<PAGE>
RECOVERY ENGINEERING, INC.
9300 North 75th Avenue
Minneapolis, Minnesota 55428
INFORMATION STATEMENT PURSUANT TO
SECTION 14(F) OF THE SECURITIES EXCHANGE
ACT OF 1934 AND RULE 14F-1 THEREUNDER
----------------
GENERAL INFORMATION
This Information Statement is being mailed on or about September 1, 1999, as
part of the Solicitation/ Recommendation Statement on Schedule 14D-9 (the
"Schedule 14D-9") of Recovery Engineering, Inc., a Minnesota corporation (the
"Company"), to the holders of record of shares of common stock, par value $.01
per share, of the Company (the "Common Stock" or the "Shares"). You are
receiving this Information Statement in connection with the possible election
or appointment of persons designated by Purchaser (as defined below) to a
majority of the seats of the Board of Directors of the Company (the "Board of
Directors" or "Board").
On August 26, 1999, the Company, The Procter & Gamble Company, an Ohio
corporation ("Parent"), and Tenzing, Inc., a Minnesota corporation and a
wholly owned subsidiary of Parent ("Purchaser"), entered into an Agreement and
Plan of Merger (the "Merger Agreement") pursuant to which (i) Purchaser will
commence a tender offer (the "Offer") for all outstanding Shares at a price of
$35.25 per Share (the "Merger Consideration"), net to the seller in cash
without interest thereon and (ii) Purchaser will be merged with and into the
Company (the "Merger") upon the filing of articles of merger relating to the
Merger with the Secretary of State of the State of Minnesota, or such later
time as may be set forth therein (the "Effective Time"). As a result of the
Offer and the Merger, the Company will continue as a wholly owned subsidiary
of Parent.
The Merger Agreement provides that, promptly upon the purchase by Purchaser
of the Shares pursuant to the Offer, Purchaser will be entitled to designate
directors (the "Purchaser Designees") on the Board that will give Purchaser
representation substantially proportionate to its ownership interest. The
Merger Agreement requires the Company promptly to take necessary action to
cause the Purchaser Designees to be elected or appointed to the Board under
the circumstances described therein. This Information Statement is required by
Section 14(f) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and Rule 14f-1 thereunder. Capitalized terms used herein and
not otherwise defined shall have the meaning set forth in the Schedule 14D-9.
You are urged to read this Information Statement carefully. You are not,
however, required to take any action in connection with this Information
Statement.
The information contained in this Information Statement concerning Purchaser
and the Purchaser Designees has been furnished to the Company by Purchaser.
The Company assumes no responsibility for the accuracy or completeness of such
information.
The Common Stock is the only class of voting securities of the Company
outstanding. Each share of Common Stock has one vote. As of August 25, 1999,
there were 6,044,601 shares of Common Stock outstanding.
RIGHT TO DESIGNATE DIRECTORS; PURCHASER DESIGNEES
The Merger Agreement provides that, promptly upon the purchase by Purchaser
of the Shares pursuant to the Offer, and from time to time thereafter,
Purchaser will be entitled, subject to compliance with Section 14(f) of the
Exchange Act, to designate up to such number of directors, rounded up to the
next whole number, on the
I-1
<PAGE>
Board as will give Purchaser representation on the Board equal to the product
of the total number of directors on the Board (giving effect to the directors
elected pursuant to this sentence) multiplied by the percentage that the
aggregate number of Shares beneficially owned by Purchaser or any affiliate of
Purchaser following such purchase bears to the total number of Shares then
outstanding, and the Company will, at such time, promptly take all actions
necessary to cause the Purchaser Designees to be elected or appointed as
directors of the Company, including increasing the size of the Board or
securing the resignations of incumbent directors or both. At such times, the
Company will, upon the written request of Purchaser, use its reasonable
efforts to cause the Purchaser Designees to constitute the same percentage as
persons designated by Purchaser will constitute of the Board of (i) each
committee of the Board, (ii) the board of directors of Recovery Engineering
International, Ltd., a Barbados corporation and a wholly owned subsidiary of
the Company ("REI Barbados"), and (iii) the committees of the board of
directors of REI Barbados. Notwithstanding anything stated herein, if Shares
are purchased pursuant to the Offer, Parent and Purchaser will use reasonable
efforts to assure that, until the Effective Time, the Board has at least one
director who is a director on the date of the Merger Agreement and is not an
employee of the Company.
It is expected that on the date that Purchaser accepts for payment and
purchases the Shares under the Offer the Company will promptly take such other
action as will be necessary to enable the Purchaser Designees to be elected to
the Company's Board of Directors.
Set forth below is the name, age and present principal occupation or
employment for each of the persons who may be designated by Parent as
Purchaser Designees. Unless otherwise indicated below, the business address
for each of the individuals listed below is One Procter & Gamble Plaza,
Cincinnati, Ohio 45202-3315. Each of the individuals listed below is a citizen
of the United States.
<TABLE>
<CAPTION>
Present Principal Occupation or Employment; Material
Name and Age Positions Held During the Past Five Years
------------ ----------------------------------------------------
<S> <C>
Bruce L. Byrnes (51)..... Director and President of Tenzing, Inc.; January 1,
1999--President-Global Health Care and Corporate New
Ventures, The Procter & Gamble Company; 1996-1998--
responsible for Health Care in North America, The
Procter & Gamble Company; 1995-1996--responsible for
Paper Products in North America, The Procter &
Gamble Company; 1994-1995--responsible for Paper and
Beverage in Europe, The Procter & Gamble Company.
