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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
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 July 4, 1999
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
N/A
- --------------------------------------------------------------------------------
(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 - 6,042,484 shares as of July 30, 1999
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<PAGE>
RECOVERY ENGINEERING, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements (Unaudited):
Balance Sheets
July 4, 1999 and January 3, 1999.................................... 3
Statements of Operations
Three- and Sixth-month periods ended July 4, 1999 and July 5, 1998.. 4
Statements of Cash Flows
Six-month periods ended July 4, 1999 and July 5, 1998............... 5
Notes to Financial Statements....................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................... 7
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 3. Defaults upon Senior Securities..................................... 11
Item 4. Submission of Matters to a Vote of Security Holders................. 12
Item 5. Other Information................................................... 12
Item 6. Exhibits and Reports on Form 8-K.................................... 13
Signatures.......................................................... 14
Exhibit Index to Form 10-Q.......................................... 15
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<PAGE>
RECOVERY ENGINEERING, INC.
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
July 4, January 3,
1999 1999
-------- --------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................ $ 16,866 $ 14,000
Accounts receivable (net of allowance of
$281 for fiscal 1999 and $308 for fiscal 1998) ....... 14,819 15,389
Inventory ............................................ 12,454 10,661
Other current assets ................................. 550 620
-------- --------
Total Current Assets .............................. 44,689 40,670
Property and equipment:
Tooling .............................................. 10,229 9,547
Equipment and fixtures ............................... 14,774 14,109
-------- --------
25,003 23,656
Less accumulated depreciation ........................ 8,818 7,004
-------- --------
16,185 16,652
Deferred income taxes ................................... 1,512 1,512
Patents (net of accumulated amortization) ............... 731 729
Other assets ............................................ 415 313
-------- --------
Total assets ...................................... $ 63,532 $ 59,876
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................... $ 2,366 $ 5,740
Accrued marketing expenses ........................... 4,367 1,003
Accrued co-op advertising ............................ 4,128 2,994
Other accrued expenses ............................... 3,342 2,868
-------- --------
Total current liabilities ......................... 14,203 12,605
Long-term debt .......................................... 15,000 15,000
Shareholders' equity:
Common stock, $.01 par value:
Authorized shares -- 100,000,000
Issued and outstanding shares:
Fiscal 1999 - 6,039,223 and fiscal 1998 - 6,012,281 60 60
Additional paid-in capital ........................... 60,242 59,977
Note receivable from sale of stock ................... (498) (498)
Retained earnings (deficit) .......................... (25,475) (27,268)
-------- --------
Total shareholders' equity ........................ 34,329 32,271
-------- --------
Total liabilities and shareholders' equity ........... $ 63,532 $ 59,876
======== ========
</TABLE>
See accompanying notes.
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<PAGE>
RECOVERY ENGINEERING, INC.
STATEMENTS OF OPERATIONS
(Unaudited - in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
July 4, 1999 July 5, 1998 July 4, 1999 July 5, 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales ............................. $ 24,592 $ 21,724 $ 45,158 $ 38,949
Cost of products sold ................. 10,974 10,626 21,239 19,659
-------- -------- -------- --------
Gross profit .......................... 13,618 11,098 23,919 19,290
Operating expenses:
Selling, general and administrative 11,077 8,857 19,832 16,722
Research and development .......... 962 1,089 1,923 2,100
-------- -------- -------- --------
12,039 9,946 21,755 18,822
Income from operations ................ 1,579 1,152 2,164 468
Other income (expense):
Interest income and other ......... 226 207 453 207
Interest expense and other ........ (248) (394) (507) (934)
-------- -------- -------- --------
(22) (187) (54) (727)
Income (loss) before income taxes ..... 1,557 965 2,110 (259)
Income tax benefit (expense) .......... (234) (145) (317) 40
-------- -------- -------- --------
Net income (loss) ..................... $ 1,323 $ 820 $ 1,793 $ (219)
======== ======== ======== ========
Net income (loss) per share - basic ... $ 0.22 $ 0.15 $ 0.30 $ (0.04)
======== ======== ======== ========
Weighted average shares - basic ....... 6,030 5,557 6,023 5,044
Net income (loss) per share - diluted . $ 0.20 $ 0.14 $ 0.29 $ (0.04)
======== ======== ======== ========
Weighted average shares - diluted ..... 7,444 7,200 7,234 5,044
</TABLE>
See accompanying notes.
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<PAGE>
RECOVERY ENGINEERING, INC.
STATEMENTS OF CASH FLOWS
(Unaudited - in thousands)
<TABLE>
<CAPTION>
Six months Six months
ended ended
July 4, 1999 July 5, 1998
------------ ------------
<S> <C> <C>
Operating activities
Net income (loss) ....................................... $ 1,793 $ (219)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization ....................... 1,885 1,308
Changes in operating assets and liabilities:
Accounts receivable ............................ 570 (1,516)
Inventory ...................................... (1,793) (1,060)
Other assets ................................... (32) 816
Accounts payable ............................... (3,374) (3,652)
Accrued expenses ............................... 4,972 (1,749)
-------- --------
Net cash provided by (used in) operating activities ..... 4,021 (6,072)
Investing activities
Purchase of property and equipment ...................... (1,347) (3,829)
Purchase of patents ..................................... (73) (71)
Purchase of marketable securities ....................... -- (2,000)
-------- --------
Net cash used in investing activities ................... (1,420) (5,900)
Financing activities
Net repayments - bank line of credit .................... -- (7,161)
Issuance of common stock ................................ 265 38,439
-------- --------
Net cash provided by financing activities ............... 265 31,278
-------- --------
Increase (decrease) in cash and cash equivalents ............. 2,866 19,306
Cash and cash equivalents at beginning of period ............. 14,000 261
-------- --------
Cash and cash equivalents at end of period ................... $ 16,866 $ 19,567
======== ========
</TABLE>
See accompanying notes.
5 of 15
<PAGE>
RECOVERY ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
July 4, 1999
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-one day period
ended July 4, 1999 are not necessarily indicative of the results that may be
expected for the year ending January 2, 2000, or any other period. For further
information, refer to the financial statements and footnotes thereto for the
year ended January 3, 1999 included in the Company's latest annual report on
Form 10-K.
Commencing with fiscal 1998, the Company's fiscal year ends on the Sunday
closest to December 31 (fiscal year 1999 ends January 2, 2000) and each quarter
ends on the last Sunday of a thirteen-week period. As a result, the six months
ended July 4, 1999 and July 5, 1998 included 182 and 186 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:
July 4, January 3,
1999 1999
----------- -----------
Finished products $ 8,076,000 $ 4,378,000
Work in process 213,000 258,000
Raw materials 4,165,000 6,025,000
----------- -----------
$12,454,000 $10,661,000
=========== ===========
Note C -- 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. In 1998, the FASB issued Statements No.
132 EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS, and
No. 133 ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. Statement
No. 132 is effective for fiscal years beginning after December 15, 1997, and
Statement No. 133 is effective for fiscal years beginning after June 15, 1999.
The adoption by the Company of these statements in January 1998 and January
1999, respectively, did not and is not expected to have a material impact on the
Company's financial statements.
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<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Ninety-one Day Period ended July 4, 1999)
RESULTS OF OPERATIONS:
Net sales for the three-month period ended July 4, 1999 increased 13.2% to
$24,592,000 from $21,724,000 for the same period in 1998. Net sales for the
six-month period ended July 4, 1999 increased 15.9% to $45,158,000 from
$38,949,000 for the same period in 1998. The increase in sales for the quarter
was driven by a 33% increase in sell-through at retail versus the same period
in 1998, according to data collected by the Company. As previously reported, a
higher percentage of the Company's sales in the first half of 1998 were to stock
retailers' shelves with new products than has been the case in 1999.
Gross profit margins increased to 55.4% and 53.0% for the three- and six-month
periods ended July 4, 1999, respectively, compared to 51.1% and 49.5% for the
same periods in the prior year. These increases were driven largely by increased
replacement filter sales as a percentage of total sales, by a reduction in
product direct costs, and by reductions in manufacturing overhead expenses. The
Company continues to benefit from the maturation of the new manufacturing
processes launched in 1998.
Selling, general and administrative expenses increased to $11,077,000 (45.0% of
net sales) and $19,832,000 (43.9% of net sales) for the three- and six-month
periods ended July 4, 1999 from $8,857,000 (40.8% of net sales) and $16,722,000
(42.9% of net sales) for the same periods in 1998. 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. Selling, general and administrative
expenses increased as a percentage of sales for the three- and six-month periods
ended July 4, 1999 compared to the same periods in 1998. Although the Company
expects to continue its investment in marketing and advertising expenditures,
the Company believes that selling, general and administrative expenses will, as
a percentage of net sales, decrease for the year in 1999 compared to 1998.
Research and development expense decreased to $962,000 and $1,923,000 for the
three- and six-month periods ended July 4, 1999, compared to $1,089,000 and
$2,100,000 for the same periods in 1998. The Company continues to be committed
towards developing new products and technology. Development of product line
extensions and other new technology will require continued emphasis and may
require increased spending on research and development.
Other expenses decreased to $22,000 and $54,000 for the three- and six-month
periods ended July 4, 1999 compared to $187,000 and $727,000 for the same
periods in 1998. Interest income and other income increased to $226,000 and
$453,000 for the three- and six-month periods ended July 4, 1999 compared to
$207,000 and $207,000 for the same periods in 1998.
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<PAGE>
This increase was mainly due to increased balances of cash and cash equivalents
as a result of the Company's public offering which was completed April 28, 1998,
as well as the proceeds from the overallotment option completed May 18, 1998.
Interest expense and other expense decreased to $248,000 and $507,000 for the
three- and six-month periods ended July 4, 1999 compared to $394,000 and
$934,000 for the same periods in 1998. The decrease was due mainly to lower
interest expense on the Company's bank line of credit, which was established in
March 1997 and repaid by the Company subsequent to its public offering in the
second quarter of 1998.
The Company's effective income tax rate was 15% for the three- and six-month
periods ended July 4, 1999 and July 5, 1998, respectively. The Company has a
$1,512,000 net deferred tax asset primarily related to net operating loss
carryforwards. The Company has recorded a valuation allowance for the majority
of its deferred tax asset due to the uncertainty of future realization.
LIQUIDITY AND CAPITAL RESOURCES:
During the six-month period ended July 4, 1999, operations provided cash of
$4,021,000, compared to $6,072,000 of cash used in operations in the same period
the prior year. In the first half of 1999, cash was provided by net income and a
decrease in accounts receivable and an increase in accrued expenses, while cash
was used to increase inventories and decrease accounts payable. In the first
half of 1998, cash was used to fund the net loss and increase inventories and
accounts receivable, as well as decrease accounts payable and accrued expenses.
Capital expenditures were $1,347,000 for the six-month period ended July 4,
1999, compared to $3,829,000 for the same period in 1998. Capital expenditures
in both periods were primarily to purchase tooling and manufacturing equipment.
The Company anticipates continued expenditures for tooling and manufacturing
equipment purchases associated with product development and an increase in
overall production capacity.
In July 1996, the Company issued $15.0 million of Convertible Notes to certain
investment partnerships affiliated with The Goldman Sachs Group, L.P. ("GS
Group") which bear interest at 5% per annum and expire 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, subject to adjustment in certain
circumstances. 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 borrowings outstanding under its bank credit facility at July
4, 1999 and January 3, 1999. This credit facility, established in March 1997 and
amended in March 1998, provides for total borrowings up to $15,000,000 secured
by equipment, inventory, receivables, and intangibles. The credit facility is a
discretionary working capital line of credit, limited to eligible receivables
and inventory, which bears interest at the bank's reference rate plus 0.75
8 of 15
<PAGE>
percent. Borrowings are due on demand. Pursuant to the Company's agreement with
GS Group, borrowings are limited to $12,500,000 in 1999.
The Company completed a public offering of Common Stock in the second quarter of
1998 netting approximately $38,200,000 from the sale of 1,368,500 shares. The
Common Stock was priced at $30.00 per share. All of the shares were sold by the
Company.
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,
expansion of plant capacity and product development. The Board of Directors
currently intends to retain all earnings for expansion of the Company's
business.
YEAR 2000 ISSUES
The Company understands the Year 2000 ("Y2K") issue to be the result of computer
programs using a two-digit format, as opposed to four digits, to indicate the
year. Such computer systems would be unable to interpret dates beyond the year
1999, which could cause a system failure or other computer errors, leading to
disruptions in operations either through internal failures or through the effect
of failures which might happen externally, and which could have a material
adverse effect on the Company's financial position.
In 1998, the Company developed a three-phase program for Y2K information systems
readiness. The intent of Phase I was to identify those systems with which the
Company has exposure to Y2K issues and assess the ability to make them Y2K
ready. The intent of Phase II was to implement corrective actions to remedy
issues discovered in Phase I. The intent of Phase III is to test all remedial
corrective actions taken and, if necessary, complete a contingency plan.
The Company has identified three major areas determined to be critical for
successful Y2K readiness: (1) financial and manufacturing information system
applications, (2) manufacturing automation and (3) third-party relationships.
The Company, in accordance with Phase I of the program, has completed an
internal review of all systems and contacted all software suppliers to determine
major areas of exposure to Y2K issues. In the financial and information system
area, a number of applications have been identified as Y2K ready due to their
recent implementation, and no material issues were discovered. These include the
Company's core financial and reporting systems. In the manufacturing area, the
Company has completed its review and did not find any material issues. In the
third-party area, the Company continues its assessment of its major third-party
relationships. Many of these parties state that they intend to be Y2K ready by
2000. The Company has completed Phase II of the program, as well as the testing
component of Phase III. The Company has developed contingency plans in
conjunction with Phase III and is in the process of finalizing them.
9 of 15
<PAGE>
The Company is in the process of determining what total costs will be incurred
in connection with its Y2K readiness initiatives. Expenses incurred to date are
not material and future expenses estimated by the Company are not expected to be
material. The Company will fund all Y2K readiness expenses through operating
cash flows.
