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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 5, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-21232
RECOVERY ENGINEERING, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1557115
(State or other jurisdiction of (I.R.S. Employer Identification No.)
- ------------------------------- ------------------------------------
incorporation organization)
9300 North 75th Avenue
Minneapolis, MN 55428
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 315-5500
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(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No ____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.01 Par Value - 5,751,387 shares as of May 5, 1998
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<PAGE>
RECOVERY ENGINEERING, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements (Unaudited):
Balance Sheets
April 5, 1998 and December 31, 1997................................ 3
Statements of Operations
Ninety-five day period ended April 5, 1998 and ninety day
period ended March 31, 1997........................................ 4
Statements of Cash Flows
Ninety-five day period ended April 5, 1998 and ninety day
period ended March 31, 1997........................................ 5
Notes to Financial Statements...................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 11
Item 2. Changes in Securities and Use of Proceeds.......................... 11
Item 4. Submission of Matters to a Vote of Security Holders................ 11
Item 5. Other Information.................................................. 12
Item 6. Exhibits and Reports on Form 8-K................................... 12
Signatures......................................................... 14
<PAGE>
RECOVERY ENGINEERING, INC.
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
April 5, December 31,
1998 1997
ASSETS (Unaudited)
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents ................ $ -- $ 261
Accounts receivable (net of allowance of
$281 for 1998 and $314 for 1997) ......... 17,678 16,236
Inventory ................................ 8,343 7,594
Other current assets ..................... 1,103 1,522
---------- ----------
Total Current Assets ................. 27,124 25,613
Property and equipment:
Tooling .................................. 11,297 9,451
Equipment and fixtures ................... 9,340 9,056
---------- ----------
20,637 18,507
Less accumulated depreciation ............ 5,352 4,771
---------- ----------
15,285 13,736
Deferred income taxes ........................ 1,512 1,512
Patents (net of accumulated amortization) .... 736 732
Other assets ................................. 576 676
---------- ----------
Total assets ......................... $ 45,233 $ 42,269
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank line of credit ...................... $ 13,206 $ 7,161
Accounts payable ......................... 6,921 8,336
Accrued facility relocation costs ........ 182 217
Accrued marketing expenses ............... 2,511 1,781
Accrued co-op advertising ................ 1,308 2,138
Other accrued expenses ................... 2,759 3,405
---------- ----------
Total current liabilities ............ 26,887 23,038
Long-term debt ............................... 15,000 15,000
Shareholders' equity:
Common stock, $.01 par value:
Authorized shares -- 100,000,000
Issued and outstanding shares:
1998 - 4,558,000 and 1997 - 4,548,000 46 45
Additional paid-in capital ............... 21,517 21,364
Note receivable from sale of stock ....... (498) (498)
Retained earnings (deficit) .............. (17,719) (16,680)
---------- ----------
Total shareholders' equity ........... 3,346 4,231
---------- ----------
Total liabilities and shareholders' equity $ 45,233 $ 42,269
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
RECOVERY ENGINEERING, INC.
STATEMENTS OF OPERATIONS
(Unaudited - in thousands, except per share data)
<TABLE>
<CAPTION>
Ninety-five day period Ninety day period
ended April 5, 1998 ended March 31, 1997
------------------- --------------------
<S> <C> <C>
Net sales .............................. $ 17,225 $ 10,347
Cost of products sold .................. 9,033 6,192
---------- ----------
Gross profit ........................... 8,192 4,155
Operating expenses:
Selling, general and administrative 7,865 5,156
Research and development .......... 1,011 754
---------- ----------
8,876 5,910
Loss from operations ................... (684) (1,755)
Other income (expense):
Interest income ................... -- 68
Interest expense .................. (540) (211)
---------- ----------
(540) (143)
---------- ----------
Loss before income taxes ............... (1,224) (1,898)
Income tax benefit ..................... 185 --
---------- ----------
Net loss ............................... $ (1,039) $ (1,898)
========== ==========
Net loss per share - basic and diluted . $ (.23) $ (.44)
========== ==========
Weighted average shares ................ 4,553 4,329
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
RECOVERY ENGINEERING, INC.
