a working capital deficit and stockholders'
deficiency of $4,742,911 and $2,033,903, respectively, at September 30, 1999.
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.
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- - Complete the sale leaseback transaction which should infuse approximately
$725,000 in cash which will be used to pay down bank debt and be used for
working capital purposes.
- - 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. 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.
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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 September 30, 1998, the
Company sent a Year 2000 compliance survey to critical business
partners. A follow-up survey was sent during the third quarter of 1999
to all critical business partners who did not respond to the first
survey or whose responses were not adequate. 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. The Company considers the evaluation phase
to be 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 was found not to be compliant. On
October 16, 1999 the Company changed over to a Year 2000 compliant
operating system and installed Year 2000 compliant patches to its
office products software. The internal operating systems and software
of the Company are now
14
<PAGE> 15
deemed to be Year 2000 compliant. The Company considers the remediation
planning phase to be complete.
Contingency 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 by November 30, 1999. The Company estimates that as of
November 15, 1999, the contingency planning phase is approximately 80%
complete.
Costs - Preliminary cost estimates for achieving Year 2000 compliance
of the Company are approximately $88,000, including $71,000 in capital
costs and $17,000 of operating expenses, with approximately $70,000 of
expenses having been incurred to date. The remaining costs will be
incurred by December 31, 1999. No material resource constraints 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 need 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. The Company has
several sources for raw materials for products that it produces. As
part of the Company's contingency planning, several new vendors have
been added as backup sources for material in the event that primary
vendors systems fail because of Year 2000 problems. 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.
SUMMARY
In summary, the Company incurred a net loss during the third quarter of
1999, however, in August and September 1999, revenues approached $1.1 million
dollars during each month which is very close to a profit breakeven for the
Company. In addition, the Company incurred a smaller loss on lower sales volume,
compared to the nine month period ended September 30, 1998. Also, previous
interrupted shipments of one blood centrifuge model to the Company's largest
customer began to resume mid-February 1999. 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 $400,000 ($350,000 during 1998 and $50,000 during 1999) in proceeds from a
private placement of debentures with warrants to fund operating activities. In
July 1999, the Company received earnest money of $200,000
15
<PAGE> 16
related to a pending sale and leaseback transaction of the Company's land and
building. The sale and leaseback transaction is anticipated to close in December
1999 or early 2000 and should infuse another $725,000 of cash into the Company
that will be used to fund operating activities and pay down bank debt. 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.
Except for the historical financial information reported above, this
Form 10-QSB contains forward-looking statements that involve risk and
uncertainties, including references to anticipated and projected sales volume,
the risk associated with establishing new or improving existing relationships
with customers of the Company, other business development activities,
anticipated financial performance, business prospects, and similar matters. In
addition, the Company has a high concentration of business with one major
customer and reductions in scheduled shipments to this customer were primarily
responsible for the net losses in the prior year. There can be no assurance that
this customer will resume shipments to prior or expected levels. Because of
these and other uncertainties, actual results could differ materially from those
reflected in the forward-looking statements.
16
<PAGE> 17
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports
(a) Exhibits.
Item No. Item Method of Filing
--------- -------------- ----------------
27.1 Financial Data Schedule Filed herewith electronically
(b) Reports on Form 8-K.
There were no reports on Form 8-K which were filed during the third
quarter of 1999.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REUTER MANUFACTURING, INC.
--------------------------
(Registrant)
Date: November 15, 1999 By: /s/Michael J. Tate
-------------------- --------------------------------
Michael J. Tate
President and Chief Executive Officer
(principal executive officer)
Date: November 15, 1999 By: /s/William H. Johnson
-------------------- --------------------------------
William H. Johnson
Vice President, Chief Financial
Officer and Secretary (principal
financial officer)
18
<PAGE> 19
REUTER MANUFACTURING, INC.
EXHIBIT TO QUARTERLY
REPORT ON FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
Item No. Item Method of Filing
---------- ---------------- ----------------
27.1 Financial Data Schedule Filed herewith electronically
19
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
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