Management of the Company believes it has an effective program in place to
resolve Y2K issues in a timely manner. As noted above, the Company has not yet
completed all necessary phases of its Y2K readiness program. In the event that
the Company does not complete any additional phases or is exposed to Y2K
problems beyond its reasonable control, the Company may be unable to take
customer orders, manufacture and ship products, invoice customers or collect
payments, and may be generally subject to litigation or disruptions in the
economy which could materially adversely affect the Company. The amount of
potential liability or lost revenue that might result from such events cannot be
reasonably estimated at this time.
FORWARD-LOOKING STATEMENTS
This report (as well as press releases, other public documents, 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, continued customer acceptance of products, the Company's reliance on
proprietary technology, pending patent litigation, product obsolescence, the
Company's ability to manage growth, risks associated with international
operations, competition, product liability, 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's operations are not currently subject to market risks for interest
rates, foreign currency rates, commodity prices or other market price risks of a
material nature.
10 of 15
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company and several other water filtration companies were named
as defendants in a civil proceeding initiated in January 1997 by
Brita U.S.A., a subsidiary of Clorox Company, which asserted that
the defendants infringed one of Brita's patents relating to pitcher
products. On March 3, 1999, summary judgment was entered in the
United States District Court for the Northern District of Illinois,
dismissing all claims against the Company and the other defendants.
Brita has filed a Notice of Appeal regarding the Court's decision.
The Company will continue to vigorously defend this case. 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 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 has been named as the defendant in a civil proceeding
initiated in May 1999 by KX Industries, L.P., a former supplier to
the Company, which asserts that the Company is infringing a KX
patent relating to processes for manufacturing carbon blocks. The
Company intends to vigorously defend this case. The Company was
aware of the KX patent prior to developing its manufacturing
processes and believes that it does not infringe KX's patent.
The Company from time to time is involved in various other legal
proceedings arising in the normal course of business, none of which
is expected to result in any material loss to the Company.
Item 2. Changes in Securities and Use of Proceeds
On April 29, 1999, the Board of Directors of the Company adopted
Amendment No. 2 to the Rights Agreement, dated January 30, 1996,
between the Company and Norwest Bank, N.A., as Rights Agent. The
Rights Agreement previously required that a majority of the
"Continuing Directors," as defined in the Rights Agreement, approve
the redemption of the Rights, the exchange of the Rights after any
person becomes an Acquiring Person, and certain other actions under
the Rights Agreement. Pursuant to Amendment No. 2, these actions now
require the approval of a majority of the Board of Directors.
Item 3. Defaults upon Senior Securities
Not applicable
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<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on April 29,
1999. The following matters were submitted to a vote of the
shareholders at the Annual Meeting:
Approval of Amendment to the Company's Articles of Incorporation to
authorize a classified board and to implement certain related
matters. (2,512,146 votes FOR, 1,226,219 votes AGAINST, and 7,499
votes ABSTAINED, and 1,228,262 shares held by brokers were not voted
on the resolution)
Election of Directors. The following persons were elected to serve
as directors, for the following terms:
Terms expiring in 2000 Terms expiring in 2001
Robert R. Gheewalla John E. Gherty
William D. Thompson Sanjay H. Patel
Richard J. Zeckhauser
Terms expiring in 2002
Brian F. Sullivan
William F. Wanner, Jr.
Approval of Amendment to 1994 Stock Option and Incentive Plan to
increase the number of shares reserved for issuance thereunder.
(3,412,243 votes FOR, 308,472 votes AGAINST, and 25,150 votes
ABSTAINED, and 1,228,262 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 reserved for issuance thereunder. (3,567,201
votes FOR, 199,246 votes AGAINST, and 36,009 votes ABSTAINED, and
1,171,670 shares held by brokers were not voted on the resolution)
Ratification of Appointment of Ernst & Young, LLP as Independent
Auditors. (4,951,398 votes FOR, 13,140 votes AGAINST, and 9,589
votes ABSTAINED)
Item 5. Other Information
Not applicable
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<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
No. Description
--- -----------
10.1 Change-in-Control Severance Pay Agreement
dated November 2, 1998 between Recovery
Engineering, Inc. and Brian F. Sullivan
10.2 Change-in-Control Severance Pay Agreement
dated November 2, 1998 between Recovery
Engineering, Inc. and Richard D. Hembree
10.3 Change-in-Control Severance Pay Agreement
dated November 2, 1998 between Recovery
Engineering, Inc. and Charles F. Karpinske
10.4 Change-in-Control Severance Pay Agreement
dated November 2, 1998 between Recovery
Engineering, Inc. and Jeffrey T. Dekko
10.5 Change-in-Control Severance Pay Agreement
dated November 2, 1998 between Recovery
Engineering, Inc. and Barry B. Van Lerberghe
10.6 Change-in-Control Severance Pay Agreement
dated November 2, 1998 between Recovery
Engineering, Inc. and Daniel B. Seebart
10.7 Change-in-Control Severance Pay Agreement
dated February 17, 1999 between Recovery
Engineering, Inc. and Reed A. Watson
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
covered by this Form 10-Q.
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<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: August 16, 1999 /s/Brian F. Sullivan
---------------- ----------------------------------------------
Brian F. Sullivan
Chairman and Chief Executive Officer
(principal executive officer)
Dated: August 16, 1999 /s/Charles F. Karpinske
---------------- ----------------------------------------------
Charles F. Karpinske
Chief Financial Officer
(principal financial and accounting officer)
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<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBIT INDEX TO FORM 10-Q
For the quarter ended Commission File No.: 0-21232
July 4, 1999
- --------------------------------------------------------------------------------
RECOVERY ENGINEERING, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
--- ----------- ----------------
<S> <C>
10.1 * Change-in-Control Severance Pay Agreement Filed electronically herewith
dated November 2, 1998 between Recovery
Engineering, Inc. and Brian F. Sullivan
10.2 * Change-in-Control Severance Pay Agreement Filed electronically herewith
dated November 2, 1998 between Recovery
Engineering, Inc. and Richard D. Hembree
10.3 * Change-in-Control Severance Pay Agreement Filed electronically herewith
dated November 2, 1998 between Recovery
Engineering, Inc. and Charles F. Karpinske
10.4 * Change-in-Control Severance Pay Agreement Filed electronically herewith
dated November 2, 1998 between Recovery
Engineering, Inc. and Jeffrey T. Dekko
10.5 * Change-in-Control Severance Pay Agreement Filed electronically herewith
dated November 2, 1998 between Recovery
Engineering, Inc. and Barry B. Van Lerberghe
10.6 * Change-in-Control Severance Pay Agreement Filed electronically herewith
dated November 2, 1998 between Recovery
Engineering, Inc. and Daniel B. Seebart
10.7 * Change-in-Control Severance Pay Agreement Filed electronically herewith
dated February 17, 1999 between Recovery
Engineering, Inc. and Reed A. Watson
27 Financial Data Schedule Filed electronically herewith
</TABLE>
- ----------
* Management Contracts
15 of 15
EXHIBIT 10.1
CHANGE-IN-CONTROL SEVERANCE PAY AGREEMENT
THIS AGREEMENT is made this 2nd day of November, 1998, by and between
Recovery Engineering, Inc., a Minnesota corporation, (the "Company") and Brian
F. Sullivan (the "Executive").
RECITALS
A. The Executive is the President and Chief Executive Officer of the
Company as of the date of this Agreement, and has been an employee of the
Company since March 1986.
B. The Board of Directors of the Company desires to retain the
Executive in the employ of the Company.
C. The Board of Director believes that it is essential to preserve and
maintain the stability and continuity of management of the Company by providing
the Executive with economic and other security from the uncertainty of risks
inherent in a potential or threatened takeover of the Company which might
jeopardize the Executive's employment.
NOW THEREFORE, in consideration of the foregoing and of the mutual
promises of the parties hereto, the Company and the Executive agree as follows:
1. Eligibility for Severance Pay. The Executive shall be eligible to
receive severance pay, in the amounts and at the times described in paragraph 3,
if:
(a) the Executive's employment with the Company and all of its
subsidiaries (if any) is terminated within 24 months after there has
been a "change in control," as such term is hereinafter defined; and
(b) the Executive's termination of employment was not:
(i) on account of the Executive's death;
(ii) on account of a physical or mental
condition that entitles the Executive to benefits under any
long-term disability plan maintained by the Company or any of
its subsidiaries, as then in effect;
(iii) for conduct involving serious willful
misconduct (such as commission by the Executive of a felony or
a common law fraud against the Company) which is detrimental
in a significant way to the business of the Company or any or
its subsidiaries; or
(iv) on account of the Executive's voluntary
resignation; provided, that a resignation shall not be
considered to be voluntary for the purposes of this Agreement
if it occurs under the circumstances described in paragraph
11(a), or if,
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<PAGE>
subsequent to the change in control, there has been: (1) a
reduction in the Executive's compensation; (2) an alteration
in the Executive's status, title or position with the Company
or in the nature of the Executive's responsibilities from
those in effect immediately prior to the change in control, or
the assignment to the Executive of any duties inconsistent
with his or her status, title or position with the Company; or
(3) a change in the place in which the Executive is required
to perform his or her duties, if the new place is more than 25
miles from his or her previous place of employment.
2. Change in Control. For the purposes of this Agreement, a "change in
control" shall be deemed to have occurred if:
(a) the shareholders of the Company shall adopt a resolution
providing for its dissolution or liquidation, or for a merger,
consolidation, or other corporate reorganization of the Company under
circumstances in which the Company will not be the surviving party; or
(b) any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934) (other than the Company
or any of its subsidiaries or any employee benefit plan of the Company
or any of its subsidiaries) becomes a beneficial owner, directly or
indirectly, of securities of the Company representing 25% or more of
the voting power of all of the Company's then outstanding securities;
or
(c) during any period of two consecutive years, individuals
who at the beginning of such period constituted the Board of Directors
of the Company ceased for any reason to constitute at least a majority
thereof (unless the nomination of each new director was approved by a
vote of at least two thirds of the directors then still in office who
were directors at the beginning of such period); or
(d) the Board of Directors of the Company shall approve the
sale of all, or substantially all, of the business or assets of the
Company.
3. Amount and Payment of Severance Pay. The Executive shall receive:
(a) a lump sum cash payment, no later than 30 days after the
date on which the Executive's employment terminates, in an amount equal
to three times the Executive's average annual compensation (as defined
below);
(b) continuation of coverage under the Company's group
medical, group life, and group long-term disability plans, if any, and
under any individual policy or policies of life insurance maintained by
the Company, with the same rate of employer contributions as for active
employees, until the earlier to occur of:
(i) the expiration of 36 months from the
date on which the Executive's employment terminates; or
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<PAGE>
(ii) the date on which the Executive obtains
comparable coverage provided by a new employer.
(c) a lump sum cash payment, payable no later than 30 days
after the date on which the Executive's employment terminates, in an
amount equal to the sum of:
(i) the amount by which the fair market
value of that number of shares of stock subject to any stock
option which is forfeited or which otherwise becomes
non-exercisable by the Executive by reason of the termination
of his or her employment (determined as of the date of such
termination) exceeds the option price for such shares;
(ii) such additional amounts (or the fair
market value of such additional property) in excess of the
amount determined pursuant to subparagraph (i) that would have
been paid or distributed to the Executive upon the exercise of
any such forfeited stock options, had such options been
exercisable, and exercised, by the Executive as of the date
his or her employment terminated;
(iii) an amount equal to the fair market
value of any shares of restricted stock forfeited by the
Executive by reason of the termination of his or her
employment, determined as of the date of such termination; and
(iv) an amount equal to the amount that the
Executive would have received if any stock appreciation right
which is forfeited or which otherwise becomes non-exercisable
by the Executive by reason of the termination of his or her
employment had been exercisable, and exercised, by the
Executive as of the date of such termination.
It is understood and agreed that this payment is to occur only to the
extent the Executive is not entitled to exercise his or her options or
stock appreciate rights, or to retain his or her restricted stock,
after the termination of his or her employment under the provisions of
the Executive's stock option, restricted stock, or stock appreciation
rights agreements.
For purposes of this paragraph 3, the term "average annual compensation" shall
mean the average rate of annual salary payable to the Executive for the calendar
year in which the Executive's employment terminates and for the two immediately
preceding calendar years, plus the average annual bonus or incentive payments
awarded to the Executive for the same three calendar years; provided, that if
bonus or incentive compensation awards have not been determined for the calendar
year in which the Executive's employment terminates prior to the date of such
termination, such average shall be determined using the bonuses or incentive
payments awarded to the Executive for the three calendar years immediately
preceding the year in which the Executive's employment terminates; and provided
further, that if the Executive has not been employed by the Company for two full
calendar years preceding the year in which the Executive's employment
terminates, "average annual compensation" shall be based on the Executive's
average annual rate of salary plus the average annual bonus or incentive
payments determined as described above, for the entire period of the Executive's
employment. The Executive's average annual compensation shall be determined
-3-
<PAGE>
prior to any reduction for deferred compensation, "401(k)" plan contributions,
and similar items, and any reduction in the Executive's rate of salary occurring
within 24 months after a change in control shall be disregarded. In addition,
the insurance coverage provided under this paragraph shall be governed by the
insurance coverage provided to such the Executive immediately prior to any
reduction in such coverage occurring within 24 months after any change in
control.
4. Limitations. If any part of the amounts to be paid to or for the
benefit of the Executive pursuant to this Agreement constitute "parachute
payments" within the meaning of section 280G of the Internal Revenue Code of
1986, as from time to time amended (the "Code"), such amounts shall be reduced
as provided below so that the aggregate present value of the amounts payable
pursuant to this Agreement which constitute such parachute payments will be
equal to 299% of the Executive's "annualized includible compensation for the
base period," as such term is defined in section 280G(d)(1) of the Code. Such
reductions shall be made in the benefits provided pursuant to subparagraph 3(b),
in the inverse order of their anticipated payment, before any reductions are
made in the amounts payable pursuant to subparagraphs 3(a) or 3(c). For the
purpose of this subparagraph, present value shall be determined in accordance
with section 1274(b)(2) of the Code.
