EXHIBIT 31.2

CERTIFICATION

EXHIBIT 31.2

CERTIFICATION

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

ITEM 3: CONTROLS AND PROCEDURES

ITEM 3: CONTROLS AND PROCEDURES

For the quarterly period ended June 30, 2004

0001104659-04-024486.txt : 20040816 0001104659-04-024486.hdr.sgml : 20040816 20040816094527 ACCESSION NUMBER: 0001104659-04-024486 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAGSTAR TECHNOLOGIES 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: 04976404 BUSINESS ADDRESS: STREET 1: 410 11TH AVE SOUTH CITY: HOPKINS STATE: MN ZIP: 55343 BUSINESS PHONE: 6129356921 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 a04-9548_110qsb.htm 10QSB

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB

(Mark One)

ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended June 30, 2004

o		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

MAGSTAR TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

Minnesota		41-0780999
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


410 - 11th Avenue South, Hopkins, Minnesota 55343
(Address of principal executive offices)

952/935-6921

(Registrant’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 ý No o

As of August 13, 2004, there were 9,040,173 and 1,000,000 shares of the registrant’s $.1875 and $.1875 par value Common Stock and Preferred Stock, respectively, outstanding.

Transitional Small Business Disclosure Format (Check one): YES o NO ý

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MagStar Technologies, Inc.

Balance Sheets

	June 30, 2004			December 31, 2003
	(Unaudited)
ASSETS

Current Assets:
Cash	$	500		$	500
Accounts receivable, net	941,146			723,413
Inventories, net	1,141,432			1,074,242
Other current assets	79,211			73,731
Total current assets	2,162,289			1,871,886

Property, plant and equipment, net	46,937			52,855
Patents	11,549			11,261
Total assets	$	2,220,775		$	1,936,002

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY

Current Liabilities:
Senior debt	$	668,452		$	802,240
Current maturities of capital lease obligation	126,754			126,754
Accounts payable to related parties	22,133			820,411
Notes payable to related parties	2,935,154			5,703,689
Checks issued in excess of cash in bank	8,403			20,180
Accounts payable	601,989			503,995
Accrued expenses	407,491			400,813
Short term deferred gain on sale - leaseback equipment	155,576			155,576
Short term deferred gain on sale - leaseback building	331,978			331,978
Deposits	12,000			10,000
Total current liabilities	5,269,930			8,875,636

Deferred gain on sale - leaseback equipment, net of current portion	388,940			466,728
Deferred gain on sale - leaseback building, net of current portion	1,383,241			1,549,229
Deferred rent and equipment lease	117,849			54,478
Other liabilities	23,845			23,845

	7,183,805			10,969,916

Stockholders’ deficiency:
Preferred stock, par value $.1875 per share, authorized 2,500,000 shares; 1,000,000 issued and outstanding	187,500			187,500
Common stock, par value $.1875 per share, authorized 30,000,000 shares; issued and outstanding 9,040,173 shares at both June 30, 2004 and December 31, 2003	1,695,032			1,695,032
Additional paid-in capital	22,238,789			18,002,729
Accumulated deficit	(29,084,351		)	(28,919,175		)

Total stockholders’ deficiency	(4,963,030		)	(9,033,914		)
Total liabilities and stockholders’ deficiency	$	2,220,775		$	1,936,002

See notes to financial statements.

MagStar Technologies, Inc.

Statements of Operations

	(Unaudited)						(Unaudited)
	For the three months ended June 30,						For the six months ended June 30,
	2004			2003			2004			2003

Total Net Sales	$	1,904,770		$	1,769,363		$	3,809,693		$	3,202,896
Cost of sales	1,540,990			1,608,389			3,302,969			3,015,999

Gross profit	363,780			160,974			506,724			186,897

Selling, general and administrative expenses
Gain on sale - leaseback	(121,889		)	(128,805		)	(243,777		)	(227,639		)
Insurance refund	—			—			—			(67,175		)
Other Selling, general and administratve expenses	394,095			346,275			751,512			702,715

Total Selling, general and administrative expenses, net	272,206			217,470			507,735			407,901

Operating income (loss)	91,574			(56,496		)	(1,011		)	(221,004		)

Other (expense) income:
Interest expense	(59,438		)	(99,253		)	(176,433		)	(239,849		)
Property tax accrual reversal	—			—			—			131,185
Other, net	(3,649		)	30,086			12,268			62,808

Total other expense, net	(63,087		)	(69,167		)	(164,165		)	(45,856		)

Net income (loss)	$	28,487		$	(125,663	)	$	(165,176	)	$	(266,860	)

Net income (loss) per share - basic	$	0.00		$	(0.01	)	$	(0.02	)	$	(0.03	)
Net income (loss) per share - diluted	$	0.00		$	(0.01	)	$	(0.02	)	$	(0.03	)

Weighted average common shares outstanding - basic	9,040,173			8,740,173			9,040,173			8,740,173
Weighted average common shares outstanding - diluted	9,780,840			8,740,173			9,040,173			8,740,173

See notes to financial statements.

MagStar Technologies, Inc.

Statements of Cash Flows

	(Unaudited)
	For the six months ended June 30,
	2004			2003
Cash flows from operating activities:
Net loss	$	(165,176	)	$	(266,860	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Interest added to debt	24,751			—
Depreciation and amortization	20,804			80,291
Provision for doubtful accounts	—			(5,279		)
Gain on sale-leaseback Equipment	(77,788		)	(77,788		)
Gain on sale-leaseback Building	(165,988		)	(149,851		)
Deferred Rent	132,323			—
Changes in operating assets and liabilities:
Receivables	(217,733		)	84,183
Inventories	(67,190		)	149,798
Prepaid expenses	(85,126		)	—
Accrued Expenses	54,845			(313,483		)
Other current assets	—			(35,482		)
Accounts payable, trade	97,994			(1,001,311		)
Payable to related parties	—			147,521
Deposits	2,000			—

Net cash (used in) operating activities	(446,284		)	(1,388,261		)

Cash flows from investing activities:
Proceeds from sale of building	—			3,700,000
Purchase of property and equipment	(14,886		)	—
Payments for patents	(288		)	—

Net cash provided by (used in) investing activities	(15,174		)	3,700,000

Cash flows from financing activities:
Repayment of term note, bank	—			(2,658,078		)
Change in line of credit (net)	(133,789		)	(280,689		)
Checks in excess	(11,776		)	33,858
Net payments or proceeds from related party notes	607,023			658,000
Payments of capital lease obligations	—			(64,830		)

Net cash provided by (used in) financing activities	461,458			(2,311,739		)
Net (decrease) increase in cash	—			—
Cash, beginning of year	500			500

Cash, end of period	$	500		$	500

Supplemental disclosures of cash flow information:
Cash paid for interest	$	79,785		$	76,432

See notes to financial statements.

