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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 June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------ ------
Commission File Number 0-1561
REUTER MANUFACTURING, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0780999
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
410 - 11TH AVENUE SOUTH, HOPKINS, MINNESOTA 55343
- ---------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
612/935-6921
- ---------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X . No. .
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As of August 13, 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>
June 30,
1999 December 31,
(Unaudited) 1998
------------------- -------------------
ASSETS
<S> <C> <C>
Current assets:
Cash $ - $ 179,875
Receivables, net of allowances of $50,000 and $25,000
at June 30, 1999 and December 31, 1998, respectively 1,491,438 1,432,723
Inventories 1,828,515 2,027,040
Other current assets 26,654 44,685
------------------- -------------------
Total current assets 3,346,607 3,684,323
Property, plant and equipment, net 3,812,697 4,027,404
------------------- -------------------
Total assets $ 7,159,304 $ 7,711,727
------------------- -------------------
------------------- -------------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Book overdraft $ 40,816 $ -
Asset-based line of credit and term obligations, bank 5,428,538 5,610,405
Current maturities of long-term equipment financing 398,542 240,483
Accounts payable, trade 1,240,806 1,198,469
Accrued expenses 728,251 792,260
------------------- -------------------
Total current liabilities 7,836,953 7,841,617
Long-term equipment financing, less current maturities 568,582 657,045
Debentures payable 344,800 292,040
Other liabilities 30,713 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 June 30, 1999
and December 31, 1998, respectively 918,635 918,541
Additional paid-in capital 17,890,509 17,832,113
Accumulated deficit (20,385,055) (19,879,789)
Unearned stock compensation (45,833) -
------------------- -------------------
Total stockholders' deficiency (1,621,744) (1,129,135)
------------------- -------------------
Total liabilities and stockholders' deficiency $ 7,159,304 $ 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 six months ended
June 30, June 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 2,777,992 $ 3,046,450 $ 5,724,147 $ 6,704,570
Cost of sales 2,429,387 2,893,766 4,942,844 6,173,624
----------- ----------- ----------- -----------
Gross profit 348,605 152,684 781,303 530,946
Selling, general and administrative expenses 443,769 563,152 913,916 1,236,742
----------- ----------- ----------- -----------
Operating loss (95,164) (410,468) (132,613) (705,796)
----------- ----------- ----------- -----------
Other (expense) income:
Interest expense (193,831) (166,481) (379,223) (323,804)
Other, net 21,367 2,196 6,570 15,894
----------- ----------- ----------- -----------
Total other expense, net (172,464) (164,285) (372,653) (307,910)
----------- ----------- ----------- -----------
Net loss $ (267,628) $ (574,753) $ (505,266) $(1,013,706)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net loss per share (basic and diluted) $ (0.05) $ (0.12) $ (0.10) $ (0.21)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average common shares outstanding
(basic and diluted) 4,898,923 4,865,721 4,898,904 4,864,645
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</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 six months ended June 30,
- ---------------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (505,266) $(1,013,706)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 400,651 420,500
Amortization of intangible assets 40,984
Accretion of debentures payable 11,040
Stock compensation 4,167
Provision for doubtful accounts 25,000
Provision for write-down of inventories 50,000 (40,000)
Changes in operating assets and liabilities:
Receivables (83,715) 188,547
Inventories 148,525 411,986
Other current assets 18,031 10,352
Accounts payable, trade 42,337 (44,587)
Accrued expenses (64,009) 9,625
Other liabilities (19,447) (26,751)
----------- -----------
Net cash provided by (used in) operating activities 27,314 (43,050)
----------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment (45,671) (111,965)
----------- -----------
Net cash used in investing activities (45,671) (111,965)
----------- -----------
Cash flows from financing activities:
Book overdraft 40,816
Repayment of long-term equipment financing (70,677) (108,625)
Proceeds from asset-based line of credit and term obligations, bank 5,578,697 7,286,102
Repayment of asset-based line of credit (5,760,564) (6,932,072)
Proceeds from private placement of debentures 50,000
Proceeds from exercise of stock options 210 2,520
----------- -----------
Net cash (used in) provided by financing activities (161,518) 247,925
----------- -----------
Net (decrease) increase in cash (179,875) 92,910
Cash, beginning of year 179,875 113,234
----------- -----------
Cash, end of period $ -- $ 206,144
----------- -----------
----------- -----------
Supplemental disclosures of cash flow information:
Cash paid for interest $ 382,545 $ 313,394
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 six month periods ended June 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 June 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 loss for the three and six month periods ended
June 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 June 30, 1999, the Company had 415,144
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 60.2% and 41.0% of net sales for the three
months ended June 30, 1999 and 1998, respectively and accounted for
57.9% and 41.6% of net sales for the six months ended June 30, 1999 and
1998, respectively. Accounts receivable credit concentrations
associated with this customer totaled $720,790 at June 30, 1999, and
inventory related to production in process according to customers'
specifications totaled $489,820 at June 30, 1999.