5. No Funding of Severance Pay. Nothing herein contained shall require
or be deemed to require the Company or a subsidiary to segregate, earmark, or
otherwise set aside any funds or other assets to provide for any payments
required to be made hereunder, and the rights of the terminating Executive to
severance pay hereunder shall be solely those of a general, unsecured creditor
of the Company. However, the Company may, in its discretion, deposit cash or
property, or both, equal in value to all or a portion of the amounts anticipated
to be payable hereunder for the Executive into a trust, the assets of which are
to be distributed at such times as determined by the trustee of such trust;
provided, that such assets shall be subject at all times to the rights of the
Company's general creditors.
6. Death. In the event of the Executive's death, any amount or benefit
payable or distributable to the Executive pursuant to paragraph 3(a) or
paragraph 3(c) shall be paid to the beneficiary designated by the Executive for
such purpose in the last written instrument, if any, received by the Boards of
Directors of the Company prior to the Executive's death, or, if no beneficiary
has been designated, to the Executive's estate.
7. Rights in the Event of Dispute. If a claim or dispute arises
concerning the rights of the Executive or a beneficiary to benefits under this
Agreement, regardless of the party by whom such claim or dispute is initiated,
the Company shall, upon presentation of appropriate vouchers, pay all legal
expenses, including reasonable attorneys' fees, court costs, and ordinary and
necessary out-of-pocket costs of attorneys, billed to and payable by the
Executive or by anyone claiming under or through the Executive (such person
being hereinafter referred to as the Executive's "claimant"), in connection with
the bringing, prosecuting, defending, litigating, negotiating, or settling such
claim or dispute; provided, that:
(a) the Executive or the Executive's claimant shall repay to
the Company any such expenses theretofore paid or advanced by the
Company if and to the extent that the party disputing the Executive's
rights obtains a judgment in its favor from a court of competent
jurisdiction, which judgment has become final, whether because the time
to
-4-
<PAGE>
appeal from such judgment has expired with no appeal taken or
otherwise, and it is determined that such expenses were not incurred by
the Executive or the Executive's claimant while acting in good faith;
and provided further, that
(b) in the case of any claim or dispute initiated by the
Executive or the Executive's claimant, such claim shall be made, or
notice of such dispute given, with specific reference to the provisions
of this Agreement, to the Board of Directors of the Company within one
year after the occurrence of the event giving rise to such claim or
dispute.
8. Amendment. This Agreement may not be amended or modified except by a
written instrument signed by both parties as of a date contemporaneous herewith
or subsequent hereto.
9. No Obligation to Mitigate Damages. In the event the Executive
becomes eligible to receive benefits hereunder the Executive shall have no
obligation to seek other employment in an effort to mitigate damages. To the
extent the Executive shall accept other employment after the termination of his
or her employment, the compensation and benefits received from such employment
shall not reduce any compensation and benefits due under this Agreement, except
as provided in paragraph 3(b).
10. Other Benefits. The benefits provided under this Agreement shall,
except to the extent otherwise specifically provided herein, be in addition to,
and not in derogation or diminution of, any benefits that the Executive or the
Executive's beneficiary may be entitled to receive under any other plan or
program now or hereafter maintained by the Company or by any of its
subsidiaries.
11. Successors.
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation, or otherwise) to all or
substantially all of the business and/or assets of the Company, to
expressly assume and agree to perform the Company's obligations under
this Agreement in the same manner and to the same extent that the
Company would be required to perform them if no such succession had
taken place unless, in the opinion of legal counsel mutually acceptable
to the Company and the Executive, such obligations have been assumed by
the successor as a matter of law. Failure of the Company to obtain such
agreement prior to the effectiveness of any such succession (unless the
foregoing opinion is rendered to the Executive) shall entitle the
Executive to terminate his or her employment and to receive the
payments provided for in paragraph 3 above. As used in this Agreement,
"Company" shall mean the Company, as presently constituted, and any
successor to its business and/or assets which executes and delivers the
agreement provided for in this paragraph 11 or which otherwise becomes
bound by all the terms and provisions of this Agreement as a matter of
law.
(b) The Executive's rights under this Agreement shall inure to
the benefit of, and shall be enforceable by, the Executive's legal
representative or other successors in interest, but shall not otherwise
be assignable or transferable.
-5-
<PAGE>
12. Notices. Any notices referred to herein shall be in writing and
shall be sufficient if delivered in person or sent by U.S. registered or
certified mail to the Executive at his or her address on file with the Company
(or to such other address as the Executive shall specify by notice), or to the
Company at 9300 75th Avenue North, Minneapolis, Minnesota 55428, Attn: Board of
Directors.
13. Waiver. Any waiver of any breach of any of the provisions of this
Agreement shall not operate as a waiver of any other breach of such provisions
or any other provisions, nor shall any failure to enforce any provision of this
Agreement operate as a waiver of any party's right to enforce such provision or
any other provision.
14. Severability. If any provision of this Agreement or the application
thereof is held invalid or unenforceable by a court of competent jurisdiction,
the invalidity or unenforceability thereof shall not affect any other provisions
or applications of this Agreement which can be given effect without the invalid
or unenforceable provision or application.
15. Governing Law. The validity, interpretation, construction, and
performance of this Agreement shall be governed by the laws of the State of
Minnesota, except to the extent superseded by applicable federal law.
16. Headings. The headings and paragraph designations of this Agreement
are included solely for convenience of reference and shall in no event be
construed to affect or modify any provisions of this Agreement.
17. Gender and Number. In this Agreement where the context admits,
words in any gender shall include the other genders, words in the plural shall
include the singular, and words in the singular shall include the plural.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
COMPANY: RECOVERY ENGINEERING, INC.
By /s/ WILLIAM F. WANNER, JR.
------------------------------------
William F. Wanner, Jr.
Director
EXECUTIVE:
/s/ BRIAN F. SULLIVAN
------------------------------------
Brian F. Sullivan
-6-
EXHIBIT 10.2
CHANGE-IN-CONTROL SEVERANCE PAY AGREEMENT
THIS AGREEMENT is made this 2nd day of November, 1998, by and between
Recovery Engineering, Inc., a Minnesota corporation, (the "Company") and Richard
D. Hembree (the "Executive").
RECITALS
A. The Executive is the Vice President - Engineering of the Company as
of the date of this Agreement, and has been an employee of the Company since
1987.
B. The Board of Directors of the Company desires to retain the
Executive in the employ of the Company.
C. The Board of Director believes that it is essential to preserve and
maintain the stability and continuity of management of the Company by providing
the Executive with economic and other security from the uncertainty of risks
inherent in a potential or threatened takeover of the Company which might
jeopardize the Executive's employment.
NOW THEREFORE, in consideration of the foregoing and of the mutual
promises of the parties hereto, the Company and the Executive agree as follows:
1. Eligibility for Severance Pay. The Executive shall be eligible to
receive severance pay, in the amounts and at the times described in paragraph 3,
if:
(a) the Executive's employment with the Company and all of its
subsidiaries (if any) is terminated within 24 months after there has
been a "change in control," as such term is hereinafter defined; and
(b) the Executive's termination of employment was not:
(i) on account of the Executive's death;
(ii) on account of a physical or mental
condition that entitles the Executive to benefits under any
long-term disability plan maintained by the Company or any of
its subsidiaries, as then in effect;
(iii) for conduct involving serious willful
misconduct (such as commission by the Executive of a felony or
a common law fraud against the Company) which is detrimental
in a significant way to the business of the Company or any or
its subsidiaries; or
(iv) on account of the Executive's voluntary
resignation; provided, that a resignation shall not be
considered to be voluntary for the purposes of this Agreement
if it occurs under the circumstances described in paragraph
11(a), or if,
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<PAGE>
subsequent to the change in control, there has been: (1) a
reduction in the Executive's compensation; (2) an alteration
in the Executive's status, title or position with the Company
or in the nature of the Executive's responsibilities from
those in effect immediately prior to the change in control, or
the assignment to the Executive of any duties inconsistent
with his or her status, title or position with the Company; or
(3) a change in the place in which the Executive is required
to perform his or her duties, if the new place is more than 25
miles from his or her previous place of employment.
2. Change in Control. For the purposes of this Agreement, a "change in
control" shall be deemed to have occurred if:
(a) the shareholders of the Company shall adopt a resolution
providing for its dissolution or liquidation, or for a merger,
consolidation, or other corporate reorganization of the Company under
circumstances in which the Company will not be the surviving party; or
(b) any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934) (other than the Company
or any of its subsidiaries or any employee benefit plan of the Company
or any of its subsidiaries) becomes a beneficial owner, directly or
indirectly, of securities of the Company representing 25% or more of
the voting power of all of the Company's then outstanding securities;
or
(c) during any period of two consecutive years, individuals
who at the beginning of such period constituted the Board of Directors
of the Company ceased for any reason to constitute at least a majority
thereof (unless the nomination of each new director was approved by a
vote of at least two thirds of the directors then still in office who
were directors at the beginning of such period); or
(d) the Board of Directors of the Company shall approve the
sale of all, or substantially all, of the business or assets of the
Company.
3. Amount and Payment of Severance Pay. The Executive shall receive:
(a) a lump sum cash payment, no later than 30 days after the
date on which the Executive's employment terminates, in an amount equal
to two times the Executive's average annual compensation (as defined
below);
(b) continuation of coverage under the Company's group
medical, group life, and group long-term disability plans, if any, and
under any individual policy or policies of life insurance maintained by
the Company, with the same rate of employer contributions as for active
employees, until the earlier to occur of:
(i) the expiration of 24 months from the date on
which the Executive's employment terminates; or
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<PAGE>
(ii) the date on which the Executive obtains
comparable coverage provided by a new employer.
(c) a lump sum cash payment, payable no later than 30 days
after the date on which the Executive's employment terminates, in an
amount equal to the sum of:
(i) the amount by which the fair market
value of that number of shares of stock subject to any stock
option which is forfeited or which otherwise becomes
non-exercisable by the Executive by reason of the termination
of his or her employment (determined as of the date of such
termination) exceeds the option price for such shares;
(ii) such additional amounts (or the fair
market value of such additional property) in excess of the
amount determined pursuant to subparagraph (i) that would have
been paid or distributed to the Executive upon the exercise of
any such forfeited stock options, had such options been
exercisable, and exercised, by the Executive as of the date
his or her employment terminated;
(iii) an amount equal to the fair market
value of any shares of restricted stock forfeited by the
Executive by reason of the termination of his or her
employment, determined as of the date of such termination; and
(iv) an amount equal to the amount that the
Executive would have received if any stock appreciation right
which is forfeited or which otherwise becomes non-exercisable
by the Executive by reason of the termination of his or her
employment had been exercisable, and exercised, by the
Executive as of the date of such termination.
It is understood and agreed that this payment is to occur only to the
extent the Executive is not entitled to exercise his or her options or
stock appreciate rights, or to retain his or her restricted stock,
after the termination of his or her employment under the provisions of
the Executive's stock option, restricted stock, or stock appreciation
rights agreements.
For purposes of this paragraph 3, the term "average annual compensation" shall
mean the average rate of annual salary payable to the Executive for the calendar
year in which the Executive's employment terminates and for the two immediately
preceding calendar years, plus the average annual bonus or incentive payments
awarded to the Executive for the same three calendar years; provided, that if
bonus or incentive compensation awards have not been determined for the calendar
year in which the Executive's employment terminates prior to the date of such
termination, such average shall be determined using the bonuses or incentive
payments awarded to the Executive for the three calendar years immediately
preceding the year in which the Executive's employment terminates; and provided
further, that if the Executive has not been employed by the Company for two full
calendar years preceding the year in which the Executive's employment
terminates, "average annual compensation" shall be based on the Executive's
average annual rate of salary plus the average annual bonus or incentive
payments determined as described above, for the entire period of the Executive's
employment. The Executive's average annual compensation shall be determined
-3-
<PAGE>
prior to any reduction for deferred compensation, "401(k)" plan contributions,
and similar items, and any reduction in the Executive's rate of salary occurring
within 24 months after a change in control shall be disregarded. In addition,
the insurance coverage provided under this paragraph shall be governed by the
insurance coverage provided to such the Executive immediately prior to any
reduction in such coverage occurring within 24 months after any change in
control.
4. Limitations. If any part of the amounts to be paid to or for the
benefit of the Executive pursuant to this Agreement constitute "parachute
payments" within the meaning of section 280G of the Internal Revenue Code of
1986, as from time to time amended (the "Code"), such amounts shall be reduced
as provided below so that the aggregate present value of the amounts payable
pursuant to this Agreement which constitute such parachute payments will be
equal to 299% of the Executive's "annualized includible compensation for the
base period," as such term is defined in section 280G(d)(1) of the Code. Such
reductions shall be made in the benefits provided pursuant to subparagraph 3(b),
in the inverse order of their anticipated payment, before any reductions are
made in the amounts payable pursuant to subparagraphs 3(a) or 3(c). For the
purpose of this subparagraph, present value shall be determined in accordance
with section 1274(b)(2) of the Code.
5. No Funding of Severance Pay. Nothing herein contained shall require
or be deemed to require the Company or a subsidiary to segregate, earmark, or
otherwise set aside any funds or other assets to provide for any payments
required to be made hereunder, and the rights of the terminating Executive to
severance pay hereunder shall be solely those of a general, unsecured creditor
of the Company. However, the Company may, in its discretion, deposit cash or
property, or both, equal in value to all or a portion of the amounts anticipated
to be payable hereunder for the Executive into a trust, the assets of which are
to be distributed at such times as determined by the trustee of such trust;
provided, that such assets shall be subject at all times to the rights of the
Company's general creditors.
6. Death. In the event of the Executive's death, any amount or benefit
payable or distributable to the Executive pursuant to paragraph 3(a) or
paragraph 3(c) shall be paid to the beneficiary designated by the Executive for
such purpose in the last written instrument, if any, received by the Boards of
Directors of the Company prior to the Executive's death, or, if no beneficiary
has been designated, to the Executive's estate.
