UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended March 31, 1997 Commission File Number 0-21232
- ----------------------------------- ------------------------------
RECOVERY ENGINEERING, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1557115
State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation organization)
9300 North 75th Avenue
Minneapolis, MN 55428
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 315-5500
Recovery Engineering, Inc., 2229 Edgewood Ave. So., Minneapolis, MN 55426
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes_X_ No___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.01 Par Value ) 4,530,311 shares as of April 30, 1997
RECOVERY ENGINEERING, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements:
Balance Sheets
March 31, 1997 and December 31, 1996................... 3
Statements of Operations
Three months ended March 31, 1997 and 1996............. 4
Statements of Cash Flows
Three months ended March 31, 1997 and 1996............. 5
Notes to Financial Statements.......................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......... 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.... 10
Item 6. Exhibits and Reports on Form 8-K....................... 11
Signatures............................................. 12
RECOVERY ENGINEERING, INC.
BALANCE SHEETS
(In thousands, except share data)
March 31, December 31,
1997 1996
-------- --------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents .................. $ 1,467 $ 5,988
Marketable securities ...................... -- 1,542
Accounts receivable (net of allowance of
$241 for 1997 and $212 for 1996) ........ 7,681 8,109
Inventory .................................. 6,512 4,926
Other assets ............................... 455 304
-------- --------
Total current assets ................. 16,115 20,869
Property and equipment:
Tooling .................................... 6,412 6,057
Equipment and fixtures ..................... 7,645 6,569
-------- --------
14,057 12,626
Less accumulated depreciation .............. 3,395 3,003
-------- --------
10,662 9,623
Deferred income taxes ......................... 1,512 1,512
Patents (net of accumulated amortization) ..... 745 766
Other assets .................................. 465 487
-------- --------
Total assets ............................ $ 29,499 $ 33,257
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................... $ 5,913 $ 6,483
Accrued expenses ........................... 3,322 4,643
-------- --------
Total current liabilities ............... 9,235 11,126
Long-term debt ................................ 15,000 15,000
Shareholders' equity:
Common stock, $.01 par value:
Authorized shares ) 100,000,000;
Issued and outstanding shares:
1997 ) 4,330,538 and 1996 ) 4,325,710 43 43
Additional paid-in capital ................. 20,344 20,313
Retained earnings (deficit) ................ (15,123) (13,225)
-------- --------
Total shareholders' equity .............. 5,264 7,131
-------- --------
Total liabilities and shareholders' equity .. $ 29,499 $ 33,257
======== ========
See accompanying notes.
RECOVERY ENGINEERING, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three months ended
March 31,
---------
(Unaudited)
1997 1996
-------- --------
Net sales .............................. $ 10,347 $ 6,440
Cost of products sold .................. 6,192 3,986
-------- --------
Gross profit ........................... 4,155 2,454
Operating expenses:
Selling, general and administrative . 5,156 3,706
Research and development ............ 754 669
-------- --------
5,910 4,375
Loss from operations ................... (1,755) (1,921)
Other income (expense):
Interest income ..................... 68 12
Interest expense .................... (210) (2)
Other expenses ...................... (1) (10)
-------- --------
(143) --
-------- --------
Loss before income taxes ............... (1,898) (1,921)
Income tax expense ..................... -- --
-------- --------
Net loss ............................... $ (1,898) $ (1,921)
======== ========
Net loss per share ..................... $ (.44) $ (.45)
======== ========
Weighted average number of common shares
outstanding ............................ 4,329 4,261
======== ========
See accompanying notes.