MagStar Technologies, Inc.

Notes to Financial Statements

(Unaudited)

1. Financial Statements:

The unaudited financial statements of MagStar Technologies, Inc. (the “Company”) for the three and six month periods ended June 30, 2004 and 2003 reflect, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to fairly state the financial position at June 30, 2004, 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, 2003, balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. These unaudited interim financial statements should be read in conjunction with the financial statements and related notes for the year ended December 31, 2003, which are included in the Company’s 2003 Annual Report on Form 10-KSB.

Net Income (Loss) Per Common Share:

Basic net income (loss) per common share is computed using the weighted average number of shares outstanding for the period. Diluted net income (loss) 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. At June 30, 2004, the Company had outstanding warrants for the purchase of 250,000 shares of common stock and had outstanding stock options for the purchase of 1,242,079 shares of common stock. The dilutive warrants and stock options for the quarter ended June 30, 2004 were 250,000 and 812,079, respectively. The other periods presented all common stock warrants and options were anti-dilutive.

Stock-Based Compensation

In accordance with Accounting Principles Board (APB) Opinion No. 25 and related interpretations, the Company uses the intrinsic value-based method for measuring stock-based compensation cost which measures compensation cost as the excess, if any, of quoted market price of the Company’s common stock at the grant date over the amount the employee must pay for the stock. The Company’s general policy is to grant stock options at fair value at the date of grant. Options and warrants issued to non-employees are recorded at fair value, as required by Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation”, using the Black Scholes pricing method.

Had compensation cost been recognized based on the fair values of options at the grant dates consistent with the provisions of SFAS No. 123, the Company’s net income (loss) and basic and diluted net income (loss) per common share would have been changed to the following pro forma amounts:

	Three Months Ended June 30,					Six Months Ended June 30,
	2004		2003			2004			2003
Net Income (loss)
As reported	$	28,487	$	(125,663	)	$	(164,746	)	$	(266,860	)
Pro forma	28,487		(150,267		)	(229,420		)	(316,069		)
Basic and diluted net income (loss) per common share:
As reported	0.00		(0.01		)	(0.02		)	(0.03		)
Pro forma	0.00		(0.02		)	(0.03		)	(0.04		)
Stock Based Compensation:
As reported	—		—			—			—
Pro forma	—		24,604			64,674			49,209

In determining the compensation cost of options granted during the three and six months ended June 30, 2004 and 2003, as specified by SFAS No. 123, the fair value of each option grant has been estimated on the date of grant using the Black-Scholes option pricing model and the weighted average assumptions used in these calculations are summarized as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2004		2003		2004		2003

Risk-free interest rate	4.250		4.000		4.250		4.000
Expected life of options granted	6 years		6 years		6 years		6 years
Expected Volatility	42	%	255	%	20	%	255	%
Expected dividend yield	0	%	0	%	0	%	0	%

Warranty Reserve

The Company warrants its products for one or two years. The reserve for warranty is computed by averaging the last four years warranty costs incurred and multiplying by two, which provides a full two-year warranty on all products. The Company has reserved an additional $50,000 to cover any unanticipated or unusual product warranty problems. The following summarizes the warranty transactions:

	June 30, 2004		June 30, 2003

Balance at Beginning of Year	$	74,000	$	104,000
Claims paid	—		(45,654		)
Expense Provision	—		45,654

Balance at End of Period	$	74,000	$	104,000

2. Significant Customer:

The Company had two customers that accounted for a significant percentage of net sales as follows:

	For the three months ended June 30,				For the six months ended June 30,
	2004		2003		2004		2003

Customer A	574,685		750,006		1,185,596		1,244,734
% of Sales	30	%	42	%	31	%	39	%
% of Accounts Receivable	17	%	26	%

Customer B	269,293		123,263		613,635		229,440
% of Sales	14	%	7	%	16	%	7	%
% of Accounts Receivable					14	%	6	%

3. Senior Debt:

The credit facility restricts the payment of dividends and the Company’s ability to incur other indebtedness. The credit facility is collateralized by all of the Company’s assets, except for certain equipment purchased with notes payable. The bank may at any time apply the funds available in any Company bank account against the outstanding loan balances.

On February 25, 2003, the Company sold and leased back its headquarters and manufacturing facility in Hopkins, Minnesota. The purchaser was Hopkins Eleventh Avenue LLC (“Eleventh Avenue”), a wholly owned subsidiary of Activar Properties, Inc., which in turn is wholly owned by Richard McNamara, a director and substantial shareholder of the Company. The purchase price for the building and property was $3,700,000. The Company entered into a 6.5-year gross lease with Eleventh Avenue for the building and property at a monthly cost of $34,000 increasing to $44,436 per month. The proceeds of $1,001,397 realized by the Company in the transaction were applied to reduce the Company’s debt to Activar Properties, Inc. and affiliates. The Company’s outstanding balance to Activar Properties, Inc. and other affiliates of Mr. McNamara was approximately $5,512,918 as of February 28, 2003. James L. Reissner, the President of Activar Properties, Inc., is also an officer, director and shareholder of the Company. The Board of Directors of the Company authorized the transaction in order to reduce the indebtedness of the Company, provide working capital and improve cash flow. The transaction with Eleventh Avenue was determined to be on better terms than could be obtained by the Company directly from unaffiliated financing sources. The purchase price was based upon an independent appraisal of the value of the property and building obtained by the bank which provided financing to Eleventh Avenue in connection with the transaction.

Term Loan C was non-interest bearing and was due and payable in full on September 30, 2003. On August 7, 2003, US Bancorp canceled Term Loan C in exchange for 300,000 shares of the

Company’s restricted common stock.

