UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended June 30, 1996 Commission File Number 0-21232
- - ---------------------------------- ------------------------------
RECOVERY ENGINEERING, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1557115
State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation organization)
2229 Edgewood Avenue S.
Minneapolis, MN 55426
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 541-1313
Not applicable
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.01 Par Value -- 4,321,275 shares as of June 30, 1996
RECOVERY ENGINEERING, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements:
Balance Sheets
June 30, 1996 and December 31, 1995............................... 3
Statements of Operations
Three and six month periods ended June 30, 1996 and 1995.......... 4
Statements of Cash Flows
Six months ended June 30, 1996 and 1995........................... 5
Notes to Financial Statements..................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 7
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............... 9
Item 6. Exhibits and Reports on Form 8-K.................................. 9
Signatures........................................................ 10
RECOVERY ENGINEERING, INC.
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- --------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ -- $ 1,291
Marketable securities -- 1,022
Accounts receivable (net of allowance of
$144 for 1996 and $57 for 1995) 5,262 4,196
Inventory 5,782 6,173
Refundable income taxes 35 1,177
Prepaid expenses 471 321
Deferred income taxes 63 63
-------- --------
Total Current Assets 11,613 14,243
Property and equipment:
Tooling 5,311 4,449
Equipment and fixtures 5,916 4,587
-------- --------
11,227 9,036
Less accumulated depreciation 2,455 1,870
-------- --------
8,772 7,166
Deferred income taxes 1,512 1,512
Patents 1,594 1,523
Less accumulated amortization 872 822
-------- --------
722 701
-------- --------
Total assets $ 22,619 $ 23,622
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,617 $ 2,912
Bank line of credit 2,560 --
Accrued expenses 1,574 1,280
-------- --------
Total current liabilities 6,751 4,192
Shareholders' equity:
Common stock, $.01 par value:
Authorized shares -- 100,000,000 Issued and outstanding shares:
1996 - 4,321,275 and 1995 - 4,256,723 43 42
Additional paid-in capital 20,194 20,114
Retained earnings (deficit) (4,369) (726)
-------- --------
Total shareholders' equity 15,868 19,430
-------- --------
Total liabilities and shareholders' equity $ 22,619 $ 23,622
======== ========
</TABLE>
See accompanying notes.
RECOVERY ENGINEERING, INC.
STATEMENTS OF OPERATIONS
(Unaudited - in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------- --------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 6,598 $ 3,608 $ 13,038 $ 8,816
Cost of products sold 4,076 2,142 8,062 4,875
-------- -------- -------- --------
Gross profit 2,522 1,466 4,976 3,941
Operating expenses:
Selling, general and administrative 3,810 2,567 7,516 4,408
Research and development 402 383 1,071 811
-------- -------- -------- --------
4,212 2,950 8,587 5,219
-------- -------- -------- --------
Loss from operations (1,690) (1,484) (3,611) (1,278)
Other income (expense):
Interest income 2 181 14 368
Interest expense (38) -- (40) --
Other income (expense) 4 (3) (6) --
-------- -------- -------- --------
(32) 178 (32) 368
-------- -------- -------- --------
Loss before income taxes (1,722) (1,306) (3,643) (910)
Income tax benefit -- (405) -- (282)
-------- -------- -------- --------
Net loss $ (1,722) $ (901) $ (3,643) $ (628)
======== ======== ======== ========
Net loss per share $ (.40) $ (.21) $ (.85) $ (.15)
======== ======== ======== ========
Weighted average number of
common shares outstanding 4,319 4,243 4,290 4,225
======== ======== ======== ========
</TABLE>
See accompanying notes.
RECOVERY ENGINEERING, INC.
STATEMENTS OF CASH FLOWS
(Unaudited - in thousands)
Six months ended
June 30
-------
1996 1995
------- -------
Operating activities
Net loss $(3,643) $ (628)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 635 350
Deferred income taxes -- 96
Provision for losses on accounts receivable 87 22
Changes in operating assets and liabilities:
Accounts receivable (1,153) 1,156
Inventory 391 (1,955)
Prepaid expenses (150) (704)
Accounts payable (295) (41)
Accrued expenses 294 (58)
Refundable income taxes 1,142 --
------- -------
Net cash used in operating activities (2,692) (1,762)
Investing activities
Purchase of property and equipment (2,191) (1,907)
Purchase of marketable securities -- (2,582)
Sale of marketable securities 1,022 3,503
Purchase of patents (71) (71)
------- -------
Net cash used in investing activities (1,240) (1,057)
Financing activities
Net proceeds from bank line of credit 2,560 --
Exercise of stock options and warrants 81 1,034
------- -------
Net cash provided by financing activities 2,641 1,034
------- -------
Decrease in cash and cash equivalents (1,291) (1,785)
Cash and cash equivalents at beginning of period 1,291 5,913
------- -------
Cash and cash equivalents at end of period $ -- $ 4,128
======= =======
See accompanying notes.
