-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LiAuP6RZX9iyI17/Ci2mebeDufdpBvz/264+VvnhSbUQMu2XH9UJnek+oL+TOB9R m8igTHGycbkUD0kTQVNZmw== 0000912057-96-023745.txt : 19961028 0000912057-96-023745.hdr.sgml : 19961028 ACCESSION NUMBER: 0000912057-96-023745 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961025 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: REUTER MANUFACTURING INC CENTRAL INDEX KEY: 0000083490 STANDARD INDUSTRIAL CLASSIFICATION: LABORATORY APPARATUS & FURNITURE [3821] IRS NUMBER: 410780999 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-01561 FILM NUMBER: 96648064 BUSINESS ADDRESS: STREET 1: 410 11TH AVE SOUTH CITY: HOPKINS STATE: MN ZIP: 55343 BUSINESS PHONE: 612-935-69 MAIL ADDRESS: STREET 1: 410 11TH AVENUE SOUTH CITY: HOPKINS STATE: MN ZIP: 55343 FORMER COMPANY: FORMER CONFORMED NAME: GREEN ISLE ENVIRONMENTAL SERVICES INC DATE OF NAME CHANGE: 19940210 FORMER COMPANY: FORMER CONFORMED NAME: REUTER INC DATE OF NAME CHANGE: 19920703 10QSB 1 10QSB FORM 10-QSB U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (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, 1996 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from to -------- -------- Commission File Number 0-1561 REUTER MANUFACTURING, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Minnesota 41-0780999 - ------------------------------- ------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 410 - 11th Avenue South, Hopkins, Minnesota 55343 - ------------------------------------------------- ---------------- (Address of principal executive offices) (Zip Code) 612/935-6921 - -------------------------------------------------------------------------------- (Issuer's telephone number, including area code) Check whether the issuer (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 October 25, 1996 there were outstanding 3,198,520 shares of the registrant's common stock, par value $.18-3/4 per share. 1 PART I. FINANCIAL INFORMATION. ITEM 1. FINANCIAL STATEMENTS. REUTER MANUFACTURING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended For the nine months ended September 30, September 30, 1996 1995 1996 1995 ------------- ------------- ------------- ------------- Net sales $4,038,677 $2,703,830 $10,118,277 $8,754,793 Less: Cost of sales 2,683,024 2,168,215 7,264,913 6,761,509 Depreciation 136,088 150,442 422,908 448,921 ------------- ------------- ------------- ------------- GROSS PROFIT 1,219,565 385,173 2,430,456 1,544,363 Selling, general and administrative expenses 577,821 520,356 1,678,122 1,667,494 Depreciation 26,320 28,751 83,097 84,311 ------------- ------------- ------------- ------------- OPERATING INCOME (LOSS) 615,424 (163,934) 669,237 (207,442) Other income (expenses): Interest income 2,314 2,951 14,088 7,572 Interest expense (104,629) (106,490) (307,463) (302,044) Management fees 30,000 90,000 Other, net 14,778 16,988 22,789 43,629 ------------- ------------- ------------- ------------- TOTAL OTHER EXPENSE (87,537) (56,551) (270,586) (160,843) ------------- ------------- ------------- ------------- INCOME (LOSS) FROM CONTINUING OPERATIONS 527,887 (220,485) 398,651 (368,285) ------------- ------------- ------------- ------------- Discontinued Operations: Loss from discontinued waste processing operations, primarily accrued interest during elongated debt settlement negotiations (540,131) (1,617,809) ------------- ------------- ------------- ------------- INCOME (LOSS) BEFORE EXTRORDINARY ITEM 527,887 (760,616) 398,651 (1,986,094) Extraordinary item - gain on debt restructuring (note 3) 7,249,018 ------------- ------------- ------------- ------------- NET INCOME (LOSS) $527,887 ($760,616) $7,647,669 ($1,986,094) ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
The accompanying notes are an integral part of the consolidated financial statements. 2 REUTER MANUFACTURING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
For the three months ended For the nine months ended September 30, September 30, 1996 1995 1996 1995 ------------ ------------ ------------ ------------ Net income (loss) per common share data: Primary: Income (loss) from continuing operations $0.15 ($0.07) $0.12 ($0.11) Loss from discontinued operations (0.17) (0.51) ------------ ------------ ------------ ------------ INCOME (LOSS) PER SHARE BEFORE EXTRAORDINARY ITEM 0.15 (0.24) 0.12 (0.62) ------------ ------------ ------------ ------------ Extraordinary item (note 3) 2.19 ------------ ------------ ------------ ------------ NET INCOME (LOSS) PER SHARE $0.15 ($0.24) $2.31 ($0.62) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Fully diluted: Income from continuing operations $0.08 $0.08 Loss from discontinued operations ------------ ------------ INCOME PER SHARE BEFORE EXTRAORDINARY ITEM 0.08 0.08 ------------ ------------ Extraordinary item (note 3) 1.51 ------------ ------------ NET INCOME PER SHARE $0.08 $1.59 ------------ ------------ ------------ ------------ Weighted average number of shares outstanding: Primary 3,406,831 3,191,520 3,308,530 3,191,520 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Fully Diluted 6,658,086 3,191,520 4,800,810 3,191,520 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of the consolidated financial statements. 3 REUTER MANUFACTURING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