7. Rights in the Event of Dispute. If a claim or dispute arises
concerning the rights of the Executive or a beneficiary to benefits under this
Agreement, regardless of the party by whom such claim or dispute is initiated,
the Company shall, upon presentation of appropriate vouchers, pay all legal
expenses, including reasonable attorneys' fees, court costs, and ordinary and
necessary out-of-pocket costs of attorneys, billed to and payable by the
Executive or by anyone claiming under or through the Executive (such person
being hereinafter referred to as the Executive's "claimant"), in connection with
the bringing, prosecuting, defending, litigating, negotiating, or settling such
claim or dispute; provided, that:
(a) the Executive or the Executive's claimant shall repay to
the Company any such expenses theretofore paid or advanced by the
Company if and to the extent that the party disputing the Executive's
rights obtains a judgment in its favor from a court of competent
jurisdiction, which judgment has become final, whether because the time
to
-4-
<PAGE>
appeal from such judgment has expired with no appeal taken or
otherwise, and it is determined that such expenses were not incurred by
the Executive or the Executive's claimant while acting in good faith;
and provided further, that
(b) in the case of any claim or dispute initiated by the
Executive or the Executive's claimant, such claim shall be made, or
notice of such dispute given, with specific reference to the provisions
of this Agreement, to the Board of Directors of the Company within one
year after the occurrence of the event giving rise to such claim or
dispute.
8. Amendment. This Agreement may not be amended or modified except by a
written instrument signed by both parties as of a date contemporaneous herewith
or subsequent hereto.
9. No Obligation to Mitigate Damages. In the event the Executive
becomes eligible to receive benefits hereunder the Executive shall have no
obligation to seek other employment in an effort to mitigate damages. To the
extent the Executive shall accept other employment after the termination of his
or her employment, the compensation and benefits received from such employment
shall not reduce any compensation and benefits due under this Agreement, except
as provided in paragraph 3(b).
10. Other Benefits. The benefits provided under this Agreement shall,
except to the extent otherwise specifically provided herein, be in addition to,
and not in derogation or diminution of, any benefits that the Executive or the
Executive's beneficiary may be entitled to receive under any other plan or
program now or hereafter maintained by the Company or by any of its
subsidiaries.
11. Successors.
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation, or otherwise) to all or
substantially all of the business and/or assets of the Company, to
expressly assume and agree to perform the Company's obligations under
this Agreement in the same manner and to the same extent that the
Company would be required to perform them if no such succession had
taken place unless, in the opinion of legal counsel mutually acceptable
to the Company and the Executive, such obligations have been assumed by
the successor as a matter of law. Failure of the Company to obtain such
agreement prior to the effectiveness of any such succession (unless the
foregoing opinion is rendered to the Executive) shall entitle the
Executive to terminate his or her employment and to receive the
payments provided for in paragraph 3 above. As used in this Agreement,
"Company" shall mean the Company, as presently constituted, and any
successor to its business and/or assets which executes and delivers the
agreement provided for in this paragraph 11 or which otherwise becomes
bound by all the terms and provisions of this Agreement as a matter of
law.
(b) The Executive's rights under this Agreement shall inure to
the benefit of, and shall be enforceable by, the Executive's legal
representative or other successors in interest, but shall not otherwise
be assignable or transferable.
-5-
<PAGE>
12. Notices. Any notices referred to herein shall be in writing and
shall be sufficient if delivered in person or sent by U.S. registered or
certified mail to the Executive at his or her address on file with the Company
(or to such other address as the Executive shall specify by notice), or to the
Company at 9300 75th Avenue North, Minneapolis, Minnesota 55428, Attn: Board of
Directors.
13. Waiver. Any waiver of any breach of any of the provisions of this
Agreement shall not operate as a waiver of any other breach of such provisions
or any other provisions, nor shall any failure to enforce any provision of this
Agreement operate as a waiver of any party's right to enforce such provision or
any other provision.
14. Severability. If any provision of this Agreement or the application
thereof is held invalid or unenforceable by a court of competent jurisdiction,
the invalidity or unenforceability thereof shall not affect any other provisions
or applications of this Agreement which can be given effect without the invalid
or unenforceable provision or application.
15. Governing Law. The validity, interpretation, construction, and
performance of this Agreement shall be governed by the laws of the State of
Minnesota, except to the extent superseded by applicable federal law.
16. Headings. The headings and paragraph designations of this Agreement
are included solely for convenience of reference and shall in no event be
construed to affect or modify any provisions of this Agreement.
17. Gender and Number. In this Agreement where the context admits,
words in any gender shall include the other genders, words in the plural shall
include the singular, and words in the singular shall include the plural.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
COMPANY: RECOVERY ENGINEERING, INC.
By /s/ BRIAN F. SULLIVAN
-------------------------------------
Brian F. Sullivan
President and Chief Executive Officer
EXECUTIVE:
/s/ RICHARD D. HEMBREE
-------------------------------------
Richard D. Hembree
-6-
EXHIBIT 10.3
CHANGE-IN-CONTROL SEVERANCE PAY AGREEMENT
THIS AGREEMENT is made this 2nd day of November, 1998, by and between
Recovery Engineering, Inc., a Minnesota corporation, (the "Company") and Charles
F. Karpinske (the "Executive").
RECITALS
A. The Executive is the Chief Financial Officer of the Company as of
the date of this Agreement, and has been an employee of the Company since
February 1996.
B. The Board of Directors of the Company desires to retain the
Executive in the employ of the Company.
C. The Board of Director believes that it is essential to preserve and
maintain the stability and continuity of management of the Company by providing
the Executive with economic and other security from the uncertainty of risks
inherent in a potential or threatened takeover of the Company which might
jeopardize the Executive's employment.
NOW THEREFORE, in consideration of the foregoing and of the mutual
promises of the parties hereto, the Company and the Executive agree as follows:
1. Eligibility for Severance Pay. The Executive shall be eligible to
receive severance pay, in the amounts and at the times described in paragraph 3,
if:
(a) the Executive's employment with the Company and all of its
subsidiaries (if any) is terminated within 24 months after there has
been a "change in control," as such term is hereinafter defined; and
(b) the Executive's termination of employment was not:
(i) on account of the Executive's death;
(ii) on account of a physical or mental
condition that entitles the Executive to benefits under any
long-term disability plan maintained by the Company or any of
its subsidiaries, as then in effect;
(iii) for conduct involving serious willful
misconduct (such as commission by the Executive of a felony or
a common law fraud against the Company) which is detrimental
in a significant way to the business of the Company or any or
its subsidiaries; or
(iv) on account of the Executive's voluntary
resignation; provided, that a resignation shall not be
considered to be voluntary for the purposes of this Agreement
if it occurs under the circumstances described in paragraph
11(a), or if,
-1-
<PAGE>
subsequent to the change in control, there has been: (1) a
reduction in the Executive's compensation; (2) an alteration
in the Executive's status, title or position with the Company
or in the nature of the Executive's responsibilities from
those in effect immediately prior to the change in control, or
the assignment to the Executive of any duties inconsistent
with his or her status, title or position with the Company; or
(3) a change in the place in which the Executive is required
to perform his or her duties, if the new place is more than 25
miles from his or her previous place of employment.
2. Change in Control. For the purposes of this Agreement, a "change in
control" shall be deemed to have occurred if:
(a) the shareholders of the Company shall adopt a resolution
providing for its dissolution or liquidation, or for a merger,
consolidation, or other corporate reorganization of the Company under
circumstances in which the Company will not be the surviving party; or
(b) any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934) (other than the Company
or any of its subsidiaries or any employee benefit plan of the Company
or any of its subsidiaries) becomes a beneficial owner, directly or
indirectly, of securities of the Company representing 25% or more of
the voting power of all of the Company's then outstanding securities;
or
(c) during any period of two consecutive years, individuals
who at the beginning of such period constituted the Board of Directors
of the Company ceased for any reason to constitute at least a majority
thereof (unless the nomination of each new director was approved by a
vote of at least two thirds of the directors then still in office who
were directors at the beginning of such period); or
(d) the Board of Directors of the Company shall approve the
sale of all, or substantially all, of the business or assets of the
Company.
3. Amount and Payment of Severance Pay. The Executive shall receive:
(a) a lump sum cash payment, no later than 30 days after the
date on which the Executive's employment terminates, in an amount equal
to two times the Executive's average annual compensation (as defined
below);
(b) continuation of coverage under the Company's group
medical, group life, and group long-term disability plans, if any, and
under any individual policy or policies of life insurance maintained by
the Company, with the same rate of employer contributions as for active
employees, until the earlier to occur of:
(i) the expiration of 24 months from the date on
which the Executive's employment terminates; or
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<PAGE>
(ii) the date on which the Executive obtains
comparable coverage provided by a new employer.
(c) a lump sum cash payment, payable no later than 30 days
after the date on which the Executive's employment terminates, in an
amount equal to the sum of:
(i) the amount by which the fair market
value of that number of shares of stock subject to any stock
option which is forfeited or which otherwise becomes
non-exercisable by the Executive by reason of the termination
of his or her employment (determined as of the date of such
termination) exceeds the option price for such shares;
(ii) such additional amounts (or the fair
market value of such additional property) in excess of the
amount determined pursuant to subparagraph (i) that would have
been paid or distributed to the Executive upon the exercise of
any such forfeited stock options, had such options been
exercisable, and exercised, by the Executive as of the date
his or her employment terminated;
(iii) an amount equal to the fair market
value of any shares of restricted stock forfeited by the
Executive by reason of the termination of his or her
employment, determined as of the date of such termination; and
(iv) an amount equal to the amount that the
Executive would have received if any stock appreciation right
which is forfeited or which otherwise becomes non-exercisable
by the Executive by reason of the termination of his or her
employment had been exercisable, and exercised, by the
Executive as of the date of such termination.
It is understood and agreed that this payment is to occur only to the
extent the Executive is not entitled to exercise his or her options or
stock appreciate rights, or to retain his or her restricted stock,
after the termination of his or her employment under the provisions of
the Executive's stock option, restricted stock, or stock appreciation
rights agreements.
For purposes of this paragraph 3, the term "average annual compensation" shall
mean the average rate of annual salary payable to the Executive for the calendar
year in which the Executive's employment terminates and for the two immediately
preceding calendar years, plus the average annual bonus or incentive payments
awarded to the Executive for the same three calendar years; provided, that if
bonus or incentive compensation awards have not been determined for the calendar
year in which the Executive's employment terminates prior to the date of such
termination, such average shall be determined using the bonuses or incentive
payments awarded to the Executive for the three calendar years immediately
preceding the year in which the Executive's employment terminates; and provided
further, that if the Executive has not been employed by the Company for two full
calendar years preceding the year in which the Executive's employment
terminates, "average annual compensation" shall be based on the Executive's
average annual rate of salary plus the average annual bonus or incentive
payments determined as described above, for the entire period of the Executive's
employment. The Executive's average annual compensation shall be determined
-3-
<PAGE>
prior to any reduction for deferred compensation, "401(k)" plan contributions,
and similar items, and any reduction in the Executive's rate of salary occurring
within 24 months after a change in control shall be disregarded. In addition,
the insurance coverage provided under this paragraph shall be governed by the
insurance coverage provided to such the Executive immediately prior to any
reduction in such coverage occurring within 24 months after any change in
control.
4. Limitations. If any part of the amounts to be paid to or for the
benefit of the Executive pursuant to this Agreement constitute "parachute
payments" within the meaning of section 280G of the Internal Revenue Code of
1986, as from time to time amended (the "Code"), such amounts shall be reduced
as provided below so that the aggregate present value of the amounts payable
pursuant to this Agreement which constitute such parachute payments will be
equal to 299% of the Executive's "annualized includible compensation for the
base period," as such term is defined in section 280G(d)(1) of the Code. Such
reductions shall be made in the benefits provided pursuant to subparagraph 3(b),
in the inverse order of their anticipated payment, before any reductions are
made in the amounts payable pursuant to subparagraphs 3(a) or 3(c). For the
purpose of this subparagraph, present value shall be determined in accordance
with section 1274(b)(2) of the Code.
5. No Funding of Severance Pay. Nothing herein contained shall require
or be deemed to require the Company or a subsidiary to segregate, earmark, or
otherwise set aside any funds or other assets to provide for any payments
required to be made hereunder, and the rights of the terminating Executive to
severance pay hereunder shall be solely those of a general, unsecured creditor
of the Company. However, the Company may, in its discretion, deposit cash or
property, or both, equal in value to all or a portion of the amounts anticipated
to be payable hereunder for the Executive into a trust, the assets of which are
to be distributed at such times as determined by the trustee of such trust;
provided, that such assets shall be subject at all times to the rights of the
Company's general creditors.
6. Death. In the event of the Executive's death, any amount or benefit
payable or distributable to the Executive pursuant to paragraph 3(a) or
paragraph 3(c) shall be paid to the beneficiary designated by the Executive for
such purpose in the last written instrument, if any, received by the Boards of
Directors of the Company prior to the Executive's death, or, if no beneficiary
has been designated, to the Executive's estate.
7. Rights in the Event of Dispute. If a claim or dispute arises
concerning the rights of the Executive or a beneficiary to benefits under this
Agreement, regardless of the party by whom such claim or dispute is initiated,
the Company shall, upon presentation of appropriate vouchers, pay all legal
expenses, including reasonable attorneys' fees, court costs, and ordinary and
necessary out-of-pocket costs of attorneys, billed to and payable by the
Executive or by anyone claiming under or through the Executive (such person
being hereinafter referred to as the Executive's "claimant"), in connection with
the bringing, prosecuting, defending, litigating, negotiating, or settling such
claim or dispute; provided, that:
(a) the Executive or the Executive's claimant shall repay to
the Company any such expenses theretofore paid or advanced by the
Company if and to the extent that the party disputing the Executive's
rights obtains a judgment in its favor from a court of competent
jurisdiction, which judgment has become final, whether because the time
to
-4-
<PAGE>
appeal from such judgment has expired with no appeal taken or
otherwise, and it is determined that such expenses were not incurred by
the Executive or the Executive's claimant while acting in good faith;
and provided further, that
(b) in the case of any claim or dispute initiated by the
Executive or the Executive's claimant, such claim shall be made, or
notice of such dispute given, with specific reference to the provisions
of this Agreement, to the Board of Directors of the Company within one
year after the occurrence of the event giving rise to such claim or
dispute.
