UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-21232
RECOVERY ENGINEERING, INC.
(Name of small business issuer in its charter)
MINNESOTA 41-1557115
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9300 NORTH 75TH AVENUE, MINNEAPOLIS, MN 55428
(Address of principal executive offices)
Registrant's telephone number: (612) 315-5500
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01
PAR VALUE
(Title of class)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 20, 1998, based on the closing sale price of the
Common Stock on such date as reported on the Nasdaq National Market, was
$94,621,000.
On February 20, 1998, the Company had outstanding 4,552,994 shares of Common
Stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE>
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. BUSINESS.............................................................1
General..............................................................1
Industry Overview....................................................1
Business Strategy....................................................3
Products.............................................................4
Marketing and Distribution...........................................8
Research and Development.............................................9
Manufacturing........................................................9
Patents.............................................................10
Competition.........................................................10
Government Regulation...............................................10
Employees...........................................................11
ITEM 2. PROPERTIES..........................................................11
ITEM 3. LEGAL PROCEEDINGS...................................................11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................11
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS.............12
ITEM 6. SELECTED FINANCIAL DATA.............................................13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...........................................14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................................19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS....................................20
ITEM 11. EXECUTIVE COMPENSATION..............................................22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT......................................................26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.....29
SIGNATURES..........................................................31
INDEX TO FINANCIAL STATEMENTS......................................F-1
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
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). 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, volatile organic compounds ("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 United States Environmental Protection Agency ("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.
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.
<PAGE>
ITEM 2. PROPERTIES
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. 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 St. Louis Park, 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.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter ended December 31, 1997.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
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
As of February 20, 1998, there were 175 shareholders of record and
approximately 2,200 beneficial owners of the Company's Common Stock.
<PAGE>
ITEM 6. 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
Report, 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 Report.
<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>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EXCEPT FOR HISTORICAL INFORMATION CONTAINED IN THIS REPORT, 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.
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 Report. 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 the sale of
securities 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>
PART III
ITEM 10. DIRECTORS, 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.
See "Item 13. Certain Relationships and Related Transactions."
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth certain information
regarding compensation of the Chief Executive Officer and each of the other
executive officers of the Company for the years ended December 31, 1997, 1996
and 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL ------------------
COMPENSATION AWARDS
---------------------------- ------------------ OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) OPTIONS COMPENSATION(2)
- --------------------------- -------- ------------ ------------ ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Brian F. Sullivan 1997 $205,000 $150,000 -- $3,200
(President and Chief Executive 1996 150,000 -- 250,000 shares --
Officer) 1995 150,000 -- 121,500 shares --
Jeffrey T. Dekko (3) 1997 $110,000 $60,345 12,000 shares $2,575
(Vice President - Marketing) 1996 88,500 -- 14,000 shares 1,312
1995 82,000 -- 11,000 shares --
Richard D. Hembree 1997 $112,000 $49,164 10,000 shares $2,382
(Vice President - Engineering) 1996 99,900 -- -- 1,996
1995 82,000 -- 45,000 shares --
Charles F. Karpinske (4) 1997 $140,000 $64,280 40,000 shares $3,023
(Vice President and Chief 1996 112,500 -- 25,000 shares --
Financial Officer) 1995 N/A N/A N/A N/A
Sally S. Mainquist 1997 $107,000 $47,304 10,000 shares $2,191
(Vice President - 1996 99,000 -- 20,000 shares 1,974
Manufacturing) 1995 82,000 -- -- --
Barry B. Van Lerberghe (5) 1997 $110,000 $57,020 12,000 shares $2,491
(Vice President - Sales) 1996 96,300 -- 13,000 shares 2,140
1995 41,885 -- 12,000 shares 39,440(6)
</TABLE>
- -----------------
(1) The executive officers of the Company are eligible to earn annual cash
bonuses tied to the level of achievement of annual performance targets.
(2) Represents the Company's matching contribution under its 401(k) Retirement
Savings Plan, unless otherwise indicated.
(3) Mr. Dekko and Mr. Van Lerberghe became executive officers of the Company in
April 1997.
(4) Mr. Karpinske's employment with the Company commenced in February 1996.
(5) Mr. Van Lerberghe's employment with the Company commenced in July 1995.
(6) Represents relocation costs in connection with the hiring of Mr. Van
Lerberghe.
AGREEMENTS WITH EXECUTIVES
The Company, certain investment partnerships affiliated with The Goldman
Sachs Group, L.P. ("GS Group"), and Brian F. Sullivan entered into an Executive
Restriction Agreement, dated July 19, 1996, in connection with the Company's
sale of Convertible Notes to the GS Group. See "Certain Transactions."
The Company and Charles F. Karpinske entered into an Executive Severance
Pay Agreement, dated March 24, 1997, which provides that if Mr. Karpinske's
employment with the Company is terminated within 24 months following a "change
in control" of the Company, other than termination for cause, voluntary
termination by Mr. Karpinske, or termination on account of death or disability,
the Company will pay to Mr. Karpinske an amount equal to two times his average
annual compensation, including bonus, for the three-year period ending in the
year in which his employment terminates, will provide continued coverage under
the Company's insurance programs, and will pay him an amount equal to the
difference between the aggregate fair market value of shares subject to stock
options which are forfeited or become unexercisable as a result of his
termination of employment,
<PAGE>
and the aggregate exercise price of such options. For these purposes, a "change
in control" means (i) the dissolution or liquidation of the Company, or a
merger, consolidation or other corporate reorganization in which the Company is
not the surviving party; (ii) the sale of all or substantially all of the
business or assets of the Company; (iii) the acquisition by any person of
securities representing more than 25% of the voting power of the Company's
outstanding securities; or (iv) individuals who constitute the Board of
Directors at the beginning of any two-year period ceasing to constitute at least
a majority of the Board of Directors, unless each new director is approved by a
two-thirds vote of the directors then in office who were directors at the
beginning of such period.
RETIREMENT SAVINGS PLAN
The Company maintains a profit sharing and savings plan (the "401(k)
Plan") under Section 401(k) of the Internal Revenue Code of 1986, as amended
(the "Code"), which allows employees to contribute up to 15% of their pre-tax
income to the 401(k) Plan. The 401(k) Plan includes a discretionary matching
contribution by the Company and provides that the Company may make an additional
discretionary contribution out of profits at the end of any year. The Company
made discretionary matching contributions of $98,000, $61,000 and $34,000 for
1997, 1996 and 1995, respectively. No additional discretionary contributions
were made by the Company for 1997, 1996 or 1995.
STOCK OPTIONS
Since its inception, the Company has utilized stock and stock options to
provide incentives and rewards to its employees and directors. The Recovery
Engineering, Inc. 1986 Stock Option Plan (the "1986 Option Plan") permits the
granting of awards to directors and employees of the Company in the form of
stock options. Stock options granted under the 1986 Option Plan may be
"incentive stock options" meeting the requirements of Section 422 of the Code or
non-qualified options which do not meet the requirements of Section 422. At
December 31, 1997, options for an aggregate of 21,650 shares were outstanding
under the 1986 Plan. The outstanding options are presently exercisable with
respect to 15,950 shares. No additional options may be granted under the 1986
Plan.
The Recovery Engineering, Inc. 1994 Stock Option and Incentive Plan (the
"1994 Plan") permits the granting of awards to employees, consultants and other
service providers in the form of incentive stock options, non-qualified stock
options and grants of restricted stock. At December 31, 1997, options for an
aggregate of 875,300 shares were outstanding under the 1994 Plan, and 154,015
shares were available for grant. The outstanding stock options are presently
exercisable with respect to 278,676 shares. Awards may be granted under the 1994
Plan through January 31, 2004. The 1994 Plan may be terminated earlier by the
Board of Directors in its sole discretion.
The 1986 Option Plan and the 1994 Plan are administered by the
Compensation Committee of the Board of Directors. These Plans give broad powers
to the Committee to administer and interpret the plans, including the authority
to select the individuals to be granted awards and to prescribe the particular
form and conditions of each award granted. Awards are granted on the basis of
various factors, including the individual's capacity for contributing to the
successful performance of the Company, the nature of the operations for which
the individual is responsible, and the period for which the individual has
served or will have served the Company at the vesting of the award.
<PAGE>
The following table sets forth certain information regarding stock options
granted to the executive officers named in the Summary Compensation Table during
the Company's 1997 fiscal year.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
----------------------------------------------------- ANNUAL RATES OF STOCK
PERCENT OF TOTAL PRICE APPRECIATION FOR
OPTIONS GRANTED EXERCISE OPTION TERM (1)
OPTIONS TO EMPLOYEES PRICE EXPIRATION -----------------------
NAME GRANTED(#) IN FISCAL YEAR (S/Sh) DATE 5% ($) 10% ($)
- ---- ---------- ----------------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Brian F. Sullivan............ -- -- -- -- -- --
Jeffrey T. Dekko............. 12,000(2) 4.8% $7.00 02/02/2007 $52,827 $133,874
Richard D. Hembree........... 10,000(2) 4.0% $7.00 02/02/2007 $44,023 $111,562
Charles F. Karpinske......... 40,000(2) 16.0% $7.00 02/02/2007 $176,090 $446,248
Sally S. Mainquist........... 10,000(2) 4.0% $7.00 02/02/2007 $44,023 $111,562
Barry B. Van Lerberghe....... 12,000(2) 4.8% $7.00 02/02/2007 $52,827 $133,874
</TABLE>
- ----------------
(1) Represents the potential net realizable value of each grant of options
assuming that the market price of the underlying common stock appreciates
in value from its fair market value on the date of grant to the end of the
option term at the indicated annual rates.
(2) Each option was granted on February 2, 1997 and vests with respect to 25%
of the option shares on the first, second, third and fourth anniversaries
of the grant date.
The following table sets forth certain information regarding the number
and value of unexercised stock options held by the executive officer named in
the Summary Compensation Table as of the end of the Company's fiscal year ended
December 31, 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT YEAR-END(#) AT YEAR-END($)(1)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE / UNEXERCISABLE EXERCISABLE / UNEXERCISABLE
- ---- ------------ ----------- --------------------------- ---------------------------
<S> <C> <C> <C> <C>
Brian F. Sullivan........ 199,000 $771,125(2) 121,500 / 250,000 $1,275,750 / $2,625,000
Jeffrey T. Dekko......... -- -- 14,750 / 22,250 $231,313 / $380,438
Richard D. Hembree....... -- -- 41,250 / 18,750 $612,188 / $291,563
Charles F. Karpinske..... -- -- 22,500 / 42,500 $371,875 / $721,875
Sally S. Mainquist....... 200 $3,075(3) 19,800 / 17,500 $291,500 / $275,000
Barry B. Van Lerberghe... -- -- 12,250 / 24,750 $194,875 / $413,625
</TABLE>
- ----------------
(1) Based on the difference between the December 31, 1997 closing price of
$24.50 per share as reported on the Nasdaq National Market and the exercise
price of the options.
(2) Based on the difference between the closing price of $6.375 per share on
April 21, 1997, the date of exercise, as reported on the Nasdaq National
Market and the exercise price of the options.
(3) Based on the difference between the closing price of $25.50 per share on
November 13, 1997, the date of exercise, as reported on the Nasdaq National
Market and the exercise price of the option.
Mr. Sullivan's options that are not currently exercisable will become
exercisable in 2005 and may become exercisable earlier if certain sales and
income objectives established by the Compensation Committee are achieved by the
Company. In addition, the options will become exercisable if Mr. Sullivan's
employment with the Company is terminated by reason of his death or disability,
or within 24 months following a "change in
<PAGE>
control" of the Company. For these purposes, a "change in control" means (i) the
dissolution or liquidation of the Company, or a merger, consolidation or other
corporate reorganization in which the Company is not the surviving party; (ii)
the acquisition by any person, other than Wanner Engineering, Inc., of
securities representing more than 50% of the voting power of the Company's
outstanding securities; or (iii) individuals who constitute the Board of
Directors at the beginning of any two-year period ceasing to constitute at least
a majority of the Board of Directors, unless each new director is approved by a
two-thirds vote of the directors then in office who were directors at the
beginning of such period.
DIRECTOR STOCK OPTION PLAN
The Company's 1993 Director Stock Option Plan (the "Director Option Plan")
was adopted by the Board of Directors in 1993 and approved by the shareholders
of the Company in 1994. The Director Option Plan provides for the automatic
granting of an option for shares of common stock to each non-employee director
of the Company on the date of his or her initial election or appointment as a
director, and additional options on the date of each annual meeting of
shareholders at which the director is reelected by the shareholders. The number
of shares covered by such options was 1,000 shares per grant through 1996, and
4,000 shares per grant for 1997 and subsequent years. The exercise price of
options granted under the Director Option Plan is equal to 85% of the fair
market value of the Common stock on the date of grant. A total of 100,000 shares
of the Company's common stock has been reserved for issuance pursuant to options
granted under the Director Option Plan. At December 31, 1997, options for an
aggregate of 49,000 shares were outstanding under the Director Option Plan, and
51,000 shares were available for grant. All of the outstanding options are
presently exercisable.
EMPLOYEE STOCK PURCHASE PLAN
In 1994, the Company's 1994 Stock Purchase Plan was adopted by the Board
of Directors and approved by the shareholders of the Company. The Stock Purchase
Plan permits eligible employees to make voluntary contributions through payroll
deductions, to be used to purchase stock from the Company on a monthly basis at
a price equal to 85% of the fair market value of a share of common stock on the
purchase date. An aggregate of 100,000 shares has been reserved for issuance
under the Stock Purchase Plan. The number of shares that an employee may
purchase under the Stock Purchase Plan may not exceed 500 shares during any
calendar year, and the aggregate purchase price of shares purchased by any
employee under the Stock Purchase Plan may not exceed $10,000 during any
calendar year. The Company issued 9,501 shares, 6,874 shares and 5,312 shares
under the Stock Purchase Plan in 1997, 1996 and 1995, respectively.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
Decisions and recommendations regarding compensation paid to the Company's
executive officers in 1997 were made by a Compensation Committee consisting of
John E. Gherty and William F. Wanner, Jr., each of whom is a non-employee
director of the Company. Brian F. Sullivan, the only executive officer of the
Company who serves on the Board of Directors, abstains from voting on
compensation matters affecting his compensation.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company's directors, executive officers and any persons holding more
than 10% of the outstanding Common Stock of the Company are required to file
with the Securities and Exchange Commission reports concerning their initial
ownership of Common Stock and any subsequent changes in such ownership. The
Company believes that during 1997 the filing requirements were satisfied on a
timely basis by all such persons, except as follows: Initial reports of
beneficial ownership by Mr. Dekko and Mr. Van Lerberghe were not timely filed;
and one transaction by Mr. Hembree and one transaction by Mr. Thompson were not
reported on a timely basis. In making this disclosure, the Company has relied
solely on written representations of its directors, officers and beneficial
owners of more than 10% of the Common Stock and copies of the reports they have
filed with the Securities and Exchange Commission and furnished to the Company.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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>
NUMBER OF SHARES PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OUTSTANDING SHARES(2)
- ------------------------------------ --------------------- ---------------------
<S> <C> <C>
Certain investment funds affiliated with
The Goldman Sachs Group, L.P. (3).................. 1,015,101 18.2%
85 Broad Street
New York, NY 10004
Investment Advisers, Inc. (4)........................ 620,300 13.6%
3700 First Bank Place
Minneapolis, MN 55440
Wanner Engineering, Inc. (5)......................... 596,100 13.1%
1204 Chestnut Avenue
Minneapolis, MN 55403
US Trust Company of New York (6)..................... 370,036 8.1%
114 West 47th Street
New York, NY 10036
Nevis Capital Management, Inc. (7)................... 311,300 6.8%
1119 St. Paul Street
Baltimore, MD 21202
DIRECTORS AND EXECUTIVE OFFICERS:
Brian F. Sullivan (8) (9)............................ 530,000 11.3%
Jeffrey T. Dekko (8)................................. 15,263 *
Richard D. Hembree (8)............................... 72,150 1.6%
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%
Sanjay H. Patel (8)(12).............................. 5,700 *
William D. Thompson (8).............................. 21,000 *
William F. Wanner, Jr. (8)(13)....................... 660,150 14.5%
Ronald W. Weber (8).................................. 28,000 *
Richard J. Zeckhauser (8)(14)........................ 92,500 2.0%
All directors and executive officers as a group
(13 persons, including those named above) (8)...... 1,540,379 31.9%
</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 at December 31, 1997. Such amount
does not include 2,094,051 shares of Common Stock issuable upon exercise of
stock options and warrants or conversion of Convertible Notes outstanding
<PAGE>
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 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.
(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>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On July 19, 1996, the Company entered into a Securities Purchase Agreement
with five investment partnerships affiliated with GS Group, L.P. ("GS Group"),
pursuant to which the Company issued to GS Group $15 million principal amount of
its 5% Convertible Notes Due 2003 (the "Convertible Notes"). The Convertible
Notes are convertible into shares of the Company's common stock at a conversion
price of $14.85 per share, subject to customary anti-dilution provisions. The
Convertible Notes may be converted to common stock at any time at the option of
GS Group or, if certain conditions are satisfied, after January 18, 2000 by the
Company. The Convertible Notes bear interest at the rate of 5% per annum,
payable quarterly on March 31, June 30, September 30, and December 31 in each
year, commencing September 30, 1996, until the principal of the Convertible
Notes becomes due and payable. The principal amount of the Convertible Notes is
due and payable on July 18, 2003. The Convertible Notes may be prepaid in whole
or in part at any time by the Company, without penalty, provided that if less
than the entire indebtedness evidenced by the Convertible Notes is to be prepaid
by the Company, it must offer to repay the Convertible Notes pro rata from each
holder thereof.
