SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant |X|
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Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
RECOVERY ENGINEERING, INC.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement if other than the Registrant)
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|X| No fee required.
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RECOVERY ENGINEERING, INC.
9300 North 75th Avenue
Minneapolis, Minnesota 55428
(612) 315-5500
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 24, 1997
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TO THE SHAREHOLDERS OF
RECOVERY ENGINEERING, INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Recovery
Engineering, Inc., a Minnesota corporation (the "Company"), will be held on
Thursday, April 24, 1997, at 3:30 p.m. (Minneapolis time), at the Universe Room,
50th Floor, IDS Center, 80 South Eighth Street, Minneapolis, Minnesota 55402,
for the following purposes:
1. To elect seven directors of the Company for the coming year.
2. To consider and act upon a proposal to amend the 1994 Stock Option and
Incentive Plan to increase the number of shares reserved for issuance
thereunder.
3. To ratify the appointment of Ernst & Young LLP as independent auditors
for the fiscal year ending December 31, 1997.
4. To transact such other business as may properly come before the
meeting or any adjournment thereof.
Only holders of record of the Company's common stock at the close of
business on March 14, 1997 are entitled to notice of and to vote at the Annual
Meeting or any adjournment thereof.
Each of you is invited to attend the Annual Meeting in person if possible.
Whether or not you plan to attend in person, please mark, date and sign the
enclosed proxy, and mail it promptly. A return envelope is enclosed for your
convenience.
By Order of the Board of Directors
Eric O. Madson, SECRETARY
March 27, 1997
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WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING,
PLEASE SIGN THE PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE.
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RECOVERY ENGINEERING, INC.
9300 North 75th Avenue
Minneapolis, Minnesota 55428
(612) 315-5500
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PROXY STATEMENT
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SOLICITATION OF PROXIES
The enclosed proxy is solicited by and on behalf of the Board of Directors
of Recovery Engineering, Inc., a Minnesota corporation ("REI" or the "Company"),
for use at the Annual Meeting of Shareholders ("Annual Meeting") to be held on
April 24, 1997, and any adjournment thereof. This Proxy Statement and the
accompanying form of proxy are being mailed to shareholders on or about March
27, 1997.
The expense of the solicitation of proxies for the Annual Meeting,
including the cost of mailing, has been or will be borne by the Company.
Arrangements will be made with brokerage houses and other custodian nominees and
fiduciaries to send proxies and proxy materials to their principals, and the
Company will reimburse them for their expense in so doing. In addition to
solicitation by mail, proxies may be solicited by telephone, telegraph or
personally.
VOTING AND REVOCATION OF PROXY
Only holders of record of REI's common stock at the close of business on
March 14, 1997, the record date for the Annual Meeting, are entitled to notice
of and to vote at the Annual Meeting. On the record date, 4,329,432 shares of
REI's common stock were outstanding. Each share of common stock entitles the
holder thereof to one vote upon each matter to be presented at the Annual
Meeting.
Each proxy returned to the Company will be voted in accordance with the
instructions indicated thereon. If no instructions are indicated, the shares
will be voted (i) FOR the election of the nominees for the Board of Directors
named in this Proxy Statement; (ii) FOR the approval of an amendment to the 1994
Stock Option and Incentive Plan to increase the number of shares reserved for
issuance thereunder; and (iii) FOR the ratification of the appointment of Ernst
& Young LLP as independent auditors for the fiscal year ending December 31,
1997. While the Board of Directors knows of no other matters to be presented at
the Annual Meeting or any adjournment thereof, all proxies returned to the
Company will be voted on any such matter in accordance with the judgment of the
proxy holders.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (a) giving
written notice of such revocation to the Secretary of the Company, (b) giving
another written proxy bearing a later date, or (c) attending the Annual Meeting
and voting in person (although attendance at the Annual Meeting will not in and
of itself constitute a revocation of a proxy).
A quorum, consisting of a majority of the shares of Common Stock entitled
to vote at the Annual Meeting, must be present in person or by proxy before
action may be taken at the Annual Meeting. If an executed proxy is returned and
the shareholder has abstained from voting on any matter, the shares represented
by such proxy will be considered present at the meeting for purposes of
determining a quorum and for purposes of calculating the vote, but will not be
considered to have been voted in favor of such matter. If an executed proxy is
returned by a broker holding shares in "street name" which indicates that the
broker does not have discretionary authority as to certain shares to vote on one
or more matters, such shares will be considered present at the meeting for
purposes of determining a quorum, but will not be considered to be represented
at the meeting for purposes of calculating the vote with respect to such matter.
ELECTION OF DIRECTORS
(PROPOSAL 1)
The business and affairs of the Company are managed under the direction of
its Board of Directors. Each director is elected for a term of one year or until
his or her successor is elected.
Shareholders will be asked at the Annual Meeting to elect seven directors.
The Board has nominated the seven individuals named below to serve as directors
of the Company. Unless authority is withheld, all proxies received in response
to this solicitation will be voted FOR the election of the nominees named below.
Each of the nominees named below is now a director of the Company and has served
continuously as a director since the year indicated. Each of the nominees was
elected by the shareholders at the 1996 Annual Meeting, except for Mr. Patel who
was appointed by the Board of Directors in July 1996. All nominees have
indicated a willingness to serve if elected. If any nominee becomes unable to
serve prior to the Annual Meeting, the proxies received in response to this
solicitation will be voted for a replacement nominee selected in accordance with
the best judgment of the proxy holders named therein.
DIRECTOR
NAME POSITIONS WITH THE COMPANY AGE SINCE
- ---- -------------------------- --- -----
John E. Gherty Director 53 1988
Sanjay H. Patel Director 35 1996
Brian F. Sullivan President, Chief Executive Officer 35 1986
and Director
William D. Thompson Director 75 1995
William F. Wanner, Jr. Director 54 1986
Ronald W. Weber Director 68 1993
Richard J. Zeckhauser Director 56 1987
SHAREHOLDER APPROVAL
The affirmative vote of a plurality of the shares of common stock of the
Company represented at the Annual Meeting either in person or by proxy, assuming
a quorum is present, is required for the election of directors.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
ELECTION OF THE NOMINEES FOR THE BOARD OF DIRECTORS AS SET FORTH IN PROPOSAL 1.
INFORMATION CONCERNING DIRECTORS,
NOMINEES AND EXECUTIVE OFFICERS
DIRECTORS AND NOMINEES
All of the nominees for election to the Company's Board of Directors are
presently serving as directors of the Company. The following discussion sets
forth certain information concerning the directors and nominees of the Company.
JOHN E. GHERTY has been a director of REI since 1988. Mr. Gherty has been
President and Chief Executive Officer of Land O' Lakes, Inc., a food and
agricultural company, since 1989 and prior thereto was Group Vice President and
Chief Administrative Officer of Land O' Lakes, Inc. Mr. Gherty is also a
director of CF Industries, Inc., the National Parenting Association, the
National Council of Farmer Cooperatives and the Minnesota Business Partnership.
SANJAY H. PATEL has been a director of REI since July 1996. Mr. Patel has
been a Managing Director in the Principal Investment Area of Goldman Sachs & Co.
since 1996. From 1987 to 1996, he worked in the Leveraged Buyout Group of
Goldman Sachs & Co. Mr. Patel also serves on the Advisory Committees or Boards
of Directors of Marcus Cable Company, L.P., Stirling Cooke Brown Holdings
Limited and GGS Management, Inc.
BRIAN F. SULLIVAN has been the President and Chief Executive Officer and a
director of REI since its inception in 1986, and also served as Chief Financial
Officer of the Company from 1986 to 1994. Mr. Sullivan has established and
directed the implementation of the Company's strategic direction since its
inception. He has led the Company from the development stage through its initial
contracts with the United States armed forces, the introduction of reverse
osmosis desalinators and portable drinking water systems, and the development
and introduction of the Company's household drinking water systems. Mr. Sullivan
is named as an inventor on four United States patents held by the Company. Mr.
Sullivan is also a director of North Central Life Insurance Company and J.L.
Wickham Co.
WILLIAM D. THOMPSON has been a director of REI since December 1995. Mr.
Thompson served as Executive Vice President of the New York City advertising
firm of Young & Rubicam, Inc. until his retirement in 1989. During 37 years of
service for Young & Rubicam, Mr. Thompson oversaw accounts for numerous
companies, including General Foods, Merrill Lynch, General Electric,
Warner-Lambert, Bristol-Meyers Squibb, and Johnson & Johnson.
WILLIAM F. WANNER, JR. has been a director of REI since its inception in
1986. Mr. Wanner served as Chairman of the Board from 1986 to 1994. Since 1973,
Mr. Wanner has been the Chief Executive Officer and principal shareholder of
Wanner Engineering, Inc. and its affiliated companies, which design, produce and
market a range of high pressure pumps and controls for the domestic and
international industrial market.
RONALD W. WEBER has been a director of REI since 1993. Mr. Weber has been
President and Chief Executive Officer of Normark Corporation, a distributor of
fishing and sporting equipment, since 1959. Mr. Weber is also a director of
Rapala Oy, a manufacturer of fishing and sporting equipment.
RICHARD J. ZECKHAUSER has been a director of REI since 1987. Dr. Zeckhauser
has been a professor of political economy at the John F. Kennedy School of
Government at Harvard University since 1968. Dr. Zeckhauser was a co-founder of
Niederhoffer, Cross and Zeckhauser, a New York-based investment firm
specializing in mergers and acquisitions and money management.
BOARD COMMITTEES AND ACTIONS
During calendar year 1996, the Board of Directors met five times. The Board
of Directors has two standing committees, a Compensation Committee and an Audit
Committee, which met three times and one time, respectively, during 1996. Each
director attended at least 75% of the total number of meetings of the Board and
of committees on which the director served.