September 30, December 31, 1996 1995 --------------- -------------- ASSETS CURRENT ASSETS: Cash $174,996 $101,048 Investments, restricted 250,000 250,000 Accounts receivable, net of allowances of $17,000 at September 30, 1996 and $15,000 at December 31, 1995 1,802,875 1,248,697 Inventories 1,854,576 1,301,105 Other current assets 14,275 72,784 --------------- -------------- TOTAL CURRENT ASSETS 4,096,722 2,973,634 Property, plant and equipment, net 3,835,858 4,082,318 Intangible assets, net 409,889 446,365 --------------- -------------- TOTAL ASSETS $8,342,469 $7,502,317 --------------- -------------- --------------- -------------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) CURRENT LIABILITIES: Debt of Eden Prairie facility guaranteed by parent company, including accrued interest of $3,275,656 at December 31, 1995 $18,784,019 Current maturities of long-term debt $4,311,846 259,734 Borrowings under asset-based line of credit 2,892,222 2,589,575 Accounts payable, trade 756,981 530,991 Accrued expenses 822,846 714,872 --------------- -------------- TOTAL CURRENT LIABILITIES 8,783,895 22,879,191 Long-term debt, less current maturities 7,818,448 495,715 Other long-term liabilities 162,610 199,654 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: 3,198,520 shares at September 30,1996 and 3,191,520 shares at December 31, 1995 599,722 598,410 Additional paid-in capital 13,711,374 13,710,596 Accumulated deficit (22,733,580) (30,381,249) --------------- -------------- TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (8,422,484) (16,072,243) --------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $8,342,469 $7,502,317 --------------- -------------- --------------- --------------
The accompanying notes are an integral part of the consolidated financial statements. 4 REUTER MANUFACTURING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash For the nine months ended September 30, - ---------------------------------------------------------------------------------------------------------------------------- 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $7,647,669 ($1,986,094) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 506,005 533,232 Amortization of intangible assets 36,476 58,976 Extraordinary gain on debt restructuring (note 3) (7,249,018) Gain on sales of assets (9,636) Provision for uncollectible accounts receivable 2,000 7,907 Sanwa interest accrued during elongated debt settlement negotiations 1,617,809 Provision for obsolete inventory 100,000 15,000 Changes in operating assets and liabilities: Accounts receivable (556,178) 143,224 Inventories (653,471) (277,849) Other assets 58,509 (20,153) Accounts payable 225,990 247,284 Accrued expenses 158,691 178,859 Accrued retirement (37,044) (32,750) Other liabilities (50,717) (18,849) - ---------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 188,912 456,960 - ---------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of property and equipment 35,124 Acquisition of Sollami product line (287,921) Additions to property, plant and equipment (101,957) (133,455) - ---------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (101,957) (386,252) - ---------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt (317,744) (131,057) Proceeds from short-term borrowings 9,881,315 8,758,977 Repayment of short-term borrowings (9,578,668) (8,906,480) Proceeds from issuance of stock 2,090 - ---------------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (13,007) (278,560) - ---------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash 73,948 (207,852) Cash, beginning of year 101,048 209,192 - ---------------------------------------------------------------------------------------------------------------------------- Cash, end of period $174,996 $1,340 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Supplemental disclosures of cash flow information: Cash paid for interest $307,516 $299,460 Noncash investing and financing activities: Purchase of equipment in exchange for notes payable 157,588 226,024 Purchase of Sollami in exchange for future minimum payments 346,285
