SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
RECOVERY ENGINEERING, INC.
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(Name of Registrant as Specified In Its Charter)
N/A
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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RECOVERY ENGINEERING, INC.
9300 North 75th Avenue
Minneapolis, Minnesota 55428
(612) 315-5500
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 29, 1999
TO THE SHAREHOLDERS OF
RECOVERY ENGINEERING, INC.:
The Annual Meeting of Shareholders of Recovery Engineering, Inc., a
Minnesota corporation (the "Company"), will be held on Thursday, April 29, 1999,
at 3:30 p.m. Central Daylight Savings Time, at the offices of Robins, Kaplan,
Miller & Ciresi L.L.P., 2800 LaSalle Plaza, 800 LaSalle Avenue, Minneapolis,
Minnesota 55402. The Annual Meeting is being held for the following purposes:
1. To consider and act upon a proposal to amend the Company's Articles
of Incorporation to authorize a classified board and to implement
certain related matters.
2. To elect seven directors of the Company.
3. To consider and act upon a proposal to amend the Company's 1994
Stock Option and Incentive Plan to increase the number of shares
reserved for issuance under the plan.
4. To consider and act upon a proposal to amend the Company's 1993
Director Stock Option Plan to increase the number of shares reserved
for issuance under the plan.
5. To ratify the appointment of Ernst & Young LLP as independent
auditors for the fiscal year ending January 2, 2000.
6. To transact such other business as may properly come before the
meeting or any adjournment thereof.
Holders of record of the Company's Common Stock at the close of business
on March 5, 1999 are entitled to notice of and to vote at the Annual Meeting or
any adjournment thereof.
Each of you is invited to attend the Annual Meeting in person if possible.
Whether or not you plan to attend in person, please mark, date and sign the
enclosed proxy, and mail it promptly. A return envelope is enclosed for your
convenience.
By Order of the Board of Directors
March 22, 1999 Eric O. Madson, SECRETARY
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WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING,
PLEASE SIGN THE PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE.
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TABLE OF CONTENTS
Solicitation of Proxies........................................................1
Voting and Revocation of Proxies...............................................1
Approval of Amendment of the Company's Articles of Incorporation
to Authorize a Classified Board of Directors and to Implement
Certain Related Matters (Proposal 1).....................................2
Information Concerning Proposed Amendment to Articles of Incorporation.........3
Election of Directors (Proposal 2).............................................7
Information Concerning Directors, Nominees and Executive Officers..............8
Report of the Compensation Committee..........................................16
Performance Graph.............................................................17
Beneficial Ownership of Common Stock..........................................18
Approval of Amendment to 1994 Stock Option and Incentive Plan (Proposal 3)....20
Approval of Amendment to 1993 Director Stock Option Plan (Proposal 4).........25
Ratification of Appointment of Independent Auditors (Proposal 5)..............27
Proposals of Shareholders.....................................................27
Other Business................................................................28
Financial Information.........................................................28
Exhibit A: Amendment to Articles of Incorporation............................A-1
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RECOVERY ENGINEERING, INC.
9300 North 75th Avenue
Minneapolis, Minnesota 55428
(612) 315-5500
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PROXY STATEMENT
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SOLICITATION OF PROXIES
The enclosed proxy is solicited by and on behalf of the Board of Directors
of Recovery Engineering, Inc., a Minnesota corporation (the "Company"), for use
at the Annual Meeting of Shareholders ("Annual Meeting") to be held on April 29,
1999, and any adjournment thereof. This Proxy Statement and the accompanying
form of proxy are being mailed to shareholders on or about March 23, 1999.
The expense of the solicitation of proxies for the Annual Meeting,
including the cost of mailing, has been or will be borne by the Company.
Arrangements will be made with brokerage houses and other custodian nominees and
fiduciaries to send proxies and proxy materials to their principals, and the
Company will reimburse them for their expense in so doing. In addition to
solicitation by mail, proxies may be solicited by telephone, telegraph or
personally.