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3. ASSET-BASED LINE OF CREDIT:
At June 30, 1999, the Company had borrowed approximately $5,429,000 and
had additional availability of approximately $96,000 under its line of
credit facilities. There can be no assurance that the lender will
continue to provide credit to the Company. If the lender demanded full
payment of the credit facilities, the Company would need to obtain
financing from another source. There can be no assurance that the
Company would be able to obtain such financing on terms acceptable to
the Company or at all.
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. After payment of its mortgage obligation the
Company expects to obtain approximately $725,000 net cash from the
transaction. 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 September or October 1999. The lease term will be
for ten (10) years and the Company will have two five-year renewal
options. The Company 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 buyer no later than
January 3, 2000.
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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 six 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 $2,777,992 for the second quarter ended
June 30, 1999 decreased by approximately 8.8% or $268,458 from $3,046,450 for
the same period in 1998. The decrease in net sales for the second quarter of
1999 compared to the same quarter for 1998 was due primarily to decreased sales
of industrial products (automotive fuel pump bushing and refurbished spindles)
and engine products (oil centrifuges). Net sales from medical, industrial,
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and proprietary products were $2,085,434, $554,066, and $138,492, respectively,
for the second quarter ended June 30, 1999 compared to $2,081,966, $732,917, and
$231,567, respectively, for the comparable period in 1998. Sales to the
Company's largest medical product customer were $1,672,341 or 60.2% of net sales
for the second quarter of 1999 compared to $1,248,211 or 41.0% of net sales for
the same period in 1998. The Company's net sales of $5,724,147 for the six
months ended June 30, 1999 decreased by approximately 14.6% or $980,423 from
$6,704,570 for the same period in 1998. The decrease in net sales for the first
six months of 1999 compared to the same period in 1998 was due primarily to
decreased sales of industrial products (automotive fuel pump bushing and
refurbished spindles) and engine products (oil centrifuges). Net sales from
medical, industrial, and proprietary products were $4,333,061, $1,127,691, and
$263,395, respectively, for the six months ended June 30, 1999 compared to
$4,314,163, $1,912,325, and $478,082, respectively, for the comparable period in
1998. Sales to the Company's largest medical product customer were $3,314,825 or
57.9% of net sales for the six months ended June 30, 1999 compared to $2,786,204
or 41.6% of net sales for the same period in 1998.
Gross profit was 12.5% in the second quarter of 1999, compared to 5.0% for
the same period in 1998. Gross profit was 13.6% for the six months ended
June 30, 1999, compared to 7.9% for the same period in 1998. The improvement in
gross profit for the second quarter and six months of 1999 from 1998 was
primarily due to lower wages and related lower benefit costs resulting from a
reduction of 44 direct and indirect manufacturing employees and tighter cost
control. In addition, for 1999 there was a more favorable mix of higher margin
medical product business over the comparable periods in 1998.