Under the Securities Purchase Agreement, for so long as at least 25% of
the initial amount of Convertible Notes remain outstanding and GS Group holds at
least a majority of the outstanding Convertible Notes, at each meeting for the
election of directors of the Company, the Company is to use its best efforts to
cause to be elected to, and maintained as a member of, the Company's Board of
Directors, one person designated by GS Group. The representative is to be a
member of the Company's executive and finance committees, if any, or any other
committee performing substantially similar functions and, upon request by the
representative, any other committee of the Board of Directors. The Company has
also agreed that if, at any time, GS Group does not have a representative on the
Company's Board of Directors, GS Group will be entitled to have an observer
present at all meetings of the Company's Board. Robert R. Gheewalla currently
serves as a director of the Company as the designee of GS Group.
In connection with the sale of the Convertible Notes, the Company, GS
Group and Brian F. Sullivan entered into an Executive Restriction Agreement,
dated July 19, 1996. The Executive Restriction Agreement prohibits, subject to
certain exceptions, Mr. Sullivan's sale of common stock of the Company until
July 19, 1998. After that date, Mr. Sullivan may not sell or otherwise transfer
in any transaction more than 25% of the common stock (including shares subject
to stock options) which he held as of July 19, 1996 unless the holders of the
Convertible Notes are allowed to participate in such sale on a pro rata basis.
Under the Executive Restriction Agreement, Mr. Sullivan also has agreed to
refrain from competing with the Company for three years after (i) his employment
with the Company is terminated for cause or (ii) he resigns from the Company
other than for good reason (as defined in the Executive Restriction Agreement).
In April 1997, Brian F. Sullivan exercised stock options for an aggregate
of 199,000 shares of Common Stock, and paid the exercise price of the options by
delivering to the Company a Promissory Note in the principal amount of $497,500.
The Note bears interest at the rate of 9.25% per annum, and matures on June 30,
1999.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THE REPORT:
1. FINANCIAL STATEMENTS.
The following financial statements of Recovery Engineering, Inc. are
included as a separate section of this Report, beginning at page F-1:
Report of Independent Auditors
Balance sheets as of December 31, 1996 and 1997
Statements of Operations for the Years ended December 31, 1995, 1996
and 1997
Statements of Cash Flows for the Years ended December 31, 1995, 1996
and 1997
Statement of Changes in Shareholders' Equity for the Years ended
December 31, 1995, 1996 and 1997
Notes to Financial Statements
2. FINANCIAL STATEMENT SCHEDULES.
The following schedule supporting financial statements for the three
years ended December 31, 1997 is filed herewith:
Schedule II - Valuation and Qualifying Accounts.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore
have been omitted.
3. LISTING OF EXHIBITS.
EXHIBIT
NO. DESCRIPTION
3.1 Articles of Incorporation of Recovery Engineering, Inc.
3.2 Bylaws of Recovery Engineering, Inc.
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
10.1 * Recovery Engineering, Inc. 1986 Stock Option Plan, as
amended
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
<PAGE>
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.
21.1 Subsidiary of Recovery Engineering, Inc.
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
- -------------
* Management Contracts
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RECOVERY ENGINEERING, INC.
Date: February 24, 1998 By /s/ Brian F. Sullivan
--------------------------------------
Brian F. Sullivan
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and 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 February 24, 1998
- -------------------------------- Officer (Principal Financial and
Charles F. Karpinske Accounting Officer)
/s/ Robert R. Gheewalla Director February 12, 1998
- --------------------------------
Robert R. 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>
<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. Our audit also included the financial
statement schedule listed in the index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
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>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
RECOVERY ENGINEERING, INC.
<TABLE>
<CAPTION>
(in thousands)
Additions
------------------------------
Balance at Charged to
Beginning of Costs and Charged to Other Balance at End
Description Period Expenses Accounts Deductions of Period
- ----------- ------ -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Reserves & allowances deducted from
asset accounts:
Allowance for uncollectible accounts $212 $148 $46(1) $314
Reserve for inventory obsolescence $226 $471 $279(2) $418
YEAR ENDED DECEMBER 31, 1996
Reserves & allowances deducted from
asset accounts:
Allowance for uncollectible accounts $ 57 $315 $160(1) $212
Reserve for inventory obsolescence $112 $430 $316(2) $226
YEAR ENDED DECEMBER 31, 1995
Reserves & allowances deducted from
asset accounts:
Allowance for uncollectible accounts $32 $119 $94(1) $57
Reserve for inventory obsolescence $-- $112 $-- $112
</TABLE>
- ---------------------------
(1) Uncollectible accounts written off, net of recoveries.
(2) Inventory written off
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION METHOD OF FILING
- --- ----------- ----------------
<S> <C> <C>
3.1 Articles of Incorporation of Recovery Filed as Appendix 1 to the Company's
Engineering, Inc. Proxy Statement dated March 27, 1996 (File
No. 0-21232) and incorporated herein by
reference
3.2 Bylaws of Recovery Engineering, Inc. Filed as Appendix 2 to the Company's
Proxy Statement dated March 27, 1996 (File
No. 0-21232) and incorporated herein by
reference
4.1 Rights Agreement dated as of January 30, 1996 Filed as Exhibit 4.1 to the Company's Form
between Recovery Engineering, Inc. and 8-A Registration Statement dated February
Norwest Bank Minnesota, National 20, 1996 (File No. 0-21232) and
Association, as Rights Agent incorporated herein by reference
4.1.1 Amendment No. 1 dated as of February 3, 1998 Filed electronically herewith
to Rights Agreement between Recovery
Engineering, Inc. and Norwest Bank
Minnesota, National Association, as Rights
Agent
10.1 * Recovery Engineering, Inc. 1986 Stock Option Filed as Exhibit 10.6 to the Company's
Plan, as amended Registration Statement on Form SB-2 (No.
33-57826C) and incorporated herein by
reference
10.2 * Recovery Engineering, Inc. 1993 Director Filed as Exhibit 10.7 to the Company's
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 Option Filed as Exhibit 99.1 to the Company's
and Incentive Plan, as amended Registration Statement on Form S-8 (No.
333-41621) and incorporated herein by
reference
10.5 Supplier Agreement dated November 25, 1996, Filed electronically herewith
between Thermotech and Recovery
Engineering, Inc.
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
<PAGE>
EXHIBIT
NO. DESCRIPTION METHOD OF FILING
- --- ----------- ----------------
10.7 Financing Agreement dated March 31, 1997 Filed as Exhibit 99.1 to the Company's
between Recovery Engineering, Inc. and First Quarterly Report on Form 10-Q for the
Bank National Association quarter ended June 30, 1997 (File No. 0-
21232) and incorporated herein by reference
10.8 Securities Purchase Agreement dated July 19, Filed as Exhibit 4.1 to the Company's
1996 by and among Recovery Engineering, Inc. Report on Form 8-K dated July 19, 1996
and investment partnerships affiliated with The (File No. 0-21232) and incorporated herein
Goldman Sachs Group, L.P. ("GS Group") by reference
10.9 Registration Rights Agreement dated July 19, Filed as Exhibit 99.1 to the Company's
1996 by and among Recovery Engineering, Inc. Report on Form 8-K dated July 19, 1996
and GS Group (File No. 0-21232) and incorporated herein
by reference
10.10 * Executive Restriction Agreement dated July 19, Filed as Exhibit 99.2 to the Company's
1996 by and among Recovery Engineering, Report on Form 8-K dated July 19, 1996
Inc., GS Group and Brian F. Sullivan (File No. 0-21232) and incorporated herein
by reference
10.11 * Executive Severance Pay Agreement dated Filed as Exhibit 99.2 to the Company's
March 24, 1997 between Recovery Quarterly Report on Form 10-Q for the
Engineering, Inc. and Charles F. Karpinske quarter ended June 30, 1997 (File No. 0-
21232) and incorporated herein by reference
10.12 Lease Agreement dated November 8, 1996 Filed as Exhibit 10.20 to the Company's
between Ryan Companies US, Inc. and Annual Report on Form 10-K for the year
Recovery Engineering, Inc. ended December 31, 1996 (File No. 0-
21232) and incorporated herein by reference
10.12.1 First Amendment to Lease dated December 20, Filed electronically herewith
1996, between Ryan Companies US, Inc. and
Recovery Engineering, Inc.
10.12.2 Second Amendment to Lease dated May 1, Filed electronically herewith
1997, between Ryan Recovery, LLC and
Recovery Engineering, Inc.
10.12.3 Third Amendment to Lease dated December Filed electronically herewith
22, 1997, between Ryan Recovery, LLC and
Recovery Engineering, Inc.
21.1 Subsidiary of Recovery Engineering, Inc. Filed electronically herewith
23.1 Consent of Ernst & Young LLP Filed electronically herewith
27.1 Financial Data Schedule Filed electronically herewith
</TABLE>
- ---------------
* Management Contracts
EXHIBIT 4.1.1
AMENDMENT NO. 1
RECOVERY ENGINEERING, INC.
RIGHTS AGREEMENT
This Amendment No. 1, dated as of February 3, 1998, between Recovery
Engineering, Inc., a Minnesota corporation (the "Company"), and Norwest Bank
Minnesota, National Association (the "Rights Agent"), amends certain terms and
provisions of the Rights Agreement (the "Rights Agreement"), dated as of January
30, 1996, between Recovery Engineering, Inc., a Delaware corporation to which
the Company is a successor entity by merger, and the Rights Agent as follows
(each capitalized term used herein but not defined herein shall have the same
meaning assigned to such term in the Rights Agreement):
1. Section 1 of the Rights Agreement entitled "Certain Definitions" is hereby
amended as follows:
1.1. by deleting each reference to "20%" set forth in the definition
of "Acquiring Person" contained in paragraph (a) thereof and in each case
substituting therefor: "15%";
1.2. by supplementing the definition of "Acquiring Person" set forth
in paragraph (a) with the following subparagraph (iii):
(iii) Notwithstanding the foregoing, at no time shall Brian F.
Sullivan, William F. Wanner, Jr., Goldman, Sachs & Co. or any of their
respective Affiliates or Associates be deemed to be an "Acquiring
Person" by reason of any such Person being the beneficial owner of 15%
or more of the shares of Common Stock of the Company then outstanding
unless (in addition to (i) any shares of Common Stock of the Company
beneficially owned by such Person as of February 3, 1998, and (ii) any
shares of Common Stock of the Company in respect of which such Person
becomes the beneficial owner after February 3, 1998 as a result of any
acquisition of securities directly from the Company by such Person)
such Person is also then the beneficial owner of shares of Common
Stock of the Company that represent 3% or more of the shares of Common
Stock of the Company then outstanding;
1.3. by deleting the definition of "Continuing Directors" set forth in
paragraph (g) thereof in its entirety and substituting therefor the
following definition:
"Continuing Director" shall mean (i) any Person who is a member
of the Board of Directors of the Company, while such Person is a
member of the Board of Directors of the Company, who is not an
Acquiring Person, or an Affiliate or Associate of an Acquiring Person,
or a representative or nominee of an Acquiring Person or of any such
Affiliate or Associate, and who was a member of the Board of Directors
of the Company on February 3, 1998; (ii) any Person who becomes a
member of the Board of Directors of the Company after February 3,
1998, while such Person is a member of the Board of the Directors of
the Company, who is not an Acquiring Person, or an Affiliate or
Associate of an Acquiring Person, or a representative or nominee of an
Acquiring Person or of any such Affiliate or Associate, if such
Person's nomination for election to the Board of Directors of the
Company is recommended or approved by a majority of the Continuing
Directors; or, (iii) any Person who becomes a member of the Board of
Directors of the Company after February 3, 1998, while such Person is
a member of the Board of the Directors of the Company, who is not an
Acquiring Person, or an Affiliate or Associate of an Acquiring Person,
or a representative or nominee of an Acquiring Person or of any such
Affiliate or Associate, if such Person has been a member of the Board
of Directors of the Company for a period of two continuous years or
longer.
and
<PAGE>
1.4. by adding the following definitions of "Transaction,"
"Transaction Person" and "number of Adjustment Shares" as paragraphs (n),
(o) and (p) thereof, respectively;
"Transaction" shall mean any Section 13 Event (as defined herein)
or any acquisition of shares of Common Stock of the Company which
would result in a Person becoming a Transaction Person.
"Transaction Person" shall mean, with respect to any Transaction,
(x) any Person who (i) is or will become an Acquiring Person or a
Principal Party (as such term is defined herein) if the Transaction
were to be consummated and (ii) directly or indirectly proposed or
nominated a member of the Board of Directors of the Company which
member is in office at the time of the consideration of the
Transaction (a Person shall be deemed to have indirectly nominated a
member of the Board of Directors of the Company if such Person has
proposed becoming or indicated an intention to become an Acquiring
Person or a Principal Party by reason of the occurrence of a Section
13 Event or otherwise and a third party (other than a majority of the
Continuing Directors) proposes, nominates or appoints a member of the
Board of Directors of the Company for the purpose of facilitating a
Transaction with such Person), or (y) any Affiliate or Associate of
such a Person.
"number of Adjustment Shares" shall mean, with respect to each
adjustment pursuant to Section 11(a)(ii) in the number of shares of
Common Stock for which a Right is then exercisable, the number of
shares of Common Stock that the holder of such Right has the right to
receive after such adjustment upon exercise of such Right.
2. Section 3 of the Rights Agreement entitled "Issue of Rights Certificates" is
hereby amended by deleting the first sentence of paragraph (a) thereof in its
entirety and substituting therefor the following sentence:
Until the earlier of (i) the tenth calendar day after the Shares
Acquisition Date, (ii) the close of business on the tenth Business Day
(or such later date as shall be determined by a majority of the
Continuing Directors of the Company which date shall not be later than
the earlier of the dates specified in clauses (i) and (iii)) after the
commencement by any Person (other than the Company, any Subsidiary of
the Company, any employee benefit plan of the Company or any
Subsidiary of the Company or any trustee or administrator of any such
plan in his, her or its capacity as such) of, or the first public
announcement of the intention of any Person (other than the Company,
any Subsidiary of the Company, any employee benefit plan of the
Company or any Subsidiary of the Company or any trustee or
administrator of any such plan in his, her or its capacity as such) to
commence (which intention to commence remains in effect for five
Business Days after such announcement), a tender or exchange offer the
consummation of which would result in any Person becoming an Acquiring
Person, or (iii) twenty Business Days prior to the date on which a
Transaction with a Transaction Person is reasonably expected to become
effective or be consummated (or such earlier or later date as shall be
determined by a majority of the Continuing Directors) (the earliest of
the dates specified in clause (i), (ii) and (iii) being referred to
herein as the "Distribution Date"), (x) the Rights will be evidenced
(subject to the provisions of Section 3(b) hereof) by the certificates
for Common Stock registered in the names of the holders thereof (which
certificates for Common Stock shall be deemed also to be certificates
for Rights) and not by separate certificates, and (y) the Rights (and
the right to receive Rights Certificates) will be transferable only in
connection with the transfer of shares of Common Stock.