The line of credit is due on demand; accordingly, it has been classified as a current liability in the Company’s June 30, 2004 and December 31, 2003 balance sheets.

On October 16, 2003, the Company negotiated a third amendment of its amended and restated senior credit agreement, an extension with US Bancorp on the line of credit.

On January 6, 2004, the Company negotiated a fourth amendment of its amended and restated senior credit agreement, an extension with US Bancorp on the line of credit. The extended asset-based line of credit bears interest at the bank’s reference rate plus two percent, has availability of $1,350,000 subject to a borrowing base limitation of 80% of the Company’s eligible accounts receivable plus 40% of raw materials and 30% of finished goods and expired in June 2004. The credit facility is collateralized by substantially all the assets of the Company.

On August 13, 2004, the Company negotiated a fifth amendment of its amended and restated senior credit agreement with US Bancorp on the line of credit effective April 1, 2004. The extended asset-based line of credit bears interest at the bank’s reference rate plus two and one half percent, has availability of $1,200,000 subject to a borrowing base limitation of 80% of the Company’s eligible accounts receivable plus 40% of raw materials and 30% of finished goods and will expire on June 30, 2005. The credit facility is collateralized by substantially all the assets of the Company.

As a condition to obtaining the amended line of credit, the Company was required to restructure portions of the Company’s liabilities and lease agreements with related parties. As a result, effective as of April 1, 2004, the Company amended its building and equipment leases with Hopkins Eleventh Ave, LLC and Activar Properties, respectively, and $3,930,596 of related party debt has been extinguished without additional consideration. Because the transaction is between related parties and effective as of April 1, 2004, the gain on the extinguishment of debt is classified as a contribution to equity during the quarter ended June 30, 2004. The amended and reduced building and equipment leases will positively affect the statement of operations on an ongoing basis. The reduced related party debt will reduce interest expense.

Forward Looking Statements

The information in this discussion may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties, including statements regarding the Company’s capital needs, business strategy and expectations. Any statements that are not of historical fact may be deemed to be forward-looking statements. These forward-looking statements involve substantial risks and uncertainties. In some cases you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue”, the negative of the terms or other comparable terminology. Forward-looking statements in this Report also include references to anticipated sales volume and product margins, efforts aimed at establishing new or improving existing relationships with

customers, other business development activities, anticipated financial performance, business prospects and similar matters. Actual events or results may differ materially from the anticipated results or other expectations expressed in the forward-looking statements. In evaluating these statements, you should consider various factors, including the risks included from time to time in other reports or registration statements filed with the United States Securities and Exchange Commission. These factors may cause the Company’s actual results to differ materially from any forward-looking statements. The Company disclaims any obligation to publicly update these statements, or disclose any difference between actual results and those reflected in these statements.

General

MagStar Technologies, Inc. (“MagStar” or the “Company”) is a publicly owned company headquartered in Hopkins, Minnesota. The Company’s stock is quoted on the Over The Counter Bulletin Board under the symbol “MGST”. MagStar Technologies is a prototype developer and manufacturer of centrifuges, conveyors, medical devices, spindles, and sub assemblies. MagStar’s technical abilities in design, process, and manufacturing specialize in the “concept-to-production” process designed to result in short manufacturing cycles, high performance, and cost effective products such as electro-mechanical assemblies and devices for over two dozen medical, magnetic, motion control, and industrial original equipment manufacturers (“OEMs”). The Company strives for a unique identity as it emphasizes its design and manufacturing engineering capabilities, partnering with customers, providing engineering solutions and machining, manufacturing, and assembly services for efficiently manufactured, long life assemblies.

The Company was established in 1948 as Reuter Manufacturing, Inc., and specialized in precision machining and assemblies. In early 2001, the Company changed its name to MagStar Technologies, Inc.

Results of Operations

The Company’s net sales of $1,904,770 for the second quarter ended June 30, 2004 increased by approximately 8% or $135,407 from $1,769,363 for the same period in 2003. Net sales from medical, magnets, industrial, contract manufacturing, and conveyors were $656,804, $141,751, $244,699, $420,088, and $438,694, respectively, for the second quarter ended June 30, 2004, compared to $852,859, $136,620, $224,274, $381,703, and $184,841, respectively, for the comparable period in 2003. Sales to the Company’s largest medical product customer were $574,685 or 30% of net sales for the second quarter of 2004 compared to $750,006 or 42% of net sales for the same period in 2003. Sales to the Company’s second largest customer were $269,293 or 14% of sales for the second quarter of 2004 compared to $123,263 or 7% of sales for the same period in 2003. The Company’s net sales of $3,809,693 for the six months ended June 30, 2004 increased by approximately 19% or $606,797 from $3,202,896 for the same period in 2003. Net sales from medical, magnets, industrial, contract manufacturing, and conveyors were $1,272,631, $235,143, $455,278, $749,075, and $1,006,937, respectively, for the six months ended June 30, 2004, compared to $1,421,922, $315,131, $406,110, $661,877, and $376,090, respectively, for the comparable period in 2003. Sales to the Company’s largest medical product customer were $1,185,596 or 31% of net sales for the six months ended June 30, 2004 compared to $1,244,734 or 39% of net sales for the same period in 2003. Sales to the Company’s second largest customer were $613,635, or 16% of sales for the six months ended June 30, 2004 compared to $229,440, or 7% of sales for the same period in 2003. Sales increased overall from 2004 to the same period in 2003 due to increased sales from the Company’s second largest customer and overall increased conveyor sales.

Gross profit was $363,780 or 19% in the second quarter of 2004, compared to $160,974 or 9% for the same period in 2003. The increase in gross profit of $202,806, or 126% for the second quarter of 2004 over the same period in 2003 is the result of growth in higher margin sales and reductions in production, labor, and overhead costs. Gross profit was $506,724 or 13% in the six months ended June 30, 2004, compared to $186,897 or 6% for the same period in 2003. The increase in gross profit of $319,827, or 171% for the six months ended June 30, 2004 over the same period in 2003 is the result of growth in higher margin sales and reductions in production, labor, and overhead costs.