VOTING AND REVOCATION OF PROXY
The record date for the Annual Meeting is the close of business on March
5, 1999. On the record date, 6,018,397 shares of Common Stock were outstanding.
Holders of record of the Company's Common Stock on the record date are entitled
to notice of and to vote at the Annual Meeting. Each holder of a share of Common
Stock is entitled to one vote per share upon each matter to be presented at the
Annual Meeting.
Each proxy returned to the Company will be voted in accordance with the
instructions indicated on the proxy. If no instructions are indicated, the
shares will be voted (i) FOR the approval of the amendment of the Company's
Articles of Incorporation to authorize a classified board and to implement
certain related matters; (ii) FOR the election of the nominees for the Board of
Directors named in this Proxy Statement; (iii) FOR the approval of an amendment
to the Company's 1994 Stock Option and Incentive Plan to increase the number of
shares reserved for issuance under the plan; (iv) FOR the approval of an
amendment to the Company's 1993 Director Stock Option Plan to increase the
number of shares reserved for issuance under the plan; and (v) FOR the
ratification of the appointment of Ernst & Young LLP as independent auditors for
the fiscal year ending January 2, 2000. While the Board of Directors knows of no
other matters to be presented at the Annual Meeting or any adjournment thereof,
all proxies returned to the Company will be voted on any such matter in
accordance with the judgment of the proxy holders.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (a) giving
written notice of such revocation to the Secretary of the Company, (b) giving
another written proxy bearing a later date, or (c) attending the Annual Meeting
and voting in person (although attendance at the Annual Meeting will not in and
of itself constitute a revocation of a proxy).
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A quorum, consisting of a majority of the shares of Common Stock entitled
to vote at the Annual Meeting, must be present in person or by proxy before
action may be taken at the Annual Meeting. If an executed proxy is returned and
the shareholder has abstained from voting on any matter, the shares represented
by such proxy will be considered present at the meeting for purposes of
determining a quorum and for purposes of calculating the vote, but will not be
considered to have been voted in favor of such matter. If an executed proxy is
returned by a broker holding shares in "street name" which indicates that the
broker does not have discretionary authority as to certain shares to vote on one
or more matters, such shares will be considered present at the meeting for
purposes of determining a quorum, but will not be considered to be represented
at the meeting for purposes of calculating the vote with respect to such matter.
APPROVAL OF AMENDMENT OF THE COMPANY'S ARTICLES OF INCORPORATION
TO AUTHORIZE A CLASSIFIED BOARD OF DIRECTORS AND
TO IMPLEMENT CERTAIN RELATED MATTERS
(PROPOSAL 1)
GENERAL
The Company's Board of Directors has unanimously approved an amendment to
the Company's Articles of Incorporation (the "Articles") and recommends that the
Company's shareholders approve such amendment. If adopted, the amendment would
(i) classify the Board into three classes, as nearly equal in number as
possible, each of which, after an interim arrangement, would serve for three
years, with one class being elected each year; (ii) provide that the number of
directors may not be less than five nor more than eleven, the precise number to
be set by the Company's Board of Directors; (iii) provide that directors shall
be removed only for cause; (iv) provide that any vacancy on the Board shall be
filled by a vote of the majority of the remaining directors then in office, even
if less than a quorum; and (v) provide that the Articles of Incorporation
relating to the classified board shall only be amended by the affirmative vote
of the holders of at least two-thirds of the voting power of the outstanding
shares. The proposed amendment is designed to assure continuity and stability in
the Board's leadership and policies, particularly in the event of an unsolicited
takeover attempt. The proposed amendment also establishes a legal structure that
encourages any potential acquirer to negotiate with the Board rather than
unilaterally attempt to gain control of the Company. The Board believes that
this approach is the one most likely to result in long-term enhancement of
shareholder value. Although there has been no problem in the past with the
continuity or stability of the Board, the Board believes that the amendment will
help to assure the continuity and stability of the Company's affairs and
policies in the future. If approved, the amendment will be effective upon the
filing of Articles of Amendment with the Office of the Minnesota Secretary of
State, which filing will be made promptly after the Annual Meeting.