3. Section 11 of the Rights Agreement entitled "Adjustment of Purchase Price,
Number and Kind or Number of Rights" is hereby amended as follows:
3.1. by deleting the second paragraph of subparagraph (ii) of
paragraph (a) thereof in its entirety and substituting therefor the
following paragraph:
Notwithstanding anything in this Agreement to the contrary, from
and after the time an Acquiring Person first becomes such, any Rights
beneficially owned by (i) an Acquiring Person, (ii) a transferee of an
Acquiring Person who becomes a transferee after the Acquiring Person
becomes such, or (iii) a transferee of an Acquiring Person who becomes
a transferee prior to or concurrently with the Acquiring Person
becoming such and receives such Right pursuant to either (a) a
transfer (whether or not for
<PAGE>
consideration) from the Acquiring Person to holders of equity
interests in an Acquiring Person or any Person with whom an Acquiring
Person has a continuing agreement, arrangement or understanding
regarding the transferred Rights or (b) a transfer which a majority of
Continuing Directors of the Company has determined is part of a plan,
arrangement or understanding which has a primary purpose or effect the
avoidance of the provisions of this paragraph, shall become null and
void without further action and no holder of such Rights shall have
any rights whatsoever with respect to such Rights, whether under any
provision of this Agreement or otherwise. No Rights Certificates shall
be issued pursuant to Section 3 that represent Rights beneficially
owned by any Person whose Rights would be null and void pursuant to
the preceding sentence; no Rights Certificates shall be issued at any
time upon transfer of any Rights to any Person whose Rights would be
null and void pursuant to the preceding sentence; any Rights
Certificates delivered to the Rights Agent for transfer to any Person
whose Rights would be null and void pursuant to the preceding sentence
shall be canceled.;
3.2. by deleting subparagraph (iv) of paragraph (a) thereof in its
entirety and substituting therefor the following paragraph:
In the event that there shall not be sufficient authorized but
unissued shares of Common Stock to permit the exercise in full of the
Rights in accordance with the foregoing subparagraph (ii), the Company
shall promptly take all actions as may be necessary, including calling
a special meeting of the shareholders of the Company, to have
authorized additional shares of Common Stock for issuance upon
exercise of the Rights. In the event that, by reason of the Company's
failure to comply with the foregoing sentence or otherwise, there
shall not be sufficient authorized but unissued shares of Common Stock
to permit the exercise in full of the Rights in accordance with the
foregoing subparagraph (ii), notwithstanding any other provision of
this Agreement, to the extent necessary and permitted by applicable
law, each Right shall thereafter represent the right to receive, upon
exercise thereof, at the then current Purchase Price in accordance
with the terms of this Agreement, (A) a number of shares of Common
Stock (up to the maximum number of such shares which may permissibly
be issued), and (B) a number of other equity securities of the Company
or, in the discretion of a majority of the Continuing Directors (or if
there are then no Continuing Directors, the Board of Directors of the
Company), debt which a majority of the Continuing Directors (or if
there are then no Continuing Directors, the Board of Directors of the
Company) has determined in good faith to have the same aggregate
current per share market price (determined pursuant to Section 11(d)
hereof) as a share of Common Stock (such number of equity securities
or debt of the Company being referred to as "Equivalent Securities"),
equal in the aggregate to the number of Adjustment Shares; provided,
however, that if the Company is unable to cause sufficient shares of
Common Stock and/or Equivalent Securities to be available for issuance
upon exercise in full of the Rights, then each Right shall thereafter
represent the right to receive the Adjusted Number of Shares upon
exercise at the Adjusted Purchase Price (both as defined below). As
used herein, the "Adjusted Number of Shares" shall be equal to that
number of shares of Common Stock equal to the product of (x) the
number of Adjustment Shares and (y) a fraction, the numerator of which
is the number of shares of Common Stock and/or Equivalent Securities
available for issuance upon the exercise of the Rights and the
denominator of which is the aggregate number of Adjustment Shares
otherwise issuable upon exercise in full of all Rights (assuming there
were a sufficient number of shares of Common Stock available) (such
fraction being referred to as the "Proration Factor"). The "Adjusted
Purchase Price" shall mean the product of the Purchase Price and the
Proration Factor. A majority of the Continuing Directors (or if there
are then no Continuing Directors, the Board of Directors of the
Company) may, but shall not be required to, establish procedures to
allocate the right to receive shares of Common Stock and/or Equivalent
Securities upon exercise of the Rights among holders of Rights;
3.3. by adding after the words "a majority of the Continuing Directors
of the Company" in each place they appear in paragraphs (b), (c) and (d)
thereof the following: "(or if there are then no Continuing Directors, by
the Board of Directors of the Company)";
3.4. by adding immediately prior to the last sentence of paragraph (d)
thereof, the following sentence:
<PAGE>
If on any such date, no market maker is making a market in the
Security, the fair market value of the Security on such date as
determined by a majority of the Continuing Directors of the Company
(or, if there are then no Continuing Directors, by the Board of
Directors of the Company in good faith) shall be used and shall be
binding on the Rights Agent.
;and
3.5. by adding the following paragraphs (o) and (p) after paragraph
(n) thereof:
(o) The Company covenants and agrees that it shall not, at any
time after the Distribution Date, (i) consolidate with any other
Person (other than a Subsidiary of the Company in a transaction which
does not violate Section 11(p) hereof), (ii) merge with or into any
other Person (other than a Subsidiary of the Company in a transaction
which does not violate Section 11(p) hereof), or (iii) sell or
transfer (or permit any Subsidiary to sell or transfer), in one
transaction, or a series of related transactions, assets or earning
power aggregating more than 50% of the assets or earning power of the
Company and its Subsidiaries (taken as a whole) to any other Person or
Persons (other than the Company and/or any of its Subsidiaries in one
or more transactions each of which does not violate Section 11(p)
hereof), if (x) at the time of or immediately after such
consolidation, merger, sale or transfer there are any charter or
by-law provisions, any rights, warrants or other instruments or
securities outstanding or agreements in effect, or any other actions
taken, which would materially diminish or otherwise eliminate the
benefits intended to be afforded by the Rights or (y) prior to,
simultaneously with or immediately after such consolidation, merger,
sale or transfer, the stockholders of the Person who constitutes, or
would constitute, the "Principal Party" for purposes of Section 13(a)
hereof shall have received a distribution of Rights previously owned
by such Person or any of its Affiliates and Associates. The Company
shall not consummate any such consolidation, merger, sale or transfer
unless prior thereto the Company and such other Person shall have
executed and delivered to the Rights Agent a certificate certifying
compliance with this Section 11(o).
(p) The Company covenants and agrees that, after the Distribution
Date, it will not, except as permitted by Section 23 or Section 27
hereof, take (or permit any Subsidiary to take) any action the purpose
of which is to, or if at the time such action is taken it is
reasonably foreseeable that the effect of such action is to,
materially diminish or otherwise eliminate the benefits intended to be
afforded by the Rights.
4. Section 13 of the Rights Agreement entitled "Consolidation, Merger or Sale or
Transfer of Assets or Earning Power" is hereby deleted in its entirety and
substituted therefor is the following:
Section 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power.
(a) In the event that, following the Shares Acquisition Date or,
if a Transaction with a Transaction Person has then been proposed, the
Distribution Date, directly or indirectly, (a) the Company shall
consolidate with, or merge with and into, any other Person, (b) any
Person shall consolidate with the Company, or merge with and into the
Company and the Company shall be the continuing or surviving
corporation of such merger and, in connection with such merger, all or
part of the outstanding shares of Common Stock shall be changed into
or exchanged for stock or other securities of any other Person (or the
Company) or cash or any other property, or (c) the Company shall sell
or otherwise transfer (or one or more of its Subsidiaries shall sell
or otherwise transfer), in one or more transactions, assets or earning
power aggregating 50% or more of the assets or earning power of the
Company and its Subsidiaries (taken as a whole) to any other Person
other than the Company or one or more of its wholly-owned
Subsidiaries, then, and in the case of the occurrence of any of events
specified in clauses (a), (b) and (c), above (each such case being
referred to herein as a "Section 13 Event") proper provision shall be
made so that (i) following the date of the consummation of any Section
13 Event, each holder of a Right (except as otherwise provided herein)
shall thereafter have the right to receive, upon the exercise thereof,
at a price equal to the then current Purchase Price multiplied by the
number of shares of Common Stock for which a Right is then
exercisable, in accordance with the terms of this Agreement and in
lieu of shares of Common Stock, such number of shares of Common Stock
of the Principal Party (as defined
<PAGE>
below) not subject to any lien, encumbrances, rights of first refusal
or other adverse claims as shall equal the result obtained by (A)
multiplying the then current Purchase Price by the number of shares of
Common Stock for which a Right is then exercisable and (B) dividing
that product by 50% of the then current per share market price of the
shares of Common Stock of the Principal Party (determined pursuant to
Section 11(b) hereof) on the date of consummation of such Section 13
Event; (ii) such Principal Party shall thereafter be liable for, and
shall assume, by virtue of such Section 13 Event, all of the
obligations and duties of the Company pursuant to this Agreement;
(iii) the term "Company" shall thereafter be deemed to refer to the
Principal Party, it being specifically intended that the provisions of
Section 11 hereof shall apply only to such Principal Party; and (iv)
such Principal Party shall take such steps (including, but not limited
to, the reservation of a sufficient number of its shares of Common
Stock) in connection with such consummation as may be necessary to
assure that the provisions hereof shall hereafter be applicable, as
nearly as reasonably may be, in relation to the shares of Common Stock
thereafter deliverable upon the exercise of the Rights. The Company
shall not consummate any transaction that would constitute a Section
13 Event unless prior thereto the Company and the Principal Party
shall have executed and delivered to the Rights Agent a supplemental
agreement so providing and further providing that, as soon as
practicable after the date of any Section 13 Event, the Principal
Party at its own expense will (i) prepare and file a registration
statement under the Securities Act with respect to the Rights and the
securities purchasable upon exercise of the Rights on an appropriate
form of registration statement, use its best efforts to cause such
registration statement to become effective as soon as practicable
after such filing and use its best efforts to cause such registration
statement to remain effective (with a prospectus at all times meeting
the requirements of the Securities Act) until the Final Expiration
Date; (ii) use its best efforts to qualify or register the Rights and
the securities purchasable upon exercise of the Rights under the blue
sky laws of such jurisdictions as may be necessary or appropriate; and
(iii) deliver to holders of the Rights historical financial statements
for the Principal Party and each of its Affiliates which comply in all
material respects with requirements for registration on Form 10 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act").
(b) "Principal Party" shall mean
(i) in the case of any transaction described in clauses (a) or
(b) of the first sentence of paragraph (a) of this Section 13, the
Person that is the issuer of any securities into which shares of
Common Stock of the Company are converted in such merger or
consolidation, and if no securities are issued, the Person that is the
other party to the merger or consolidation (including, if applicable,
the Company if it is the surviving corporation); and
(ii) in the case of any transaction described in clause (c) of
the first sentence of paragraph (a) of this Section 13, the Person
that is the party receiving the greatest portion of the assets or
earning power transferred pursuant to such transaction or
transactions;
provided, however, that in any such case, (1) if the Common Stock of
such Person is not at such time and has not been continuously over the
preceding 12-month period registered under Section 12 of the Exchange
Act and such Person is a direct or indirect subsidiary or Affiliate of
another Person, the Common Stock of which has been so registered,
"Principal Party" shall refer to such other Person; (2) in case such
Person is a subsidiary, directly or indirectly, or Affiliate of more
than one Person, the Common Stock of two or more of which are and have
been so registered, "Principal Party" shall refer to whichever of such
Persons is the issuer of the Common Stock having the greatest
aggregate market value; and (3) in case such Person is owned, directly
or indirectly, by a joint venture formed by two or more Persons that
are not owned, directly or indirectly, by the same Person, the rules
set forth in (1) and (2) above shall apply to each of the chains of
ownership having an interest in such joint venture as if such Person
were a Subsidiary of both or all of such joint venturers, and the
Principal Parties in each such chain shall bear the obligations set
forth in this Section 13 in the same ratio as their direct or indirect
interests in such Person bear to the total of such interests.
(c) The provisions of this Section 13 shall similarly apply to
successive mergers or consolidations or sales or other transfers. The
rights under this Section 13 shall be in addition to the
<PAGE>
rights to exercise Rights and adjustments under Section 11(a)(ii) and
shall survive any exercise thereunder.
5. Section 23 of the Rights Agreement entitled "Redemption and Termination" is
hereby deleted in its entirety and substituted therefor is the following:
Section 23. Redemption and Termination. (a) The Board of Directors of
the Company may, at its option, at any time prior to the earlier of
(i) the time any Person becomes an Acquiring Person or (ii) the Final
Expiration Date, redeem all but not less than all of the then
outstanding Rights at a redemption price of $.01 per Right, as such
amount may be appropriately adjusted to reflect any stock split,
dividend or similar transaction occurring after February 3, 1998 (such
redemption price being hereinafter referred to as the "Redemption
Price"), such Redemption Price to be payable in cash, shares of Common
Stock (based on the "current per share market price," as defined in
Section 11(d) hereof, of the Common Stock at the time of redemption)
or such other form of consideration as may be deemed appropriate by
the Board of Directors of the Company; provided, however, if the Board
of Directors of the Company authorizes the redemption of the Rights
for the purpose of facilitating a Transaction with a Transaction
Person, then there must be Continuing Directors then in office and
such authorization shall require the concurrence of a majority of such
Continuing Directors
(b) Immediately upon the action of the Board of Directors of the
Company ordering the redemption of the Rights in accordance with
paragraph (a) of this Section 23 and without any further action and
without any notice, the right to exercise the Rights will terminate
and the only right thereafter of the holders of Rights shall be to
receive the Redemption Price. The Company shall promptly give public
notice of such redemption; provided, however, that the failure to
give, or any defect in, any such notice shall not affect the validity
of such redemption. Within ten calendar days after such action of the
Board of Directors ordering the redemption of the Rights in accordance
with paragraph (a) of this Section 23, the Company shall mail a notice
of redemption to all holders of the then outstanding Rights at their
last addresses as they appear on the registry books of the Rights
Agent or, prior to the Distribution Date, on the registry books of the
transfer agent for the Common Stock. Any notice which is mailed in the
manner herein provided shall be deemed given, whether or not the
holder receives the notice. Each such notice of redemption will state
the method by which the payment of the Redemption Price will be made.
Neither the Company nor any of its Affiliates or Associates may
redeem, acquire or purchase for value any Rights at any time in a
manner other than that specifically set forth in this Section 23 or in
Section 24 hereof, other than in connection with the purchase of
shares of Common Stock prior to the Distribution Date.
6. Section 24 of the Rights Agreement entitled "Exchange" is hereby amended as
follows:
6.1. by adding after the words "Continuing Director of the Company in
each place they appear in paragraphs (a) and (b) thereof: "(or, if there
are then no Continuing Directors, the Board of Directors)";
6.2. by deleting paragraph (c) thereof in its entirety and
substituting therefor the following paragraph:
No exchange transaction referred to in this Section 24 may be authorized
unless at the time such exchange transaction is authorized there shall be
sufficient shares of Common Stock issued but not outstanding, or authorized
but unissued, to permit the exchange of Rights as contemplated by this
Section 24.
7. Section 27 of the Rights Agreement entitled "Supplements and Amendments" is
hereby amended as follows:
7.1. by deleting all of the words after "provided, however," in the
first sentence thereof and substituting therefor the following: "that (x)
on and after such time at which any Person becomes an Acquiring Person,
this Agreement shall not be amended in any way which would adversely affect
the interests of holders of Rights (other than an Acquiring Person), and
(y) at no time may this Agreement be amended or supplemented for the
purpose of facilitating a Transaction with a Transaction Person unless at
the time such
<PAGE>
amendment or supplement is authorized by the Board of Directors of the
Company there are Continuing Directors then in office and such a
authorization is approved by a majority of the Continuing Directors."
; and
7.2. by deleting the words "the greater of (i) any percentage greater
than the largest percentage of the outstanding shares of Common Stock then
known by the Company to be beneficially owned by any Person (other than the
Company, any Subsidiary of the Company, any employee benefit plan of the
Company or any Subsidiary of the Company, or any entity holding shares of
Common Stock for or pursuant to the terms of any such plan); and (ii)"
8. All references in the Rights Agreement to "the Company" shall be deemed
references to the Company as defined in this Amendment.
9. All terms and provisions of the Rights Agreement shall remain in full force
and effect, except to the extent specifically amended or modified by this
Amendment No. 1.
Attest: RECOVERY ENGINEERING, INC.
/s/ ERIC O. MADSON By: /s/ BRIAN F. SULLIVAN
- -------------------------- ------------------------------------
Name: Eric O. Madson Name: Brian F. Sullivan
Title: Secretary Title: President and Chief Executive
Officer
NORWEST BANK MINNESOTA,
Attest: NATIONAL ASSOCIATION
/s/ BARBARA M. NOVAK By: /s/ SUSAN J. ROEDER
- -------------------------- ------------------------------------
Name: BARBARA M. NOVAK Name: SUSAN J. ROEDER
Title: ACCOUNT REPRESENTATIVE Title: ASST. VICE PRESIDENT
EXHIBIT 10.5
RECOVERY ENGINEERING, INC.
2229 Edgewood Avenue South
Minneapolis, MN 55426
Telephone (612) 541-1313 -- Fax (612) 541-1230
CONTRACT # THERMOTECH 1
Recovery Engineering, Inc. "REI", 2229 Edgewood Avenue South, Minneapolis, MN
55426 and
Thermotech
1202 South 5th Street
Hopkins, MN 55343
enter into this agreement dated November 25 for a period of 3 years, beginning
November, 1996 with an expiration date of November 1999, Thermotech is
hereinafter referred to as "Supplier." It is agreed that the following terms and
conditions shall apply to all orders placed by REI with Supplier during the term
of this agreement and shall supersede all other terms and conditions between the
parties that are contrary to these terms and conditions.
1. The following REI and/or supplier part numbers comprise the product(s)
covered by this agreement:
See attached addendum "A"
2. CONTRACT PRICE: as stated / see attached
PART NUMBER PRICE
See attached addendum "A" See attached addendum "A"
3. PAYMENT DISCOUNT TERMS: Net 57 days
The point in time used in qualifying for payment discounts is (initial one)
[ ] Scheduled delivery date
[ ] Invoice date
[ X ] Actual delivery date
<PAGE>
4. FREIGHT TERMS: (initial one and complete)
[ ] Prepaid REI's dock St. Louis Park
[ ] FOB Origin Collect
[ ] Other: FOB Thermotech, Freight Prepaid
5. INVOICE OF FREIGHT: (initial one)
[ NA ] Separate invoice
[ NA ] Freight added to original invoice
6. DELIVERY:
REI has the right to cancel any goods not shipped on time. TIME IS OF THE
ESSENCE on all shipments. The supplier must notify REI of anticipated
delays. Early deliveries are subject to return at the supplier's expense
and liability. Premium freight costs incurred above the "standard routing"
transportation rate due to late deliveries, specified routing not used,
proper authorization or documentation and shipped to wrong location will be
assumed by the supplier. See attached addendum "B".
