As filed with the Securities and Exchange Commission on February , 1998
Registration No. 333-
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
RECOVERY ENGINEERING, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1557115
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9300 NORTH 75TH AVENUE
MINNEAPOLIS, MINNESOTA 55428
TELEPHONE: (612) 315-5500
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
BRIAN F. SULLIVAN, CHIEF EXECUTIVE OFFICER
9300 NORTH 75TH AVENUE
MINNEAPOLIS, MINNESOTA 55428
TELEPHONE: (612) 315-5500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES OF COMMUNICATIONS TO:
Eric O. Madson, Esq. Edward S. Rosenthal, Esq.
Robins, Kaplan, Miller & Ciresi L.L.P. Fried, Frank, Harris, Shriver &
2800 LaSalle Plaza Jacobson
800 LaSalle Avenue 350 South Grand Avenue
Minneapolis, MN 55402-2015 32nd Floor
Telephone: (612) 349-0822 Los Angeles, CA 90071
Telecopier: (612) 339-4181 Telephone: (213) 473-2000
Telecopier: (213) 473-2222
Approximate date of commencement of proposed sale to the public:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED (1) PER SHARE (2) PRICE (2) FEE
- ----------------------------------- ------------------ ------------------ -------------------- -------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value 1,150,000 shares $ 28.75 $33,062,500 $10,019
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</TABLE>
(1) Includes 150,000 shares subject to the Underwriters' over-allotment option.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) under the Securities Act of 1933, based on the average of the
high and low prices for the Common Stock on February 19, 1998, as reported
on the Nasdaq National Market.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION, DATED FEBRUARY , 1998
1,000,000 SHARES
[GRAPHIC OMITTED]
PUR DRINKING WATER SYSTEMS
RECOVERY ENGINEERING, INC.
COMMON STOCK
ALL OF THE SHARES OF COMMON STOCK ("COMMON STOCK") OFFERED HEREBY ARE BEING
SOLD BY RECOVERY ENGINEERING, INC. (THE "COMPANY").
THE COMPANY'S COMMON STOCK IS QUOTED ON THE NASDAQ NATIONAL MARKET UNDER
THE SYMBOL "REIN." ON FEBRUARY 23, 1998, THE LAST REPORTED SALE PRICE OF THE
COMMON STOCK WAS $28.50 PER SHARE. SEE "PRICE RANGE OF COMMON STOCK."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
- --------------------------------------------------------------------------------
PER SHARE ......... $ $ $
TOTAL (3) ......... $ $ $
================================================================================
(1) SEE "UNDERWRITING" FOR INFORMATION CONCERNING INDEMNIFICATION OF THE
UNDERWRITERS AND OTHER MATTERS.
(2) BEFORE DEDUCTING OFFERING EXPENSES PAYABLE BY THE COMPANY ESTIMATED TO BE
$300,000.
(3) THE COMPANY HAS GRANTED THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP TO
150,000 ADDITIONAL SHARES OF COMMON STOCK SOLELY TO COVER OVER-ALLOTMENTS,
IF ANY. IF THE UNDERWRITERS EXERCISE THIS OPTION IN FULL, THE PRICE TO
PUBLIC WILL TOTAL $ , THE UNDERWRITING DISCOUNT WILL TOTAL $ AND THE
PROCEEDS TO COMPANY WILL TOTAL $ . SEE "UNDERWRITING."
THE SHARES OF COMMON STOCK ARE OFFERED BY THE UNDERWRITERS NAMED HEREIN,
SUBJECT TO RECEIPT AND ACCEPTANCE BY THEM AND SUBJECT TO THEIR RIGHT TO REJECT
ANY ORDER IN WHOLE OR IN PART. IT IS EXPECTED THAT DELIVERY OF THE CERTIFICATES
REPRESENTING SUCH SHARES WILL BE MADE AGAINST PAYMENT THEREFOR AT THE OFFICE OF
NATIONSBANC MONTGOMERY SECURITIES LLC ON OR ABOUT , 1998.
-----------------
NationsBanc Montgomery Securities LLC
Deutsche Morgan Grenfell
, 1998.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PUR
SELF-MONITORING WATER FILTERS
THE LEADER IN DRINKING WATER FILTRATION TECHNOLOGY
NEWLY INTRODUCED PRODUCTS
[PHOTO OF PRODUCT]
The New PUR Plus
Walter Filtration Pitcher
and Replacement Filter
[PHOTO OF PRODUCT]
The New PUR Ultimate
Faucet Mount Water Filter
and Replacement Filter
[PHOTO OF PRODUCT]
The New PUR Plus
Water Filtration Dispenser
and Replacement Filter
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<PAGE>
PUR OFFERS A BROAD LINE OF PRODUCTS
POUR-THROUGH FILTERS
- --------------------
[PHOTO OF PRODUCT]
PUR STANDARD PITCHER
Offers a unique Automatic Safety Monitor(TM) while removing high levels of
lead and chlorine.
[PHOTO OF PRODUCT]
PUR PLUS PITCHER
The only pour through pitcher water filter to remove microbiological cysts
- including Cryptosporidium and Giardia.
[PHOTO OF PRODUCT]
PUR PLUS DISPENSER
The only pour through dispenser water filter to remove microbiological
cysts - including Cryptosporidium and Giardia.
IN-LINE SYSTEMS
- ---------------
FAUCET MOUNTS
[PHOTO OF PRODUCT]
PUR STANDARD FAUCET MOUNT
Protects you from more contaminants than most pitcher water filters.
[PHOTO OF PRODUCT]
PUR PLUS FAUCET MOUNT
Higher contaminant removal.
[PHOTO OF PRODUCT]
PUR ULTIMATE FAUCET MOUNT
Our most advanced faucet mount filter provides protection from harmful
chemicals linked to cancer.
COUNTERTOP & UNDERSINK
[PHOTO OF PRODUCT]
PUR PLUS COUNTERTOP
Higher protection from contaminants and longer filter life.
[PHOTO OF PRODUCT]
PUR PLUS UNDERSINK
Only PUR provides superior contaminant removal and the Automatic Safety
Monitor Gauge in an undersink configuration.
<PAGE>
PUR PORTABLE SYSTEMS
[PHOTO]
Make back country water microbiologically safe to drink by eliminating all types
of microorganisms, including viruses, bacteria and Giardia. PUR offers a line of
purifiers and microfilters at a variety of price points and safety levels.
[GRAPHIC]
Pioneer Microfilter
[GRAPHIC]
Hiker Microfilter
[GRAPHIC]
Voyageur Purifier
[GRAPHIC]
Scout Purifier
[GRAPHIC]
Explorer Purifier
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PUR DESALINATION SYSTEMS
[PHOTO]
PUR makes dependable watermakers for extended use - under all kinds of
conditions. Highly efficient PUR PowerSurvivor 12-volt systems produce a
plentiful supply of drinking water while putting the least demand on power
supplies.
[GRAPHIC]
POWER SURVIVOR 40
PUR hand-operated Survivor watermakers are perfect for liferafts. They are
small, lightweight and proven life savers.
[GRAPHIC]
SURVIVOR 06
[GRAPHIC]
SURVIVOR 35
- --------------------------------------------------------------------------------
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS AND THE IMPOSITION
OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING
TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE
WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
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PUR(R), SELF-MONITORING WATER FILTER(R), ASM(R), AUTOMATIC SAFETY MONITOR(TM),
TRITEK(R), PIONEER(R), HIKER(R), VOYAGEUR(TM), SCOUT(R), EXPLORER(R) AND
SURVIVOR(R) ARE TRADEMARKS OF THE COMPANY.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS OF THE COMPANY, INCLUDING THE NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE
INFORMATION PRESENTED IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION.
THE COMPANY
Recovery Engineering, Inc. (the "Company") designs, manufactures and
markets proprietary small-scale drinking water systems under the PUR(R) brand
name for the household, recreational and military markets. These products
include a line of self-monitoring water filters for household use, a rugged line
of portable drinking water systems for outdoor enthusiasts and international
travelers and a line of low-energy, reverse osmosis desalinators for offshore
marine, commercial life raft and military use. PUR household water filters,
which accounted for more than 80% of the Company's net sales in 1997, are
offered in a variety of configurations, including pitchers and dispensers which
are filled from the tap ("pour-through" systems) and faucet-mounted, countertop
and under-sink filter systems which are connected to the water lines ("in-line"
systems). PUR household products are distributed through approximately 26,000
retail outlets in the United States and Canada, including Wal-Mart, Sears,
Target, Costco, Kmart, Macy's and Walgreens.
The United States Environmental Protection Agency ("EPA") and other
organizations have identified a number of harmful contaminants that many
municipal water authorities do not or cannot remove from drinking water. For
example, municipal drinking water available in many homes in the United States
contains dangerous contaminants such as lead, microbiological cysts,
agricultural pesticides and herbicides, and carcinogenic chlorine byproducts.
The Company believes that increasing awareness and concern in the United States
about tap water quality has contributed significantly to a steady increase in
the size of the market for tap water substitutes and filtration systems. The
United States market for bottled water is currently estimated to be over $3.0
billion annually, with approximately 35% of U.S. households purchasing bottled
water. The Company estimates that the overall annual market for household
drinking water systems, services and supplies (such as water filters, water
softeners and whole house systems) is approximately $1.5 billion, with the
Company's current segments of this overall market representing approximately
$400 million. Based on consumer research conducted in 1993, the Company
determined that this market offered an opportunity for a company with
significant technological expertise to achieve a leading position by developing
water filtration products with superior performance capabilities.
The Company launched its first PUR water filters for the household market
in 1994 with the intent of establishing a large installed base of PUR water
filter systems to support recurring sales of replacement filter cartridges. To
date, the Company has sold more than 2.5 million household water filter systems
and has obtained a significant share of this market. According to survey
information from Intelect, a third party market research firm, PUR is the number
one brand of in-line water filters and the second leading brand of all household
water filters sold in the United States. To accomplish this, the Company has
invested significant resources during the past three years to develop advanced
filtration and monitoring technologies, launch a broad range of products at a
variety of price points, expand distribution aggressively, and provide high
levels of consumer and trade advertising support.
The Company's internally developed proprietary filtration technologies
reduce a wide range of contaminants, such as microbiological cysts, lead,
pesticides, volatile organic compounds ("VOCs") and other impurities, while
improving water taste and odor. Each PUR household water filter system
incorporates a replaceable filtration cartridge which has a capacity from 40 to
200 gallons and provides the typical consumer with one to six months of filtered
water, depending on the system and the consumer's usage. To ensure that
consumers do not overuse their filtration cartridges, the Company developed a
proprietary technology, known as the Automatic Safety Monitor(TM) ("ASM(R)"),
that measures the filter's usage and indicates its remaining capacity. The
Company believes that this visible indication of when to replace the filter
cartridge encourages consumers to purchase replacement cartridges more
frequently than they otherwise would. The sale of the Company's replacement
cartridges is expected to comprise an increasing portion of sales of household
water filter products as the installed base of filter systems continues to
increase.
<PAGE>
The Company's objective is to establish and maintain PUR as the leading
brand of consumer water filter products and to obtain a leading position in each
market segment it enters. The Company's key strategies to accomplish this
objective are:
* DEVELOP PROPRIETARY TECHNOLOGIES TO ADDRESS CONSUMER CONCERNS. Research and
development efforts are focused on creating innovative and technologically
superior products that provide performance characteristics exceeding those
of competing products. The Company conducts consumer research to identify
consumer concerns that can be addressed with innovative products. For
example, in 1998 the Company introduced two new pour-through systems, the
PUR PLUS pitcher and the PUR PLUS dispenser, which are the first
gravity-fed water filter systems capable of removing potentially harmful
microorganisms as small as CRYPTOSPORIDIUM and GIARDIA LAMBLIA.
* OFFER A BROAD LINE OF SUPERIOR PRODUCTS WHICH CATER TO A WIDE CONSUMER
SEGMENT. The Company has established a leading position in its consumer
drinking water treatment categories by developing a broad range of products
with superior performance characteristics at a number of retail price
points.
* ESTABLISH A BROAD DISTRIBUTION NETWORK. Since entering the household water
filter market in 1994, the Company has expanded its distribution network
aggressively. PUR household products are currently sold throughout the
United States and Canada through approximately 26,000 retail outlets (an
increase from approximately 15,000 retail outlets at the end of 1996),
including department stores, mass merchants, drug stores, grocery stores,
hardware stores and warehouse clubs.
* PROMOTE BRAND AWARENESS THROUGH EFFECTIVE MARKETING. The Company invests
significant resources in advertising and promotional activities to increase
awareness of its products and build recognition of the PUR brand. These
activities include point-of-sale displays and cooperative advertising
programs for retailers, television commercials and infomercials, and print
and radio advertisements.
* GENERATE RECURRING SALES OF REPLACEMENT FILTER CARTRIDGES. The Company's
strategy is to build brand name recognition for PUR products and develop an
installed base of its products to promote recurring sales of replacement
cartridges. In addition, all PUR household products incorporate the
Company's ASM technology to indicate when a filter cartridge needs to be
replaced. The Company anticipates that an increasing portion of its
revenues in the household market will be derived from recurring sales of
replacement cartridges, which on average have higher margins than the
Company's other products.
* DEVELOP LOW-COST, HIGH-VOLUME FLEXIBLE MANUFACTURING PROCESSES. The Company
continues to make substantial investments in automating the manufacturing
and assembly processes for its household water filters, including the
development of several proprietary, automated processes for manufacturing
filter elements. These automated processes enable the Company to improve
its manufacturing efficiencies while enhancing its ability to provide high
volumes of differentiated products to retailers.
The Company was originally incorporated in the State of Delaware in March
1986 and was reincorporated in the State of Minnesota in March 1996. Its
principal office is located at 9300 North 75th Avenue, Minneapolis, Minnesota
55428, and its telephone number is (612) 315-5500.
THE OFFERING
Common Stock offered............ 1,000,000 shares
Common Stock to be outstanding
after the offering............. 5,552,994 shares (1)
Use of proceeds................. To repay certain existing indebtedness and
for general corporate purposes, including
working capital. See "Use of Proceeds."
Risk factors.................... Investors should carefully consider the
factors discussed under "Risk Factors."
Nasdaq National Market symbol... REIN
- -----------------
(1) Does not include 2,094,051 shares of Common Stock issuable upon exercise of
options and warrants or conversion of convertible debt outstanding at
December 31, 1997. See "Dilution."
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
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YEAR ENDED DECEMBER 31,
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1993 1994 1995 1996 1997
------------ ------------ ---------- ------------ -------------
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STATEMENT OF OPERATIONS DATA:
Net sales ......................................... $ 10,292 $ 16,671 $ 22,921 $ 33,277 $ 71,243
Gross profit ...................................... 5,304 8,774 8,962 12,521 33,826
Income (loss) from operations ..................... 2,057 2,470 (7,751) (12,262) (2,071)
Income (loss) before income taxes ................. 2,202 2,926 (7,326) (12,499) (3,455)
Income tax expense (benefit) ...................... 705 907 (2,564) -- --
Net income (loss) ................................. 1,497 2,019 (4,762) (12,499) (3,455)
======== ======== ======== ========= ==========
Net income (loss) per share (basic) (1) ........... $ 0.53 $ 0.57 $ (1.12) $ (2.90) $ (0.77)
======== ======== ======== ========= ==========
Weighted average shares (basic) ................... 2,843 3,531 4,239 4,307 4,471
Net income (loss) per share (diluted) (1) ......... $ 0.45 $ 0.50 $ (1.12) $ (2.90) $ (0.77)
======== ======== ======== ========= ==========
Weighted average shares (diluted) ................. 3,321 4,029 4,239 4,307 4,471
OPERATING DATA:
Estimated number of retail outlets at end of
period (2) ....................................... 1,200 2,200 9,900 16,900 28,000
Number of replacement cartridges shipped
during year ...................................... 4,500 51,000 186,000 716,000 3,135,000
</TABLE>
DECEMBER 31, 1997
----------------------------
ACTUAL AS ADJUSTED (3)
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BALANCE SHEET DATA:
Working capital .............. $ 2,144 $28,634
Total assets ................. 43,198 62,527
Long-term debt ............... 15,000 15,000
Shareholders' equity ......... 4,729 31,219
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(1) All earnings per share amounts for all periods have been presented and,
where appropriate, restated to conform to FASB Statement 128 requirements.
(2) Represents the Company's estimate of the number of outlets at which one or
more of the Company's household and outdoor products were sold. The
approximate numbers of retail outlets at which the Company's household
products were sold at the end of such periods were none in 1993, 1,000 in
1994, 8,000 in 1995, 15,000 in 1996 and 26,000 in 1997.
(3) Adjusted to give effect to the sale of the 1,000,000 shares of Common Stock
offered hereby at an assumed public offering price of $28.50 per share and
the application of the estimated net proceeds therefrom. Does not include
2,094,051 shares of Common Stock issuable upon exercise of options and
warrants or conversion of convertible debt outstanding at December 31, 1997.
See "Use of Proceeds," "Capitalization" and "Dilution."
FORWARD-LOOKING STATEMENTS
Except for historical information contained in this Prospectus, the
matters discussed herein contain forward-looking statements that involve risks
and uncertainties that could cause actual results to differ materially from
those suggested in the forward-looking statements, including without limitation
the effects of economic conditions, product demand, competitive products and
other risks detailed herein. See "Risk Factors."
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY REVIEW AND CONSIDER THE FOLLOWING
RISK FACTORS AND OTHER INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
RECENT HISTORY OF OPERATING LOSSES
The Company has experienced a net loss in each of the last three years due
primarily to costs associated with entering the household market including,
among other things, costs of creating brand name awareness, developing broader
product line offerings, and establishing a wide distribution network for its
products. The net losses were incurred despite substantial increases in net
sales that resulted from the Company's entry into the household water filter
market. The Company intends to continue investing significant amounts in
development of additional extensions of its product lines, advertising and
promotional activities to support existing products and new product
introductions, and continued development of enhanced manufacturing processes and
expanded production capacity. Thus, the Company may continue to generate losses
even if revenues increase, and there can be no assurance that the Company will
become consistently profitable. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation."
CONTINUED ACCEPTANCE OF PRODUCTS
The Company's ability to continue to increase its sales and return to
consistent profitability will depend to a significant degree on the continued
successful retail sell-through of new and existing household drinking water
treatment products for consumer markets in the United States and other
countries. The success of the Company's products will depend in part on the
Company's continued ability to educate consumers about the advantages of such
products over other means of addressing drinking water concerns, including
bottled water and alternative products for water filtration. Additionally, there
can be no assurance that the Company's household water filtration products will
continue to be successfully sold through the Company's established network of
retail outlets or that the Company will be able to maintain its distribution
network. The Company's performance will also depend on consumers' willingness to
continue using the Company's products and to buy replacement filter cartridges.
See "Business -- Industry Overview -- Household Market" and "Business --
Products -- Household Water Filters."
RELIANCE ON PROPRIETARY TECHNOLOGY
The Company's ability to compete depends in part on its proprietary
technology, which it seeks to protect with patents and trademarks. The Company
is the owner of 12 United States utility patents, five United States design
patents, and 12 United States registered trademarks related to its desalinator,
recreational, and household water filtration products. Additionally, the Company
has applied for 11 patents related to its new and existing household water
filtration products and recreational products. The Company has also applied for
and received various corresponding foreign patents where it deemed such
applications necessary. The laws of certain foreign countries do not protect the
Company's intellectual property rights to the same extent as do the laws of the
United States. The Company intends to vigorously defend and protect its patents
and other proprietary technology against infringement or misappropriation by
others. There can be no assurance, however, that steps taken by the Company will
prevent misappropriation of its technology, that any patents from pending patent
applications or from any future patent application will be issued, that the
scope of any patent protection will provide competitive advantages to the
Company or preclude competitors from developing products similar to the
Company's products, that any of the Company's patents will be held valid if
subsequently challenged, or that others will not claim rights in or ownership of
the patents and other proprietary rights held by the Company. In addition, there
can be no assurance that third parties will not assert infringement claims with
respect to the Company's current or future products or that any such claims will
not require the Company to enter into license arrangements or result in
litigation, regardless of the merits of such claims. No assurance can be given
that any necessary licenses could be obtained on commercially reasonable terms,
or at all. Litigation or regulatory proceedings may also be necessary to enforce
patent or other intellectual property rights of the Company or to determine the
scope and validity of other parties' proprietary rights. Such litigation could
be expensive and time consuming and could have a
<PAGE>
material adverse effect on the Company's business, financial condition or
results of operations regardless of the outcome of such litigation. See
"Business -- Patents."
PATENT LITIGATION
The Company is currently engaged in litigation with respect to certain
aspects of its technology. The Company and several other water filtration
companies are defendants in a civil proceeding initiated in January 1997 by
Brita U.S.A. (a subsidiary of Clorox Company) which asserts that the defendants
have infringed one of Brita's patents relating to pitcher products. Brita's
lawsuit, now pending in the United States District Court for the Northern
District of Illinois, seeks injunctive relief and unspecified monetary damages.
The litigation is still in the initial stages. The Company is also a defendant
in a civil proceeding initiated in April 1997 by UltraPure Systems, Inc.
("UltraPure"), a subsidiary of Culligan Water Technologies, Inc., which asserts
that the Company has infringed an UltraPure patent on a faucet-mounted filter
system. UltraPure's lawsuit, now pending in the United States District Court for
the District of Minnesota, seeks injunctive relief and unspecified monetary
damages. This litigation is also still in the initial stages. The Company
believes it has meritorious defenses to both of these disputes and is vigorously
defending these actions. The Company is unable to predict the outcome of these
proceedings. An adverse decision in either proceeding could have a material
adverse effect on the Company's business, prospects and financial condition. See
"Business -- Litigation."
TECHNOLOGICAL CHANGE AND PRODUCT OBSOLESCENCE
The water treatment markets in which the Company competes are subject to
technological changes, and the Company's business strategy is based to a
substantial extent on the Company's ability to offer technologically superior
products. The ability of the Company to compete successfully will depend in part
on its ability to continue to respond effectively to technological changes,
enhance its technology and develop and market new products and new applications
for its existing technology. Although the Company expends a significant portion
of its revenues on research and development and product enhancement efforts,
there can be no assurance that the Company can successfully develop and bring
any new products to the market in a timely manner, that such products will be
commercially successful, or that competitors' technologies or services will not
render the Company's products or services non-competitive or obsolete. The
Company relies on product effectiveness certifications from the National
Sanitation Foundation ("NSF"), a nationally recognized not-for-profit agency for
the certification of water filters, to support its claims to consumers. NSF
certification is currently pending for the Company's new PUR PLUS dispenser and
PUR FM ULTIMATE faucet mounted products. There can be no assurance that these or
other future products will receive anticipated certification or that the failure
to receive anticipated certification would not impair the Company's ability to
market such products. See "Business -- Products" and "Business -- Research and
Development."
MANAGEMENT OF GROWTH
During the last three years, as a result of higher than forecast sales of
the Company's household water filter systems, the Company was not able at all
times to adjust its production capacity quickly enough to keep pace with the
demand for its products. However, the Company believes that any resulting
delivery delays did not materially adversely affect the Company's total net
sales over this period or its relationships with its principal customers. To
manage further growth successfully, the Company will be required to continue
improving its operations, management and financial systems and controls and
expand its facilities and its employee workforce. Any future growth can be
expected to place significant additional responsibilities on the Company's
management, operations, employees and resources. There can be no assurance the
Company will be able to maintain or accelerate its current growth, effectively
manage its expanding operations or achieve planned growth on a timely or
profitable basis. To the extent that the Company is unable to manage its growth
efficiently and effectively, the Company's business, financial condition and
results of operations could be materially adversely affected. Furthermore, in
pursuing its growth strategy, the Company may need to incur additional debt or
issue additional equity securities, resulting in increased financial leverage or
potential dilution to holders of Common Stock. See "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Business Strategy."
<PAGE>
RISKS OF INTERNATIONAL OPERATIONS
The Company's international sales efforts are and will continue to be
conducted principally through third party distributors and accordingly the
Company is dependent on the efforts of such distributors for the majority of its
international sales. There can be no assurance that the Company will be
successful in establishing and maintaining such distribution relationships, or
that such distributors will promote the Company's products aggressively or
achieve greater market awareness and penetration for the Company's products than
for competing products. In addition, because of this distribution strategy, the
Company is dependent upon the financial viability, reputation and success of its
distributors, with the result that the Company's business and financial
condition could be adversely affected by factors unrelated to the Company's
performance. The Company's international business may also be adversely affected
by governmental, political and economic conditions, including import quotas and
other factors. While foreign sales are expected to be priced in dollars,
fluctuation in currency exchange rates may reduce the demand for the Company's
products by increasing the price of these products in the currency of the
countries in which the products are sold. See "Business -- Marketing and
Distribution."
COMPETITION
The Company encounters and expects to continue to encounter intense
competition in the sale of its products. The Company believes that the principal
competitive factors affecting the market for its products include product
features, product performance and reputation, price and service. The Company's
competitors include companies with established reputations in the consumer,
household water filtration and purification field and substantially greater
financial, technical, marketing and other resources than the Company. As a
result, such companies may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements or to devote greater resources
to the promotion and sale of their products than the Company. Competition could
increase if new companies enter the market or if existing competitors expand
their product lines or intensify efforts within existing product lines. The
Company also indirectly competes on the retail consumer level with suppliers of
prepackaged bottled water and bulk water dispensing systems. There can be no
assurance that the Company's current products, products under development or
ability to discover new technologies will be sufficient to enable it to compete
effectively. See "Business -- Competition."
PRODUCT LIABILITY
The Company could be liable for personal injuries allegedly caused by a
defect in one of the Company's products. While to date the Company has not
experienced any such claims, there can be no assurance that such claims will not
be made in the future. The Company currently carries product liability insurance
covering its products with policy limits of $2.0 million in the aggregate and
$1.0 million per occurrence. The Company also maintains umbrella coverage over
this amount to $15.0 million. It cannot be predicted, however, whether such
insurance is sufficient to adequately cover the Company's product liability
risk. Lack of sufficient insurance could expose the Company to substantial
damages in connection with product liability claims or product recalls. In
addition, the costs related to defending any claim, and/or the negative
publicity resulting from any liability action could have a material adverse
effect on the Company's sales and profitability.
CUSTOMER CONCENTRATION
Sales of PUR household water filtration products to the Company's five
largest customers accounted for more than 45% of the Company's net sales in
1997, with Wal-Mart (12.8%) and Costco (10.1%) each representing more than 10%
of net sales. A reduction, delay or cancellation of orders from one or more of
these customers, or the loss of one or more of such customers, could have a
material adverse effect on the Company's operating results. See "Business --
Marketing and Distribution."
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends in significant part upon the continued
service of its key senior management and technical personnel, including Brian F.
Sullivan, President and Chief Executive Officer and Richard D. Hembree, Vice
President -- Engineering. The Company's future success also
<PAGE>
depends on its continuing ability to attract and retain highly qualified
managerial and technical personnel. There can be no assurance that the Company
will be able to retain key employees or attract and retain other qualified
personnel in the future.
SEASONALITY; QUARTERLY FLUCTUATIONS; POSSIBLE VOLATILITY OF STOCK PRICE
Management believes that the Company's business is to some extent seasonal,
with its highest sales levels occurring during the fourth quarter, although its
recent sales growth may have masked seasonal patterns. Results for any quarter
are not necessarily indicative of the results that the Company may achieve for
any subsequent quarter or a full fiscal year. Quarterly results may fluctuate as
a result of the timing of merchandise shipments, timing of expenditures for
product development and other factors. There can be no assurance that results in
future periods will not fluctuate on a quarterly basis. In addition, the market
price for the Common Stock may be highly volatile depending on various factors,
including the general economy, stock market conditions, the establishment or
loss of major customer relationships, technological innovations, new product
introductions by the Company or its competitors, and fluctuations in the
Company's operating results. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
POTENTIAL ADVERSE EFFECT OF STOCK OPTIONS, WARRANTS AND CONVERTIBLE SECURITIES
A substantial number of shares of Common Stock are issuable upon the
exercise of outstanding stock options and warrants or the conversion of the
Company's 5% Convertible Notes due 2003 (the "Convertible Notes") at exercise or
conversion prices that are significantly less than recent market prices for the
Common Stock. When issued, such shares may become available for sale in the
public market. Sales of substantial amounts of such shares in the public market
could adversely affect the market price of the Common Stock. See "Dilution." The
Company, its officers, directors and certain other shareholders, including the
holders of the Convertible Notes, have agreed that, for a period of 180 days
from the date of this Prospectus (120 days in the case of the holders of the
Convertible Notes), they will not, without the prior written consent of
NationsBanc Montgomery Securities LLC, offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock or securities convertible into,
or exercisable or exchangeable for, Common Stock. Such shareholders beneficially
own an aggregate of 1,261,829 shares of Common Stock currently outstanding and
options exercisable for or securities convertible into an aggregate of 1,293,651
shares of Common Stock.
EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS
The Company has adopted a Shareholder Rights Plan and is subject to certain
anti-takeover provisions of the Minnesota Business Corporation Act. Such
provisions could have the effect of discouraging a takeover proposal or tender
offer not approved by management and the Board of Directors of the Company.
Accordingly, shareholders may be denied the opportunity to participate in a
transaction which offers a premium to the prevailing market price of the Common
Stock. Furthermore, the Company's Board of Directors is authorized, without
further action by the holders of Common Stock, to establish various series of
Preferred Stock from time to time and to determine the rights, preferences and
restrictions of any wholly unissued series, including, among other matters,
dividend, liquidation and voting rights. Thus, the Board of Directors may,
without shareholder approval, issue shares of a class or series of Preferred
Stock with voting and conversion rights which could adversely affect the voting
power of the holders of the Common Stock and could have the effect of delaying,
deferring or preventing a change in control of the Company. The creation and
issuance of shares of such a class or series of Preferred Stock could also
adversely affect the market price of the Common Stock.
DILUTION
Purchasers of the shares of Common Stock offered hereby will experience
immediate substantial dilution in net tangible book value estimated at $23.01
per share, assuming a public offering price of $28.50. See "Dilution."
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,000,000 shares of
Common Stock offered hereby at an assumed public offering price of $28.50 per
share will be approximately $26.5 million ($30.5 million if the Underwriters'
over-allotment option is exercised in full), after deducting estimated
underwriting discounts and offering expenses.
The Company currently intends to apply the net proceeds of this offering to
repay bank debt and support the continued expansion of the Company's business.
Approximately $15 million of the net proceeds will be used to repay borrowings
under the Company's credit facility with First Bank National Association ("First
Bank"). The remainder of the net proceeds of this offering (approximately $11.5
million) will be used to expand its consumer water treatment systems business
and for general corporate purposes. Pending the use of the net proceeds of this
offering, the Company will invest the funds in short-term interest bearing
securities.
Borrowings under the Company's credit facility with First Bank were $10.4
million at January 31, 1998 and are expected to be approximately $15 million at
March 31, 1998. Approximately $4.0 million of the borrowings have been used to
finance equipment purchases, with the remainder being used for working capital
and general corporate purposes. Borrowings under the credit facility bear
interest at (i) the bank's reference rate plus 2.5% on borrowings for equipment
purchases, and (ii) the bank's reference rate plus 1.25% on the working capital
portion of the borrowings. The principal amount of borrowings for equipment
purchases is payable over a 42-month period commencing October 1998, unless
demand is made sooner. Other borrowings under the credit facility are due on
demand.
DIVIDEND POLICY
The Company has never paid or declared any cash dividends on its Common
Stock and does not intend to do so in the foreseeable future. The Company
presently expects to retain its earnings to finance the development and
expansion of its business. The payment by the Company of cash dividends, if any,
on its Common Stock in the future is subject to the discretion of the Company's
Board of Directors and will depend on the Company's earnings, financial
condition, capital requirements and other relevant factors. In addition, the
Company is prohibited from paying cash dividends on its Common Stock by the
terms of its current credit facility with First Bank and the terms of a
Securities Purchase Agreement dated July 19, 1996, between the Company and
certain investment partnerships, of which affiliates of The Goldman Sachs Group,
L.P. ("GS Group") are the general partner, managing general partner, managing
partner or investment manager, pursuant to which such investment partnerships
purchased $15.0 million principal amount of Convertible Notes from the Company.
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
December 31, 1997 on an actual basis and as adjusted to give effect to the sale
of the 1,000,000 shares of Common Stock offered hereby at an assumed public
offering price of $28.50 per share, and the application of the estimated net
proceeds therefrom. This table should be read in conjunction with the Company's
financial statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------
ACTUAL AS ADJUSTED
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt (1) ...................................... $ 7,161 $ --
======== ========
Long-term debt ........................................... $ 15,000 $ 15,000
Shareholders' equity:
Capital Stock, 100,000,000 shares authorized:
Common Stock, $.01 par value; 4,548,249 shares issued and
outstanding (actual); 5,548,249 shares (as adjusted) (2) 45 55
Additional paid-in capital .............................. 21,364 47,844
Retained earnings (deficit) ............................. (16,680) (16,680)
-------- --------
Total shareholders' equity ............................. 4,729 31,219
-------- --------
Total capitalization .................................. $ 19,729 $ 46,219
======== ========
</TABLE>
- ------------------
(1) Short-term debt was $10.4 million at January 31, 1998, and is expected to
be approximately $15 million at March 31, 1998.
(2) Does not include 2,094,051 shares of Common Stock issuable upon exercise of
options and warrants or conversion of Convertible Notes outstanding at
December 31, 1997. See "Dilution."
DILUTION
The net tangible book value of the Company's Common Stock at December 31,
1997 was $4.0 million, or $0.88 per share. Net tangible book value per share of
Common Stock represents the tangible assets (total assets less intangible
assets) reduced by total liabilities, divided by the number of outstanding
shares of Common Stock. After giving effect to the sale of the 1,000,000 shares
offered by the Company hereby at an assumed public offering price of $28.50 per
share and the application of the estimated net proceeds therefrom, and after
deducting estimated underwriting discounts and offering expenses payable by the
Company, the net tangible book value of the Company's Common Stock at December
31, 1997, would have been approximately $30.5 million, or $5.49 per share. This
represents an immediate dilution in net tangible book value to new investors of
$23.01 per share and an immediate increase in net tangible book value to
existing shareholders of $4.61 per share as illustrated by the following table:
<TABLE>
<S> <C> <C>
Assumed Price to Public .......................................... $ 28.50
Net tangible book value per share at December 31, 1997 ........... $ 0.88
Increase per share attributable to new investors ................. 4.61
-------
Pro forma net tangible book value per share after this offering .. 5.49
--------
Dilution per share to new investors .............................. $ 23.01
========
</TABLE>
The foregoing table assumes no exercise of stock options or warrants. As of
December 31, 1997, the Company had 946,450 shares of Common Stock issuable upon
the exercise of outstanding incentive and non-qualified stock options under the
Company's stock option plans, with a weighted average exercise price of $12.49
per share; and 137,500 shares issuable upon the exercise of outstanding warrants
at a weighted average exercise price of $7.59 per share. The foregoing table
also excludes 1,010,101 shares of Common Stock issuable upon the conversion of
$15.0 million principal amount of Convertible Notes at a conversion price of
$14.85 per share. See "Principal Shareholders" and Notes 5 and 6 of Notes to
Financial Statements.
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been quoted on the Nasdaq National Market
under the symbol "REIN" since March 1993. The following table sets forth, for
the periods indicated, the range of high and low prices for the Company's Common
Stock as reported on the Nasdaq National Market.
HIGH LOW
----------- ----------
1996:
First Quarter ................................ $ 15.75 $ 8.25
Second Quarter ............................... 17.50 10.25
Third Quarter ................................ 14.75 11.50
Fourth Quarter ............................... 12.38 6.50
1997:
First Quarter ................................ $ 8.75 $ 6.75
Second Quarter ............................... 16.50 6.25
Third Quarter ................................ 30.50 15.00
Fourth Quarter ............................... 31.50 23.00
1998:
First Quarter (through February 23, 1998) .... $ 30.50 $ 22.00
On February 23, 1998, the last sale price of the Common Stock as reported
on the Nasdaq National Market was $28.50 per share. As of February 23, 1998,
there were 175 shareholders of record and approximately 2,200 beneficial owners
of the Company's Common Stock.
<PAGE>
SELECTED FINANCIAL DATA
The statement of operations data for the years ended December 31, 1995,
1996 and 1997, and the balance sheet data at December 31, 1996 and 1997, are
derived from the Company's financial statements included elsewhere in this
Prospectus, which have been audited by Ernst & Young LLP, independent auditors.
The statement of operations data for the years ended December 31, 1993 and 1994
and the balance sheet data at December 31, 1993, 1994 and 1995 are derived from
audited financial statements not included herein. The selected financial data
set forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- --------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ............................... $ 10,292 $ 16,671 $ 22,921 $ 33,277 $ 71,243
Cost of products sold ................... 4,988 7,897 13,959 20,756 37,417
-------- -------- --------- --------- -----------
Gross profit ............................ 5,304 8,774 8,962 12,521 33,826
Operating expenses:
Selling, general and administrative .... 2,446 5,240 14,692 21,803 32,815
Research and development ............... 801 1,064 2,021 2,007 3,082
Facility relocation costs .............. -- -- -- 973 --
-------- -------- --------- --------- -----------
3,247 6,304 16,713 24,783 35,897
-------- -------- --------- --------- -----------
Income (loss) from operations ........... 2,057 2,470 (7,751) (12,262) (2,071)
Other income (expense):
Interest income ........................ 167 508 551 220 43
Interest expense ....................... (22) (52) (126) (457) (1,427)
-------- -------- --------- --------- -----------
Income (loss) before income taxes ....... 2,202 2,926 (7,326) (12,499) (3,455)
Income tax expense (benefit) ............ 705 907 (2,564) -- --
-------- -------- --------- --------- -----------
Net income (loss) ....................... $ 1,497 $ 2,019 $ (4,762) $ (12,499) $ (3,455)
======== ======== ========= ========= ===========
Net income (loss) per share (basic) (1) . $ 0.53 $ 0.57 $ (1.12) $ (2.90) $ (0.77)
======== ======== ========= ========= ===========
Weighted average shares (basic) ......... 2,843 3,531 4,239 4,307 4,471
Net income (loss) per share (diluted) (1) $ 0.45 $ 0.50 $ (1.12) $ (2.90) $ (0.77)
======== ======== ========= ========= ===========
Weighted average shares (diluted) ....... 3,321 4,029 4,239 4,307 4,471
OPERATING DATA:
Estimated number of retail outlets at end
of period (2) .......................... 1,200 2,200 9,900 16,900 28,000
Number of replacement cartridges shipped
during year ............................ 4,500 51,000 186,000 716,000 3,135,000
BALANCE SHEET DATA (at end of period):
Working capital ......................... $ 7,458 $ 14,754 $ 10,051 $ 9,743 $ 2,144
Total assets ............................ 10,025 25,054 23,622 33,257 43,198
Long-term debt .......................... -- -- -- 15,000 15,000
Shareholders' equity .................... 8,667 22,895 19,430 7,131 4,729
</TABLE>
- ------------------
(1) All earnings per share amounts for all periods have been presented and,
where appropriate, restated to conform to FASB Statement 128 requirements.
(2) Represents the Company's estimate of the number of outlets at which one or
more of the Company's household and outdoor products were sold. The
approximate numbers of retail outlets at which the Company's household
products were sold at the end of such periods were none in 1993, 1,000 in
1994, 8,000 in 1995, 15,000 in 1996 and 26,000 in 1997.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXCEPT FOR HISTORICAL INFORMATION CONTAINED IN THIS PROSPECTUS, THE MATTERS
DISCUSSED HEREIN CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
SUGGESTED IN THE FORWARD-LOOKING STATEMENTS, INCLUDING WITHOUT LIMITATION THE
EFFECTS OF ECONOMIC CONDITIONS, PRODUCT DEMAND, COMPETITIVE PRODUCTS AND OTHER
RISKS DETAILED HEREIN. SEE "RISK FACTORS."
OVERVIEW
The Company designs, manufactures and markets proprietary small-scale
drinking water systems under the PUR(R) brand name for the household,
recreational and military markets. These products include a line of
self-monitoring water filters for household use, a rugged line of portable
drinking water systems for outdoor enthusiasts and international travelers and a
line of low-energy, reverse osmosis desalinators for offshore marine, commercial
life raft and military use, including the world's only hand-operated
desalinators. PUR household products, which accounted for more than 80% of the
Company's net sales in 1997, are distributed through approximately 26,000 retail
outlets in the United States and Canada, including Wal-Mart, Sears, Target,
Costco, Kmart, Macy's and Walgreens.
Since its formation in 1986, the Company has utilized its mechanical and
chemical engineering expertise to develop new water filtration and purification
products that provide solutions to a variety of problems that have historically
prevented the adequate treatment of drinking water in a number of settings.
Initially, the Company developed a line of reverse osmosis desalinators for the
United States Navy and other military and offshore marine users. The Company
subsequently developed a line of PUR antimicrobial water purifiers and
microfilters for use by outdoor enthusiasts and international travelers. The
Company has a leading position in each of these markets.
The Company entered the retail water filter market in late 1994 with the
intent of establishing PUR as the leading brand of household water filters.
Recognizing that a significant portion of revenues in the household market would
be derived from recurring sales of replacement cartridges, the Company pursued a
strategy of building brand name recognition for PUR products and developing an
installed base of its products to promote recurring sales of replacement
cartridges. To implement this strategy, the Company invested significant
resources to develop advanced filtration and monitoring technologies, launch a
broad range of products at a variety of price points, expand distribution of its
products, and provide high levels of consumer and trade advertising support. The
Company has also developed and implemented automated manufacturing and assembly
processes for its household products, which enables it to manufacture nearly all
of the filter elements for such products, reducing the Company's costs and
enhancing its ability to respond to retailers' needs. The Company currently
offers eight different types of household water filters at suggested retail
prices ranging from $19.99 to $119.99, as well as replacement cartridges for
each product, and has a distribution network of approximately 26,000 retail
outlets. This strategy of investing heavily to build the PUR brand name and
establish a large installed base, coupled with the resulting rapid growth in
production and sales, led to reduced profit margins and net losses in each of
the last three years. The Company believes it is now well positioned to benefit
from these investments, as evidenced by the Company's results of operations for
the fourth quarter of 1997, in which it had net sales of $23.1 million, a gross
margin of 52.4%, and its first quarterly profit since the first quarter of 1995.
The Company's net sales increased from $10.3 million in 1993 to $71.2
million in 1997. The increase in net sales was primarily the result of the
Company's successful entry in late 1994 into the household water filter market.
Future increases in net sales are also expected to be derived principally from
the sale of household water filter systems and replacement cartridges. Sales of
the Company's household water filter systems have increased with (i) the
introduction of additional products for this market, (ii) an increase in the
number of retail outlets at which the Company's household products are sold,
(iii) an increase in the number of units sold at existing outlets, and (iv) the
overall growth in the market for household water filter systems. The Company
believes that its aggressive campaign to build brand name recognition for PUR
products has contributed significantly to the increase in net sales. Net sales
have also increased as a result of the sale of replacement filter cartridges to
the growing installed base of
<PAGE>
owners of PUR water filter systems. The sale of replacement cartridges is
expected to constitute an increasing portion of the net sales in future periods
as the size of the installed base continues to increase. Revenues from the sale
of outdoor systems to consumers have also increased, but at a significantly
lower rate than revenues from the sale of household water filters.
Cost of products sold is significantly affected by (i) costs of raw
materials, such as engineered thermoplastics, stainless steel and filtration
media, most of which are purchased from third party vendors, (ii) costs of
assembly, testing, quality control and packaging, which are performed by the
Company, and (iii) the mix of products sold. During 1995, 1996 and the first
half of 1997, gross margins were adversely affected by costs related to entering
the household water filter market, including investments made by the Company in
designing and implementing automated manufacturing and assembly processes for
PUR household water filters, together with the cost of conducting manual
assembly operations pending the installation of such automated processes. During
this period, the Company also took steps to reduce its material costs, including
development of a process to produce internally nearly all of its own filter
elements for its household products at significantly lower cost than purchasing
them from third party vendors. Following implementation of enhanced
manufacturing processes, the Company's household products generally carry a
higher gross margin than its other products, with replacement cartridges on
average carrying the highest gross margin of products within the household
category. The sale of household water filters and, in particular, the sale of
replacement cartridges is expected to constitute an increasing portion of net
sales in future periods.
Selling, general and administrative expenses include advertising and
promotional expenses. To implement its strategy of building brand name
recognition for PUR products and developing an installed base of its products to
promote the sale of replacement filter cartridges, the Company has invested
heavily in advertising and promotional programs. Advertising and promotional
activities in 1995 and 1996 were designed to create an initial awareness of the
Company's products, establish recognition of the PUR brand name and build an
installed base supporting recurring sales of replacement cartridges. In 1997,
such expenses were incurred in connection with the introduction and promotion of
several new products for the household market. The Company expects that, as a
percentage of net sales, its advertising and promotional expenses in 1998 will
be essentially unchanged from 1997 as it continues to expand its position in the
household market, and will decline as a percentage of net sales in subsequent
years. However, the Company expects that advertising and promotional expenses
related to the introduction of new products may, from time to time, result in an
increase in such expenses as a percentage of net sales on a quarterly basis,
including in the first quarter of 1998.
The Company intends to continue expanding its distribution network and seek
additional distribution channels to solidify its position in the growing
household water filter market. While such activities would be undertaken to
increase net sales and net income, they could affect the Company's gross profit
or selling, general and administrative expenses as a percentage of net sales.
For example, the sale of the PUR PLUS pitcher through infomercials, which
commenced in February 1998, is expected to result in different levels of gross
profit and selling, general and administrative expenses as a percentage of net
sales than the sale of the PUR products through retail outlets. The impact of
such differences will depend on the extent to which the Company determines to
use such distribution channels and the relative volumes of sales in the
respective channels.
The Company's results of operations on a quarterly basis are subject to
fluctuation due to the seasonal nature of sales for its household products, with
highest sales levels occurring during the fourth quarter, and the periodic
introduction of new products. The Company believes that these seasonal patterns
may have been masked by its recent sales growth and by the mix of sales of
outdoor systems and household systems. The Company's results of operations are
also affected by the timing of the introduction of new products, product
enhancements and related advertising and promotional expenses. Product
development expenses are incurred and advertising and promotional efforts
typically are commenced prior to the initial shipments of new products and
product enhancements. As a result, product development expenses and advertising
and promotional expenses are incurred in periods before any revenues are
recognized from the sale of new products and enhancements, and therefore, gross
margins are relatively lower and operating expenses are relatively higher during
such periods. For example, the Company expects that its gross margin and results
of operations in the first quarter of 1998
<PAGE>
will be adversely affected by its recent introduction of the PUR PLUS pitcher,
PUR PLUS dispenser and PUR ULTIMATE faucet-mounted products. Accordingly, the
Company expects that its gross margin for the first quarter of 1998 will be
similar to that in the third quarter of 1997. The Company also anticipates that
variations in its quarterly results of operations will occur from time to time
in future periods.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the Company's statements of operations, expressed as a percentage of net
sales.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1993 1994 1995 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales .......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of products sold .............. 48.5 47.4 60.9 62.4 52.5
----- ----- ----- ----- -----
Gross profit ....................... 51.5 52.6 39.1 37.6 47.5
Operating expenses:
Selling, general and administrative 23.8 31.4 64.1 65.5 46.1
Research and development .......... 7.8 6.4 8.8 6.0 4.3
Facility relocation ............... -- -- -- 2.9 --
----- ----- ----- ----- -----
31.6 37.8 72.9 74.4 50.4
----- ----- ----- ----- -----
Income (loss) from operations ...... 19.9 14.8 (33.8) (36.8) (2.9)
Other income (expense):
Interest income ................... 1.6 3.0 2.4 0.7 0.1
Interest expense .................. (0.2) (0.3) (0.6) (1.4) (2.0)
----- ----- ----- ----- -----
Income (loss) before income taxes .. 21.3 17.5 (32.0) (37.5) (4.8)
Income tax expense (benefit) ....... 6.8 5.4 (11.2) -- --
----- ----- ----- ----- -----
Net income (loss) .................. 14.5% 12.1% (20.8)% (37.5)% (4.8)%
===== ===== ===== ===== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Net sales increased 114.1% to $71.2 million in 1997 from $33.3 million in
1996. This $37.9 million increase in net sales was attributable primarily to an
increase of $38.4 million in sales of the Company's PUR household water filter
products, reflecting increased sales of filter systems and replacement
cartridges, and the introduction of the PUR PLUS faucet-mounted filter and the
PUR under-sink models, offset by a decrease of $1.5 million in sales of reverse
osmosis desalinators to military customers. Revenues from the sale of outdoor
systems to consumers also increased, but at a significantly lower rate than
revenues from the sale of household water filters. Sales of OEM water filters to
Braun AG were discontinued upon expiration of the Company's contract with Braun
AG in December 1997. Price increases did not have a significant impact on net
sales for 1997.
Gross profit as a percentage of net sales increased to 47.5% in 1997 from
37.6% in 1996. The increase in gross profit as a percentage of net sales in 1997
was due to the implementation of automated manufacturing and assembly processes,
reductions in costs of materials, and an increase in sales of higher margin
household products and replacement filter cartridges as a percentage of net
sales.
Selling, general and administrative expenses increased to $32.8 million in
1997 from $21.8 million in 1996, representing 46.1% and 65.5% of net sales,
respectively. The increase in selling, general and administrative expenses was
attributable primarily to advertising and promotional expenses related to the
continued roll-out and expansion of the Company's line of household water
filters. Advertising costs accounted for 46.0% of the increase in selling,
general and administrative expenses in 1997 relative to 1996. Despite continued
investment in marketing and advertising expenditures relating to new product
introductions, the Company believes that selling, general and administrative
expenses will remain flat as a percentage of net sales in 1998.
Research and development expenses increased to $3.1 million in 1997 from
$2.0 million in 1996, representing 4.3% and 6.0% of net sales, respectively. The
Company expects that research and development expenses will continue to increase
in 1998 as it develops new technology and product line extensions.
<PAGE>
Interest income decreased to $43,000 in 1997 from $220,000 in 1996 due to
decreased balances of cash, cash equivalents and marketable securities. Interest
expense increased to $1.4 million in 1997 from $457,000 in 1996 due to interest
on the Company's line of credit, which was established in 1997, and a full year
of interest on the Company's long-term debt in 1997 compared with six months of
interest in 1996.
The Company's effective tax rate for 1997 and 1996 was 0%. The Company
recorded a valuation allowance for the tax benefit related to the net operating
losses for 1997 and 1996. The Company had net operating tax loss carryforwards
of $23.7 million at December 31, 1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Net sales increased 45.2% to $33.3 million in 1996 from $22.9 million in
1995. This $10.4 million increase in net sales was attributable primarily to
increased sales of the Company's PUR household water filter products, including
the countertop and pitcher models which were introduced in 1996, as well as a
full year's sales of OEM water filters to Braun AG. These increases were
partially offset by a decline in sales of reverse osmosis desalinators due to
lower military sales. Price increases did not have a significant impact on net
sales for 1996 and 1995.
Gross profit as a percentage of sales decreased to 37.6% in 1996 from 39.1%
in 1995. The decrease in gross profit as a percentage of sales in 1996 was
primarily the result of costs associated with entering the household water
filter market, including investments made by the Company in automating its
manufacturing and assembly processes and the cost of conducting manual assembly
operations pending the installation of such automated processes, as well as the
full year impact of OEM filter sales, which had relatively lower profit margins.
Selling, general and administrative expenses increased to $21.8 million in
1996 from $14.7 million in 1995, representing 65.5% and 64.1% of net sales,
respectively. The increase in selling, general and administrative expenses
related primarily to the continued roll-out and expansion of the household water
systems in 1996. Advertising costs accounted for 44.6% of the increase in
selling, general and administrative expenses in 1996 relative to 1995.
Research and development expenses were $2.0 million in each of 1996 and
1995, representing 6.0% and 8.8% of net sales, respectively.
Interest income decreased to $220,000 in 1996 from $551,000 in 1995, due to
decreased balances of cash, cash equivalents and marketable securities. Interest
expense increased to $457,000 in 1996 from $126,000 in 1995 due to interest on
long-term debt issued by the Company in July 1996.
The Company's effective tax rate for 1996 was 0%, compared with 35.0% in
1995. The Company recorded a valuation allowance for the tax benefit related to
the 1996 net operating loss.
SELECTED QUARTERLY FINANCIAL DATA
The following table sets forth certain unaudited quarterly financial data
of the Company for each quarter in calendar year 1996 and 1997. The quarterly
data are derived from the Company's unaudited financial statements not otherwise
contained in this Prospectus. The Company believes that such unaudited
statements include all adjustments (consisting solely of normal recurring
adjustments) necessary for a fair presentation of such quarterly information.
The operating results for any quarter are not necessarily indicative of the
results of the full year or any future quarter.
<PAGE>
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1996
----------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales ........................ $ 6,440 $ 6,598 $ 11,001 $ 9,238
Gross profit ..................... 2,454 2,522 4,239 3,306
Gross profit margin .............. 38.1% 38.2% 38.5% 35.8%
Net income (loss) ................ (1,921) (1,722) (2,916) (5,940)
Net income (loss) per common share
(Basic and Diluted) ............. $ (0.45) $ (0.40) $ (0.67) $ (1.37)
</TABLE>
<TABLE>
<CAPTION>
1997
----------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales ........................ $ 10,347 $ 15,462 $ 22,371 $ 23,063
Gross profit ..................... 4,155 7,001 10,581 12,089
Gross profit margin .............. 40.2% 45.3% 47.3% 52.4%
Net income (loss) ................ (1,898) (1,492) (448) 383
Net income (loss) per common share
(Basic and Diluted) ............. $ (0.44) $ (0.33) $ (0.10) $ 0.08
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operations was $9.1 million in 1997, $5.7 million in 1996, and
$8.1 million in 1995. The reduction in cash flow from operations in 1997
resulted primarily from the net loss and increases in inventories and accounts
receivable. Cash used in operations in 1996 was primarily the result of the net
loss and an increase in accounts receivable. In 1995, the reduction in cash flow
from operations resulted primarily from the net loss and increased inventory
levels. In 1997 and 1996, the decrease in cash flow was partially offset by
increases in accounts payable and accrued liabilities.
Capital expenditures were $6.3 million in 1997 compared with $4.1 million
in 1996 and $4.6 million in 1995. The Company anticipates that capital
expenditures in 1998, principally associated with new product introductions and
an increase in production capacity, will total approximately $8.6 million.
In the past three years the Company has funded its cash requirements
principally with proceeds from the sale of securities and borrowings under
credit facilities with a bank. In June 1994, the Company received net proceeds
of approximately $12.0 million from a public offering of Common Stock. In July
1996, the Company issued $15.0 million of Convertible Notes to GS Group. The
Convertible Notes bear interest at an annual rate of five percent, payable
quarterly, and are due in July 2003. GS Group has the right to convert the
principal amount of the Convertible Notes to Common Stock at any time prior to
maturity at a conversion price of $14.85 per share.
The Company had $7.2 million outstanding under its bank credit facility at
December 31, 1997, compared with no bank borrowings at December 31, 1996. The
credit facility, established in March 1997, provides for total borrowings of up
to $14.0 million, secured by equipment, inventory, receivables, and intangibles.
The credit facility consists of a $10.0 million discretionary working capital
line of credit, limited to eligible receivables and inventory, which bears
interest at the bank's reference rate plus 1.25%, and a $4.0 million equipment
loan which bears interest at the bank's reference rate plus 2.5%. The principal
amount of the equipment loan is payable over a 42-month period commencing
October 1998, unless demand is made sooner. Other borrowings under the credit
facility are due on demand. The Company is currently negotiating a $25.0 million
credit facility with the same bank which would replace its current $14.0 million
credit facility. The new credit facility would consist of a $15.0 million
working capital line of credit limited to eligible receivables and inventory,
payable on demand, and an equipment term loan of up to $10.0 million amortized
over 48 months. Pursuant to the Company's agreement with GS Group, borrowings
under the bank credit facility were limited to $10.0 million in 1997 and will be
limited to $12.5 million in 1998. However, the Company received a waiver from GS
Group allowing it to borrow up to $14.0 million under the credit facility during
the fourth quarter of 1997 to accommodate the Company's peak borrowing needs.
<PAGE>
Management believes that anticipated cash flows from operations, funds
available through its bank credit facility and the net proceeds from this
offering will provide sufficient capital resources for current operations and
planned product introductions through 1999. The Board of Directors currently
intends to retain all earnings for expansion of the Company's business.
At December 31, 1997, the Company had net operating tax loss carryforwards
available to offset future taxable income of approximately $23.7 million. The
net operating loss carryforwards are available to offset future taxable income
and begin to expire in 2010 and are subject to limitations under Section 382 of
the Internal Revenue Code due to changes in equity ownership of the Company.
ACCOUNTING STATEMENTS
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
No. 128, EARNINGS PER SHARE. Statement 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to Statement 128
requirements.
In 1997, the FASB issued Statements No. 130, REPORTING COMPREHENSIVE
INCOME, and No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, effective for fiscal years beginning after December 15, 1997. The
adoption by the Company of these Statements in January 1998 is not expected to
have a material impact on the Company's financial statements
YEAR 2000 ISSUES
Many existing computer programs use only two digits to identify a year in
the date field, with the result that data referring to the year 2000 and
subsequent years may be misinterpreted by these programs. If present in the
computer applications of the Company or its suppliers and customers and not
corrected, this problem could cause computer applications to fail or to create
erroneous results and could cause a disruption in operations and have a
short-term adverse effect on the Company's business and results of operations.