Selling, general and administrative expenses were $443,769 or 16.0% of net
sales for the second quarter of 1999, compared to $563,152 or 18.5% of net sales
for the same period in 1998. For the six months ended June 30, 1999, selling,
general and administrative expenses were $913,916 or 16.0% of net sales,
compared to $1,236,742 or 18.5% of net sales for the same period in 1998. The
decrease for the quarter ended June 30, 1999 in selling, general and
administrative expenses of $119,383, from the comparable quarter in 1998 is due
to a reduction in selling related expenses of $22,053 and a reduction in
administrative expenses of $97,330. The reductions are primarily due to lower
wages and related lower benefit costs resulting from the reduction of eight
employees and a decrease in travel-related expenses. In addition, expenses are
generally lower due to increased cost control and lower sales volume. For the
six months ended June 30, 1999, selling, general and administrative expenses
decreased $322,826 from the comparable period in 1998. The decrease in these
expenses is due to a reduction in selling related expenses of $87,202 and a
decrease in administrative expenses of $235,624. The decrease in these expenses
is due to the reasons stated above for the quarter and a decrease in legal and
accounting expenses of approximately $45,000.
In the second quarter of 1999, the Company had an operating loss of
$95,164, compared to an operating loss of $410,468 in the same period of 1998.
For the six months ended June 30, 1999, the Company had an operating loss of
$132,613 compared to an operating loss of $705,796 for the same period in 1998.
The improvement in the operating results for the second quarter and
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first six month period of 1999 compared to 1998 was due principally to the
aforementioned headcount reductions and lower benefit costs, stronger product
mix of higher margin products and reduced selling, general and administrative
expenses. In addition, the Company has improved operational efficiencies as a
result of a better matching of its workforce requirements with sales volume.
Other expenses, net, increased $8,179 for the second quarter of 1999
compared to the same period in 1998. For the six months ended June 30, 1999,
other expenses, net, increased $64,743 compared to the same period in 1998. The
increase for the second quarter resulted primarily from an increase in interest
expense on the Company's asset-based financing arrangement of approximately
$8,000 due to higher interest rates, and an increase in debentures payable
interest of approximately $19,000 which was entirely offset by an increase in
other income of approximately $19,000. For the six months ended June 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 $17,000, debentures payable interest of
approximately $38,000 for 1999, and a decrease in other income of approximately
$9,000.
The Company incurred a net loss during the second quarter and first six
months of 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 first and second
quarters of 1999 and 1998, no provision for income taxes was recorded.
The effect of inflation on the Company's results has not been significant.
The net loss for the second quarter of 1999 was $267,628 or $0.05 per basic
and diluted share, compared to a net loss of $574,753 or $0.12 per basic and
diluted share for the second quarter of 1998. The net loss for the six month
period ended June 30, 1999 was $505,266 or $0.10 per basic and diluted share,
compared to a net loss of $1,013,706 or $0.21 per basic and diluted share for
the comparable period in 1998. The net loss for the three and six month period
ended June 30, 1999 compared to the same period in 1998 was due to the factors
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had a working capital deficiency of
$4,490,346, compared to a working capital deficiency of $4,157,294 at December
31, 1998. The current ratio was .43 at June 30, 1999, compared to .47 at
December 31, 1998. The increase in the working
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capital deficiency and the slight decrease in the current ratio are 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 June 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. After payment of its mortgage obligation the Company expects to
obtain approximately $725,000 net cash from the transaction. 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
September or October 1999. The lease term will be for ten (10) years and the
Company will have two five-year renewal options. The Company 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 buyer no later than
January 3, 2000.
Net cash provided by operating activities was $27,314 for the six months
ended June 30, 1999, compared to net cash used in operating activities of
$43,050 for the comparable period in 1998. The increase in cash flows from
operating activities for the six months ended June 30, 1999, from the comparable
period in 1998 was due primarily to a lower net loss in 1999 compared to 1998
resulting from a better mix of higher margin medical products and across the
board cost reductions, primarily headcount reductions. 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 $45,671 for the six month period
ended June 30, 1999, compared to cash used in investing activities of $111,965
for the same period in 1998. The decrease was due to a reduction in capital
expenditures during the first six months of 1999.