Clayton C. Daley, Jr. Director and Vice President and Chief Financial
(47).................... Officer of Tenzing, Inc.; 1998--Chief Financial
Officer, The Procter & Gamble Company; 1994-1998--
Vice President and Treasurer, The Procter & Gamble
Company.
Gretchen W. Price (44)... Director and Vice President and Treasurer of
Tenzing, Inc.; 1998--Vice President and Treasurer,
The Procter & Gamble Company; 1996-1998--responsible
for Internal Controls-Worldwide, The Procter &
Gamble Company; 1994-1996--Vice President and
Comptroller with responsibilities for Food and
Beverage Products in North America, The Procter &
Gamble Company.
</TABLE>
Any other officer of Purchaser or Parent listed in Schedule I to the Offer
to Purchase dated September 1, 1999, filed as an Exhibit to the Tender Offer
Statement on Schedule 14D-1 of Purchaser or Parent may also be designated by
Parent as a Purchaser Designee.
None of the persons from among whom the Purchaser Designees will be selected
or their associates is a director of, or holds any position with, the Company.
To the knowledge of the Company, none of the Purchaser Designees or their
associates beneficially own any equity securities, or rights to acquire any
equity securities, of the Company or has been involved in any transactions
with the Company or any of its directors or executive officers that are
required to be disclosed pursuant to the rules and regulations of the
Securities and Exchange Commission (the "Commission").
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<PAGE>
CURRENT BOARD OF DIRECTORS OF THE COMPANY
The business and affairs of the Company are managed under the direction of
its Board of Directors. Directors of the Company are elected by a plurality of
the votes cast in an election of directors at any annual or special meeting of
the shareholders. The Company's articles of incorporation do not permit
cumulative voting for directors.
The Board is divided into three classes, each class being as nearly equal in
number as possible: Class 1, Class 2 and Class 3. Each director serves for a
term ending upon the election of directors at the third annual meeting
following the annual meeting at which the class was elected; provided,
however, that the directors initially elected to Class 1 serve for a term
ending upon the election of directors at the first annual meeting following
the end of the calendar year 1999, the directors initially elected to Class 2
serve for a term ending upon the election of directors at the second annual
meeting following the end of the calendar year 1999, and the directors
initially elected to Class 3 serve for a term ending upon the election of
directors at the third annual meeting following the end of the calendar year
1999.
The Company's articles of incorporation fix the variable range of the number
of directors and provide that the precise number of directors, within that
variable range, will be as from time to time designated by the majority of the
directors then in office, even if less than a quorum. Seven directors have
been elected to the classes and for the terms set forth below. Each of the
directors named below has served continuously as a director since the year
indicated.
<TABLE>
<CAPTION>
Director
Name Positions With Company Age Since
- ---- ---------------------- --- --------
<S> <C> <C> <C>
Class 1 Directors (term
expires in 2000):
Robert R. Gheewalla..... Director 31 1998
William D. Thompson..... Director 77 1995
Class 2 Directors (term
expires in 2001):
John E. Gherty.......... Director 55 1988
Sanjay H. Patel......... Director 38 1996
Richard J. Zeckhauser... Director 58 1987
Class 3 Directors (term
expires in 2002):
Brian F. Sullivan....... Chairman, Chief Executive Officer and Director 37 1986
William F. Wanner,
Jr. ................... Director 56 1986
</TABLE>
ROBERT R. GHEEWALLA has been a director of the Company since February 1998.
Mr. Gheewalla is a Vice President in the Principal Investment Area of Goldman,
Sachs & Co. where he has worked since 1994. From 1989 to 1991, he worked in
the Global Finance Department of Goldman, Sachs & Co. Mr. Gheewalla also
serves on the Advisory Committees or Boards of Directors of North American
RailNet, Inc. and JAMtv Corporation.
WILLIAM D. THOMPSON has been a director of the Company since December 1995.
Mr. Thompson served as Executive Vice President of the New York City
advertising firm of Young & Rubicam, Inc. until his retirement in 1989. During
37 years of service for Young & Rubicam, Mr. Thompson oversaw accounts for
numerous companies, including General Foods, Merrill Lynch, General Electric,
Warner-Lambert, Bristol-Meyers Squibb, and Johnson & Johnson.
I-3
<PAGE>
JOHN E. GHERTY has been a director of the Company since 1988. Mr. Gherty has
been President and Chief Executive Officer of Land O' Lakes, Inc., a food and
agricultural company, since 1989 and prior thereto was Group Vice President
and Chief Administrative Officer of Land O' Lakes, Inc. Mr. Gherty is also a
director of CF Industries, Inc., the National Council of Farmer Cooperatives
and the Minnesota Business Partnership.
SANJAY H. PATEL has been a director of the Company since July 1996. Mr.
Patel has been a Senior Managing Director of GSCP, Inc., the manager of the
Greenwich Street Capital Partners II, L.P. and its affiliated private equity
funds, since April 1998. Mr. Patel was a Managing Director in the Principal
Investment Area of Goldman, Sachs & Co. from 1996 to January 1998, and worked
in the Leveraged Buyout Group of Goldman, Sachs & Co. from 1987 to 1996. Mr.
Patel is also the Chairman of the Board of Directors of Atlantic Express
Transportation Corp.
RICHARD J. ZECKHAUSER has been a director of the Company since 1987. Dr.
Zeckhauser has been a professor of political economy at the John F. Kennedy
School of Government at Harvard University since 1968. Dr. Zeckhauser was a
co-founder of Niederhoffer, Cross and Zeckhauser, a New York-based investment
firm specializing in mergers and acquisitions and money management.