The Company has evaluated its principal computer systems and has determined that
they are substantially Year 2000 compliant. The Company has initiated
discussions with its key suppliers and customers to determine whether they have
any Year 2000 issues. The Company has not incurred any material expenses to date
in connection with this evaluation and does not anticipate material expenses in
the future, depending on the status of its suppliers and customers with respect
to this issue.
<PAGE>
BUSINESS
GENERAL
The Company designs, manufactures and markets proprietary small-scale
drinking water systems under the PUR(R) brand name for the household,
recreational and military markets. These products include a line of
self-monitoring water filters for household use, a rugged line of portable
drinking water systems for outdoor enthusiasts and international travelers and a
line of low-energy, reverse osmosis desalinators for offshore marine, commercial
life raft and military use. PUR household water filters, which accounted for
more than 80% of the Company's net sales in 1997, are offered in a variety of
configurations, including pour-through pitchers and dispensers and in-line
faucet-mounted, countertop and under-sink filter systems. Each PUR household
water filter system incorporates a replaceable filtration cartridge.
The Company's objective is to establish and maintain PUR as the leading
brand of consumer drinking water treatment equipment, using proprietary
technology, superior design and extensive advertising and promotional programs
to obtain a leading position in each market segment it enters. The Company
launched its first PUR water filters for the household market in late 1994, with
the intent of establishing a large installed base of PUR water filter systems to
support recurring sales of replacement filter cartridges. To date, the Company
has sold more than 2.5 million household water filter systems and has obtained a
significant share of this market. According to survey information from Intelect,
a third party market research firm, PUR is the number one brand of in-line water
filters and the second leading brand of all household water filters sold in the
United States. PUR household products currently are distributed through
approximately 26,000 retail outlets in the United States and Canada, compared
with approximately 15,000 retail outlets at the end of 1996. Major customers
include Wal-Mart, Sears, Target, Costco, Kmart, Macy's and Walgreens.
Since its formation in 1986, the Company has utilized its mechanical and
chemical engineering expertise to develop new water filtration and purification
products with superior performance characteristics to meet the identified needs
of consumers. PUR reverse osmosis desalinators, introduced in 1988, include
hand-operated models for life rafts which it believes are the only such products
available in the world, and motor-driven models powered by a 12-volt DC motor.
PUR portable systems drinking water products, launched in 1991, incorporate the
Company's proprietary Tritek(R) disinfection technology which eliminates
microorganisms from water in seconds, making it possible for individuals to
produce safe drinking water when traveling, backpacking or on wilderness trips.
The Company has established a leading position in each of these markets.
In 1994, the Company introduced a faucet-mounted water filter, the first
PUR product for the rapidly growing household water filter market. Since then,
the Company has expanded its household product lines to include a broad range of
products at a variety of price points. The Company's household water filters use
advanced filtration technologies to reduce a wide range of contaminants, such as
microbiological cysts, lead, pesticides, VOCs and other impurities, while
improving water taste and odor. The Company currently offers eight different
types of pour-through and in-line water filters, as well as replacement filter
cartridges for such products. All PUR household products incorporate the
Company's proprietary technology, known as ASM(R) (Automatic Safety
Monitor(TM)), which measures the filter's usage and indicates its remaining
capacity. The Company believes that this visible indication of when to replace
the filter cartridge encourages consumers to purchase replacement cartridges
more frequently than they otherwise would. The Company anticipates that the
installed base of PUR water filter systems will continue to grow, further
promoting the sale of replacement filter cartridges, which on average carry a
higher margin than the Company's other products. Sales of replacement filter
cartridges are expected to comprise an increasing portion of the market for
household water filter products and provide a source of recurring revenues.
INDUSTRY OVERVIEW
During the last half of this century, reliable drinking water has largely
been taken for granted in the United States and other industrialized countries.
However, lead and other impurities can make water potentially unsafe or
unpleasant in taste and odor. In addition, much of the populated world,
including
<PAGE>
parts of Asia, Africa and Latin America, does not have adequate sewage or water
treatment facilities, leaving tap water unfit for human consumption.
HOUSEHOLD MARKET
The EPA and other organizations have identified a number of harmful
contaminants that many municipal water authorities do not remove from drinking
water or that enter the water supply after it has left the municipal water
treatment facility.
* In 1993, the EPA identified microbiological cysts, in particular
CRYPTOSPORIDIUM, as contaminants likely to be found in over 55% of the
nation's surface waters and 17% of the nation's municipal water supplies.
There have been numerous instances of water-borne illness resulting from
such contaminants. For example, approximately 400,000 people became ill in
1993 by an outbreak of CRYPTOSPORIDIA in the municipal water supply for
Milwaukee, Wisconsin, despite the fact that water from the Milwaukee
water-treatment plants met all existing state and federal quality
standards.
* In 1994, the EPA reported on the effect of chlorine byproducts, such as
trihalomethane, in drinking water supplies. The presence of
trihalomethanes in drinking water is considered by the EPA to be a cancer
risk. In 1998, the California Department of Health Services released a
study which found that women who had a high exposure to trihalomethanes
from water consumption were more likely to have miscarriages.
* In 1993, CONSUMER REPORTS published a report on tests it conducted for
lead in household drinking water that found unacceptable lead
contamination, based on EPA standards, in Chicago, Boston, New York,
Washington, D.C. and San Francisco. Lead consumption is regarded as a
significant health hazard, particularly for children.
* In 1997, a study conducted by the Environmental Working Group found that
certain pesticides and herbicides have leached into underground aquifers
in areas with concentrated agricultural activities. The Environmental
Working Group reported that tap water testing in 1996 by authorities in
midwestern states found that 104 communities, with a total population of
3.3 million, were provided tap water contaminated with five or more cancer
causing weed killers.
A new contaminant selection regulation under the Safe Drinking Water Act
requires the EPA to publish a list of contaminants that may be found in water
supplies and to consider the need for regulations addressing such contaminants.
The EPA will require all municipalities to notify their customers once a year
whether any contaminants are found in levels higher than the acceptable limits
identified by the EPA. The Company believes that this requirement will promote
public awareness that water supplies may contain health contaminants that
municipalities are currently unable to remove and that water treatment in the
home at the point-of-use is an increasingly important option for homeowners.
The Company believes that increasing awareness and concern about water
quality has contributed significantly to a steady increase in the size of the
market in the United States for household tap water substitutes (primarily
bottled water) and drinking water equipment. The United States market for
bottled water is currently estimated to be over $3.0 billion annually, with
approximately 35% of United States households purchasing bottled water in
individual or bulk containers. However, bottled water is less convenient and
over time is more costly per gallon than water from a point-of-use treatment
system. The Company estimates that the overall annual market for household
drinking water systems, services and supplies (such as water filters, water
softeners and whole house systems) is approximately $1.5 billion, with the
Company's current segments of this overall market representing approximately
$400 million. Despite heightened awareness of water quality and safety issues,
the domestic market penetration of household drinking water treatment systems is
estimated by the Company to be less than 25% of United States households.
OUTDOOR MARKETS
The outdoor market consists of reverse osmosis desalinators for offshore
marine and military applications, as well as portable water treatment systems
for recreational outdoor use. The Company estimates that the annual U.S. market
for such outdoor systems is approximately $30 million. The reverse
<PAGE>
osmosis desalinator segment includes large motorized systems for use aboard
larger vessels, as well as smaller systems which are hand-operated or powered by
12-volt DC motors for use aboard life rafts or as a back-up system on a boat or
ship. The recreational segment includes a variety of portable, hand-operated
water purifiers and microfilters which eliminate harmful microorganisms from
outdoor or other questionable water sources, such as tap water in developing
countries. These products are typically used by outdoor enthusiasts and
international travelers.
BUSINESS STRATEGY
The Company's objective is to establish and maintain PUR as the leading
brand of consumer drinking water treatment equipment and attain a leading
position in each of the market segments it enters. The Company's key strategies
to accomplish this objective are:
* DEVELOP PROPRIETARY TECHNOLOGY TO ADDRESS CONSUMER CONCERNS. The Company's
research and development efforts are focused on creating innovative and
technologically superior products that provide performance characteristics
exceeding those of competing products. Consumer research conducted by the
Company in 1993 and 1996 revealed that the performance of water filters
from other manufacturers failed to meet consumers' expectations because
(i) consumers were uncertain whether a filter had reached the end of its
useful life and (ii) such filters treated primarily the aesthetic
properties of drinking water and generally did not remove contaminants
related to health concerns. In response to these findings, the Company
developed the ASM monitoring technology and higher performance filters
such as the PUR ULTIMATE faucet-mounted filter and the PUR PLUS
pour-through pitcher and dispenser which were introduced in January 1998.
The Company believes that its research and development team gives it a
significant competitive advantage over others engaged in the design and
manufacture of consumer water filtration and purification equipment.
* OFFER A BROAD LINE OF SUPERIOR PRODUCTS WHICH CATER TO A WIDE CONSUMER
SEGMENT. The Company has established a leading position in its consumer
drinking water treatment categories by developing a broad range of
products with superior performance characteristics at a number of retail
price points. The Company's products are offered in a variety of
configurations with varying performance characteristics.
* ESTABLISH A BROAD DISTRIBUTION NETWORK. The Company's entry into the
household water filter market in 1994 required it to establish new
distribution channels for its products. Since then, the Company has
expanded its distribution network aggressively. The Company's broad
product line and range of price points and its ability to provide
retailers with differentiated product configurations has enabled PUR
products to be sold by a wide variety of retailers including department
stores, mass merchants, drug stores, grocery stores, hardware stores and
warehouse clubs. PUR household products are currently sold throughout the
United States and Canada through approximately 26,000 retail outlets, a
significant increase from approximately 15,000 retail outlets at the end
of 1996. The Company continues to seek additional retail outlets and
distribution channels for its household products. The Company also
distributes its household products to international markets through
Groupe-SEB, one of the world's leading suppliers of small household
appliances whose products are distributed in over 80 countries under the
brand names Rowenta and T-Fal.
* PROMOTE BRAND AWARENESS THROUGH EFFECTIVE MARKETING. The Company entered
the growing household water filter market with the belief that it could
capture a significant share of the market by quickly establishing its PUR
brand. The Company therefore invested and continues to invest significant
resources in advertising and promotional activities to increase awareness
of its products and build the PUR brand name. These activities include
providing its retailers with point-of-sale displays, cooperative
advertising programs, product flyers and in-store product demonstrations.
The Company also utilizes television commercials and infomercials which
air on a variety of national cable channels and local broadcast stations,
as well as print and radio advertisements. These efforts have enabled the
Company to establish PUR products as the number one brand of in-line water
filters and the number two brand of all household water filters sold in
the United States.
<PAGE>
* GENERATE RECURRING SALES OF REPLACEMENT FILTER CARTRIDGES. The Company has
pursued a strategy of building brand name recognition for PUR products and
developing an installed base of its products to promote recurring sales of
replacement cartridges. The Company anticipates that, as the installed
base of PUR water filter systems grows, an increasing portion of its net
sales will be derived from recurring sales of replacement cartridges,
which on average carry a higher margin than the Company's other products.
All PUR household products incorporate the Company's proprietary ASM
technology which measures the filter's usage and indicates its remaining
capacity. The Company believes that this visible indication of when to
replace the filter cartridge encourages consumers to purchase replacement
filters more frequently than they otherwise would.
* DEVELOP LOW-COST, HIGH-VOLUME FLEXIBLE MANUFACTURING PROCESSES. The
Company has invested heavily in automating the manufacturing and assembly
processes for its household water filters, including the development of
several proprietary, automated processes for manufacturing filter elements
used in certain of its products. These automated processes have enabled
the Company to improve its manufacturing efficiencies while enhancing its
ability to provide high volumes of differentiated products to respond to
retailers' needs. Many of these processes were implemented in 1997 and
have contributed to improved margins. The Company intends to continue
implementing processes to reduce the cost of manufacturing it products.
PRODUCTS
Since its formation in 1986, the Company has utilized its mechanical and
chemical engineering expertise to develop new water filtration and purification
products with superior performance characteristics to address the identified
concerns of consumers. The Company believes it is a leader in introducing new
technology to the markets its serves.
* In 1988, the Company introduced the world's first hand-operated reverse
osmosis desalinator.
* In 1991, the Company launched its line of PUR portable systems employing
the Company's proprietary Tritek(R) disinfection technology which enables
the elimination of microorganisms from water.
* In 1994, the Company introduced the first faucet-mounted water filter
capable of removing CRYPTOSPORIDIUM and GIARDIA LAMBLIA.
* In 1994, the Company introduced the first faucet-mounted water filter with
a device that automatically monitors the useful life of the filter
cartridge.
* In 1996, the Company introduced the first gravity-fed, pour-through
pitcher with an automatic monitoring device.
* In 1997, the Company introduced the first faucet-mounted water filter to
remove mercury, particulates, atrazine and lindane.
* In 1998, the Company introduced two new pour-through systems, the PUR PLUS
pitcher and the PUR PLUS dispenser, the first gravity-fed water filter
systems capable of removing microorganisms as small as CRYPTOSPORIDIUM and
GIARDIA LAMBLIA.
* In 1998, the Company introduced the PUR ULTIMATE faucet-mounted filter,
the first faucet-mounted system to remove VOCs, including trihalomethanes,
which have been linked to cancer.
The Company believes its track record of introducing leading edge
technology to the marketplace ahead of its competitors has enabled it to attain
the number one market share in the outdoor product and reverse osmosis market
segments in which it competes, as well as the number one market share in in-line
household water filter systems.
HOUSEHOLD WATER FILTERS
The Company believes it offers the broadest line of household water filters
widely available at retail. PUR household water filters are offered in a variety
of configurations, including pour-through
<PAGE>
pitchers and dispensers and in-line faucet-mounted, countertop and under-sink
filters. Each PUR household water filter system incorporates a replaceable
filter cartridge. Within each configuration, the Company offers different levels
of contaminant reduction capabilities and a range of price points. In addition,
the Company's flexible manufacturing processes allow it to make minor
modifications to its products to meet the preferences of retailers.
All PUR household water filters incorporate the Company's ASM technology
which measures the filter's usage and indicates its remaining capacity, enabling
consumers to anticipate the need to purchase a replacement filter cartridge. The
PUR in-line products also include a feature that automatically shuts off the
water flow when the filter cartridge needs changing. Replacement filter
cartridges are sold at suggested retail prices ranging from $7.99 to $29.99
which allow consumers to obtain filtered water at a small fraction of the cost
of bottled water.
PUR faucet-mounted water filters, introduced to the market in 1994, were
the first household water filters offered by the Company. These compact units
are approximately five inches high and incorporate a proprietary carbon block
filter developed by the Company. The filter cartridges for these units have a
useful life of about two to three months based on the Company's surveys of
consumer usage. The Company introduced its PUR countertop water filter systems
in 1996 and its PUR under-sink water filter system in 1997, with filter
cartridges having a useful life of four to six months. Each of these products is
approximately nine inches high and offers greater contaminant reduction and
longer filter life than the faucet-mounted units. The filter cartridge for the
countertop and under-sink units employ the same proprietary carbon block
technology as the faucet-mounted units. The Company estimates, based on survey
information from Intelect, that its line of faucet-mounted PUR water filters
accounted for approximately 75% of all household faucet-mounted water filtration
sales in the United States in 1997.
The initial PUR pour-through product, introduced to the market in January
1996, is a water pitcher which holds approximately a half-gallon of filtered
water. In 1998, the Company introduced its PUR PLUS pitcher and PUR PLUS
dispenser, which are the only gravity-fed water filters capable of filtering
microorganisms as small as CRYPTOSPORIDIUM and GIARDIA LAMBLIA. The Company
expects to begin shipping the PUR PLUS pour-through products to retailers toward
the end of the first quarter of 1998. The PUR pour-through products incorporate
a proprietary three-stage filtration cartridge, developed and manufactured by
the Company, which employs activated carbon, ion exchange resin and a
microfilter and has a useful life of approximately one to two months based on
the Company's surveys of consumer usage. The Company estimates, based on survey
information from Intelect, that its line of PUR pour-through products accounted
for approximately 8% of all water filtration pitcher sales in the United States
in 1997.
<PAGE>
The products comprising the PUR line of household water filters are as
follows:
<TABLE>
<CAPTION>
SUGGESTED RETAIL PRICE
--------------------------
ASM
FILTER LIFE NSF CERTIFICATION OF FILTER FILTER REPLACEMENT
PRODUCT/CONFIGURATION INDICATOR CONTAMINANT REDUCTION CAPABILITY (1)(2) CAPACITY (3) SYSTEM (4) CARTRIDGE
- ------------------------- ------------- ----------------------------------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
POUR-THROUGH PRODUCTS:
PUR Pitcher X * Chlorine, Taste/Odor, Zinc, 40 gal. $ 19.99 $ 7.99
(1/2 gallon capacity) Particulate, Lead, Copper 1-2 mos.
PUR PLUS Pitcher X * Chlorine, Taste/Odor, Zinc, 40 gal. $ 29.99 $ 12.99
(1/2 gallon capacity) Particulate, Lead, Copper 1-2 mos.
* Cysts (CRYPTOSPORIDIUM, GIARDIA),
Asbestos, Turbidity
PUR PLUS Dispenser X * Chlorine, Taste/Odor, Zinc, 40 gal. $ 39.99 $ 12.99
(2 gallon capacity) Particulate, Lead, Copper 1-2 mos.
* Cysts (CRYPTOSPORIDIUM, GIARDIA),
Asbestos, Turbidity
IN-LINE PRODUCTS:
PUR FM (standard) X * Chlorine, Taste/Odor, Particulate, 100 gal. $ 29.99 $ 14.99
(faucet-mounted) Cysts (CRYPTOSPORIDIUM, GIARDIA), 2-3 mos.
Lead
PUR FM PLUS X * Chlorine, Taste/Odor, Particulate, 100 gal. $ 39.99 $ 19.99
(faucet-mounted) Cysts (CRYPTOSPORIDIUM, GIARDIA), 2-3 mos.
Lead
* Asbestos, Mercury, Lindane,
Atrazine
PUR FM ULTIMATE X * Chlorine, Taste/Odor, Particulate, 100 gal. $ 49.99 $ 21.99
(faucet-mounted) Cysts (CRYPTOSPORIDIUM, GIARDIA), 2-3 mos.
Lead
* Asbestos, Mercury, Lindane,
Atrazine
* VOCs
PUR CT PLUS X * Chlorine, Taste/Odor, Particulate, 200 gal. $ 79.99 $ 29.99
(countertop) Cysts (CRYPTOSPORIDIUM, GIARDIA), 4-6 mos.
Lead
* Asbestos, Mercury, Lindane,
Atrazine
* Turbidity
PUR US PLUS X * Chlorine, Taste/Odor, Particulate, 200 gal. $ 119.99 $ 29.99
(under-sink) Cysts (CRYPTOSPORIDIUM, GIARDIA), 4-6 mos.
Lead
* Asbestos, Mercury, Lindane,
Atrazine
</TABLE>
- ------------------
(1) The National Sanitation Foundation ("NSF") is a nationally recognized
not-for-profit agency which, at the request of state drinking water
administrators and the EPA, has developed consensus standards for the
certification of water filters. NSF certification indicates that a product
has passed a series of stringent independent tests.
(2) NSF certification of the PUR PLUS dispenser and PUR FM ULTIMATE
faucet-mounted products is pending.
(3) Estimated useful life (months) based on Company surveys of consumer usage.
(4) A filter system includes the base unit and one filtration cartridge.
<PAGE>
OUTDOOR PRODUCTS
The Company believes that it offers the broadest line of small-scale
drinking water systems for recreational and offshore marine use. The Company's
outdoor products include a rugged line of portable drinking water systems for
outdoor enthusiasts and international travelers and a line of low-energy,
reverse osmosis desalinators for offshore marine, commercial life raft and
military use.
Various methods have historically been used to disinfect fresh water,
including chlorine gas, iodine, silver nitrate, hydrogen peroxide and boiling.
These methods involve a significant amount of time to be effective and,
therefore, are not convenient or practical for use on a consistent basis to
produce drinking water. In addition, chemical disinfectants are relatively
ineffective against cyst forms of various parasites, including GIARDIA LAMBLIA,
and leave residual concentrations in water, which may render the water
unpalatable. Although filtration is also commonly used to treat contaminated
water and is an effective means of removing larger microorganisms like protozoa
and bacteria, filtration is not a practical means of removing viruses.
PUR fresh water purifiers incorporate the Company's proprietary Tritek
technology, which combines microfiltration and an iodinated resin matrix to
produce safe drinking water in seconds. The microfilter is used to remove
sediment and the largest and most chemically resistant microorganisms. Smaller
microorganisms, like bacteria and viruses, are killed upon contact with the
iodinated resin. The result is a process that takes advantage of the positive
attributes of microfiltration and iodinated resin, without suffering the
drawbacks of each approach when used alone. Each of the PUR fresh water
purifiers is registered with the EPA, which has established minimum performance
guidelines for microbiological water purifiers. See "Business -- Government
Regulation."
The Company offers a range of PUR water purifiers and microfilters for use
by backpackers, campers and other outdoor enthusiasts. The PUR Voyageur(TM) is a
compact water purifier which produces approximately 1.0 liter of water per
minute. The Voyageur incorporates the Company's proprietary Anti-Clog Filter
Technology ("AFT") which extends the life of the filter, eliminating the need
for the user to clean or maintain it. The PUR Scout(R) also incorporates the AFT
filter technology and produces approximately 0.5 liter of water per minute. The
PUR Explorer(R) has a double-action pump which enables one person to produce
over 1.5 liters of water per minute. The Explorer includes a self-cleaning
mechanism, permitting the filter to be cleaned conveniently without disassembly.
The Company's microfilter products include the PUR Pioneer(R), an entry level
product which features a disposable microfilter designed to filter up to 20
gallons, and the PUR Hiker(R), which incorporates the Company's AFT filter
technology and is designed to filter up to 100 gallons.
The Company also offers a line of PUR reverse osmosis desalinators for
converting seawater to potable water when sources of energy are either
unavailable or in limited supply. These products are used primarily in offshore
marine, commercial life raft and military applications. Reverse osmosis
desalination, which has been in use in large-scale systems for over 20 years,
occurs when feed water with dissolved solids (such as salt) is forced against a
semipermeable membrane at high pressure, typically 800 pounds per square inch.
The membrane acts as a barrier to contaminants such as salts, viruses and
bacteria, separating them from the pure water that passes through the membrane.
In a conventional reverse osmosis system, approximately 10% of the seawater
forced against the membrane passes through as pure water. The remaining
high-pressure waste brine stream is discharged. This process requires a large
amount of energy, making it impractical for small-scale applications. In 1988,
the Company introduced the world's first hand-operated reverse osmosis
desalinator, a compact unit incorporating a patented high-pressure energy
recovery pump that is designed to recover and effectively use energy that is
wasted in a conventional reverse osmosis system. The pump recycles the
high-pressure waste brine stream, redirecting it to the backside of the pump's
piston, providing a power assist to the pumping operation. By thus recovering
energy contained in the high-pressure waste brine stream, the Company's energy
recovery pump reduces the external power needed to operate a desalinator by
approximately 90%, and makes possible a small-scale low-energy desalinator.
The PUR Survivor(R) models are hand-operated desalinators, designed
primarily for emergency life raft use. The Survivor-35, the first desalinator
built by the Company, was designed for use by the United States Navy in
25-person life rafts and is also available in commercial versions. The
Survivor-06, the
<PAGE>
smallest reverse osmosis desalinator manufactured in the world, can produce a
pint of fresh water in less than 30 minutes. It is recommended for 4-to
12-person life rafts and individual survival kits. The Company is not aware of
any other hand-operated desalinators on the market. The PUR PowerSurvivor models
are driven by a 12-volt DC motor with power supplied by a boat's battery.
The products comprising the PUR line of outdoor products are as follows:
<TABLE>
<CAPTION>
SUGGESTED
PRODUCT TYPE SPECIAL FEATURES RETAIL PRICE
- ------------------------ ------------- ------------------------------------------ -------------
<S> <C> <C> <C>
PORTABLE SYSTEMS:
PUR Pioneer Microfilter Disposable filter $ 34.95
PUR Hiker Microfilter Anti-clog filter $ 59.95
PUR Voyageur Purifier Anti-clog filter with iodinated resin $ 74.95
PUR Scout Purifier Anti-clog filter with iodinated resin $ 89.95
and dirt shield
PUR Explorer Purifier Double-action pump; self-cleaning filter $ 129.95
with iodinated resin
DESALINATORS:
PUR Survivor-06 Desalinator Hand-operated, 6 gallons per day ("gpd") $ 585.00
PUR Survivor-35 Desalinator Hand-operated, 35 gpd $ 1,550.00
PUR PowerSurvivor-40E Desalinator Powered by 12-volt DC motor, 40 gpd $ 2,220.00
PUR PowerSurvivor-80E Desalinator Powered by 12-volt DC motor, 80 gpd $ 3,540.00
PUR PowerSurvivor-160E Desalinator Powered by 12-volt DC motor, 160 gpd $ 3,770.00
</TABLE>
MARKETING AND DISTRIBUTION
The Company entered the growing household water filter market with the
belief that it could capture a significant share of the market by quickly
establishing its PUR brand name. The Company therefore invested and continues to
invest significant resources in advertising and promotional activities to create
awareness of its products and recognition of the PUR brand name. These
activities include providing its retailers with point-of-sale displays,
cooperative advertising programs, product flyers and in-store product
demonstrations. The Company also utilizes television commercials which air on a
variety of national cable channels and local broadcast stations, as well as
print and radio advertisements. These efforts have enabled the Company to
establish PUR products as the number one brand of in-line water filters and the
second leading brand of all household water filters sold in the United States.
In February 1998, the Company began airing a one-half hour infomercial featuring
the PUR PLUS pitcher. This infomercial is designed to generate both direct and
retail sales and further educate consumers about the advantages of the PUR PLUS
pitcher relative to the leading pitcher brand.
The Company's entry into the household water filter market in 1994 required
it to establish new distribution channels for its products. Since then, the
Company has expanded its distribution network aggressively, and currently sells
its household water filters in the United States and Canada through a wide
variety of mass retail channels, including department stores, mass merchants,
drug stores, grocery stores, hardware stores, and warehouse clubs. The Company's
household products are distributed in approximately 26,000 stores in the United
States and Canada. The accounts are serviced by a network of more than 30
independent manufacturers' representative agencies. The Company continues to
seek additional retail outlets and distribution channels for its household
products.
<PAGE>
The Company's household products are distributed through the following
channels:
<TABLE>
<CAPTION>
APPROXIMATE
DISTRIBUTION CHANNEL NO. OF STORES (1) REPRESENTATIVE RETAILERS
- ---------------------- ------------------- -----------------------------------------------------
<S> <C> <C>
Mass merchants 6,400 Wal-Mart; Target; Kmart
Department stores 2,100 Dayton's; Marshall Fields; Macy's; Robinson-May;
Dillard's; Bloomingdale's; JC Penney; Sears
Drug stores 7,800 Walgreens; Eckerd Drug; Long's Drug; American Stores
Grocery stores 3,400 Albertson's; Kroger; Super Valu; Fleming; Wegman's
Home center and 4,500 Home Depot; Lowes; Menards; Payless Cashways;
hardware stores Builders Square; Ace Hardware; True Value Hardware;
Hardware Hank; Servistar; Coast-to-Coast
Warehouse clubs 700 Costco; Sam's Club; B.J.'s
Specialty retailers 1,100 Bed, Bath & Beyond; Linens 'N Things; Home Place;
Lechters; QVC
</TABLE>
- ------------------
(1) Represents the Company's estimate of the number of outlets at which one or
more of the Company's household products are sold, including but not limited
to the representative retailers named in the table.
As part of its continuing efforts to enhance communications with its
customers, the Company utilizes electronic data interchange with its customers
to generate electronic purchase orders and invoices. The Company also receives
point-of-sale information through this system from 25 retailers including the
Company's top 10 customers. This information allows the Company to track and
monitor consumer sales of its products and anticipate orders from its principal
customers.
In 1996, the Company established an international distribution agreement
with Groupe-SEB, one of the world's leading suppliers of small household
appliances whose products are distributed in over 80 countries under the brand
names Rowenta and T-Fal. Under the distribution agreement, Groupe-SEB has the
right to distribute PUR household water filters in all countries outside of
North America and Japan. The multi-year agreement with renewal options gives the
Company immediate access to worldwide markets with minimal investment in sales
and marketing activities.