Selling, general and administrative expenses were $272,206 or 14% of net sales for the second quarter of 2004, compared to $217,470 or 12% of net sales for the same period in 2003. The increase for the quarter ended June 30, 2004 in selling, general and administrative expenses of $54,736 is due to an increased sales budget. Selling, general and administrative expenses were $507,735 or 13% of net sales for the six months of 2004, compared to $407,901 or 13% of net sales for the same period in 2003. The increase for the six months ended June 30, 2004 in selling, general and administrative expenses of $99,834 is due to an increased sales budget and a one-time insurance refund in 2003.

In the second quarter of 2004, the Company had operating income of $91,574, compared to an operating loss of $56,496 in the same period of 2003. The operating income for the second quarter of 2004 compared to 2003 reflects the reasons discussed above. In the first six months of 2004, the Company had an operating loss of $1,011, compared to an operating loss of $221,004 in the same period of 2003. The operating loss for the first six months of 2004 compared to 2003 reflects the reasons discussed above.

Other expenses, net, decreased to $63,087 from other expenses of $69,167 for the second quarter of 2004 compared to the same period in 2003. The decrease for the second quarter in Other expenses is due to lower interest expense and debt restructuring. Other expenses, net, increased to $164,165 from other expenses of $45,856 for the first six months of 2004 compared to the same period in 2003. The increase for the first six months in Other expenses is principally due a one-time property tax accrual reversal in 2003 from the building sale and leaseback.

The Company recorded net income for the second quarter and a net loss for the first six months of 2004 and consequently did not record a provision for income taxes and, generally, does not pay regular income taxes because of the availability of its net operating loss carry forwards.

The effect of inflation on the Company’s results has not been significant.

Net income for the second quarter of 2004 was $28,487 or $0.00 per basic and diluted share, compared to a net loss of $125,663 or $0.01 per basic and diluted share for the second quarter of 2003. The net income and loss are due to the reasons discussed above. The net loss for the first six months of 2004 was $165,176 or $0.02 per basic and diluted share, compared to a net loss of $266,860 or $0.03 per basic and diluted share for the six months of 2003. The net losses are due to the reasons discussed above.

Liquidity and Capital Resources

At June 30, 2004, the Company had a working capital deficiency of $3,107,642, compared to a working capital deficiency of $7,003,750 at December 31, 2003. The current ratio was .41 at June 30,

2004 and .21 at December 31, 2003. The increase in working capital is due to the related party debt restructuring discussed above.

The credit facility under the Company’s amended and restated senior credit agreement consist of an asset-based line of credit with availability of up to $1,200,000, subject to a borrowing base limitation of 80% of the Company’s eligible accounts receivable plus eligible inventories. As of June 30, 2004, the Company had borrowed $668,452 under the credit facilities. The proceeds were used to fund operating activities. Based on the current amended and restated credit agreement, current sales, inventory, and cash needs, the Company sustains an average availability of credit of approximately $150,000.

The asset-based line of credit bears interest at the bank’s reference rate plus 2.5% and matures in June 2005.

The line of credit is due on demand; accordingly, this amount has been classified as a current liability in the Company’s June 30, 2004 and December 31, 2003 balance sheets.

Net cash used in operating activities was $446,284 for the six months ended June 30, 2004, compared to net cash used in operating activities of $1,388,261 for the comparable period in 2003. The decrease in cash flows used in operating activities for the six months ended June 30, 2004, from the comparable period in 2003, was due primarily to the increased sales and operational improvements in 2004 allowing available cash to adequately cover operating expenses as well as payments in the six months ended June 30, 2003 on accounts payable due to the cash generated from the sale leaseback transaction and restructuring of related party payables in 2004.

Net cash used in investing activities for the six month period ended June 30, 2004 was $15,174, compared to $3,700,000 provided by investing activities in the same six month period in 2003. The change was due to the building sale and lease back transaction discussed above.

Net cash provided by financing activities was $461,458 for the six month period ended June 30, 2004, compared to cash used in financing activities of $2,311,739 for the same period in 2003. The change was primarily due to the building sale and lease back transaction in 2003 discussed above.

Troubled Financial Condition and Management’s Plans

Management’s plans and objectives to improve the financial condition of the Company include the following:

• Grow sales of new and existing customers offering the application of MagStar’s strengths, which are engineering solutions, precision machining, and assembly services.

• Focus on products and capabilities that are a source of unique value for customers and a reflection of what MagStar does best.

• Pursue a course of investing in research and development which management believes will lead to innovation and new value propositions in the future, establishing a reputation and expertise for product development.

• Focus on proprietary products and away from contract manufacturing, developing long term sustainable comparative advantages over our competitors.

• Seek growth through strategic acquisitions, alliances, and mergers.

• Improve productivity, improve cost control, and manage expenses in proportion with the Company’s current sales levels to achieve and maintain positive cash flow.

• Strategically add key managers and operational expertise as required in a prudent and responsible manner.

There can be no assurance that management will be able to accomplish any of the above plans and objectives or achieve the necessary improvements in its cash flows and financial position to meet its obligations as they become due. Nor can there be any assurance that the Company’s financial performance will improve even if the above strategy is fully implemented.

The Company’s ability to continue operations is dependent on its ability to maintain sales with adequate margins, manage expenses, and maintain credit facilities with a lending institution. Accordingly, there can be no assurance that the Company will continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Summary

The improved performance for the three and six month period ending June 30, 2004 is the result of measured sales growth, operational efficiencies and improvements, debt restructuring, and a balanced approach to the risk management of operations and sales. Management is cautiously optimistic and will respond to changes in economic prospects as needed to fulfill its obligation to prudent fiscal management, stable and fiscally responsible growth, while focusing on its profitable strengths and advantages.

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 any significant reduction in sales to this customer may have a material effect on net income. Because of these and other uncertainties, actual results could differ materially from those reflected in the forward-looking statements.

Critical Accounting Policies and Estimates

The Company’s significant accounting policies are described in Note 2 to the financial statements included in our annual report on form 10-KSB for the year ended December 31, 2003. The accounting policies used in preparing the Company’s interim 2004 condensed financial statements are the same as those described in the Company’s annual report.

The Company’s critical accounting policies are those both having the most impact to the reporting of the Company’s financial condition and results, and requiring significant judgements and estimates. The Company’s critical accounting policies include those related to revenue recognition, stock-based compensation and valuation of inventories.