STATEMENTS OF CASH FLOWS
(Unaudited - in thousands)
<TABLE>
<CAPTION>
Ninety-five day Ninety day
period ended period ended
April 5, 1998 March 31, 1997
------------- --------------
<S> <C> <C>
Operating activities
Net loss .......................................... $ (1,039) $ (1,898)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization ..................... 612 419
Changes in operating assets and liabilities:
Accounts receivable ............................ (1,442) 428
Inventory ...................................... (749) (1,586)
Other assets ................................... 519 (129)
Accounts payable ............................... (1,415) (570)
Accrued expenses ............................... (781) (1,321)
--------- ---------
Net cash used in operating activities ............. (4,295) (4,657)
Investing activities
Purchase of property and equipment ................ (2,130) (1,431)
Sale of marketable securities ..................... -- 1,542
Purchase of patents ............................... (35) (6)
--------- ---------
Net cash (used in) provided by investing activities (2,165) 105
Financing activities
Net proceeds from bank line of credit ............. 6,045 --
Issuance of common stock .......................... 154 31
--------- ---------
Net cash provided by financing activities ......... 6,199 31
--------- ---------
Decrease in cash and cash equivalents ................... (261) (4,521)
Cash and cash equivalents at beginning of period ........ 261 5,988
--------- ---------
Cash and cash equivalents at end of period .............. $ -- $ 1,467
========= =========
</TABLE>
See accompanying notes.
<PAGE>
RECOVERY ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
April 5, 1998
Note A -- Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and the instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the ninety-five day
period ended April 5, 1998 are not necessarily indicative of the results that
may be expected for the year ending January 3, 1999, or any other period. For
further information, refer to the financial statements and footnotes thereto for
the year ended December 31, 1997 included in the Company's latest annual report
on Form 10-K.
In 1998, the Company's fiscal year will end on the Sunday closest to December 31
(January 3, 1999) and each quarter ends on the last Sunday of a thirteen week
period. As a result, the first quarters ended April 5, 1998 and March 31, 1997
included 95 and 90 days, respectively. In the Company's opinion, this difference
in days does not materially affect the comparability of the financial results of
the periods presented.
Note B -- Inventory
The components of inventory consist of the following:
April 5, December 31,
1998 1997
---------- ----------
Raw materials $5,815,000 $5,456,000
Work in process 156,000 157,000
Finished products 2,372,000 1,981,000
---------- ----------
$8,343,000 $7,594,000
========== ==========
Note C -- Net Loss Per Share
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.
<PAGE>
Note D -- Accounting Statements
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 did not have a material impact
on the Company's financial statements.
Note E -- Subsequent Events
The Company completed a public offering of Common Stock on April 28, 1998
netting approximately $33,200,000 from the sale of 1,190,000 shares. The Common
Stock was priced at $30.00 per share. All of the shares were sold by the
Company. The underwriters have informed the Company that on May 18, 1998 they
will purchase an additional 178,500 shares of Common Stock pursuant to the
exercise of their overallotment option, which will result in additional net
proceeds to the Company of approximately $5,000,000.
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Ninety-five Day Period ended April 5, 1998)
RESULTS OF OPERATIONS:
Net sales for the ninety-five day period ended April 5, 1998 increased 66
percent over sales for the ninety day period ended March 31, 1997. This growth
was due to increased sales of the Company's existing PUR household water
filtration products and the introduction of new products for the household
market. In March 1998, the Company began shipping the PUR PLUS pitcher,
which is one of its new pour-through products introduced at the International
Housewares Show in January. The Company also continued to increase its
distribution base including the addition of Rite Aid, a nationwide drug store
chain, adding over 2,000 new retail outlets at which PUR products may be
purchased by consumers. PUR water filter systems and replacement filters
are now available at over 28,000 retail outlets nationwide.
Gross profit margin for the period ended April 5, 1998 was 47.6 percent compared
to 40.2 percent for the period ended March 31, 1997. This improvement 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 including replacement filter cartridges as a percentage of total sales.
Selling, general and administrative expenses increased to $7.9 million for the
period ended April 5, 1998 from $5.2 million for the period ended March 31,
1997, representing 45.7% and 49.8% of net sales, respectively. The increase in
selling, general and administrative expenses was attributable primarily to
advertising and promotional expenses related to the continued rollout and
expansion of the Company's line of household water filters. While selling
expenses are expected to be above 1997 levels throughout the remainder of the
year to support the continued roll-out of the household drinking water systems
and product line extensions, they are expected to remain flat as a percentage of
sales.
Research and development expense increased to $1,011,000 for the period ended
April 5, 1998,compared to $754,000 for the period ended March 31, 1997,
reflecting the Company's commitment towards developing new products and
technology. Development of product line extensions and other new products will
require continued emphasis and increased spending on research and development.