Before voting on this amendment, shareholders are urged to read carefully
the following sections of this proxy statement, which describe the amendment and
its purposes and effects, and Exhibit A hereto, which sets forth the full text
of the proposed amendment.
SHAREHOLDER APPROVAL
The affirmative vote of a majority of the shares of Common Stock
represented at the Annual Meeting either in person or by proxy and voting on the
proposal, assuming a quorum is present, is required for the approval of the
amendment to the Articles of Incorporation.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
APPROVAL OF THE AMENDMENT TO THE ARTICLES OF INCORPORATION AS SET FORTH IN
PROPOSAL 1.
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INFORMATION CONCERNING PROPOSED AMENDMENT
TO ARTICLES OF INCORPORATION
CLASSIFICATION OF THE BOARD OF DIRECTORS
The Company's Bylaws currently specify that all directors shall serve for
an indefinite term which expires at the regular meeting of the shareholders next
held after such director's election or appointment. 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 do not
permit cumulative voting for directors.
The proposed amendment divides the Board into three classes, each class to
be as nearly equal in number as possible: Class 1, Class 2 and Class 3. Each
director shall serve 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
shall 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 shall 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 shall serve for a term ending upon
the election of directors at the third annual meeting following the end of the
calendar year 1999. If the proposed amendment is adopted, every election of
directors will be by classification.
A classified Board will extend the time required to change the composition
of a majority of directors. Presently, a change in composition of the Board of
Directors can be made by the holders of a majority of the voting power of the
Company's stock voting at a single meeting. With a classified Board, two annual
meetings normally would be required for such holders to change the composition
of a majority of the Board of Directors, since only one-third of the number of
directors will be elected at each meeting. Because of the additional time
required to change the composition of the Board, classification of the Board
also may make the removal of incumbent management more difficult.
Since the classified Board will increase the time required for a third
party to obtain control of the Company without the cooperation of the Board of
Directors, it may tend to discourage certain tender offers, including perhaps
tender offers that some shareholders may feel would be in their best interest.
However, the Board of Directors believes that classification of the Board will
provide the Board with more time to evaluate any takeover proposal and thus
enable it to better protect the interests of the Company and the remaining
shareholders. The Board is not aware of any current effort to gain control of
the Company. Although the proposed amendment would not impede an acquisition of
the Company approved by the Board, adoption of the amendment may affect the
ability of the shareholders of the Company to change the composition of the
incumbent Board, to affect its policies generally and to benefit from
transactions which are opposed by the incumbent Board.
NUMBER OF DIRECTORS
Under the Minnesota corporation law, the number of directors may be fixed
or changed from time to time, within the variable range established in the
Articles of Incorporation or the Bylaws, by a shareholder resolution or, in
absence of such shareholder action, by the Board of Directors. Section 3.2 of
the Company's current Bylaws provides that the number of directors constituting
the Board of Directors of the Company shall be the number last fixed by the
shareholders or the Board of Directors. The Board of Directors has, by
resolution, established the size of the current Board of Directors to be seven
directors. The proposed amendment fixes in the Articles the variable range of
the number of directors and provides that the precise number of directors,
within that
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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.
This provision, together with the provisions regarding the filling of
vacancies on the Board and restrictions on removal of incumbent directors, may
make it more difficult for a major shareholder to obtain representation quickly
by enlarging the Board and filling the directorships with its own nominees.
REMOVAL OF DIRECTORS; FILLING NEWLY-CREATED DIRECTORSHIPS AND VACANCIES
Currently, any director may be removed, with or without cause, by a
majority vote of the shares entitled to elect directors, and newly-created
directorships and vacancies may be filled by a majority vote of the Board of
Directors. The proposed amendment provides that a director may be removed only
for cause, which requires that the director be convicted of a felony or found
guilty of gross negligence or intentional misconduct in the performance of the
director's duties. The amendment further provides that any vacancy on the Board
occurring during the course of the year, including vacancies created by an
increase in the number of directors, shall be filled by a majority vote of the
remaining directors. Directors elected in this manner would hold office for the
remaining term of the class to which they are elected.