Management of the Company has evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the quarter covered by this Quarterly Report on Form

10-QSB. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer of the Company have concluded that the Company’s disclosure controls and procedures as of the end of the quarter covered by this Quarterly Report on Form 10-QSB are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. However, due to the limited number of Company employees engaged in the authorization, recording, processing and reporting of transactions, there is inherently a lack of segregation of duties. The Company periodically assesses the cost versus benefit of adding the resources that would remedy or mitigate this situation and currently, does not consider the benefits to outweigh the costs of adding additional staff in light of the oversight of the financial statements by senior management.

Management of the Company has also evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, any change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-QSB. There was no change in the Company’s internal control over financial reporting identified in that evaluation that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-QSB that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 4. Submission of matters to a Vote of Security Holders.

The 2004 Annual Meeting of Shareholders of MagStar Technologies, Inc. was held on Friday, June 4, 2004 at the offices of the Company in Hopkins, Minnesota. At the meeting, the shareholders elected Directors of the Company to serve until the next Annual Meeting of Shareholders or until their successors are elected and qualified and ratified the appointment of Virchow, Krause & Company, LLP as independent auditors for the Company for the year ending December 31, 2004. The following summarizes the voting on those items:

Number of Shares

	For	Against	Withheld

Election of Directors:
R. F. McNamara	7,748,922	26,961	1,264,290
James L. Reissner	7,749,049	26,834	1,264,290
Michael J. Tate	7,742,257	33,626	1,264,290

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits.

10.1		Fifth Amendment to Amended and Restated Credit Agreement dated August 13, 2004 by and between the Company and U.S. Bank National Association (incorporated by reference to Exhibit 10.25 of the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2003).

31.1		Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certificate of Chief Executive and Chief Financial Officers pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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.

		MAGSTAR TECHNOLOGIES, INC.
		(Registrant)


Date:	August 13, 2004		By:	/s/ James L. Reissner
			James L. Reissner
			President, Chief Executive Officer and Director
			(Principal Executive Officer)

Date:	August 13, 2004		By:	/s/ Joseph A. Petrich
			Joseph A. Petrich
			Treasurer and Chief Financial Officer
			(Principal Financial Officer)

INDEX TO EXHIBITS

Exhibit	Item	Method of Filing

10.1	Fifth Amendment to Amended and Restated Credit Agreement dated August 13, 2004 by and between the Company and U.S. Bank National Association.	Filed herewith electronically

31.1	Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith electronically

31.2	Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith electronically

32.1	Certificate of Chief Executive and Financial Officers pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith electronically

EX-10.1 2 a04-9548_1ex10d1.htm EX-10.1

EXHIBIT 10.1

FIFTH AMENDMENT TO AMENDED AND RESTATED
CREDIT AGREEMENT

This FIFTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this “Amendment”), made and entered into as of August 13, 2004, is by and between MagStar Technologies, Inc. f/k/a Reuter Manufacturing, Inc., a Minnesota corporation (the “Borrower”), and U.S. Bank National Association, a national banking association (the “Lender”).

RECITALS

1. The Lender and the Borrower entered into a Amended and Restated Credit Agreement dated as of October 10, 2000, as amended by that First Amendment to Amended and Restated Credit Agreement dated as of November 30, 2001, as amended by that Second Amendment to Amended and Restated Credit Agreement dated as of August 7, 2003, as amended by that Third Amendment to Amended and Restated Credit Agreement dated as of September 30, 2003 and as further amended by that Fourth Amendment to Amended and Restated Credit Agreement dated as of January 6, 2004 (as amended the “Credit Agreement”); and

2. The Borrower desires to amend certain provisions of the Credit Agreement, and the Lender has agreed to make such amendments, subject to the terms and conditions set forth in this Amendment.

AGREEMENT

NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby covenant and agree to be bound as follows:

Section 1. Capitalized Terms. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to them in the Credit Agreement, unless the context shall otherwise require.

Section 2. Amendments. The Credit Agreement is hereby amended as follows:

2.1 Definitions. The definition of “Reference Rate in Section 1.1 of the Credit Agreement is deleted in its entirety.

Section 1.1 of the Credit Agreement is further amended to add the definitions of “EBITDA”, “Interest Expense”, “Prime Rate” and “Slow Moving Inventory” in correct alphabetical order as follows:

“EBITDA”: For any period of determination, without duplication, the net income of the Borrower plus cash Interest Expense, income taxes, depreciation, amortization, capital contributions, non-cash Interest Expense, deferred equipment lease expense and deferred rent expense, minus gain on sale leaseback of equipment, minus gain on sale

leaseback of building, all as determined in accordance with GAAP

“Interest Expense”: For any period of determination, the aggregate amount, without duplication, of interest paid, accrued or scheduled to be paid in respect of any indebtedness of the Borrower, including (a) all but the principal component of payments in respect of conditional sale contracts, capitalized leases and other title retention agreements, (b) commissions, discounts and other fees and charges with respect to letters of credit and bankers’ acceptance financings and (c) net costs under interest rate protection agreements, in each case determined in accordance with GAAP.

“Prime Rate” The rate of interest from time to time publicly announced by the Lender as its “prime rate.” The Lender may lend to its customers at rates that are at, above or below the Prime Rate. For purposes of determining any interest rate hereunder or under any Note which is based on the Prime Rate, such interest rate shall change as and when the Prime Rate shall change.

“Slow Moving Inventory” any obsolete Inventory, Inventory on the Borrower’s records or held by the Borrower for more than one year, and any other Inventory deemed slow moving by the Lender, excluding up to $5,000 for raw materials such as bar stock, metal rods, extrusions, plates, sheeting, or billets which is mutually agreed by Borrower and Lender.

2.2 The Commitments. Section 2.1 of the Credit Agreement is amended to read in its entirety as follows:

Section 2.1 The Commitments. On the terms and subject to the conditions hereof, the Lender agrees to make the following lending facility available to the Borrower:

2.1 (a) Revolving Credit. A revolving loan (the “Revolving Loan”) to the Borrower available as advances (“Advances”) at any time and from time to time from the Closing Date to June 30, 2005 (the “Revolving Maturity Date”), during which period the Borrower may borrow, repay and reborrow in accordance with the provisions hereof, provided, that the unpaid principal amount of revolving Advances shall not at any time exceed One Million Two Hundred Thousand Dollars ($1,200,000) (the “Revolving Commitment Amount”); and provided, further, that no revolving Advance will be made if, after giving effect thereto, the unpaid principal amount of the Advances would exceed the Borrowing Base.