The accompanying notes are an integral part of the consolidated financial statements. 5 Reuter Manufacturing, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) 1. FINANCIAL STATEMENTS: The unaudited consolidated financial statements of Reuter Manufacturing, Inc., and Subsidiaries (the Company) for the three and nine-month periods ended September 30, 1996 and 1995 reflect, in the opinion of management, all adjustments (which include only normal recurring adjustments, except as described in Note 3 of this Form 10-QSB) necessary to fairly state the consolidated financial position at September 30, 1996 and the consolidated results of operations (including discontinued operations) and cash flows for the reported periods. The consolidated results of operations for any interim period are not necessarily indicative of results expected for the full year. These unaudited consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1995 Form 10-KSB. USE OF ESTIMATES: The preparation of the Company's consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, 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. The most significant areas which require the use of management's estimates relate to allowances for doubtful accounts receivable, inventory obsolescence, and the accrual for container warranty. NET INCOME (LOSS) PER SHARE: Net income per common and common equivalent shares is computed by dividing net income by the weighted average number of shares outstanding during each period. Common stock equivalents for primary earnings per share purposes represent stock options granted to employees. For purposes of computing fully diluted earnings per share, common shares issuable in connection with the contingent stock purchase warrant issued to Sanwa Business Credit Corporation (Sanwa) as part of the restructuring of the Eden Prairie Facility debt (as discussed in Note 3(c) of this Form 10-QSB), are considered issued and outstanding. 6 2. SELECTED BALANCE SHEET INFORMATION: Inventories: September 30, December 31, 1996 1995 ------------- ------------ Raw materials and supplies $ 427,183 $ 297,067 Work-in-process 1,427,393 1,004,038 ------------- ------------ $ 1,854,576 $1,301,105 ------------- ------------ ------------- ------------ 3. EDEN PRAIRIE FACILITY ASSETS SALE AND JANUARY 24, 1996 RESTRUCTURING OF UNDERLYING DEBT GUARANTEE: As described in Notes 2 and 3 of the notes to consolidated financial statements in the Company's 1995 Form 10-KSB, on January 24, 1996, the Company and Sanwa Business Credit Corporation (Sanwa) entered into a Loan and Security Agreement (the Loan Agreement) to restructure the Company's guarantee of the debt obligation underlying the Eden Prairie Facility (EPR Facility), which included the following documents: a Senior Subordinated Secured Promissory Note in the amount of $2,780,000; a Junior Subordinated Secured Promissory Note in the amount of $1,000,000; a Mortgage, Assignment of Leases and Rents, Security Agreement and Financing Statement; a Patent Security Agreement; a $6,000,000 Income Sharing Agreement; and a Common Stock Warrant Agreement (collectively, the Loan Documents). The restructuring became effective on June 6, 1996, at which time the restructuring transaction was recognized by the Company as an extraordinary item - gain on debt restructuring of approximately $7.2 million. 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. Pursuant to the Loan Agreement, Sanwa agreed to restructure the Company's obligations to guarantee repayment of a loan from Sanwa to EPR, Inc., into three separate obligations as follows: (a) The $2,780,000 term loan, evidenced by a Senior Subordinated Secured Promissory Note in the amount of $2,780,000, executed by the Company in favor of Sanwa. The note bears interest at the rate of 8% per year and provides for 12 consecutive quarterly payments of $75,000 plus accrued interest and a final payment of any unpaid principal and accrued interest on December 31, 1999. 