The Company's portable drinking water systems are offered to outdoor
enthusiasts and international travelers through more than 1,550 outdoor and
travel stores and more than a dozen mail order catalogs. A network of
approximately 20 independent manufacturers' representatives services these
accounts. The Company's reverse osmosis desalinators can be purchased from more
than 450 marine dealers and service centers on the Atlantic, Pacific and Gulf
coasts and from several marine catalogs. Internal sales and service personnel
manage these accounts directly. The Company also sells directly to the United
States armed forces. Sales to foreign military forces and consumers are made
through approximately 30 distributors located in Europe, Asia and the Middle
East. To create awareness for its products, the Company advertises in consumer
and trade publications, participates in consumer and trade shows, and publishes
periodic newsletters to its retailers.
RESEARCH AND DEVELOPMENT
The Company believes that its research and development team gives it a
significant competitive advantage over others engaged in the design and
manufacture of consumer water filtration and purification equipment. Through the
efforts of its research and development team, the Company develops products
which incorporate proprietary technology to offer performance superior to
comparably priced products sold by competitors. The Company utilizes customer
surveys, focus groups, home user studies and field testing of its products to
assess consumer needs and preferences. Research and development efforts are then
focused on products where technological innovation can create a meaningful
difference between the Company's products and competing products. The Company's
research and development team includes an advanced manufacturing design group
which works to coordinate the transition of new products from the research and
development stage through the manufacturing process and ultimately to a
successful product launch. The Company's expenditures for
<PAGE>
research and development were $3.1 million in 1997 and $2.0 million in each of
1996 and 1995, representing 4.3%, 6.0% and 8.8% of sales, respectively.
MANUFACTURING
Since entering the household water filter market in 1994, the Company has
invested heavily in developing and implementing automated assembly and
manufacturing processes. Since 1994, the Company's annual production volume has
risen from approximately 140,000 units and cartridges to approximately 5.4
million in 1997. During this period, the Company has also implemented management
processes and information systems which it believes can accommodate significant
additional growth.
The Company currently assembles all of the filter elements used in its
household products. The manufacturing and assembly processes of some of its
filter units and most of its filter cartridges is automated. The assembly,
testing, quality control and packaging of the Company's products are conducted
by the Company's employees at its facilities in Minneapolis, Minnesota.
The principal raw materials utilized in the Company's manufacturing
operations are engineered thermoplastics, stainless steel and filtration media.
The Company relies on third party machine shops and injection molders to
manufacture components to the Company's specifications. The Company has
consolidated its supply relationships to two or three vendors for each component
to promote quality control. The Company has identified additional potential
suppliers for most of its components, and believes that alternate sources of
supply would be readily available to the Company if its relationships with
current suppliers were interrupted. The interruption of any of these supply
relationships could have a material adverse effect on the Company's results of
operations.
PATENTS
The Company is the owner of 12 United States utility patents and five
United States design patents related to its reverse osmosis desalinators,
portable drinking water systems and household drinking water systems. These
patents expire at various dates from 1998 to 2013. The Company has applied for
corresponding foreign patents where it deemed such applications necessary. The
Company has also applied for 11 other patents in the United States with respect
to its household drinking water products and for corresponding foreign patents.
The protection offered by these patents and the ability to obtain protection
with respect to new technology are important to the Company's future
performance. See "Risk Factors -- Reliance on Proprietary Technology."
COMPETITION
The Company competes with a number of companies in the manufacture and
marketing of household water filtration and purification systems. The most
significant competitors in this market currently are Brita U.S.A. (a subsidiary
of Clorox Company), Teledyne Waterpik (a subsidiary of Allegheny Teledyne,
Inc.), Culligan Water Technologies, Inc., Rubbermaid Inc. and Signature Brands
Inc. As this market develops, the Company may experience increased competition
from public water utilities, appliance manufacturers and consumer electronics
companies. In addition, the Company competes indirectly with suppliers of
bottled water.
The Company is not aware of any other company which manufactures
hand-operated desalinators. The Company competes with several other companies in
the manufacture and sale of small-scale motorized reverse osmosis desalinators.
These companies include Sea Recovery Corp. and Village Marine Tec. The Company
also competes with several companies in the manufacture of water filters and
purifiers for personal and recreational uses. These companies include Katadyn
U.S.A., Inc., Mountain Safety Research Corporation (a subsidiary of Recreational
Equipment, Inc.), and Cascade Designs, Inc.
The Company competes in the sale of drinking water systems on the basis of
product features, product performance and reputation, price and service.
GOVERNMENT REGULATION
The manufacture, marketing, advertising and distribution of water
purification devices containing active ingredients, such as iodine, is regulated
by the EPA. The EPA generally requires registration of the
<PAGE>
manufacturer, the active ingredients and the applicable device and its packaging
prior to sale of the product. Registration entails obtaining scientific data as
to the efficacy and toxicity of the device and its active ingredients. The PUR
Explorer, Scout and Voyageur, all of which contain iodinated resin, have been
registered by the EPA as "microbiological water purifiers."
In 1987, the EPA issued a protocol (the "1987 Protocol"), applicable to
manufacturers of microbiological water purification devices, for the testing and
certification of such devices, including those offered by the Company. The 1987
Protocol requires that to be registered as a "microbiological water purifier," a
device must remove, kill or inactivate all types of disease-causing
microorganisms from the water, including bacteria, viruses and protozoan cysts,
so as to render the processed water safe for drinking. The 1987 Protocol does
not require the removal of all traces of iodine from the treated water. Because
small amounts of iodine may be present in water treated by the Company's
antimicrobial water purifiers, the Company, in its labeling, advises persons
with thyroid problems and pregnant women to consult their doctors before use of
such products. Management believes the Company's water purification products
satisfy all the 1987 Protocol requirements.
In addition to EPA regulation, some states require registration of
household water filtration and purification products. The Company believes that
its current household products, and any future household products it develops,
comply and will comply with state regulations applicable to such products. There
can be no assurance, however, that such state registration requirements will not
result in delays in introduction of these products in certain markets.
The Company is also subject to regulation with respect to the handling and
disposal of the elemental iodine used in manufacturing resins. The Company
believes it is in compliance with applicable rules, and that it has properly
disposed of such material. There can be no assurance that more restrictive and
costly requirements will not be imposed in the future.
EMPLOYEES
At December 31, 1997, the Company had approximately 345 full-time
employees, of whom 33 were involved in research and development, 229 in
manufacturing, assembly and testing, 47 in sales, marketing, technical and
customer service, and 36 in administration. None of the Company's employees is
represented by a labor union or is covered by a collective bargaining agreement.
The Company has not experienced any work stoppages and believes that its
employee relations are excellent.
FACILITIES AND EQUIPMENT
The Company is headquartered in a leased facility of 101,000 square feet at
9300 North 75th Avenue, Minneapolis, Minnesota 55428. The Company initiated
construction on an 87,000 square foot expansion of this facility in 1997, and
expects to take occupancy of such expansion in May 1998, at which time the
expiration date of the lease for the entire facility will be extended from April
2007 to the date that is ten years from the date of occupancy, plus 15 days. The
Company believes this expanded facility will provide sufficient space to support
the Company's anticipated requirements for the near-term, and that additional or
alternate facilities would be available on terms acceptable to the Company if
the Company's operations were to require additional space. The Company also
leases a warehouse facility of 19,000 square feet in Brooklyn Park, Minnesota
pursuant to a one year lease that expires on July 31, 1998.
The Company was formerly headquartered in a leased facility of 52,000
square feet in Minneapolis, Minnesota pursuant to a seven-year lease which
expires on December 31, 2000. The Company has obtained a replacement tenant for
26,000 square feet of that facility and is seeking tenants for the remainder of
the facility. The original lease remains in effect and the Company will have
continuing financial obligations under such lease to the extent the facility is
not occupied by another tenant or the tenant does not assume or perform the
Company's obligations under the original lease.
The Company owns manufacturing and engineering equipment, located at its
facilities in Minneapolis, used in its assembly operations and research and
development efforts. Such equipment is available from a variety of sources, and
the Company believes that it currently owns or can readily acquire equipment
required for its current and anticipated levels of operations.
<PAGE>
LITIGATION
The Company and several other water filtration companies are defendants in
a civil proceeding initiated in January 1997 by Brita U.S.A., a subsidiary of
Clorox Company, which asserts that the defendants have infringed one of Brita's
patents relating to pitcher products. Brita's lawsuit, now pending in the United
States District Court for the Northern District of Illinois, seeks injunctive
relief and unspecified monetary damages. This litigation is still in the initial
stages. The Company was aware of Brita's patent prior to developing the PUR
pitcher design and believes that it does not infringe Brita's patent. The
Company intends to defend vigorously its right to market and sell these
products. The design of the PUR PLUS pitcher, dispenser and related filter
cartridge differs in material respects from the design of the pitcher products
that are the subject of this litigation.
The Company is also a defendant in a civil proceeding initiated in April
1997 by UltraPure Systems, Inc., a subsidiary of Culligan Water Technologies,
Inc., which asserts that the Company has infringed an UltraPure patent on a
faucet-mounted filter system. UltraPure's lawsuit, now pending in the United
States District Court for the District of Minnesota, seeks injunctive relief and
unspecified monetary damages. The Company believes it does not infringe
UltraPure's patent and intends 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.
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
- ------------------------------------ ----- -------------------------------------------
<S> <C> <C>
Brian F. Sullivan ............... 36 President, Chief Executive Officer
and Director
Jeffrey T. Dekko ................ 31 Vice President -- Marketing
Richard D. Hembree .............. 45 Vice President -- Engineering
Charles F. Karpinske ............ 43 Vice President and Chief Financial Officer
Sally S. Mainquist .............. 42 Vice President -- Manufacturing
Barry B. Van Lerberghe .......... 36 Vice President -- Sales
Robert R. Gheewalla ............. 30 Director
John E. Gherty .................. 54 Director
Sanjay H. Patel ................. 37 Director
William D. Thompson ............. 76 Director
William F. Wanner, Jr. .......... 55 Director
Ronald W. Weber ................. 69 Director
Richard J. Zeckhauser ........... 57 Director
</TABLE>
BRIAN F. SULLIVAN has been the President and Chief Executive Officer and a
director of the Company 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 Simple
Simon, Inc.
JEFFREY T. DEKKO has served as Vice President -- Marketing of the Company
since July 1995. Mr. Dekko served as Vice President of Recreational Products
for the Company from October 1994 to July 1995. Mr. Dekko directs the Company's
marketing efforts in the consumer household water products category. From 1988
to October 1994, Mr. Dekko was marketing manager for General Mills, Inc.
RICHARD D. HEMBREE has served as chief engineer of the Company 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 eight United States
patents held by the Company. From 1983 to 1986, Mr. Hembree was a senior design
engineer at Seagold Industries Corporation, a manufacturer of desalinators,
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, a software development company, from April 1995 to
February 1996. From August 1993 to March 1995, Mr. Karpinske was the Chief
Operating Officer and Chief Financial Officer for Decision Data, a manufacturer
and distributor of computer equipment. From October 1986 to July 1993, Mr.
Karpinske worked for Apertus Technologies (formerly Lee Data), a manufacturer
and distributor of computer equipment, 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 the
Company 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, most recently as a factory operations manager.
<PAGE>
BARRY B. VAN LERBERGHE has served as Vice President -- Sales of the Company
since July 1995. Prior to joining the Company, Mr. Van Lerberghe was Western
Regional Manager for Sunbeam Household Products from 1992 to 1995, and District
Sales Manager for Polaroid Corporation from 1988 to 1992.
ROBERT GHEEWALLA has been a director of the Company since February 1998.
Mr. Gheewalla has been an Associate in the Principal Investment Area of
Goldman, Sachs & Co. since 1994. From 1989 to 1994, he worked in the Global
Finance Department of Goldman, Sachs & Co. Mr. Gheewalla also serves on the
Advisory Committees or Boards of Directors of Marcus Cable Co., L.P. and North
American Railnet, Inc.
JOHN E. GHERTY has been a director of the Company 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 the Company since July 1996. Mr.
Patel is expected to join Greenwich Street Capital Partners as a managing
director in April 1998. Mr. Patel was a Managing Director in the Principal
Investment Area of Goldman, Sachs & Co. from 1996 to January 1998, and worked
in the Leveraged Buyout Group of Goldman, Sachs & Co. from 1987 to 1996. Mr.
Patel is also a director of Stirling Cooke Brown Holdings Limited.
WILLIAM D. THOMPSON has been a director of the Company 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 the Company since its
inception in 1986. Mr. Wanner served as Chairman of the Board of the Company
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.
RONALD W. WEBER has been a director of the Company 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 the Company 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.
Directors of the Company are elected annually to serve until the next
annual meeting of shareholders. GS Group 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. Gheewalla serves as a director of the Company pursuant to such arrangements.
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information as of December 31, 1997,
regarding the beneficial ownership of shares of Common Stock of the Company by
each director and executive officer of the Company, by all directors and
executive officers of the Company as a group, and by each shareholder known by
the Company to own beneficially more than five percent (5%) of the outstanding
shares of the Company's Common Stock. Unless otherwise noted, each person or
group identified possesses sole voting and investment power with respect to such
shares.
<TABLE>
<CAPTION>
PERCENT OF OUTSTANDING
SHARES (2)
----------------------
NUMBER OF SHARES BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED (1) OFFERING OFFERING
- ------------------------------------------------------- ------------------------ ---------- ---------
<S> <C> <C> <C>
Certain investment funds affiliated with
The Goldman Sachs Group, L.P. (3) .................... 1,015,101 18.2% 15.5%
85 Broad Street
New York, NY 10004
Investment Advisers, Inc. (4) ......................... 620,300 13.6% 11.2%
3700 First Bank Place
Minneapolis, MN 55440
Wanner Engineering, Inc. (5) .......................... 596,100 13.1% 10.7%
1204 Chestnut Avenue
Minneapolis, MN 55403
US Trust Company of New York (6) ...................... 370,036 8.1% 6.7%
114 West 47th Street
New York, NY 10036
Nevis Capital Management, Inc. (7) .................... 311,300 6.8% 5.6%
1119 St. Paul Street
Baltimore, MD 21202
DIRECTORS AND EXECUTIVE OFFICERS:
Brian F. Sullivan (8)(9) .............................. 530,000 11.3% 9.3%
Jeffrey T. Dekko (8) .................................. 15,263 * *
Richard D. Hembree (8) ................................ 72,150 1.6% 1.3%
Charles F. Karpinske (8) .............................. 22,500 * *
Sally S. Mainquist (8) ................................ 20,615 * *
Barry B. Van Lerberghe (8) ............................ 16,050 * *
Robert R. Gheewalla (10) .............................. -- * *
John E. Gherty (8) (11) ............................... 56,451 1.2% 1.0%
Sanjay H. Patel (8) (12) .............................. 5,700 * *
William D. Thompson (8) ............................... 21,000 * *
William F. Wanner, Jr. (8)(13) ........................ 660,150 14.5% 11.9%
Ronald W. Weber (8) ................................... 28,000 * *
Richard J. Zeckhauser (8) (14) ........................ 92,500 2.0% 1.7%
All directors and executive officers as a group
(13 persons, including those named above)(8) ......... 1,540,379 31.9% 26.4%
</TABLE>
- ------------------
* Less than one percent.
(1) Each person has sole voting and sole power with respect to all outstanding
shares, except as noted.
(2) Based on 4,548,249 shares outstanding before the offering and 5,548,249
shares to be outstanding after the offering. Such amounts do not include
2,094,051 shares of Common Stock issuable upon exercise of stock options
and warrants or conversion of Convertible Notes outstanding at December 31,
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 or the conversion of the
Convertible Notes.
(3) Reflects information included on a Schedule 13D, dated October 1, 1997,
filed with the Securities and Exchange Commission by certain investment
partnerships, of which affiliates of The Goldman Sachs Group, L.P. ("GS
Group") are the general partner, managing general partner, managing partner
or investment manager. Includes (i) 1,010,101 shares which may be
<PAGE>
acquired upon the conversion of Convertible Notes owned by the investment
partnerships, and (ii) 5,000 shares subject to options held for the benefit
of the GS Group by Mr. Patel (see Notes 8 and 12). Includes Convertible
Notes held of record by GS Capital Partners II, L.P., currently convertible
into 633,766 shares, Convertible Notes held of record by GS Capital
Partners II Offshore, L.P., currently convertible into 251,948 shares,
Convertible Notes held of record by Stone Street Fund 1996, L.P., currently
convertible into 60,191 shares, Convertible Notes held of record by Bridge
Street Fund 1996, L.P., currently convertible into 40,819 shares, and
Convertible Notes held of record by Goldman, Sachs & Co. Verwaltungs GmbH,
currently convertible into 23,377 shares. Does not include up to 367,309
aggregate shares of Common Stock in respect of certain reset rights held by
the investment partnerships. GS Group disclaims beneficial ownership of the
shares owned by such investment partnerships to the extent attributable to
partnership interests therein held by persons other than GS Group and its
affiliates. Each of such investment partnerships shares voting and
investment power with certain of its respective affiliates. See "Dilution."
(4) Reflects information as of December 31, 1997, based on a Schedule 13G,
dated January 30, 1998, 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 464,500 shares and shared
voting power and shared dispositive power with respect to 155,800 shares.
(5) Mr. Wanner, a director of the Company, is a director, officer and principal
shareholder of Wanner Engineering, Inc. Such shares are also included in
the shares beneficially owned by Mr. Wanner.
(6) Reflects information as of December 31, 1997, based on a Schedule 13G,
dated February 6, 1998, 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 stock options as follows: Mr. Sullivan, 121,500 shares; Mr. Dekko,
14,750 shares; Mr. Hembree, 41,250 shares; Mr. Karpinske, 22,500 shares;
Ms. Mainquist, 19,800 shares, Mr. Van Lerberghe, 12,250 shares; Mr. Gherty,
9,000 shares; Mr. Patel, 5,000 shares; Mr. Thompson, 6,000 shares; Mr.
Wanner, 10,000 shares; Mr. Weber, 8,000 shares; Dr. Zeckhauser, 8,500
shares; and all directors and executive officers as a group, 278,550
shares.
(9) Mr. Sullivan's address is 9300 North 75th Avenue, Minneapolis, MN 55428.
(10) Does not include securities that may be deemed to be beneficially owned by
GS Group (see Note 3). Mr. Gheewalla, a director of the Company, is an
associate of Goldman, Sachs & Co., the investment manager for certain of
the investment partnerships, Mr. Gheewalla disclaims beneficial ownership
of such securities.
(11) Includes 10,701 shares held by Mr. Gherty as custodian for his minor
children.
(12) Includes 5,000 shares subject to options held for the benefit of GS Group
with which Mr. Patel was previously associated. Mr. Patel disclaims
beneficial ownership of such securities.
(13) Includes 2,200 shares held by Mr. Wanner as trustee for members of his
family and 596,100 shares owned by Wanner Engineering, Inc., of which Mr.
Wanner is a director, officer and principal shareholder.
(14) 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.
<PAGE>
UNDERWRITING
NationsBanc Montgomery Securities LLC and Deutsche Morgan Grenfell Inc.
(the "Underwriters") have severally agreed, subject to the terms and conditions
in the underwriting agreement (the "Underwriting Agreement") by and between the
Company and the Underwriters, to purchase from the Company the aggregate number
of shares of Common Stock indicated below opposite their respective names at the
public offering price less the underwriting discount set forth on the cover page
of this Prospectus. The Underwriting Agreement provides that the obligations of
the Underwriters are subject to certain conditions precedent and that the
Underwriters are committed to purchase all the shares of Common Stock if they
purchase any.
UNDERWRITER NUMBER OF SHARES
----------- ----------------
NationsBanc Montgomery Securities LLC ..........
Deutsche Morgan Grenfell Inc. ..................
---------
Total ......................................... 1,000,000
The Underwriters have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public on the terms set
forth on the cover page of this Prospectus. The Underwriters may allow to
selected dealers a concession of not more than $ per share and the Underwriters
may allow, and such dealers may reallow, a concession of not more than $ per
share to certain other dealers. After the offering, the public offering price
and other selling terms may be changed by the Underwriters. The Common Stock is
offered subject to receipt and acceptance by the Underwriters and to certain
other conditions, including the right to reject orders in whole or in part.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of 150,000 additional shares of Common Stock to cover over-allotments, if any,
at the same price per share as the initial 1,000,000 shares to be purchased by
the Underwriters. To the extent that the Underwriters exercise such
over-allotment option, each of the Underwriters will be committed, subject to
certain conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may purchase such
shares only to cover over-allotments made in connection with this offering.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or will contribute to payments the Underwriters may be required
to make in respect thereof.
The Company, its officers, directors and certain other shareholders of the
Company designated by the Underwriters, including the holders of the Convertible
Notes, have agreed that, for a period of 180 days from the date of this
Prospectus (120 days in the case of the holders of the Convertible Notes), they
will not, without the prior written consent of NationsBanc Montgomery Securities
LLC, offer, sell, contract to sell or otherwise dispose of any shares of Common
Stock or any securities convertible into, or exercisable or exchangeable for,
Common Stock, except that the Company may issue shares of Common Stock (i) in
connection with acquisitions and (ii) pursuant to the conversion of the
Convertible Notes and the exercise of options and warrants outstanding as of the
closing of this offering. Such shareholders beneficially own an aggregate of
1,261,829 shares of Common Stock currently outstanding and options exercisable
for or securities convertible into an aggregate of 1,293,651 shares of Common
Stock.
The Underwriters have informed the Company that the Underwriters do not
expect to make sales of Common Stock offered by this Prospectus to accounts over
which they exercise discretionary authority in excess of 5% of the number of
shares of Common Stock offered hereby.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission (the "Commission") may limit the ability of
the Underwriters and certain selling group members to bid for and purchase the
Common Stock. As an exception to these rules, the Underwriters are permitted to
engage in certain transactions that stabilize the price of the Common Stock.
Such transactions consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the Common Stock. If the Underwriters create
a short position in the Common Stock in connection with this offering, i.e., if
they sell more shares of Common Stock than are set forth on the cover page of
this Prospectus, the Underwriters may reduce that short position by purchasing
Common Stock in the open
<PAGE>
market. The Underwriters may also elect to reduce any short position by
exercising all or part of the over-allotment option described above. The
Underwriters may also impose a penalty bid on certain Underwriters and selling
group members. This means that if the Underwriters purchase shares of Common
Stock in the open market to reduce the Underwriters' short position or to
stabilize the price of the Common Stock, they may reclaim the amount of the
selling concession from the Underwriters and selling group members who sold
those shares as part of this offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security. Neither the Company nor any of the
Underwriters makes any representation or predictions as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the Common Stock. In addition, neither the Company nor any of the
Underwriters makes any representation that the Underwriters will engage in such
transactions or that such transactions, once commenced, will not be discontinued
without notice.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Robins, Kaplan, Miller & Ciresi L.L.P., Minneapolis,
Minnesota. Eric O. Madson, a partner in Robins, Kaplan, Miller & Ciresi L.L.P.,
is the Secretary of the Company and a beneficial owner of shares of Common
Stock. Certain legal matters will be passed upon for the Underwriters by Fried,
Frank, Harris, Shriver & Jacobson (a partnership including professional
corporations), Los Angeles, California.
EXPERTS
The financial statements of the Company as of December 31, 1996 and 1997
and for each of the three years in the period ended December 31, 1997, included
in this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon, appearing
elsewhere herein, and in the Registration Statement, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-3 (together with all amendments and exhibits, the "Registration Statement")
under the Securities Act of 1933, as amended, with respect to the offering of
the shares of Common Stock made hereby. This Prospectus does not contain all of
the information set forth in the Registration Statement. For further information
with respect to the Company and the Common Stock, reference is made to such
Registration Statement. Statements made in this Prospectus as to the contents of
any contract, agreement or other documents referred to are not necessarily
complete. With respect to each such contract, agreement or other document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved. The Registration
Statement may be inspected without charge and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549; 500 West Madison, Suite 1400, Chicago, Illinois 60661; and 7 World
Trade Center, Suite 1300, New York, New York 10048. Copies of such materials may
also be obtained at prescribed rates from the Commission's Public Reference
Section at 450 Fifth Street, N.W., Washington, D.C. 20549.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files periodic reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information may be
inspected without charge and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549;
500 West Madison, Suite 1400, Chicago, Illinois 60661; and 7 World Trade Center,
Suite 1300, New York, New York 10048. Copies of such materials may also be
obtained at prescribed rates from the Commission's Public Reference Section at
450 Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a web
site at "http://www.sec.gov" which provides on-line access to registration
statements, reports, proxy statements and other information regarding
registrants that file electronically with the Commission.
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are hereby
incorporated by reference in this Prospectus except as superseded or modified
herein:
i. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997;
ii. The description of the Company's capital stock, contained in the
Company's Form 8-A filed February 3, 1996, and amended on December 4,
1997; and
iii. The description of the Company's Rights Plan, contained in the
Company's Form 8-A filed February 20, 1996.
All documents filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus
and prior to the termination of the offering of the shares of Common Stock
offered hereby shall be deemed to be incorporated by reference into this
Prospectus and to be a part hereof from the date of filing such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as modified or
superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including a
beneficial owner, to whom this Prospectus is delivered, upon written or oral
request of such person, a copy of any or all documents that have been or may be
incorporated by reference herein (other than exhibits to such documents which
are not specifically incorporated by reference into such documents). Such
requests should be directed to the Chief Financial Officer at the Company's
principal executive offices at 9300 North 75th Avenue, Minneapolis, Minnesota
55428, telephone number (612) 315-5500.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Auditors ............................................... F-2
Balance Sheets as of December 31, 1996 and 1997 .............................. F-3
Statements of Operations for the Years Ended December 31, 1995, 1996 and 1997 F-4
Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997 F-5
Statements of Changes in Shareholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997 ............................................ F-6
Notes to Financial Statements ................................................ F-7
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Recovery Engineering, Inc.