7. QUALITY INSPECTION:
REI has the right to inspect the goods for conformance to specifications,
merchanability, and fitness for purpose even though prior payments were
made for the goods. See attached addendum "B".
8. DEFECTIVE PRODUCT; HARMFUL INGREDIENTS: The Supplier hereby represents and
warrants that the Product is free of defects and harmful ingredients and
shall be liable for "latent" defects despite inspection and acceptance by
REI. The Supplier also represents and warrants that the Product complies
with the Consumer Product Safety Act and OSHA's Hazard Communication Rule.
9. RETURNS DUE TO QUALITY PROBLEMS: See attached QWR.
10. DELIVERY CHANGES:
REI has the right to hold up shipments because of strikes, accidents or
other causes of work stoppage at our plants.
11. DOCUMENTATION REQUIREMENTS:
REI purchase order number, line number, part number and quantity must
appear on all invoices, correspondence, shipping papers and packages. REI
reserves the right to charge back the supplier for non-compliance.
12. PROPERTY INSURANCE:
The supplier must have insurance for any of REI's property in the
supplier's possession and indemnify the buyer for any loss or damage.
13. PROPERTY PROTECTION:
Any tooling, dies, fixtures, artwork, photos, etc. "property" supplied by
REI or purchased by REI is REI's. Suppliers shall maintain REI's property
in good condition and must be returned to REI upon
<PAGE>
request. Supplier acknowledges that title to such property is REI's and
shall return such property immediately upon request of REI.
14. PATENT OR COPYRIGHT INFRINGEMENT:
The Supplier represents and warrants that the Product does not infringe on
any patents, copyrights or other proprietary rights of third parties. The
Supplier agrees to indemnify and hold harmless REI from and against any
claims and expenses (including fees and expenses of counsel to REI) based
on the Product's infringement or alleged infringement of any patents,
copyrights or other proprietary rights of other parties.
15. OVERSHIPMENTS: (initial one)
[ ] Overshipments of quantities larger than ordered are allowed and
invoice at larger amount.
[ ] Overshipment of quantities larger than ordered are allowed but
invoice at order quantity.
[ X ] Overshipments are not allowed.
16. PURCHASE ORDER AND CONTRACT REVISIONS:
REI's purchase order is limited to the terms and conditions contained on
the face and reverse sides. Any additional or different terms proposed by
the supplier in any quotation, acceptance or other documentation previously
issued or issued hereafter are hereby deemed to be material alterations and
hereby objected to.
No revisions to the terms of this contract are permitted by anyone other
than the authorized buyer.
17. ORDER CANCELLATIONS:
REI has the right to cancel the contract and purchase order if the supplier
fails to comply with the terms of this agreement.
18. BUYER'S RIGHTS:
Payment for the goods will not end REI's rights under this contract, or the
representation on warranties of supplier concerning the goods.
19. PRODUCT WARRANTY: The Supplier hereby represents and warrants the Product
to be merchantable and fit for the purpose for which REI intends to use the
Product. The Supplier further represents and warrants that the Product
complies with all applicable federal, state and local laws.
20. WORKER SAFETY INSURANCE:
REI has a hold harmless clause for services performed on our premises. The
supplier must have a specified amount of Worker's Compensation,
Occupational Disease, and Public Liability Insurance and furnish the proof
of such insurance to REI.
21. PRODUCT DESIGN PROTECTION:
The supplier agrees not to use REI's drawings, designs or tooling to
produce goods for another customer.
<PAGE>
22. PRODUCT TESTING:
Additional time may be needed to inspect or test material/machinery at
REI's facility. REI's right to reject goods or material shall extend
through the times of inspection.
23. TERMINATION:
REI shall have the right to terminate the contract at any time without
cause with 90 days written notice.
Supplier's claim is limited to reasonable cost the supplier has incurred.
REI is not liable for material, labor, etc. bought in unreasonable
anticipation of REI's needs or manufactured in advance of requirements.
24. ASSIGNMENT/SUBCONTRACTS:
Supplier is restricted from doing so with REI's written permission. REI
shall have the right to assign the contract.
25. PROPRIETARY INFORMATION:
The supplier shall keep REI's proprietary information in confidence.
Nondisclosure agreement attached.
26. SUBSTITUTIONS:
The supplier cannot make any substitutions without REI's written consent.
27. TAXES:
The supplier's price is to include all taxes.
28. ARBITRATION:
Disputes over the terms of this agreement shall be determined by
arbitration. Arbitration shall be held in the State of Minnesota, the laws
of the state of Minnesota shall apply.
29. TOOLING TERMS AND CONDITIONS:
See attached addendum "C"
<PAGE>
These terms and conditions agreed upon this 25th day of November, 1996.
THERMOTECH RECOVERY ENGINEERING, INC.
/s/ Paul J. Stanton /s/ Brian F. Sullivan
- ---------------------------------- ---------------------------------------
Authorized Signature Brian Sullivan, CEO
/s/ Sally S. Mainquist
---------------------------------------
Sally Mainquist, V.P. Manufacturing
/s/ Neal Hiatt
---------------------------------------
Neal Hiatt, Materials Manager
/s/ Debra Johnson
---------------------------------------
Debra Johnson, Sr. Buyer
<PAGE>
ADDENDUM "B"
Thermotech has agreed to the following:
1. No mark-up of resin material in the pricing of Addendum "A".
2. Thermotech and REI will establish a kanban system with three weekly
deliveries, REI will make an effort to maximize truck space efficiency.
3. Cost reduction target of 5% per year. Share cost reduction when provided by
supplier 50/50.
4. Quality will at 98% or better, quality improvement plan to be developed by
Thermotech for each part number; REI to hold a strategy meeting to
determine time frame for quality improvement for each part number.
5. On-time delivery performance of 95% or better.
6. Recyclable packaging will be implemented for each part as deemed; parts to
be requoted based on using recyclable packaging. Cost of containers
purchased for this will be 50% cost to Themotech and 50% cost to REI.
7. First article samples will provided to REI at no charge.
8. It is at the discretion of REI to amortize tooling charges as follows: 1/3
down with tooling order, balance with interest over one (1) years
production parts, unpaid balance due 12 months after mold approval.
9. Goal of Dock-to-Stock for all items is directly linked with quality
improvement plan meeting.
11. Weekly on-site support will be provided by Thermotech; on-site support to
include Thermotech becoming member of REI teams where parts provided by
Thermotech will be impacted.
12. For new parts quoted agreed pricing calculation will shared with REI:
i.e.: Overhead
Press Rate
Material
Cycle time
13. Future price increases proposed will be based on documented material
increases only.
14. Thermotech to accept excess raw material resulting from related tool
transfers; only sealed drums of virgin material is acceptable. (At
Thermotech's standard cost.)
15. Material Certification will be provided with each shipment as specified by
NSF standards.
<PAGE>
RECOVERY ENGINEERING, INC.
QUALITY WORKING RELATIONSHIP AGREEMENT
1. INTRODUCTION
1.1 SUPPLIER QUALITY GOALS
Recovery Engineering, Inc. will work in harmony, mutual respect and
cooperation with its suppliers.
* Suppliers have the responsibility to deliver exactly the product
and/or service that they have promised to produce.
* We expect the standard of performance of our suppliers to be zero
defects.
* If problems exist, or if it is necessary to make corrections, we
expect our suppliers to satisfy all complaints fully and as
quickly as possible, then to correct the system that produced the
problem.
2. SUPPLIER QUALITY ASSURANCE REQUIREMENTS
2.1 QUALITY CONTROL SYSTEM
The supplier is responsible for the quality of the material and
processing provided to Recovery Engineering, Inc. The supplier shall
maintain an effective quality control system coordinated with
production activities. The system shall provide prompt detection of
discrepancies and immediate corrective actions to prevent defective
supplies from reaching Recovery Engineering, Inc. The supplier's
system should be documented and the records must be available for
audit and review as deemed necessary by Recovery Engineering, Inc.
2.2 ORGANIZATION
A responsible, authoritative representative of the supplier with
immediate access to top management must administer the quality control
system.
2.3 DESIGN AND PROCESS CHANGE CONTROL
No product, part number, or critical processing changes shall be made
on material supplied to Recovery Engineering, Inc. without prior
specific authorization by Recovery Engineering, Inc. Notification of
all such changes, and their effect on meeting commitments on
outstanding purchase orders, must be made to authorized persons in the
Recovery Engineering, Inc. Purchasing Department. In some cases,
sample approval will be required.
The supplier will maintain an effective drawing change control system
to ensure that only current drawings and specifications are used.
Obsolete information must be removed from all points of issue and use.
<PAGE>
2.4 PROCEDURES
The supplier shall provide and maintain written work, inspection and
test instructions, as required, to supplement drawings and
specifications. These instructions shall be kept current and be
available at all locations where they are needed.
2.5 INSPECTION AND TESTING
Suppliers are expected to inspect and test products supplied to
Recovery Engineering, Inc. to assure conformance to specifications of
applicable drawings, standards, etc. Acceptance inspections or tests
performed by Recovery Engineering, Inc. do not relieve the supplier of
this responsibility.
2.6 MEASUREMENT AND TEST EQUIPMENT
The supplier must provide and maintain measuring and test equipment in
sufficient quantities necessary to ensure continued accuracy. This
equipment must be updated to reflect engineering changes. The supplier
should maintain and conform to a written schedule for maintenance and
calibration of such equipment.
2.7 CONTROL OF SUBCONTRACTED SUPPLIES
The supplier is responsible for ensuring that all supplies obtained
from outside sources for use in products supplied to Recovery
Engineering, Inc. conform to all specified requirements.
The supplier may use one or all of the following methods to ensure
receipt of conforming subcontracted materials:
* Quality assurance surveys at its supplier's location.
* Satisfactory inspection and test results, or certification of
compliance, provided by subsupplier.
* Performance of incoming inspections and tests at adequate
frequencies to ensure conformance to specifications.
2.8 QUALITY DOCUMENTATION
The supplier is required to be able to document its quality system and
quality performance experience. Adequate records must be maintained of
all inspections and tests performed. These records are to be available
for review by Recovery Engineering, Inc. representatives on request.
2.9 QUALITY STATUS IDENTIFICATION
The supplier must identify the inspection and test status (okay,
reject, sort, hold, rework, etc.) of all purchased materials, raw
materials, work in process, and finished materials by means of stamps,
tags, routing cards, color codes, or other normal means.
<PAGE>
3. QUALITY ASSURANCE PROCESS
3.1 MATERIALS QUALIFICATION
Materials qualification is the process used by Recovery Engineering,
Inc. to assure that a given supplier's material or process will
conform to requirements in a given application.
The process consists of these steps:
* Review and approval of all new engineering drawings by Purchasing
and Design Engineering. Input from suppliers may also be
requested during this stage of drawing review.
* Inspection of all prototype and sample parts by Quality Control
Department.
* Reliability testing by Engineering Department.
3.2 RECEIVING INSPECTION
All materials received at Recovery Engineering, Inc. must pass through
Receiving Inspection. Inspection levels vary from simple physical
identification to complete dimensional and functional check, depending
on past performance.
3.3 NONCONFORMANCE REPORTING SYSTEM
All purchased part nonconformances are documented on a Nonconformance
Report (NMR). The information from each of these reports, along with
the associated costs of quality, is stored in a computer database and
used for reporting supplier quality performance. Purchased part costs
of quality include rework labor, factory overhead, scrap, and
paperwork and material handling costs. Should the NMR be written at
receiving inspection, the NMR, along with a marked drawing and past
history, is then forwarded to the Recovery Engineering, Inc.
appropriate buyer.
3.4 DISPOSITION OF DEFECTIVE MATERIAL
Nonconforming material is handled in one of the following ways:
* Return to supplier -- this is Recovery Engineering, Inc.'s
preferred disposition method. It will be used whenever possible.
* Scrap at Recovery Engineering, Inc. at supplier's expense --
supplier will be notified prior to disposition.
* Rework at Recovery Engineering, Inc. at supplier's expense --
supplier will be notified prior to reworking.
All NMRs are required to have corrective action prior to disposition.
All suppliers will negotiate in good faith the settlement of all cost
incurred associated with the nonconforming parts they ship to us.
3.5 RETURNING DEFECTIVE MATERIAL
* RETURN FOR REPAIR, REPLACEMENT OR CREDIT: Materials returned for
repair,
<PAGE>
replacement, or credit will be accompanied by a copy of the
Return form, which serves as the packing slip.
The return order packing slip explains the reason for return,
quantity returned, new purchase order number, etc.
* WARRANTY RETURNS: A Return form also accompanies all warranty
materials returned to the supplier. The return order packing slip
explains that the materials were returned from the field under
warranty, reason for return, etc.
Any material which is repaired and returned to Recovery Engineering,
Inc. under the Return form must be in "as new" condition. This
includes appearance items (painting, plating, etc.), packaging, and
complete inspection and testing to new material specifications. No
reference to any defect shall be on the material or package, and all
required "loose" items (mounting hardware, clevis pin, keys, etc.)
must be included. Material marked "rebuilt" or "reconditioned" will
not be accepted.
3.6 SUPPLIER CORRECTIVE ACTION
A Corrective Action Request will be used by Recovery Engineering,
Inc.'s Quality Group to notify suppliers of nonconformance and to
obtain documentation as to the cause of the discrepancy and the
corrective action taken by the supplier.
If a score of 3 or less is received on the Quality Audit Survey, the
supplier must provide a corrective action plan for improvement.
Suppliers are responsible for detailing the reason for the
nonconformance, a statement of corrective action taken to prevent the
noncomformance from recurring, and the effective date. All requests
must be answered on or before the date specified. All answered
requests are reviewed by Recovery Engineering, Inc. Quality or
Purchasing. The form will be reissued if specific corrective action is
not specified.
Signed: Date: Signed: Date:
/s/ Robert O. Bishop 8/9/96 /s/ Neal Hiatt 8/21/96
- -------------------------- ----------- ------------------------ -----------
Q.A. Manager Materials Manager
- -------------------------- ------------------------
Title Title
Thermotech Recovery Engineering
- -------------------------------------- -------------------------------------
Company Name Company Name
<PAGE>
ADDENDUM "C"
TOOLING TERMS AND CONDITIONS
RECOVERY ENGINEERING, INC.
INTRODUCTION
The following terms and conditions supplement those shown on the reverse side of
our Purchase Order and supersede any inconsistent provision on Purchase Orders
for the supplying of tooling by Seller to Recovery Engineering, Inc.
(REI/Buyer).
IDENTIFICATION AND MARKING
1.0 Supplier shall identify all new tooling as designated in the tooling
purchase order. This applies to REI owned tooling. A tool number shall
be assigned and affixed to the tooling indicating the funding and/or
controlling agency, i.e., Property of REI.
2.0 Marking shall be accomplished in the appropriate manner of those
methods listed below, unless otherwise stated on the purchase order.
Extreme caution must be exercised so as not to damage or distort tools
when placing identification markings on them.
2.1 Whenever practical, the required identification should be placed
on the tools by metal stamping. The size of the letters and
figures used for metal stamping should be in proportion to the
size of the tool and clearly legible.
2.2 On hardened parts and parts that may be distorted by stamping, or
where it is otherwise impractical to stamp, the required
identification may be applied by etching or other means of
permanent identification.
2.3 Metal identification tags should be used in identifying tools
where because of size and delicate construction, it is
impractical to mark them otherwise. When using metals tags,
identification data should be placed upon the metal tag and
securely attached to the tool with a wire lead.
2.4 When a tool consists of more than one part, individual parts
shall be marked in accordance with 2.1, 2.2, , of 2.3 above.
PAYMENT
Upon acceptance of tooling in accordance with the paragraph below, Seller shall
submit an invoice to Buyer for payment. To qualify for payment, the invoice must
be accompanied by the following:
1.0 A complete listing of all tools produced under the purchase order, and
breakdown of material, labor, etc. for each tool including a copy of
the quote and invoice from tool shop selected.
2.0 A tool drawing of each individual tool if specified. A photo is
optional.
<PAGE>
EXCLUSIVE RIGHTS
Upon acceptance of tooling, in accordance with the paragraph below regarding
acceptance, and upon payment of Seller's invoice, all tooling produced under
this purchase order becomes the property of REI. Use of this tooling for any
purpose other than that authorized by Buyer is strictly prohibited.
MAINTENANCE AND INSPECTION
All tooling produced under this purchase order will be maintained by Seller in
usable condition, at no cost to Buyer, while tooling is in their possession.
Upon completion of all purchase orders for production usage of these tools,
Seller shall store the tooling in adequate protective storage at no charge to
the Buyer. Such tools will be subject to inspection by Buyer at Seller's plant
or Seller's subcontractor's plants at any time.
DISPOSITION
If no further requirements for usage of the tools arises, Seller shall request
disposition of such tooling. Disposition will be advised in writing by the
REI/Buyer. If Seller is to return tooling to the REI/Buyer, the cost of
transportation shall be paid by the REI/Buyer; however, preparation of tools for
shipment shall be responsibility of the Seller.