The Compensation Committee reviews and makes recommendations to the Board
of Directors regarding salaries, compensation and benefits of executive officers
and senior management of the Company and administers the Company's 1986 Stock
Option Plan and 1994 Stock Option and Incentive Plan. The members of the
Compensation Committee are Mr. Gherty and Mr. Wanner.
The Audit Committee reviews the internal and external financial reporting
of the Company and reviews the scope of the independent audit. The members of
the Audit Committee are Mr. Weber and Dr. Zeckhauser.
The Board of Directors acts as the nominating committee. See "Information
Concerning Directors, Nominees and Executive Officers -- Nomination of
Directors."
DIRECTOR COMPENSATION
Directors of the Company currently receive no cash fee for their service as
directors. Non-employee directors of the Company have been granted stock options
in connection with their service as directors, including options automatically
granted under the 1993 Director Stock Option Plan. See "Information Concerning
Directors, Nominees and Executive Officers -- Director Stock Option Plan."
NOMINATION OF DIRECTORS
Directors of the Company are elected annually to serve until the next
annual meeting of shareholders or until their successors are duly elected.
Pursuant to a Securities Purchase Agreement dated July 19, 1996, between the
Company and five investment partnerships affiliated with Goldman, Sachs & Co.
(collectively, "Goldman Sachs"), Goldman Sachs has the right to nominate one
person to serve on the Company's Board of Directors, and the Company has agreed
to use its best efforts to secure the election of such nominee to the Board of
Directors. See "Information Concerning Directors, Nominees and Executive
Officers -- Certain Transactions." Until March 1998, Miller, Johnson & Kuehn,
Incorporated, the underwriter of the Company's March 1993 initial public stock
offering, has the right to nominate one person to serve on the Company's Board
of Directors, and the Company has agreed to use its best efforts to secure the
election of such nominee to the Board of Directors. Mr. Patel and Mr. Weber have
been nominated by Goldman Sachs and Miller, Johnson & Kuehn, respectively, and
have been elected directors pursuant to such arrangements. The Company knows of
no other arrangements or understandings between a director or nominee and any
other person pursuant to which he has been selected as a director or nominee.
There is no family relationship between any of the nominees, directors or
executive officers of the Company.
The Board of Directors acts as the nominating committee for selecting the
Board's nominees for election as directors. The Company's Bylaws require that
shareholder nominations for director be made pursuant to timely notice in
writing to the Company. To be timely, written notice must be delivered to the
Company not less than 60 nor more than 90 days prior to the date of the
scheduled annual meeting; provided, however, that if the Company gives less than
70 days' notice of such meeting, the shareholder may deliver notice no later
than the tenth day following the earlier of the day on which the Company's
notice of the date of the meeting was mailed or the day on which such date was
publicly disclosed. The Bylaws further provide that the shareholder's notice
shall set forth certain information concerning each nominee, including (i) the
name, age, business address and residence address of such person, (ii) the
principal occupation or employment of such person, (iii) the class and number of
shares of the Company's stock beneficially owned by such person on the date of
the notice, and (iv) any other information relating to such person that would be
required to be disclosed pursuant to Regulation 13D and Regulation 14A under the
Securities Exchange Act of 1934. In addition, the shareholder giving the notice
is required to state the name and address of such shareholder and the identity
of other shareholders known by such shareholder to be supporting such nominees
and the extent of such shareholders' beneficial ownership of the Company's
stock. A majority of the Continuing Directors may reject a nomination by a
shareholder not timely made in accordance with the requirements of the Bylaws.
In case of a deficiency in such shareholder's notice, the shareholder has the
opportunity to cure the deficiency by providing additional information within
five days of the date that such a deficiency notice is given to the shareholder.
A majority of the Continuing Directors determines whether the deficiency has
been cured by the shareholder.
EXECUTIVE OFFICERS
The following discussion sets forth information about the executive
officers of the Company who are not directors.
OFFICER
NAME POSITIONS WITH THE COMPANY AGE SINCE
- ---- -------------------------- --- -----
Richard D. Hembree Vice President-- Engineering 44 1987
Charles F. Karpinske Vice President and Chief Financial 42 1996
Officer
Sally S. Mainquist Vice President-- Manufacturing 41 1994
RICHARD D. HEMBREE has served as chief engineer of REI since 1986 and Vice
President -- Engineering since 1987. Mr. Hembree has been principally
responsible for the development of new technologies incorporated into the
Company's products. Mr. Hembree is named as an inventor on seven United States
patents held by the Company. From 1983 to 1986, Mr. Hembree was a senior design
engineer at Seagold Industries Corporation, where he designed several energy
recovery pumps and was engaged in the design and development of manual
desalinators and hydraulic energy recovery devices.
CHARLES F. KARPINSKE has served as the Company's Vice President and Chief
Financial Officer since February 1996. Prior to joining the Company, Mr.
Karpinske served as Vice President of Operations and Chief Financial Officer of
Goretek Data Systems from April 1995 to February 1996. From August 1992 to March
1995, Mr. Karpinske was the Chief Operating Officer and Chief Financial Officer
for Decision Data. From October 1986 to July 1993, Mr. Karpinske worked for
Apertus Technologies (formerly Lee Data) serving in a number of financial
positions including Chief Financial Officer, Vice President of Finance and
Administration and Corporate Controller.
SALLY S. MAINQUIST has served as Vice President -- Manufacturing of REI
since March 1994. Ms. Mainquist directs the Company's manufacturing operations
and is responsible for establishing automated manufacturing processes for the
Company's household drinking water systems. From 1982 to February 1994, Ms.
Mainquist served in various positions with Graco Inc., a manufacturer of fluid
handling equipment. She served most recently as factory operations manager for
the Tip/Aircap plant, one of Graco's five focus factories.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
earned by or awarded to Mr. Sullivan and Mr. Karpinske for the years ended
December 31, 1996, 1995 and 1994. No other executive officers received total
salary and bonus compensation in excess of $100,000 for such years.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
--------------
ANNUAL COMPENSATION AWARDS
----------------------------- -------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) OPTIONS(#) COMPENSATION
- --------------------------- ---- ----------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Brian F. Sullivan 1996 $ 150,000 $ -- 250,000 shares $ --
(President and Chief Executive 1995 150,000 -- 121,500 shares --
Officer) 1994 125,000 153,978 -- 1,647(2)
Charles F. Karpinske(3) 1996 $ 112,500 $ -- 25,000 shares $ --
(Vice President and Chief 1995 N/A N/A N/A N/A
Financial Officer) 1994 N/A N/A N/A N/A
</TABLE>
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(1) The executive officers of the Company are eligible to earn annual cash
bonuses tied to the level of achievement of annual performance targets.
(2) Represents the Company's matching contribution under its 401(k) Retirement
Savings Plan.
(3) Mr. Karpinske's employment with the Company commenced in February 1996.
RETIREMENT SAVINGS PLAN
The Company maintains a profit sharing and savings plan (the "401(k) Plan")
under Section 401(k) of the Internal Revenue Code of 1986, as amended (the
"Code"), which allows employees to contribute up to 15% of their pre-tax income
to the 401(k) Plan. The 401(k) Plan includes a discretionary matching
contribution by the Company and provides that the Company may make an additional
discretionary contribution out of profits at the end of any year. The Company
made discretionary matching contributions of $61,000, $34,000 and $18,000 for
1996, 1995 and 1994, respectively. No additional discretionary contributions
were made by the Company for 1996, 1995 or 1994.
STOCK OPTIONS
Since its inception, the Company has utilized stock and stock options to
provide incentives and rewards to its employees and directors. The Recovery
Engineering, Inc. 1986 Stock Option Plan (the "1986 Option Plan") permits the
granting of awards to directors and employees of the Company in the form of
stock options. Stock options granted under the 1986 Option Plan may be
"incentive stock options" meeting the requirements of Section 422 of the Code or
non-qualified options which do not meet the requirements of Section 422. At
March 14, 1997, options for an aggregate of 227,275 shares were outstanding
under the 1986 Plan. The outstanding options are presently exercisable with
respect to 218,825 shares. No additional options may be granted under the 1986
Plan.
The Recovery Engineering, Inc. 1994 Stock Option and Incentive Plan (the
"1994 Plan") permits the granting of awards to employees, consultants and other
service providers in the form of incentive stock options, non-qualified stock
options and grants of restricted stock. A total of 800,000 shares of the
Company's common stock has been reserved for issuance pursuant to awards under
the 1994 Plan, of which 700,000 shares have previously been approved by the
shareholders. On January 28, 1997, the Board of Directors reserved an additional
100,000 shares for issuance under the 1994 Plan. The shareholders are being
asked to approve the additional shares at the Annual Meeting. See "Approval of
Amendment to 1994 Stock Option and Incentive Plan to Increase Number of Shares
Reserved for Issuance Thereunder (Proposal 2)." At March 14, 1997, options for
an aggregate of 743,000 shares were outstanding under the 1994 Plan, and 44,490
shares were available for grant, assuming the additional shares are approved.
The outstanding stock options are presently exercisable with respect to 204,800
shares. Awards may be granted under the 1994 Plan through January 31, 2004. The
1994 Plan may be terminated earlier by the Board of Directors in its sole
discretion.
The 1986 Option Plan and the 1994 Plan are administered by the Compensation
Committee of the Board of Directors. These Plans give broad powers to the
Committee to administer and interpret the plans, including the authority to
select the individuals to be granted awards and to prescribe the particular form
and conditions of each award granted. Awards are granted on the basis of various
factors, including the individual's capacity for contributing to the successful
performance of the Company, the nature of the operations for which the
individual is responsible, and the period for which the individual has served or
will have served the Company at the vesting of the award.