7 EDEN PRAIRIE FACILITY ASSETS SALE AND JANUARY 24, 1996 RESTRUCTURING OF UNDERLYING DEBT GUARANTEE, CONTINUED: (b) The $1,000,000 term loan, evidenced by a Junior Subordinated Secured Promissory Note in the amount of $1,000,000, executed by the Company in favor of Sanwa. The note bears interest at the rate of 8% per year and provides for quarterly payments of principal and interest, to the extent that the Company generates cash flow after payment of certain indebtedness and capital expenditures, and a final payment of any unpaid principal and accrued interest on December 31, 1999. (c) The Income Sharing Agreement, whereby the Company is required to make payments to Sanwa in an amount equal to 40% of the Company's income before taxes, as defined, (prior to a change in control as defined in Section 382(g)(1) of the Internal Revenue Code of 1986, as amended), less cash interest payments made by the Company under the Senior Subordinated Secured Promissory Note. However, if a change in control occurs, the Company is required to make payments to Sanwa in an amount equal to the percentage of the long-term tax-exempt rate, as defined in Section 382(f) of the Internal Revenue Code of 1986, as amended, multiplied by the Company's income before taxes, as defined, less cash interest payments made by the Company under the Senior Subordinated Secured Promissory Note. The Income Sharing Agreement remains in effect until the Company has made total payments of $6,000,000 under the agreement, or it expires on December 31, 2010, whichever is earlier. The Company's obligations under the Loan Documents are collateralized by a security interest in substantially all of the Company's assets. The security interest granted to Sanwa is subordinate to the security interest previously granted in connection with the Asset-Based Short-Term Financing Agreement (see Note 7 of the Company's 1995 10-KSB). The Company also granted Sanwa a contingent stock purchase warrant to purchase up to 3,178,780 shares of common stock of the Company for an aggregate purchase price of $10 (ten dollars) (see Note 8 of the Company's 1995 10-KSB). The warrant is exercisable only following the occurrence of an "ownership change" in respect of the Company, as defined in Section 382(g)(1) of the Internal Revenue Code of 1986, as amended. The warrant expires upon payment in full by the Company of all amounts due under the Income Sharing Agreement. In addition, the Company and Sanwa entered into separate Standstill Agreements with the Company's Chief Executive Officer (the CEO) and its Chairman of the Board of Directors (the Chairman) who agreed not to, directly or indirectly, acquire, dispose of, or exercise any option or other right to acquire any capital stock or option of the Company. The Standstill Agreements remain in effect until the earlier of (a) the expiration of the Income Sharing Agreement, (b) the death of the CEO or the Chairman, 8 EDEN PRAIRIE FACILITY ASSETS SALE AND JANUARY 24, 1996 RESTRUCTURING OF UNDERLYING DEBT GUARANTEE, CONTINUED: or (c) the occurrence of an "ownership change" in respect of the Company, as defined in Section 382(g)(1) of the Internal Revenue Code of 1986, as amended. As a result of the Sanwa Standstill Agreements described above, the Company has entered into an agreement (the Management Standstill Agreement) with the CEO and the Chairman whereby, under a predetermined formula, these two individuals can earn up to an aggregate of $600,000 based on increases in the market value of shares they hold, that they are unable to trade due to the provisions of the Sanwa Standstill Agreement. 4. ASSET-BASED SHORT-TERM FINANCING ARRANGEMENT: The Company is in violation of certain financial and technical covenants of the Asset-Based short-term financing agreement and a cross-default covenant due to the defaults described in this Form 10-QSB under the caption "Liquidity and Capital Resources" and Note 7 of the notes to the consolidated financial statements in the Company's 1995 Form 10-KSB. As a result of these default conditions, the lender may, at its sole discretion declare the Company in default, discontinue making advances to the Company and demand immediate repayment of borrowings under the line of credit. If the lender will continue making advances to the Company, additional borrowing capacity under this line of credit is approximately $158,000 at October 25, 1996. 5. RECLASSIFICATIONS: Certain reclassifications have been made to the periods ended September 30, 1995 consolidated statements of operations to conform to the current periods presentation. These reclassifications had no impact on previously reported losses from continuing operations. 6. SIGNIFICANT CUSTOMERS: Sales to the Company's two largest medical product customers were $3,106,609 or 76.9% of net sales for the third quarter of 1996, compared to sales of $1,949,674 or 72.1% of net sales for the same period in 1995. Sales to the Company's two largest medical product customers were $7,334,739 or 72.5% of net sales and $6,218,192 or 71.0% of net sales for the nine-months ended September 30, 1996 and 1995, respectively. Accounts receivable concentrations associated with the two largest medical customers discussed above, represented 55.6% and 11.4% of September 30, 1996 total customer accounts receivable. 