1.0 WHEN ANY TOOLING IS REVISED, THE REVISION LEVEL SHALL ALSO BE ADDED TO
THE TOOLING NUMBER.
OWNERSHIP AND TRANSFER
1.0 Ownership of all tooling remains with REI. This includes any tooling
which a supplier shall subcontract to his supplier.
2.0 Transfer of tooling directly from one supplier to another is not
permitted unless authorized in writing by REI.
ACCOUNTABILITY
Supplier shall maintain property control records. Such records will contain at a
minimum the following information for each item:
1.0 Identification number, revision level, and description of tool
2.0 Cost of tool, including any revision costs
3.0 Number of parts made, including revision level
4.0 Tooling purchase order number and contract number, if existent
<PAGE>
5.0 Location
6.0 Final disposition action and dates
7.0 Drawings, sketches or photograph of tools
ACCEPTANCE
Acceptance of tooling produced under this Purchase Order will be based on
acceptance of a sample lot of parts (quantity shown on face of purchase order
for parts). This sample must meet all specifications, prints, and requirements
as shown on the producing parts that meet a process capability index (CPK)
greater than or equal to 1.33 on all parameters specified. NOTE: Acceptance of
tooling on the basis of sample parts does not constitute acceptance of
subsequent material, as each lot of material is subject to inspection and
acceptance upon receipt.
UTILIZATION
Supplier shall not use any tooling procured by REI except for REI approved uses.
MODIFICATION
Supplier shall not modify REI tooling without written authorization from REI via
a purchase order or a change order to the tooling order.
RECALL
REI tooling is subject to recall any time without additional expense by the
Buyer.
MASTER REFERENCE
1. Tool is to be a __________ cavity tool.
2. Tool base is to be made of high quality prehardened tool steel. All
cavities and cores are to be made with high quality hardened tool steel.
Tool is to be designed to standard quality mold practices.
3. Tool is to have sufficient cooling and venting to allow tool to run at
optimum performance. 4. Tool is to have sufficient part ejection system to
allow the tool to run at optimum performance with minimal part deformation.
5. Tool is to be manufactured to produce parts per Recovery Engineering,
Inc.'s Drawing Number _____ (at the most recent revision supplied) and to
meet all specifications on the drawing. Recovery Engineering, Inc. will
supply a CAD drawing disk file.
6. No steel for tool is to be cut prior to Recovery Engineering, Inc.'s review
of the tool design and written sign off. Supplier is responsible for
providing this as part of total tool cost. Responsibility for the tool
design capability remains with the supplier.
7. Supplier to supply Recovery Engineering, Inc. with complete tool drawings
prior to acceptance of the tool.
<PAGE>
8. All tooling and designs are the sole property of Recovery Engineering, Inc.
9. Payment terms are as follows:
A. 1/3 at the time of order (vendor to supply invoice) Net 30
B. 1/3 with first samples (vendor to supply invoice) Net 30
C. 1/3 with final part approval (vendor to supply invoice) Net 30
10. On tools transferred to supplier that were not purchased from supplier,
responsibilty and tool life will be determined after assesment of the
condition of the tool (s). Tool will then be guaranteed for a remainder of
expected life of tool with determined mumber of shots and all maintenance
and repair being the responsibility of Thermotech.
11. Tool is to be guaranteed for a life of _____ million shots, with all
maintenance and repair being the responsibility of Thermotech.
12. Complete first article report and samples are required prior to production
from new or revised tooling. Thermotech to provide 1st article samples at
no charge to REI.
13. Supplier will assume ownership of all related fixtures to the piece parts
of tools at the Supplier.
SIGNED:
RECOVERY ENGINEERING, INC.
------------------------------------ -----------------------------------
Company Company
------------------------------------ -----------------------------------
Title Title
------------------------------------ -----------------------------------
Signature Signature
------------------------------------ -----------------------------------
Date Date
EXHIBIT 10.12.1
FIRST AMENDMENT TO LEASE
This First Amendment to Lease, dated as of December 20, 1996 (First Amendment),
between Ryan Companies US, Inc., (Landlord) and Recovery Engineering, Inc., a
Minnesota Corporation (Tenant).
WITNESSETH, that:
WHEREAS, Landlord and Tenant have entered into a Lease dated November 8,
1996 (Lease), for approximately 97,284 square feet of area, whereby Landlord has
leased to Tenant certain premises located in the City of Brooklyn Park, County
of Hennepin, State of Minnesota, consisting of the Lease Property, as such
Leased Property is defined in the Lease; and
NOW, THEREFORE, Landlord and Tenant desire and intend hereby to amend the
Lease as specifically hereinafter set forth and provided:
1. SECTION 1.3., PARAGRAPH 5 IS HEREBY DELETED AND REPLACED WITH: FOR THE
PERIOD FROM THE COMMENCEMENT OF THE LEASE THROUGH AUGUST 31, 1999, THE
INTEREST CHARGED ON THE LAND SHALL BE 7.75% PER ANNUM. COMMENCING
SEPTMBER 1, 1999, THE INTEREST CHARGED ON THE LAND OPTION AREA SHALL
BE EQUAL TO LANDLORD'S COST OF BORROWING . ANY CHANGES OR ADJUSTMENTS
TO THE ANNUAL CARRY COSTS OR LAND OPTION AREA DURING THE YEAR SHALL BE
RECALCULATED AND ADJUSTED ON EACH ANNIVERSARY OF THE LAND OPTION.
2. SECTION 6 IS HEREBY DELETED AND REPLACED WITH: TENANT AT ITS EXPENSE
WILL KEEP THE PROPERTY AND THE ADJOINING SIDEWALKS, CURBS, AND ALL
MEANS OF ACCESS TO THE PROPERTY IN GOOD AND CLEAN ORDER AND CONDITION,
SUBJECT TO ORDINARY WEAR AND TEAR, AND WILL PROMPTLY, AT ITS OWN
EXPENSE, MAKE ALL NECESSARY OR APPROPRIATE REPAIRS, REPLACEMENTS AND
RENEWALS THEREOF, WHETHER INTERIOR OR EXTERIOR, ORDINARY OR
EXTRAORDINARY, FORESEEN OR UNFORESEEN. ALL REPAIRS, REPLACEMENTS AND
RENEWALS SHALL BE AT LEAST EQUAL IN QUALITY, UTILITY AND CLASS TO THE
ORIGINAL CONDITION OF THE PROPERTY. WHENEVER PRACTICAL, TENANT SHALL
USE CONTRACTORS WHO ARE SIGNATORIES TO THE LOCAL AFL-CIO BUILDING
TRADES COUNCIL AGREEMENT. EXCEPT AS SET FORTH IN SECTION 24(g), TENANT
WAIVES ANY RIGHT CREATED BY ANY LAW NOW OR HEREAFTER IN FORCE TO MAKE
REPAIRS TO THE PROPERTY AT LANDLORD'S EXPENSE. LANDLORD SHALL HAVE NO
OBLIGATION TO REPAIR, REBUILD OR MAINTAIN THE PROPERTY, EXCEPT AS SET
FORTH BELOW.
3. SECTION 17.1 IS HEREBY DELETED AND REPLACED WITH: RISKS TO BE INSURED.
TENANT, AT ITS EXPENSE, WILL MAINTAIN WITH INSURERS AUTHORIZED TO
ISSUE INSURANCE IN THE STATE OF MINNESOTA AND HAVING AN A.M. BEST
RATING OF "A-VIII" OR BETTER OR OTHERWISE APPROVED BY LANDLORD AND ANY
MORTGAGEE (a) INSURANCE WITH RESPECT TO THE IMPROVEMENTS AGAINST LOSS
OR DAMAGE BY FIRE, LIGHTNING AND OTHER RISKS FROM TIME TO TIME
INCLUDED UNDER "ALL-RISK" POLICIES AND AGAINST LOSS OR DAMAGE BY
SPRINKLER LEAKAGE, WATER DAMAGE, COLLAPSE, VANDALISM AND MALICIOUS
MISCHIEF, IN AMOUNTS SUFFICIENT TO PREVENT LANDLORD AND TENANT FROM
BECOMING CO-INSURERS OF ANY LOSS UNDER THE APPLICABLE POLICIES, AND IN
ANY EVENT IN AMOUNTS NOT LESS THAN 100% OF THE ACTUAL REPLACEMENT COST
OF THE IMPROVEMENTS (INITIALLY DETERMINED AS OF THE DATE ON WHICH SUCH
INSURANCE IS ORIGINALLY ISSUED, AND SUBSEQUENTLY RE-DETERMINED ON THE
BASIS ON AN ANNUAL REVIEW OF THE ACTUAL REPLACEMENT COST OF THE
IMPROVEMENT), AS DETERMINED AT THE REQUEST OF LANDLORD (SUCH INSURANCE
SHALL ALSO INCLUDE AT LEAST NINE (9) MONTHS RENTAL LOSS COVERAGE), (b)
COMPREHENSIVE GENERAL LIABILITY INSURANCE AGAINST CLAIMS ARISING OUT
OF OR CONNECTED WITH THE POSSESSION, USE, LEASING, OPERATION OR
CONDITION OF THE PROPERTY IN SUCH AMOUNTS AS ARE USUALLY CARRIED BY
PERSONS OPERATING SIMILAR PROPERTIES IN THE SAME GENERAL LOCALITY BUT
IN ANY EVENT WITH A COMBINED SINGLE LIMIT OF NOT LESS THAN $3,000,000
FOR ALL CLAIMS WITH RESPECT TO PROPERTY DAMAGE AND PERSONAL INJURY AND
DEATH WITH RESPECT TO ANY ONE OCCURRENCE, (c) EXPLOSION INSURANCE
<PAGE>
IN RESPECT OF ANY STEAM AND PRESSURE BOILERS AND SIMILAR APPARATUS
LOCATED ON THE PROPERTY IN AMOUNTS NOT LESS THAN THOSE REQUIRED BY
SUBDIVISION (b) ABOVE, (d) IN THE EVENT THAT THE PROPERTY SHALL AT ANY
TIME BE USED AS ANYTHING OTHER THAN FOR OFFICE AND WAREHOUSE PURPOSES
AND MANUFACTURING PURPOSES OF A NATURE CONSISTENT WITH TENANT'S
CURRENT BUSINESS, SUCH OTHER INSURANCE AGAINST SUCH RISKS AND IN SUCH
AMOUNTS AS IS CUSTOMARY AND AS LANDLORD SHALL REASONABLY REQUEST. IN
ADDITION, DURING ANY PERIOD OF REPAIR, ALTERATION OR ADDITION TO THE
PROPERTY, TENANT SHALL OBTAIN AND KEEP IN EFFECT BUILDER'S RISK
INSURANCE IN SUCH AMOUNTS AS LANDLORD SHALL REASONABLY REQUEST. TENANT
MAY EFFECT ANY INSURANCE NOT REQUIRED BY THIS LEASE, BUT ANY SUCH
INSURANCE EFFECTED BY TENANT ON THE PROPERTY SHALL BE FOR THE BENEFIT
OF LANDLORD, TENANT AND ANY MORTGAGEE, AS THEIR INTERESTS MAY APPEAR,
AND SHALL BE SUBJECT TO ALL OF THE PROVISIONS OF SECTION 17.2 HEREOF.
THE INSURANCE REQUIRED UNDER THIS SECTION 17.1 MAY BE SUBJECT TO A
DEDUCTIBLE IN AN AMOUNT NOT EXCEEDING $10,000.00 AND MAY BE EFFECTED
UNDER A BLANKET POLICY OR POLICIES COVERING THE PROPERTY AND OTHER
PROPERTY AND ASSETS NOT CONSTITUTING PART OF THE PROPERTY; PROVIDED,
HOWEVER, THAT ANY SUCH POLICY SHALL SPECIFY THE PORTION OF THE TOTAL
COVERAGE OF SUCH POLICY OR POLICIES THAT IS ALLOCATED TO THE PROPERTY
AND SHALL, IN ALL OTHER RESPECTS, COMPLY WITH THE REQUIREMENTS OF THIS
SECTION 17.
4. SECTION 18 IS HEREBY DELETED AND REPLACED WITH: HAZARDOUS SUBSTANCES
OR MATERIALS. TENANT SHALL NOT (EITHER WITH OR WITHOUT NEGLIGENCE)
CAUSE OR PERMIT THE ESCAPE, DISPOSAL OR RELEASE OF ANY BIOLOGICALLY OR
CHEMICALLY ACTIVE OR OTHER HAZARDOUS SUBSTANCES OR MATERIALS. TENANT
SHALL NOT ALLOW THE STORAGE OR USE OF SUCH HAZARDOUS SUBSTANCES OR
MATERIALS IN ANY MANNER NOT SANCTIONED BY LAW OR BY THE HIGHEST
STANDARDS PREVAILING IN THE INDUSTRY FOR THE STORAGE AND USE OF SUCH
HAZARDOUS SUBSTANCES OR MATERIALS, NOR ALLOW TO BE BROUGHT INTO THE
PROPERTY ANY SUCH HAZARDOUS SUBSTANCES OR MATERIALS EXCEPT TO USE IN
THE ORDINARY COURSE OF TENANT'S BUSINESS. WITHOUT LIMITATION,
HAZARDOUS SUBSTANCES OR MATERIALS SHALL INCLUDE THOSE DESCRIBED IN THE
COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION AND LIABILITY ACT
OF 1980, AS AMENDED, 42 U.S.C. SECTION 9601 ET SEQ., THE RESOURCE
CONSERVATION AND RECOVERY ACT, AS AMENDED, 42 U.S.C. SECTION 6901 ET
SEQ., ANY APPLICABLE STATE OR LOCAL LAWS AND THE REGULATIONS ADOPTED
UNDER THESE ACTS. IF ANY LENDER OR GOVERNMENTAL AGENCY SHALL EVER
REQUIRE TESTING TO ASCERTAIN WHETHER OR NOT THERE HAS BEEN ANY RELEASE
OF HAZARDOUS SUBSTANCES OR MATERIALS, THEN THE REASONABLE COSTS
THEREOF SHALL BE REIMBURSED BY TENANT TO LANDLORD UPON DEMAND AS
ADDITIONAL CHARGES IF SUCH REQUIREMENT APPLIES TO THE PROPERTY AND
ONLY IF AND TO THE EXTENT LANDLORD HAS A REASONABLE BASIS TO BELIEVE
THAT A MATERIAL RELEASE HAS OCCURRED ON OR ABOUT THE PROPERTY IN
VIOLATION OF ENVIRONMENTAL LAWS WHICH HAS NOT BEEN REPORTED BY TENANT
TO THE MINNESOTA POLLUTION CONTROL AGENCY (THE "MPCA"). IN ANY EVENT,
LANDLORD SHALL GIVE TENANT AT LEAST FIFTEEN (15) DAYS PRIOR WRITTEN
NOTICE OF ITS INTENT TO CONDUCT SUCH TESTING, IDENTIFYING THE
SUSPECTED RELEASE. IF TENANT REPORTS THE SUSPECTED RELEASE IN WRITING
TO THE MPCA DURING SUCH FIFTEEN (15) DAY PERIOD, TENANT SHALL NOT BE
RESPONSIBLE FOR THE COST OF TESTS UNDERTAKEN BY LANDLORD RELATING
THERETO. IN ADDITION, TENANT SHALL EXECUTE AFFIDAVITS, REPRESENTATIONS
AND THE LIKE FROM TIME TO TIME AT LANDLORD'S REQUEST CONCERNING
TENANT'S BEST KNOWLEDGE AND BELIEF REGARDING THE PRESENCE OF HAZARDOUS
SUBSTANCES OR MATERIALS ON THE PROPERTY. IN ALL EVENTS, TENANT SHALL
INDEMNIFY LANDLORD IN THE MANNER ELSEWHERE PROVIDED IN THIS LEASE FROM
ANY RELEASE OF HAZARDOUS SUBSTANCES OR MATERIALS ON THE PROPERTY
OCCURRING WHILE TENANT IS IN POSSESSION, OR ELSEWHERE IF CAUSED BY
TENANT OR PERSONS ACTING UNDER TENANT. THE WITHIN COVENANTS SHALL
SURVIVE THE EXPIRATION OR EARLIER TERMINATION OF THE LEASE TERM.
LANDLORD WARRANTS THAT, TO THE BEST OF ITS KNOWLEDGE THE PROPERTY IS,
AS OF THE DATE OF THIS LEASE, FREE OF HAZARDOUS SUBSTANCES OR
MATERIALS. LANDLORD SHALL INDEMNIFY TENANT FROM ANY AND ALL DAMAGES,
LIABILITIES, COSTS AND EXPENSES (INCLUDING WITHOUT LIMITATION
REASONABLE ATTORNEY'S FEES), PAID OR INCURRED BY TENANT AS A RESULT OF
THE RELEASE OF HAZARDOUS SUBSTANCES OR MATERIALS ON THE PROPERTY
OCCURRING PRIOR TO TENANT'S POSSESSION.
<PAGE>
EXCEPT as expressly amended or supplemented herein, the Lease as amended
shall remain and continue in full force and effect in all respects.
IN WITNESS WHEREOF, the Lease Amendment is hereby executed and delivered
effective as of the date and year first above written.