8. Amendment. This Agreement may not be amended or modified except by a
written instrument signed by both parties as of a date contemporaneous herewith
or subsequent hereto.
9. No Obligation to Mitigate Damages. In the event the Executive
becomes eligible to receive benefits hereunder the Executive shall have no
obligation to seek other employment in an effort to mitigate damages. To the
extent the Executive shall accept other employment after the termination of his
or her employment, the compensation and benefits received from such employment
shall not reduce any compensation and benefits due under this Agreement, except
as provided in paragraph 3(b).
10. Other Benefits. The benefits provided under this Agreement shall,
except to the extent otherwise specifically provided herein, be in addition to,
and not in derogation or diminution of, any benefits that the Executive or the
Executive's beneficiary may be entitled to receive under any other plan or
program now or hereafter maintained by the Company or by any of its
subsidiaries.
11. Successors.
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation, or otherwise) to all or
substantially all of the business and/or assets of the Company, to
expressly assume and agree to perform the Company's obligations under
this Agreement in the same manner and to the same extent that the
Company would be required to perform them if no such succession had
taken place unless, in the opinion of legal counsel mutually acceptable
to the Company and the Executive, such obligations have been assumed by
the successor as a matter of law. Failure of the Company to obtain such
agreement prior to the effectiveness of any such succession (unless the
foregoing opinion is rendered to the Executive) shall entitle the
Executive to terminate his or her employment and to receive the
payments provided for in paragraph 3 above. As used in this Agreement,
"Company" shall mean the Company, as presently constituted, and any
successor to its business and/or assets which executes and delivers the
agreement provided for in this paragraph 11 or which otherwise becomes
bound by all the terms and provisions of this Agreement as a matter of
law.
(b) The Executive's rights under this Agreement shall inure to
the benefit of, and shall be enforceable by, the Executive's legal
representative or other successors in interest, but shall not otherwise
be assignable or transferable.
-5-
<PAGE>
12. Notices. Any notices referred to herein shall be in writing and
shall be sufficient if delivered in person or sent by U.S. registered or
certified mail to the Executive at his or her address on file with the Company
(or to such other address as the Executive shall specify by notice), or to the
Company at 9300 75th Avenue North, Minneapolis, Minnesota 55428, Attn: Board of
Directors.
13. Waiver. Any waiver of any breach of any of the provisions of this
Agreement shall not operate as a waiver of any other breach of such provisions
or any other provisions, nor shall any failure to enforce any provision of this
Agreement operate as a waiver of any party's right to enforce such provision or
any other provision.
14. Severability. If any provision of this Agreement or the application
thereof is held invalid or unenforceable by a court of competent jurisdiction,
the invalidity or unenforceability thereof shall not affect any other provisions
or applications of this Agreement which can be given effect without the invalid
or unenforceable provision or application.
15. Governing Law. The validity, interpretation, construction, and
performance of this Agreement shall be governed by the laws of the State of
Minnesota, except to the extent superseded by applicable federal law.
16. Headings. The headings and paragraph designations of this Agreement
are included solely for convenience of reference and shall in no event be
construed to affect or modify any provisions of this Agreement.
17. Gender and Number. In this Agreement where the context admits,
words in any gender shall include the other genders, words in the plural shall
include the singular, and words in the singular shall include the plural.
18. Replacement of Prior Agreement. This Agreement replaces and
supersedes in its entirety the Executive Severance Pay Agreement, dated March
24, 1997, by and between the Company and the Executive.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
COMPANY: RECOVERY ENGINEERING, INC.
By /s/ BRIAN F. SULLIVAN
-------------------------------------
Brian F. Sullivan
President and Chief Executive Officer
EXECUTIVE:
/s/ CHARLES F. KARPINSKE
-------------------------------------
Charles F. Karpinske
-6-
EXHIBIT 10.4
CHANGE-IN-CONTROL SEVERANCE PAY AGREEMENT
THIS AGREEMENT is made this 2nd day of November, 1998, by and between
Recovery Engineering, Inc., a Minnesota corporation, (the "Company") and Jeffrey
T. Dekko (the "Executive").
RECITALS
A. The Executive is the Vice President - Marketing of the Company as of
the date of this Agreement, and has been an employee of the Company since
October 1994.
B. The Board of Directors of the Company desires to retain the
Executive in the employ of the Company.
C. The Board of Director believes that it is essential to preserve and
maintain the stability and continuity of management of the Company by providing
the Executive with economic and other security from the uncertainty of risks
inherent in a potential or threatened takeover of the Company which might
jeopardize the Executive's employment.
NOW THEREFORE, in consideration of the foregoing and of the mutual
promises of the parties hereto, the Company and the Executive agree as follows:
1. Eligibility for Severance Pay. The Executive shall be eligible to
receive severance pay, in the amounts and at the times described in paragraph 3,
if:
(a) the Executive's employment with the Company and all of its
subsidiaries (if any) is terminated within 24 months after there has
been a "change in control," as such term is hereinafter defined; and
(b) the Executive's termination of employment was not:
(i) on account of the Executive's death;
(ii) on account of a physical or mental
condition that entitles the Executive to benefits under any
long-term disability plan maintained by the Company or any of
its subsidiaries, as then in effect;
(iii) for conduct involving serious willful
misconduct (such as commission by the Executive of a felony or
a common law fraud against the Company) which is detrimental
in a significant way to the business of the Company or any or
its subsidiaries; or
(iv) on account of the Executive's voluntary
resignation; provided, that a resignation shall not be
considered to be voluntary for the purposes of this Agreement
if it occurs under the circumstances described in paragraph
11(a), or if,
-1-
<PAGE>
subsequent to the change in control, there has been: (1) a
reduction in the Executive's compensation; (2) an alteration
in the Executive's status, title or position with the Company
or in the nature of the Executive's responsibilities from
those in effect immediately prior to the change in control, or
the assignment to the Executive of any duties inconsistent
with his or her status, title or position with the Company; or
(3) a change in the place in which the Executive is required
to perform his or her duties, if the new place is more than 25
miles from his or her previous place of employment.
2. Change in Control. For the purposes of this Agreement, a "change in
control" shall be deemed to have occurred if:
(a) the shareholders of the Company shall adopt a resolution
providing for its dissolution or liquidation, or for a merger,
consolidation, or other corporate reorganization of the Company under
circumstances in which the Company will not be the surviving party; or
(b) any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934) (other than the Company
or any of its subsidiaries or any employee benefit plan of the Company
or any of its subsidiaries) becomes a beneficial owner, directly or
indirectly, of securities of the Company representing 25% or more of
the voting power of all of the Company's then outstanding securities;
or
(c) during any period of two consecutive years, individuals
who at the beginning of such period constituted the Board of Directors
of the Company ceased for any reason to constitute at least a majority
thereof (unless the nomination of each new director was approved by a
vote of at least two thirds of the directors then still in office who
were directors at the beginning of such period); or
(d) the Board of Directors of the Company shall approve the
sale of all, or substantially all, of the business or assets of the
Company.
3. Amount and Payment of Severance Pay. The Executive shall receive:
(a) a lump sum cash payment, no later than 30 days after the
date on which the Executive's employment terminates, in an amount equal
to the Executive's average annual compensation (as defined below);
(b) continuation of coverage under the Company's group
medical, group life, and group long-term disability plans, if any, and
under any individual policy or policies of life insurance maintained by
the Company, with the same rate of employer contributions as for active
employees, until the earlier to occur of:
(i) the expiration of 12 months from the date
on which the Executive's employment terminates; or
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<PAGE>
(ii) the date on which the Executive obtains
comparable coverage provided by a new employer.
(c) a lump sum cash payment, payable no later than 30 days
after the date on which the Executive's employment terminates, in an
amount equal to the sum of:
(i) the amount by which the fair market
value of that number of shares of stock subject to any stock
option which is forfeited or which otherwise becomes
non-exercisable by the Executive by reason of the termination
of his or her employment (determined as of the date of such
termination) exceeds the option price for such shares;
(ii) such additional amounts (or the fair
market value of such additional property) in excess of the
amount determined pursuant to subparagraph (i) that would have
been paid or distributed to the Executive upon the exercise of
any such forfeited stock options, had such options been
exercisable, and exercised, by the Executive as of the date
his or her employment terminated;
(iii) an amount equal to the fair market
value of any shares of restricted stock forfeited by the
Executive by reason of the termination of his or her
employment, determined as of the date of such termination; and
(iv) an amount equal to the amount that the
Executive would have received if any stock appreciation right
which is forfeited or which otherwise becomes non-exercisable
by the Executive by reason of the termination of his or her
employment had been exercisable, and exercised, by the
Executive as of the date of such termination.
It is understood and agreed that this payment is to occur only to the
extent the Executive is not entitled to exercise his or her options or
stock appreciate rights, or to retain his or her restricted stock,
after the termination of his or her employment under the provisions of
the Executive's stock option, restricted stock, or stock appreciation
rights agreements.
For purposes of this paragraph 3, the term "average annual compensation" shall
mean the average rate of annual salary payable to the Executive for the calendar
year in which the Executive's employment terminates and for the two immediately
preceding calendar years, plus the average annual bonus or incentive payments
awarded to the Executive for the same three calendar years; provided, that if
bonus or incentive compensation awards have not been determined for the calendar
year in which the Executive's employment terminates prior to the date of such
termination, such average shall be determined using the bonuses or incentive
payments awarded to the Executive for the three calendar years immediately
preceding the year in which the Executive's employment terminates; and provided
further, that if the Executive has not been employed by the Company for two full
calendar years preceding the year in which the Executive's employment
terminates, "average annual compensation" shall be based on the Executive's
average annual rate of salary plus the average annual bonus or incentive
payments determined as described above, for the entire period of the Executive's
employment. The Executive's average annual compensation shall be determined
-3-
<PAGE>
prior to any reduction for deferred compensation, "401(k)" plan contributions,
and similar items, and any reduction in the Executive's rate of salary occurring
within 24 months after a change in control shall be disregarded. In addition,
the insurance coverage provided under this paragraph shall be governed by the
insurance coverage provided to such the Executive immediately prior to any
reduction in such coverage occurring within 24 months after any change in
control.
4. Limitations. If any part of the amounts to be paid to or for the
benefit of the Executive pursuant to this Agreement constitute "parachute
payments" within the meaning of section 280G of the Internal Revenue Code of
1986, as from time to time amended (the "Code"), such amounts shall be reduced
as provided below so that the aggregate present value of the amounts payable
pursuant to this Agreement which constitute such parachute payments will be
equal to 299% of the Executive's "annualized includible compensation for the
base period," as such term is defined in section 280G(d)(1) of the Code. Such
reductions shall be made in the benefits provided pursuant to subparagraph 3(b),
in the inverse order of their anticipated payment, before any reductions are
made in the amounts payable pursuant to subparagraphs 3(a) or 3(c). For the
purpose of this subparagraph, present value shall be determined in accordance
with section 1274(b)(2) of the Code.
5. No Funding of Severance Pay. Nothing herein contained shall require
or be deemed to require the Company or a subsidiary to segregate, earmark, or
otherwise set aside any funds or other assets to provide for any payments
required to be made hereunder, and the rights of the terminating Executive to
severance pay hereunder shall be solely those of a general, unsecured creditor
of the Company. However, the Company may, in its discretion, deposit cash or
property, or both, equal in value to all or a portion of the amounts anticipated
to be payable hereunder for the Executive into a trust, the assets of which are
to be distributed at such times as determined by the trustee of such trust;
provided, that such assets shall be subject at all times to the rights of the
Company's general creditors.
6. Death. In the event of the Executive's death, any amount or benefit
payable or distributable to the Executive pursuant to paragraph 3(a) or
paragraph 3(c) shall be paid to the beneficiary designated by the Executive for
such purpose in the last written instrument, if any, received by the Boards of
Directors of the Company prior to the Executive's death, or, if no beneficiary
has been designated, to the Executive's estate.
7. Rights in the Event of Dispute. If a claim or dispute arises
concerning the rights of the Executive or a beneficiary to benefits under this
Agreement, regardless of the party by whom such claim or dispute is initiated,
the Company shall, upon presentation of appropriate vouchers, pay all legal
expenses, including reasonable attorneys' fees, court costs, and ordinary and
necessary out-of-pocket costs of attorneys, billed to and payable by the
Executive or by anyone claiming under or through the Executive (such person
being hereinafter referred to as the Executive's "claimant"), in connection with
the bringing, prosecuting, defending, litigating, negotiating, or settling such
claim or dispute; provided, that:
(a) the Executive or the Executive's claimant shall repay to
the Company any such expenses theretofore paid or advanced by the
Company if and to the extent that the party disputing the Executive's
rights obtains a judgment in its favor from a court of competent
jurisdiction, which judgment has become final, whether because the time
to
-4-
<PAGE>
appeal from such judgment has expired with no appeal taken or
otherwise, and it is determined that such expenses were not incurred by
the Executive or the Executive's claimant while acting in good faith;
and provided further, that
(b) in the case of any claim or dispute initiated by the
Executive or the Executive's claimant, such claim shall be made, or
notice of such dispute given, with specific reference to the provisions
of this Agreement, to the Board of Directors of the Company within one
year after the occurrence of the event giving rise to such claim or
dispute.
8. Amendment. This Agreement may not be amended or modified except by a
written instrument signed by both parties as of a date contemporaneous herewith
or subsequent hereto.
9. No Obligation to Mitigate Damages. In the event the Executive
becomes eligible to receive benefits hereunder the Executive shall have no
obligation to seek other employment in an effort to mitigate damages. To the
extent the Executive shall accept other employment after the termination of his
or her employment, the compensation and benefits received from such employment
shall not reduce any compensation and benefits due under this Agreement, except
as provided in paragraph 3(b).