BRIAN F. SULLIVAN has been the Chief Executive Officer and a director of the
Company since its inception in 1986, and was named Chairman in February 1999.
He also served as President of the Company from 1986 to February 1999 and as
Chief Financial Officer of the Company from 1986 to 1994. Mr. Sullivan has
established and directed the implementation of the Company's strategic
direction since its inception. He has led the Company from the development
stage through its initial contracts with the United States armed forces, the
introduction of reverse osmosis desalinators and portable drinking water
systems, and the development and introduction of the Company's household
drinking water systems. Mr. Sullivan is named as an inventor on four United
States patents held by the Company. Mr. Sullivan is also a director of North
Central Life Insurance Company.
WILLIAM F. WANNER, JR. has been a director of the Company since its
inception in 1986. Mr. Wanner served as Chairman of the Board of the Company
from 1986 to 1994. Since 1973, Mr. Wanner has been the Chief Executive Officer
and principal shareholder of Wanner Engineering, Inc. and its affiliated
companies, which design, produce and market a range of high pressure pumps and
controls.
Pursuant to a Securities Purchase Agreement dated July 19, 1996 (the
"Securities Purchase Agreement"), between the Company and five investment
partnerships affiliated with The Goldman Sachs Group, L.P. (collectively, "GS
Group"), GS Group has the right to nominate one person to serve on the Board
of Directors, and the Company has agreed to use its best efforts to secure the
election of such nominee to the Board of Directors. Mr. Gheewalla has been
nominated by GS Group and has been elected director pursuant to such
arrangement. The Company knows of no other arrangements or understandings
between a director and any other person pursuant to which he has been selected
as a director. There is no family relationship between any of the directors or
executive officers of the Company.
BOARD COMMITTEES AND ACTIONS
During calendar year 1998, the Board of Directors met four times. The Board
of Directors has two standing committees, a Compensation Committee and an
Audit Committee, which met three times and one time, respectively, during
1998. Each director attended at least 75% of the total number of meetings of
the Board and of committees on which the director served, except for Mr.
Gherty who was absent from two meetings of the Board of Directors.
The Compensation Committee reviews and makes recommendations to the Board of
Directors regarding salaries, compensation and benefits of executive officers
of the Company and administers the Company's 1986
I-4
<PAGE>
Stock Option Plan and 1994 Stock Option and Incentive Plan. The members of the
Compensation Committee are Mr. Gherty, Mr. Patel and Mr. Wanner.
The Audit Committee reviews the internal and external financial reporting of
the Company and reviews the scope of the independent audit. During 1998, the
members of the Audit Committee were Mr. Gheewalla, Mr. Thompson and Dr.
Zeckhauser.
The Board of Directors acts as the nominating committee for selecting the
Board's nominees for election as directors. The Company's bylaws require that
shareholder nominations for director be made pursuant to timely notice in
writing to the Company. To be timely, written notice must be delivered to the
Company not less than 60 nor more than 90 days prior to the date of the
scheduled annual meeting; however, if the Company gives less than 70 days'
notice of such meeting, the shareholder may deliver notice no later than the
tenth day following the earlier of the day on which the Company's notice of
the date of the meeting was mailed or the day on which such date was publicly
disclosed. The bylaws further provide that the shareholder's notice shall set
forth certain information concerning each nominee, including (i) the name,
age, business address and residence address of such person, (ii) the principal
occupation or employment of such person, (iii) the class and number of shares
of Common Stock beneficially owned by such person on the date of the notice,
and (iv) any other information relating to such person that would be required
to be disclosed pursuant to Regulation 13D and Regulation 14A under the
Exchange Act. In addition, the shareholder giving the notice is required to
state the name and address of such shareholder and the identity of other
shareholders known by such shareholder to be supporting such nominees and the
extent of such shareholders' beneficial ownership of Common Stock. A majority
of the continuing directors may reject a nomination by a shareholder not
timely made in accordance with the requirements of the bylaws. In case of a
deficiency in such shareholder's notice, the shareholder has the opportunity
to cure the deficiency by providing additional information within five days of
the date that such a deficiency notice is given to the shareholder. A majority
of the continuing directors determines whether the deficiency has been cured
by the shareholder.
DIRECTOR COMPENSATION
Directors of the Company receive no cash fee for their service as directors.
Non-employee directors of the Company have been granted stock options in
connection with their service as directors, including options automatically
granted under the Company's 1993 Director Stock Option Plan.
EXECUTIVE OFFICERS
The following discussion sets forth information about the executive officers
of the Company who are not directors.
<TABLE>
<S> <C> <C> <C>
Officer
Name Positions With Company Age Since
- ---- ---------------------- --- -------
Reed A.
Watson.... President and Chief Operating Officer 40 1999
Charles F.
Karpinske.. Vice President and Chief Financial Officer 44 1996
Richard D.
Hembree... Vice President--Engineering 46 1987
Jeffrey T.
Dekko..... Vice President--Marketing 32 1995
Barry B.
Van
Lerberghe.. Vice President--Sales 37 1995
Daniel B.
Seebart... Vice President--Manufacturing 52 1998
</TABLE>
REED A. WATSON has served as President and Chief Operating Officer of the
Company since February 1999. From 1992 until joining the Company, Mr. Watson
was employed by The Pillsbury Company, where he served most recently as the
Vice President and General Manager of the $1.8 billion Baked Foods Division.