9 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS GENERAL: In June 1996, the "Restructuring Agreements" (described below) were released from escrow and the Company was released from its guarantee of the indebtedness of EPR, Inc. ("EPR") a wholly owned subsidiary of the Company to Sanwa Business Credit Corporation. The Company recognized an extraordinary gain of $7,249,018 or $2.19 per share ($1.51 per share on a fully diluted basis) during the second quarter of 1996 in connection with this transaction. EPR ceased operations on January 1, 1994 and had no operations or assets on December 31, 1995. As more fully described in Note 3 to the consolidated financial statements included in this report on Form 10-QSB, in January 1996, the Company and Sanwa entered into a series of agreements (the "Restructuring Agreements"), pursuant to which Sanwa agreed to restructure the Company's obligations to guarantee repayment of the EPR Loan. The Restructuring Agreements were subject to an escrow arrangement whereby Sanwa had the right to rescind the transaction if the Company sought protection under U.S. Bankruptcy Laws on or before June 6, 1996. As described above, the Restructuring Agreements were released from escrow and the Company was released from its guarantee of the indebtedness of the EPR debt during June 1996. Pursuant to the Restructuring Agreements, Sanwa agreed to restructure the Company's obligations on the EPR Loan into three separate obligations: a term loan in the amount of $2,780,000, a term loan in the amount of $1,000,000, and payment obligations under an Income Sharing Agreement which generally requires the Company to make payments to Sanwa in an amount equal to 40% of its income before taxes, as defined, if any, less cash interest payments made by the Company under the $2,780,000 term loan. The Income Sharing Agreement remains in effect until the Company has made total payments of $6,000,000 under the agreement or December 31, 2010, whichever is earlier. The Company also granted Sanwa a warrant to purchase up to 3,178,780 shares of Common Stock of the Company for an aggregate purchase price of $10.00 (ten dollars), which will become exercisable if there is a change in control of the Company as defined in Section 382(g)(1) of the Internal Revenue Code of 1986, as amended. In addition, the Company and Sanwa entered into separate Standstill Agreements with each of James Taylor, the Chief Executive Officer and a Director of the Company, and Edward E. Strickland, the Chairman of the Board of Directors of the Company, under which Mr. Taylor and Mr. Strickland have agreed not to, directly or indirectly, acquire, dispose of, or exercise any option or other right to acquire any capital stock or options of the Company. As a result of the Sanwa Standstill Agreements described above, the Company has agreed to pay these individuals, under a predetermined formula, up to an aggregate of $600,000 based on the increases in the market value of the shares of Common Stock of the Company that 10 they hold and are unable to trade due to the Sanwa Standstill Agreements. CONTINUING MANUFACTURING OPERATIONS: Continuing operations consist primarily of the precision machining business, which manufactures and assembles medical devices and other precision machined parts on a contract basis. The Company also manufactures proprietary products (oil centrifuges and rotary vane actuators). The Company ceased its plastics manufacturing operations during 1994 and has sold most of the equipment used in its plastics manufacturing operations. The Company currently has no involvement in the waste processing business. The Company's net sales from continuing operations for the third quarter of 1996 increased by approximately 49.4% or $1,334,847 from the same period in 1995. The Company's net sales for the nine-months ended September 30, 1996 were $10,118,277 compared to $8,754,793 for the same period in 1995, an increase of 15.6%. The increase in sales was due primarily to increased sales to one of the Company's largest medical customers in the third quarter, which offset a decrease in sales to the Company's other largest medical customer of approximately $135,000 and $1,635,000 for the three and nine-month periods ended September 30, 1996, respectively, from the same periods in 1995. Sales to the Company's two largest medical product customers were $3,106,609 or 76.9% of net sales for the third quarter