Other expenses increased to $540,000 for the period ended April 5, 1998 compared
to $143,000 for the period ended March 31, 1997. The increase is due to payments
of interest on long-term debt and the Company's line of credit as well as no
interest income corresponding to decreased balances of cash, cash equivalents
and marketable securities.
The Company's effective income tax rate was 15% for the period ended April 5,
1998, compared to 0% for the period ended March 31, 1997. The Company has a
$1,512,000 net deferred tax asset primarily related to net operating loss
carryforwards. The Company has
<PAGE>
recorded a valuation allowance for the majority of its deferred tax asset due to
the uncertainty of future realization.
LIQUIDITY AND CAPITAL RESOURCES:
Cash used in operations was $4,295,000 for the period ended April 5, 1998,
compared to cash used in operations of $4,657,000 for the period ended March 31,
1997. Cash was used to fund operations and increase the level of inventories and
receivables, as well as reduce the level of accounts payable and accrued
expenses.
Capital expenditures were $2,130,000 for the period ended April 5, 1998,
compared to $1,431,000 for the period ended March 31, 1997. The capital
expenditures were primarily to purchase tooling and manufacturing equipment for
both periods. The Company anticipates increased expenditures for tooling and
manufacturing equipment purchases associated with new product introductions and
an increase in overall production capacity.
The Company had $13,206,000 of bank debt at April 5, 1998, as compared to
$7,161,000 at December 31, 1997. This credit facility, established in March 1997
and amended in March 1998, provides for total borrowings of up to $25.0 million,
secured by equipment, inventory, receivables and intangibles. The credit
facility consists of $15.0 million discretionary working capital line of credit,
limited to eligible receivables and inventory, which bears interest at the
bank's reference rate plus 0.75%, and a $10.0 million equipment loan which bears
interest at the bank's reference rate plus 1.25%. Borrowings under the equipment
loan are made in increments of $2.0 million and are payable over a 48-month
period commencing the first full month following each separate advance. Other
borrowings under the credit facility are due on demand. Pursuant to the
Company's agreement with GS Group, borrowings under the bank credit facility
were limited to $10.0 million in 1997 and are limited to $12.5 million in 1998.
However, the Company received waivers from GS Group allowing it to borrow up to
$14.0 million under the credit facility during the fourth quarter of 1997 and up
to $16.0 million in 1998.
The Company completed a public offering of Common Stock on April 28, 1998
netting approximately $33,200,000 from the sale of 1,190,000 shares. The Common
Stock was priced at $30.00 per share. All of the shares were sold by the
Company. The underwriters have informed the Company that on May 18, 1998 they
will purchase an additional 178,500 shares of Common Stock pursuant to the
exercise of their overallotment option, which will result in additional net
proceeds to the Company of approximately $5,000,000.
Management believes that anticipated cash flows from operations, funds available
through its bank credit facility, and the net proceeds from its public offering
of Common Stock will provide sufficient capital resources for current operations
and planned product introductions.
The Company has not paid cash dividends. The Board of Directors currently
intends to retain all earnings for expansion of the Company's business.
<PAGE>
FORWARD-LOOKING STATEMENTS
This report (as well as press releases, other written statements and oral
statements made or to be made by the Company) contains statements relating to
future events or the future financial performance of the Company which are
forward-looking statements within the meaning of the safe harbor provisions of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking statements involve
risks and uncertainties that could significantly affect anticipated results in
the future and, accordingly, actual results may differ materially from those
described in the forward-looking statements. These risks and uncertainties
include, but are not limited to, the effects of economic conditions, product
demand, competitive products, and other factors described from time to time in
the Company's filings with the Securities and Exchange Commission, including the
Company's Annual Report on Form 10-K and certain registration statements of the
Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported, the Company is 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. On April 16, 1998, the Court granted the Company's
motion for summary judgment, dismissing all of UltraPure's claims.
The Court's order is subject to appeal for a period of thirty days
from the date the judgment is entered. The Company believes it does
not infringe UltraPure's patent and, if the order for summary
judgment is appealed, the Company intends to defend vigorously its
right to market and sell these products.
Item 2. Changes in Securities and Use of Proceeds
On February 3, 1998, the Board of Directors of the Company adopted an
amendment to the Rights Agreement between the Company and Norwest
Bank Minnesota, National Association, as Rights Agent. The amendment
provides that a person who becomes the beneficial owner of 15% or
more (formerly 20% or more) of the shares of Common Stock of the
Company then outstanding will be deemed to be an "Acquiring Person,"
except that Brian F. Sullivan, William F. Wanner, Jr. or Goldman,
Sachs & Co. and their respective affiliates may, in addition to
shares beneficially owned on February 3, 1998, acquire shares that
represent up to 3% of the shares of Common Stock outstanding without
being deemed to be an "Acquiring Person." The amendment also provides
that decisions to redeem the Rights or to adopt certain amendments to
the Rights Agreement may be made only by "Continuing Directors," as
such term is defined in the amendment.