Net cash used in financing activities was $161,518 for the six month period
ended June 30, 1999, compared to cash provided by financing activities of
$247,925 for the same period in 1998. The change was primarily due to decreased
borrowings under the Company's asset-based line of credit to fund operating
activities. As of June 30, 1999, the Company had borrowed approximately
$5,429,000 and had additional availability of approximately $96,000 under the
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 $344,800
as of June 30, 1999. These debentures are due on December
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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 $505,266 for the six months ended
June 30, 1999 and has a working capital deficit and stockholders' deficiency of
$4,490,346 and $1,621,744, respectively, at June 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.
- - 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 June 30, 1998, the
Company sent a Year 2000 compliance survey to critical business
partners. A follow-up survey was sent during the second 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. As of August 13, 1999, the evaluation
phase was 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 deemed
compliant by the manufacturer. This compliant software is anticipated
to be available in the third quarter of 1999. The Company estimates
that as of August 13, 1999, the remediation planning phase was
complete.
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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 during the quarter ending September 30, 1999. The Company
estimates that as of August 13, 1999, the contingency planning phase is
approximately 50% complete. Management expects this plan to be
completed by the fourth quarter of 1999.
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 $28,000 of
expenses having been incurred to date. A majority of the remaining
costs are anticipated to be incurred in 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. 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 had a disappointing first half of 1999. However,
the Company incurred a smaller loss on lower sales volume, compared to the first
half of 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 related to a pending sale and leaseback transaction of the Company's
land and building. The transaction is scheduled to close in September or October
1999 and should infuse another $725,000 of cash into the Company that will be
used to fund operating activities and pay down bank debt. Sales are projected to
begin recovering during the third quarter of 1999. 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.
13
<PAGE>
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.
14
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May 11, 1999, the Company held its annual Meeting of Shareholders. The
following matters were voted on at the annual meeting:
(a) The following directors were elected to serve until the Annual Meeting
of Shareholders to be held in 2002:
DIRECTOR VOTES FOR VOTES AGAINST
Kenneth E. Daugherty 3,481,253 26,045
Edward E. Strickland 3,480,602 26,696
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 second
quarter of 1999.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REUTER MANUFACTURING, INC.
--------------------------------
(Registrant)
Date: AUGUST 16, 1999 By: /s/ MICHAEL J. TATE
----------------- -----------------------------------------------
Michael J. Tate
President and Chief Executive Officer (principal
executive officer)
Date: AUGUST 16, 1999 By: /s/ WILLIAM H. JOHNSON
------------------- -----------------------------------------------
William H. Johnson
Vice President, Chief Financial Officer and
Secretary (principal financial officer)
16
<PAGE>
REUTER MANUFACTURING, INC.
EXHIBIT TO QUARTERLY
REPORT ON FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Item No. Item Method of Filing
-------- --------------- -------------------
<S> <C> <C>
27.1 Financial Data Schedule Filed herewith electronically
</TABLE>
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,491,438
<ALLOWANCES> 0
<INVENTORY> 1,828,515
<CURRENT-ASSETS> 3,346,607
<PP&E> 13,143,886
<DEPRECIATION> 9,331,189
<TOTAL-ASSETS> 7,159,304
<CURRENT-LIABILITIES> 7,836,953
<BONDS> 0
0
0
<COMMON> 918,635
<OTHER-SE> (2,540,379)
<TOTAL-LIABILITY-AND-EQUITY> 7,159,304
<SALES> 2,777,992
<TOTAL-REVENUES> 2,777,992
<CGS> 2,429,387
<TOTAL-COSTS> 2,873,156
<OTHER-EXPENSES> 172,464
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 193,831
<INCOME-PRETAX> (267,628)
<INCOME-TAX> 0
<INCOME-CONTINUING> (267,628)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (267,628)
<EPS-BASIC> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