We have audited the accompanying balance sheets of Recovery Engineering,
Inc. as of December 31, 1996 and 1997, and the related statements of operations,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement presentation. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Recovery Engineering, Inc.
at December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Minneapolis, Minnesota
January 30, 1998
<PAGE>
RECOVERY ENGINEERING, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................ $ 5,988 $ 261
Marketable securities ................................ 1,542 --
Accounts receivable (net of allowance of $212 for 1996
and $314 for 1997) .................................. 8,109 16,236
Inventory ............................................ 4,926 7,594
Other current assets ................................. 304 1,522
--------- ---------
Total current assets .................................. 20,869 25,613
Property and equipment:
Tooling .............................................. 6,057 9,815
Equipment and fixtures ............................... 6,569 9,123
--------- ---------
12,626 18,938
Less accumulated depreciation ........................ 3,003 4,771
--------- ---------
9,623 14,167
Deferred income taxes ................................. 1,512 1,512
Patents (net of accumulated amortization) ............. 766 732
Other assets .......................................... 487 676
Note receivable -- related party ...................... -- 498
--------- ---------
Total assets .......................................... $ 33,257 $ 43,198
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank line of credit .................................. $ -- $ 7,161
Accounts payable ..................................... 6,483 8,336
Accrued facility relocation costs .................... 608 217
Accrued marketing expenses ........................... 861 1,781
Accrued coop advertising ............................. 1,050 2,138
Other accrued expenses ............................... 2,124 3,836
--------- ---------
Total current liabilities ............................. 11,126 23,469
Long term debt ........................................ 15,000 15,000
Commitments
Shareholders' equity:
Common stock, $.01 par value:
Authorized shares -- 100,000,000
Issued and outstanding shares 1996 -- 4,325,710 and
1997 -- 4,548,249 ................................. 43 45
Additional paid-in capital ........................... 20,313 21,364
Retained earnings (deficit) .......................... (13,225) (16,680)
--------- ---------
Total shareholders' equity ............................ 7,131 4,729
--------- ---------
Total liabilities and shareholders' equity ............ $ 33,257 $ 43,198
========= =========
</TABLE>
See accompanying notes
<PAGE>
RECOVERY ENGINEERING, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales ....................................... $ 22,921 $ 33,277 $ 71,243
Cost of products sold ........................... 13,959 20,756 37,417
-------- --------- --------
Gross profit .................................... 8,962 12,521 33,826
Operating expenses:
Selling, general and administrative ............ 14,692 21,803 32,815
Research and development ....................... 2,021 2,007 3,082
Facility relocation costs ...................... -- 973 --
-------- --------- --------
16,713 24,783 35,897
-------- --------- --------
Loss from operations ............................ (7,751) (12,262) (2,071)
Other income (expense):
Interest income ................................ 551 220 43
Interest expense ............................... (126) (457) (1,427)
-------- --------- --------
Loss before income taxes ........................ (7,326) (12,499) (3,455)
Income tax benefit .............................. (2,564) -- --
-------- --------- --------
Net loss ........................................ $ (4,762) $ (12,499) $ (3,455)
======== ========= ========
Net loss per share -- basic and diluted ......... $ (1.12) $ (2.90) $ (0.77)
======== ========= ========
Weighted average shares ......................... 4,239 4,307 4,471
======== ========= ========
</TABLE>
See accompanying notes
<PAGE>
RECOVERY ENGINEERING, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 1996 1997
------------ ------------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss .................................................... $ (4,762) $ (12,499) $ (3,455)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization ............................. 852 1,396 1,883
Write off of leasehold improvements ....................... -- 365 --
Deferred income taxes ..................................... (1,775) -- --
Changes in operating assets and liabilities:
Accounts receivable ..................................... (207) (3,913) (8,127)
Inventory ............................................... (3,554) 1,247 (2,668)
Refundable income taxes ................................. (975) 1,177 --
Other current assets .................................... 69 80 (1,218)
Other assets ............................................ -- (487) (687)
Accounts payable ........................................ 1,489 3,571 1,853
Accrued expenses ........................................ 807 3,363 3,329
-------- --------- ---------
Net cash used in operating activities ....................... (8,056) (5,700) (9,090)
INVESTING ACTIVITIES
Purchase of marketable securities ........................... (2,511) (12,185) --
Sale of marketable securities ............................... 4,963 11,665 1,542
Purchase of investments ..................................... (614) -- --
Sale of investments ......................................... 5,116 -- --
Purchase of property and equipment .......................... (4,601) (4,117) (6,312)
Purchase of patents ......................................... (216) (166) (81)
-------- --------- ---------
Net cash (used in) provided by investing activities ......... 2,137 (4,803) (4,851)
FINANCING ACTIVITIES
Gross borrowings -- bank line of credit ..................... -- -- 52,181
Gross repayments -- bank line of credit ..................... -- -- (45,020)
Issuance of warrants ........................................ -- -- 328
Proceeds from issuance of long-term debt .................... -- 15,000 --
Exercise of stock options and warrants ...................... 1,342 334 725
Common stock acquired ....................................... (45) (134) --
-------- --------- ---------
Net cash provided by financing activities ................... 1,297 15,200 8,214
-------- --------- ---------
Increase (decrease) in cash and cash equivalents ............ (4,622) 4,697 (5,727)
Cash and cash equivalents at beginning of year .............. 5,913 1,291 5,988
-------- --------- ---------
Cash and cash equivalents at end of year .................... $ 1,291 $ 5,988 $ 261
======== ========= =========
</TABLE>
See accompanying notes
<PAGE>
RECOVERY ENGINEERING, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
------------------------ ADDITIONAL EARNINGS
SHARES AMOUNT PAID-IN CAPITAL (DEFICIT) TOTAL
------------- -------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
December 31, 1994 ............................. 4,002,414 $ 40 $18,819 $ 4,036 $ 22,895
Stock options and warrants exercised ......... 251,525 2 1,270 -- 1,272
Employee stock purchase plan ................. 5,312 -- 70 -- 70
Common stock acquired ........................ (2,528) -- (45) -- (45)
Net loss for year ............................ -- -- -- (4,762) (4,762)
--------- ---- ------- --------- ---------
December 31, 1995 ............................. 4,256,723 42 20,114 (726) 19,430
Stock options and warrants exercised ......... 71,375 1 272 -- 273
Employee stock purchase plan ................. 6,874 -- 61 -- 61
Common stock acquired ........................ (9,262) -- (134) -- (134)
Net loss for year ............................ -- -- -- (12,499) (12,499)
--------- ---- ------- --------- ---------
December 31, 1996 ............................. 4,325,710 43 20,313 (13,225) 7,131
Stock options and warrants exercised ......... 213,038 2 605 -- 607
Employee stock purchase plan ................. 9,501 -- 118 -- 118
Issuance of warrants ......................... -- -- 328 -- 328
Net loss for year ............................ -- -- -- (3,455) (3,455)
--------- ---- ------- --------- ---------
December 31, 1997 ............................. 4,548,249 $ 45 $21,364 $ (16,680) $ 4,729
========= ==== ======= ========= =========
</TABLE>
See accompanying notes
<PAGE>
RECOVERY ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1. BUSINESS ACTIVITY
Recovery Engineering, Inc., (the Company) manufactures and markets low
energy desalinators, antimicrobial water purifiers and microfilters, and
residential water filters sold primarily to retailers under the PUR brand name
for residential, marine, military and recreational use in the United States and
foreign markets.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Marketable securities and investments are classified as available for sale
and consist primarily of commercial paper, US Treasury Notes and municipal
bonds. At December 31, 1997, the Company had no marketable securities. At
December 31, 1996, the market value of marketable securities and investments
approximates cost.
Sales are recorded upon shipment of product. The Company performs periodic
credit evaluation of its customers' financial condition and generally does not
require collateral. The Company requires irrevocable letters of credit on sales
to certain foreign customers. Receivables generally are due within 30 days.
Credit losses relating to customers consistently have been within management's
expectations.
Inventories are stated at the lower of cost or market determined by the
first-in, first-out (FIFO) method. Inventory cost elements consist of raw
materials, purchased parts, direct labor and applied manufacturing overhead.
The Company follows Accounting Principles Board Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES ("APB 25"), and related interpretations in
accounting for its stock options. Under APB 25, when the exercise price of stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION ("Statement 123"). The Company adopted the disclosure only
provisions of Statement 123. Accordingly, the Company has made pro forma
disclosures of what net loss and loss per share would have been had the
provisions of Statement 123 been applied to the Company's stock options.
Property and equipment are stated at cost. The Company depreciates these
assets over their estimated useful lives ranging from three to ten years.
Depreciation expense was $767,000, $1,294,000 and $1,768,000 for the years ended
1995, 1996, and 1997, respectively.
Patents are stated at cost and are amortized on a straight-line basis
ranging from three to fifteen years. The carrying value of a patent will be
reviewed if the facts and circumstances suggest that it may be impaired. If this
review indicates that patent cost will not be recoverable, as determined based
on the undiscounted cash flows over the remaining amortization period, the
Company's carrying value of the patents will be reduced by the estimated
shortfall of cash flows.
Deferred financing costs which are included in other assets are being
amortized over a five year period.
The Company records losses on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
Advertising costs are charged to operations in the year incurred.
Advertising costs charged to operations were $6,372,000, $9,541,000 and
$14,602,000 for the years ended December 31, 1995, 1996, and 1997, respectively.
<PAGE>
RECOVERY ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income taxes are accounted for under the liability method. Deferred income
taxes are provided for temporary differences between the financial reporting and
tax basis of assets and liabilities.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from the estimates.
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
No. 128, EARNINGS PER SHARE. Statement 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to Statement 128
requirements.
In 1997, the FASB issued Statements No. 130, REPORTING COMPREHENSIVE
INCOME, and No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, effective for fiscal years beginning after December 15, 1997. The
adoption by the Company of these Statements in January 1998 is not expected to
have a material impact on the Company's financial statements
NOTE 3. INVENTORIES
Inventories consist of the following:
DECEMBER 31
-----------------------------
1996 1997
------------- -------------
Finished goods ........... $1,704,000 $1,981,000
Work in progress ......... 95,000 157,000
Raw materials ............ 3,127,000 5,456,000
---------- ----------
$4,926,000 $7,594,000
========== ==========
NOTE 4. RELATED PARTY NOTE RECEIVABLE
At December 31, 1997 the Company had a note receivable of approximately
$498,000 due from its president and CEO. The note bears interest at 9.25%.
Principal and interest are due and payable in one installment on June 30, 1999.
The proceeds of the note were used to exercise stock options which were nearing
their expiration date.
NOTE 5. DEBT
Long-term debt consists of a $15.0 million convertible loan with certain
investment partnerships affiliated with The Goldman Sachs Group, L.P. ("GS
Group") which bears interest at 5% per annum and expires in 2003. Interest on
the loan is paid quarterly. GS Group may convert the outstanding balance of the
loan into shares of Common Stock at a conversion price of $14.85 per share at
any time during the life of the loan. If not converted, the loan is payable in
annual installments starting August 2001. The estimated fair value of the
convertible loan, based on the Company's incremental borrowing rate for similar
liabilities, approximates its carrying value.
The Company had no bank debt at December 31, 1996, compared with $7.2
million at December 31, 1997. In March 1997, the Company obtained a $14.0
million credit facility secured by equipment, inventory, receivables, and
intangibles. The credit facility consists of a $10.0 million discretionary
working capital line-of-credit, limited to eligible receivables and inventory,
which bears interest at the bank reference rate plus 1.25%, and a $4.0 million
equipment loan which bears interest at the bank reference rate plus 2.50%. The
principal amount of the equipment loan is payable over a 42-month period
commencing October 1998, unless demand is made sooner. Other borrowings under
the credit facility
<PAGE>
RECOVERY ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 5. DEBT (CONTINUED)
are due on demand. The Company's weighted average interest rate on the bank debt
for 1997 was 10.2%. Borrowings under this agreement are limited to $10.0 million
in 1997 and $12.5 million in 1998 by provisions in the convertible loan
agreement. The Company received a waiver allowing it to make full use of the
$14.0 million credit facility for the fourth quarter of 1997. In connection with
the acquisition of the credit facility, the Company issued warrants to the bank
for the purchase of 80,000 shares of Common Stock at $7.00 per share. The
warrants cannot be exercised until October 8, 1998 and expire six years from the
effective date of the credit facility. The Company has estimated the value of
the warrants to be $328,000, which has been included in additional paid-in
capital and is being amortized over the estimated life of the warrants.
NOTE 6. STOCK OPTIONS AND WARRANTS
The Company has various incentive and non-qualified stock option plans
which it uses as an incentive for directors, officers, and other employees,
consultants and technical advisors. Options are granted at fair market values
determined on the date of grant and vesting normally occurs over a four year
period. The Company adopted the 1993 Director Stock Option Plan, a non-qualified
stock option plan, to provide non-employee directors with an automatic annual
stock option grant at 85% of fair market value on the date of grant.
Shares available and options outstanding are as follows:
<TABLE>
<CAPTION>
WEIGHTED
PLAN DIRECTOR AVERAGE
OPTIONS PLAN NON-PLAN PLAN EXERCISE
AVAILABLE FOR OPTIONS OPTIONS OPTIONS PRICE
GRANT OUTSTANDING OUTSTANDING OUTSTANDING PER SHARE
--------------- ------------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994. ......... 280,611 610,425 500 10,000 $ 4.32
Additional shares reserved ........... 350,000 -- -- -- --
Granted .............................. (306,475) 306,475 -- 8,000 13.86
Exercised ............................ -- (251,525) -- -- 2.30
Canceled ............................. 14,125 (14,125) -- -- 12.90
-------- -------- --- ------ -------
Balance at December 31, 1995 .......... 338,261 651,250 500 18,000 8.97
Granted .............................. (410,850) 410,850 -- 7,000 12.04
Exercised ............................ -- (71,375) -- -- 3.75
Canceled ............................. 95,700 (95,700) -- -- 11.27
-------- -------- --- ------ -------
Balance at December 31, 1996. ......... 23,111 895,025 500 25,000 9.77
Additional shares reserved ........... 350,000 -- -- -- --
Granted .............................. (249,825) 249,825 -- 24,000 13.59
Exercised ............................ -- (212,925) -- -- 2.86
Canceled ............................. 34,975 (34,975) -- -- 10.52
-------- -------- --- ------ -------
Balance at December 31, 1997 .......... 158,261 896,950 500 49,000 $ 12.49
======== ======== === ====== =======
</TABLE>
The weighted average fair value of options granted in 1995, 1996 and 1997
was $6.77, $6.35 and $8.52, per share, respectively. The exercise price of
options outstanding at December 31, 1997 ranged from $2.50 to $29.19 per share
as summarized in the following table:
<PAGE>
RECOVERY ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 6. STOCK OPTIONS AND WARRANTS (CONTINUED)
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE OF EXERCISE OUTSTANDING AT REMAINING NUMBER EXERCISABLE EXERCISE PRICE PER
PRICES 12/31/97 CONTRACTUAL LIFE AT 12/31/97 SHARE
- ------------------- ---------------- ------------------ -------------------- -------------------
<S> <C> <C> <C> <C>
$ 2.50 - $10.00 256,000 10 years 65,438 $ 7.26
$10.01 - $12.00 180,150 8 years 84,388 $ 10.22
$12.01 - $14.00 397,400 9 years 143,375 $ 13.92
$14.01 - $29.19 112,900 10 years 1,425 $ 22.92
- ------------------- ------- ------------------ ------- -------
$ 2.50 - $29.19 946,450 9 years 294,626 $ 12.49
=================== ======= ================== ======= =======
</TABLE>
The number of stock options exercisable at December 31, 1995 and 1996 were
391,025 and 403,350, respectively, at a weighted average price of $7.30 and
$7.68, respectively.
The Company has elected to follow Accounting Principles Board Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided under FASB
Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("Statement 123"),
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, when the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of Statement 123. The fair
value of these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1995, 1996 and 1997, respectively; risk-free interest rate of
6%; volatility factor of the expected market price of the Company's Common Stock
of .55 and a weighted-average expected life of the options of 6 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. The Company's
pro forma information is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------------- ----------------- ----------------
<S> <C> <C> <C>
Pro forma net loss ........................... $ (5,024,000) $ (13,102,000) $ (4,254,000)
Pro forma net loss per common share .......... $ (1.19) $ (3.05) $ (0.95)
</TABLE>
These pro forma amounts may not be indicative of future years' amounts
since the statement provides for a phase in of option values beginning with
those granted in 1995.
The Company has a warrant outstanding for the purchase of 57,500 shares of
Common Stock at $8.40 per share, which expires in 1998.
The Company has an Employee Stock Purchase Plan with 100,000 shares
reserved for issuance under the plan. During 1995, 1996 and 1997, 5,312, 6,874
and 9,501 shares were issued under the plan at prices ranging from $5.84 to
$25.73. Approximately 75,000 shares remain reserved for future issuance.
<PAGE>
RECOVERY ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward .................. $ 5,590,000 $ 8,070,000
Tax benefit of nonqualified stock options ........ 530,000 449,000
Warranty reserve ................................. 130,000 296,000
Inventory obsolescence ........................... 81,000 150,000
Bad debt reserve ................................. 76,000 130,000
Facility relocation costs ........................ 350,000 78,000
Accrued expenses ................................. 165,000 74,000
Other ............................................ 34,000 29,000
----------- -----------
Total deferred tax assets ......................... 6,956,000 9,276,000
Deferred tax liabilities:
Tax depreciation in excess of financial reporting
depreciation .................................... 769,000 1,670,000
Tax amortization of patents in excess of financial
reporting amortization .......................... 116,000 108,000
----------- -----------
Total deferred tax liabilities .................... 885,000 1,778,000
6,071,000 7,498,000
Valuation allowance ............................... (4,496,000) (5,923,000)
----------- -----------
Net deferred tax assets ........................... $ 1,575,000 $ 1,575,000
=========== ===========
</TABLE>
Significant components of the provision for income taxes are as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
---------------- ------ -------
Current:
Federal ............... $ (1,256,000) $ -- $ --
State ................. -- -- --
------------ ---- ----
Total current ......... (1,256,000) -- --
------------ ---- ----
Deferred:
Federal ............... (1,158,000) -- --
State ................. (150,000) -- --
------------ ---- ----
Total deferred ......... (1,308,000) -- --
------------ ---- ----
$ (2,564,000) $ -- $ --
------------ ---- ----
The Company has a net operating loss carryforward of $23,664,000 available
to offset future taxable income, which begins to expire in 2010. Cash paid for
income taxes amounted to $31,000, $0, and $0 in 1995, 1996, and 1997,
respectively.
<PAGE>
RECOVERY ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 7. INCOME TAXES (CONTINUED)
A reconciliation of the statutory federal income tax rate of 34% to the
Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1995 1996 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Income taxes (benefit) at statutory rate (34%). ......... $ (2,491,000) $ (4,249,000) $ (1,175,000)
State tax net of federal benefit ........................ (100,000) (255,000) (69,000)
Effect of tax rate changes on NOL carryback ............. 171,000 -- --
Valuation allowance ..................................... -- 4,496,000 1,427,000
Other ................................................... (144,000) 8,000 (183,000)
------------ ------------ ------------
Provision (benefit) for income taxes .................... $ (2,564,000) $ -- $ --
------------ ------------ ------------
Effective rate .......................................... 35% --% --%
------------ ------------- -------------
</TABLE>
NOTE 8. RETIREMENT SALARY SAVINGS PLAN
The Company has a defined contribution 401(k) plan that covers all
full-time employees who have six months of vested service. Employees are allowed
to contribute up to 15% of their pre-tax income to the plan. Employee salary
deferrals are matched by the Company at a rate of 100% of the first 1% of salary
deferred and 25% of the next 4% of salary deferred. The Company contributions to
this plan for each of the years ended December 31, 1995, 1996, and 1997 were
$34,000, $61,000, and $98,000, respectively.
NOTE 9. SALES AND SEGMENT INFORMATION
The Company, operating in a single business segment, designs, manufactures
and markets water purification products. The Company's manufacturing and
distribution operations are located within the United States. Export sales for
1995, 1996, and 1997 amounted to $2.6 million, $3.9 million, and $6.3 million,
respectively. During 1995, four customers accounted for approximately 39% of the
total net sales. During 1996, three customers accounted for approximately 23% of
the total net sales. During 1997, two customers accounted for approximately 23%
of the total net sales.
NOTE 10. COMMITMENTS
The Company has noncancelable operating lease agreements for its facilities
in Minneapolis, Minnesota extending through April 2008. Under the terms of the
lease agreements, the Company is responsible for base rent and all operating
costs associated with the building. Total rent expense was $393,000, $469,000
and $695,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
Future minimum rental lease commitments are as follows: 1998 -- $837,000; 1999
- -- $717,000; 2000 -- $738,000; 2001 -- $613,000; 2002 -- $682,000; thereafter --
$3,698,000.
In the fourth quarter of 1997, management entered into an agreement to
expand the Company's facility. The Company entered into a noncancelable
operating lease agreement for an expansion to its facility in Brooklyn Park,
Minnesota extending through April 2008. Under the terms of the lease agreement,
the Company will be responsible for base rent and all operating costs associated
with the addition. Future minimum rental lease commitments are as follows: 1998
- -- $408,000; 1999 -- $544,000; 2000 -- $544,000; 2001 -- $544,000; 2002 --
$605,000; thereafter -- $3,281,000.
The Company incurred expenses of $973,000 for the year ended December 31,
1996, primarily related to the writedown of certain fixed assets, buildout
costs, future lease payments on the original lease, and real estate commissions
associated with the relocation to its new facility.
<PAGE>
ALL PUR PRODUCTS USE ADVANCED TECHNOLOGY
[GRAPHIC] AUTOMATIC SAFETY MONITOR(TM) GAUGE
AUTOMATICALLY TELLS YOU WHEN TO CHANGE THE FILTER
ADVANCED MICROFILTER GIVES YOU DOUBLE FILTER
PROTECTION USING AN EXCLUSIVE TWO-LAYER
PROCESS.
[THIS CAPTION POINTS TO PHOTO AT RIGHT]
AUTOMATIC SAFETY MONITOR(TM)
Only PUR has an exclusive Automatic Safety
Monitor that shows how much filter life is
left, and automatically tells you when to
replace it.
[THIS CAPTION POINTS TO PHOTO AT RIGHT] PUR Plus Pitcher &
LAYER ONE Dispenser Filter
PLEATED MICROFILTER [PHOTO]
Only PUR has a pleated microfilter that
removes microbiological cysts as well as
asbestos. No other pitcher filter removes
these contaminants.
[THIS CAPTION POINTS TO PHOTO AT RIGHT]
LAYER TWO
ION EXCHANGE RESIN
AND ACTIVATED CARBON
Reduces Lead, Copper, Zinc, chlorine, bad
taste and odor for great-tasting water.
[THIS CAPTION POINTS TO PHOTO AT RIGHT]
AUTOMATIC SAFETY MONITOR(TM)
The Automatic Safety Monitor(TM) gauge for
in-line systems automatically shuts off when
the filter needs changing in addition to
indicating remaining filter life.
[THIS CAPTION POINTS TO PHOTO AT RIGHT] PUR Standard Faucet
ADVANCED MICROFILTER Mount Filter
The PUR one-micron carbon filter offers [PHOTO]
superior protection by reducing lead and
removing even the smallest elements such as
Cryptosporidium and Giardia.
[THIS CAPTION POINTS TO PHOTO AT RIGHT]
BYPASS FEATURE
With a twist of the wrist the faucet mount
unit bypasses the filter for unfiltered water
and provides convenient access to the faucet
for washing dishes.
POINT-OF-SALE EDUCATION
[PHOTO]
These displays help educate consumers on the different safety levels, as well as
features and benefits. They are used by a number of PUR's national accounts.
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE HEREBY. IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED
HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY THE SECURITIES BY ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE OF
THIS PROSPECTUS.
---------------------------------------------------
TABLE OF CONTENTS
---------------------------------------------------
PAGE
PROSPECTUS SUMMARY .................... 3
RISK FACTORS .......................... 6
USE OF PROCEEDS ....................... 10
DIVIDEND POLICY ....................... 10
CAPITALIZATION ........................ 11
DILUTION .............................. 11
PRICE RANGE OF COMMON STOCK ........... 12
SELECTED FINANCIAL DATA ............... 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS .......................... 14
BUSINESS .............................. 20
MANAGEMENT ............................ 32
PRINCIPAL SHAREHOLDERS ................ 34
UNDERWRITING .......................... 36
LEGAL MATTERS ......................... 37
EXPERTS ............................... 37
AVAILABLE INFORMATION ................. 37
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE ........................... 38
INDEX TO FINANCIAL STATEMENTS ......... F-1
================================================================================
1,000,000 SHARES
[GRAPHIC OMITTED]
PUR DRINKING WATER SYSTEMS
RECOVERY ENGINEERING, INC.
COMMON STOCK
------------------------------------
PROSPECTUS
------------------------------------
NationsBanc Montgomery
Securities LLC
Deutsche Morgan Grenfell
, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be borne by the
Company in connection with the issuance and distribution of the shares of Common
Stock offered hereby:
SEC registration fee ..................... $ 10,019
NASD filing fee .......................... 3,807
Nasdaq listing fee ....................... 17,500
Legal fees and expenses .................. 90,000
Accounting fees and expenses ............. 45,000
Blue Sky fees and expenses ............... 6,000
Printing expenses ........................ 75,000
Transfer agent fees and expenses ......... 5,000
Miscellaneous ............................ 47,674
--------
TOTAL ................................... $300,000
========
Each amount set forth above, except the SEC registration fee, NASD filing
fee and Nasdaq listing fee, is estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 302A.521 of the Minnesota Statutes provides that unless prohibited
or limited by a corporation's articles of incorporation or bylaws, the Company
must indemnify its current and former officers, directors, employees and agents
against reasonable expenses (including attorneys' fees), judgments, penalties,
fines and amounts paid in settlement and which were incurred in connection with
actions, suits, or proceedings in which such persons are parties by reason of
the fact that they are or were an officer, director, employee or agent of the
corporation, if they (i) have not been indemnified by another organization, (ii)
acted in good faith, (iii) received no improper personal benefit, (iv) in the
case of a criminal proceeding, had no reasonable cause to believe the conduct
was unlawful, and (v) reasonably believed that the conduct was in the best
interests of the corporation. Section 302A.521 also permits a corporation to
purchase and maintain insurance on behalf of its officers, directors, employees
and agents against any liability which may be asserted against, or incurred by,
such persons in their capacities as officers, directors, employees and agents of
the corporation, whether or not the corporation would have been required to
indemnify the person against the liability under the provisions of such section.
Article V of the Bylaws of the Company provides that the directors,
officers, committee members, of the Company and other persons shall have the
rights to indemnification provided by Section 302A.521 of the Minnesota
Statutes.
Section 8 of the Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement provides certain indemnification rights to officers and
directors of the Registrant.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- -------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement
4.1 Rights Agreement dated as of January 30, 1996 between Recovery Engineering, Inc. and
Norwest Bank Minnesota, National Association, as Rights Agent
4.1.1 Amendment No. 1 dated as of February 3, 1998 to Rights Agreement between
Recovery Engineering, Inc. and Norwest Bank Minnesota, National Association, as
Rights Agent
5.1 Opinion of Robins, Kaplan, Miller & Ciresi L.L.P.*
10.1 Recovery Engineering, Inc. 1986 Stock Option Plan, as amended**
<PAGE>
EXHIBIT
NO. DESCRIPTION
- ------------ ---------------------------------------------------------------------------------------
10.2 Recovery Engineering, Inc. 1993 Director Stock Option Plan**
10.3 Recovery Engineering, Inc. 1994 Stock Purchase Plan**
10.4 Recovery Engineering, Inc. 1994 Stock Option and Incentive Plan**
10.5 Supplier Agreement dated November 25, 1996, between Thermotech and Recovery
Engineering, Inc.
10.6 Form of Distributor Agreement
10.7 Financing Agreement dated March 31, 1997 between Recovery Engineering, Inc. and
First Bank National Association
10.8 Securities Purchase Agreement dated July 19, 1996 by and among Recovery
Engineering, Inc. and investment partnerships affiliated with The Goldman Sachs Group,
L.P. ("GS Group")
10.9 Registration Rights Agreement dated July 19, 1996 by and among Recovery
Engineering, Inc. and GS Group
10.10 Executive Restriction Agreement dated July 19, 1996 by and among
Recovery Engineering, Inc., GS Group and Brian F. Sullivan**
10.11 Executive Severance Pay Agreement dated March 24, 1997 between Recovery
Engineering, Inc. and Charles F. Karpinske**
10.12 Lease Agreement dated November 8, 1996 between Ryan Companies US, Inc. and
Recovery Engineering, Inc.
10.12.1 First Amendment to Lease dated December 20, 1996, between Ryan Companies US,
Inc. and Recovery Engineering, Inc.
10.12.2 Second Amendment to Lease dated May 1, 1997, between Ryan
Recovery, LLC and Recovery Engineering, Inc.
10.12.3 Third Amendment to Lease dated December 22, 1997, between Ryan
Recovery, LLC and Recovery Engineering, Inc.
23.1 Consent of Ernst & Young LLP
23.2 Consent of Robins, Kaplan, Miller & Ciresi L.L.P. (included in Exhibit 5.1)
24.1 Powers of Attorney
</TABLE>
- ------------------
*To be filed by amendment.
**Management Contracts
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors,
officers, and controlling persons of the registrant pursuant to the
provisions summarized in Item 15 above, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of
any action, suit, or proceeding) is asserted by such director,
officer, or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Act, as amended, and will be governed by the final adjudication of
such issue.
(b) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance
<PAGE>
upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Minneapolis, State of Minnesota, on February 24,
1998.
RECOVERY ENGINEERING, INC.
By: /S/ BRIAN F. SULLIVAN
-------------------------------------
Brian F. Sullivan
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------- --------------------------------------------- ------------------
<S> <C> <C>
/S/ BRIAN F. SULLIVAN President, Chief Executive Officer and February 24, 1998
- ------------------------------ Director (Principal Executive Officer)
Brian F. Sullivan
/S/ CHARLES F. KARPINSKE Vice President and Chief Financial Officer February 24, 1998
- ------------------------------ (Principal Financial and Accounting Officer)
Charles F. Karpinske
* Director February 24, 1998
- ------------------------------
Robert Gheewalla
* Director February 24, 1998
- ------------------------------
John E. Gherty
* Director February 24, 1998
- ------------------------------
Sanjay H. Patel
* Director February 24, 1998
- ------------------------------
William D. Thompson
* Director February 24, 1998
- ------------------------------
William F. Wanner, Jr.