The following table sets forth certain information regarding stock options
granted to the executive officers named in the Summary Compensation Table during
the Company's 1996 fiscal year.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
----------------------------------------------------------------- ANNUAL RATES OF STOCK
PERCENT OF TOTAL MARKET PRICE APPRECIATION FOR
OPTIONS GRANTED EXERCISE PRICE AT OPTION TERM(1)
OPTIONS TO EMPLOYEES IN PRICE GRANT DATE EXPIRATION ------------------------------
NAME GRANTED(#) FISCAL YEAR ($/SH) ($/SH) DATE 0% ($) 5% ($) 10% ($)
- ---- ----------- ------------- -------- ---------- ---------- ------ -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Brian F. Sullivan 250,000 (2) 60.8% $14.00 $10.375 2/13/2006 $0 $724,945 $3,227,520
Charles F. Karpinske 25,000 (3) 6.1% $8.75 $10.375 2/19/2006 $40,625 $137,571 $348,631
</TABLE>
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(1) Represents the potential realizable value of each grant of options assuming
that the market price of the underlying common stock appreciates in value
from its fair market value on the date of grant to the end of the option
term at the indicated annual rates.
(2) Mr. Sullivan was granted an option for 250,000 shares of Common Stock on
February 13, 1996. Such option will become fully vested on February 13,
2005, and will become exercisable sooner in installments of 50,000 shares
each upon the achievement of certain performance criteria established by
the Compensation Committee.
(3) Mr. Karpinske was granted an option for 25,000 shares of Common Stock on
February 19, 1996. Such option will vest and become exercisable in
installments of 6,250 shares each on February 19, 1997, 1998, 1999 and
2000.
The following table sets forth certain information regarding the number and
value of unexercised stock options held by the executive officers named in the
Summary Compensation Table as of the end of the Company's 1996 fiscal year.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
VALUE OF UNEXERCISED
SHARES NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED VALUE OPTIONS AT YEAR-END(#) AT YEAR-END($)(1)
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Brian F. Sullivan 32,250 $201,563(2) 320,500 / 250,000 $895,000 / $--
Charles F. Karpinske -- -- -- / 25,000 $-- / $--
</TABLE>
- --------------------
(1) Based on the difference between the December 31, 1996 closing price of
$7.00 per share as reported on The Nasdaq Stock Market and the exercise
price of the options.
(2) Based on the difference between the closing price of $8.75 per share on
March 16, 1996, the date of exercise, as reported on The Nasdaq Stock
Market and the exercise price of the option.
Mr. Sullivan's options that are not currently exercisable will become
exercisable in 2005 and may become exercisable earlier if certain sales and
income objectives established by the Compensation Committee are achieved by the
Company. In addition, the options will become exercisable if Mr. Sullivan's
employment with the Company is terminated by reason of his death or disability,
or within 24 months following a "change in control" of the Company. For these
purposes, a "change in control" means (i) the dissolution or liquidation of the
Company, or a merger, consolidation or other corporate reorganization in which
the Company is not the surviving party; (ii) the acquisition by any person,
other than Wanner Engineering, Inc., of securities representing more than 50% of
the voting power of the Company's outstanding securities; or (iii) individuals
who constitute the Board of Directors at the beginning of any two-year period
ceasing to constitute at least a majority of the Board of Directors, unless each
new director is approved by a two-thirds vote of the directors then in office
who were directors at the beginning of such period.
DIRECTOR STOCK OPTION PLAN
The Company's 1993 Director Stock Option Plan (the "Director Option Plan")
was adopted by the Board of Directors in 1993 and approved by the shareholders
of the Company in 1994. The Director Option Plan provides for the automatic
granting of an option for 1,000 shares of common stock to each non-employee
director of the Company on the date of his or her initial election or
appointment as a director, and additional options for 1,000 shares on the date
of each annual meeting of shareholders at which the director is reelected by the
shareholders. The exercise price of options granted under the Director Option
Plan is equal to 85% of the fair market value of the Common stock on the date of
grant. A total of 100,000 shares of the Company's common stock has been reserved
for issuance pursuant to options granted under the Director Option Plan. At
March 14, 1997, options for an aggregate of 25,000 shares were outstanding under
the Director Option Plan, and 75,000 shares were available for grant. All of the
outstanding options are presently exercisable.
EMPLOYEE STOCK PURCHASE PLAN
In 1994, the Company's 1994 Stock Purchase Plan was adopted by the Board of
Directors and approved by the shareholders of the Company. The Stock Purchase
Plan permits eligible employees to make voluntary contributions through payroll
deductions, to be used to purchase stock from the Company on a monthly basis at
a price equal to 85% of the fair market value of a share of common stock on the
purchase date. An aggregate of 100,000 shares has been reserved for issuance
under the Stock Purchase Plan. The number of shares that an employee may
purchase under the Stock Purchase Plan may not exceed 500 shares during any
calendar year, and the aggregate purchase price of shares purchased by any
employee under the Stock Purchase Plan may not exceed $10,000 during any
calendar year.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
Decisions and recommendations regarding compensation paid to the Company's
executive officers in 1996 were made by a Compensation Committee consisting of
John E. Gherty and William F. Wanner, Jr., each of whom is a non-employee
director of the Company. See "Report of the Compensation Committee." Brian F.
Sullivan, the only executive officer of the Company who serves on the Board of
Directors, abstains from voting on compensation matters affecting his
compensation.
CERTAIN TRANSACTIONS
On July 19, 1996, the Company entered into a Securities Purchase Agreement
with five investment partnerships affiliated with Goldman, Sachs & Co.
(collectively, "Goldman Sachs"), pursuant to which the Company issued to Goldman
Sachs $15 million principal amount of its 5% Convertible Notes Due 2003 (the
"Notes"). Upon the closing of the sale of the Notes, the Company appointed
Sanjay H. Patel, the designee of Goldman Sachs, to serve as a director of the
Company.
The Notes are convertible into shares of the Company's common stock at a
conversion price of $15 per share, subject to customary anti-dilution
provisions. The Notes may be converted to common stock at any time at the option
of Goldman Sachs or, if certain conditions are satisfied, after January 18, 2000
by the Company. The Notes bear interest at the rate of 5% per annum, payable
quarterly on March 31, June 30, September 30, and December 31 in each year,
commencing September 30, 1996, until the principal of the Notes becomes due and
payable. The principal on the Notes is due and payable on July 18, 2003. The
Notes may be prepaid in whole or in part at any time by the Company, without
penalty, provided that if less than the entire indebtedness evidenced by the
Notes is to be prepaid by the Company, it must offer to repay the Notes pro rata
from each holder thereof.
Under the Securities Purchase Agreement, for so long as at least 25% of the
initial amount of Notes remain outstanding and Goldman Sachs holds at least a
majority of the outstanding Notes, at each meeting for the election of directors
of the Company, the Company is to use its best efforts to cause to be elected
to, and maintained as a member of, the Company's Board of Directors, one person
designated by Goldman Sachs. The representative is to be a member of the
Company's executive and finance committees, if any, or any other committee
performing substantially similar functions and, upon request by the
representative, any other committee of the Board of Directors. The Company has
also agreed that if, at any time, Goldman Sachs does not have a representative
on the Company's Board of Directors, Goldman Sachs will be entitled to have an
observer present at all meetings of the Company's Board.
In connection with the sale of the Notes, the Company, Goldman Sachs and
Brian F. Sullivan entered into an Executive Agreement, dated July 19, 1996. The
Executive Agreement prohibits, subject to certain exceptions, Mr. Sullivan's
sale of common stock of the Company until July 19, 1998. After that date, Mr.
Sullivan may not sell or otherwise transfer in any transaction more than 25% of
the common stock (including shares subject to stock options) which he held as of
July 19, 1996 unless the holders of the Notes are allowed to participate in such
sale on a pro rata basis. Under the Executive Agreement, Mr. Sullivan also has
agreed to refrain from competing with the Company for three years after (i) his
employment with the Company is terminated for cause or (ii) he resigns from the
Company other than for good reason (as defined in the Executive Agreement).
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors (the "Committee") is
composed of non-employee directors of the Company. For 1996 the Committee
consisted of John E. Gherty and William F. Wanner, Jr. The Committee is
responsible for assuring that compensation for executives is consistent with the
Company compensation philosophy. The Committee also administers and makes grants
under the Company's stock option plans with respect to the Company's executive
officers.
The Company's executive compensation program is based on a
pay-for-performance philosophy. Under the Company's program, an executive's
compensation consists of three components: base salary, an annual incentive
(bonus) payment, and long-term incentives (principally stock options). Base
salary is determined by an assessment of the executive's sustained performance
against his or her individual job responsibilities, including the impact of such
performance on the business results of the Company. Payments under the Company's
annual incentive plan are tied to the level of achievement of annual performance
targets, including pre-tax earnings and other performance targets related to
business functions under the executive's direction. Annual performance targets
are based upon the Company's annual strategic plan as reviewed by the Board of
Directors. An individual executive's annual incentive opportunity is a
percentage of his or her base salary.
The Company's long-term incentives are in the form of stock options. The
objectives of these awards is to advance the longer term interests of the
Company and its shareholders, complement incentives tied to annual performance,
and align the interests of executives more closely with those of shareholders.
The Company also believes that the entrepreneurial character of its executives
makes the long-term incentives provided by its stock option program especially
significant in the motivation and retention of its executives. The number of
stock options awarded to an executive is based on the executive's position and
his or her performance in that position. The executive's right to the stock
options generally vests over a four-year period and each option is exercisable,
to the extent it has vested, over a ten-year period following its grant. In the
case of Mr. Sullivan, a significant portion of his stock options vest upon the
achievement of certain sales and income objectives established by the
Compensation Committee.
Mr. Sullivan's base salary and annual incentive compensation results from
his participation in the same compensation program as the other executives of
the Company. His base salary is reviewed periodically, and was increased in 1995
but not in 1996. Under the annual incentive plan, Mr. Sullivan is eligible to
earn a cash bonus based on the Company's net income before income taxes. No
bonus was earned by Mr. Sullivan under this program in 1995 or 1996. The
composition of Mr. Sullivan's compensation is weighted more heavily to stock
options than to cash compensation. The stock option granted to Mr. Sullivan in
1996 reflects the Company's compensation philosophy of providing long-term
incentives aligned with the interests of shareholders.