2.3 Interest Rates, Interest Payments and Default Interest. Section 2.4 of the Credit Agreement is amended to read in its entirety as follows:

Section 2.4 Interest Rates, Interest Payments and Default Interest. Interest shall accrue and be payable on the unpaid balance of the Advances at a floating rate per annum equal to the sum of the Prime Rate plus 2.5% (the latter being the “Applicable Revolving Margin”); provided, however, that upon the happening of any Event of Default, then, at the option of the Lender, the Advances shall thereafter bear interest at a floating rate equal to the sum of (a) the Prime Rate, plus (b) the Applicable Revolving Margin, plus (c) 4%. Interest shall be payable monthly in arrears on the first day of each month and upon final payment of the Advances.

2.4 Borrowing Base and Mandatory Payment. Section 2.5 of the Credit Agreement is amended to read in its entirety as follows:

Section 2.5 Borrowing Base and Mandatory Prepayment. The Borrowing Base shall be equal to the sum of (1) the lesser of (x) 40% of the lower of cost or market value of raw material Eligible Inventory; provided, however that Slow Moving Inventory shall not comprise more than $100,000 of Eligible Inventory on August 30, 2004 (the “Slow Moving Inventory Tolerance Level”), the Slow Moving Inventory Tolerance Level shall be reduced by $5,000 on the last day of each month commencing on September 30, 2004 and continuing on the last day of each month until the Slow Moving Inventory Tolerance Level reaches $50,000 and all amounts of Slow Moving Inventory that exceed the Slow Moving Inventory Tolerance Level shall be excluded from the Borrowing Base; plus 30% of the lower of cost (determined on a first in, first out basis) or market value of finished good Eligible inventory or (y) $500,000, plus (2) 80% of the face value of Eligible Accounts. The Borrower shall deliver borrowing base certificates in substantially the form attached hereto (a “Borrowing Base Certificate”) to the Lender contemporaneously with each Advance request and in any event not less than weekly. Each such certificate shall state the amount of Eligible Accounts and the Borrowing Base as of the end of the previous day and shall state the amount of Eligible Inventory and Slow Moving Inventory as of the end of the most recent of the 15^th day of that month or as of the last day of the previous month. Any limitations on advances or required prepayments relating to the Borrowing Base shall be based on the latest borrowing base certificate the Borrower shall have delivered to the Lender. If the principal balance of the Advances at any time exceeds the Borrowing Base, the Borrower shall immediately prepay the Advances by the amount of that excess.

2.5 Minimum EBITDA. Section 6.10 of the Credit Agreement is amended to read in its entirety as follows:

Section 6.10 Minimum EBITDA. The Borrower shall not permit its cumulative year-to-date EBITDA after July 1, 2004 to be less than (i) $40,000 as of September 30, 2004, (ii) $100,000 as of December 31, 2004, (iii) $160,000 as of March 31, 2005 and (iv) $220,000 as of June 30, 2005, provided, however, that in the event the Borrower’s EBITDA is less than the amounts set forth in this Section 6.10, the Borrower shall have thirty days after the end of the applicable fiscal quarter to obtain capital injections to raise its EBITDA to the levels set forth in this Section 6.10.

2.6 Borrowing Base Certificate. The Borrowing Base Certificate attached to the Credit Agreement is hereby amended to read as set forth on Exhibit B attached to this Amendment.

2.7 Compliance Certificate. The Compliance Certificate attached to the Credit Agreement as Exhibit 5.1(c) is hereby amended to read as set forth on Exhibit 5.1(c) attached to this Amendment.

Section 3. Effectiveness of Amendments. The amendments contained in this Amendment shall become effective upon delivery by the Borrower of, and compliance by the Borrower with, the following:

3.1 This Amendment duly executed by the Borrower.

An Amended and Restated Note in the form of Exhibit A hereto.

Subordination Agreements from Richard McNamara, Activar, Inc. and Activar Properties, Inc. in form and substance satisfactory to the Lender.

A copy of the resolutions of the Board of Directors of the Borrower authorizing the execution, delivery and performance of this Amendment certified as true and accurate by its Secretary or Assistant Secretary, along with a certification by such Secretary or Assistant Secretary (i) certifying that there has been no amendment to the Articles of Incorporation or Bylaws of the Borrower since true and accurate copies of the same were delivered to the Lender with a certificate of the Secretary of the Borrower dated October 10, 2000, and (ii) identifying each officer of the Borrower authorized to execute this Amendment and any other instrument or agreement executed by the Borrower in connection with this Amendment (collectively, the “Amendment Documents”), and certifying as to specimens of such officer’s signature and such officer’s incumbency in such offices as such officer holds.

The Borrower shall have satisfied such other conditions as specified by the Lender, including payment of all unpaid legal fees and expenses incurred by the Lender through the date of this Amendment in connection with the Credit Agreement and the Amendment Documents.

Section 4. Representations, Warranties, Authority, No Adverse Claim.

4.1 Reassertion of Representations and Warranties, No Default. The Borrower hereby represents that on and as of the date hereof and after giving effect to this Amendment (a) all of the representations and warranties contained in the Credit Agreement are true, correct and complete in all respects as of the date hereof as though made on and as of such date, except for changes permitted by the terms of the Credit Agreement, and (b) there will exist no Default or Event of Default under the Credit Agreement as amended by this Amendment on such date which has not been waived by the Lender.

4.2 Authority, No Conflict, No Consent Required. The Borrower represents and warrants that the Borrower has the power and legal right and authority to enter into the Amendment Documents and has duly authorized as appropriate the execution and delivery of the Amendment Documents and other agreements and documents executed and delivered by the Borrower in connection herewith or therewith by proper corporate action, and none of the Amendment Documents nor the agreements contained herein or therein contravenes or constitutes a default under any agreement, instrument or indenture to which the Borrower is a party or a signatory or a provision of the Borrower’s Articles of Incorporation, Bylaws or any other agreement or requirement of law, or result in the imposition of any Lien on any of its property under any agreement binding on or applicable to the Borrower or any of its property except, if any, in favor of the Lender. The Borrower represents and warrants that no consent, approval or authorization of or registration or declaration with any Person, including but not limited to any governmental authority, is required in connection with the execution and delivery by the Borrower of the Amendment Documents or other agreements and documents executed and delivered by the Borrower in connection therewith or the performance of obligations of the Borrower therein described, except for those which the Borrower has obtained or provided and as to which the Borrower has delivered certified copies of documents evidencing each such action to the Lender.