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on April 23,
1998. The following matters were submitted to a vote of the
shareholders at the Annual Meeting:
<PAGE>
Election of Directors. The following persons were elected to serve as
directors, for a term of one year:
Robert R. Gheewalla Brian F. Sullivan Richard J. Zeckhauser
John E. Gherty William D. Thompson
Sanjay H. Patel William F. Wanner, Jr.
Approval of Amendment to 1994 Stock Option and Incentive Plan to
increase the number of shares reserved for issuance thereunder.
(2,259,218 votes FOR, 420,103 votes AGAINST, and 4,665 votes
ABSTAINED, and 1,074,881 shares held by brokers were not voted on the
resolution)
Approval of Amendment to 1993 Director Stock Option Plan to increase
the number of shares subject to each option granted thereunder.
(2,325,551 votes FOR, 388,618 votes AGAINST, and 5,512 votes
ABSTAINED, and 1,039,186 shares held by brokers were not voted on the
resolution)
Ratification of Appointment of Ernst & Young, LLP as Independent
Auditors. (3,702,470 votes FOR, 6,444 votes AGAINST, and 49,953 votes
ABSTAINED)
Item 5. Other Information
On April 28, 1998, the Company completed a public offering of
1,190,000 shares of Common Stock at a public offering price of $30.00
per share, from which it received net proceeds of approximately $33.2
million. All of the shares were sold by the Company. The underwriters
have informed the Company that on May 18, 1998 they will purchase an
additional 178,500 shares of Common Stock pursuant to the exercise of
their overallotment option, which will result in additional net
proceeds to the Company of approximately $5,000,000. The underwriters
for the offering are NationsBanc Montgomery Securities LLP and
Deutsche Morgan Grenfell. The Company intends to use the net proceeds
to repay certain existing indebtedness and for working capital and
general corporate purposes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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
10.7.1 First Amendment to Financing Agreement dated
March 16, 1998 between Recovery Engineering,
Inc. and First Bank National Association
<PAGE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the
quarter covered by this Form 10-Q.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Recovery Engineering, Inc.
(Registrant)
Dated: May 14, 1998. /s/Brian F. Sullivan
--------------------------------------------
Brian F. Sullivan
President, Chief Executive Officer
and Director
(principal executive officer)
Dated: May 14, 1998. /s/Charles F. Karpinske
--------------------------------------------
Charles F. Karpinske
Chief Financial Officer
(principal financial and accounting officer)
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBIT INDEX TO FORM 10-Q
For the quarter ended Commission File No.: 0-21232
April 5, 1998
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RECOVERY ENGINEERING, INC.
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Exhibit
No. Description Method of Filing
--- ----------- ----------------
4.1.1 Amendment No. 1 dated as of February 3, Filed as Exhibit 4.1.1
1998 to Rights Agreement between Recovery to the Company's
Engineering, Inc. and Norwest Bank Registration Statement
Minnesota, National Association, as Rights on Form S-3
Agent (No. 333-46833) and
incorporated herein by
reference
10.7.1 First Amendment to Financing Agreement Filed as Exhibit 10.7.1
dated March 16, 1998 between Recovery to the Company's
Engineering, Inc. and First Bank National Registration Statement
Association on Form S-3
(No. 333-46833) and
incorporated herein by
reference
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-START> JAN-01-1998
<PERIOD-END> APR-05-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 17,678
<ALLOWANCES> 281
<INVENTORY> 8,343
<CURRENT-ASSETS> 27,124
<PP&E> 20,637
<DEPRECIATION> 5,352
<TOTAL-ASSETS> 45,233
<CURRENT-LIABILITIES> 26,887
<BONDS> 0
0
0
<COMMON> 46
<OTHER-SE> 3,300
<TOTAL-LIABILITY-AND-EQUITY> 45,233
<SALES> 17,225
<TOTAL-REVENUES> 17,225
<CGS> 9,033
<TOTAL-COSTS> 17,909
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 37
<INTEREST-EXPENSE> 540
<INCOME-PRETAX> (1,224)
<INCOME-TAX> (185)
<INCOME-CONTINUING> (1,039)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,039)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> (.23)
</TABLE>