The Committee believes that the Company's executives are focused on the
attainment of a sustained high rate of growth and profitability for the benefit
of the Company and its shareholders, and that the Company's compensation
program, with its emphasis on performance-based and long-term incentive
compensation, serves to reinforce this focus.
By the Compensation Committee
John E. Gherty
William F. Wanner, Jr.
PERFORMANCE GRAPH
The Company's common stock has been traded on The Nasdaq National Market since
March 4, 1993, 1993. Prior to that date there was no public market for the
Company's common stock. The following graph shows changes during the period from
March 4, 1993 (the date on which the Company's common stock was first traded on
The Nasdaq National Market) to December 31, 1996, in the value of $100 invested
in: (1) the Company's common stock; (2) the CRSP Total Return Index for The
Nasdaq Stock Market (US); and (3) Nasdaq Non-Financial Stocks. The values of
each investment as of the dates indicated are based on share prices plus any
dividends paid in cash, with the dividends reinvested on the date they were
paid. The calculations exclude trading commissions and taxes.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
3/4/93 12/31/93 12/30/94 12/29/95 12/31/96
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Recovery Engineering, Inc. $100.00 $176.79 $264.29 $217.86 $100.00
- ---------------------------------------------------------------------------------------------------------
CRSP Index for Nasdaq Stock Market (US) $100.00 $114.20 $111.63 $157.87 $194.19
- ---------------------------------------------------------------------------------------------------------
Nasdaq Non-Financial Stocks $100.00 $116.64 $111.16 $156.30 $189.91
- ---------------------------------------------------------------------------------------------------------
</TABLE>
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth, as of February 28, 1997, certain
information regarding the beneficial ownership of shares of common stock of the
Company by (i) each person or entity who is known by the Company to own more
than 5% of the Company's common stock, (ii) each director or nominee for
director of the Company, (iii) each executive officer named in the Summary
Compensation Table, and (iv) all directors, nominees and executive officers of
the Company as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OUTSTANDING(2)
- ------------------------------------ ---------------------- --------------
<S> <C> <C>
Goldman Sachs & Co. 1,000,000(3) 18.8%
85 Broad Street
New York, NY 10004
Wanner Engineering, Inc. 596,100(4) 13.8%
1204 Chestnut Avenue
Minneapolis, MN 55403
Investment Advisors, Inc. 566,500(5) 13.1%
3700 First Bank Place
Minneapolis, MN 55440
US Trust 431,390(6) 10.0%
114 West 47th Street
New York, NY 10036
Nevis Capital Management, Inc. 311,300(7) 7.2%
1119 St. Paul Street
Baltimore, MD 21202
DIRECTORS AND EXECUTIVE OFFICERS:
Brian F. Sullivan 526,500(8) 11.3%
9300 North 75th Avenue
Minneapolis, MN 55428
Richard J. Zeckhauser 88,500(8)(9) 2.0%
William F. Wanner, Jr. 62,700(8)(10) 1.4%
John E. Gherty 37,261(8)(11) *
Ronald W. Weber 24,000(8) *
John R. Albers 19,100(8) *
William D. Thompson 11,000(8) *
Charles F. Karpinske 6,250(8) *
Sanjay H. Patel 1,000(8)(12) *
All directors and executive officers as a group 1,443,744(8) 30.5%
(11 persons, including those named above)
</TABLE>
- ---------------------
* Less than one percent.
(1) Each person has sole voting and sole dispositive power with respect to all
outstanding shares, except as noted.
(2) Based on 4,329,432 shares outstanding. Such amounts do not include
1,053,275 shares of common stock issuable upon exercise of stock options
and warrants outstanding at February 28, 1997. Each figure showing the
percentage of outstanding shares owned beneficially has been calculated by
treating as outstanding and owned the shares which could be purchased by
the indicated person(s) within 60 days upon the exercise of existing stock
options.
(3) Such shares may be acquired by the shareholder upon conversion of 5%
Convertible Notes. See "Information Concerning Directors, Nominees and
Executive Officers -- Certain Transactions."
(4) Mr. Wanner, a director of the Company, is a director, officer and principal
shareholder of Wanner Engineering, Inc.
(5) Reflects information as of December 31, 1996, based on a Schedule 13G,
dated January 10, 1997, filed by such company with the Securities and
Exchange Commission, which indicates that the shareholder has sole voting
power and sole dispositive power with respect to 425,000 shares and shared
voting power and shared dispositive power with respect to 141,500 shares.
(6) Reflects information as of December 31, 1996, based on a Schedule 13G,
dated February 14, 1997, filed by such company with the Securities and
Exchange Commission, which indicates that the shareholder has shared voting
power and shared dispositive power with respect to said shares.
(7) Reflects information as of December 31, 1996, based on a Schedule 13G,
dated February 12, 1997, filed by such company with the Securities and
Exchange Commission, which indicates that the shareholder has sole voting
power and sole dispositive power with respect to said shares.
(8) Includes shares which could be purchased within 60 days upon the exercise
of existing options as follows: Mr. Sullivan, 320,500 shares; Dr.
Zeckhauser, 4,500 shares; Mr. Wanner, 6,000 shares; Mr. Gherty, 5,000
shares; Mr. Weber, 4,000 shares; Mr. Albers, 3,000 shares; Mr. Thompson,
2,000 shares; Mr. Karpinske, 6,250 shares; Mr. Patel, 1,000 shares; and all
directors and executive officers as a group, 397,250 shares.
(9) Includes 25,000 shares owned by Dr. Zeckhauser's wife. Dr. Zeckhauser,
having no voting or dispositive powers with respect to such shares,
disclaims beneficial ownership of such shares.
(10) Includes 2,200 shares held by Mr. Wanner as Trustee for members of his
family. Does not include 596,100 shares owned by Wanner Engineering, Inc.,
of which Mr. Wanner is a director, officer, and principal shareholder.
(11) Includes 3,567 shares held by Mr. Gherty as custodian for his minor
children.
(12) Does not include 1,000,000 shares beneficially owned by Goldman Sachs, of
which Mr. Patel is an officer.
COMPLIANCE WITH SECTION 16(a)
The Company's directors, executive officers, and any persons holding more
than 10% of the outstanding common stock of the Company are required to file
reports concerning their initial ownership of common stock and any subsequent
changes in that ownership. The Company believes that during 1996 the filing
requirements were satisfied. In making this disclosure, the Company has relied
solely on written representations of its directors, executive officers and
beneficial owners of more than 10% of common stock and copies of the reports
that they have filed with the Securities and Exchange Commission.
APPROVAL OF AMENDMENT TO 1994 STOCK OPTION
AND INCENTIVE PLAN TO INCREASE NUMBER OF SHARES
RESERVED FOR ISSUANCE THEREUNDER
(PROPOSAL 2)
The Recovery Engineering, Inc. 1994 Stock Option and Incentive Plan ("1994
Plan") was adopted by the Board of Directors and approved by the shareholders of
the Company in 1994. An aggregate of 350,000 shares was reserved for issuance
under the 1994 Plan at the time of its adoption. In 1995, the Board of Directors
increased the number of shares reserved for issuance under the 1994 Plan to
700,000 shares, and such increase was approved by the shareholders in 1995.
Effective January 28, 1997, the Board of Directors increased the number of
shares reserved for issuance under the 1994 Plan to 800,000 shares, subject to
the approval of REI's shareholders on or before January 28, 1998.
The 1994 Plan is intended to assist the Company in hiring and retaining
well-qualified employees, consultants, and other service providers by allowing
them to participate in the ownership and growth of the Company through the grant
of incentive and non-statutory stock options ("Options"), awards of restricted
stock or any combination thereof. Management believes that the granting of
Options and restricted stock awards will serve as partial consideration for and
give well-qualified employees, consultants, and other service providers an
additional inducement to remain in the service of the Company and provide them
with an increased incentive to work for REI's success.
The principal features and effects of the 1994 Plan are discussed below.
ADMINISTRATION
The 1994 Plan is administered by the Compensation Committee of the Board of
Directors, which selects the employees, consultants, and other service providers
who will be granted Options and restricted stock awards under the 1994 Plan.
Subject to the provisions of the 1994 Plan, the Compensation Committee also
determines the type, amount, size and terms of Options and restricted stock
awards; the time when Options and awards should be granted; whether any
restrictions should be placed on shares purchased pursuant to any Option or
issued pursuant to any restricted stock award; and all other determinations
necessary or advisable for the administration of the 1994 Plan. The
determinations by the Compensation Committee are final and conclusive. Grants of
Options and restricted stock awards and other decisions of the Compensation
Committee are not required to be made on a uniform basis.
SHARES SUBJECT TO 1994 PLAN
The 1994 Plan, as amended, provides that the total number of shares of
REI's common stock that may be purchased pursuant to the exercise of Options and
the grant of restricted stock awards shall not exceed 800,000 shares, subject to
adjustment as provided in the 1994 Plan. The shares to be issued upon the
exercise of Options and restricted stock awards granted under the 1994 Plan will
be currently authorized but unissued shares of common stock of the Company. The
number of shares of REI's common stock available under the 1994 Plan, the
exercise price of an Option, or the value of a restricted stock award, may be
adjusted by the Compensation Committee in its sole discretion upon any stock
dividend or split, recapitalization, reclassification, combination, exchange of
shares, or other similar corporate change, if the Compensation Committee
determines that such change necessarily or equitably requires such an
adjustment.
ELIGIBILITY
Employees of REI and any of its "Affiliates" (as such term is defined in
the 1994 Plan) are eligible for selection to receive Options qualified as
incentive stock options ("ISOs") under Section 422 of the Code. Employees,
consultants and other service providers of the Company or its Affiliates may be
granted non-qualified Options ("NQOs") or restricted stock awards. Options have
been granted under the 1994 Plan to approximately 180 persons.