Director February , 1998
- ------------------------------
Ronald W. Weber
* Director February 24, 1998
- ------------------------------
Richard J. Zeckhauser
*By: /S/ BRIAN F. SULLIVAN
--------------------------
Brian F. Sullivan
Attorney-in-fact
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION METHOD OF FILING
- ---------- ----------------------------------------- ----------------------------------------
<S> <C> <C>
1.1 Form of Underwriting Agreement .......... Filed electronically herewith
4.1 Rights Agreement dated as of Filed as Exhibit 4.1 to the Company's
January 30, 1996 between Recovery Form 8-A Registration Statement dated
Engineering, Inc. and Norwest Bank February 20, 1996 (File No. 0-21232)
Minnesota, National Association, as and incorporated herein by reference
Rights Agent
4.1.1 Amendment No. 1 dated as of Filed as Exhibit 4.1.1 to the Company's
February 3, 1998 to Rights Agreement Annual Report on Form 10-K for the
between Recovery Engineering, Inc. year ended December 31, 1997 (File
and Norwest Bank Minnesota, National No. 0-21232) and incorporated herein
Association, as Rights Agent by reference
5.1 Opinion of Robins, Kaplan, Miller &
Ciresi L.L.P. *
10.1 Recovery Engineering, Inc. 1986 Stock Filed as Exhibit 10.6 to the Company's
Option Plan, as amended** Registration Statement on Form SB-2
(No. 33-57826C) and incorporated
herein by reference
10.2 Recovery Engineering, Inc. 1993 Filed as Exhibit 10.7 to the Company's
Director Stock Option Plan** Annual Report on Form 10-K for the
year ended December 31, 1993 (File
No. 0-21232) and incorporated herein
by reference
10.3 Recovery Engineering, Inc. 1994 Stock Filed as Exhibit 10.8 to the Company's
Purchase Plan** Annual Report on Form 10-K for the
year ended December 31, 1993 (File
No. 0-21232) and incorporated herein
by reference
10.4 Recovery Engineering, Inc. 1994 Stock Filed as Exhibit 99.1 to the Company's
Option and Incentive Plan** Registration Statement on Form S-8
(No. 333- ) and incorporated
herein by reference
10.5 Supplier Agreement dated Filed as Exhibit 10.5 to the Company's
November 25, 1996, between Annual Report on Form 10-K for the
Thermotech and Recovery year ended December 31, 1997 (File
Engineering, Inc. No. 0-21232) and incorporated herein
by reference
10.6 Form of Distributor Agreement Filed as Exhibit 10.3 to the Company's
Registration Statement on Form SB-2
(No. 33-57826C) and incorporated
herein by reference
10.7 Financing Agreement dated March 31, Filed as Exhibit 99.1 to the Company's
1997 between Recovery Engineering, Quarterly Report on Form 10-Q for the
Inc. and First Bank National quarter ended June 30, 1997 (File
Association No. 0-21232) and incorporated herein
by reference
10.8 Securities Purchase Agreement dated Filed as Exhibit 4.1 to the Company's
July 19, 1996 by and among Recovery Report on Form 8-K dated July 19,
Engineering, Inc. and investment 1996 (File No. 0-21232) and
partnerships affiliated with The incorporated herein by reference
Goldman Sachs Group, L.P. ("GS
Group")
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION METHOD OF FILING
- ------------- --------------------------------------- ----------------------------------------
<S> <C> <C>
10.9 Registration Rights Agreement dated Filed as Exhibit 99.1 to the Company's
July 19, 1996 by and among Recovery Report on Form 8-K dated July 19,
Engineering, Inc. and GS Group 1996 (File No. 0-21232) and
incorporated herein by reference
10.10 Executive Restriction Agreement dated Filed as Exhibit 99.2 to the Company's
July 19, 1996 by and among Recovery Report on Form 8-K dated July 19,
Engineering, Inc., GS Group and Brian 1996 (File No. 0-21232) and
F. Sullivan** incorporated herein by reference
10.11 Executive Severance Pay Agreement Filed as Exhibit 99.2 to the Company's
dated March 24, 1997 between Quarterly Report on Form 10-Q for the
Recovery Engineering, Inc. and Charles quarter ended June 30, 1997 (File
F. Karpinske** No. 0-21232) and incorporated herein
by reference
10.12 Lease Agreement dated November 8, Filed as Exhibit 10.20 to the Company's
1997 between Ryan Companies US, Inc. Annual Report on Form 10-K for the
and Recovery Engineering, Inc. year ended December 31, 1996 (File
No. 0-21232) and incorporated herein
by reference
10.12.1 First Amendment to Lease dated Filed as Exhibit 10.12.1 to the
December 20, 1996, between Ryan Company's Annual Report on Form
Companies US, Inc. and Recovery 10-K for the year ended December 31,
Engineering, Inc. 1997 (File No. 0-21232) and
incorporated herein by reference
10.12.2 Second Amendment to Lease dated Filed as Exhibit 10.12.2 to the
May 1, 1997, between Ryan Recovery, Company's Annual Report on Form
LLC and Recovery Engineering, Inc. 10-K for the year ended December 31,
1997 (File No. 0-21232) and
incorporated herein by reference
10.12.3 Third Amendment to Lease dated Filed as Exhibit 10.12.3 to the
December 22, 1997, between Ryan Company's Annual Report on Form
Recovery, LLC and Recovery 10-K for the year ended December 31,
Engineering, Inc. 1997 (File No. 0-21232) and
incorporated herein by reference
23.1 Consent of Ernst & Young LLP .......... Filed electronically herewith
23.2 Consent of Robins, Kaplan, Miller &
Ciresi L.L.P. Included in Exhibit 5.1
24.1 Powers of Attorney .................... Filed electronically herewith
</TABLE>
- ------------------
*To be filed by amendment.
**Management Contracts
1,000,000 SHARES
RECOVERY ENGINEERING, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
DATED [___], 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY...............................2
COMPLIANCE WITH REGISTRATION REQUIREMENTS......................................2
OFFERING MATERIALS FURNISHED TO UNDERWRITERS...................................3
DISTRIBUTION OF OFFERING MATERIAL BY THE COMPANY...............................3
THE UNDERWRITING AGREEMENT.....................................................3
AUTHORIZATION OF THE COMMON SHARES.............................................3
NO APPLICABLE REGISTRATION OR OTHER SIMILAR RIGHTS.............................3
NO MATERIAL ADVERSE CHANGE.....................................................4
INDEPENDENT ACCOUNTANTS........................................................4
PREPARATION OF THE FINANCIAL STATEMENTS........................................4
INCORPORATION AND GOOD STANDING OF THE COMPANY AND ITS SUBSIDIARIES............4
CAPITALIZATION AND OTHER CAPITAL STOCK MATTERS.................................5
STOCK EXCHANGE LISTING.........................................................5
NON-CONTRAVENTION OF EXISTING INSTRUMENTS; NO FURTHER AUTHORIZATIONS OR
APPROVALS REQUIRED...........................................................5
NO MATERIAL ACTIONS OR PROCEEDINGS.............................................6
INTELLECTUAL PROPERTY RIGHTS...................................................6
ALL NECESSARY PERMITS, ETC.....................................................7
TITLE TO PROPERTIES............................................................7
TAX LAW COMPLIANCE.............................................................7
COMPANY NOT AN INVESTMENT COMPANY..............................................7
INSURANCE......................................................................8
NO PRICE STABILIZATION OR MANIPULATION.........................................8
RELATED PARTY TRANSACTIONS.....................................................8
NO UNLAWFUL CONTRIBUTIONS OR OTHER PAYMENTS....................................8
COMPANY'S ACCOUNTING SYSTEM....................................................8
EXCHANGE ACT COMPLIANCE........................................................8
COMPLIANCE WITH ENVIRONMENTAL LAWS.............................................9
ERISA COMPLIANCE...............................................................9
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE COMMON SHARES...........................10
THE FIRM COMMON SHARES........................................................10
THE FIRST CLOSING DATE........................................................10
THE OPTIONAL COMMON SHARES; THE SECOND CLOSING DATE...........................11
PUBLIC OFFERING OF THE COMMON SHARES..........................................11
PAYMENT FOR THE COMMON SHARES.................................................12
DELIVERY OF THE COMMON SHARES.................................................12
SECTION 3. ADDITIONAL COVENANTS OF THE COMPANY........................................12
UNDERWRITERS' REVIEW OF PROPOSED AMENDMENTS AND SUPPLEMENTS...................12
SECURITIES ACT COMPLIANCE.....................................................13
AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS AND OTHER SECURITIES
ACT MATTERS..................................................................13
COPIES OF ANY AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS....................13
BLUE SKY COMPLIANCE...........................................................13
<PAGE>
USE OF PROCEEDS...............................................................14
TRANSFER AGENT................................................................14
EARNINGS STATEMENT............................................................14
PERIODIC REPORTING OBLIGATIONS................................................14
AGREEMENT NOT TO OFFER OR SELL ADDITIONAL SECURITIES..........................14
FUTURE REPORTS TO THE UNDERWRITERS............................................15
EXCHANGE ACT COMPLIANCE.......................................................15
SECTION 4. PAYMENT OF EXPENSES........................................................15
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS..........................16
ACCOUNTANTS' COMFORT LETTER...................................................16
COMPLIANCE WITH REGISTRATION REQUIREMENTS; NO STOP ORDER; NO OBJECTION FROM
NASD........................................................................16
NO MATERIAL ADVERSE CHANGE OR RATINGS AGENCY CHANGE...........................17
OPINION OF COUNSEL FOR THE COMPANY............................................17
OPINION OF COUNSEL FOR THE UNDERWRITERS.......................................17
OFFICERS' CERTIFICATE.........................................................17
BRING-DOWN COMFORT LETTER.....................................................18
LOCK-UP AGREEMENT FROM CERTAIN SHAREHOLDERS OF THE COMPANY....................18
ADDITIONAL DOCUMENTS..........................................................18
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES....................................18
SECTION 7. EFFECTIVENESS OF THIS AGREEMENT............................................19
SECTION 8. INDEMNIFICATION............................................................19
INDEMNIFICATION OF THE UNDERWRITERS...........................................19
INDEMNIFICATION OF THE COMPANY, ITS DIRECTORS AND OFFICERS....................20
NOTIFICATIONS AND OTHER INDEMNIFICATION PROCEDURES............................21
SETTLEMENTS...................................................................22
SECTION 9. CONTRIBUTION...............................................................22
SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS........................24
SECTION 11. TERMINATION OF THIS AGREEMENT.............................................24
SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY.......................25
SECTION 13. NOTICES...................................................................25
SECTION 14. SUCCESSORS................................................................26
SECTION 15. PARTIAL UNENFORCEABILITY..................................................26
SECTION 16. GOVERNING LAW PROVISIONS..................................................26
GOVERNING LAW PROVISIONS......................................................26
CONSENT TO JURISDICTION.......................................................26
SECTION 17. GENERAL PROVISIONS........................................................27
</TABLE>
<PAGE>
UNDERWRITING AGREEMENT
[Date]
NATIONSBANC MONTGOMERY SECURITIES LLC
DEUTSCHE MORGAN GRENFELL INC.
c/o NATIONSBANC MONTGOMERY SECURITIES LLC
600 Montgomery Street
San Francisco, California 94111
Ladies and Gentlemen:
INTRODUCTORY. Recovery Engineering, Inc. a Minnesota corporation
(the "Company), proposes to issue and sell to the several underwriters named in
Schedule A (the "Underwriters") an aggregate of 1,000,000 shares (the "Firm
Common Shares") of its Common Stock, par value $.01 per share (the "Common
Stock"). In addition, the Company has granted to the Underwriters an option to
purchase up to an additional 150,000 shares (the "Optional Common Shares") of
Common Stock, as provided in Section 2. The Firm Common Shares and, if and to
the extent such option is exercised, the Optional Common Shares are collectively
called the "Common Shares".
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-3 (File No.
333-[___]), which contains a form of prospectus to be used in connection with
the public offering and sale of the Common Shares. Such registration statement,
as amended, including the financial statements, exhibits and schedules thereto,
in the form in which it was declared effective by the Commission under the
Securities Act of 1933 and the rules and regulations promulgated thereunder
(collectively, the "Securities Act"), including all documents incorporated or
deemed to be incorporated by reference therein and any information deemed to be
a part thereof at the time of effectiveness pursuant to Rule 430A or Rule 434
under the Securities Act or the Securities Exchange Act of 1934 and the rules
and regulations promulgated thereunder (collectively, "the Exchange Act"), is
called the "Registration Statement". Any registration statement filed by the
Company pursuant to Rule 462(b) under the Securities Act is called the "Rule
462(b) Registration Statement", and from and after the date and time of filing
of the Rule 462(b) Registration Statement the term "Registration Statement"
shall include the Rule 462(b) Registration Statement. Such prospectus, in the
form first used by the Underwriters to confirm sales of the Common Shares, is
called the "Prospectus"; PROVIDED, HOWEVER, if the Company has, with the consent
of NMSI, elected to rely upon Rule 434 under the Securities Act, the term
"Prospectus" shall mean the Company's prospectus subject to completion (each,
<PAGE>
a "preliminary prospectus") dated [___] (such preliminary prospectus is called
the "Rule 434 preliminary prospectus"),(1) together with the applicable term
sheet (the "Term Sheet") prepared and filed by the Company with the Commission
under Rules 434 and 424(b) under the Securities Act and all references in this
Agreement to the date of the Prospectus shall mean the date of the Term Sheet.
All references in this Agreement to [(i)] the Registration Statement, the Rule
462(b) Registration Statement, a preliminary prospectus, the Prospectus or the
Term Sheet, or any amendments or supplements to any of the foregoing, shall
include any copy thereof filed with the Commission pursuant to its Electronic
Data Gathering, Analysis and Retrieval System ("EDGAR"). All references in this
Agreement to financial statements and schedules and other information which is
"contained," "included" or "stated" in the Registration Statement or the
Prospectus (and all other references of like import) shall be deemed to mean and
include all such financial statements and schedules and other information which
is or is deemed to be incorporated by reference in the Registration Statement or
the Prospectus, as the case may be; and all references in this Agreement to
amendments or supplements to the Registration Statement or the Prospectus shall
be deemed to mean and include the filing of any document under the Exchange Act
which is or is deemed to be incorporated by reference in the Registration
Statement or the Prospectus, as the case may be.
The Company hereby confirms its agreement with the Underwriters as
follows:
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents, warrants and covenants to each Underwriter as follows:
(a) COMPLIANCE WITH REGISTRATION REQUIREMENTS. The
Registration Statement and any Rule 462(b) Registration Statement have been
declared effective by the Commission under the Securities Act. The Company has
complied to the Commission's satisfaction with all requests of the Commission
for additional or supplemental information. No stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement is in effect and no proceedings for such purpose have been instituted
or are pending or, to the best knowledge of the Company, are contemplated or
threatened by the Commission.
Each preliminary prospectus and the Prospectus when filed
complied in all material respects with the Securities Act and, if filed by
electronic transmission pursuant to EDGAR (except as may be permitted by
Regulation S-T under the Securities Act), was identical to the copy thereof
delivered to the Underwriters for use in connection with the offer and sale of
the Common Shares. Each of the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendment thereto, at the time it
became effective and at all subsequent times, complied and will comply in all
material respects with the Securities Act and did not and will not contain any
untrue statement of a material fact or omit to state a material fact required to
- ----------
(1) Complete with the date of the Company's most recent preliminary
prospectus that was circulated to prospective offerees.
<PAGE>
be stated therein or necessary to make the statements therein not misleading.
The Prospectus, as amended or supplemented, as of its date and at all subsequent
times, did not and will not contain any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
The representations and warranties set forth in the two immediately preceding
sentences do not apply to statements in or omissions from the Registration
Statement, any Rule 462(b) Registration Statement, or any post-effective
amendment thereto, or the Prospectus, or any amendments or supplements thereto,
made in reliance upon and in conformity with information relating to any
Underwriter furnished to the Company in writing by the Underwriters expressly
for use therein. There are no contracts or other documents required to be
described in the Prospectus or to be filed as exhibits to the Registration
Statement which have not been described or filed as required.
(b) OFFERING MATERIALS FURNISHED TO UNDERWRITERS. The Company
has delivered to each of the Underwriters one complete manually signed copy of
the Registration Statement and of each consent and certificate of experts filed
as a part thereof, and conformed copies of the Registration Statement (without
exhibits) and preliminary prospectuses and the Prospectus, as amended or
supplemented, in such quantities and at such places as the Underwriters have
reasonably requested for each of the Underwriters.
(c) DISTRIBUTION OF OFFERING MATERIAL BY THE COMPANY. The
Company has not distributed and will not distribute, prior to the later of the
Second Closing Date (as defined below) and the completion of the Underwriters'
distribution of the Common Shares, any offering material in connection with the
offering and sale of the Common Shares other than a preliminary prospectus, the
Prospectus or the Registration Statement.
(d) THE UNDERWRITING AGREEMENT. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding agreement of,
the Company, enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as the
enforcement hereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting the rights and
remedies of creditors or by general equitable principles.
(e) AUTHORIZATION OF THE COMMON SHARES. The Common Shares to
be purchased by the Underwriters from the Company have been duly authorized for
issuance and sale pursuant to this Agreement and, when issued and delivered by
the Company pursuant to this Agreement, will be validly issued, fully paid and
nonassessable.
(f) NO APPLICABLE REGISTRATION OR OTHER SIMILAR RIGHTS. There
are no persons with registration or other similar rights to have any equity or
debt
<PAGE>
securities registered for sale under the Registration Statement or included in
the offering contemplated by this Agreement, except for such rights as have been
duly waived.
(g) NO MATERIAL ADVERSE CHANGE. Except as otherwise disclosed
in the Prospectus, subsequent to the respective dates as of which information is
given in the Prospectus: (i) there has been no material adverse change, or any
development that could reasonably be expected to result in a material adverse
change, in the condition, financial or otherwise, or in the earnings, business,
operations or prospects, whether or not arising from transactions in the
ordinary course of business, of the Company and its subsidiaries, considered as
one entity (any such change is called a "Material Adverse Change"); (ii) the
Company and its subsidiaries, considered as one entity, have not incurred any
material liability or obligation, indirect, direct or contingent, not in the
ordinary course of business nor entered into any material transaction or
agreement not in the ordinary course of business; and (iii) there has been no
dividend or distribution of any kind declared, paid or made by the Company or,
except for dividends paid to the Company or other subsidiaries, any of its
subsidiaries on any class of capital stock or repurchase or redemption by the
Company or any of its subsidiaries of any class of capital stock.
(h) INDEPENDENT ACCOUNTANTS. Ernst & Young LLP, who have
expressed their opinion with respect to the financial statements (which term as
used in this Agreement includes the related notes thereto) [and supporting
schedules] filed with the Commission as a part of the Registration Statement and
included in the Prospectus, are independent public or certified public
accountants as required by the Securities Act and the Exchange Act.
(i) PREPARATION OF THE FINANCIAL STATEMENTS. The financial
statements filed with the Commission as a part of the Registration Statement and
included in the Prospectus present fairly the consolidated financial position of
the Company and its subsidiaries as of and at the dates indicated and the
results of their operations and cash flows for the periods specified. Such
financial statements have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved, except as may be expressly stated in the related notes thereto. No
other financial statements or supporting schedules are required to be included
in the Registration Statement. The financial data set forth in the Prospectus
under the captions "Summary of the Offering--Summary Financial Data", "Selected
Financial Data" and "Capitalization" fairly present the information set forth
therein on a basis consistent with that of the audited financial statements
contained in the Registration Statement.
(j) INCORPORATION AND GOOD STANDING OF THE COMPANY AND ITS
SUBSIDIARIES. Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation and has corporate power and
authority to own, lease and operate its properties and to conduct its business
as described in the Prospectus and, in the case of
<PAGE>
the Company, to enter into and perform its obligations under this Agreement.
Each of the Company and each subsidiary is duly qualified as a foreign
corporation to transact business and is in good standing in each jurisdiction in
which such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except for such jurisdictions
where the failure to so qualify or to be in good standing would not,
individually or in the aggregate, result in a Material Adverse Change. All of
the issued and outstanding capital stock of each subsidiary has been duly
authorized and validly issued, is fully paid and nonassessable and is owned by
the Company, directly or through subsidiaries, free and clear of any security
interest, mortgage, pledge, lien, encumbrance or claim. The Company does not own
or control, directly or indirectly, any corporation, association or other entity
other than the subsidiaries listed in Schedule B hereto. The Company has no
Significant Subsidiaries (as defined in Rule 405 under the Securities Act).
(k) CAPITALIZATION AND OTHER CAPITAL STOCK MATTERS. The
authorized, issued and outstanding capital stock of the Company is as set forth
in the Prospectus under the caption "Capitalization" (other than for subsequent
issuances, if any, pursuant to employee benefit plans described in the
Prospectus or upon exercise of outstanding options or warrants described in the
Prospectus). The Common Stock (including the Common Shares) conforms in all
material respects to the description thereof contained in the Prospectus. All of
the issued and outstanding shares of Common Stock have been duly authorized and
validly issued, are fully paid and nonassessable and have been issued in
compliance with federal and state securities laws. None of the outstanding
shares of Common Stock were issued in violation of any preemptive rights, rights
of first refusal or other similar rights to subscribe for or purchase securities
of the Company. There are no authorized or outstanding options, warrants,
preemptive rights, rights of first refusal or other rights to purchase, or
equity or debt securities convertible into or exchangeable or exercisable for,
any capital stock of the Company or any of its subsidiaries other than those
accurately described in the Prospectus. The description of the Company's stock
option, stock bonus and other stock plans or arrangements, and the options or
other rights granted thereunder, set forth in the Prospectus accurately and
fairly presents the information required to be shown with respect to such plans,
arrangements, options and rights.
(l) STOCK EXCHANGE LISTING. The Common Stock (including the
Common Shares) is registered pursuant to Section 12(g) of the Exchange and is
listed on the Nasdaq National Market, and the Company has taken no action
designed to, or likely to have the effect of, terminating the registration of
the Common Stock under the Exchange Act or delisting the Common Stock from the
Nasdaq National Market, nor has the Company received any notification that the
Commission or the National Association of Securities Dealers LLC (the "NASD") is
contemplating terminating such registration or listing.
(m) NON-CONTRAVENTION OF EXISTING INSTRUMENTS; NO FURTHER
AUTHORIZATIONS OR APPROVALS REQUIRED. Neither the Company nor any of its
subsidiaries
<PAGE>
is in violation of its charter or by-laws or is in default (or, with the giving
of notice or lapse of time, would be in default) ("Default") under any
indenture, mortgage, loan or credit agreement, note, contract, franchise, lease
or other instrument to which the Company or any of its subsidiaries is a party
or by which it or any of them may be bound (including, without limitation, the
Company's 5% Convertible Loan due 2003, and the Company's Financing Agreement
with First Bank National Association as lender), or to which any of the property
or assets of the Company or any of its subsidiaries is subject (each, an
"Existing Instrument"), except for such Defaults as would not, individually or
in the aggregate, result in a Material Adverse Change. The Company's execution,
delivery and performance of this Agreement and consummation of the transactions
contemplated hereby and by the Prospectus (i) have been duly authorized by all
necessary corporate action and will not result in any violation of the
provisions of the charter or by-laws of the Company or any subsidiary, (ii) will
not conflict with or constitute a breach of, or Default under, or result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any of its subsidiaries pursuant to, or require the
consent of any other part to, any Existing Instrument, except for such
conflicts, breaches, Defaults, liens, charges or encumbrances as would not,
individually or in the aggregate, result in a Material Adverse Change and (iii)
will not result in any violation of any law, administrative regulation or
administrative or court decree applicable to the Company or any subsidiary. No
consent, approval, authorization or other order of, or registration or filing
with, any court or other governmental or regulatory authority or agency, is
required for the Company's execution, delivery and performance of this Agreement
and consummation of the transactions contemplated hereby and by the Prospectus,
except such as have been obtained or made by the Company and are in full force
and effect under the Securities Act, applicable state securities or blue sky
laws and from the NASD.
(n) NO MATERIAL ACTIONS OR PROCEEDINGS. Except as otherwise
disclosed in the Prospectus, there are no legal or governmental actions, suits
or proceedings pending or, to the best of the Company's knowledge, threatened
(i) against or affecting the Company or any of its subsidiaries, (ii) which has
as the subject thereof any officer or director of, or property owned or leased
by, the Company or any of its subsidiaries or (iii) relating to environmental or
discrimination matters, where in any such case (A) there is a reasonable
possibility that such action, suit or proceeding might be determined adversely
to the Company or such subsidiary and (B) any such action, suit or proceeding,
if so determined adversely, would reasonably be expected to result in a Material
Adverse Change or adversely affect the consummation of the transactions
contemplated by this Agreement. No material labor dispute with the employees of
the Company or any of its subsidiaries, or with the employees of any principal
supplier of the Company, exists or, to the best of the Company's knowledge, is
threatened or imminent.
(o) INTELLECTUAL PROPERTY RIGHTS. The Company and its
subsidiaries own or possess sufficient trademarks, trade names, patent rights,
copyrights, licenses, approvals, trade secrets and other similar rights
(collectively, "Intellectual
<PAGE>
Property Rights") reasonably necessary to conduct their businesses as now
conducted; and the expected expiration of any of such Intellectual Property
Rights would not result in a Material Adverse Change. Neither the Company nor
any of its subsidiaries has received any notice of infringement or conflict with
asserted Intellectual Property Rights of others, which infringement or conflict,
if the subject of an unfavorable decision, would result in a Material Adverse
Change.
(p) ALL NECESSARY PERMITS, ETC. The Company and each
subsidiary possess such valid and current certificates, authorizations or
permits issued by the appropriate state, federal or foreign regulatory agencies
or bodies necessary to conduct their respective businesses, and neither the
Company nor any subsidiary has received any notice of proceedings relating to
the revocation or modification of, or non-compliance with, any such certificate,
authorization or permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, could result in a Material Adverse
Change.
(q) TITLE TO PROPERTIES. The Company and each of its
subsidiaries has good and marketable title to all the properties and assets
reflected as owned in the financial statements referred to in Section 1(i) above
(or elsewhere in the Prospectus), in each case free and clear of any security
interests, mortgages, liens, encumbrances, equities, claims and other defects,
except such as do not materially and adversely affect the value of such property
and do not materially interfere with the use made or proposed to be made of such
property by the Company or such subsidiary. The real property, improvements,
equipment and personal property held under lease by the Company or any
subsidiary are held under valid and enforceable leases, with such exceptions as
are not material and do not materially interfere with the use made or proposed
to be made of such real property, improvements, equipment or personal property
by the Company or such subsidiary.
(r) TAX LAW COMPLIANCE. The Company and its subsidiaries have
filed all necessary federal, state and foreign income and franchise tax returns
or have properly requested extensions thereof and have paid all taxes required
to be paid by any of them and, if due and payable, any related or similar
assessment, fine or penalty levied against any of them. The Company has made
adequate charges, accruals and reserves in the applicable financial statements
referred to in Section 1(i) above in respect of all federal, state and foreign
income and franchise taxes for all periods as to which the tax liability of the
Company or any of its subsidiaries has not been finally determined.
(s) COMPANY NOT AN "INVESTMENT COMPANY". The Company has been
advised of the rules and requirements under the Investment Company Act of 1940,
as amended (the "Investment Company Act"). The Company is not, and after receipt
of payment for the Common Shares will not be, an "investment company" within the
meaning of Investment Company Act and will conduct its business in a manner so
that it will not become subject to the Investment Company Act.
<PAGE>
(t) INSURANCE. Each of the Company and its subsidiaries are
insured by recognized, financially sound and reputable institutions with
policies in such amounts and with such deductibles and covering such risks as
are generally deemed adequate and customary for their businesses including, but
not limited to, policies covering real and personal property owned or leased by
the Company and its subsidiaries against theft, damage, destruction, acts of
vandalism and earthquakes. The Company has no reason to believe that it or any
subsidiary will not be able (i) to renew its existing insurance coverage as and
when such policies expire or (ii) to obtain comparable coverage from similar
institutions as may be necessary or appropriate to conduct its business as now
conducted and at a cost that would not result in a Material Adverse Change.
Neither of the Company nor any subsidiary has been denied any insurance coverage
which it has sought or for which it has applied.
(u) NO PRICE STABILIZATION OR MANIPULATION. The Company has
not taken and will not take, directly or indirectly, any action designed to or
that might be reasonably expected to cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or resale
of the Common Shares.
(v) RELATED PARTY TRANSACTIONS. There are no business
relationships or related-party transactions involving the Company or any
subsidiary or any other person required to be described in the Prospectus which
have not been described as required.
(w) NO UNLAWFUL CONTRIBUTIONS OR OTHER PAYMENTS. Neither the
Company nor any of its subsidiaries nor, to the best of the Company's knowledge,
any employee or agent of the Company or any subsidiary, has made any
contribution or other payment to any official of, or candidate for, any federal,
state or foreign office in violation of any law or of the character required to
be disclosed in the Prospectus.