These provisions are intended to prevent a major shareholder from
destabilizing the classified Board by removing directors without cause and
replacing them with its own nominees. Removal of directors only for cause may
encourage bidders to negotiate with the Board of Directors prior to launching a
takeover bid. This provision, together with the provision for classification of
the Board of Directors and the other provisions of the proposed amendment, would
make it more difficult and more time consuming for shareholders to replace a
majority of the directors even when the only reason for a change may be the
performance of the incumbent directors.
SUPER-MAJORITY VOTE REQUIRED TO AMEND THE ARTICLES OF INCORPORATION
Under the Minnesota corporation law, the affirmative vote of the holders
of a majority of the voting power of the outstanding shares represented and
voting on the proposal is required to amend the Articles. The proposed amendment
requires a super-majority vote of two-thirds of the voting power entitled to
vote thereon to amend Article 10 relating to the classified board. The
requirement for a super-majority vote is designed to prevent a shareholder with
a majority of the voting power from avoiding the requirements of the proposed
amendment by simply amending or repealing it. It will also have the effect of
giving the holders of one third of the voting power of the Company a veto power
over any changes in the proposed amendment, even if a majority of the board of
directors or of the shareholders favor such changes.
EXISTING LIMITATIONS ON ACQUISITION OF CONTROL OF THE COMPANY
In addition to the proposed amendment to the Articles of Incorporation,
the Company has adopted or is subject to certain other arrangements which may
make it more difficult for a third party to acquire control of the Company. The
principal provisions are summarized below.
In 1996, the Board of Directors of the Company adopted a Shareholder
Rights Plan under which a dividend was declared of one Common Stock purchase
right (a "Right") for each outstanding share of Common Stock. The Rights will
become exercisable only if a person or group (with limited exceptions for
certain existing shareholders) acquires or announces an offer to acquire 15% or
more of the outstanding shares of the Company's Common Stock. Upon becoming
exercisable, each Right entitles the registered holder to purchase from the
Company one share of Common Stock at a price ("Exercise Price") of $60.00 per
share, subject to adjustment as described below. However, in the event that any
person or group becomes the beneficial owner of 15% or more of the Company's
Common
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Stock, proper provision shall be made so that each holder of a Right other than
any person or group beneficially owning 15% or more of the outstanding Common
Stock (whose Rights will thereafter be void), will thereafter have the right to
receive upon exercise that number of shares of Common Stock having a market
value of two times the Exercise Price of the Right. In addition, in the event
that after the Rights become exercisable, the Company is acquired in a merger or
other business combination transaction or 50% or more of its consolidated assets
or earning power are sold, proper provision shall be made so that each holder of
a Right will thereafter have the right to receive, upon the exercise thereof at
the Exercise Price, that number of shares of common stock of the acquiring
company which at the time of such transaction will have a market value of two
times the Exercise Price of the Right.
The Rights, if exercised, would have the effect of diluting the ownership
of the acquiring person and may make the acquisition less attractive and more
expensive. The Rights can be redeemed by the Company at any time prior to the
acquisition of beneficial ownership of 15% or more of the outstanding shares of
Common Stock. Immediately upon any redemption of the Rights, the right to
exercise the Rights will terminate and the only right of the holders of Rights
will be to receive the Redemption Price of $.01 per Right.
The Recovery Engineering, Inc. 1994 Stock Option and Incentive Plan (the
"1994 Plan") generally provides that the restrictions on all shares of
restricted stock shall lapse immediately, and all outstanding Options will
become exercisable immediately upon the occurrence of certain events which may
constitute changes in the Company's ownership or governance. See "Information
Concerning Directors, Nominees and Executive Officers - Stock Options" and
"Approval of Amendment to 1994 Stock Option and Incentive Plan - Immediate
Acceleration of Awards." If the options are exercised by the participants, the
effect would be to dilute the beneficial ownership of such person triggering the
changes in the Company's ownership or governance.