The following table sets forth certain information regarding the allocation
of the additional shares under the 1994 Plan, to the extent such allocation is
presently determinable.
<TABLE>
<CAPTION>
NEW PLAN BENEFITS
NAME AND POSITION OPTIONS EXERCISE EXPIRATION
GRANTED(#) PRICE ($/SH) DATE
----------------- ------------ ----------
<S> <C> <C> <C>
Brian F. Sullivan (President and Chief -- -- --
Executive Officer)
Charles F. Karpinske (Vice President and 40,000(1) $7.00 2/3/2007
Chief Financial Officer)
All current executive officers as a group
(4 persons, including those named above) 60,000(1) $7.00 2/3/2007
All other employees 32,600(1)
</TABLE>
- --------------------
(1) Each option will vest and become exercisable in four equal installments on
the first, second, third and fourth anniversaries of the date of grant, and
will expire ten years after the date of grant.
The additional shares which are not currently allocated, together with
shares previously authorized and available for issuance under the Plan, may be
allocated to such employees as the Compensation Committee may determine. No
options or shares under the 1994 Plan will be allocated to directors who are not
employees of the Company. At March 14, 1997, the closing price for the Company's
common stock as reported on The Nasdaq Stock Market was $7.75 per share.
TERMS OF OPTIONS
Upon the grant of an Option, the Compensation Committee fixes the number of
shares of the Company's common stock that the optionee may purchase upon
exercise of the Option and the price at which the shares may be purchased. With
regard to ISOs, the exercise price cannot be less than the "fair market value"
of the common stock at the time the ISO is granted or 110% of such fair market
value in certain cases (as set forth below). NQOs may be granted at less than
the fair market value of the common stock. See "Federal Income Tax
Consequences."
With regard to ISOs only, the aggregate fair market value of common stock
(determined at the time the ISO is granted) subject to ISOs granted to an
employee under all stock option plans of the Company and any Affiliate of the
Company that become exercisable for the first time by such employee during any
calendar year may not exceed $100,000. Furthermore, no ISO may be granted to any
employee who, immediately after the grant of such ISO, would own more than 10%
of the total combined voting power of all classes of the Company's stock unless
such ISO has an exercise price equal to at least 110% of the common stock's fair
market value at the time of grant and the term of the ISO is no longer than five
years.
Each Option will be exercisable by the optionee only during the term fixed
by the Compensation Committee, with such term ending not later than 121 months
after the date of grant (ten years in the case of ISOs). Upon exercise of any
Option, payment for shares as to which the Option is exercised may be made in
cash, in shares of REI's common stock having an aggregate fair market value on
the date of exercise which is not less than the exercise price of the Option, or
by a combination of cash and such shares, as the Compensation Committee may
determine.
TRANSFERABILITY OF OPTIONS; TERMINATION OF EMPLOYMENT
Options granted under the 1994 Plan are non-transferable except to the
extent permitted by the agreement evidencing such Option. However, no Option
will be transferable by any optionee other than by will or the laws of descent
and distribution. If, pursuant to the agreement evidencing any Option, such
Option remains exercisable after the optionee's death, it may be exercised to
the extent permitted by such agreement by the personal representative of the
optionee's estate or by any person who acquired the right to exercise such
option by bequest, inheritance, or otherwise, by reason of the optionee's death.
RESTRICTED STOCK AWARDS
Restricted stock awards granted pursuant to the 1994 Plan entitle the
holder to receive shares of REI's common stock, which will be subject to
forfeiture to REI if specified conditions are not satisfied by the end of a
specified period, as determined in each case by the Compensation Committee. The
Compensation Committee is to establish a period (the "Restricted Period") at the
time a restricted stock award is granted during which the holder will not be
permitted to sell, transfer, pledge, encumber, or assign the shares of REI
common stock subject to the award. During the Restricted Period, the holder of
shares subject to the restricted stock award shall have all of the rights of a
shareholder of the Company with respect to such shares, including the right to
vote the shares and to receive any dividends and other distributions with
respect to the shares. However, any and all stock dividends, stock rights, and
stock issued upon split-ups or reclassifications of shares subject to restricted
stock awards shall be subject to the same restrictions as the shares with
respect to which such stock dividends, rights, or additional stock are issued.
Except to the extent otherwise provided in the restricted stock agreement
governing each restricted stock award, all shares of REI common stock then
subject to any restriction will be forfeited to REI without further obligation
of REI to the holder thereof, and all rights of the holder with respect to such
shares will terminate, if the holder ceases to provide services to the Company
or its Affiliates as an employee, consultant or other service provider, or if
any condition established by the Compensation Committee for the release of any
restriction has not occurred, prior to the expiration of the Restricted Period.
The Compensation Committee may permit a gift of restricted stock to the holder's
spouse, child, stepchild, grandchild, or legal dependent, or to a trust whose
sole beneficiary or beneficiaries is the holder of the stock, and/or any one or
more of such persons. However, the donee must enter into an agreement with the
Company pursuant to which it agrees that the restricted shares shall be subject
to the same restrictions in the hands of such donee as it was in the hands of
the donor.
IMMEDIATE ACCELERATION OF AWARDS
The 1994 Plan provides that, notwithstanding any other provisions contained
in the 1994 Plan or the agreement evidencing any Option or restricted stock
award thereunder, the restrictions on all shares of restricted stock shall lapse
immediately, and all outstanding Options will become exercisable immediately, if
any of the following events occur: (i) any person or group of persons, other
than the shareholders of record of REI as of January 31, 1994 (the date the 1994
Plan was adopted by the Board) becomes a beneficial owner of 30% or more of any
equity security of the Company entitled to vote for the election of directors;
(ii) a change in the composition of the Board of Directors of REI within any
consecutive two-year period occurs such that the "Continuing Directors" cease to
constitute a majority of the Board (as such term is defined in the 1994 Plan);
or (iii) the shareholders of the Company approve an agreement to merge or
consolidate with or into another corporation or an agreement to sell or
otherwise dispose of all or substantially all of REI's assets (including a plan
of liquidation). However, a participant under the 1994 Plan will not be entitled
to the immediate acceleration of an award as provided above if such acceleration
would, with respect to such participant, constitute a "parachute payment" for
purposes of Section 280G of the Internal Revenue Code of 1986, as amended, or
any successor provision.
TERMINATION AND AMENDMENT
The 1994 Plan will terminate on the earlier of the date on which the 1994
Plan is terminated by the Board of Directors of the Company or January 31, 2004.
Options or restricted stock rights outstanding at the termination of the 1994
Plan may continue to be exercised in accordance with their terms after such
termination. The 1994 Plan may be amended at any time by the Board of Directors.
However, without the approval of a majority of REI's shareholders voting at a
meeting at which a quorum is present, no such amendment may (i) materially
increase the benefits accruing to participants under the 1994 Plan; (ii)
increase the number of shares available for issuance or sale pursuant to the
1994 Plan (other than as permitted in certain circumstances provided by the 1994
Plan); or (iii) materially modify the requirements as to eligibility for
participation in the 1994 Plan, without the affirmative vote of shareholders
holding at least the majority of the voting stock of the Company represented in
person or by proxy at a duly held shareholders' meeting.
FEDERAL INCOME TAX CONSEQUENCES
The following description is a general summary of the current federal
income tax provisions relating to the grant and exercise of ISOs and NQOs under
the 1994 Plan, the grant of restricted stock awards thereunder, and the sale of
shares of common stock acquired upon exercise of Options or under a restricted
stock award. The provisions summarized below are subject to changes in federal
income tax laws and regulations, and the effects of such provisions may vary
with individual circumstances.
INCENTIVE STOCK OPTIONS
ISOs granted under the 1994 Plan are intended to be "incentive stock
options" as defined by Section 422 of the Code. Under present law, the recipient
of an ISO will not realize taxable income upon the grant or the exercise of an
ISO; and REI will not receive an income tax deduction at either such time.
Generally, if an optionee exercises an ISO at any time prior to three months
after termination of the optionee's employment and does not sell the shares
acquired upon exercise of an ISO within either (i) two years after the grant of
the ISO or (ii) one year after the date of exercise of the ISO, the gain upon a
subsequent sale of the shares will be taxed as long-term capital gain. If the
optionee does not satisfy these requirements, the optionee generally will
recognize ordinary income in an amount equal to the difference between the
exercise price paid in connection with exercise of the ISO and the fair market
value of the shares acquired as of the date of exercise of the ISO, and will
recognize capital gain on the difference between the sale price of the shares
and the fair market value of the shares as of the date of exercise. In such
event, REI would be entitled to a corresponding income tax deduction equal to
the amount recognized as ordinary income by the optionee.
Upon the exercise of an ISO, the excess of the stock's fair market value on
the date of exercise over the exercise price will be included in the optionee's
alternative minimum taxable income ("AMTI") and may result in the imposition of
a tax on such AMTI. Liability for the alternative minimum tax is complex and
depends upon an individual's overall tax situation.
NON-STATUTORY STOCK OPTIONS
Generally, upon the grant of an NQO, neither REI nor the optionee will
experience any tax consequences. Upon exercise of an NQO granted under the 1994
Option Plan, or upon the exercise of an Option initially intended to be an ISO
that does not qualify for the tax treatment described above, the optionee will
realize ordinary income in an amount equal to the excess of the fair market
value of the shares of common stock received over the exercise price paid by the
optionee with respect to such shares. The amount recognized as ordinary income
by the optionee will increase the optionee's basis in the stock acquired
pursuant to the exercise of the NQO. REI will be allowed a federal income tax
deduction for the amount recognized as ordinary income by the optionee upon the
optionee's exercise of the NQO. Upon a subsequent sale of the stock, the
optionee will recognize short-term or long-term gain or loss depending upon the
holding period for the stock and upon the stock's subsequent appreciation or
depreciation in value.