10. Other Benefits. The benefits provided under this Agreement shall,
except to the extent otherwise specifically provided herein, be in addition to,
and not in derogation or diminution of, any benefits that the Executive or the
Executive's beneficiary may be entitled to receive under any other plan or
program now or hereafter maintained by the Company or by any of its
subsidiaries.
11. Successors.
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation, or otherwise) to all or
substantially all of the business and/or assets of the Company, to
expressly assume and agree to perform the Company's obligations under
this Agreement in the same manner and to the same extent that the
Company would be required to perform them if no such succession had
taken place unless, in the opinion of legal counsel mutually acceptable
to the Company and the Executive, such obligations have been assumed by
the successor as a matter of law. Failure of the Company to obtain such
agreement prior to the effectiveness of any such succession (unless the
foregoing opinion is rendered to the Executive) shall entitle the
Executive to terminate his or her employment and to receive the
payments provided for in paragraph 3 above. As used in this Agreement,
"Company" shall mean the Company, as presently constituted, and any
successor to its business and/or assets which executes and delivers the
agreement provided for in this paragraph 11 or which otherwise becomes
bound by all the terms and provisions of this Agreement as a matter of
law.
(b) The Executive's rights under this Agreement shall inure to
the benefit of, and shall be enforceable by, the Executive's legal
representative or other successors in interest, but shall not otherwise
be assignable or transferable.
-5-
<PAGE>
12. Notices. Any notices referred to herein shall be in writing and
shall be sufficient if delivered in person or sent by U.S. registered or
certified mail to the Executive at his or her address on file with the Company
(or to such other address as the Executive shall specify by notice), or to the
Company at 9300 75th Avenue North, Minneapolis, Minnesota 55428, Attn: Board of
Directors.
13. Waiver. Any waiver of any breach of any of the provisions of this
Agreement shall not operate as a waiver of any other breach of such provisions
or any other provisions, nor shall any failure to enforce any provision of this
Agreement operate as a waiver of any party's right to enforce such provision or
any other provision.
14. Severability. If any provision of this Agreement or the application
thereof is held invalid or unenforceable by a court of competent jurisdiction,
the invalidity or unenforceability thereof shall not affect any other provisions
or applications of this Agreement which can be given effect without the invalid
or unenforceable provision or application.
15. Governing Law. The validity, interpretation, construction, and
performance of this Agreement shall be governed by the laws of the State of
Minnesota, except to the extent superseded by applicable federal law.
16. Headings. The headings and paragraph designations of this Agreement
are included solely for convenience of reference and shall in no event be
construed to affect or modify any provisions of this Agreement.
17. Gender and Number. In this Agreement where the context admits,
words in any gender shall include the other genders, words in the plural shall
include the singular, and words in the singular shall include the plural.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
COMPANY: RECOVERY ENGINEERING, INC.
By /s/ BRIAN F. SULLIVAN
-------------------------------------
Brian F. Sullivan
President and Chief Executive Officer
EXECUTIVE:
/s/ JEFFREY T. DEKKO
-------------------------------------
Jeffrey T. Dekko
-6-
EXHIBIT 10.5
CHANGE-IN-CONTROL SEVERANCE PAY AGREEMENT
THIS AGREEMENT is made this 2nd day of November, 1998, by and between
Recovery Engineering, Inc., a Minnesota corporation, (the "Company") and Barry
B. Van Lerberghe (the "Executive").
RECITALS
A. The Executive is the Vice President - Sales of the Company as of the
date of this Agreement, and has been an employee of the Company since July 1995.
B. The Board of Directors of the Company desires to retain the
Executive in the employ of the Company.
C. The Board of Director believes that it is essential to preserve and
maintain the stability and continuity of management of the Company by providing
the Executive with economic and other security from the uncertainty of risks
inherent in a potential or threatened takeover of the Company which might
jeopardize the Executive's employment.
NOW THEREFORE, in consideration of the foregoing and of the mutual
promises of the parties hereto, the Company and the Executive agree as follows:
1. Eligibility for Severance Pay. The Executive shall be eligible to
receive severance pay, in the amounts and at the times described in paragraph 3,
if:
(a) the Executive's employment with the Company and all of its
subsidiaries (if any) is terminated within 24 months after there has
been a "change in control," as such term is hereinafter defined; and
(b) the Executive's termination of employment was not:
(i) on account of the Executive's death;
(ii) on account of a physical or mental
condition that entitles the Executive to benefits under any
long-term disability plan maintained by the Company or any of
its subsidiaries, as then in effect;
(iii) for conduct involving serious willful
misconduct (such as commission by the Executive of a felony or
a common law fraud against the Company) which is detrimental
in a significant way to the business of the Company or any or
its subsidiaries; or
(iv) on account of the Executive's voluntary
resignation; provided, that a resignation shall not be
considered to be voluntary for the purposes of this Agreement
if it occurs under the circumstances described in paragraph
11(a), or if,
-1-
<PAGE>
subsequent to the change in control, there has been: (1) a
reduction in the Executive's compensation; (2) an alteration
in the Executive's status, title or position with the Company
or in the nature of the Executive's responsibilities from
those in effect immediately prior to the change in control, or
the assignment to the Executive of any duties inconsistent
with his or her status, title or position with the Company; or
(3) a change in the place in which the Executive is required
to perform his or her duties, if the new place is more than 25
miles from his or her previous place of employment.
2. Change in Control. For the purposes of this Agreement, a "change in
control" shall be deemed to have occurred if:
(a) the shareholders of the Company shall adopt a resolution
providing for its dissolution or liquidation, or for a merger,
consolidation, or other corporate reorganization of the Company under
circumstances in which the Company will not be the surviving party; or
(b) any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934) (other than the Company
or any of its subsidiaries or any employee benefit plan of the Company
or any of its subsidiaries) becomes a beneficial owner, directly or
indirectly, of securities of the Company representing 25% or more of
the voting power of all of the Company's then outstanding securities;
or
(c) during any period of two consecutive years, individuals
who at the beginning of such period constituted the Board of Directors
of the Company ceased for any reason to constitute at least a majority
thereof (unless the nomination of each new director was approved by a
vote of at least two thirds of the directors then still in office who
were directors at the beginning of such period); or
(d) the Board of Directors of the Company shall approve the
sale of all, or substantially all, of the business or assets of the
Company.
3. Amount and Payment of Severance Pay. The Executive shall receive:
(a) a lump sum cash payment, no later than 30 days after the
date on which the Executive's employment terminates, in an amount equal
to the Executive's average annual compensation (as defined below);
(b) continuation of coverage under the Company's group
medical, group life, and group long-term disability plans, if any, and
under any individual policy or policies of life insurance maintained by
the Company, with the same rate of employer contributions as for active
employees, until the earlier to occur of:
(i) the expiration of 12 months from the date
on which the Executive's employment terminates; or
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<PAGE>
(ii) the date on which the Executive obtains
comparable coverage provided by a new employer.
(c) a lump sum cash payment, payable no later than 30 days
after the date on which the Executive's employment terminates, in an
amount equal to the sum of:
(i) the amount by which the fair market
value of that number of shares of stock subject to any stock
option which is forfeited or which otherwise becomes
non-exercisable by the Executive by reason of the termination
of his or her employment (determined as of the date of such
termination) exceeds the option price for such shares;
(ii) such additional amounts (or the fair
market value of such additional property) in excess of the
amount determined pursuant to subparagraph (i) that would have
been paid or distributed to the Executive upon the exercise of
any such forfeited stock options, had such options been
exercisable, and exercised, by the Executive as of the date
his or her employment terminated;
(iii) an amount equal to the fair market
value of any shares of restricted stock forfeited by the
Executive by reason of the termination of his or her
employment, determined as of the date of such termination; and
(iv) an amount equal to the amount that the
Executive would have received if any stock appreciation right
which is forfeited or which otherwise becomes non-exercisable
by the Executive by reason of the termination of his or her
employment had been exercisable, and exercised, by the
Executive as of the date of such termination.
It is understood and agreed that this payment is to occur only to the
extent the Executive is not entitled to exercise his or her options or
stock appreciate rights, or to retain his or her restricted stock,
after the termination of his or her employment under the provisions of
the Executive's stock option, restricted stock, or stock appreciation
rights agreements.
For purposes of this paragraph 3, the term "average annual compensation" shall
mean the average rate of annual salary payable to the Executive for the calendar
year in which the Executive's employment terminates and for the two immediately
preceding calendar years, plus the average annual bonus or incentive payments
awarded to the Executive for the same three calendar years; provided, that if
bonus or incentive compensation awards have not been determined for the calendar
year in which the Executive's employment terminates prior to the date of such
termination, such average shall be determined using the bonuses or incentive
payments awarded to the Executive for the three calendar years immediately
preceding the year in which the Executive's employment terminates; and provided
further, that if the Executive has not been employed by the Company for two full
calendar years preceding the year in which the Executive's employment
terminates, "average annual compensation" shall be based on the Executive's
average annual rate of salary plus the average annual bonus or incentive
payments determined as described above, for the entire period of the Executive's
employment. The Executive's average annual compensation shall be determined
-3-
<PAGE>
prior to any reduction for deferred compensation, "401(k)" plan contributions,
and similar items, and any reduction in the Executive's rate of salary occurring
within 24 months after a change in control shall be disregarded. In addition,
the insurance coverage provided under this paragraph shall be governed by the
insurance coverage provided to such the Executive immediately prior to any
reduction in such coverage occurring within 24 months after any change in
control.
4. Limitations. If any part of the amounts to be paid to or for the
benefit of the Executive pursuant to this Agreement constitute "parachute
payments" within the meaning of section 280G of the Internal Revenue Code of
1986, as from time to time amended (the "Code"), such amounts shall be reduced
as provided below so that the aggregate present value of the amounts payable
pursuant to this Agreement which constitute such parachute payments will be
equal to 299% of the Executive's "annualized includible compensation for the
base period," as such term is defined in section 280G(d)(1) of the Code. Such
reductions shall be made in the benefits provided pursuant to subparagraph 3(b),
in the inverse order of their anticipated payment, before any reductions are
made in the amounts payable pursuant to subparagraphs 3(a) or 3(c). For the
purpose of this subparagraph, present value shall be determined in accordance
with section 1274(b)(2) of the Code.
5. No Funding of Severance Pay. Nothing herein contained shall require
or be deemed to require the Company or a subsidiary to segregate, earmark, or
otherwise set aside any funds or other assets to provide for any payments
required to be made hereunder, and the rights of the terminating Executive to
severance pay hereunder shall be solely those of a general, unsecured creditor
of the Company. However, the Company may, in its discretion, deposit cash or
property, or both, equal in value to all or a portion of the amounts anticipated
to be payable hereunder for the Executive into a trust, the assets of which are
to be distributed at such times as determined by the trustee of such trust;
provided, that such assets shall be subject at all times to the rights of the
Company's general creditors.
6. Death. In the event of the Executive's death, any amount or benefit
payable or distributable to the Executive pursuant to paragraph 3(a) or
paragraph 3(c) shall be paid to the beneficiary designated by the Executive for
such purpose in the last written instrument, if any, received by the Boards of
Directors of the Company prior to the Executive's death, or, if no beneficiary
has been designated, to the Executive's estate.
7. Rights in the Event of Dispute. If a claim or dispute arises
concerning the rights of the Executive or a beneficiary to benefits under this
Agreement, regardless of the party by whom such claim or dispute is initiated,
the Company shall, upon presentation of appropriate vouchers, pay all legal
expenses, including reasonable attorneys' fees, court costs, and ordinary and
necessary out-of-pocket costs of attorneys, billed to and payable by the
Executive or by anyone claiming under or through the Executive (such person
being hereinafter referred to as the Executive's "claimant"), in connection with
the bringing, prosecuting, defending, litigating, negotiating, or settling such
claim or dispute; provided, that:
(a) the Executive or the Executive's claimant shall repay to
the Company any such expenses theretofore paid or advanced by the
Company if and to the extent that the party disputing the Executive's
rights obtains a judgment in its favor from a court of competent
jurisdiction, which judgment has become final, whether because the time
to
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<PAGE>
appeal from such judgment has expired with no appeal taken or
otherwise, and it is determined that such expenses were not incurred by
the Executive or the Executive's claimant while acting in good faith;
and provided further, that
(b) in the case of any claim or dispute initiated by the
Executive or the Executive's claimant, such claim shall be made, or
notice of such dispute given, with specific reference to the provisions
of this Agreement, to the Board of Directors of the Company within one
year after the occurrence of the event giving rise to such claim or
dispute.
8. Amendment. This Agreement may not be amended or modified except by a
written instrument signed by both parties as of a date contemporaneous herewith
or subsequent hereto.
9. No Obligation to Mitigate Damages. In the event the Executive
becomes eligible to receive benefits hereunder the Executive shall have no
obligation to seek other employment in an effort to mitigate damages. To the
extent the Executive shall accept other employment after the termination of his
or her employment, the compensation and benefits received from such employment
shall not reduce any compensation and benefits due under this Agreement, except
as provided in paragraph 3(b).
10. Other Benefits. The benefits provided under this Agreement shall,
except to the extent otherwise specifically provided herein, be in addition to,
and not in derogation or diminution of, any benefits that the Executive or the
Executive's beneficiary may be entitled to receive under any other plan or
program now or hereafter maintained by the Company or by any of its
subsidiaries.
11. Successors.
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation, or otherwise) to all or
substantially all of the business and/or assets of the Company, to
expressly assume and agree to perform the Company's obligations under
this Agreement in the same manner and to the same extent that the
Company would be required to perform them if no such succession had
taken place unless, in the opinion of legal counsel mutually acceptable
to the Company and the Executive, such obligations have been assumed by
the successor as a matter of law. Failure of the Company to obtain such
agreement prior to the effectiveness of any such succession (unless the
foregoing opinion is rendered to the Executive) shall entitle the
Executive to terminate his or her employment and to receive the
payments provided for in paragraph 3 above. As used in this Agreement,
"Company" shall mean the Company, as presently constituted, and any
successor to its business and/or assets which executes and delivers the
agreement provided for in this paragraph 11 or which otherwise becomes
bound by all the terms and provisions of this Agreement as a matter of
law.