4.3 No Adverse Claim. The Borrower warrants, acknowledges and agrees that no events have been taken place and no circumstances exist at the date hereof which would give the Borrower a basis to assert a defense, offset or counterclaim to any claim of the Lender with respect to the Obligations.

Section 5. Affirmation of Credit Agreement, Further References, Affirmation of Security Interest. The Lender and the Borrower each acknowledge and affirm that the Credit Agreement, as hereby amended, is hereby ratified and confirmed in all respects and all terms, conditions and provisions of the Credit Agreement, except as amended by this Amendment, shall remain unmodified and in full force and effect. All references in any document or instrument to the Credit Agreement are hereby amended and shall refer to the Credit Agreement as amended by this Amendment. The Borrower confirms to the Lender that the Obligations are and continue to be secured by the security interest granted by the Borrower in favor of the Lender under the Security Agreement, and all of the terms, conditions, provisions, agreements, requirements, promises, obligations, duties, covenants and representations of the Borrower under such documents and any and all other documents and agreements entered into with respect to the obligations under the Credit Agreement are incorporated herein by reference and are hereby ratified and affirmed in all respects by the Borrower.

Section 6. Merger and Integration, Superseding Effect. This Amendment, from and after the date hereof, embodies the entire agreement and understanding between the parties hereto and supersedes and has merged into this Amendment all prior oral and written agreements on the same subjects by and between the parties hereto with the effect that this Amendment, shall control with respect to the specific subjects hereof and thereof.

Section 7. Severability. Whenever possible, each provision of this Amendment and the other Amendment Documents and any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be interpreted in such manner as to be effective, valid and enforceable under the applicable law of any jurisdiction, but, if any provision of this Amendment, the other Amendment Documents or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be held to be prohibited, invalid or unenforceable under the applicable law, such provision shall be ineffective in such jurisdiction only to the extent of such prohibition, invalidity or unenforceability, without invalidating or rendering unenforceable the remainder of such provision or the remaining provisions of this Amendment, the other Amendment Documents or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto in such jurisdiction, or affecting the effectiveness, validity or enforceability of such provision in any other jurisdiction.

Section 8. Successors. The Amendment Documents shall be binding upon the Borrower and the Lender and their respective successors and assigns, and shall inure to the benefit of the Borrower and the Lender and the successors and assigns of the Lender.

Section 9. Legal Expenses. As provided in Section 8.2 of the Credit Agreement, the Borrower agrees to reimburse the Lender, upon execution of this Amendment, for all reasonable out-of-pocket expenses (including attorney’ fees and legal expenses of Dorsey & Whitney LLP, counsel for the Lender) incurred in connection with the Credit Agreement, including in connection with the negotiation, preparation and execution of the Amendment Documents and all other documents negotiated, prepared and executed in connection with the Amendment Documents, and in enforcing the obligations of the Borrower under the Amendment Documents, and to pay and save the Lender harmless from all liability for, any stamp or other taxes which may be payable with respect to the execution or delivery of the Amendment Documents, which obligations of the Borrower shall survive any termination of the Credit Agreement.

Section 10. Headings. The headings of various sections of this Amendment have been inserted for reference only and shall not be deemed to be a part of this Amendment.

Section 11. Counterparts. The Amendment Documents may be executed in several counterparts as deemed necessary or convenient, each of which, when so executed, shall be deemed an original, provided that all such counterparts shall be regarded as one and the same document, and either party to the Amendment Documents may execute any such agreement by executing a counterpart of such agreement.

Section 12. Governing Law. THE AMENDMENT DOCUMENTS SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAW PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS, THEIR HOLDING COMPANIES AND THEIR AFFILIATES.

[Remainder of Page Intentionally Left Blank]

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date and year first above written.

BORROWER:
	MAGSTAR TECHNOLOGIES, INC. F/K/A REUTER MANUFACTURING, INC.


	By:	/s/ James L. Reissner
	Title:		President, Chief Executive Officer And Director


LENDER:
	U.S. BANK NATIONAL ASSOCIATION


	By:	/s/ John Phillipi
	Title:		Vice President

EXHIBIT A

AMENDED AND RESTATED NOTE

$1,200,000		August 13, 2004
		Minneapolis, Minnesota

FOR VALUE RECEIVED, MAGSTAR TECHNOLOGIES, INC. F/K/A REUTER MANUFACTURING, INC., a corporation organized under the laws of the State of Minnesota (the “Borrower”), hereby promises to pay to the order of U.S. BANK NATIONAL ASSOCIATION (the “Lender”) at its main office in Minneapolis, Minnesota, in lawful money of the United States of America in immediately available funds the principal amount of ONE MILLION TWO HUNDRED THOUSAND DOLLARS AND NO CENTS ($1,200,000), and to pay interest (computed on the basis of actual days elapsed and a year of 360 days) in like funds on the unpaid principal amount hereof from time to time outstanding.

The principal hereof and interest hereon is payable on the Advances (as such term and each other capitalized term used herein are defined in the Credit Agreement hereinafter referred to) at the rates and times set forth in the Credit Agreement. The Advances are payable in full on the Revolving Maturity Date.

This note is the Amended and Restated Note referred to in the Amended and Restated Credit Agreement dated as of October 10, 2000 (as the same may be hereafter from time to time amended, restated or modified, the “Credit Agreement”) between the Borrower and the Lender. This note is secured, it is subject to certain permissive and mandatory prepayments and its maturity is subject to acceleration, in each case upon the terms provided in said Credit Agreement. This note is issued in substitution and replacement but not in payment of indebtedness owed to the Lender by the Borrower under that Promissory Note dated as of August 7, 2003 in the original principal amount of $1,750,000 from the Borrower to the Lender.