RESTRICTED STOCK AWARDS
A participant who receives an award of restricted stock under the 1994 Plan
generally will recognize ordinary income at the time at which the restrictions
on such shares (the "Restrictions") lapse, in an amount equal to the excess of
(i) the fair market value of such shares at the time the Restrictions lapse,
over (ii) the price, if any, paid for such shares. If the participant makes an
election with respect to such shares under Section 83(b) of the Internal Revenue
Code of 1986, as amended (the "Code"), not later than 30 days after the date
shares are transferred to the participant pursuant to such award, the
participant will recognize ordinary income at the time of transfer in an amount
equal to the excess of (i) the fair market value of the shares covered by the
award (determined without regard to any restriction other than a restriction
which by its terms will never lapse) at the time of such transfer over (ii) the
price, if any, paid for such shares.
A participant's tax basis in shares received pursuant to a restricted stock
award granted under the 1994 Plan will be equal to the sum of the price paid for
such shares, if any, and the amount of ordinary income recognized by such
participant with respect to the transfer of such shares or the lapse of the
Restrictions thereon. The participant's holding period for such shares for
purposes of determining gain or loss on a subsequent sale will begin immediately
after the transfer of such shares to the participant, if a Section 83(b)
election is made with respect to such shares, or immediately after the
Restrictions on such shares lapse, if no Section 83(b) election is made.
Generally, a deduction will be allowed to the Company, for federal income
tax purposes, in an amount equal to the ordinary income recognized by a
participant with respect to shares awarded pursuant to the 1994 Plan, provided
that such amount constitutes an ordinary and necessary business expense of the
Company and is reasonable.
If, subsequent to the lapse of Restrictions on his or her shares, the
participant sells such shares, the difference, if any, between the amount
realized from such sale and the tax basis of such shares to the holder will be
taxed as long-term or short-term capital gain or loss, depending on whether the
participant's holding period for such shares exceeds the applicable holding
period at the time of sale and provided that the participant holds such shares
as a capital asset at such time.
If a Section 83(b) election is made and, before the Restrictions on the
shares lapse, the shares which are subject to such election are resold to the
Company or are forfeited, (i) no deduction would be allowed to such participant
for the amount included in the income of such participant by reason of such
Section 83(b) election, and (ii) the participant would realize a loss in an
amount equal to the excess, if any, of the amount paid for such shares over the
amount received by the participant upon such resale or forfeiture (which loss
would be a capital loss if the shares are held as a capital asset at such time).
In such event, the Company would be required to include in its income the amount
of any deduction previously allowable to it in connection with the transfer of
such shares.
The Compensation Committee will have the discretion to provide with respect
to any restricted stock award that upon a change in control of the Company, any
Restrictions on the shares of REI's common stock covered by the award will
lapse. In general, if the total amount of payments in the nature of compensation
that are contingent upon a "change in control" of the Company (as defined in
Section 280G of the Code) equals or exceeds three times a recipient's "base
amount" (generally, such recipient's average annual compensation for the five
years preceding the change in control), then, subject to certain exceptions, the
payments may be treated as parachute payments under Section 280G of the Code, in
which case a portion of the payments would be nondeductible to the Company and
the recipient would be subject to a 20% excise tax on such portion of the
payments under Section 4999 of the Code.
SHAREHOLDER APPROVAL
The affirmative vote of a majority of the shares of common stock of the
Company represented at the Annual Meeting either in person or by proxy, assuming
a quorum is present, is required to approve the amendment to the 1994 Plan
increasing the number of share reserved for issuance thereunder.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR APPROVAL
OF THE AMENDMENT TO THE 1994 STOCK OPTION AND INCENTIVE PLAN AS SET FORTH IN
PROPOSAL 2.
RATIFICATION OF THE APPOINTMENT
OF INDEPENDENT AUDITORS
(PROPOSAL 3)
The Board of Directors has appointed the firm of Ernst & Young LLP as
independent auditors for the fiscal year ending December 31, 1997. The firm of
Ernst & Young LLP has served as the Company's auditors since 1986. A
representative of Ernst & Young LLP will be present at the Annual Meeting, will
have an opportunity to make a statement if he desires to do so, and will be
available to respond to appropriate questions from shareholders.
All proxies received in response to this solicitation will be voted in
favor of the ratification of the appointment of the independent auditors, unless
other instructions are indicated thereon.
SHAREHOLDER APPROVAL
The affirmative vote of a majority of the shares of common stock of the
Company represented at the Annual Meeting either in person or by proxy, assuming
a quorum is present, is required to ratify the appointment of Ernst & Young LLP
as independent auditors for the Company for the year ending December 31, 1997.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS INDEPENDENT AUDITORS AS
SET FORTH IN PROPOSAL 3.
PROPOSALS OF SHAREHOLDERS
Any shareholder wishing to have a proposal considered for inclusion in the
Company's proxy solicitation materials for the 1998 Annual Meeting of
Shareholders must set forth such proposal in writing and file it with the
Secretary of the Company no later than November 27, 1997. Shareholders are also
required to comply with the provisions of the Company's Bylaws with respect to
any proposal to be presented at the 1998 Annual Meeting of Shareholders of the
Company.
The Company's Bylaws provide that, except for shareholder proposals filed
in accordance with the proxy rules promulgated under the Exchange Act, a
shareholder seeking to bring new business before an annual meeting is required
to comply with the provisions described below. The Bylaws require that
shareholder proposals for new business, together with certain accompanying
information, be filed with the Company no less than 60 nor more than 90 days
prior to the scheduled annual meeting, provided that the Company has given at
least 70 days' notice of such meeting. If the Company has not given at least 70
days' notice, shareholder proposals must be submitted no later than the tenth
day following the earlier of the date that notice of the date of the annual
meeting was mailed to the shareholders or the day on which public disclosure of
such date was made. The Bylaws require that the shareholder's notice set forth
as to each proposal (i) a description of and the reasons for such proposal, (ii)
the names and addresses of the shareholder making the proposal and of any
shareholders known to be supporting the proposal, (iii) such persons' beneficial
ownership of the Company's stock, and (iv) any financial interest in the
proposal of the shareholder offering the proposal. If the information supplied
by the shareholder is deficient in any material aspect, the Board of Directors
may reject the shareholder proposal. The shareholder may cure the deficiency
within five days after notification. The Board of Directors determines whether
the deficiency has been cured by the shareholder.
Shareholders are also required to comply with the provisions of the
Company's Bylaws with respect to any nomination of candidates for election as
directors at such Annual Meeting. See "Information Concerning Directors,
Nominees and Executive Officers -- Nomination of Directors."
OTHER BUSINESS
At the date of this Proxy Statement, management knows of no other business
that may properly come before the Annual Meeting. However, if any other matters
properly come before the meeting, the persons named in the enclosed form of
proxy will vote the proxies received in response to this solicitation in
accordance with their best judgment on such matters.
FINANCIAL INFORMATION
The Company's 1996 Annual Report to Shareholders, including, but not
limited to, the balance sheets as of December 31, 1996 and 1995 and the related
statements of operations, changes in shareholders' equity and cash flows for the
years ended December 31, 1996, 1995 and 1994, accompanies these materials. A
copy of the 1996 Annual Report to Shareholders may be obtained without charge
upon request to the Company. In addition, the Company will provide without
charge to any shareholder solicited hereby, upon written request of such
shareholder, a copy of its 1996 Annual Report on Form 10-K filed with the
Securities and Exchange Commission. Requests should be directed to the Chief
Financial Officer, Recovery Engineering, Inc., 9300 North 75th Avenue,
Minneapolis, Minnesota 55428.
By Order of the Board of Directors
Eric O. Madson, SECRETARY
March 27, 1997
PROXY
RECOVERY ENGINEERING, INC.
PROXY SOLICITED BY BOARD OF DIRECTORS
FOR ANNUAL MEETING OF SHAREHOLDERS
APRIL 24, 1997
The undersigned, revoking all prior proxies, hereby appoints Brian F. Sullivan
and William F. Wanner, Jr., or either of them, as proxy or proxies, with full
power of substitution and revocation, to vote all shares of common stock of
Recovery Engineering, Inc. (the "Company") of record in the name of the
undersigned at the close of business on March 14, 1997, at the Annual Meeting of
Shareholders to be held on Thursday, April 24, 1997, or at any adjournment
thereof, upon the following matters:
1. Election of the following nominees as directors:
JOHN E. GHERTY, SANJAY H. PATEL, BRIAN F. SULLIVAN, WILLIAM D. THOMPSON,
WILLIAM F. WANNER, JR., RONALD W. WEBER, RICHARD J. ZECKHAUSER
|_| FOR ALL NOMINEES |_| WITHHOLD FOR ALL NOMINEES
|_| FOR ALL NOMINEES EXCEPT THE FOLLOWING:
(Write the name(s) of the nominee(s) withheld in the space provided
below.)
--------------------------------------------------------------------------
2. Approval of amendment to the 1994 Stock Option and Incentive Plan to
increase the number of shares reserved for issuance thereunder.
|_| FOR |_| AGAINST |_| ABSTAIN
3. Ratification of appointment of Ernst & Young LLP as independent auditors
for 1997.
|_| FOR |_| AGAINST |_| ABSTAIN
4. In their discretion the Proxies are authorized to vote upon such matters as
may properly come before the meeting.
Please mark, date, sign, and mail this proxy promptly in the enclosed envelope.
This proxy when properly executed will be voted in the manner directed herein by
the undersigned shareholder. If no direction is made, this proxy will be voted
FOR Proposals 1, 2 and 3. The Board of Directors recommends a vote FOR Proposals
1, 2 and 3.
Please sign your name exactly as it appears below. In the case of shares owned
in joint tenancy or as tenants in common, all should sign. Fiduciaries should
indicate their title and authority.
Dated: _____________________________, 1997.