(x) COMPANY'S ACCOUNTING SYSTEM. The Company maintains a
system of accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles as applied in the United States and to maintain
accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(y) EXCHANGE ACT COMPLIANCE. The documents incorporated or
deemed to be incorporated by reference in the Prospectus, at the time they were
or hereafter are filed with the Commission, complied and will comply in all
material respects with the requirements of the Exchange Act, and, when read
together with the other information in the Prospectus, at the time the
Registration Statement and any
<PAGE>
amendments thereto become effective and at the First Closing Date and the Second
Closing Date, as the case may be, will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading
(z) COMPLIANCE WITH ENVIRONMENTAL LAWS. Except as would not,
individually or in the aggregate, result in a Material Adverse Change (i)
neither the Company nor any of its subsidiaries is in violation of any federal,
state, local or foreign law or regulation relating to pollution or protection of
human health or the environment (including, without limitation, ambient air,
surface water, groundwater, land surface or subsurface strata) or wildlife,
including without limitation, laws and regulations relating to emissions,
discharges, releases or threatened releases of chemicals, pollutants,
contaminants, wastes, toxic substances, hazardous substances, petroleum and
petroleum products (collectively, "Materials of Environmental Concern"), or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Materials of Environment Concern
(collectively, "Environmental Laws"), which violation includes, but is not
limited to, noncompliance with any permits or other governmental authorizations
required for the operation of the business of the Company or its subsidiaries
under applicable Environmental Laws, or noncompliance with the terms and
conditions thereof, nor has the Company or any of its subsidiaries received any
written communication, whether from a governmental authority, citizens group,
employee or otherwise, that alleges that the Company or any of its subsidiaries
is in violation of any Environmental Law; (ii) there is no claim, action or
cause of action filed with a court or governmental authority, no investigation
with respect to which the Company has received written notice, and no written
notice by any person or entity alleging potential liability for investigatory
costs, cleanup costs, governmental responses costs, natural resources damages,
property damages, personal injuries, attorneys' fees or penalties arising out
of, based on or resulting from the presence, or release into the environment, of
any Material of Environmental Concern at any location owned, leased or operated
by the Company or any of its subsidiaries, now or in the past (collectively,
"Environmental Claims"), pending or, to the best of the Company's knowledge,
threatened against the Company or any of its subsidiaries or any person or
entity whose liability for any Environmental Claim the Company or any of its
subsidiaries has retained or assumed either contractually or by operation of
law; and (iii) to the best of the Company's knowledge, there are no past or
present actions, activities, circumstances, conditions, events or incidents,
including, without limitation, the release, emission, discharge, presence or
disposal of any Material of Environmental Concern, that reasonably could result
in a violation of any Environmental Law or form the basis of a potential
Environmental Claim against the Company or any of its subsidiaries or against
any person or entity whose liability for any Environmental Claim the Company or
any of its subsidiaries has retained or assumed either contractually or by
operation of law.
(aa) ERISA COMPLIANCE. The Company and its subsidiaries and
any "employee benefit plan" (as defined under the Employee Retirement Income
Security
<PAGE>
Act of 1974, as amended, and the regulations and published interpretations
thereunder (collectively, "ERISA")) established or maintained by the Company,
its subsidiaries or their "ERISA Affiliates" (as defined below) are in
compliance in all material respects with ERISA. "ERISA Affiliate" means, with
respect to the Company or a subsidiary, any member of any group of organizations
described in Sections 414(b),(c),(m) or (o) of the Internal Revenue Code of
1986, as amended, and the regulations and published interpretations thereunder
(the "Code") of which the Company or such subsidiary is a member. No "reportable
event" (as defined under ERISA) has occurred or is reasonably expected to occur
with respect to any "employee benefit plan" established or maintained by the
Company, its subsidiaries or any of their ERISA Affiliates. No "employee benefit
plan" established or maintained by the Company, its subsidiaries or any of their
ERISA Affiliates, if such "employee benefit plan" were terminated, would have
any "amount of unfunded benefit liabilities" (as defined under ERISA). Neither
the Company, its subsidiaries nor any of their ERISA Affiliates has incurred or
reasonably expects to incur any liability under (i) Title IV of ERISA with
respect to termination of, or withdrawal from, any "employee benefit plan" or
(ii) Sections 412, 4971, 4975 or 4980B of the Code. Each "employee benefit plan"
established or maintained by the Company, its subsidiaries or any of their ERISA
Affiliates that is intended to be qualified under Section 401(a) of the Code is
so qualified and nothing has occurred, whether by action or failure to act,
which would cause the loss of such qualification.
Any certificate signed by an officer of the Company and
delivered to the Underwriters or to counsel for the Underwriters shall be deemed
to be a representation and warranty by the Company to each Underwriter as to the
matters set forth therein.
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE COMMON SHARES.
THE FIRM COMMON SHARES. The Company agrees to issue and sell to the
several Underwriters the Firm Common Shares upon the terms herein set forth. On
the basis of the representations, warranties and agreements herein contained,
and upon the terms but subject to the conditions herein set forth, the
Underwriters agree, severally and not jointly, to purchase from the Company the
respective number of Firm Common Shares set forth opposite their names on
Schedule A. The purchase price per Firm Common Share to be paid by the several
Underwriters to the Company shall be $[___] per share.
THE FIRST CLOSING DATE. Delivery of certificates for the Firm Common
Shares to be purchased by the Underwriters and payment therefor shall be made at
the offices of NMSI, 600 Montgomery Street, San Francisco, California (or such
other place as may be agreed to by the Company and the Underwriters) at 6:00
a.m. San Francisco time, on [___],(2) or such other time and date not later than
10:30 a.m. San Francisco time , on
- ----------
(2) Insert the fourth full business day after the date of this
Agreement, unless the pricing occurs at a time earlier than 4:30 p.m., EAST
COAST TIME, in which case insert the third full business day after the date of
this Agreement.
<PAGE>
[___](3) as the Underwriters shall designate by notice to the Company (the time
and date of such closing are called the "First Closing Date"). The Company
hereby acknowledges that circumstances exist under which the Underwriters may
provide notice to postpone the First Closing Date as originally scheduled
include, but are in no way limited to, any determination by the Company or the
Underwriters to recirculate to the public copies of an amended or supplemented
Prospectus or a delay as contemplated by the provisions of Section 10.
THE OPTIONAL COMMON SHARES; THE SECOND CLOSING DATE. In addition, on
the basis of the representations, warranties and agreements herein contained,
and upon the terms but subject to the conditions herein set forth, the Company
hereby grants an option to the several Underwriters to purchase, severally and
not jointly, up to an aggregate of $150,000 Optional Common Shares from the
Company at the purchase price per share to be paid by the Underwriters for the
Firm Common Shares. The option granted hereunder is for use by the Underwriters
solely in covering any over-allotments in connection with the sale and
distribution of the Firm Common Shares. The option granted hereunder may be
exercised at any time (but not more than once) upon notice by the Underwriters
to the Company which notice may be given at any time within 30 days from the
date of this Agreement. Such notice shall set forth (i) the aggregate number of
Optional Common Shares as to which the Underwriters are exercising the option,
(ii) the names and denominations in which the certificates for the Optional
Common Shares are to be registered and (iii) the time, date and place at which
such certificates will be delivered (which time and date may be simultaneous
with, but not earlier than, the First Closing Date; and in such case the term
"First Closing Date" shall refer to the time and date of delivery of
certificates for the Firm Common Shares and the Optional Common Shares). Such
time and date of delivery, if subsequent to the First Closing Date, is called
the "Second Closing Date" and shall be determined by the Underwriters and shall
not be earlier than three nor later than five full business days after delivery
of such notice of exercise. If any Optional Common Shares are to be purchased,
each Underwriter agrees, severally and not jointly, to purchase the number of
Optional Common Shares (subject to such adjustments to eliminate fractional
shares as the Underwriters may determine) that bears the same proportion to the
total number of Optional Common Shares to be purchased as the number of Firm
Common Shares set forth on Schedule A opposite the name of such Underwriter
bears to the total number of Firm Common Shares and the Company agrees to sell
the number of Optional Common Shares to be sold by the Company as set forth in
the paragraph "Introductory" of this Agreement). The Underwriters may cancel the
option at any time prior to its expiration by giving written notice of such
cancellation to the Company.
PUBLIC OFFERING OF THE COMMON SHARES. The Underwriters hereby advises
the Company that the Underwriters intend to offer for sale to the public, as
described in the Prospectus, their respective portions of the Common Shares as
soon after this Agreement
- ----------
(3) Insert a date ten business days following the original contemplated
First Closing Date.
<PAGE>
has been executed and the Registration Statement has been declared effective as
the Underwriters, in their sole judgment, have determined is advisable and
practicable.
PAYMENT FOR THE COMMON SHARES. Payment for the Common Shares shall be
made at the First Closing Date (and, if applicable, at the Second Closing Date)
by wire transfer of immediately available funds to the order of the Company.
It is understood that the Underwriters have been authorized, for their
own account to accept delivery of and receipt for, and make payment of the
purchase price for, the Firm Common Shares and any Optional Common Shares the
Underwriters have agreed to purchase. NMSI, individually and not as the
representative of the Underwriters, may (but shall not be obligated to) make
payment for any Common Shares to be purchased by any Underwriter whose funds
shall not have been received by NMSI by the First Closing Date or the Second
Closing Date, as the case may be, for the account of such Underwriter, but any
such payment shall not relieve such Underwriter from any of its obligations
under this Agreement.
DELIVERY OF THE COMMON SHARES. The Company shall deliver, or cause to
be delivered, to the Underwriters certificates for the Firm Common Shares at the
First Closing Date, against the irrevocable release of a wire transfer of
immediately available funds for the amount of the purchase price therefor. The
Company shall also deliver, or cause to be delivered, to the Underwriters
certificates for the Optional Common Shares the Underwriters have agreed to
purchase at the First Closing Date or the Second Closing Date, as the case may
be, against the irrevocable release of a wire transfer of immediately available
funds for the amount of the purchase price therefor. The certificates for the
Common Shares shall be in definitive form and registered in such names and
denominations as the Underwriters shall have requested at least two full
business days prior to the First Closing Date (or the Second Closing Date, as
the case may be) and shall be made available for inspection on the business day
preceding the First Closing Date (or the Second Closing Date, as the case may
be) at a location in New York City as the Underwriters may designate. Time shall
be of the essence, and delivery at the time and place specified in this
Agreement is a further condition to the obligations of the Underwriters.
SECTION 3. ADDITIONAL COVENANTS OF THE COMPANY. The Company further
covenants and agrees with each Underwriter as follows:
(a) UNDERWRITERS' REVIEW OF PROPOSED AMENDMENTS AND
SUPPLEMENTS. During such period beginning on the date hereof and ending on the
later of the First Closing Date or such date, as in the opinion of counsel for
the Underwriters, the Prospectus is no longer required by law to be delivered in
connection with sales by an Underwriter or dealer (the "Prospectus Delivery
Period"), prior to amending or supplementing the Registration Statement
(including any registration statement filed under Rule 462(b) under the
Securities Act) or the Prospectus (including any amendment or supplement through
incorporation by reference of any report filed under the Exchange
<PAGE>
Act), the Company shall furnish to the Underwriters for review a copy of each
such proposed amendment or supplement, and the Company shall not file any such
proposed amendment or supplement to which the Underwriters reasonably object.
(b) SECURITIES ACT COMPLIANCE. After the date of this
Agreement, the Company shall promptly advise the Underwriters in writing (i) of
the receipt of any comments of, or requests for additional or supplemental
information from, the Commission, (ii) of the time and date of any filing of any
post-effective amendment to the Registration Statement or any amendment or
supplement to any preliminary prospectus or the Prospectus, (iii) of the time
and date that any post-effective amendment to the Registration Statement becomes
effective and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or any post-effective
amendment thereto or of any order preventing or suspending the use of any
preliminary prospectus or the Prospectus, or of any proceedings to remove,
suspend or terminate from listing or quotation the Common Stock from any
securities exchange upon which the it is listed for trading or included or
designated for quotation, or of the threatening or initiation of any proceedings
for any of such purposes. If the Commission shall enter any such stop order at
any time, the Company will use its best efforts to obtain the lifting of such
order at the earliest possible moment. Additionally, the Company agrees that it
shall comply with the provisions of Rules 424(b), 430A and 434, as applicable,
under the Securities Act and will use its reasonable efforts to confirm that any
filings made by the Company under such Rule 424(b) were received in a timely
manner by the Commission.
(c) AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS AND OTHER
SECURITIES ACT MATTERS. If, during the Prospectus Delivery Period, any event
shall occur or condition exist as a result of which it is necessary to amend or
supplement the Prospectus in order to make the statements therein, in the light
of the circumstances when the Prospectus is delivered to a purchaser, not
misleading, or if in the opinion of the Underwriters or counsel for the
Underwriters it is otherwise necessary to amend or supplement the Prospectus to
comply with law, the Company agrees to promptly prepare (subject to Section
3(A)(a) hereof), file with the Commission and furnish at its own expense to the
Underwriters and to dealers, amendments or supplements to the Prospectus so that
the statements in the Prospectus as so amended or supplemented will not, in the
light of the circumstances when the Prospectus is delivered to a purchaser, be
misleading or so that the Prospectus, as amended or supplemented, will comply
with law.
(d) COPIES OF ANY AMENDMENTS AND SUPPLEMENTS TO THE
PROSPECTUS. The Company agrees to furnish the Underwriters, without charge,
during the Prospectus Delivery Period, as many copies of the Prospectus and any
amendments and supplements thereto (including any documents incorporated or
deemed incorporated by reference therein) as the Underwriters may request.
(e) BLUE SKY COMPLIANCE. The Company shall cooperate with the
Underwriters and counsel for the Underwriters to qualify or register the Common
<PAGE>
Shares for sale under (or obtain exemptions from the application of) the or
state securities or blue sky laws or Canadian provincial Securities laws of
those jurisdictions designated by the Underwriters, shall comply with such laws
and shall continue such qualifications, registrations and exemptions in effect
so long as required for the distribution of the Common Shares. The Company shall
not be required to qualify as a foreign corporation or to take any action that
would subject it to general service of process in any such jurisdiction where it
is not presently qualified or where it would be subject to taxation as a foreign
corporation. The Company will advise the Underwriters promptly of the suspension
of the qualification or registration of (or any such exemption relating to) the
Common Shares for offering, sale or trading in any jurisdiction or any
initiation or threat of any proceeding for any such purpose, and in the event of
the issuance of any order suspending such qualification, registration or
exemption, the Company shall use its best efforts to obtain the withdrawal
thereof at the earliest possible moment.
(f) USE OF PROCEEDS. The Company shall apply the net proceeds
from the sale of the Common Shares sold by it in the manner described under the
caption "Use of Proceeds" in the Prospectus.
(g) The Company shall engage and maintain, at its expense, a
registrar and transfer agent for the Common Stock.
(h) EARNINGS STATEMENT. As soon as practicable, the Company
will make generally available to its security holders and to the Underwriters an
earnings statement (which need not be audited) covering the twelve-month period
ending [___](4) that satisfies the provisions of Section 11(a) of the Securities
Act.
(j) PERIODIC REPORTING OBLIGATIONS. During the Prospectus
Delivery Period the Company shall file, on a timely basis, with the Commission
and the Nasdaq National Market all reports and documents required to be filed
under the Exchange Act. [Additionally, the Company shall file with the
Commission all reports on Form SR as may be required under Rule 463 under the
Securities Act.]
(k) AGREEMENT NOT TO OFFER OR SELL ADDITIONAL SECURITIES
During the period of 180 days following the date of the Prospectus, the Company
will not, without the prior written consent of NMSI (which consent may be
withheld at the sole discretion of NMSI), directly or indirectly, sell, offer,
contract or grant any option to sell, pledge, transfer or establish an open "put
equivalent position" within the meaning of Rule 16a-1(h) under the Exchange Act,
or otherwise dispose of or transfer, or announce the offering of, or file any
registration statement under the Securities Act in respect of, any shares of
Common Stock, options or warrants to acquire shares of the Common Stock or
securities exchangeable or exercisable for or convertible into shares of Common
- ----------
(4) Insert the date of the end of the Company's first quarter ending
after one year following the "effective date of the Registration Statement" (as
defined in Rule 158(c) under the Securities Act).
<PAGE>
Stock (other than as contemplated by this Agreement with respect to the Common
Shares); PROVIDED, HOWEVER, that the Company may issue shares of its Common
Stock or options to purchase its Common Stock, or Common Stock upon exercise of
options, pursuant to any stock option, stock bonus or other stock plan or
arrangement described in the Prospectus, but only if the holders of such shares,
options, or shares issued upon exercise of such options, agree in writing not to
sell, offer, dispose of or otherwise transfer any such shares or options during
such 180 day period without the prior written consent of NMSI (which consent may
be withheld at the sole discretion of the NMSI).
(l) FUTURE REPORTS TO THE UNDERWRITERS. During the period of
five years hereafter the Company will furnish to the Underwriters at 600
Montgomery Street, San Francisco, CA 94111 Attention: Karl L. Matthies (i) as
soon as practicable after the end of each fiscal year, copies of the Annual
Report of the Company containing the balance sheet of the Company as of the
close of such fiscal year and statements of income, Shareholders' equity and
cash flows for the year then ended and the opinion thereon of the Company's
independent public or certified public accountants; (ii) as soon as practicable
after the filing thereof, copies of each proxy statement, Annual Report on Form
10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K or other report
filed by the Company with the Commission, the NASD or any securities exchange;
and (iii) as soon as available, copies of any report or communication of the
Company mailed generally to holders of its capital stock.
(m) EXCHANGE ACT COMPLIANCE. During the Prospectus Delivery
Period, the Company will file all documents required to be filed with the
Commission pursuant to Section 13, 14 or 15 of the Exchange Act in the manner
and within the time periods required by the Exchange Act.
SECTION 4. PAYMENT OF EXPENSES. The Company agrees to pay all costs,
fees and expenses incurred in connection with the performance of its obligations
hereunder and in connection with the transactions contemplated hereby, including
without limitation (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing and engraving costs), (ii) all fees and
expenses of the registrar and transfer agent of the Common Stock, (iii) all
necessary issue, transfer and other stamp taxes in connection with the issuance
and sale of the Common Shares to the Underwriters, (iv) all fees and expenses of
the Company's counsel, independent public or certified public accountants and
other advisors, (v) all costs and expenses incurred in connection with the
preparation, printing, filing, shipping and distribution of the Registration
Statement (including financial statements, exhibits, schedules, consents and
certificates of experts), each preliminary prospectus and the Prospectus, and
all amendments and supplements thereto, and this Agreement, (vi) all filing
fees, attorneys' fees and expenses incurred by the Company or the Underwriters
in connection with qualifying or registering (or obtaining exemptions from the
qualification or registration of) all or any part of the Common Shares for offer
and sale under the state securities or blue sky laws or the provincial
securities laws of Canada, and, if requested by the Underwriters, preparing and
printing a "Blue Sky Survey" or memorandum, and any
<PAGE>
supplements thereto, advising the Underwriters of such qualifications,
registrations and exemptions, (vii) the filing fees incident to, and the
reasonable fees and expenses of counsel for the Underwriters in connection with,
the NASD's review and approval of the Underwriters' participation in the
offering and distribution of the Common Shares, (viii) the fees and expenses
associated with including the Common Shares on the Nasdaq National Market, and
(ix) all other fees, costs and expenses referred to in Item 14 of Part II of the
Registration Statement. Except as provided in this Section 4, Section 6, Section
8 and Section 9 hereof, the Underwriters shall pay their own expenses, including
the fees and disbursements of their counsel.
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Common
Shares as provided herein on the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date, shall be subject to the
accuracy of the representations and warranties on the part of the Company set
forth in Section 1 hereof as of the date hereof and as of the First Closing Date
as though then made and, with respect to the Optional Common Shares, as of the
Second Closing Date as though then made, to the timely performance by the
Company of its covenants and other obligations hereunder, and to each of the
following additional conditions:
(a) ACCOUNTANTS' COMFORT LETTER. On the date hereof, the
Underwriters shall have received from Ernst & Young LLP, independent public or
certified public accountants for the Company, a letter dated the date hereof
addressed to the Underwriters, in form and substance satisfactory to the
Underwriters, containing statements and information of the type ordinarily
included in accountant's "comfort letters" to underwriters, delivered according
to Statement of Auditing Standards No. 72 (or any successor bulletin), with
respect to the audited and unaudited financial statements and certain financial
information contained in the Registration Statement and the Prospectus (and the
Underwriters shall have received an additional one conformed copy of such
accountants' letter for each of the several Underwriters).
(b) COMPLIANCE WITH REGISTRATION REQUIREMENTS; NO STOP ORDER;
NO OBJECTION FROM NASD. For the period from and after effectiveness of this
Agreement and prior to the First Closing Date and, with respect to the Optional
Common Shares, the Second Closing Date:
(i) the Company shall have filed the Prospectus with the
Commission (including the information required by Rule 430A under the
Securities Act) in the manner and within the time period required by
Rule 424(b) under the Securities Act; or the Company shall have filed a
post-effective amendment to the Registration Statement containing the
information required by such Rule 430A, and such post-effective
amendment shall have become effective; or, if the Company elected to
rely upon Rule 434 under the Securities Act and obtained the
Underwriters' consent thereto, the Company shall have filed a Term
Sheet with the Commission in the manner and within the time period
required by such Rule 424(b);
<PAGE>
(ii) no stop order suspending the effectiveness of the
Registration Statement, any Rule 462(b) Registration Statement, or any
post-effective amendment to the Registration Statement, shall be in
effect and no proceedings for such purpose shall have been instituted
or threatened by the Commission; and
(iii) the NASD shall have raised no objection to the fairness
and reasonableness of the underwriting terms and arrangements.
(c) NO MATERIAL ADVERSE CHANGE OR RATINGS AGENCY CHANGE. For
the period from and after the date of this Agreement and prior to the First
Closing Date and, with respect to the Optional Common Shares, the Second Closing
Date:
(i) in the judgment of the Underwriters there shall not have
occurred any Material Adverse Change; and
(ii) there shall not have occurred any downgrading, nor shall
any notice have been given of any intended or potential downgrading or
of any review for a possible change that does not indicate the
direction of the possible change, in the rating accorded any securities
of the Company or any of its subsidiaries by any "nationally recognized
statistical rating organization" as such term is defined for purposes
of Rule 436(g)(2) under the Securities Act.
(d) OPINION OF COUNSEL FOR THE COMPANY. On each of the First
Closing Date and the Second Closing Date, the Underwriters shall have received
the favorable opinion of Robins, Kaplan, Miller & Ciresi L.L.P., counsel for the
Company, dated as of such Closing Date, the form of which is attached as Exhibit
A.
(e) OPINION OF COUNSEL FOR THE UNDERWRITERS. On each of the
First Closing Date and the Second Closing Date, the Underwriters shall have
received the favorable opinion of Fried, Frank, Harris, Shriver & Jacobson (a
partnership including professional corporations), counsel for the Underwriters,
dated as of such Closing Date, with respect to the matters set forth in
paragraphs (i), (vii) (with respect to subparagraph (i) only, (viii), (ix), (x),
(xi), (xii) and the next-to-last paragraph of Exhibit A.
(f) OFFICERS' CERTIFICATE. On each of the First Closing Date
and the Second Closing Date, the Underwriters shall have received a written
certificate executed by the Chairman of the Board, Chief Executive Officer or
President of the Company and the Chief Financial Officer or Chief Accounting
Officer of the Company, dated as of such Closing Date, to the effect set forth
in subsections (b)(ii) and (c)(ii) of this Section 5, and further to the effect
that:
(i) for the period from and after the date of this Agreement
and prior to such Closing Date, there has not occurred any Material
Adverse Change;
<PAGE>
(ii) the representations, warranties and covenants of the
Company set forth in Section 1 of this Agreement are true and correct
with the same force and effect as though expressly made on and as of
such Closing Date; and
(iii) the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied
at or prior to such Closing Date.
(g) BRING-DOWN COMFORT LETTER. On each of the First Closing
Date and the Second Closing Date, the Underwriters shall have received from
Ernst & Young LLP, independent public or certified public accountants for the
Company, a letter dated such date, in form and substance satisfactory to the
Underwriters, to the effect that they reaffirm the statements made in the letter
furnished by them pursuant to subsection (a) of this Section 5, except that the
specified date referred to therein for the carrying out of procedures shall be
no more than three business days prior to the First Closing Date or Second
Closing Date, as the case may be (and the Underwriters shall have received an
additional one conformed copy of such accountants' letter for each of the
several Underwriters).
(h) LOCK-UP AGREEMENT FROM CERTAIN SHAREHOLDERS OF THE
COMPANY. On the date hereof, the Company shall have furnished to the
Underwriters an agreement in the form of Exhibit B hereto from [___], and such
agreement shall be in full force and effect on each of the First Closing Date
and the Second Closing Date.]
(i) ADDITIONAL DOCUMENTS. On or before each of the First
Closing Date and the Second Closing Date, the Underwriters and counsel for the
Underwriters shall have received such information, documents and opinions as
they may reasonably require for the purposes of enabling them to pass upon the
issuance and sale of the Common Shares as contemplated herein, or in order to
evidence the accuracy of any of the representations and warranties, or the
satisfaction of any of the conditions or agreements, herein contained.
If any condition specified in this Section 5 is not satisfied when and
as required to be satisfied, this Agreement may be terminated by the
Underwriters by notice to the Company at any time on or prior to the First
Closing Date and, with respect to the Optional Common Shares, at any time prior
to the Second Closing Date, which termination shall be without liability on the
part of any party to any other party, except that Section 4, Section 6, Section
8 and Section 9 shall at all times be effective and shall survive such
termination.
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this Agreement
is terminated by the Underwriters pursuant to Section 5, Section 7, Section 10
or Section 11, or if the sale to the Underwriters of the Common Shares on the
First Closing Date is not consummated because of any refusal, inability or
failure on the part of the Company
<PAGE>
to perform any agreement herein or to comply with any provision hereof, the
Company agrees to reimburse the Underwriters (or such Underwriters as have
terminated this Agreement with respect to themselves), severally, upon demand
for all out-of-pocket expenses that shall have been reasonably incurred by the
Underwriters in connection with the proposed purchase and the offering and sale
of the Common Shares, including but not limited to fees and disbursements of
counsel, printing expenses, travel expenses, postage, facsimile and telephone
charges.
SECTION 7. EFFECTIVENESS OF THIS AGREEMENT.
This Agreement shall not become effective until the later of (i) the
execution of this Agreement by the parties hereto and (ii) notification by the
Commission to the Company and the Underwriters of the effectiveness of the
Registration Statement under the Securities Act.
Prior to such effectiveness, this Agreement may be terminated by any
party by notice to each of the other parties hereto, and any such termination
shall be without liability on the part of (a) the Company to any Underwriter,
except that the Company shall be obligated to reimburse the expenses of the
Underwriters pursuant to Sections 4 and 6 hereof, (b) of any Underwriter to the
Company or (c) of any party hereto to any other party except that the provisions
of Section 8 and Section 9 shall at all times be effective and shall survive
such termination.
SECTION 8. INDEMNIFICATION.
(a) INDEMNIFICATION OF THE UNDERWRITERS. The Company agrees to
indemnify and hold harmless each Underwriter, its officers and employees, and
each person, if any, who controls any Underwriter within the meaning of the
Securities Act and the Exchange Act against any loss, claim, damage, liability
or expense, as incurred, to which such Underwriter or such controlling person
may become subject, under the Securities Act, the Exchange Act or other federal
or state statutory law or regulation, or at common law or otherwise (including
in settlement of any litigation, if such settlement is effected with the written
consent of the Company), insofar as such loss, claim, damage, liability or
expense (or actions in respect thereof as contemplated below) arises out of or
is based (i) upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement, or any amendment thereto,
including any information deemed to be a part thereof pursuant to Rule 430A or
Rule 434 under the Securities Act, or the omission or alleged omission therefrom
of a material fact required to be stated therein or necessary to make the
statements therein not misleading; or (ii) upon any untrue statement or alleged
untrue statement of a material fact contained in any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto), or the omission or
alleged omission therefrom of a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; or (iii) in whole or in part upon any inaccuracy in the
<PAGE>
representations and warranties of the Company contained herein; or (iv) in whole
or in part upon any failure of the Company to perform their respective
obligations hereunder or under law; or (v) any act or failure to act or any
alleged act or failure to act by any Underwriter in connection with, or relating
in any manner to, the Common Stock or the offering contemplated hereby, and
which is included as part of or referred to in any loss, claim, damage,
liability or action arising out of or based upon any matter covered by clause
(i) or (ii) above, PROVIDED that the Company shall not be liable under this
clause (v) to the extent that a court of competent jurisdiction shall have
determined by a final judgment that such loss, claim, damage, liability or
action resulted directly from any such acts or failures to act undertaken or
omitted to be taken by such Underwriter through its bad faith or willful
misconduct; and to reimburse each Underwriter and each such controlling person
for any and all expenses (including the fees and disbursements of counsel chosen
by NMSI) as such expenses are reasonably incurred by such Underwriter or such
controlling person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense or
action; PROVIDED, HOWEVER, that the foregoing indemnity agreement shall not
apply to any loss, claim, damage, liability or expense to the extent, but only
to the extent, arising out of or based upon any untrue statement or alleged
untrue statement or omission or alleged omission made in reliance upon and in
conformity with written information furnished to the Company by the Underwriters
expressly for use in the Registration Statement, any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto); and PROVIDED, FURTHER,
that with respect to any preliminary prospectus, the foregoing indemnity
agreement shall not inure to the benefit of any Underwriter from whom the person
asserting any loss, claim, damage, liability or expense purchased Common Shares,
or any person controlling such Underwriter, if copies of the Prospectus were
timely delivered to the Underwriter pursuant to Section 2 and a copy of the
Prospectus (as then amended or supplemented if the Company shall have furnished
any amendments or supplements thereto) was not sent or given by or on behalf of
such Underwriter to such person, if required by law so to have been delivered,
at or prior to the written confirmation of the sale of the Common Shares to such
person, and if the Prospectus (as so amended or supplemented) would have cured
the defect giving rise to such loss, claim, damage, liability or expense. The
indemnity agreement set forth in this Section 8(a) shall be in addition to any
liabilities that the Company may otherwise have.