LANDLORD: RYAN COMPANIES US, INC.
BY: /s/ JOHN P. KELLY, JR.
--------------------------
Its: V. Pres.
TENANT: RECOVERY ENGINEERING, INC.
BY: /s/ CHARLES F. KARPINSKE
--------------------------
Its: VP/CFO
EXHIBIT 10.12.2
SECOND AMENDMENT TO LEASE
THIS AGREEMENT, made and entered into as of the 1st day of May, 1997, by
and between RYAN RECOVERY, LLC, a Minnesota limited liability company
("Landlord"), and RECOVERY ENGINEERING, INC., a Minnesota corporation
("Tenant");
WITNESSETH, THAT:
WHEREAS, Ryan Companies US, Inc. ("Ryan") and Tenant entered into a Lease
Agreement dated November 8, 1996, and a First Amendment to Lease dated December
20, 1996 (together, the "Lease"), pertaining to certain premises therein
described located in the City of Brooklyn Park, Minnesota; and
WHEREAS, Ryan's interest in the Lease was assigned to and is now owned by
Landlord;
and
WHEREAS, capitalized terms which are used but not defined herein have the
meanings ascribed to them in the Lease; and
WHEREAS, Landlord and Tenant wish to confirm in writing the Commencement
Date of the Fixed Term of the Lease and the initial Basic Rent, and to further
amend the Lease in one respect.
NOW, THEREFORE, in consideration of the mutual terms hereof, Landlord and
Tenant agree as follows:
1. The Commencement Date of the Fixed Term of the Lease was April 1, 1997.
2. The monthly Basic Rent payable by Tenant for the initial sixty (60)
months of the Fixed Term is $51,059.00.
3. Section 36 of the Lease, captioned "Moving Allowance", is deleted in its
entirety.
4. Except as so modified, the Lease is and shall remain in full force and
effect in accordance with its terms.
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have caused this Agreement to be
duly executed as of the date first above written.
RYAN RECOVERY, LLC
By: Ryan Properties, Inc.,
Its Manager
By /s/ TIMOTHY P. McSHANE
--------------------------------
Its Vice President
LANDLORD
RECOVERY ENGINEERING, INC.
By /s/ CHARLES F. KARPINSKE
--------------------------------
Its VP & CFO
TENANT
EXHIBIT 10.12.3
THIRD AMENDMENT TO LEASE
This Third Amendment to Lease, dated as of 12-22, 1997 (Third Amendment),
between Ryan Recovery, LLC, a Minnesota limited liability company (Landlord) and
Recovery Engineering, Inc., a Minnesota Corporation (Tenant).
WITNESSETH, that:
WHEREAS, Landlord (or its predecessor in interest, Ryan Companies US, Inc.)
and Tenant have entered into a Lease Agreement dated November 8, 1996; First
Amendment to Lease dated December 20, 1996; and Second Amendment to Lease dated
May 1, 1997 (Lease), whereby Landlord has leased to Tenant certain premises
located in the City of Brooklyn Park, County of Hennepin, State of Minnesota,
consisting of the Property, as such Property is defined in the Lease; and
WHEREAS, Tenant desires to exercise its option to expand the Property as
provided in Section 1.4 of Lease; and
NOW, THEREFORE, Landlord and Tenant desire and intend hereby to further
amend the Lease as specifically hereinafter set forth and provided:
1. Upon completion of the expanded Improvements, the Property shall be
deemed to consist of the area crosshatched on Exhibit A hereto,
together with the Improvements located thereon.
2. The additional Improvements shall be constructed by Landlord in a good
and workmanlike manner and in accordance with the plans and
specifications for the same identified on Exhibit attached hereto.
3. The Fixed Term of the Lease shall be extended and shall expire at
midnight on the last day of the one hundred twentieth full calendar
month following completion of the expanded Improvements.
4. Upon completion of the expanded Improvements and issuance of a
certificate of occupancy therefor, Basic Rent shall increase in
accordance with Section 1.4 of the Lease. The "lease constant", as
such term is used in Section 1.4 of the Lease, shall be 11.39%.
Landlord's best estimate of the capital costs to expand the
Improvements, as of the date of this Third Amendment, is attached
hereto as Exhibit C. Costs of the type described in Exhibit C hereto,
including development costs, interim interest and leasing fees, shall
be included in the "capital cost of the expansion", as such term is
used in Section 1.4 of the Lease.
5. Section 2 of Exhibit C is hereby deleted in its entirety and replaced
with the following: "FOR THE PERIOD FROM APRIL 1, 2002, THROUGH THE
LAST DAY OF THE FIXED TERM, MONTHLY BASIC RENT SHALL BE EQUAL TO 115%
OF THE MONTHLY BASIC RENT FOR THE MONTH OF MARCH, 2002".
6. Tenant shall have no further option to expand the Property or the
Improvements under this Lease.
7. Section 2.3 of the Lease is deleted in its entirety and replaced with
the following:
"SECTION 2.3 TAX INCREMENT BENEFITS. The Brooklyn Park Economic
Development Authority has issued to Landlord its Tax Increment Revenue
Note in the amount of $499,825; and in connection with the expansion
of the Improvements will issue to Landlord an additional Tax Increment
Revenue Note in the amount of $209,537 (together, the "Notes").
Provided Tenant is not in default hereunder, Landlord will pay to
Tenant all sums which are paid to Landlord pursuant to the Notes. Such
payments will be made to Tenant within seven (7) business days after
the payments pursuant to the Notes are received by Landlord. Tenant
will furnish to Landlord the space utilization information and the
payroll evidence and other information which the Landlord is required
to provide to the Brooklyn Park Economic Development Authority
pursuant to Section 3.6 and Section 4.4 of the Development Agreements
pursuant to which the Notes are issued."
8. The annual land option cost payable by Tenant pursuant to Section 1.3
of the Lease shall terminate upon substantial completion of the
Improvements.
<PAGE>
9. Landlord will pay Tobin Real Estate Company a commission with respect
to this Third Amendment in the amount of $73,384, 50% of which will be
paid within 30 days after execution hereof and 50% of which shall be
paid upon initial occupancy of the expansion space.
EXCEPT as expressly amended or supplemented herein, the Lease shall remain
and continue in full force and effect in all respects.
THIS THIRD AMENDMENT is contingent upon its approval by the holder of the
Mortgage on the Property, NationsBank, N.A., as Trustee ("Mortgagee"). It is
understood and agreed that Mortgagee shall have no liability or obligation
whatsoever with respect to the expansion of the Improvements as provided herein.
IN WITNESS WHEREOF, this Third Amendment is hereby executed and delivered
effective as of the date and year first above written.
LANDLORD: RYAN RECOVERY, LLC
BY: /s/ TIMOTHY P. MCSHANE
------------------------------
Its: V.P.
TENANT: RECOVERY ENGINEERING, INC.
BY: /s/ CHARLES F. KARPINSKE
------------------------------
Its: VP/CFO
CONSENT BY MORTGAGEE
The undersigned, being the holder of the Mortgage covering the Property
described in the foregoing Third Amendment to Lease, does hereby consent to the
foregoing Third Amendment to Lease and to the construction of the expansion of
the Improvements described therein.
Date: 1/5, 1998 ASB Capital Management, Inc. as successor Trustee
Security Trust Collective Investment Trust for
Employee Benefit Plans - The Real Estate Fund.
By: /s/ MICHAEL DOPP
---------------------------------------------
Its: Managing Director
<PAGE>
EXHIBIT B
OUTLINE SPECIFICATION FOR
THE DESIGN AND CONSTRUCTION OF
RECOVERY ENGINEERING, INC.
PHASE II
BROOKLYN PARK, MINNESOTA
PREPARED BY:
RYAN COMPANIES US, INC.
NOVEMBER 11, 1997
<PAGE>
TABLE OF CONTENTS
01000 GENERAL CONDITIONS.......................................................1
02000 SITEWORK.................................................................3
03000 CONCRETE.................................................................4
04000 MASONRY..................................................................4
05000 METALS...................................................................4
06000 CARPENTRY AND MILLWORK...................................................5
07000 THERMAL AND MOISTURE PROTECTION..........................................5
08000 DOORS AND WINDOWS........................................................6
09000 FINISHES.................................................................6
10000 SPECIALTIES..............................................................7
11000 EQUIPMENT................................................................8
14000 CONVEYING SYSTEMS........................................................8
15000 MECHANICAL...............................................................8
16000 ELECTRICAL..............................................................10
QUALIFICATIONS................................................................19
LIST OF EXHIBITS..............................................................20
EXHIBIT #1 ROOM FINISH SCHEDULE.....................................21
<PAGE>
01000 GENERAL CONDITIONS
1. INTENT: This outline specification and the preliminary drawings outline
the general scope of work for the design and construction of a 87,382
square foot gross area (approximate) addition to the manufacturing
facility for Recovery Engineering, Inc. ("Tenant") in Brooklyn Park,
Minnesota. Design/Builder shall provide all design, supervision, labor,
materials, equipment, and general requirements necessary for the
complete and timely construction of the project specified herein.
2. DESIGN:
A. Architecture & Engineering: Design/Builder shall prepare a
complete set of working drawings and specifications in
accordance with these outline documents, applicable building
codes and zoning requirements, and the requirements of Tenant.
Additions or deletions to the scope of work incorporated into
the final drawings and specifications at the direction of
Tenant will result in an appropriate adjustment to the
contract price.
B. Interior Design: As a part of this proposal, Design/Builder
shall provide basic interior design services for this project.
This service shall be limited to providing overall floor plans
and selection of interior finish materials. Additional
interior design services available from Design/Builder on a
fee basis include:
1) Space Planning of Moveable Office Work Stations
2) Design of Custom Furniture, Millwork and Fixtures
3) Selection of Furnishings, Artwork and Accessories
4) Inventory Existing Furniture and Equipment
3. SUPERVISION:
A. PROJECT MANAGER: Design/Builder shall assign a Project Manager
to this project who shall be responsible for the complete
execution of all work. The Project Manager's responsibilities
shall include interfacing the project as required with Tenant
throughout the entire design and construction process,
obtaining the required building permits, and managing the
construction process through completion of the project.
B. SUPERINTENDENT: Design/Builder shall assign a Superintendent
to this project who shall be responsible for the supervision
of all field construction in progress. The Superintendent's
responsibilities shall include the scheduling and direct
supervision of field construction forces, interfacing as
required with Building Inspection officials, and ensuring
compliance of work in place with drawings and specifications.
4. CONSTRUCTION SCHEDULE: Design/Builder shall prepare a progress schedule
for the project. This schedule shall indicate the dates for starting
and completion of the various stages of construction, and shall be
updated on a regular basis to reflect the actual progress of the work.
This proposal is based on a six (6) month construction schedule with
building turnover scheduled for April 1998 and sitework to be completed
by July 9, 1998, unless prohibited by weather related circumstances.
5. TEMPORARY CONSTRUCTION: Design/Builder shall provide all required
temporary construction, temporary facilities and temporary utilities
required to complete project construction including heated
<PAGE>
weather-tight enclosures, temporary roadways and parking areas, erosion
control structures, material storage areas, enclosures for tools and
other equipment, a heated and air conditioned field office, temporary
utility services for construction usage, and temporary toilet
facilities as required.
6. CLEAN-UP: Design/Builder shall be responsible for construction trash
removal services and shall at all times keep the building and site free
from accumulation of debris. Upon completion, the building shall be
turned over to Tenant in a "broom clean" condition.
7. WARRANTY: Design/Builder warrants that all materials and equipment
shall be new unless otherwise specified, and shall be free from defects
for a period of one year from the date of substantial completion of the
work. Any extended warranties obtained from suppliers or subcontractors
shall be passed on to the Tenant.
8. INSURANCE: Design/Builder shall maintain Workmen's Compensation
Insurance, Comprehensive Public Liability Insurance, and Builder's Risk
Insurance, "All Risk" form, for this project for the duration of the
work. Deductible losses shall be the responsibility of the
Design/Builder.
9. QUALITY ASSURANCE: Design/Builder shall prepare and implement a Quality
Assurance program for this project. The Quality Assurance program shall
include Independent Agency testing and observation of soils, bituminous
paving, and cast in place concrete, as well as inspection of work in
progress by project designers. The Tenant will have the right to
perform inspections and independent tests at any time.
10. ITEMS FURNISHED BY THE DESIGN/BUILDER: The following items shall be
furnished by Design/Builder.
A. PROPERTY SURVEY: Design/Builder shall retain a registered land
surveyor to prepare a survey for the proposed site. The survey
shall include the property legal description, site boundaries,
easements, existing utility locations and elevations, existing
structures and trees, lines and grades of adjoining streets
and alleys, horizontal control and elevation reference points,
and site topography. The Design/Builder will provide title
information to the surveyor with respect to any restrictions
that may affect project design or construction.
B. SOIL REPORT: Design/Builder shall retain an independent
testing agency to perform subsurface exploration (soil
borings) and prepare an engineered foundation report (Soil
Report) for the proposed project. Building design and site
preparation shall conform to the requirements of the Soil
Report. Field conditions encountered that are substantially
different form those described in the Soil Report will result
in an equitable adjustment to the Contract Price.
C. HAZARDOUS MATERIALS REPORTS: When there is reason to suspect
the presence of hazardous materials on the site or within an
existing structure, or when such materials are discovered
during construction, the Design/Builder will retain an
independent testing agency to perform investigation and
testing and to prepare a Hazardous Materials Report.
11. PERMITS AND FEES: Design/Builder shall pay for all required building
permits necessary for the construction of the project. S.A.C. and
W.A.C. charges will be paid by the Design/Builder.
12. BONDS:
<PAGE>
A. PERFORMANCE AND PAYMENT BOND: Not required or included.
B. SITE IMPROVEMENT AND LANDSCAPING BONDS: The Tenant will
provide any site improvement or landscaping bonds required by
the local governmental authority. Design/Builder shall assist
the Tenant in preparing any required documentation for the
bonds.
13. RECORD DOCUMENTS: Upon completion of the project, Design/Builder shall
provide the Tenant with a complete set of record documents including
record drawings, a list of Subcontractors used on the project,
manufacturer's warranties, operation and maintenance manuals for major
pieces of equipment, and instruction manuals when appropriate for
building systems.
02000 SITEWORK
1. EARTHWORK: The Design/Builder shall provide all required site clearing,
mass excavation and filling, structural excavation and backfill and
fine grading as required for the proposed building structure, paved
areas, and proper site drainage.
Topsoil shall be stockpiled during construction from on-site materials
and spread over disturbed areas to be landscaped with sod, seed or
other plant materials. All excess soil materials shall remain on site.
2. UTILITIES: The Design/Builder shall provide on-site utility work
required for connection to utility services, contingent upon adequate
utility services located immediately adjacent to the site. Fees imposed
by serving utility companies for the installation of on-site electrical
or gas mains shall be paid by the Design/Builder.
A. SANITARY SEWER: Sanitary sewer service shall be provided
complete including connection to the sewer main in the street
and an on-site sewer main to the building.
B. WATER: Water service shall be provided to the new addition for
domestic water and fire protection systems complete from the
existing building service inside the building. Extension to
the existing on-site water main with necessary fire hydrants
is also included. In addition, water mains and fire hydrants
shall be provided for fire service as required by the local
Fire Marshall.
C. STORM DRAINAGE: Provisions shall be made for the proper
drainage of storm water from roof, parking, drive and
landscaped areas. Surface drainage shall be utilized wherever
possible.
D. ELECTRICAL: A new 800 electrical service to the new addition
shall be provided from the existing switch gear.
E. GAS: Gas service to the new addition shall be by extending the
existing service to the new addition.
F. TELEPHONE: Telephone service to the building shall be provided
by tenant from existing building.
3. LANDSCAPING: Site landscaping shall be designed and installed in
accordance with the requirements of the City of Brooklyn Park and as
approved by Tenant. All seeding, sodding, imported topsoil, trees,
mulch, edging, shrubbery, retaining walls and any other landscaping or
irrigation systems required by the final landscaping design is
included.
<PAGE>
4. BITUMINOUS AND CONCRETE PAVING: Bituminous and concrete paving shall be
provided complete including curb cuts and driveways as indicated on the
site plan.
Paved areas will be designed to meet the Geotechnical Engineer's
recommendations.
Concrete dolly pads shall be provided as indicated on site plan and
shall consist of 6" granular base and 8" of 4000 PSI air entrained
concrete reinforced with welded wire mesh
Cast in place concrete curb and gutter shall be provided at the
perimeter of all paved parking and drive areas.
Parking area striping and traffic markings shall be provided as
indicated on the drawings.
03000 CONCRETE
1. CONCRETE FOUNDATIONS: Concrete foundations shall be spread footings
consisting of strip footings, pads, piers, and cast in place walls
constructed with concrete and reinforcing steel as required by the
final structural design.
A poured concrete foundation wall will be provided for current truck
docks.
2. CONCRETE SLABS: Office area slab on grade shall consist of 4" thick
4,000 P.S.I. unreinforced concrete cast in place on a granular base.
Warehouse area floors shall consist of 5" 4000 P.S.I. concrete
reinforced with fiber mesh, cast in place on a granular base.