Prior to his tenure at Pillsbury, Mr. Watson was employed in various marketing
capacities at Kraft Foods, Inc.
I-5
<PAGE>
CHARLES F. KARPINSKE has served as the Company's Vice President and Chief
Financial Officer since February 1996. Prior to joining the Company, Mr.
Karpinske served as Vice President of Operations and Chief Financial Officer
of Goretek Data Systems, a software development company, from April 1995 to
February 1996. From August 1993 to March 1995, Mr. Karpinske was the Chief
Operating Officer and Chief Financial Officer for Decision Data, a
manufacturer and distributor of computer equipment. From October 1986 to July
1993, Mr. Karpinske worked for Apertus Technologies (formerly Lee Data), a
manufacturer and distributor of computer equipment, serving in a number of
financial positions including Chief Financial Officer, Vice President of
Finance and Administration and Corporate Controller.
RICHARD D. HEMBREE has served as chief engineer of the Company since 1986
and Vice President--Engineering since 1987. Mr. Hembree has been principally
responsible for the development of new technologies incorporated into the
Company's products. Mr. Hembree is named as an inventor on eight United States
patents held by the Company. From 1983 to 1986, Mr. Hembree was a senior
design engineer at Seagold Industries Corporation, a manufacturer of
desalinators, where he designed several energy recovery pumps and was engaged
in the design and development of manual desalinators and hydraulic energy
recovery devices.
JEFFREY T. DEKKO has served as Vice President--Marketing of the Company
since July 1995. Mr. Dekko served as Vice President of Recreational Products
for the Company from October 1994 to July 1995. Mr. Dekko directs the
Company's marketing efforts in the consumer household water products category.
From 1988 to October 1994, Mr. Dekko was marketing manager for General Mills,
Inc.
BARRY B. VAN LERBERGHE has served as Vice President--Sales of the Company
since July 1995. Prior to joining the Company, Mr. Van Lerberghe was Western
Regional Manager for Sunbeam Household Products from 1992 to 1995, and
District Sales Manager for Polaroid Corporation from 1988 to 1992.
DANIEL B. SEEBART has served as Vice President--Manufacturing of the Company
since October 1998. From 1991 to September 1998, Mr. Seebart was employed by
Onan, a division of Cummings Engine Company, where he served as plant manager
and executive director of continuous improvement. Prior to 1991, Mr. Seebart
served as a vice president at Century Manufacturing Company.
I-6
<PAGE>
EXECUTIVE COMPENSATION
The following Summary Compensation Table shows cash and other compensation
paid or accrued during the last three fiscal years to the Company's Chief
Executive Officer and each of the four other most highly compensated executive
officers of the Company.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
----------------- ------------
Name and Principal Awards Other
Position Year Salary Bonus(1) Options(#) Compensation(2)
- ------------------ ---- -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Brian F. Sullivan......... 1998 $275,000 $ -- -- $3,200
(Chairman and Chief Execu-
tive Officer) 1997 205,000 150,000 -- 3,200
1996 150,000 -- 250,000 --
Charles F. Karpinske (3).. 1998 $161,000 $ -- 10,000 $3,200
(Vice President and Chief
Financial Officer) 1997 140,000 64,280 40,000 3,023
1996 112,500 -- 25,000 --
Richard D. Hembree........ 1998 $145,000 $ -- 15,000 $2,994
(Vice President--Engineer-
ing) 1997 112,000 49,164 10,000 2,382
1996 99,900 -- -- 1,996
Jeffrey T. Dekko.......... 1998 $132,000 $ -- 9,000 $1,333
(Vice President--Market-
ing) 1997 110,000 60,345 12,000 2,575
1996 88,500 -- 14,000 1,312
Barry B. Van Lerberghe.... 1998 $132,000 $ -- 9,000 $2,753
(Vice President--Sales) 1997 110,000 57,020 12,000 2,491
1996 96,300 -- 13,000 2,140
</TABLE>
- --------
(1) The executive officers of the Company are eligible to earn annual cash
bonuses tied to the level of achievement of annual performance targets.
(2) Represents the Company's matching contribution under its 401(k)
Retirement Savings Plan.
(3) Mr. Karpinske's employment with the Company commenced in February 1996.
AGREEMENTS WITH EXECUTIVES
The Company, GS Group and Brian F. Sullivan entered into an Executive
Restriction Agreement dated July 19, 1996 in connection with the Company's
sale of its 5% Convertible Notes due 2003 (the "Convertible Notes") to GS
Group.
The Company has entered into Change-in-Control Severance Pay Agreements with
each of its executive officers which provide that if the executive officer's
employment with the Company is terminated within 24 months following a
"change-in-control" of the Company, other than termination for cause,
voluntary termination by the executive officer, or termination on account of
death or disability, the Company will (i) pay to the executive officer an
amount equal to a multiple of his average annual compensation, including
bonus, for the three-year period ending in the year in which his employment
terminates, (ii) provide continued coverage under the Company's insurance
programs, and (iii) pay the executive officer an amount equal to the
difference between the aggregate fair market value of shares subject to stock
options which are forfeited or become unexercisable as a result of his
termination of employment, and the aggregate exercise price of such options.