The Company's Bylaws set forth procedures concerning a shareholder
proposal or a shareholder director nomination for consideration at any annual
meeting. See "Proposals by Shareholders" and "Information Concerning Directors,
Nominees and Executive Officers - Nomination of Directors," respectively, for a
discussion of these Bylaws.
The advance notice requirement for shareholder proposals, by regulating
the introduction of new business at an annual meeting of shareholders, affords
the Board the opportunity to consider shareholder proposals and, to the extent
deemed necessary or desirable by the Board, respond accordingly. Although the
Bylaw does not give the Board any power to approve or disapprove of shareholder
proposals, it may have the effect of precluding such proposals if the procedures
established by it are not followed and may discourage or deter a third party
from conducting a solicitation of proxies in furtherance of such proposals.
The advance notice requirement for shareholder director nominations, by
regulating such nomination at an annual meeting of shareholders, affords the
Board the opportunity to consider the qualifications of the proposed nominees
and, to the extent deemed necessary or desirable by the Board, inform
shareholders about such qualification. Although the Bylaw does not give the
Board any power to approve or disapprove of shareholder nominations for election
of directors, it may have the effect of precluding contests for the election of
directors if the procedures established by it are not followed, and may
discourage or deter a third party from conducting a solicitation of proxies to
elect its own slate of directors.
The Company is subject to the provisions of the Minnesota Business
Corporation Act, including the provisions described below which are designed to
deter non-negotiated takeovers of Minnesota corporations.
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CONTROL SHARE ACQUISITIONS. Section 302A.671 of the Minnesota Statutes
generally requires that a majority of the Company's shareholders must approve,
prior to consummation, the acquisition by any person of the Company's voting
stock from a person other than the Company, and other than in connection with
certain mergers and exchanges to which the Company is a party, which acquisition
results in certain percentages of voting control of the Company (in excess of
20%, 33-1/3% or 50%) being held by such acquiring person. In general, shares
acquired in the absence of such approval are denied voting rights and are
redeemable at their then fair market value by the Company if the acquiring
person has failed to give a timely information statement to the Company or the
shareholders have voted not to grant voting rights to the acquiring person's
shares.
BUSINESS COMBINATIONS. Section 302A.673 of the Minnesota Statutes
generally prohibits any business combination by a Minnesota corporation that is
a "publicly held corporation" (i.e., a corporation that has a class of equity
securities registered with the Securities and Exchange Commission), or any
subsidiary of the publicly held corporation, with any shareholder which
purchases 10% or more of the corporation's voting shares (an "interested
shareholder") within four years following such interested shareholder's share
acquisition date, unless the business combination or the acquisition of shares
is approved by a committee of all of the disinterested members of the Board of
Directors of the corporation before the interested shareholder's share
acquisition date.
FAIR PRICE REQUIREMENT. In the event of certain tender offers for stock of
a publicly held corporation, Section 302A.675 of the Minnesota Statutes
precludes the tender offeror from acquiring additional shares of stock
(including acquisitions pursuant to mergers, consolidations or statutory share
exchanges) within two years following the completion of such an offer unless the
selling shareholders are given the opportunity to sell the shares on terms that
are substantially equivalent to those contained in the earlier tender offer.
Section 302A.675 does not apply if a committee of the Board of Directors
consisting of all of its disinterested directors (excluding present and former
officers of the corporation) approves the subsequent acquisition before shares
are acquired pursuant to the earlier tender offer.