In the event of default hereunder, the undersigned agrees to pay all costs and expenses of collection, including reasonable attorneys’ fees. The undersigned waives demand, presentment, notice of nonpayment, protest, notice of protest and notice of dishonor.

THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS NOTE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS OF THE UNITED STATES APPLICABLE TO NATIONAL BANKS.

MAGSTAR TECHNOLOGIES, INC. F/K/A REUTER MANUFACTURING, INC.

By	EXHIBIT
Title		EXHIBIT

B-1

EXHIBIT B

BORROWING BASE CERTIFICATE
Magstar Technologies Inc.

Borrowing Base Certificate for the period ended , 20

This Borrowing Base Certificate is delivered in accordance with the Credit Agreement dated as of October 10, 2000 between U.S. Bank National Association (the “Lender”) and Magstar Technologies Inc. (“the Borrower”). Capitalized terms used herein which are defined in the Credit Agreement shall have the meanings set forth for such terms therein. All amounts are as of the date shown above except as otherwise stated herein.

I certify that the following amounts were correctly determined according to the Credit Agreement:

Total Receivables		$	(A)

Receivables 90+ days	$

Other Ineligible	$

Total Ineligible		$	(B)

Eligible Receivables (A) - (B)		$	(C)

Eligible Receivables Borrowing Base (80% of (C))		$	(D)

Total Raw Material Inventory		$	(E)

Ineligible Raw Material Inventory		$	(F)

Eligible Raw Material Inventory (E) - (F)		$	(G)

Raw Material Inventory Subtotal Borrowing Base 40% of (G)		$	(H)

B-1

Slow Moving Inventory	$	(I)

Slow Moving Inventory Tolerance Level	$	(J)

Deduction for Slow Moving Inventory (I) - (J)	$	(K)

Raw Material Inventory Borrowing Base (H)-(K)	$	(L)

Total Finished Goods Inventory	$	(M)

Ineligible Finished Goods Inventory	$	(N)

Eligible Finished Goods Inventory (M) - (N)	$	(O)

Finished Goods Inventory Borrowing Base 30% of (O)	$	(P)

Total Borrowing Base (D) + (L) + (P)	$	(Q)

Outstanding Advances	$	(R)

Availability (Q) - (R)	$	(S)

I hereby certify that all payroll and unemployment taxes are current as of this date.

B-2

For the purpose of inducing the Lender to extend credit to the Borrower pursuant to the Credit Agreement, the Borrower hereby certifies that the foregoing information is true and correct in all respects. The Borrower further certifies that all amounts outstanding under the Note were properly authorized for the benefit of the Borrower and constitute obligations of the Borrower in accordance with the terms of the Credit Agreement. The Borrower further certifies that no circumstances or conditions exist at the date of the Borrowing Base Certificate which constitute an Event of Default.

	MAGSTAR TECHNOLOGIES INC.

	By
	Title

EXHIBIT 5.1(c) TO

CREDIT AGREEMENT

[FORM OF COMPLIANCE CERTIFICATE]

To: U.S. Bank National Association

THE UNDERSIGNED HEREBY CERTIFIES THAT:

(1) I am the duly elected chief financial officer of REUTER MANUFACTURING, INC. (the “Borrower”);

(2) I have reviewed the terms of the Amended and Restated Credit Agreement dated as of October 10, 2000, as amended between MAGSTAR TECHNOLOGIES, INC. F/K/A REUTER MANUFACTURING, INC., a corporation organized under the laws of the State of Minnesota, (the “Borrower”), and U.S. BANK NATIONAL ASSOCIATION (the “Lender”) (the “Credit Agreement”) and I have made, or have caused to be made under my supervision, a detailed review of the transaction and conditions of the Borrower during the accounting period covered by the Attachment hereto; and

(3) The examination described in paragraph (2) did not disclose, and I have no knowledge, whether arising out of such examinations or otherwise, of the existence of any condition or event which constitutes a Default or an Event of Default (as such terms are defined in the Credit Agreement) during or at the end of the accounting period covered by Attachment hereto or as of the date of this Certificate, except as described below (or on a separate attachment to this Certificate). The following exceptions set forth, in detail, the nature of the condition or event, the period during which has existed and the action which the Borrower has taken, is taking or proposes to take with respect to each such condition or event.

B-3

The foregoing certification, together with the computations in the Attachment hereto and the financial statements delivered with this Certificate in support hereof, are made and delivered this day of , , pursuant to Section 5.1 (c) of the Credit Agreement.

	MAGSTAR TECHNOLOGIES, INC. F/K/A
	REUTER MANUFACTURING, INC.


		By:
		Name:

ATTACHMENT TO COMPLIANCE CERTIFICATE

AS OF ,

WHICH PERTAINS TO THE PERIOD

FROM , TO ,

FOR THE FISCAL YEAR ENDING ,

EX-31.1 3 a04-9548_1ex31d1.htm EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, James L. Reissner, President and Chief Executive Officer of MagStar Technologies, Inc., certify that:

1. I have reviewed this Quarterly Report on Form 10-QSB of MagStar Technologies, Inc;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4. The small business issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

5. The small business issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

Date: August 13 , 2004
	/s/	James L. Reissner

		James L. Reissner
		President and Chief Executive Officer

EX-31.2 4 a04-9548_1ex31d2.htm EX-31.2

I, Joseph A. Petrich, Treasurer and Chief Financial Officer of MagStar Technologies, Inc., certify that:

1. I have reviewed this Quarterly Report on Form 10-QSB of MagStar Technologies, Inc;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

Date: August 13 , 2004
	/s/	Joseph A. Petrich

		Joseph A. Petrich
		Treasurer and Chief Financial Officer

EX-32.1 5 a04-9548_1ex32d1.htm EX-32.1

EXHIBIT 32.1

CERTIFICATION OF

PRESIDENT AND CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of MagStar Technologies, Inc. (the “Company”) on Form 10-QSB for the first quarter ending June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned officers of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/	James L. Reissner

James L. Reissner
President and Chief Executive Officer
August 13, 2004


/s/	Joseph A. Petrich

Joseph A. Petrich
Treasurer and Chief Financial Officer
August 13, 2004

This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed to be filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section.

Against

Withheld

Ratification of Appointment

Of Auditors