___________________________________________
___________________________________________
___________________________________________
Signature(s)
Appendix
RECOVERY ENGINEERING, INC.
1994 STOCK OPTION AND INCENTIVE PLAN
The purpose of the Recovery Engineering, Inc. 1994 Stock Option and
Incentive Plan (the "Plan") is to promote the growth and profitability of
Recovery Engineering, Inc. (the "Company") and its Affiliates by providing its
employees, consultants and other service providers with an incentive to achieve
long-term corporate objectives, to attract and retain persons of outstanding
competence, and to provide such persons with an equity interest in the Company.
1. STOCK SUBJECT TO PLAN. An aggregate of 350,000 shares (the "Shares")
of the Common Stock, par value $.01 per share, ("Common Stock") of the Company
may be subject to awards granted under the Plan. The number of shares authorized
for issuance under the Plan may be increased from time to time by approval of
the Board of Directors and, if required pursuant to Rule 16b-3 under the
Securities Exchange Act of 1934 or the applicable rules of any securities
exchange or the NASD, the shareholders of the Company. Such Shares may be
authorized but unissued Common Stock or authorized and issued Common Stock that
has been or may be acquired by the Company. Shares that are subject to an award
which expires or is terminated unexercised, or which are reacquired by the
Company upon the forfeiture of restricted Shares, shall again be available for
issuance under the Plan.
2. ADMINISTRATION.
a. COMMITTEE. The Plan shall be administered by the
Compensation Committee (the "Committee") of the Board of Directors of
the Company (the "Board"). The Committee shall be comprised of the
entire Board or, if the Board so determines, of two or more members of
the Board.
b. POWERS AND DUTIES. The Committee shall have the authority
to make rules and regulations governing the administration of the Plan;
to select the eligible employees, consultants and other service
providers to whom awards shall be granted; to determine the type,
amount, size, and terms of awards; to determine the time when awards
shall be granted; to determine whether any restrictions shall be placed
on Shares purchased pursuant to any option or issued pursuant to any
award; and to make all other determinations necessary or advisable for
the administration of the Plan. The Committee's determinations need not
be uniform, and may be made by it selectively among persons who are
eligible to receive awards under the Plan, whether or not such persons
are similarly situated. All interpretations, decisions, or
determinations made by the Committee pursuant to the Plan shall be
final and conclusive.
3. ELIGIBILITY; PARTICIPANTS.
a. Any person who provides services to the Company or any of
its Affiliates as an employee, consultant or other service provider
shall be eligible to receive awards under the Plan. Eligible persons
may be selected to receive awards individually or by group or category
(for example, by pay grade) as the Committee may determine. The
selection of officers of the Company to receive awards under the Plan
and the terms of any award granted to such officers shall be approved
by the Committee. The Committee, in its sole discretion, may delegate
to one or more officers of the Company the authority to select persons
who are not officers to receive awards under the Plan and to establish
the terms of awards granted to such persons.
b. A person who has been granted an award under this Plan, or
under any predecessor plan, may be granted additional awards if the
Committee shall so determine. Except to the extent otherwise provided
in the agreement evidencing an award, the granting of an award under
this Plan shall not affect any outstanding award previously granted
under this Plan or under any other plan of the Company or any
Affiliate.
c. For purposes of this Plan, the term "Affiliate" shall mean
any "parent corporation" or "subsidiary corporation" of the Company, as
those terms are defined in Sections 424(e) and 424(f) of the Internal
Revenue Code of 1986, as amended.
4. AWARDS. The Committee may make awards to eligible persons in the
form of stock options which are intended to qualify as "Incentive Stock Options"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, or stock options which are not intended to so qualify ("Non- qualified
Options"), or awards of restricted stock, or any combination thereof.
5. STOCK OPTIONS. A stock option granted pursuant to the Plan shall
entitle the optionee, upon exercise, to purchase Shares at a specified price
during a specified period. Options shall be subject to such terms and conditions
as the Committee shall from time to time approve; provided, that each option
shall be subject to the following requirements:
a. TYPE OF OPTION. Each option shall be identified in the
agreement pursuant to which it is granted as an Incentive Stock Option
or as a Non-qualified Option, as the case may be.
b. TERM. No option shall be exercisable more than 121 months
after the date on which it is granted.
c. PAYMENT. The purchase price of Shares subject to an option
shall be payable in full at the time the option is exercised. Payment
may be made in cash, in shares of Common Stock having an aggregate fair
market value on the date of exercise which is not less than the option
price, or by a combination of cash and such shares, as the Committee
may determine, and subject to such terms and conditions as the
Committee deems appropriate.
d. OPTIONS NOT TRANSFERABLE. Options shall not be transferable
except to the extent permitted by the agreement evidencing such option;
provided, that in no event shall any option be transferable by the
optionee, other than by will or the laws of descent and distribution.
Options shall be exercisable during an optionee's lifetime only by such
optionee. If, pursuant to the agreement evidencing any option, such
option remains exercisable after the optionee's death, it may be
exercised, to the extent permitted by such agreement, by the personal
representative of the optionee's estate or by any person who acquired
the right to exercise such option by bequest, inheritance, or otherwise
by reason of the optionee's death.
e. INCENTIVE STOCK OPTIONS. If an option is an Incentive Stock
Option, it shall be subject to the following additional requirements:
i. Incentive Stock Options may be granted only to
persons who are employees of the Company or of an Affiliate.
ii. The purchase price of Shares that are subject to
an Incentive Stock Option shall not be less than 100% of the
fair market value of such Shares at the time the option is
granted, as determined in good faith by the Committee.
iii. The aggregate fair market value (determined at
the time the option is granted) of the Shares with respect to
which Incentive Stock Options are exercisable by the optionee
for the first time during any calendar year, under this Plan
or any other plan of the Company or any Affiliate, shall not
exceed $100,000.
iv. An Incentive Stock Option shall not be
exercisable more than ten years after the date on which it is
granted.
v. The purchase price of Shares that are subject to
an Incentive Stock Option granted to an employee who, at the
time such option is granted, owns 10% or more of the total
combined voting power of all classes of stock of the Company
or of any Affiliate shall not be less than 110% of the fair
market value of such Shares on the date such option is
granted, and such option may not be exercisable more than five
years after the date on which it is granted. For the purposes
of this subparagraph, the rules of Section 424(d) of the Code
shall apply in determining the stock ownership of any
employee.
Subject to the foregoing, options may be made exercisable in one or more
installments, upon the happening of certain events, upon the fulfillment of
certain conditions, or upon such other terms and conditions as the Committee
shall determine.
6. RESTRICTED STOCK. Restricted stock awards granted pursuant to the
Plan shall entitle the holder to receive Shares, subject to forfeiture if
specified conditions are not satisfied at the end of a specified period.
Restricted stock awards shall be subject to such terms and conditions as the
Committee shall from time to time approve; provided, that each award shall be
subject to the following requirements:
a. RESTRICTED PERIOD. The Committee shall establish a period
(the "Restricted Period") at the time an award is granted during which
the holder will not be permitted to sell, transfer, pledge, encumber,
or assign the Shares subject to the award. The Committee may provide
for the lapse of restrictions in installments, or upon the occurrence
of certain events, where deemed appropriate. Any attempt by a holder to
dispose of restricted Shares in a manner contrary to the applicable
restrictions shall be void, and of no force and effect.
b. RIGHTS DURING RESTRICTED PERIOD. Except to the extent
otherwise provided in this paragraph 6 or under the terms of any
restricted stock agreement, during the Restricted Period the holder of
restricted Shares shall have all of the rights of a shareholder in the
Company with respect to such Shares, including the right to vote the
Shares and to receive dividends and other distributions with respect to
the Shares; provided, that all stock dividends, stock rights, and stock
issued upon split-ups or reclassifications of Shares shall be subject
to the same restrictions as the Shares with respect to which such stock
dividends, rights, or additional stock are issued, and may be held in
custody as provided below in this paragraph 6 until the restrictions
thereon shall have lapsed.
c. FORFEITURES. Except to the extent otherwise provided in the
restricted stock agreement, all Shares then subject to any restriction
shall be forfeited to the Company without further obligation of the
Company to the holder thereof, and all rights of the holder with
respect to such Shares shall terminate, if the holder shall cease to
provide services to the Company and its Affiliates as an employee,
consultant or other service provider, or if any condition established
by the Committee for the release of any restriction shall not have
occurred, prior to the expiration of the Restricted Period.
d. CUSTODY. The Committee may provide that the certificates
evidencing restricted Shares shall be held in custody by a bank or
other institution, or by the Company or any Affiliate, until the
restrictions thereon have lapsed, and may require that the holder of
any restricted Shares shall have delivered to the Company one or more
stock powers, endorsed in blank, relating to the restricted Shares as a
condition of receiving the award.
e. CERTIFICATES. A recipient of a restricted stock award shall
be issued a certificate or certificates evidencing the Shares subject
to such award. Such certificates shall be registered in the name of the
recipient, and may bear an appropriate legend referring to the terms,
conditions, and restrictions applicable to such award, which legend
shall be in substantially the following form:
"The transferability of this certificate and the shares
represented hereby are subject to the terms and conditions
(including forfeiture) of the Recovery Engineering, Inc. 1994
Stock Option and Incentive Plan and an Agreement entered into
between the registered owner and Recovery Engineering, Inc.
Copies of such Plan and Agreement are on file in the offices
of Recovery Engineering, Inc."
f. GIFTS, ETC. Notwithstanding any other provision of this
paragraph 6, the Committee may permit a gift of restricted stock to the
holder's spouse, child, stepchild, grandchild, or legal dependent, or
to a trust whose sole beneficiary or beneficiaries shall be the holder
and/or any one or more of such persons; provided, that the donee shall
have entered into an agreement with the Company pursuant to which it
agrees that the restricted stock shall be subject to the same
restrictions in the hands of such donee as it was in the hands of the
donor.