LIMITATION ON SHARE PURCHASES. Section 302A.553 of the Minnesota Statutes
generally prohibits a Minnesota corporation that is a publicly held corporation
from directly or indirectly purchasing or agreeing to purchase any voting shares
from a person (or two or more persons who are acting together) who beneficially
owns more than five percent of the voting power of the corporation for more than
the market value of such shares if the shares have been beneficially owned by
the person for less than two years, unless (i) the purchase or agreement to
purchase is approved at a meeting of shareholders by the affirmative vote of the
holders of a majority of the voting power of all shares entitled to vote, or
(ii) the corporation makes an offer, of at least equal value per share, to all
holders of shares of the class or series and to all holders of any class or
series into which the securities may be converted.
As a result of the foregoing measures, stock of the Company may not
attract institutional investors or certain other members of the investment
community and this could result in a depressed market price and liquidity of the
Company stock and/or discourage non-negotiated takeover offers that might have
been deemed by shareholders to be in their interests and might have involved
offers to purchase stock at a premium over the market price prevailing at the
time.
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ELECTION OF DIRECTORS
(PROPOSAL 2)
The business and affairs of the Company are managed under the direction of
its Board of Directors. Shareholders will be asked at the Annual Meeting to
elect seven directors. If Proposal 1 is adopted, seven directors will be elected
to the classes and for the terms set forth below. If Proposal 1 is not adopted,
seven directors will be elected to hold office until the next Annual Meeting of
shareholders or until their successors are duly elected. In either case,
directors will be elected by a plurality of the shares present and voting at the
meeting.
The Board has nominated the seven individuals named below to serve as
directors of the Company. Unless authority is withheld, all proxies received in
response to this solicitation will be voted FOR the election of the nominees
named below. Each of the nominees named below is now a director of the Company
and has served continuously as a director since the year indicated. Each of the
nominees was elected by the shareholders at the 1998 Annual Meeting. All
nominees have indicated a willingness to serve if elected. If any nominee
becomes unable to serve prior to the Annual Meeting, the proxies received in
response to this solicitation will be voted for a replacement nominee selected
in accordance with the best judgment of the proxy holders named therein.
DIRECTOR
NAME POSITIONS WITH COMPANY AGE SINCE
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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 37 1986
and Director
William F. Wanner, Jr. Director 56 1986
SHAREHOLDER APPROVAL
The affirmative vote of a plurality of the shares of Common Stock
represented at the Annual Meeting either in person or by proxy, assuming a
quorum is present, is required for the election of directors.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
ELECTION OF THE NOMINEES FOR THE BOARD OF DIRECTORS AS SET FORTH IN PROPOSAL 2.
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INFORMATION CONCERNING DIRECTORS,
NOMINEES AND EXECUTIVE OFFICERS
DIRECTORS AND NOMINEES
All of the nominees for election to the Company's Board of Directors are
presently serving as directors of the Company. The following discussion sets
forth certain information concerning the directors and nominees of the Company.
CLASS 1 - NOMINEES FOR TERMS EXPIRING IN YEAR 2000
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.
CLASS 2 - NOMINEES FOR TERMS EXPIRING IN YEAR 2001
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.
CLASS 3 - NOMINEES FOR TERMS EXPIRING IN YEAR 2002
BRIAN F. SULLIVAN has been the President and Chief Executive Officer and a
director of the Company since its inception in 1986, and also served as Chief
Financial Officer of the Company from 1986 to 1994. Mr. Sullivan has established
and directed the implementation of the Company's strategic direction since its
inception. He has led the Company from the development stage through its initial
contracts with the United States armed forces, the introduction of reverse
osmosis desalinators and portable drinking water systems, and the development
and introduction of the Company's household drinking water systems. Mr. Sullivan
is named as an inventor on four United States patents held by the Company. Mr.
Sullivan is also a director of North Central Life Insurance Company.
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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.
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 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. See "Information
Concerning Directors, Nominees and Executive Officers - Nomination of
Directors."
DIRECTOR COMPENSATION
Directors of the Company currently 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 1993 Director Stock Option Plan. See
"Information Concerning Directors, Nominees and Executive Officers - Director
Stock Option Plan" and "Approval of Amendment to 1993 Director Stock Option Plan
(Proposal 4)."