The applicable multiples of average annual compensation are three times for
Mr. Sullivan, two times for Mr. Karpinske and Mr. Hembree, and one time for
Mr. Dekko and Mr. Van Lerberghe. For these purposes, a "change-in-control"
means (i) the dissolution or liquidation of the Company, or a merger,
consolidation or other corporate reorganization in which the Company is not
the surviving party; (ii) the sale of all or substantially all of the business
or assets of the Company; (iii) the acquisition by any person of securities
representing more than 25% of the voting power
I-7
<PAGE>
of the Company's outstanding securities; or (iv) individuals who constitute
the Board of Directors at the beginning of any two-year period ceasing to
constitute at least a majority of the Board of Directors, unless each new
director is approved by a two-thirds vote of the directors then in office who
were directors at the beginning of such period. At the Effective Time, the
Change-in-Control Severance Pay Agreements for five of the seven executive
officers will be cancelled.
RETIREMENT SAVINGS PLAN
The Company maintains a profit sharing and savings plan (the "401(k) Plan")
under Section 401(k) of the Internal Revenue Code of 1986, as amended (the
"Code"), which allows employees to contribute up to 15% of their pre-tax
income to the 401(k) Plan. The 401(k) Plan includes a discretionary matching
contribution by the Company and provides that the Company may make an
additional discretionary contribution out of profits at the end of any year.
The Company made discretionary matching contributions of $61,000, $98,000 and
$170,000 for 1996, 1997 and fiscal 1998, respectively. No additional
discretionary contributions were made by the Company for 1996, 1997 or fiscal
1998.
STOCK OPTIONS
Since its inception, the Company has utilized stock and stock options to
provide incentives and rewards to its employees and directors. The Recovery
Engineering, Inc. 1986 Stock Option Plan (the "1986 Option Plan") permits the
granting of awards to directors and employees of the Company in the form of
stock options. Stock options granted under the 1986 Option Plan may be
"incentive stock options" meeting the requirements of Section 422 of the Code
or non-qualified options which do not meet the requirements of Section 422. At
February 28, 1999, options for an aggregate of 17,150 Shares were outstanding
under the 1986 Plan. The outstanding options are presently exercisable with
respect to 15,650 Shares. No additional options may be granted under the 1986
Plan.
The Recovery Engineering, Inc. 1994 Stock Option and Incentive Plan (the
"1994 Plan") permits the granting of awards to employees, consultants and
other service providers in the form of incentive stock options, non-qualified
stock options and grants of restricted stock. At February 28, 1999, options
for an aggregate of 1,102,432 Shares were outstanding under the 1994 Plan, and
89,343 Shares were available for grant. The outstanding stock options are
presently exercisable with respect to 382,071 Shares. Awards may be granted
under the 1994 Plan through January 31, 2004. The 1994 Plan may be terminated
earlier by the Board of Directors in its sole discretion.
The 1986 Option Plan and the 1994 Plan are administered by the Compensation
Committee of the Board of Directors. These plans give broad powers to the
Committee to administer and interpret the plans, including the authority to
select the individuals to be granted awards and to prescribe the particular
form and conditions of each award granted. Awards are granted on the basis of
various factors, including the individual's capacity for contributing to the
successful performance of the Company, the nature of the operations for which
the individual is responsible, and the period for which the individual has
served or will have served the Company at the vesting of the award.
I-8
<PAGE>
The following table shows certain information regarding stock options
granted to the executive officers named in the Summary Compensation Table
during the Company's 1998 fiscal year.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed Annual
Rates of Stock
Price
Appreciation for
Individual Grants Option Term (1)
------------------------------------------------- -----------------
Percent of Total
Options Granted Exercise
Options to Employees in Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- ---- ----------- ---------------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Brian F. Sullivan....... -- -- -- -- -- --
Charles F. Karpinske.... 10,000(2) 5.0% $23.38 01/12/2008 $147,004 $372,537
Richard D. Hembree...... 15,000(2) 7.5% $23.38 01/12/2008 $220,506 $558,806
Jeffrey T. Dekko........ 9,000(2) 4.5% $23.38 01/12/2008 $132,304 $335,284
Barry B. Van Lerberghe.. 9,000(2) 4.5% $23.38 01/12/2008 $132,304 $335,284
</TABLE>
- --------
(1) Represents the potential net realizable value of each grant of options
assuming that the market price of the underlying Common Stock appreciates
in value from its fair market value on the date of grant to the end of the
option term at the indicated annual rates.
(2) Each option was granted on January 12, 1998 and vests with respect to 25%
of the option shares on the first, second, third and fourth anniversaries
of the grant date.
The following table shows information for the executive officers named in
the Summary Compensation Table regarding the exercise of stock options during
fiscal 1998 and the number and value of unexercised stock options held by as
of the end of fiscal 1998.
Aggregated Option Exercises in Last Fiscal Year and Year-End Option Values
<TABLE>
<CAPTION>
Value of Unexercised
Shares Number of Unexercised In-the-Money Options
Acquired on Options at Year-End (#) at Year-End ($)(1)
Exercise Value ------------------------- -------------------------
(#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
----------- ------------ ------------------------- -------------------------
<S> <C> <C> <C> <C>
Brian F. Sullivan....... -- -- 121,500/250,000 $0/$0
Charles F. Karpinske.... -- -- 41,250/33,750 $0/$0
Richard D. Hembree...... -- -- 58,750/16,250 $0/$0
Jeffrey T. Dekko........ -- -- 26,250/19,750 $0/$0
Barry B. Van Lerberghe.. -- -- 23,750/22,250 $0/$0
</TABLE>
- --------
(1) The December 31, 1998 closing price of $6.63 per share as reported on the
NASDAQ/NMS was less than the exercise price of all of the options held by
the executive officers named in the Summary Compensation Table.