7. AGREEMENTS. Each option or award granted pursuant to the Plan shall
be evidenced by an agreement setting forth the terms and conditions upon which
it is granted. Multiple options or awards may be evidenced by a single
agreement. Subject to the limitations set forth in the Plan, the Committee may,
with the consent of the person to whom an award has been granted, amend any such
agreement to modify the terms or conditions governing the award evidenced
thereby.
8. ADJUSTMENTS. In the event of any change in the outstanding Shares of
Common Stock by reason of any stock dividend or split, recapitalization,
reclassification, combination, or exchange of Shares or other similar corporate
change, then if the Committee shall determine, in its sole discretion, that such
change necessarily or equitably requires an adjustment in the number of Shares
subject to an award, in the option price or value of an award, or in the maximum
number of Shares subject to this Plan, such adjustments shall be made by the
Committee and shall be conclusive and binding for all purposes of this Plan. No
adjustment shall be made in connection with the issuance by the Company of any
warrants, rights, or options to acquire additional Common Stock or of securities
convertible into Common Stock.
9. MERGER, CONSOLIDATION, REORGANIZATION, LIQUIDATION, ETC. Subject to
the provisions of the agreement evidencing any award, if the Company shall
become a party to any corporate merger, consolidation, major acquisition of
property for stock, reorganization, or liquidation, the Board of Directors of
the Company shall have the power to make any arrangement it deems advisable with
respect to outstanding awards and in the number of Shares subject to this Plan,
which shall be binding for all purposes of this Plan, including, but not limited
to, the substitution of new awards for any awards then outstanding, the
assumption of any such awards, and the termination of such awards.
10. EXPENSES OF PLAN. The expenses of administering this Plan shall be
borne by the Company and its Affiliates.
11. RELIANCE ON REPORTS. Each member of the Committee and each member
of the Board of Directors shall be fully justified in relying or acting in good
faith upon any report made by the independent public accountants of the Company
and its Affiliates and upon any other information furnished in connection with
this Plan by any person or persons other than himself. In no event shall any
person who is or shall have been a member of the Committee or of the Board of
Directors be liable for any determination made or other action taken or omitted
in reliance upon any such report or information, or for any action taken or
omitted, including the furnishing of information, in good faith.
12. RIGHTS AS SHAREHOLDER. Except to the extent otherwise specifically
provided hereon, no recipient of any award shall have any rights as a
shareholder with respect to Shares sold or issued pursuant to the Plan until
certificates for such Shares have been issued to such person.
13. GENERAL RESTRICTIONS. Each award granted pursuant to the Plan shall
be subject to the requirement that if, in the opinion of the Committee, the
listing, registration, or qualification of any Shares related thereto upon any
securities exchange or under any state or federal law, the consent or approval
of any regulatory body, or an agreement by the recipient with respect to the
disposition of any such Shares, is necessary or desirable as a condition of the
issuance or sale of such Shares, such award shall not be consummated unless and
until such listing, registration, qualification, consent, approval, or agreement
is effected or obtained in form satisfactory to the Committee.
14. EMPLOYMENT RIGHTS. Nothing in this Plan, or in any agreement
entered into hereunder, shall confer upon any person the right to continue to
provide services to the Company or an Affiliate as an employee, consultant or
other service provider, or affect the right of the Company or Affiliate to
terminate such person's service at any time, with or without cause.
15. WITHHOLDING. If the Company proposes or is required to issue Shares
pursuant to the Plan, it may require the recipient to remit to it, or may
withhold from such award or from the recipient's other compensation, an amount,
in the form of cash or Shares, sufficient to satisfy any applicable federal,
state, or local tax withholding requirements prior to the delivery of any
certificates for such Shares.
16. AMENDMENTS. The Board of Directors of the Company may at any time,
and from time to time, amend the Plan in any respect, except that no amendment
that would:
a. materially increase the benefits accruing to participants
under the Plan;
b. increase the number of Shares available for issuance or
sale pursuant to the Plan (other than as permitted by paragraphs 8 and
9); or
c. materially modify the requirements as to eligibility for
participation in the Plan;
shall be made without the affirmative vote of shareholders holding at least a
majority of the voting stock of the Company represented in person or by proxy at
a duly held shareholders' meeting.
17. IMMEDIATE ACCELERATION OF AWARDS. Notwithstanding any provision in
this Plan or in any award to the contrary, the restrictions on all shares of
restricted stock shall lapse immediately and all outstanding options will become
exercisable immediately if, subsequent to the Effective Date of this Plan, any
of the following events occur:
a. Any person or group of persons, other than the shareholders
of record of the Company as of the date of this Plan is adopted by the
Board, becomes the beneficial owner of 30% or more of any equity
security of the Company entitled to vote for the election of directors;
b. A change in the composition of the Board within any
consecutive two-year period such that the "Continuing Directors" cease
to constitute a majority of the board. For purposes of this event, the
"Continuing Directors" shall mean those members of the Board who
either: (i) were directors at the beginning of such two-year period, or
(ii) were elected by, or on nominations or recommendations of, a
majority of the then-existing Board members; or
c. The shareholders of the Company approve an agreement to
merge or consolidate with or into another corporation or an agreement
to sell or otherwise dispose of all or substantially all of the
Company's assets (including a plan of liquidation).
For purposes of this paragraph 17, beneficial ownership by a person or
group of persons shall be determined in accordance with Regulation 13D (or any
similar successor regulation) promulgated by the Securities and Exchange
Commission pursuant to the 1934 Act. Beneficial ownership of more than 30% of an
equity security may be established by any reasonable method, but shall be
presumed conclusively to exist as to any person who files a Schedule 13D report
with the Securities and Exchange Commission reporting such ownership. If the
restrictions and forfeiture periods are eliminated by reason of subparagraph a.,
the limitations of this Plan shall not become applicable again should the person
cease to own 30% or more of any equity security of the Company.
A participant shall not be entitled to the immediate acceleration of an
award as provided in this paragraph 17 if such acceleration would, with respect
to the participant, constitute a "parachute payment" for purposes of Internal
Revenue Code Section 280G, or any successor provision. The participant shall
have the right to designate those awards which would be reduced or eliminated so
that the participant will not receive a "parachute payment."
Prior to the occurrence of one of the events described in subparagraph
a., b. or c. above, the participant shall have no rights under this paragraph
17, and the Board shall have the power and right, within its sole discretion, to
rescind, modify or amend this paragraph 17 without any consent of the
participant. In all other cases, and notwithstanding the authority granted to
the Board or the Committee, as the case may be, to exercise discretion in
interpreting, administering, amending or terminating this Plan, neither the
Board nor the Committee shall, following the occurrence of one of the events
described in subparagraph a., b. or c. above, have the power to exercise such
authority or otherwise take any action which is inconsistent with the provisions
of this paragraph 17.
18. SHAREHOLDER APPROVAL. The Plan shall be subject to approval by the
shareholders holding at least a majority of the voting stock of the Company
represented in person or by proxy and voting thereon at a duly held
shareholders' meeting, and any award granted under the Plan prior to the date of
such approval shall be contingent upon such approval.
19. EFFECTIVE DATE; DURATION. This Plan shall be effective as of
January 31, 1994, subject to shareholder approval of the Plan as described above
on or before January 31, 1995. No options or rights shall be granted under the
Plan after the earlier of (a) the date on which the Plan is terminated by the
Board of Directors of the Company; or (b) January 31, 2004. Options or rights
outstanding at the termination of the Plan may continue to be exercised in
accordance with their terms after such termination.
FIRST AMENDMENT
TO THE
RECOVERY ENGINEERING, INC.
1994 STOCK OPTION AND INCENTIVE PLAN
January 31, 1995
RECITALS:
A. The Recovery Engineering, Inc. 1994 Stock Option and Incentive Plan
(the "Plan") was adopted by the Board of Directors of Recovery
Engineering, Inc. (the "Company") on January 31, 1994, and was approved
by the shareholders of the Company on April 12, 1994. The Plan is now
in full force and effect.
B. The Company desires to amend the Plan to increase the number of shares
of common stock available for issuance pursuant to the Plan.
AMENDMENT:
THEREFORE, the Plan is hereby amended as follows:
1. The first sentence of paragraph 1 of the Plan is hereby amended to read
as follows:
1. STOCK SUBJECT TO PLAN. An aggregate of 700,000 shares of
the Common Stock, par value $.01 per share, ("Common Stock") of the
Company may be subject to awards granted under the Plan."
2. The foregoing amendment shall be effective as of January 31, 1995, and
shall be subject to approval by the shareholders of the Company at its
next Annual or Special Meeting of shareholders.
SECOND AMENDMENT
TO THE
RECOVERY ENGINEERING, INC.
1994 STOCK OPTION AND INCENTIVE PLAN
January 28, 1997
RECITALS:
A. The Recovery Engineering, Inc. 1994 Stock Option and Incentive Plan
(the "Plan") was adopted by the Board of Directors of Recovery
Engineering, Inc. (the "Company") on January 31, 1994, and was approved
by the shareholders of the Company on April 12, 1994. On January 31,
1995, the Board of Directors increased the number of shares of common
stock available for issuance under the Plan from 350,000 shares to
700,000 shares, and such increase was approved by the shareholders of
the Company on April 27, 1995. The Plan, as amended, is now in full
force and effect.
B. The Company desires to amend the Plan to further increase the number of
shares of common stock available for issuance pursuant to the Plan.
AMENDMENT:
THEREFORE, the Plan is hereby amended as follows:
1. The first sentence of paragraph 1 of the Plan is hereby amended to read
as follows:
1. STOCK SUBJECT TO PLAN. An aggregate of 800,000 shares of
the Common Stock, par value $.01 per share, ("Common Stock") of the
Company may be subject to awards granted under the Plan."
2. The foregoing amendment shall be effective as of January 28, 1997, and
shall be subject to approval by the shareholders of the Company at its
next Annual or Special Meeting of shareholders.