(b) The Executive's rights under this Agreement shall inure to
the benefit of, and shall be enforceable by, the Executive's legal
representative or other successors in interest, but shall not otherwise
be assignable or transferable.
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<PAGE>
12. Notices. Any notices referred to herein shall be in writing and
shall be sufficient if delivered in person or sent by U.S. registered or
certified mail to the Executive at his or her address on file with the Company
(or to such other address as the Executive shall specify by notice), or to the
Company at 9300 75th Avenue North, Minneapolis, Minnesota 55428, Attn: Board of
Directors.
13. Waiver. Any waiver of any breach of any of the provisions of this
Agreement shall not operate as a waiver of any other breach of such provisions
or any other provisions, nor shall any failure to enforce any provision of this
Agreement operate as a waiver of any party's right to enforce such provision or
any other provision.
14. Severability. If any provision of this Agreement or the application
thereof is held invalid or unenforceable by a court of competent jurisdiction,
the invalidity or unenforceability thereof shall not affect any other provisions
or applications of this Agreement which can be given effect without the invalid
or unenforceable provision or application.
15. Governing Law. The validity, interpretation, construction, and
performance of this Agreement shall be governed by the laws of the State of
Minnesota, except to the extent superseded by applicable federal law.
16. Headings. The headings and paragraph designations of this Agreement
are included solely for convenience of reference and shall in no event be
construed to affect or modify any provisions of this Agreement.
17. Gender and Number. In this Agreement where the context admits,
words in any gender shall include the other genders, words in the plural shall
include the singular, and words in the singular shall include the plural.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
COMPANY: RECOVERY ENGINEERING, INC.
By /s/ BRIAN F. SULLIVAN
----------------------------------------
Brian F. Sullivan
President and Chief Executive Officer
EXECUTIVE:
/s/ BARRY B. VAN LERBERGHE
----------------------------------------
Barry B. Van Lerberghe
-6-
EXHIBIT 10.6
CHANGE-IN-CONTROL SEVERANCE PAY AGREEMENT
THIS AGREEMENT is made this 2nd day of November, 1998, by and between
Recovery Engineering, Inc., a Minnesota corporation, (the "Company") and Daniel
B. Seebart (the "Executive").
RECITALS
A. The Executive is the Vice President - Manufacturing of the Company
as of the date of this Agreement, and has been an employee of the Company since
August 1998.
B. The Board of Directors of the Company desires to retain the
Executive in the employ of the Company.
C. The Board of Director believes that it is essential to preserve and
maintain the stability and continuity of management of the Company by providing
the Executive with economic and other security from the uncertainty of risks
inherent in a potential or threatened takeover of the Company which might
jeopardize the Executive's employment.
NOW THEREFORE, in consideration of the foregoing and of the mutual
promises of the parties hereto, the Company and the Executive agree as follows:
1. Eligibility for Severance Pay. The Executive shall be eligible to
receive severance pay, in the amounts and at the times described in paragraph 3,
if:
(a) the Executive's employment with the Company and all of its
subsidiaries (if any) is terminated within 24 months after there has
been a "change in control," as such term is hereinafter defined; and
(b) the Executive's termination of employment was not:
(i) on account of the Executive's death;
(ii) on account of a physical or mental
condition that entitles the Executive to benefits under any
long-term disability plan maintained by the Company or any of
its subsidiaries, as then in effect;
(iii) for conduct involving serious willful
misconduct (such as commission by the Executive of a felony or
a common law fraud against the Company) which is detrimental
in a significant way to the business of the Company or any or
its subsidiaries; or
(iv) on account of the Executive's voluntary
resignation; provided, that a resignation shall not be
considered to be voluntary for the purposes of this Agreement
if it occurs under the circumstances described in paragraph
11(a), or if,
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<PAGE>
subsequent to the change in control, there has been: (1) a
reduction in the Executive's compensation; (2) an alteration
in the Executive's status, title or position with the Company
or in the nature of the Executive's responsibilities from
those in effect immediately prior to the change in control, or
the assignment to the Executive of any duties inconsistent
with his or her status, title or position with the Company; or
(3) a change in the place in which the Executive is required
to perform his or her duties, if the new place is more than 25
miles from his or her previous place of employment.
2. Change in Control. For the purposes of this Agreement, a "change in
control" shall be deemed to have occurred if:
(a) the shareholders of the Company shall adopt a resolution
providing for its dissolution or liquidation, or for a merger,
consolidation, or other corporate reorganization of the Company under
circumstances in which the Company will not be the surviving party; or
(b) any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934) (other than the Company
or any of its subsidiaries or any employee benefit plan of the Company
or any of its subsidiaries) becomes a beneficial owner, directly or
indirectly, of securities of the Company representing 25% or more of
the voting power of all of the Company's then outstanding securities;
or
(c) during any period of two consecutive years, individuals
who at the beginning of such period constituted the Board of Directors
of the Company ceased for any reason to constitute at least a majority
thereof (unless the nomination of each new director was approved by a
vote of at least two thirds of the directors then still in office who
were directors at the beginning of such period); or
(d) the Board of Directors of the Company shall approve the
sale of all, or substantially all, of the business or assets of the
Company.
3. Amount and Payment of Severance Pay. The Executive shall receive:
(a) a lump sum cash payment, no later than 30 days after the
date on which the Executive's employment terminates, in an amount equal
to the Executive's average annual compensation (as defined below);
(b) continuation of coverage under the Company's group
medical, group life, and group long-term disability plans, if any, and
under any individual policy or policies of life insurance maintained by
the Company, with the same rate of employer contributions as for active
employees, until the earlier to occur of:
(i) the expiration of 12 months from the date
on which the Executive's employment terminates; or
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<PAGE>
(ii) the date on which the Executive obtains
comparable coverage provided by a new employer.
(c) a lump sum cash payment, payable no later than 30 days
after the date on which the Executive's employment terminates, in an
amount equal to the sum of:
(i) the amount by which the fair market
value of that number of shares of stock subject to any stock
option which is forfeited or which otherwise becomes
non-exercisable by the Executive by reason of the termination
of his or her employment (determined as of the date of such
termination) exceeds the option price for such shares;
(ii) such additional amounts (or the fair
market value of such additional property) in excess of the
amount determined pursuant to subparagraph (i) that would have
been paid or distributed to the Executive upon the exercise of
any such forfeited stock options, had such options been
exercisable, and exercised, by the Executive as of the date
his or her employment terminated;
(iii) an amount equal to the fair market
value of any shares of restricted stock forfeited by the
Executive by reason of the termination of his or her
employment, determined as of the date of such termination; and
(iv) an amount equal to the amount that the
Executive would have received if any stock appreciation right
which is forfeited or which otherwise becomes non-exercisable
by the Executive by reason of the termination of his or her
employment had been exercisable, and exercised, by the
Executive as of the date of such termination.
It is understood and agreed that this payment is to occur only to the
extent the Executive is not entitled to exercise his or her options or
stock appreciate rights, or to retain his or her restricted stock,
after the termination of his or her employment under the provisions of
the Executive's stock option, restricted stock, or stock appreciation
rights agreements.
For purposes of this paragraph 3, the term "average annual compensation" shall
mean the average rate of annual salary payable to the Executive for the calendar
year in which the Executive's employment terminates and for the two immediately
preceding calendar years, plus the average annual bonus or incentive payments
awarded to the Executive for the same three calendar years; provided, that if
bonus or incentive compensation awards have not been determined for the calendar
year in which the Executive's employment terminates prior to the date of such
termination, such average shall be determined using the bonuses or incentive
payments awarded to the Executive for the three calendar years immediately
preceding the year in which the Executive's employment terminates; and provided
further, that if the Executive has not been employed by the Company for two full
calendar years preceding the year in which the Executive's employment
terminates, "average annual compensation" shall be based on the Executive's
average annual rate of salary plus the average annual bonus or incentive
payments determined as described above, for the entire period of the Executive's
employment. The Executive's average annual compensation shall be determined
-3-
<PAGE>
prior to any reduction for deferred compensation, "401(k)" plan contributions,
and similar items, and any reduction in the Executive's rate of salary occurring
within 24 months after a change in control shall be disregarded. In addition,
the insurance coverage provided under this paragraph shall be governed by the
insurance coverage provided to such the Executive immediately prior to any
reduction in such coverage occurring within 24 months after any change in
control.
4. Limitations. If any part of the amounts to be paid to or for the
benefit of the Executive pursuant to this Agreement constitute "parachute
payments" within the meaning of section 280G of the Internal Revenue Code of
1986, as from time to time amended (the "Code"), such amounts shall be reduced
as provided below so that the aggregate present value of the amounts payable
pursuant to this Agreement which constitute such parachute payments will be
equal to 299% of the Executive's "annualized includible compensation for the
base period," as such term is defined in section 280G(d)(1) of the Code. Such
reductions shall be made in the benefits provided pursuant to subparagraph 3(b),
in the inverse order of their anticipated payment, before any reductions are
made in the amounts payable pursuant to subparagraphs 3(a) or 3(c). For the
purpose of this subparagraph, present value shall be determined in accordance
with section 1274(b)(2) of the Code.
5. No Funding of Severance Pay. Nothing herein contained shall require
or be deemed to require the Company or a subsidiary to segregate, earmark, or
otherwise set aside any funds or other assets to provide for any payments
required to be made hereunder, and the rights of the terminating Executive to
severance pay hereunder shall be solely those of a general, unsecured creditor
of the Company. However, the Company may, in its discretion, deposit cash or
property, or both, equal in value to all or a portion of the amounts anticipated
to be payable hereunder for the Executive into a trust, the assets of which are
to be distributed at such times as determined by the trustee of such trust;
provided, that such assets shall be subject at all times to the rights of the
Company's general creditors.
6. Death. In the event of the Executive's death, any amount or benefit
payable or distributable to the Executive pursuant to paragraph 3(a) or
paragraph 3(c) shall be paid to the beneficiary designated by the Executive for
such purpose in the last written instrument, if any, received by the Boards of
Directors of the Company prior to the Executive's death, or, if no beneficiary
has been designated, to the Executive's estate.
7. Rights in the Event of Dispute. If a claim or dispute arises
concerning the rights of the Executive or a beneficiary to benefits under this
Agreement, regardless of the party by whom such claim or dispute is initiated,
the Company shall, upon presentation of appropriate vouchers, pay all legal
expenses, including reasonable attorneys' fees, court costs, and ordinary and
necessary out-of-pocket costs of attorneys, billed to and payable by the
Executive or by anyone claiming under or through the Executive (such person
being hereinafter referred to as the Executive's "claimant"), in connection with
the bringing, prosecuting, defending, litigating, negotiating, or settling such
claim or dispute; provided, that:
(a) the Executive or the Executive's claimant shall repay to
the Company any such expenses theretofore paid or advanced by the
Company if and to the extent that the party disputing the Executive's
rights obtains a judgment in its favor from a court of competent
jurisdiction, which judgment has become final, whether because the time
to
-4-
<PAGE>
appeal from such judgment has expired with no appeal taken or
otherwise, and it is determined that such expenses were not incurred by
the Executive or the Executive's claimant while acting in good faith;
and provided further, that
(b) in the case of any claim or dispute initiated by the
Executive or the Executive's claimant, such claim shall be made, or
notice of such dispute given, with specific reference to the provisions
of this Agreement, to the Board of Directors of the Company within one
year after the occurrence of the event giving rise to such claim or
dispute.
8. Amendment. This Agreement may not be amended or modified except by a
written instrument signed by both parties as of a date contemporaneous herewith
or subsequent hereto.
9. No Obligation to Mitigate Damages. In the event the Executive
becomes eligible to receive benefits hereunder the Executive shall have no
obligation to seek other employment in an effort to mitigate damages. To the
extent the Executive shall accept other employment after the termination of his
or her employment, the compensation and benefits received from such employment
shall not reduce any compensation and benefits due under this Agreement, except
as provided in paragraph 3(b).
10. Other Benefits. The benefits provided under this Agreement shall,
except to the extent otherwise specifically provided herein, be in addition to,
and not in derogation or diminution of, any benefits that the Executive or the
Executive's beneficiary may be entitled to receive under any other plan or
program now or hereafter maintained by the Company or by any of its
subsidiaries.
11. Successors.
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation, or otherwise) to all or
substantially all of the business and/or assets of the Company, to
expressly assume and agree to perform the Company's obligations under
this Agreement in the same manner and to the same extent that the
Company would be required to perform them if no such succession had
taken place unless, in the opinion of legal counsel mutually acceptable
to the Company and the Executive, such obligations have been assumed by
the successor as a matter of law. Failure of the Company to obtain such
agreement prior to the effectiveness of any such succession (unless the
foregoing opinion is rendered to the Executive) shall entitle the
Executive to terminate his or her employment and to receive the
payments provided for in paragraph 3 above. As used in this Agreement,
"Company" shall mean the Company, as presently constituted, and any
successor to its business and/or assets which executes and delivers the
agreement provided for in this paragraph 11 or which otherwise becomes
bound by all the terms and provisions of this Agreement as a matter of
law.
(b) The Executive's rights under this Agreement shall inure to
the benefit of, and shall be enforceable by, the Executive's legal
representative or other successors in interest, but shall not otherwise
be assignable or transferable.
-5-
<PAGE>
12. Notices. Any notices referred to herein shall be in writing and
shall be sufficient if delivered in person or sent by U.S. registered or
certified mail to the Executive at his or her address on file with the Company
(or to such other address as the Executive shall specify by notice), or to the
Company at 9300 75th Avenue North, Minneapolis, Minnesota 55428, Attn: Board of
Directors.
13. Waiver. Any waiver of any breach of any of the provisions of this
Agreement shall not operate as a waiver of any other breach of such provisions
or any other provisions, nor shall any failure to enforce any provision of this
Agreement operate as a waiver of any party's right to enforce such provision or
any other provision.