(b) INDEMNIFICATION OF THE COMPANY, ITS DIRECTORS AND
OFFICERS. Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, each of its directors, each of its officers who
signed the Registration Statement, and each person, if any, who controls the
Company within the meaning of the Securities Act or the Exchange Act, against
any loss, claim, damage, liability or expense, as incurred, to which the
Company, or any such director, officer, or controlling person may become
subject, under the Securities Act, the Exchange Act, or other federal or state
statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the written
consent of such Underwriter), insofar as such loss, claim, damage, liability or
expense (or actions in respect thereof as contemplated below) arises out of or
is based upon any
<PAGE>
untrue or alleged untrue statement of a material fact contained in the
Registration Statement, any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto), or arises out of or is based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in the Registration
Statement, any preliminary prospectus, the Prospectus (or any amendment or
supplement thereto), in reliance upon and in conformity with written information
furnished to the Company by the Underwriters expressly for use therein; and to
reimburse the Company, or any such director, officer, or controlling person for
any legal and other expense reasonably incurred by the Company, or any such
director, officer, or controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action. The Company hereby acknowledges that the only
information that the Underwriters have furnished to the Company expressly for
use in the Registration Statement, any preliminary prospectus or the Prospectus
(or any amendment or supplement thereto) are the statements set forth (A) as the
last paragraphs on the inside front cover page of the Prospectus concerning
stabilization by the Underwriters and (B) in the table in the first paragraph,
and as the second and sixth paragraphs under the caption "Underwriting" in the
Prospectus; and the Underwriters confirm that such statements are correct. The
indemnity agreement set forth in this Section 8(b) shall be in addition to any
liabilities that each Underwriter may otherwise have.
(c) NOTIFICATIONS AND OTHER INDEMNIFICATION PROCEDURES.
Promptly after receipt by an indemnified party under this Section 8 of notice of
the commencement of any action, such indemnified party will, if a claim in
respect thereof is to be made against an indemnifying party under this Section
8, notify the indemnifying party in writing of the commencement thereof, but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party for contribution or
otherwise than under the indemnity agreement contained in this Section 8 or to
the extent it is not prejudiced as a proximate result of such failure. In case
any such action is brought against any indemnified party and such indemnified
party seeks or intends to seek indemnity from an indemnifying party, the
indemnifying party will be entitled to participate in, and, to the extent that
it shall elect, jointly with all other indemnifying parties similarly notified,
by written notice delivered to the indemnified party promptly after receiving
the aforesaid notice from such indemnified party, to assume the defense thereof
with counsel reasonably satisfactory to such indemnified party; PROVIDED,
HOWEVER, if the defendants in any such action include both the indemnified party
and the indemnifying party and the indemnified party shall have reasonably
concluded that a conflict may arise between the positions of the indemnifying
party and the indemnified party in conducting the defense of any such action or
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such
<PAGE>
indemnified party or parties. Upon receipt of notice from the indemnifying party
to such indemnified party of such indemnifying party's election so to assume the
defense of such action and approval by the indemnified party of counsel, the
indemnifying party will not be liable to such indemnified party under this
Section 8 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (together with local counsel), approved by the indemnifying
party (NMSI in the case of Section 8(b) and Section 9), representing the
indemnified parties who are parties to such action) or (ii) the indemnifying
party shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action, in each of which cases the fees and expenses of
counsel shall be at the expense of the indemnifying party.
(d) SETTLEMENTS. The indemnifying party under this Section 8
shall not be liable for any settlement of any proceeding effected without its
written consent, but if settled with such consent or if there be a final
judgment for the plaintiff, the indemnifying party agrees to indemnify the
indemnified party against any loss, claim, damage, liability or expense by
reason of such settlement or judgment. Notwithstanding the foregoing sentence,
if at any time an indemnified party shall have requested an indemnifying party
to reimburse the indemnified party for fees and expenses of counsel as
contemplated by Section 8(c) hereof, the indemnifying party agrees that it shall
be liable for any settlement of any proceeding effected without its written
consent if (i) such settlement is entered into more than 30 days after receipt
by such indemnifying party of the aforesaid request and (ii) such indemnifying
party shall not have reimbursed the indemnified party in accordance with such
request prior to the date of such settlement. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement, compromise or consent to the entry of judgment in any pending or
threatened action, suit or proceeding in respect of which any indemnified party
is or could have been a party and indemnity was or could have been sought
hereunder by such indemnified party, unless such settlement, compromise or
consent includes an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such action, suit or
proceeding.
SECTION 9. CONTRIBUTION.
If the indemnification provided for in Section 8 is for any reason held
to be unavailable to or otherwise insufficient to hold harmless an indemnified
party in respect of any losses, claims, damages, liabilities or expenses
referred to therein, then each indemnifying party shall contribute to the
aggregate amount paid or payable by such indemnified party, as incurred, as a
result of any losses, claims, damages, liabilities or expenses referred to
therein (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company, on the one hand, and the Underwriters, on the
other hand, from the offering of the Common Shares pursuant to this Agreement or
(ii) if the
<PAGE>
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company, on
the one hand, and the Underwriters, on the other hand, in connection with the
statements or omissions or inaccuracies in the representations and warranties
herein which resulted in such losses, claims, damages, liabilities or expenses,
as well as any other relevant equitable considerations. The relative benefits
received by the Company, on the one hand, and the Underwriters, on the other
hand, in connection with the offering of the Common Shares pursuant to this
Agreement shall be deemed to be in the same respective proportions as the total
net proceeds from the offering of the Common Shares pursuant to this Agreement
(before deducting expenses) received by the Company, and the total underwriting
discount received by the Underwriters, in each case as set forth on the front
cover page of the Prospectus (or, if Rule 434 under the Securities Act is used,
the corresponding location on the Term Sheet) bear to the aggregate initial
public offering price of the Common Shares as set forth on such cover. The
relative fault of the Company, on the one hand, and the Underwriters, on the
other hand, shall be determined by reference to, among other things, whether any
such untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact or any such inaccurate or alleged
inaccurate representation or warranty relates to information supplied by the
Company, on the one hand, or the Underwriters, on the other hand, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in Section 8(c), any legal or
other fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim. The provisions set forth in
Section 8(c) with respect to notice of commencement of any action shall apply if
a claim for contribution is to be made under this Section 9; PROVIDED, HOWEVER,
that no additional notice shall be required with respect to any action for which
notice has been given under Section 8(c) for purposes of indemnification.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 9 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in this Section 9.
Notwithstanding the provisions of this Section 9, no Underwriter shall
be required to contribute any amount in excess of the underwriting commissions
received by such Underwriter in connection with the Common Shares underwritten
by it and distributed to the public. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 9 are several, and not joint, in
<PAGE>
proportion to their respective underwriting commitments as set forth opposite
their names in Schedule A. For purposes of this Section 9, each officer and
employee of an Underwriter and each person, if any, who controls an Underwriter
within the meaning of the Securities Act and the Exchange Act shall have the
same rights to contribution as such Underwriter, and each director of the
Company, each officer of the Company who signed the Registration Statement, and
each person, if any, who controls the Company with the meaning of the Securities
Act and the Exchange Act shall have the same rights to contribution as the
Company.
SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS. If, on
the First Closing Date or the Second Closing Date, as the case may be, any one
or more of the several Underwriters shall fail or refuse to purchase Common
Shares that it or they have agreed to purchase hereunder on such date, and the
aggregate number of Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase does not exceed 10% of the
aggregate number of the Common Shares to be purchased on such date, the other
Underwriters shall be obligated, severally, in the proportions that the number
of Firm Common Shares set forth opposite their respective names on Schedule A
bears to the aggregate number of Firm Common Shares set forth opposite the names
of all such non-defaulting Underwriters, or in such other proportions as may be
specified by the Underwriters with the consent of the non-defaulting
Underwriters, to purchase the Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date. If, on the
First Closing Date or the Second Closing Date, as the case may be, any one or
more of the Underwriters shall fail or refuse to purchase Common Shares and the
aggregate number of Common Shares with respect to which such default occurs
exceeds 10% of the aggregate number of Common Shares to be purchased on such
date, and arrangements satisfactory to the Underwriters and the Company for the
purchase of such Common Shares are not made within 48 hours after such default,
this Agreement shall terminate without liability of any party to any other party
except that the provisions of Section 4, Section 8 and Section 9 shall at all
times be effective and shall survive such termination. In any such case either
the Underwriters or the Company shall have the right to postpone the First
Closing Date or the Second Closing Date, as the case may be, but in no event for
longer than seven days in order that the required changes, if any, to the
Registration Statement and the Prospectus or any other documents or arrangements
may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
10. Any action taken under this Section 10 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
SECTION 11. TERMINATION OF THIS AGREEMENT. Prior to the First Closing
Date this Agreement maybe terminated by the Underwriters by notice given to the
Company if at any time (i) trading or quotation in any of the Company's
securities shall have been suspended or limited by the Commission or by the
Nasdaq National Market, or trading in securities generally on either the Nasdaq
National Market or the New York Stock
<PAGE>
Exchange shall have been suspended or limited, or minimum or maximum prices
shall have been generally established on any of such stock exchanges by the
Commission or the NASD; (ii) a general banking moratorium shall have been
declared by any of federal, New York, Minnesota or California authorities; (iii)
there shall have occurred any outbreak or escalation of national or
international hostilities or any crisis or calamity, or any change in the United
States or international financial markets, or any substantial change or
development involving a prospective substantial change in United States' or
international political, financial or economic conditions, as in the judgment of
the Underwriters is material and adverse and makes it impracticable to market
the Common Shares in the manner and on the terms described in the Prospectus or
to enforce contracts for the sale of securities; (iv) in the judgment of the
Underwriters there shall have occurred any Material Adverse Change; or (v) the
Company shall have sustained a loss by strike, fire, flood, earthquake, accident
or other calamity of such character as in the judgment of the Underwriters may
interfere materially with the conduct of the business and operations of the
Company regardless of whether or not such loss shall have been insured. Any
termination pursuant to this Section 11 shall be without liability on the part
of (a) the Company to any Underwriter, except that the Company shall be
obligated to reimburse the expenses of the Underwriters and the Underwriters
pursuant to Sections 4 and 6 hereof, (b) any Underwriter to the Company, or (c)
of any party hereto to any other party except that the provisions of Section 8
and Section 9 shall at all times be effective and shall survive such
termination.
SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers and of the several Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or the Company or any of its or their partners, officers or directors or any
controlling person, as the case may be, and will survive delivery of and payment
for the Common Shares sold hereunder and any termination of this Agreement.
SECTION 13. NOTICES. All communications hereunder shall be in writing
and shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Underwriters:
NationsBanc Montgomery Securities LLC
600 Montgomery Street
San Francisco, California 94111
Facsimile: 415-249-5558
Attention: Richard A. Smith
<PAGE>
with a copy to:
NationsBanc Montgomery Securities LLC
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5553
Attention: David A. Baylor, Esq.
If to the Company:
Recovery Engineering, Inc.
9300 North 75th Avenue
Minneapolis, Minnesota 55428
Facsimile: (612) 315-5508
Attention: Brian F. Sullivan
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
SECTION 14. SUCCESSORS. This Agreement will inure to the benefit of and
be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 10 hereof, and to the benefit of the employees, officers and
directors and controlling persons referred to in Section 8 and Section 9, and in
each case their respective successors, and personal representatives, and no
other person will have any right or obligation hereunder. The term "successors"
shall not include any purchaser of the Common Shares as such from any of the
Underwriters merely by reason of such purchase.
SECTION 15. PARTIAL UNENFORCEABILITY. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
SECTION 16. (a) GOVERNING LAW PROVISIONS. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF
NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE.
(b) CONSENT TO JURISDICTION. Any legal suit, action or
proceeding arising out of or based upon this Agreement or the transactions
contemplated hereby ("Related Proceedings") may be instituted in the federal
courts of the United States of America located in the City and County of San
Francisco or the courts of the State of California in each case located in the
City and County of San Francisco
<PAGE>
(collectively, the "Specified Courts"), and each party irrevocably submits to
the exclusive jurisdiction (except for proceedings instituted in regard to the
enforcement of a judgment of any such court (a "Related Judgment"), as to which
such jurisdiction is non-exclusive) of such courts in any such suit, action or
proceeding. Service of any process, summons, notice or document by mail to such
party's address set forth above shall be effective service of process for any
suit, action or other proceeding brought in any such court. The parties
irrevocably and unconditionally waive any objection to the laying of venue of
any suit, action or other proceeding in the Specified Courts and irrevocably and
unconditionally waive and agree not to plead or claim in any such court that any
such suit, action or other proceeding brought in any such court has been brought
in an inconvenient forum.
SECTION 17. GENERAL PROVISIONS. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in two
or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement may not be amended or modified unless in writing by all of the
parties hereto, and no condition herein (express or implied) may be waived
unless waived in writing by each party whom the condition is meant to benefit.
The Table of Contents and the Section headings herein are for the convenience of
the parties only and shall not affect the construction or interpretation of this
Agreement.
Each of the parties hereto acknowledges that it is a sophisticated
business person who was adequately represented by counsel during negotiations
regarding the provisions hereof, including, without limitation, the
indemnification provisions of Section 8 and the contribution provisions of
Section 9, and is fully informed regarding said provisions. Each of the parties
hereto further acknowledges that the provisions of Sections 8 and 9 hereto
fairly allocate the risks in light of the ability of the parties to investigate
the Company, its affairs and its business in order to assure that adequate
disclosure has been made in the Registration Statement, any preliminary
prospectus and the Prospectus (and any amendments and supplements thereto), as
required by the Securities Act and the Exchange Act.
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to the Company and the Custodian the enclosed
copies hereof, whereupon this instrument, along with all counterparts hereof,
shall become a binding agreement in accordance with its terms.
Very truly yours,
RECOVERY ENGINEERING, INC.
By:__________________________
Brian F. Sullivan,
President and Chief Executive Officer
The foregoing Underwriting Agreement is hereby confirmed and accepted
by the Underwriters in San Francisco, California as of the date first above
written.
NATIONSBANC MONTGOMERY SECURITIES LLC
DEUTSCHE MORGAN GRENFELL INC.
By NATIONSBANC MONTGOMERY SECURITIES LLC
By:__________________________
Richard A. Smith
Managing Director
<PAGE>
SCHEDULE A
NUMBER OF
FIRM COMMON SHARES
UNDERWRITERS TO BE PURCHASED
NationsBanc Montgomery Securities LLC ............... [___]
Deutsche Morgan Grenfell Inc. [___]
Total....................................... [___]
<PAGE>
SCHEDULE B
LIST OF SUBSIDIARIES:
Recovery Engineering International, Ltd., which is based in Barbados.
<PAGE>
EXHIBIT A
THE FINAL OPINION IN DRAFT FORM SHOULD BE ATTACHED AS EXHIBIT A AT THE TIME THIS
AGREEMENT IS EXECUTED.
Opinion of counsel for the Company to be delivered pursuant to Section
5(e) of the Underwriting Agreement.
References to the Prospectus in this Exhibit A include any supplements
thereto at the Closing Date.
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Minnesota.
(ii) The Company has corporate power and authority to own,
lease and operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the Underwriting
Agreement.
(iii) The Company is duly qualified as a foreign corporation
to transact business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except for such jurisdictions where the
failure to so qualify or to be in good standing would not, individually or in
the aggregate, result in a Material Adverse Change.
(iv) Each significant subsidiary (as defined in Rule 405 under
the Securities Act) has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Prospectus and, to
the best knowledge of such counsel, is duly qualified as a foreign corporation
to transact business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except for such jurisdictions where the
failure to so qualify or to be in good standing would not, individually or in
the aggregate, result in a Material Adverse Change.
(v) All of the issued and outstanding capital stock of each
such significant subsidiary has been duly authorized and validly issued, is
fully paid and non-assessable and is owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage, pledge, lien,
encumbrance or, to the best knowledge of such counsel, any pending or threatened
claim.
(vi) The authorized, issued and outstanding capital stock of
the Company (including the Common Stock) conform to the descriptions thereof set
forth or
<PAGE>
incorporated by reference in the Prospectus. All of the outstanding shares of
Common Stock have been duly authorized and validly issued, are fully paid and
nonassessable and, to the best of such counsel's knowledge, have been issued in
compliance with the registration and qualification requirements of federal and
state securities laws. The form of certificate used to evidence the Common Stock
is in due and proper form and complies with all applicable requirements of the
charter and by-laws of the Company and the General Corporation Law of the State
of Minnesota. The description of the Company's stock option, stock bonus and
other stock plans or arrangements, and the options or other rights granted and
exercised thereunder, set forth in the Prospectus accurately and fairly presents
the information required to be shown with respect to such plans, arrangements,
options and rights.
(vii) No Shareholder of the Company or any other person has
any preemptive right, right of first refusal or other similar right to subscribe
for or purchase securities of the Company arising (i) by operation of the
charter or by-laws of the Company or the General Corporation Law of the State of
Minnesota or (ii) to the best knowledge of such counsel, otherwise.
(viii) The Underwriting Agreement has been duly authorized,
executed and delivered by, and is a valid and binding agreement of, the Company,
enforceable in accordance with its terms, except as rights to indemnification
thereunder may be limited by applicable law and except as the enforcement
thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles.
(ix) Each document filed pursuant to the Exchange Act (other
than the financial statements and supporting schedules included therein, as to
which no opinion need be rendered) and incorporated or deemed to be incorporated
by reference in the Prospectus complied when so filed as to form in all material
respects with the Exchange Act and such counsel has not reason to believe that
any of such documents, when they were so filed, contained an untrue statement of
a material fact or omitted to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made when such documents were filed, not misleading.
(x) The Common Shares to be purchased by the Underwriters from
the Company have been duly authorized for issuance and sale pursuant to the
Underwriting Agreement and, when issued and delivered by the Company pursuant to
the Underwriting Agreement against payment of the consideration set forth
therein, will be validly issued, fully paid and nonassessable.
(xi) Each of the Registration Statement and the Rule 462(b)
Registration Statement, if any, has been declared effective by the
<PAGE>
Commission under the Securities Act. To the best knowledge of such counsel, no
stop order suspending the effectiveness of either of the Registration Statement
or the Rule 462(b) Registration Statement, if any, has been issued under the
Securities Act and no proceedings for such purpose have been instituted or are
pending or are contemplated or threatened by the Commission. Any required filing
of the Prospectus and any supplement thereto pursuant to Rule 424(b) under the
Securities Act has been made in the manner and within the time period required
by such Rule 424(b).
(xii) The Registration Statement, including any Rule 462(b)
Registration Statement, the Prospectus including any document incorporated by
reference therein, and each amendment or supplement to the Registration
Statement and the Prospectus including any document incorporated by reference
therein, as of their respective effective or issue dates (other than the
financial statements and supporting schedules included or incorporated by
reference therein or in exhibits to or excluded from the Registration Statement,
as to which no opinion need be rendered) comply as to form in all material
respects with the applicable requirements of the Securities Act and the Exchange
Act.
(xiii) The Common Shares have been approved for listing on the
Nasdaq National Market.
(xiv) The statements (i) in the Prospectus under the captions
"Risk Factors -- Reliance on Proprietary Technology", "Risk Factors -- Patent
Litigation", "Risk Factors -- Effects of Certain Anti-Takeover Provisions",
"Management's Discussion and Analysis and Results of Operations -- Liquidity and
Capital Resources", "Business--Patents", "Business -- Government Regulation",
"Business--Litigation", and "Underwriting" and (ii) in Item 14 and Item 15 of
the Registration Statement, insofar as such statements constitute matters of
law, summaries of legal matters, the Company's charter or by-law provisions,
documents or legal proceedings, or legal conclusions, has been reviewed by such
counsel and fairly present and summarize, in all material respects, the matters
referred to therein.
(xv) To the best knowledge of such counsel, there are no legal
or governmental actions, suits or proceedings pending or threatened which are
required to be disclosed in the Registration Statement, other than those
disclosed therein.
(xvi) To the best knowledge of such counsel, there are no
Existing Instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described or
referred to therein or filed or incorporated by reference as exhibits thereto;
and the descriptions thereof and references thereto are correct in all material
respects.
<PAGE>
(xvii) No consent, approval, authorization or other order of,
or registration or filing with, any court or other governmental authority or
agency, is required for the Company's execution, delivery and performance of the
Underwriting Agreement and consummation of the transactions contemplated thereby
and by the Prospectus, except as required under the Securities Act, applicable
state securities or blue sky laws and from the NASD.
(xviii) The execution and delivery of the Underwriting
Agreement by the Company and the performance by the Company of its obligations
thereunder (other than performance by the Company of its obligations under the
indemnification section of the Underwriting Agreement, as to which no opinion
need be rendered) (i) have been duly authorized by all necessary corporate
action on the part of the Company; (ii) will not result in any violation of the
provisions of the charter or by-laws of the Company or any subsidiary; (iii)
will not constitute a breach of, or Default [or a Debt Repayment Triggering
Event] under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any of its
subsidiaries pursuant to, (A) the Company's 5% Convertible Note due 2003 or the
Company's Financing Agreement with First Bank National Association as lender, or
(B) to the best knowledge of such counsel, any other material Existing
Instrument; or (iv) to the best knowledge of such counsel, will not result in
any violation of any law, administrative regulation or administrative or court
decree applicable to the Company or any subsidiary.
(xix) The Company is not, and after receipt of payment for the
Common Shares will not be, an "investment company" within the meaning of
Investment Company Act.
(xx) Except as disclosed in the Prospectus to the best
knowledge of such counsel, there are no persons with registration or other
similar rights to have any equity or debt securities registered for sale under
the Registration Statement or included in the offering contemplated by the
Underwriting Agreement, except for such rights as have been duly waived.
(xxi) To the best knowledge of such counsel, neither the
Company nor any subsidiary is in violation of its charter or by-laws or any law,
administrative regulation or administrative or court decree applicable to the
Company or any subsidiary or is in Default in the performance or observance of
any obligation, agreement, covenant or condition contained in any material
Existing Instrument, except in each such case for such violations or Defaults as
would not, individually or in the aggregate, result in a Material Adverse
Change.
In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company,
representatives of the
<PAGE>
independent public or certified public accountants for the Company and with
representatives of the Underwriters at which the contents of the Registration
Statement and the Prospectus, and any supplements or amendments thereto, and
related matters were discussed and, although such counsel is not passing upon
and does not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement or the
Prospectus (other than as specified above), and any supplements or amendments
thereto, on the basis of the foregoing, nothing has come to their attention
which would lead them to believe that either the Registration Statement or any
amendments thereto, at the time the Registration Statement or such amendments
became effective, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus, as of its date or at
the First Closing Date or the Second Closing Date, as the case may be, contained
an untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading (it being understood
that such counsel need express no belief as to the financial statements or
schedules or other financial or statistical data derived therefrom, included or
incorporated by reference in the Registration Statement or the Prospectus or any
amendments or supplements thereto).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the General
Corporation Law of the State of Minnesota or the federal law of the United
States, to the extent they deem proper and specified in such opinion, upon the
opinion (which shall be dated the First Closing Date or the Second Closing Date,
as the case may be, shall be satisfactory in form and substance to the
Underwriters, shall expressly state that the Underwriters may rely on such
opinion as if it were addressed to them and shall be furnished to the
Underwriters) of other counsel of good standing whom they believe to be reliable
and who are satisfactory to counsel for the Underwriters; PROVIDED, HOWEVER,
that such counsel shall further state that they believe that they and the
Underwriters are justified in relying upon such opinion of other counsel, and
(B) as to matters of fact, to the extent they deem proper, on certificates of
responsible officers of the Company and public officials.
<PAGE>
EXHIBIT B
[Date]
NationsBanc Montgomery Securities LLC
Deutsche Morgan Grenfell Inc.
c/o NationsBanc Montgomery Securities LLC
600 Montgomery Street
San Francisco, California 94111
RE: Recovery Engineering, Inc. (the "Company")
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain shares of
Common Stock of the Company ("Common Stock") or securities convertible into or
exchangeable or exercisable for Common Stock. The Company proposes to carry out
a public offering of Common Stock (the "Offering") for which you will act as the
underwriters. The undersigned recognizes that the Offering will be of benefit to
the undersigned and will benefit the Company by, among other things, raising
additional capital for its operations. The undersigned acknowledges that you and
the other underwriters are relying on the representations and agreements of the
undersigned contained in this letter in carrying out the Offering and in
entering into underwriting arrangements with the Company with respect to the
Offering.
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not, without the prior written consent of NMSI (which consent
may be withheld in its sole discretion), directly or indirectly, sell, offer,
contract or grant any option to sell (including without limitation any short
sale), pledge, transfer, establish an open "put equivalent position" within the
meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934, or otherwise
dispose of any shares of Common Stock, options or warrants to acquire shares of
Common Stock, or securities exchangeable or exercisable for or convertible into
shares of Common Stock currently or hereafter owned either of record or
beneficially (as defined in Rule 13d-3 under Securities Exchange Act of 1934, as
amended) by the undersigned, or publicly announce the undersigned's intention to
do any of the foregoing, for a period commencing on the date hereof and
continuing through the close of trading on the date 180 days after the date of
the Prospectus. The undersigned also agrees and consents to the entry of stop
transfer instructions with the Company's transfer agent and registrar against
the transfer of shares of Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock held by the undersigned except in
compliance with the foregoing restrictions.
<PAGE>
With respect to the Offering only, the undersigned waives any registration
rights relating to registration under the Securities Act of any Common Stock
owned either of record or beneficially by the undersigned, including any rights
to receive notice of the Offering.
This agreement is irrevocable and will be binding on the undersigned and the
respective successors, heirs, personal representatives, and assigns of the
undersigned.
- -------------------------------------------
Printed Name of Holder
By:
----------------------------------------
Signature
- -------------------------------------------
Printed Name of Person Signing
(AND INDICATE CAPACITY OF PERSON SIGNING IF
SIGNING AS CUSTODIAN, TRUSTEE, OR ON BEHALF
OF AN ENTITY)
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP
We consent to the incorporation by reference in this Registration Statement
(Form S-3 No. 33-_______) and related Prospectus of Recovery Engineering, Inc.
for the registration of 1,000,000 shares of its common stock of our report dated
January 30, 1998, with respect to the financial statements and schedule of
Recovery Engineering, Inc. included in the Annual Report (Form 10-K) of Recovery
Engineering, Inc., and to the references to our firm under the captions
"Selected Financial Data" and "Experts" in this Registration Statement.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 24, 1998
EXHIBIT 24.1
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Brian F. Sullivan and Charles F. Karpinske, or either of them, such person's
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for such person and in such person's name, place and stead, in
any and all capacities, to sign and file with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Securities Act"),
the Registration Statement on Form S-3 of Recovery Engineering, Inc. (the
"Registration Statement"), or any registration statement related to this
offering that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act ("462(b) Registration Statement") and any or all amendments
(including post-effective amendments) to the Registration Statement or a 462(b)
Registration Statement, with all exhibits thereto and other documents in
connection therewith, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or either
of them, or their substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------- --------------------------------------------- ------------------
<S> <C> <C>
/S/ BRIAN F. SULLIVAN President, Chief Executive Officer and February 24, 1998
- ------------------------------ Director (Principal Executive Officer)
Brian F. Sullivan
/S/ CHARLES F. KARPINSKE Vice President and Chief Financial Officer February 24, 1998
- ------------------------------ (Principal Financial and Accounting Officer)
Charles F. Karpinske
/S/ ROBERT GHEEWALLA Director February 12, 1998
- ------------------------------
Robert Gheewalla
/S/ JOHN E. GHERTY Director February 10, 1998
- ------------------------------
John E. Gherty
/S/ SANJAY H. PATEL Director February 18, 1998
- ------------------------------
Sanjay H. Patel
/S/ WILLIAM D. THOMPSON Director February 16, 1998
- ------------------------------
William D. Thompson
/S/ WILLIAM F. WANNER, JR. Director February 24, 1998
- ------------------------------
William F. Wanner, Jr.
Director February , 1998
- ------------------------------
Ronald W. Weber
/S/ RICHARD J. ZECKHAUSER Director February 10, 1998
- ------------------------------
Richard J. Zeckhauser
</TABLE>