Smooth dowel connections shall be provided at slab on grade
construction joints. Sawcut control joints shall be provided for the
control of shrinkage cracking. Warehouse and manufacturing area aisle
floor control joints shall be filled with semirigid joint filler.
Concrete slabs shall be treated with liquid applied curing compound.
3. PRECAST CONCRETE: Exterior warehouse area walls shall be 12" thick,
insulated, precast concrete panels with a raked exterior finish to
match existing.
4. SIDEWALKS: Sidewalks shall be constructed with 4000 P.S.I., air
entrained, unreinforced concrete. Sidewalks shall be broom finished
unless indicated otherwise on the drawings.
04000 MASONRY
1. CONCRETE BLOCK: 8" CMU will be used at stoop foundations.
05000 METALS
<PAGE>
1. STRUCTURAL STEEL: The structural framing system for the building shall
consist of steel columns, beams or truss girders, bar joists, and metal
roof deck, with column locations as indicated on the drawings.
A minimum clear height of 24' feet shall be provided under the steel
structure in warehouse areas. Bay spacing will be 40' x 40'. The
building structural system shall be designed to accommodate a future
building expansion, as indicated on the drawings. No draft curtains are
included.
Metal deck and structural steel will be factory primed gray.
2. MISCELLANEOUS METALS: Steel tread dock stairs, overhead door plates and
concrete filled pipe bollards shall be provided as indicated on the
drawings.
06000 CARPENTRY AND MILLWORK
1. MILLWORK: Bathroom vanities, window sills, base cabinets, wall cabinets
and counters as shown on drawings at vending area and one conference
room.
2. MISCELLANEOUS CARPENTRY: Roof cants, curbs, and other miscellaneous
blocking shall be provided for items indicated on the drawings.
07000 THERMAL AND MOISTURE PROTECTION
1. BUILDING INSULATION: The overall building thermal envelope shall
conform to the requirements of the Minnesota Energy Code.
A. EXTERIOR PRECAST WALLS: Exterior Precast wall panels shall
include 2-1/2" of expanded polystyrene insulation to provide
an approximate overall R value of 12.
B. PERIMETER SUBGRADE WALLS: Perimeter masonry or concrete
subgrade foundation walls shall be insulated from top of
footing (or frost line) to bottom of slab with 2" of extruded
polystyrene insulation applied to the inside face of the wall.
C. ROOF INSULATION: Roof areas shall be insulated with rigid
insulation installed over metal deck to provide an approximate
overall R value of 22.
2. ROOFING SYSTEM: The roofing system shall consist of a single-ply, 45
mil, ballasted EPDM membrane over rigid insulation. Roof edge fascia
and other visible flashings shall be prefinished metal. Roof areas
shall drain to exterior downspouts and interior roof drains. Roof slope
will be designed to accommodate future expansion. Roof water will not
drain onto truck dock area. The roofing system shall be guaranteed free
from defects for a period of 10 years by the roofing system
manufacturer. Roof slope shall be designed to accommodate future
expansion.
Roof access is provided from existing building.
<PAGE>
08000 DOORS AND WINDOWS
1. PEDESTRIAN DOORS: Office area doors shall consist of wood doors set in
hollow metal frames. Warehouse area doors shall be flush hollow metal
doors set in hollow metal frames.
A. WOOD DOORS: Wood doors shall be 7'-0, solid core wood, with
stained and sealed, premium grade, plain sliced oak veneer.
B. BIFOLD DOOR: Bifold doors shall be solid core wood, with
stained and sealed, premium grade, plain sliced oak veneer,
mounted on overhead track.
C. HOLLOW METAL DOORS: Hollow metal doors shall be 3'-0" x 7'-0",
flush face panel design. Exterior hollow metal doors shall be
insulated and weatherstripped. Hollow metal doors shall be
painted.
D. HOLLOW METAL FRAMES: Wood doors, hollow metal doors, and
interior glazing shall be set in 2" painted hollow metal
frames.
E. FINISH HARDWARE: Door hardware shall be manufactured by
Schlage, Yale, Corbin or equal commercial grade, US10 finish,
with its function appropriate for its intended usage. The
keying system shall allow doors to be keyed alike within a
given area and tied into a building master.
2. OVERHEAD DOORS: Overhead doors shall be insulated steel sectional doors
with high lift track and, weatherstripping. 14' x 16' overhead door
shall have motor operation. 8' x 9' overhead door shall be manually
operated.
3. WINDOW SYSTEM: Windows shall be 1" thick, blue tinted thermal panes set
in anodized aluminum frames with a thermal-break design. Areas behind
glass spandrel sections shall be insulated.
Entrance door frame finish shall match window framing system. Aluminum
thresholds shall be provided for exterior doors. Panic devices shall be
provided at entrance doors where required by code.
Interior glazed openings shall be 1/4" clear glass set in hollow metal
frames. Framed mirrors shall be provided above toilet room vanities.
09000 FINISHES
1. BUILDING FINISHES: Building interior finishes shall be provided as
indicated in the Room Finish Schedule at the end of this Outline
Specification.
Production Area walls shall not be painted.
Building exterior finishes shall consist of painted raked precast
concrete with aluminum window applications as indicated on the
elevation drawings and prefinished sheet metal flashings.
2. OFFICE AREA PARTITIONS: Office area partitions shall be constructed
with steel studs 24" on center and 5/8" gypsum wallboard. All
conference rooms, Training Room, restrooms, lunch room and all walls
separating office function from manufacturing production areas will
receive acoustical insulation.
<PAGE>
3. ACOUSTICAL CEILINGS: Ceilings shall be exposed 1" grid system with lay
in ceiling board units. Units shall be 24" x 48", standard ceiling
tile.
4. CARPETING: Carpet shall be installed by the direct glue method with an
allowance of $15.00 per square yard of floor area, total installed
cost.
5. FLOOR TILE AND BASE: Vinyl composition floor tile shall be 12" x 12" x
1/8" tiles adhesive applied to concrete floors. Base shall be 4" high,
vinyl base adhesive applied to walls with coved profile at hard surface
floors and straight profile at carpet.
6. CERAMIC AND QUARRY TILE: Ceramic and quarry tile shall be set by the
thin-set method. Ceramic wall tile shall be 4" x 4" x 1/4", and ceramic
floor tile shall be 2" x 2" x 1/4". Coved base shall be provided at the
perimeter of ceramic tile floors. Quarry tile shall be 6" x 6" x 1/2"
with bullnose edges and coved base. Sizes indicated are nominal.
7. PAINTING AND WALLCOVERING: Wood doors and other finished hardwood
materials shall be stained, sealed and varnished. Door frames, metal
doors, and miscellaneous metals shall be painted unless provided with
factory finish.
All interior walls shall be painted as indicated on Room Finish
Schedule.
Exposed exterior wood, ferrous metals and equipment shall be painted,
unless provided with a factory applied finish. Paint materials and
coverage shall be acceptable for each application and exposure.
10000 SPECIALTIES
1. TOILET PARTITIONS AND ACCESSORIES: Toilet partitions shall be floor
mounted metal partitions with baked enamel finish complete with door,
latch, rubber stop and coat hook at each stall. Matching screens shall
be provided between urinals. The following accessories shall be
provided:
A. Toilet Tissue Dispenser: One at each toilet stall.
B. Paper Towel Dispenser: One per lavatory, maximum of two per
toilet room.
C. Soap Dispenser: One at each lavatory.
D. Grab Bars: As required by handicapped code.
E. Feminine Napkin Receptacles: One at each women's toilet stall.
F. Feminine Napkin Dispensers: One at each women's toilet room.
2. FIRE EXTINGUISHERS: Fire extinguishers shall be provided as required by
local fire codes. Fire extinguishers shall be housed in painted metal
cabinets in finished areas, and surface mounted in unfinished areas.
3. SIGNS: Code required building and site signs shall be provided
including toilet room signs, handicapped parking signs and traffic
control signs.
4. LOCKERS: Are not included.
5. ENTRANCE MAT: Recessed mat by 3M Products included.
<PAGE>
6. BLINDS: Are not included.
11000 EQUIPMENT
1. DOCK LEVELERS: Dock levelers shall be manual 6'-6" x 8'-0", Capacity C,
12,000 lb. gross loads with Safe-T-Lip to match existing. Also included
are bumpers, 8' x 9' dock pads with wear pleats and "C" style head
curtains and dock lights.
14000 CONVEYING SYSTEMS
not used
15000 MECHANICAL
1. PLUMBING: A complete plumbing system shall be provided, consisting of
sanitary waste and vent piping, hot and cold water piping and
commercial quality fixtures. Water closets shall be wall hung, flush
valve type. Urinals shall be wall hung, flush valve type. Lavatories
shall be countertop self rimming type. Half Bradley shall be floor set.
Electric water coolers and janitor receptors shall be provided as
required.
The roof area will receive a piped, interior roof drainage system that
ties directly into the storm drainage system. Above grade, horizontal
portions of the drain pipes shall be insulated. Provisions shall be
made for emergency overflow drainage of ponded roof water, in
accordance with building code requirements via roof scuppers.
Electric water heater shall supply hot water at 105 degrees. Hot water
piping shall be insulated. Stop valves shall be provided at each
fixture, and isolating valves shall be provided as required for an
easily serviceable system.
Roof Drainage
(6) 8" Roof drains.
Pack to Ship
(10) Soft Air Drops
Shipping
(10) Soft Air Drops
Office
(10) Water closets
(10) Lavatories
(4) Urinals
(5) Floor drains
(1) Half Bradley
(3) Two compartment stainless steel sinks
(2) Vending water stubs
(1) Dishwasher connection
(4) Air outlets at Training ceiling
(3) Electric water heaters
(1) Coffee water supply
<PAGE>
Miscellaneous
Domestic water supply tied in at existing water meter.
Waste and vent piping schedule 40 PVC where allowed by code.
Water piping Type L copper.
Roof drainage piping No Hub schedule 40 PVC
Air piping Press Fit.
Compressed air tied to existing system.
(2) Outside frost proof hose bibs.
New water softener serving Addition.
2. HEATING, VENTILATION, AND AIR CONDITIONING: A complete mechanical
system shall be provided throughout the facility to accomplish heating,
ventilation, and air conditioning in the office, manufacturing and
warehouse areas.
Office areas shall be heated, cooled and ventilated to normal office
conditions in accordance with ASHRAE design standards by means of roof
mounted packaged mechanical units. Temperature control shall be by
means of wall mounted thermostats.
Supply air shall be distributed by means of overhead ductwork and
ceiling diffusers. Slot diffusers are included at perimeter of open
area. Return air shall be accomplished by means of free air movement
through the ceiling plenum. Separate zones of control shall be provided
where required by variances in occupancies and exposures. A wall
mounted electric cabinet unit heater shall provide supplementary heat
at the entrance vestibule.
Open Office Area, Conference Rooms, Office Rooms
(3) Heating/cooling roof tops totaling 20 tons
Perimeterzones with linear slot diffusers, interior zones
with lay-ins (plenum ceilings through out)
(2) Toilet exhausts as required per code
(2) Thermo diffusers and exhaust fans at conference rooms
Lunch Room
(1) 10 Ton heating/cooling roof top plenum return
(1) 5 Ton heating/cooling roof top plenum return
(1) P.R.V. For Ventilation
Entrance Vestibule
(1) 4 kw electric wall heater
Training Room
(1) 10 Ton heating/cooling roof top with plenum return.
Focus Factory
(2) Wall air conditioners with fan
Main Manufacturing/Warehouse Area (Sized for Additional 100 People)
(173)
(6) 12 1/2 Ton heating/cooling roof tops with concentric drops
(75 Tons).
(12) De-stratification fans by Electrician.
(3) Smoke evacuation fans. 30,000 CFM each.
<PAGE>
(5) 54" x 84" louvers/dampers
(1) Relocated louver
Docks Shipping Area
(3) Gas Fired Unit Heaters
Energy Management System
(1) Direct digital control unit connected to 13 RTU's with
expansion space for existing building systems. Hookup to
existing building equipment not included.
General Inclusions
All roof tops to be furnished with economizer.
Thermostat with auto change over subbases
3. FIRE PROTECTION SPRINKLER SYSTEM: A complete wet automatic fire
protection system shall be provided for the facility in accordance with
the requirements of applicable codes, NFPA standards, and the local
Fire Marshall. This system is based on connection to existing fire pump
and water supply.
An ESFR Fire Protection System will be designed for Class IV
commodities per NFPA 231C at warehouse manufacturing areas. The balance
of the building will receive a light hazard system. In-rack sprinkler
systems are not included.
Conventional chrome plated semirecessed sprinkler heads shall be
provided for the office areas and other finished spaces, and upright
brass sprinkler heads shall be furnished in areas without a suspended
acoustical ceiling.
Per local Fire Marshall, fire protection at telephone and computer
rooms are not required. Therefore, no fire protection is included in
these areas.
16000 ELECTRICAL
Basic Materials and Methods
1. CONDUIT INSTALLATION
A. All building wiring shall be installed in rigid steel conduit,
IMC, EMT, flexible metallic conduit (greenfield) or PVC, as
allowed by NEC. Routing of conduits shall be as required by
job conditions.
B. Steel conduit, tubing and fittings shall be galvanized or
sheradized. Connectors and couplings shall be galvanized steel
or compression type; indented type fittings will NOT be
acceptable. Couplings used in connections to equipment of
rigid conduit shall be with a locknut and bushing or threaded
hubs.
C. The installations of conduits or pullboxes for electrical
feeders shall be adjusted before installation to avoid
conflicts between the locations of conduit runs, piping and
ductwork. In general, large pipe mains and air duct shall be
given priority in available space. Conduit runs shall be
installed so as to maintain, wherever practical, a minimum
separation of three inches (3") from water and waste piping.
D. Pull boxes sized in compliance with code requirements shall be
provided where necessary for pulling wires.
<PAGE>
E. Where conduit runs terminate at a motor, transformer, control
device or other rotating or vibrating equipment, furnish and
install a short piece of flexible sealtite between the motor
and the conduit or outlet box.
F. Installation Requirements:
1. Conduits shall not be installed in steel reinforced
concrete joists, beams or columns without the
approval of the Structural Engineer, except that 1/2"
and 3/4" conduits in columns for switches and
receptacles may be installed where shown on the
drawings.
2. All conduits shall be concealed in the building
construction wherever possible. Exposed conduits
shall be installed in a workmanlike manner parallel
with or at right angles to walls, ceilings or
structural members. Where required by the building
construction, furnish and install conduit with
expansion fittings.
3. All conduits installed in outside walls, concrete
slabs on grade, or below slabs shall be rigid PVC
type.
4. Provide an appropriately sized conduit seal for all
conduits passing through exterior walls below grade.
2. WIRES AND CABLES
A. All wire and cable furnished and installed under this contract
shall be new and of the best quality and of size, type and
numbers shown on the plans or required. Conductors shall be
soft annealed copper conforming to conductivity and in all
other respects, to the requirements of the ASTM. Unless
otherwise stated, wire shall be rated at 600 volts. Wire sizes
indicated are for copper conductors. Feeder wire shall be
aluminum.
B. All feeders and motor wiring should be type THW, THHN or THWN.
Branch circuit wiring shall be type TW, THW or THHN. No wire
smaller than #14 shall be used, unless otherwise noted, and
all #8 and larger shall be stranded.
C. No wires shall be drawn into conduit until all work of a
nature which may cause injury is completed. Mechanical wire
pulling apparatus may be used only on conductors larger than
#4 AWG, provided sufficient lubricating compound is used and
conduit is so arranged as to hold possibility or injuring
insulation to an absolute minimum. No grease, oil or
lubricants other than approved wire pulling compounds shall be
used to facilitate the pulling in of wires. Feeders shall be
run their entire length in continuos pieces, without joints or
splices, in so far as practical.
D. Wire shall meet or exceed IPECA-NEMA applicable requirements.
E. For conductors #8 AWG and larger, cable connector shall be of
"color keyed compression type". Smaller conductors shall use
"Scotchlock" brand by Minnesota Mining & Manufacturing Company
(3M), Ideal Industries, Inc., or equivalent.
F. Color Coding:
<PAGE>
All service, feeder and branch circuit conductors throughout
the project shall be color coded. The following is the
suggested color code:
208/120 Volts Phase 277/480 Volts
-----------------------------------------------------------
Black A Brown
Red B Orange
Blue C Yellow
White Neutral Gray
Green Ground Green
G. Aluminum Conductors:
Feeder wire shall be aluminum.
H. Armored cable (MC/BX) may be used for branch circuit wiring
where allowed by Code.
3. WIRING DEVICES AND COVERING PLATES
A. Switches for all incandescent and fluorescent lamp loads shall
be rated for 15 amperes, 120/277 volt, AC, Underwriters'
approved specification grade.
B. Receptacles for general uses shall be duplex, grounding type,
rated 15 or 20 amperes, 120/277 volts, specification grade.
C. Coverplates shall be smooth plastic.
D. Provide GFI duplex receptacle in each toilet and on each
mechanical rooftop unit.
E. Office Areas:
1. Duplex convenience outlets shall be provided at walls
within the office area.
2. Provide dedicated feeder to serve tenant's computer
equipment.
3. Provide wiring devices as indicated in building area
requirement worksheets.