14. Severability. If any provision of this Agreement or the application
thereof is held invalid or unenforceable by a court of competent jurisdiction,
the invalidity or unenforceability thereof shall not affect any other provisions
or applications of this Agreement which can be given effect without the invalid
or unenforceable provision or application.
15. Governing Law. The validity, interpretation, construction, and
performance of this Agreement shall be governed by the laws of the State of
Minnesota, except to the extent superseded by applicable federal law.
16. Headings. The headings and paragraph designations of this Agreement
are included solely for convenience of reference and shall in no event be
construed to affect or modify any provisions of this Agreement.
17. Gender and Number. In this Agreement where the context admits,
words in any gender shall include the other genders, words in the plural shall
include the singular, and words in the singular shall include the plural.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
COMPANY: RECOVERY ENGINEERING, INC.
By /s/ BRIAN F. SULLIVAN
-------------------------------------
Brian F. Sullivan
President and Chief Executive Officer
EXECUTIVE:
/s/ DANIEL B. SEEBART
-------------------------------------
Daniel B. Seebart
-6-
EXHIBIT 10.7
CHANGE-IN-CONTROL SEVERANCE PAY AGREEMENT
THIS AGREEMENT is made this 17th day of February, 1999, by and between
Recovery Engineering, Inc., a Minnesota corporation, (the "Company") and Reed A.
Watson (the "Executive").
RECITALS
A. The Executive has been named President and Chief Operating Officer
of the Company, effective as of the date of this Agreement.
B. The Board of Directors of the Company desires to retain the
Executive in the employ of the Company.
C. The Board of Director believes that it is essential to preserve and
maintain the stability and continuity of management of the Company by providing
the Executive with economic and other security from the uncertainty of risks
inherent in a potential or threatened takeover of the Company which might
jeopardize the Executive's employment.
NOW THEREFORE, in consideration of the foregoing and of the mutual
promises of the parties hereto, the Company and the Executive agree as follows:
1. Eligibility for Severance Pay. The Executive shall be eligible to
receive severance pay, in the amounts and at the times described in paragraph 3,
if:
(a) the Executive's employment with the Company and all of its
subsidiaries (if any) is terminated within 24 months after there has
been a "change in control," as such term is hereinafter defined; and
(b) the Executive's termination of employment was not:
(i) on account of the Executive's death;
(ii) on account of a physical or mental
condition that entitles the Executive to benefits under any
long-term disability plan maintained by the Company or any of
its subsidiaries, as then in effect;
(iii) for conduct involving serious willful
misconduct (such as commission by the Executive of a felony or
a common law fraud against the Company) which is detrimental
in a significant way to the business of the Company or any or
its subsidiaries; or
(iv) on account of the Executive's voluntary
resignation; provided, that a resignation shall not be
considered to be voluntary for the purposes of this Agreement
if it occurs under the circumstances described in paragraph
11(a), or if,
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<PAGE>
subsequent to the change in control, there has been: (1) a
reduction in the Executive's compensation; (2) an alteration
in the Executive's status, title or position with the Company
or in the nature of the Executive's responsibilities from
those in effect immediately prior to the change in control, or
the assignment to the Executive of any duties inconsistent
with his or her status, title or position with the Company; or
(3) a change in the place in which the Executive is required
to perform his or her duties, if the new place is more than 25
miles from his or her previous place of employment.
2. Change in Control. For the purposes of this Agreement, a "change in
control" shall be deemed to have occurred if:
(a) the shareholders of the Company shall adopt a resolution
providing for its dissolution or liquidation, or for a merger,
consolidation, or other corporate reorganization of the Company under
circumstances in which the Company will not be the surviving party; or
(b) any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934) (other than the Company
or any of its subsidiaries or any employee benefit plan of the Company
or any of its subsidiaries) becomes a beneficial owner, directly or
indirectly, of securities of the Company representing 25% or more of
the voting power of all of the Company's then outstanding securities;
or
(c) during any period of two consecutive years, individuals
who at the beginning of such period constituted the Board of Directors
of the Company ceased for any reason to constitute at least a majority
thereof (unless the nomination of each new director was approved by a
vote of at least two thirds of the directors then still in office who
were directors at the beginning of such period); or
(d) the Board of Directors of the Company shall approve the
sale of all, or substantially all, of the business or assets of the
Company.
3. Amount and Payment of Severance Pay. The Executive shall receive:
(a) a lump sum cash payment, no later than 30 days after the
date on which the Executive's employment terminates, in an amount equal
to the Executive's average annual compensation (as defined below);
(b) continuation of coverage under the Company's group
medical, group life, and group long-term disability plans, if any, and
under any individual policy or policies of life insurance maintained by
the Company, with the same rate of employer contributions as for active
employees, until the earlier to occur of:
(i) the expiration of 12 months from the date
on which the Executive's employment terminates; or
-2-
<PAGE>
(ii) the date on which the Executive obtains
comparable coverage provided by a new employer.
(c) a lump sum cash payment, payable no later than 30 days
after the date on which the Executive's employment terminates, in an
amount equal to the sum of:
(i) the amount by which the fair market
value of that number of shares of stock subject to any stock
option which is forfeited or which otherwise becomes
non-exercisable by the Executive by reason of the termination
of his or her employment (determined as of the date of such
termination) exceeds the option price for such shares;
(ii) such additional amounts (or the fair
market value of such additional property) in excess of the
amount determined pursuant to subparagraph (i) that would have
been paid or distributed to the Executive upon the exercise of
any such forfeited stock options, had such options been
exercisable, and exercised, by the Executive as of the date
his or her employment terminated;
(iii) an amount equal to the fair market
value of any shares of restricted stock forfeited by the
Executive by reason of the termination of his or her
employment, determined as of the date of such termination; and
(iv) an amount equal to the amount that the
Executive would have received if any stock appreciation right
which is forfeited or which otherwise becomes non-exercisable
by the Executive by reason of the termination of his or her
employment had been exercisable, and exercised, by the
Executive as of the date of such termination.
It is understood and agreed that this payment is to occur only to the
extent the Executive is not entitled to exercise his or her options or
stock appreciate rights, or to retain his or her restricted stock,
after the termination of his or her employment under the provisions of
the Executive's stock option, restricted stock, or stock appreciation
rights agreements.
For purposes of this paragraph 3, the term "average annual compensation" shall
mean the average rate of annual salary payable to the Executive for the calendar
year in which the Executive's employment terminates and for the two immediately
preceding calendar years, plus the average annual bonus or incentive payments
awarded to the Executive for the same three calendar years; provided, that if
bonus or incentive compensation awards have not been determined for the calendar
year in which the Executive's employment terminates prior to the date of such
termination, such average shall be determined using the bonuses or incentive
payments awarded to the Executive for the three calendar years immediately
preceding the year in which the Executive's employment terminates; and provided
further, that if the Executive has not been employed by the Company for two full
calendar years preceding the year in which the Executive's employment
terminates, "average annual compensation" shall be based on the Executive's
average annual rate of salary plus the average annual bonus or incentive
payments determined as described above, for the entire period of the Executive's
employment. The Executive's average annual compensation shall be determined
-3-
<PAGE>
prior to any reduction for deferred compensation, "401(k)" plan contributions,
and similar items, and any reduction in the Executive's rate of salary occurring
within 24 months after a change in control shall be disregarded. In addition,
the insurance coverage provided under this paragraph shall be governed by the
insurance coverage provided to such the Executive immediately prior to any
reduction in such coverage occurring within 24 months after any change in
control.
4. Limitations. If any part of the amounts to be paid to or for the
benefit of the Executive pursuant to this Agreement constitute "parachute
payments" within the meaning of section 280G of the Internal Revenue Code of
1986, as from time to time amended (the "Code"), such amounts shall be reduced
as provided below so that the aggregate present value of the amounts payable
pursuant to this Agreement which constitute such parachute payments will be
equal to 299% of the Executive's "annualized includible compensation for the
base period," as such term is defined in section 280G(d)(1) of the Code. Such
reductions shall be made in the benefits provided pursuant to subparagraph 3(b),
in the inverse order of their anticipated payment, before any reductions are
made in the amounts payable pursuant to subparagraphs 3(a) or 3(c). For the
purpose of this subparagraph, present value shall be determined in accordance
with section 1274(b)(2) of the Code.
5. No Funding of Severance Pay. Nothing herein contained shall require
or be deemed to require the Company or a subsidiary to segregate, earmark, or
otherwise set aside any funds or other assets to provide for any payments
required to be made hereunder, and the rights of the terminating Executive to
severance pay hereunder shall be solely those of a general, unsecured creditor
of the Company. However, the Company may, in its discretion, deposit cash or
property, or both, equal in value to all or a portion of the amounts anticipated
to be payable hereunder for the Executive into a trust, the assets of which are
to be distributed at such times as determined by the trustee of such trust;
provided, that such assets shall be subject at all times to the rights of the
Company's general creditors.
6. Death. In the event of the Executive's death, any amount or benefit
payable or distributable to the Executive pursuant to paragraph 3(a) or
paragraph 3(c) shall be paid to the beneficiary designated by the Executive for
such purpose in the last written instrument, if any, received by the Boards of
Directors of the Company prior to the Executive's death, or, if no beneficiary
has been designated, to the Executive's estate.
7. Rights in the Event of Dispute. If a claim or dispute arises
concerning the rights of the Executive or a beneficiary to benefits under this
Agreement, regardless of the party by whom such claim or dispute is initiated,
the Company shall, upon presentation of appropriate vouchers, pay all legal
expenses, including reasonable attorneys' fees, court costs, and ordinary and
necessary out-of-pocket costs of attorneys, billed to and payable by the
Executive or by anyone claiming under or through the Executive (such person
being hereinafter referred to as the Executive's "claimant"), in connection with
the bringing, prosecuting, defending, litigating, negotiating, or settling such
claim or dispute; provided, that:
(a) the Executive or the Executive's claimant shall repay to
the Company any such expenses theretofore paid or advanced by the
Company if and to the extent that the party disputing the Executive's
rights obtains a judgment in its favor from a court of competent
jurisdiction, which judgment has become final, whether because the time
to
-4-
<PAGE>
appeal from such judgment has expired with no appeal taken or
otherwise, and it is determined that such expenses were not incurred by
the Executive or the Executive's claimant while acting in good faith;
and provided further, that
(b) in the case of any claim or dispute initiated by the
Executive or the Executive's claimant, such claim shall be made, or
notice of such dispute given, with specific reference to the provisions
of this Agreement, to the Board of Directors of the Company within one
year after the occurrence of the event giving rise to such claim or
dispute.
8. Amendment. This Agreement may not be amended or modified except by a
written instrument signed by both parties as of a date contemporaneous herewith
or subsequent hereto.
9. No Obligation to Mitigate Damages. In the event the Executive
becomes eligible to receive benefits hereunder the Executive shall have no
obligation to seek other employment in an effort to mitigate damages. To the
extent the Executive shall accept other employment after the termination of his
or her employment, the compensation and benefits received from such employment
shall not reduce any compensation and benefits due under this Agreement, except
as provided in paragraph 3(b).
10. Other Benefits. The benefits provided under this Agreement shall,
except to the extent otherwise specifically provided herein, be in addition to,
and not in derogation or diminution of, any benefits that the Executive or the
Executive's beneficiary may be entitled to receive under any other plan or
program now or hereafter maintained by the Company or by any of its
subsidiaries.
11. Successors.
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation, or otherwise) to all or
substantially all of the business and/or assets of the Company, to
expressly assume and agree to perform the Company's obligations under
this Agreement in the same manner and to the same extent that the
Company would be required to perform them if no such succession had
taken place unless, in the opinion of legal counsel mutually acceptable
to the Company and the Executive, such obligations have been assumed by
the successor as a matter of law. Failure of the Company to obtain such
agreement prior to the effectiveness of any such succession (unless the
foregoing opinion is rendered to the Executive) shall entitle the
Executive to terminate his or her employment and to receive the
payments provided for in paragraph 3 above. As used in this Agreement,
"Company" shall mean the Company, as presently constituted, and any
successor to its business and/or assets which executes and delivers the
agreement provided for in this paragraph 11 or which otherwise becomes
bound by all the terms and provisions of this Agreement as a matter of
law.
(b) The Executive's rights under this Agreement shall inure to
the benefit of, and shall be enforceable by, the Executive's legal
representative or other successors in interest, but shall not otherwise
be assignable or transferable.
-5-
<PAGE>
12. Notices. Any notices referred to herein shall be in writing and
shall be sufficient if delivered in person or sent by U.S. registered or
certified mail to the Executive at his or her address on file with the Company
(or to such other address as the Executive shall specify by notice), or to the
Company at 9300 75th Avenue North, Minneapolis, Minnesota 55428, Attn: Board of
Directors.
13. Waiver. Any waiver of any breach of any of the provisions of this
Agreement shall not operate as a waiver of any other breach of such provisions
or any other provisions, nor shall any failure to enforce any provision of this
Agreement operate as a waiver of any party's right to enforce such provision or
any other provision.
14. Severability. If any provision of this Agreement or the application
thereof is held invalid or unenforceable by a court of competent jurisdiction,
the invalidity or unenforceability thereof shall not affect any other provisions
or applications of this Agreement which can be given effect without the invalid
or unenforceable provision or application.
15. Governing Law. The validity, interpretation, construction, and
performance of this Agreement shall be governed by the laws of the State of
Minnesota, except to the extent superseded by applicable federal law.
16. Headings. The headings and paragraph designations of this Agreement
are included solely for convenience of reference and shall in no event be
construed to affect or modify any provisions of this Agreement.
17. Gender and Number. In this Agreement where the context admits,
words in any gender shall include the other genders, words in the plural shall
include the singular, and words in the singular shall include the plural.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
COMPANY: RECOVERY ENGINEERING, INC.
By /s/ BRIAN F. SULLIVAN
------------------------------------
Brian F. Sullivan
Chairman and Chief Executive Officer
EXECUTIVE:
/s/ REED A. WATSON
------------------------------------
Reed A. Watson
-6-
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