of 1996, compared to sales of $1,949,674 or 72.1% of net sales for the same period in 1995. Sales to the Company's two largest medical product customers were $7,334,739 or 72.5% of net sales and $6,218,192 or 71.0% of net sales for the nine-months ended September 30, 1996 and 1995, respectively. Medical product orders substantially increased during the third quarter of 1996, and rotary vane actuator volume continued its positive growth during these months. Gross profit was 30.2% of net sales for the third quarter of 1996, compared to 14.2% of net sales for the third quarter of 1995. Gross profit was 24.0% and 17.6% of net sales for the nine-month periods ended September 30, 1996 and 1995, respectively. The improvement in gross profit for the quarter and nine-months ended September 30, 1996, was primarily due to an increase in higher margin medical product business. In addition, the Company was able to obtain operational efficiencies as a result of the increase in sales volume. Selling, general and administrative expenses were $604,141, or 15.0% of net sales for the third quarter of 1996, compared to $549,107, or 20.3% of net sales for the same period in 1995. The dollar increase in these expenses for the third quarter of approximately $55,000 is primarily due to increases in selling related expenses of approximately $9,000 to market the Company's rotary vane actuators and oil centrifuges, including trade shows, business travel and additional sales personnel. Administrative expenses increased approximately $46,000, primarily for salaries and benefits ($51,000) and corporate insurance ($15,000), along with an increase in the Company's profit 11 sharing contribution accrual of approximately $28,000. These increases in administrative expenses were partially offset by a reduction in legal and accounting expenses of approximately $48,000, primarily related to restructuring of the debt underlying the EPR facility. Selling, general and administrative expenses were $1,761,219, or 17.4% of net sales for the nine-month period ended September 30, 1996, compared to $1,751,805, or 20.0% of net sales for the same period in 1995. The increase in these expenses for the nine-month period ended September 30, 1996 is primarily due to increases in selling related expenses of approximately $32,000, increases in administrative salaries and benefits of approximately $51,000, and an increase in the Company's profit sharing contribution accrual of approximately $47,000. These increases were mostly offset by a reduction in legal and accounting costs of approximately $121,000, related to the restructuring of the debt underlying the EPR facility. The Company had operating income from continuing operations of $615,424 for the third quarter of 1996, compared to an operating loss from continuing operations of ($163,934) for the same period in 1995. The operating income from continuing operations for the three-months ended September 30, 1996 was attributed to increased volume, primarily in medical products, partially offset by an increase of approximately $55,000 in selling and administrative expenses. The Company had operating income from continuing operations of $669,237 for the nine-month period ended September 30, 1996, compared to an operating loss from continuing operations of ($207,442) for the same period in 1995. The improvement in income from continuing operations for the nine-month period ended September 30, 1996 is due to increased sales of higher margin medical products, coupled with a modest increase of $9,414 in selling, general and administrative expenses, as discussed above. The Company had income from continuing operations of $527,887, or $.15 per share ($.08 per share on a fully diluted basis) for the third quarter of 1996, compared to a loss from continuing operations of ($220,485) or ($.07) per share for the same period in 1995. The increase in the third quarter 1996 income from continuing operations, compared to the loss from continuing operations for the same period in 1995, resulted from the reasons stated above, along with the loss of management fee income of approximately $30,000 for managing the waste processing facility that was present in the same period last year (Reuter Recycling of Florida, Inc.), which as described in Notes 3 and 4 to the consolidated financial statements in the Company's 1995 Form 10-KSB, was sold in October 1995. The Company had income from continuing operations of $398,651, or $.12 per share ($.08 per share on a fully diluted basis) for the nine-month period ended September 30, 1996, compared to a loss from continuing operations of ($368,285) or ($.11) per share for the same period in 1995. The improvement in income from continuing operations for the nine-month period ended September 30, 1996 is due to the reasons stated above, net of lost management fee income of $90,000. The Company did not recognize a tax provision during the periods ended September 30, 1996, due to the net operating loss carryforwards available to the Company as well as 12 the Company's continued insolvency for tax purposes, subsequent to the debt restructuring. The Company had no taxable income, and accordingly, recorded no provision for income taxes for the periods ended September 30, 1995. The effect of inflation on the Company's consolidated results has not been significant. DISCONTINUED WASTE PROCESSING OPERATIONS: As described in Notes 2 and 3 of the notes to consolidated financial statements in the Company's 1995 Form 10-KSB, the Company ceased operation of its EPR facility effective January 1, 1994, sold all assets of EPR effective September 1, 1994, and on January 24, 1996, entered into an agreement to restructure its guarantee of the debt obligation underlying the EPR facility. Losses from discontinued operations were ($0) and ($540,131) for the quarters ended September 30, 1996 and 1995, respectively, and ($0) and ($1,617,809) for the nine-month periods ended September 30, 1996 and 1995, respectively. The loss from discontinued operations for the quarter and nine-month periods ended September 30, 1995, consists of accrued interest on the EPR note guaranteed by the Company. There was no additional accrual of interest associated with financing underlying discontinued operations for the first, second or third quarters of 1996, due to the signing of a debt restructuring agreement on January 24, 1996, which became effective on June 6, 1996. NET INCOME (LOSS): The net income for the quarter ended September 30, 1996 was $527,887 or $.15 per share ($.08 per share on a fully diluted basis), compared to a net loss of ($760,616) or ($.24) per share for the quarter ended September 30, 1995. The net income for the nine-month period ended September 30, 1996 was $7,647,669 or $2.31 per share ($1.59 per share on a fully diluted basis), compared to a net loss of ($1,986,094) or ($.62) per share for the same period in 1995. The improvement in 1996 is due primarily to recognition of an extraordinary item - gain on debt restructuring of $7,249,018 or $2.19 per share ($1.51 per share on a fully diluted basis) for the nine-month period ended September 30, 1996, and the absence of interest charges associated with the EPR loan (as discussed above), as well as the income from continuing operations of $527,887 in the third quarter of 1996. LIQUIDITY AND CAPITAL RESOURCES: At September 30, 1996, the working capital deficit includes the current portion of the restructured debt obligation, in addition to the indebtedness under the asset-based short-term financing arrangement. With the exception of the balance of the Income Sharing Agreement (see Note 3 to this Form 10-QSB), debt associated with these agreements has been classified as a current liability due to ongoing covenant violations disclosed in the 13 following paragraph and notes 2 and 7 to the consolidated financial statements in the Company's 1995 Form 10-KSB, accordingly the Company had a working capital deficit of ($4,687,173) at September 30, 1996, compared to a working capital deficit of ($19,905,557) at December 31, 1995. The current ratio at September 30, 1996 was .47, compared to .13 at December 31, 1995. The improvement in the working capital deficit and current ratio is due primarily to the recognition of the debt restructuring, during the second quarter of 1996, which reduced the amount of debt previously owed by the Company that was classified as a current liability. The Company has a $4.5 million line of credit arrangement with an asset- based lender, which is collateralized by assets associated with the manufacturing operations. The Company generally borrows funds up to the maximum available because the line of credit agreement has a minimum borrowing requirement of $2.75 million, upon which the Company pays interest. Funds available to the Company pursuant to the terms of the line of credit agreement are dependent upon the level of eligible accounts receivable and plant and equipment, as defined. The Company is in violation of certain financial and technical covenants contained in this line of credit agreement, which could result in the lender discontinuing advances and demanding repayment of all outstanding borrowings. Due to the default conditions discussed above, and