RECOVERY ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
June 30, 1996
Note A -- Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Form 10-Q. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the six months ended
June 30, 1996 are not necessarily indicative of the results that may be expected
for the year ended December 31, 1996, or any other period. For further
information, refer to the financial statements and footnotes thereto for the
year ended December 31, 1995 included in the Company's latest annual report on
Form 10-K.
Note B -- Inventory
The components of inventory consist of the following:
June 30, December 31,
1996 1995
---------- ----------
Raw materials $3,093,000 $3,562,000
Work in process 122,000 303,000
Finished products 2,567,000 2,308,000
---------- ----------
$5,782,000 $6,173,000
========== ==========
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Second Quarter Ended June 30, 1996)
RESULTS OF OPERATIONS:
The report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ significantly from
those discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, changes in the
Company's materials costs, new product introductions by the Company or its
competitors, and changes in general conditions in the market for household
goods.
Net sales increased 83% for the three months and 48% for the six months ended
June 30, 1996, compared to the same periods in the prior year. The increases
were the result of contributions from our PUR Self-Monitoring Water FilterJ for
the household market. Sales of household water filters increased nearly
four-fold in the second quarter of 1996, versus the same period in 1995. Price
increases did not have a significant impact on net sales for the six months
ended June 30, 1996 or 1995.
Gross margins were 38.2% for both the second quarter and year-to-date, 1996,
versus 40.6% and 44.7% for the same periods in 1995, respectively. The decrease
in gross margins was primarily due to lower margins on the OEM product line and
unabsorbed overhead costs. With increased volume, continued reduction in
materials costs, and automation of the PUR FM series unit production line, the
Company expects higher gross margins throughout the remainder of the year.
Selling, general and administrative expenses increased for the quarter ended
June 30, 1996 and year-to-date, compared to the same periods last year. This
increase reflects increased sales and marketing expense related to the continued
roll-out of the household drinking water system products in the U.S. Selling
expenses are expected to continue to be well above 1995 levels throughout the
remainder of the year, to support the continued roll-out of the household
drinking water systems and product line extensions.
Research and development expense increased by 5% and 32% for the second quarter
and year-to-date 1996, respectively, compared to the same periods in 1995,
reflecting the Company's continued emphasis on product development. Development
of product line extensions and other new products will require continued
emphasis and increased spending on research and development in 1996.
Other income (expense) was ($32,000) for the second quarter and year-to-date
1996, compared to $178,000 and $368,000 for the same periods the prior year, due
primarily to decreased interest income corresponding to decreased balances of
cash, cash equivalents and marketable securities and the incurrance of
short-term debt.
The Company's effective income tax rate was 0% for the three months ended June
30, 1996 and year-to-date compared to 31% for the same periods in 1995. The
Company has a $1,512,000 tax benefit related to losses incurred in 1995. The
Company has recorded a valuation allowance for the tax benefit related to the
current net operating loss. In 1995, research and development tax credits and
reduced tax rates from the Company's foreign sales corporation and tax exempt
interest on certain investments in the current year, caused the effective rates
to be below the statutory level.
LIQUIDITY AND CAPITAL RESOURCES:
Cash used in operations was $2,692,000 for the six months ended June 30, 1996,
compared to $1,762,000 for the same period in 1995. In 1996, net loss as well as
increased accounts receivable related to strong second quarter sales, partially
offset by the collection of an income tax refund were the primary components of
cash used in operation. In 1995, net loss and increased inventory levels to
support the projected sales growth and an inventory increase related to military
contract delays offset cash received through collection of receivables.
Capital expenditures were $2,191,000 for the six months ended June 30, 1996,
compared to $1,907,000 for the same period the prior year. The capital
expenditures were used primarily to purchase tooling and manufacturing equipment
for both years. Increased expenditures in 1996 for tooling and manufacturing
equipment purchases are associated with new product introductions and an
increase in overall production capacity.