RECOVERY ENGINEERING, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
Three months ended
March 31,
---------
(Unaudited)
1997 1996
------- -------
OPERATING ACTIVITIES
Net loss .......................................... $(1,898) $(1,921)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization .................. 419 272
Changes in operating assets and liabilities:
Accounts receivable ......................... 428 (375)
Inventory ................................... (1,586) 378
Other assets ................................ (129) 114
Accounts payable ............................ (570) (878)
Accrued expenses ............................ (1,321) 30
------- -------
Net cash used in operating activities ............. (4,657) (2,380)
INVESTING ACTIVITIES
Purchase of property and equipment ................ (1,431) (995)
Sale of marketable securities ..................... 1,542 1,022
Purchase of patents ............................... (6) (34)
------- -------
Net cash provided by (used in) investing activities 105 (7)
FINANCING ACTIVITIES
Net proceeds from bank line of credit ............. -- 1,060
Issuance of common stock .......................... 31 36
------- -------
Net cash provided by financing activities ......... 31 1,096
------- -------
Decrease in cash and cash equivalents ................ (4,521) (1,291)
Cash and cash equivalents at beginning of period ..... 5,988 1,291
------- -------
Cash and cash equivalents at end of period ........... $ 1,467 $ --
======= =======
See accompanying notes.
RECOVERY ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
March 31, 1997
Note A - Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and the instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months ended
March 31,1997, are not necessarily indicative of the results that may be
expected for the year ended December 31, 1997, or any other period. For further
information, refer to the financial statements and footnotes thereto for the
year ended December 31, 1996, included in the Company's annual report found in
the 10-K.
Note B - Inventory
The components of inventory consist of the following:
March 31, December 31,
1997 1996
----------- ---------
Raw materials $4,042,000 $3,353,000
Work in process 238,000 95,000
Finished products 2,232,000 1,478,000
----------- ---------
$6,512,000 $4,926,000
========== ==========
Note C - Net Loss Per Share
Net loss per share is computed using the weighted average number of common
shares outstanding during the period. Common equivalent shares from stock
options, warrants and convertible are excluded from the computation as their
effect is antidilutive. In February 1997, the Financial Accounting Standard
Board (FASB) issued FASB statement No. 128, "EARNINGS PER SHARE." This Statement
replaces the presentation of primary earnings per share (EPS) with basic EPS and
also requires dual presentation of basic and diluted EPS for entities with
complex capital structures. This Statement is effective for the fiscal year
ended December 31, 1997. For the quarter ended March 31, 1997, there is no
difference between basic earnings per share under Statement No. 128 and net loss
per share as reported.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(First Quarter Ended March 31, 1997)
RESULTS OF OPERATIONS:
This report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ significantly from
those discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, changes in the
Company's material costs, new product introductions by the Company or its
competitors, and changes in general conditions in the market for household
goods.
Net sales increased 61% for the quarter ended March 31, 1997, compared to the
same period the prior year. The increase was led by a greater than two-fold
increase in the Company's PUR Self-Monitoring Water Filters(TM) for the
home market which was partially offset by a $1 million decrease in U.S. military
shipments. The Company continued to expand its distribution base in the home
market, including the addition of Wal-Mart as a new customer. PUR household
water filters are now available in over 18,000 outlets nationwide. The Company
also began shipments to French-based Groupe SEB in conjunction with the roll-out
of its household water filters to the European market.
Gross margins increased to 40.2% for the first quarter, compared to 38.1% for
the same period in the prior year. Gross margins increased primarily due to a
higher volume of sales and production, resulting in better utilization of fixed
overhead costs. This was partially offset by an increase in the percentage of
lower margin pitcher sales and in OEM sales to Braun and Groupe SEB as compared
to total sales.
Selling, general, and administrative expenses increased significantly for the
quarter ended March 31, 1997, compared with the same period last year. This
increase reflects increased sales and marketing expense related to the continued
roll-out of U.S. household products. While selling expenses are expected to be
above 1996 levels throughout the remainder of the year to support the continued
roll-out of the household products and significant product line extensions, they
are expected to decline as a percentage of sales.
Research and development expense increased to $754,000 for the three months
ended March 31, 1997, compared to $669,000 for the same period the prior year,
reflecting the Company's commitment towards developing new products and
technology. Development of product line extensions and other new products will
require continued emphasis and increased spending on research and development in
1997.
Other expense increased to $143,000 for the first quarter, compared to $0 for
the same period last year, due to payments of interest on long-term debt as well
as decreased interest income corresponding to decreased balances of cash, cash
equivalents and marketable securities.