Mr. Sullivan has agreed that 35,000 of his 250,000 options will be cancelled
at the Effective Time without payment and that the Merger Consideration
payable to Mr. Sullivan at the Effective Time with respect to the remaining
215,000 options will be reduced by an amount equal to the principal and
accrued interest on Mr. Sullivan's promissory note dated April 18, 1997,
payable to the Company, whereupon the Company will cancel and discharge all of
Mr. Sullivan's obligations thereunder.
I-9
<PAGE>
DIRECTOR STOCK OPTION PLAN
The Company's 1993 Director Stock Option Plan (the "Director Option Plan")
provides for the automatic granting of an option for shares of Common Stock to
each non-employee director of the Company on the date of his or her initial
election or appointment as a director, and additional options on the date of
each annual meeting of shareholders at which the director is re-elected by the
shareholders. The number of Shares covered by such options was 1,000 Shares
per grant through 1996, and 4,000 Shares per grant for 1997 and subsequent
years. The exercise price of options granted under the Director Option Plan is
equal to 85% of the fair market value of the Common Stock on the date of
grant. At February 28, 1999, options for an aggregate of 61,000 Shares were
outstanding under the Director Option Plan and 53,000 Shares were available
for grant.
EMPLOYEE STOCK PURCHASE PLAN
The Company's 1994 Stock Purchase Plan permits eligible employees to make
voluntary contributions through payroll deductions, to be used to purchase
Common Stock from the Company on a monthly basis at a price equal to 85% of
the fair market value of a share of Common Stock on the purchase date. The
number of Shares that an employee may purchase under the Stock Purchase Plan
may not exceed 500 Shares during any calendar year, and the aggregate purchase
price of Shares purchased by any employee under the Stock Purchase Plan may
not exceed $10,000 during any calendar year. The Company issued 6,874 Shares,
9,501 Shares and 21,068 Shares under the Stock Purchase Plan in 1996, 1997 and
fiscal 1998, respectively.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Decisions and recommendations regarding compensation paid to the Company's
executive officers in 1998 were made by a Compensation Committee consisting of
John E. Gherty, Sanjay H. Patel and William F. Wanner, Jr., each of whom is a
non-employee director of the Company. Brian F. Sullivan, the only executive
officer of the Company who serves on the Board of Directors, abstains from
voting on compensation matters affecting his compensation.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company's directors, executive officers and any persons holding more
than 10% of the outstanding Common Stock are required to file with the
Commission reports concerning their initial ownership of Common Stock and any
subsequent changes in such ownership. The Company believes that during 1998
the filing requirements were satisfied on a timely basis by all such persons,
except as follows: two transactions by Mr. Patel and one transaction by Dr.
Zeckhauser were not reported on a timely basis. In making this disclosure, the
Company has relied solely on written representations of its directors,
officers and beneficial owners of more than 10% of the Common Stock and copies
of the reports they have filed with the Commission and furnished to the
Company.
CERTAIN TRANSACTIONS
Pursuant to the Securities Purchase Agreement, the Company issued to GS
Group $15.0 million principal amount of the Convertible Notes. The Convertible
Notes are convertible into shares of Common Stock at a conversion price of
$14.85 per share. The Convertible Notes include certain reset rights which
provide for an adjustment of the conversion price if at the time the
Convertible Notes are converted into Common Stock, the market price of the
Common Stock is below certain levels. The Convertible Notes may be converted
into Common Stock at any time at the option of GS Group or, if certain
conditions are satisfied, after January 18, 2000, by the Company. The
Convertible Notes bear interest at the rate of 5% per annum, payable quarterly
on
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<PAGE>
March 31, June 30, September 30, and December 31 in each year, commencing
September 30, 1996. If not converted, the principal amount of the Convertible
Notes is payable in annual installments starting August 1, 2001. The
Convertible Notes may be prepaid in whole or in part at any time by the
Company, without penalty, provided that if less than the entire indebtedness
evidenced by the Convertible Notes is to be prepaid by the Company, it must
offer to repay the Convertible Notes pro rata from each holder thereof.
Under the Securities Purchase Agreement, for so long as at least 25% of the
initial amount of Convertible Notes remain outstanding and GS Group holds at
least a majority of the outstanding Convertible Notes, at each meeting for the
election of directors of the Company, the Company is to use its best efforts
to cause to be elected to, and maintained as a member of, the Board of
Directors, one person designated by GS Group. The representative is to be a
member of the Company's executive and finance committees, if any, or any other
committee performing substantially similar functions and, upon request by the
representative, any other committee of the Board of Directors. The Company has
also agreed that if, at any time, GS Group does not have a representative on
the Board of Directors, GS Group will be entitled to have an observer present
at all meetings of the Board. Robert R. Gheewalla currently serves as a
director of the Company as the designee of GS Group.
In connection with the sale of the Convertible Notes, the Company, GS Group
and Brian F. Sullivan entered into an Executive Restriction Agreement, dated
July 19, 1996. The Executive Restriction Agreement prohibits, subject to
certain exceptions, Mr. Sullivan's sale of Common Stock until July 19, 1998.
After that date, Mr. Sullivan may not sell or otherwise transfer in any
transaction more than 25% of the Common Stock (including Shares subject to
stock options) which he held as of July 19, 1996 unless the holders of the
Convertible Notes are allowed to participate in such sale on a pro rata basis.
Under the Executive Restriction Agreement, Mr. Sullivan also has agreed to
refrain from competing with the Company for three years after (i) his
employment with the Company is terminated for cause or (ii) he resigns from
the Company other than for good reason (as defined in the Executive
Restriction Agreement).