borrowing limits related to available collateral, it is possible that the Company will not be able to borrow sufficient amounts against this line to meet all the operating cash needs of the Company. In addition, there can be no assurance that the asset-based lender will continue to disregard these covenant violations in the future. If the lender takes any action to reduce the availability of funds to the Company, there may not be sufficient liquidity to continue operations. As of October 25, 1996, the Company had borrowed approximately $3.1 million and assuming the lender agrees to advance additional funds, had additional availability of approximately $158,000 under this line of credit. The Company generated cash flow from operations for the nine-months ended September 30, 1996 of $188,912, compared to, $456,960 for the nine-months ended September 30, 1995. The decrease in cash flow from operations is primarily due to inventory build-up resulting from higher production volumes, anticipated during the second half of 1996 and an increase in accounts receivable from the beginning of the year. The Company's ability to meet its continuing cash flow requirements during the remainder of 1996 and beyond, is dependent on continuing adequate sales and margins in the manufacturing business. Management anticipates making capital expenditures to support equipment upgrading and growth in the manufacturing division. Near term capital commitments for new manufacturing equipment total approximately $240,000. Any future expenditures will depend on cash availability. In addition to cash flows from operations, if any, the Company expects to seek needed capital through bank financing or asset- based lending arrangements. However, there can be no assurance that the Company will be able to obtain such financing, or obtain financing on terms that are satisfactory to the Company. 14 In summary, the Company currently has negative working capital and is in default under the terms of its asset-based short-term financing arrangement and, as a result of this default, is in default under the restructured Loan Agreement with Sanwa. Either of these two lenders could, at any time, demand full payment of the underlying debt, which the Company would be unable to satisfy, in which case the Company may be forced to seek protection under U.S. Bankruptcy laws. Forward looking statements in this Form 10-QSB, including references to anticipated sales volume and higher medical product margins, involve risks and uncertainties, with establishing new customers, and developing products to the specifications of our customers. In addition, the Company has a high concentration of business with two customers, even though this concentration is being steadily reduced by new business with other customers. Actual future results could differ materially from those reflected in the forward looking statements. 15 PART II - OTHER INFORMATION Item 3. Defaults upon Senior Security See Footnotes 3 and 4 to Notes to the Consolidated Financial Statements and Management's Discussion and Analysis, included in Item 1 and 2 of this report on Form 10-QSB, for a description of the status of the defaults on the loan underlying the Eden Prairie facility and the Company's asset-based short-term financing arrangement, which is incorporated herein by reference. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. Item No. Item Method of Filing -------- ---- ---------------- 27.1 Financial Data Schedule Filed herewith (b) Reports on Form 8-K. None. 16 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: October 25, 1996 By: /s/ James W. Taylor ---------------------- ------------------- James W. Taylor President, Chief Executive Officer and Chief Financial Officer (principal executive and financial officer) Date: October 25, 1996 By: /s/ William H. Johnson ----------------------- ---------------------- William H. Johnson Vice President, Controller and Secretary (principal accounting officer) 17 REUTER MANUFACTURING, INC. EXHIBIT TO QUARTERLY REPORT ON FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996 Item No. Item Method of Filing - -------- ---- ---------------- 27.1 Financial Data Schedule Filed herewith. 18 EX-27.1 2 EXHIBIT 27.1 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1996 SEP-30-1996 174,996 0 1,802,875 0 1,854,576 4,096,722 11,451,619 7,615,761 8,342,469 8,783,895 0 0 0 599,722 13,711,374 8,342,469 10,118,277 10,118,277 7,687,821 9,449,040 270,586 0 307,463 7,647,669 0 398,651 0 7,249,018 0 7,647,669 2.31 1.59 EXTRAORDINARY ITEM - GAIN ON DEBT RESTRUCTURING
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