F. Warehouse and Production Shop Areas:
1. Provide a duplex outlet at the interior face of
exterior walls adjacent to each truck dock door for
dock lights.
4. ELECTRIC SERVICE TO THE BUILDING
A. The electrical service shall consist of a 800 Amp, 277/480
Volt, 3-phase, 4-wire service, extended from existing switch
gear in existing building.
B. This Contractor is responsible for all notifications to and
coordination with the electrical utility company and shall
provide all labor and material not furnished by the utility
company. General Contractor to pay all utility charges.
5. ELECTRICAL DISTRIBUTION
<PAGE>
A. The electrical distribution in the building shall be as
required to provide power for the mechanical systems and other
various systems.
B. Bussing shall be of copper or electrical grade aluminum and
shall be formed and braced to withstand the effect of the
available fault current. Copper bussing shall be silver plated
at joints, and be properly connected with bolts and lock
washers. Aluminum bussing shall be tin plated, full length and
shall have all joints made by welding or use of bolts and
double Belleville washers properly tightened.
C. A continuous ground bus shall be provided to all sections of
the switchboard and all non-current carrying parts of the
switchboard shall be solidly connected to this ground bus.
D. All lugs for cable or bus connections shall be positive
pressure bolted clamp type for copper or shall be Burndy
"Hy-Press" type and Belleville washer for aluminum cable
terminal lugs.
E. Switchboards shall be constructed to meet all requirements for
indoor NEMA classified equipment.
F. The General Contractor shall furnish and install a concrete
housekeeping pad for all floor mounted equipment. The pad
shall be 4" high and sized to extend 4" beyond the equipment.
6. CIRCUIT BREAKER LIGHTING AND MISCELLANEOUS POWER PANELBOARDS AND
CABINETS
A. Cabinets shall be constructed by Code gauge steel. They shall
be equipped with steel trim with hinged doors, and latches.
B. Panelboards mounting, flush or surface, shall be as required.
Surface mounted cabinets shall be finished in light gray
enamel. Fronts of flush cabinets shall be provided with a
finish of light gray enamel.
C. Main capacity shall be not less than the rating of the
over-current protective device for the feeder. All bus shall
be plated.
D. Each cabinet shall be with a clear plastic covered
type-written directory of circuits. The directory shall be
mounted in a card holder attached to the inside of the door.
E. Provide branch circuit breakers as required.
F. Panelboard shall be dead-front, safety type, equipped with
circuit breakers as herein specified.
G. All panels shall be by the same manufacturer.
H. Circuit breaker panelboards for 120/208 volt services shall be
listed by Underwriter's Laboratories and bear the UL Label.
7. GROUNDING
<PAGE>
A. Safety switches shall be rated for system voltage, and where
required, shall be equipped with cartridge fuses.
B. Safety switches shall be NEMA general.
8. FUSES
A. Provide all fuses as required. Fuses shall be rated for
voltage applied, non- renewable, dual elements, cartridge
type, unless otherwise noted.
9. DRY TYPE TRANSFORMERS
A. Furnish and install dry type transformers to provide 120/208
volt, 3-phase, 4-wire power as required.
B. Transformers shall utilize a Class H insulation and shall
comply and must be tested in accordance with the requirements
of NEMA, ASA and AIEE standards. Transformers shall have
ventilated enclosures for natural draft cooling and designed
for indoor installation.
C. Transformers shall have universal voltage taps; (4) 2-1/2%
below normal and (2) 2% above normal.
10. EMERGENCY LIGHTING
A. Provide exit lights and emergency egress lights to meet Life
Safety Codes.
11. EXTERIOR LIGHTING
A. Provide metal halide wall-pack light fixtures on building
perimeter for car and truck parking.
B. Provide metal halide downlights at main entrance exterior.
C. Provide metal halide wall pack light fixtures at exit doors.
12. INTERIOR LIGHTING
1. Provide lighting as specified.
2. 2x4 fluorescent troffers with 18-cell parabolic louvers shall
be used in office.
3. All fluorescent lights will have electronic ballasts and
octron lamps.
4. Provide lighting controls as indicated in building area
requirement worksheets.
5. Provide metal halide lights at warehouse and manufacturing
13. FIRE ALARM SYSTEM
A. Provide a fire alarm connections to tamper and flow switches,
plus the exterior fire bell.
<PAGE>
14. MOTORS AND EQUIPMENT
A. Provide connection to all mechanical.
B. Provide disconnect switches for all equipment as required.
C. Install all electric heating equipment provided by mechanical
contractor and make final equipment connections.
D. All interlock and temperature control wiring by mechanical
contractor.
15. ELECTRICAL ITEMS INCLUDED:
A. POWER DISTRIBUTION
SERVICE
800 amp 277/480 volt 3 phase 4 wire electrical service
extended from existing switchgear in existing electrical room.
OFFICE
(1) 225 amp 277/480 volt 3 phase 4 wire lighting panelboard
(2) 200 amp 120/208 volt 3 phase 4 wire power panelboards
(1) 75 KVA transformer
PRODUCTION
(1) 600 amp 120/208 3 phase 4 wire disturibution panelboard
(1) 200 amp 120/208 volt 3 phase 4 wire general power
panelboard
(1) 200 amp 120/208 volt 3 phase 4 wire pack to ship
panelboard
(1) 200 amp 120/208 volt 3 phase 4 wire battery charger
panelboard
(1) 225 KVA transformer
MECHANICAL
(1) 400 amp 277/480 volt 3 phase 4 wire panelboard
B. LIGHTING
OFFICE
(137) 2x4 parabolics
(40) 2x4 acrylic troffers
(6) 3' recessed fluorescent fixtures
(16) 4' recessed fluorescent fixtures
(6) 4' fluorescent strips
(8) battery back-up exit lights
(12) twin head emergency battery packs
(24) single pole switches
(12) three way switches
PRODUCTION
(136) 400 watt metal halide high bays
(2) 4' fluorescent strips
<PAGE>
(9) battery back-up exit lights
(22) twin head emergency battery packs
(40) 4' fluorescent strip task lights
(5) single pole switches
High bays in production to be panel switched
EXTERIOR
(15) 150 watt metal halide wall packs
Automatic lighting control
C. GENERAL POWER
OFFICE
(54) duplex receptacles
(26) dedicated duplex receptacles
(6) GFI duplex receptacles
(9) furniture base feed connections
(1) dishwasher connection
PRODUCTION
(53) duplex receptacles
(2) 20 amp 208 volt hand lift charger receptacles
(4) 50 amp 208 volt fork lift charger receptacles
(19) 120 volt cord drops
(2) dedicated 20 amp 120 volt cord drops
(3) 20 amp 208 volt 3 phase cord drops
(2) 3 amp 208 volt 1 phase cord drops
(2) porta king connections
(1) overhead door operator
D. MECHANICAL EQUIPMENT
OFFICE
(2) 5 ton RTU's
(3) 7 1/2 ton RTU's
(1) 10 ton RTU
(1) 4 KW electric entry heater FBO
(4) fractional HP exhaust fans
(3) water heaters
(6) RTU GFI receptacles
(6) thermostats FBO
(12) duct smoke detectors FBO
(6) duct smoke detector remote indicating lights
PRODUCTION
(6) 12 1/2 ton RTU's
(3) unit heaters
(3) 5 HP smoke evac fans
(5) motorized wall louvers
(12) paddle fans
<PAGE>
(1) 1/2 HP battery charger exhaust fan
(1) 1 KW electric heater FBO
(1) water heater
(1) water softener
(8) thermostats
(12) duct smoke detectors FBO
(6) RTU GFI receptacles
E. COMMUNICATIONS
OFFICE
(45) voice/data openings
F. SYSTEMS
(2) tamper and flow switch connections
G. MISCELLANEOUS
Temporary power for lighting, hand held tools, gas heaters
Engineered working drawings
Permits, fees, taxes
Specifically excluded are the following items:
Utility charges of any type
Mechanical motor starters
Communications wiring
<PAGE>
ALLOWANCES
The following allowances shall be included for the total installed cost (labor,
material, freight, and taxes) of each item indicated unless specified otherwise:
1. Front Canopy: Allowance of $10,000 for footings, steel, roofing and
finishes.
2. Carpet: Allowance of $15.00 per square yard of carpeted floor area.
Allowance covers the total installed cost (carpet, pad, labor,
adhesives, etc.).
<PAGE>
QUALIFICATIONS
The following items are not included in the scope of work proposed herein:
1. Kitchen equipment (refrigerator, microwave, vending equipment,
dishwasher, etc.).
2. Furniture design and selection.
3. Demountable partitions or open office landscape partitions.
4. On-site water storage facilities.
5. Telephone equipment, telephones or communication wiring.
6. Security systems.
7. In-rack fire protection system.
8. Computer system network wiring.
9. Paging system.
10. Racking.
11. Non-water fire protection.
<PAGE>
LIST OF EXHIBITS
The following exhibits, together with this outline specification, form the basis
for this proposal:
1. Geotechnical Exploration, Recovery Engineering Development, 75th Avenue
North, Brooklyn Park, Minnesota, GME Project No. 6299, as performed by
GME Consultants, Inc. and dated July 31, 1996.
2. Project Drawings as follows:
ARCHITECTURAL
A0.1 Title Sheet 10/29/97
A2.1 Floor Plan 10/29/97
A6.1 Door Schedule 10/29/97
A6.2 Window Types, Door and Frame Types 10/29/97
A8.1 Exterior Elevations 10/29/97
A9.1 Wall Sections 10/29/97
A10.1 Roof Plan 10/29/97
A10.2 Roof Details 10/29/97
STRUCTURAL
S1 Foundation Plan 10/28/97
S2 Roof Framing Plan 10/28/97
S3 Sections and Details 10/28/97
S4 Sections and Details 10/28/97
CIVIL
Sheet 1 Cover Sheet 10/29/97
Sheet 2 Site Plan 10/29/97
Sheet 3 Grading, Drainage and Erosion 10/29/97
Control Plan
Sheet 4 Utility Plan 10/29/97
Sheet 5 Landscape Plan 10/29/97
Sheet 6 Landscape Details 10/29/97
Sheet 7 General Details 10/29/97
<PAGE>
EXHIBIT #1 ROOM FINISH SCHEDULE
Date: November 11, 1997 RECOVERY ENGINEERING, INC - PHASE II
<TABLE>
<CAPTION>
===============================================================================================================================
ROOM DESCRIPTION CEILING MATL/ WALL MATL/ WALL FINISH FLOOR MATL/ NOTES
CEILING HEIGHT WALL HEIGHT BASE
===============================================================================================================================
<S> <C> <C> <C> <C> <C>
10'-0" H; acoustical gypsum board paint floor - carpet;
Open Office Areas ceiling tile base - vinyl
- -------------------------------------------------------------------------------------------------------------------------------
Office (Vice Presidents, 10'-0" H; acoustical gypsum board paint floor - carpet; borrowed lights
Managers and Directors) ceiling tile base - vinyl
- -------------------------------------------------------------------------------------------------------------------------------
Conference Rooms 10'-0" H; acoustical gypsum board paint floor - carpet; walls and ceilings
ceiling tile base - vinyl insulated
- -------------------------------------------------------------------------------------------------------------------------------
Toilet - Office 8'-0" H; acoustical glazed ceramic glazed ceramic ceramic mosaic tile 4-8" wainscot
ceiling tile tile tile and paint floor; glazed ceramic
tile base
- -------------------------------------------------------------------------------------------------------------------------------
Corridor 10'-0" H; acoustical gypsum board paint floor - vinyl tile
ceiling tile base - vinyl
- -------------------------------------------------------------------------------------------------------------------------------
Literature Room 10'-0" H; acoustical gypsum board paint floor - vinyl tile
ceiling tile base - vinyl
- -------------------------------------------------------------------------------------------------------------------------------
Lunch Room 10'-0" H; acoustical gypsum board paint floor - vinyl tile
ceiling tile base - vinyl
- -------------------------------------------------------------------------------------------------------------------------------
Training Room 10'-0" H; acoustical gypsum board paint floor - vinyl tile
ceiling tile base - vinyl
- -------------------------------------------------------------------------------------------------------------------------------
UTility Rooms (Janitor, Exposed gypsum board paint floor - sealed
Mechanical, Electrical) concrete
base - vinyl
- -------------------------------------------------------------------------------------------------------------------------------
Manufacturing/Warehouse Exposed factory gypsum paint at gypsum fl.- sealed concrete
Area primed structural board/precast board; exposed with J-17
steel precast base - vinyl
- -------------------------------------------------------------------------------------------------------------------------------
Toilet - Manufacturing 8'-0" H; acoustical gypsum board FRP ceramic mosaic tile
ceiling tile floor; ceramic base
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT C
SUMMARY
- ---------------------------------------- ----------------
RECOVERY EXPANSION 12/19/1997
- ---------------------------------------- ----------------
SPACE TYPE SF COST PSF CONST. COST
- ------------------------------------
OFFICE/WHS 87,362 $43.64 3,812,478
OTHER 0 $0.00 0
OTHER 0 $0.00 0
OTHER 0 $0.00 0
OTHER 0 $0.00 0
OTHER 0 $0.00 0
OTHER 0 $0.00 0
OTHER 0 $0.00 0
- ------------------------------------
TOTAL 87,362 6 MONTH CONSTRUCTION PERIOD
CONSTRUCTION COST
SHELL @ SQ FT COST OF 43.64 3,812,478
SITE WORK ------
DESIGN & PERMITS 0.00 0
- ----------------------- 0.00 0
OWNER ALLOW. 0.00 0
ELEV. CHANGE 0.00 0
FEE 0.00 0
INTEREST CREDIT 0.00 (11,333)
- -----------------------
TOTAL CONSTRUCTION COSTS 3,801,145
--------------- ----------
LAND 5.84 ACRES PSF @ 1.98 503,693
--------------- ----------
DEVELOPMENT COSTS
LEGAL 45,000
TITLE 34,836
FINANCING FEES 82,006
MISCELLANEOUS 30,000
TOTAL DEVELOPMENT COSTS 191,842
INTERIM INTEREST 115,996
CARRY 0
MARKETING 0
---------
DEVELOPER OH 0
---------
---------
DEVELOPMENT FEE 0
---------
TOTAL BASE BUILDING 4,612,675
LEASING FEES MONTH LEASE SQ FT ALLOW PER
STARTS SF
- -----------------------------------------------
TENANT 1 1 87,362 0.84 73,384
TENANT 2 1 0 0.00 0
TENANT 3 1 0 0.00 0
TENANT 4 1 0 0.00 0
TENANT 5 1 0 0.00 0
TENANT 6 3 0 0.00 0
TENANT 7 5 0 0.00 0
TENANT 8 10 0 0.00 0
- ----------------------------------------------
TOTAL LEASING COSTS 73,384
TENANT IMPROVEMENTS SQ FT ALLOW PER SF
- -------------------------------------------------
TENANT 1 87,362 0.00 0
TENANT 2 0 3.00 0
TENANT 3 0 0.00 0
TENANT 4 0 0.00 0
TENANT 5 0 0.00 0
TENANT 6 0 0.00 0
TENANT 7 0 0.00 0
TENANT 8 0 0.00 0
TOTAL TENANT IMPROVEMENTS 0
TOTAL TENANT COSTS 73,384
TOTAL PROJECT COSTS 53.64/SQ FT 4,686,060
==========
EXHIBIT 21.1
SUBSIDIARY OF RECOVERY ENGINEERING, INC.
Jurisdiction of Percent
Name Incorporation Owned
- ------- --------------- -------
Recovery Engineering International, Ltd. Barbados 100%
EXHIBIT 23.1
Consent of Ernst & Young LLP
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-63214) pertaining to the 1986 Stock Option Plan, in the Registration
Statement (Form S-8 No. 33-76088) pertaining to the 1993 Director Stock Option
Plan, in the Registration Statement (Form S-8 No. 33-75882) pertaining to the
1994 Stock Purchase Plan, in the Registration Statements (Forms S-8 No. 33-76544
and No. 333-41621) pertaining to the 1994 Stock Option and Incentive Plan, and
in the Registration Statement (Form S-8 No. 333-41619) pertaining to the Salary
Savings Plan of Recovery Engineering, Inc. of our report dated January 30, 1998,
with respect to the financial statements and schedule of Recovery Engineering,
Inc. included in this Annual Report (Form 10-K) of Recovery Engineering, Inc.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 24, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 261
<SECURITIES> 0
<RECEIVABLES> 16,236
<ALLOWANCES> 314
<INVENTORY> 7,594
<CURRENT-ASSETS> 25,613
<PP&E> 18,938
<DEPRECIATION> 4,771
<TOTAL-ASSETS> 43,198
<CURRENT-LIABILITIES> 23,469
<BONDS> 15,000
0
0
<COMMON> 45
<OTHER-SE> 4,684
<TOTAL-LIABILITY-AND-EQUITY> 43,198
<SALES> 71,243
<TOTAL-REVENUES> 71,243
<CGS> 37,417
<TOTAL-COSTS> 73,314
<OTHER-EXPENSES> (43)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,427
<INCOME-PRETAX> (3,455)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,455)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,455)
<EPS-PRIMARY> (0.77)
<EPS-DILUTED> (0.77)
</TABLE>