In April 1997, Mr. Sullivan exercised stock options for an aggregate of
199,000 shares of Common Stock, and paid the exercise price of the options by
delivering to the Company his promissory note dated April 18, 1997, in the
principal amount of $497,500. The note bears interest at the rate of 9.25% per
annum, and matures on June 30, 2001.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors (the "Committee") is
composed of non-employee directors of the Company. For 1998 the Committee
consisted of John E. Gherty, Sanjay H. Patel and William F. Wanner, Jr. The
Committee is responsible for assuring that compensation for executives is
consistent with the Company's compensation philosophy. The Committee also
administers and makes grants under the Company's stock option plans with
respect to the Company's executive officers.
The Company's executive compensation program is based on a pay-for-
performance philosophy. Under the Company's program, an executive's
compensation consists of three components: base salary, an annual incentive
(bonus) payment, and long-term incentives (principally stock options). Base
salaries generally are set at levels competitive with base salaries for
comparable positions in the marketplace. In addition, base salaries reflect
the executive's individual job responsibilities, his or her sustained
performance in fulfilling those responsibilities and the impact of such
performance on the business results of the Company. Base salaries for
executive officers were increased for 1998 based on the Company's achievements
in the market for household water filter products and the additional
responsibilities assumed by the executive officers in connection with the
growth of the Company's operations. Mr. Sullivan's base salary was increased
for 1998 based on the Company's achievements and to more nearly align his base
salary with those of chief executive officers of comparable companies.
Payments under the Company's management bonus program are tied to the level
of achievement of performance objectives for business functions under the
executive's direction and performance objectives for the
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<PAGE>
Company as a whole. Performance objectives are based on the Company's annual
strategic plan as reviewed by the Board of Directors. An executive's annual
bonus potential is a percentage of his or her base salary and, for executives
other than Mr. Sullivan, is based on the achievement of various operating
objectives. Mr. Sullivan is eligible to earn a cash bonus based on the
Company's net income before income taxes. No bonuses were earned by any of the
executive officers in fiscal 1998.
The Company's long-term incentives are in the form of stock options. The
objective of these awards is to advance the longer term interests of the
Company and its shareholders, complement incentives tied to annual
performance, and align the interests of executives more closely with those of
shareholders. The Company also believes that the entrepreneurial character of
its executives makes the long-term incentives provided by its stock option
program especially significant in the motivation and retention of its
executives. The number of stock options awarded to an executive is based on
the executive's position and his or her performance in that position. The
executive's right to the stock options generally vests over a four-year period
and each option is exercisable, to the extent it has vested, over a ten-year
period following its grant. In the case of Mr. Sullivan, a significant portion
of his stock options vest upon the achievement of certain sales and income
objectives established by the Committee.
The Committee believes that the Company's executives are focused on the
attainment of a sustained high rate of growth and profitability for the
benefit of the Company and its shareholders, and that the Company's
compensation program, with its emphasis on performance-based and long-term
incentive compensation, serves to reinforce this focus.
By the Compensation Committee
John E. Gherty
Sanjay H. Patel
William F. Wanner, Jr.
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<PAGE>
PERFORMANCE GRAPH
The following graph shows changes during the five-year period ended December
31, 1998, in the value of $100 invested in: (1) the Common Stock; (2) the CRSP
Total Return Index for The Nasdaq Stock Market (US); and (3) Nasdaq Non-
Financial Stocks. The values of each investment as of the dates indicated are
based on share prices plus any dividends paid in cash, with the dividends
reinvested on the date they were paid. The calculations exclude trading
commissions and taxes.
[GRAPH]
<TABLE>
<CAPTION>
12/31/93 12/30/94 12/29/95 12/31/96 12/31/97 12/31/98
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Recovery Engineering,
Inc. .................. $100.00 $149.49 $123.23 $ 56.57 $197.98 $ 53.54
CRSP Index for Nasdaq
Stock Market (US)...... $100.00 $ 97.75 $138.26 $170.01 $208.30 $293.52
Nasdaq Non-Financial
Stocks................. $100.00 $ 96.16 $134.03 $162.84 $190.73 $280.01
</TABLE>
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<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table shows information as of August 25, 1999, regarding the
beneficial ownership of shares of Common Stock by (i) each shareholder known
by the Company to own beneficially more than five percent (5%) of the Common
Stock, (ii) each director or nominee for director of the Company, (iii) each
executive officer named in the Summary Compensation Table, and (iv) all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Name and Address of Beneficial Number of Shares Percent of
Owner Beneficially Owned (1) Outstanding Shares (2)
- ------------------------------ ---------------------- ----------------------
<S> <C> <C>
Certain investment funds
affiliated with
The Goldman Sachs Group, L.P. 1,027,101 14.5%
(3).............................
85 Broad Street
New York, NY 10004
Wanner Engineering, Inc. (4)..... 596,100 9.9%
1204 Chestnut Avenue
Minneapolis, MN 55403
US Trust Company of New York 570,100 9.4%
(5).............................
114 West 47th Street
New York, NY 10036
Safeco Corp. (6)................. 446,750 7.4%
4333 Brooklyn Avenue NE
Seattle, WA 98185
Ashford Capital Management Inc. 372,400 6.2%
(7).............................