The Company's effective income tax rate was 0% for the three months ended March
31, 1997, and March 31, 1996. The Company has a $1,512,000 tax benefit related
to losses incurred in 1995. The Company has recorded a valuation allowance for
the tax benefit related to the current net operating loss.
LIQUIDITY AND CAPITAL RESOURCES:
Cash used in operations was $4,657,000 for the three months ended March 31,
1997, compared to cash used in operations of $2,380,000 for the same period in
1996. Cash was used to fund the operating loss and increase inventories.
Capital expenditures were $1,431,000 for the first quarter, compared to $995,000
for the same period last year. The capital expenditures were used primarily to
purchase tooling and manufacturing equipment for both years. The Company
anticipates increased expenditures in 1997 for tooling and manufacturing
equipment purchases associated with new product introductions and an increase in
overall production capacity.
The Company had no bank debt at March 31, 1997, or December 31, 1996. The
Company has obtained a $14 million discretionary credit facility consisting of a
$10 million working capital line-of-credit limited to eligible receivables and
inventory as well as a $4 million equipment loan which contains an eighteen
month draw down period wherein only interest payments are due. Principal
payments will be amortized over 42 months thereafter. The credit facility was
unused at March 31, 1997. Borrowings under this agreement are limited to $10
million in 1997 by provisions in the convertible loan agreement.
Management believes that anticipated cash flows from operations as well as funds
available through its bank credit agreement will provide sufficient capital
resources for current operations and planned product introductions.
The Company has not paid cash dividends. The Board of Directors currently
intends to retain all earnings for expansion of the Company's business.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company was notified January 10, 1997 of a complaint filed by Brita
in the United States District Court for the Northern District of
Georgia for patent infringement on its pitcher products. The complaint
names Recovery Engineering and other water filtration companies as
defendants. The plaintiff, Brita, is seeking injunctive relief and
damages. The Company was aware of Brita's patent prior to developing
its own design and is confident it does not infringe upon Brita's
patent. The Company plans to defend vigorously its right to market and
sell these products.
The Company was notified April 14, 1997 of a complaint filed by
UltraPure Systems, Inc., a subsidiary of Culligan Water Technologies,
Inc., in the United States District Court for the District of Minnesota
for patent infringement on its faucet mount products. The complaint
names Recovery Engineering as the defendant. The plaintiff, UltraPure
Systems, Inc., is seeking injunctive relief and damages. The Company is
confident it does not infringe upon UltraPure's patent. The Company
plans to defend vigorously its right to market and sell these products.
The Company from time to time is involved in various other legal
proceedings arising in the normal course of business, none of which is
expected to result in any material loss to the Company.
Item 2. Changes in securities
Not applicable
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on April 24,
1997. The following matters were submitted to a vote of the
shareholders at the Annual Meeting:
Election of Directors. The following persons were elected to serve as
directors, for a term of one year:
John E. Gherty Brian F. Sullivan William D. Thompson
William F. Wanner, Jr. Ronald W. Weber Richard J. Zeckhauser
Sanjay H. Patel
Approval of Amendment to 1994 Stock Option and Incentive Plan
3,237,880 votes FOR, 342,124 votes AGAINST, and 10,121 votes ABSTAINED,
and 95,919 shares held by brokers were not voted on the resolution)
Ratification of Appointment of Ernst & Young, LLP as Independent
Auditors.
(3,669,845 votes FOR, 8,500 votes AGAINST, and 7,699 votes ABSTAINED)
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Not applicable
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter covered
by this Form 10-Q.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Recovery Engineering, Inc.
----------------------------------------------
(Registrant)
Dated: May 13, 1997. /s/ Brian F. Sullivan
----------------------------------------------
Brian F. Sullivan
President, Chief Executive Officer
and Director
(principal executive officer)
Dated: May 13, 1997. /s/ Charles F. Karpinske
----------------------------------------------
Charles F. Karpinske
Chief Financial Officer
(principal financial and accounting officer)
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