At June 30, 1996, the Company had available an $8 million credit facility
secured by equipment, inventory and receivables. The Company had borrowed
$2,560,000 under this facility at June 30, 1996, compared to $0 at December 31,
1995. Subsequent to June 30, 1996, the Company received $15 million from a
private placement of convertible notes. The notes bear interest at a rate of
five percent and are convertible into one million shares of common stock. The
Company used a portion of the proceeds from these notes to repay and close the
existing bank line of credit.
Management believes that anticipated cash flows from operations, and the
proceeds from the convertible note will provide sufficient capital resources for
current operations and planned product introductions.
The Company has not paid cash dividends. The Board of Directors currently
intends to retain all earnings for expansion of the Company's business.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company from time to time is involved in various legal proceedings
arising in the normal course of business, none of which is expected to
result in any material loss to the Company.
Item 2. Changes in securities
Not applicable
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on April 25,
1996. The following matters were submitted to a vote of the
shareholders at the Annual Meeting:
Election of Directors. The following persons were elected to serve as
directors, for a term of one year:
John R. Albers John E. Gherty Brian F. Sullivan
William D. Thompson William F. Wanner, Jr. Ronald W. Weber
Richard J. Zeckhauser
Approval of Proposal to Reincorporate the Company under the Laws of the
State of Minnesota by merging the Company with and into a Newly Formed
Minnesota Corporation. (2,188,407 votes FOR, 87,480 votes AGAINST, and
8,707 votes ABSTAINED)
Ratification of Appointment of Ernst & Young, LLP as Independent
Auditors. (3,236,785 votes FOR, 17,114 votes AGAINST, and 4,908 votes
ABSTAINED)
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on page following signature
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter covered
by this Form 10-Q.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Recovery Engineering, Inc.
(Registrant)
Dated: August 12, 1996. /s/ Brian F. Sullivan
Brian F. Sullivan
President, Chief Executive Officer
and Director
(principal executive officer)
Dated: August 12, 1996. /s/ Charles F. Karpinske
Charles F. Karpinske
Chief Financial Officer
(principal financial and accounting officer)
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBIT INDEX TO FORM 10-Q
For the quarter ended Commission File No.: 0-21232
June 30, 1996
RECOVERY ENGINEERING, INC.
Page Number in
Sequential
Numbering of
All Pages
Including Exhibits
Exhibit
11 Statement re computation of loss per share 12
27 Financial data schedule 13
EXHIBIT 11
RECOVERY ENGINEERING, INC.
COMPUTATION OF LOSS PER SHARE
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------- --------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Primary:
Weighted average shares outstanding 4,319,000 4,243,000 4,290,000 4,225,000
Net effect of dilutive stock options and
warrants -- based on treasury stock
method using average market price -- -- -- --
----------- ----------- ----------- -----------
Total 4,319,000 4,243,000 4,290,000 4,225,000
=========== =========== =========== ===========
Net loss $(1,722,000) $ (901,000) $(3,643,000) $ (628,000)
=========== =========== =========== ===========
Per share amount $ (.40) $ (.21) $ (.85) $ (.15)
=========== =========== =========== ===========
Fully diluted:
Weighted average shares outstanding 4,319,000 4,243,000 4,290,000 4,225,000
Net effect of dilutive stock options
and warrants -- based on treasury stock
method using ending market price,
if higher than average market price -- -- -- --
----------- ----------- ----------- -----------
Total 4,319,000 4,243,000 4,290,000 4,225,000
=========== =========== =========== ===========
Net loss $(1,722,000) $ (901,000) $(3,643,000) $ (628,000)
=========== =========== =========== ===========
Per share amount $ (.40) $ (.21) $ (.85) $ (.15)
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 5,262
<ALLOWANCES> 144
<INVENTORY> 5,782
<CURRENT-ASSETS> 11,613
<PP&E> 11,227
<DEPRECIATION> 2,455
<TOTAL-ASSETS> 22,619
<CURRENT-LIABILITIES> 6,751
<BONDS> 0
0
0
<COMMON> 43
<OTHER-SE> 15,825
<TOTAL-LIABILITY-AND-EQUITY> 22,619
<SALES> 13,038
<TOTAL-REVENUES> 13,038
<CGS> 8,062
<TOTAL-COSTS> 16,649
<OTHER-EXPENSES> (8)
<LOSS-PROVISION> 124
<INTEREST-EXPENSE> 40
<INCOME-PRETAX> (3,643)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,643)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,643)
<EPS-PRIMARY> (.85)
<EPS-DILUTED> (.85)
</TABLE>