P.O. Box 4172
Wilmington, DE 19807
Directors and executive officers:
Brian F. Sullivan (8)(9)......... 530,000 8.6%
Charles F. Karpinske (8)......... 41,299 *
Richard D. Hembree (8)........... 134,973 2.2%
Jeffrey T. Dekko (8)............. 28,831 *
Barry B. Van Lerberghe (8)....... 30,804 *
Robert R. Gheewalla (8)(10)...... 12,000 *
John E. Gherty (8)(11)........... 72,247 1.2%
Sanjay H. Patel (8)(12).......... 16,700 *
William D. Thompson (8).......... 29,000 *
William F. Wanner, Jr. (8)(13)... 662,150 10.9%
Richard J. Zeckhauser (8)(14).... 99,500 1.6%
All directors and executive
officers as a group
(13 persons, including those
named above) (8)................ 1,657,504 25.7%
</TABLE>
- --------
* Less than one percent.
(1) Each person has sole voting and sole power with respect to all outstanding
Shares, except as noted.
(2) Based on 6,044,601 Shares outstanding at August 25, 1999. Such amount does
not include 2,369,768 shares of Common Stock issuable upon exercise of
stock options and warrants or conversion of the Convertible Notes
outstanding at August 25, 1999. Each figure showing the percentage of
outstanding Shares owned beneficially has been calculated by treating as
outstanding and owned the Shares which could be purchased by the indicated
person(s) within 60 days upon the exercise of existing stock options or
the conversion of the Convertible Notes.
(3) Reflects information included on a Schedule 13D, dated April 30, 1998,
filed with the Commission by certain investment partnerships, of which GS
Group is the general partner, managing general partner, managing partner
or investment manager. Includes (i) 1,010,101 Shares which may be acquired
upon the
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<PAGE>
conversion of the Convertible Notes owned by the investment partnerships,
and (ii) 17,000 Shares subject to options held for the benefit of GS Group
by Mr. Gheewalla and Mr. Patel (see Notes 8, 11 and 13). Includes the
Convertible Notes held of record by GS Capital Partners II, L.P., currently
convertible into 633,766 Shares, the Convertible Notes held of record by GS
Capital Partners II Offshore, L.P., currently convertible into 251,948
Shares, the Convertible Notes held of record by Stone Street Fund 1996,
L.P., currently convertible into 60,191 Shares, the Convertible Notes held
of record by Bridge Street Fund 1996, L.P. , currently convertible into
40,819 Shares, and the Convertible Notes held of record by Goldman, Sachs &
Co. Verwaltungs GmbH, currently convertible into 23,377 Shares. Does not
include up to 367,309 aggregate Shares in respect of certain reset rights
held by the investment partnerships. The reset rights are created in
certain events through an adjustment of the conversion price applicable to
the Convertible Notes. GS Group disclaims beneficial ownership of the
Shares owned by such investment partnerships to the extent attributable to
partnership interests therein held by persons other than GS Group and its
affiliates. Each of such investment partnerships shares voting and
investment power with certain of its respective affiliates.
(4) Mr. Wanner, a director of the Company, is a director, officer and
principal shareholder of Wanner Engineering, Inc. Such Shares are also
included in the Shares beneficially owned by Mr. Wanner.
(5) Reflects information as of December 31, 1998, based on a Schedule 13G,
dated February 12, 1999, filed by such company with the Commission, which
indicates that the shareholder has shared voting power and shared
dispositive power with respect to said Shares.
(6) Reflects information as of December 31, 1998, based on a Schedule 13G,
dated February 11, 1999, filed by such company with the Commission, which
indicates that the shareholder has shared voting power and shared
dispositive power with respect to said Shares.
(7) Reflects information as of December 31, 1998, based on a Schedule 13G,
dated February 2, 1999, filed by such company with the Commission, which
indicates that the shareholder has sole voting power and sole dispositive
power with respect to said Shares.
(8) Includes Shares which could be purchased within 60 days upon the exercise
of stock options as follows: Mr. Sullivan, 121,500 Shares; Mr. Karpinske,
41,250 Shares; Mr. Hembree, 103,750 Shares; Mr. Dekko, 26,250 Shares; Mr.
Van Lerberghe, 26,750 Shares; Mr. Gheewalla, 12,000 Shares; Mr. Gherty,
14,000 Shares; Mr. Patel, 13,000 Shares; Mr. Thompson, 14,000 Shares; Mr.
Wanner, 8,000 Shares; Dr. Zeckhauser, 15,000 Shares; and all directors
and executive officers as a group, 395,500 Shares.
(9) Mr. Sullivan's address is 9300 North 75th Avenue, Minneapolis, MN 55428.
(10) Includes 12,000 Shares subject to options held for the benefit of GS
Group. Does not include other securities that may be deemed to be
beneficially owned by GS Group (see Note 3). Mr. Gheewalla, a director of
the Company, is an associate of Goldman, Sachs & Co., the investment
manager for certain of the investment partnerships. Mr. Gheewalla
disclaims beneficial ownership of such securities.
(11) Includes 10,701 Shares held by Mr. Gherty as custodian for his minor
children.
(12) Includes 5,000 Shares subject to options held for the benefit of GS Group
with which Mr. Patel was previously associated. Mr. Patel disclaims
beneficial ownership of such securities.
(13) Includes 2,200 Shares held by Mr. Wanner as trustee for members of his
family and 596,100 Shares owned by Wanner Engineering, Inc., of which Mr.
Wanner is a director, officer and principal shareholder.
(14) Includes 25,000 Shares owned by Dr. Zeckhauser's wife. Dr. Zeckhauser,
having no voting or dispositive powers with respect to such Shares,
disclaims beneficial ownership of such Shares.
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