NOMINATION OF DIRECTORS
Directors of the Company are elected annually to serve until the next
annual meeting of shareholders or until their successors are duly elected.
Pursuant to a Securities Purchase Agreement dated July 19, 1996, 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 Company's Board of Directors, and the Company has agreed
to use its best efforts to secure the election of such nominee to the Board of
Directors. See "Information Concerning Directors, Nominees and Executive
Officers - Certain Transactions." 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 or nominee and any
other person pursuant to which he has been selected as a director or nominee.
There is no family relationship between any of the nominees, directors or
executive officers of the Company.
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
9
<PAGE>
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
the Company's 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 Securities
Exchange Act of 1934. 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 the Company's 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.
EXECUTIVE OFFICERS
The following discussion sets forth information about the executive
officers of the Company who are not directors.
<TABLE>
<CAPTION>
OFFICER
NAME POSITIONS WITH COMPANY AGE SINCE
- ---- ---------------------- --- ------
<S> <C> <C> <C>
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 Pillsbury Company, where he served most recently as the Vice
President and General Manager of the Baked Foods Division. Prior to his tenure
at Pillsbury, Mr. Watson was employed in various marketing capacities at Kraft
Foods, Inc.
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
10
<PAGE>
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.
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>
LONG-TERM
COMPENSATION
ANNUAL --------------
COMPENSATION AWARDS
----------------------------- -------------- OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) OPTIONS (#) COMPENSATION (2)
- --------------------------- -------- ---------- ------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
Brian F. Sullivan 1998 $275,000 $ -- -- $3,200
(Chairman and Chief Executive 1997 205,000 150,000 -- 3,200
Officer) 1996 150,000 -- 250,000 --
Charles F. Karpinske (3) 1998 $161,000 $ -- 10,000 $3,200
(Vice President and Chief 1997 140,000 64,280 40,000 3,023
Financial Officer) 1996 112,500 -- 25,000 --
Richard D. Hembree 1998 $155,000 $ -- 15,000 $2,994
(Vice President - Engineering) 1997 112,000 49,164 10,000 2,382
1996 99,900 -- -- 1,996
Jeffrey T. Dekko (4) 1998 $132,000 $ -- 9,000 $1,333
(Vice President - Marketing) 1997 110,000 60,345 12,000 2,575
1996 88,500 -- 14,000 1,312
Barry B. Van Lerberghe (4) 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, unless otherwise indicated.
(3) Mr. Karpinske's employment with the Company commenced in February 1996.
(4) Mr. Dekko and Mr. Van Lerberghe became executive officers of the Company
in April 1997.
11
<PAGE>
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 Convertible Notes to the GS Group. See "Information Concerning Directors,
Nominees and Executive Directors - Certain Transactions."
The Company has entered into Executive 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
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 him an
amount equal to the difference between the aggregate fair market value of shares
subject to stock options which are forfeited or become unexercisable as a result
of his termination of employment, 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 of the Company's outstanding securities; or (iv)
individuals who constitute the Board of Directors at the beginning of any
two-year period ceasing to constitute at least a majority of the Board of
Directors, unless each new director is approved by a two-thirds vote of the
directors then in office who were directors at the beginning of such period.
RETIREMENT SAVINGS PLAN
The Company maintains a profit sharing and savings plan (the "401(k)
Plan") under Section 401(k) of the Internal Revenue Code of 1986, as amended
(the "Code"), which allows employees to contribute up to 15% of their pre-tax
income to the 401(k) Plan. The 401(k) Plan includes a discretionary matching
contribution by the Company and provides that the Company may make an additional
discretionary contribution out of profits at the end of any year. The Company
made discretionary matching contributions of $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, assuming the shareholders approve the proposed
amendment to the 1994 Plan at the
12
<PAGE>
Annual Meeting. See "Approval of Amendment to 1994 Stock Option and Incentive
Plan (Proposal 3)." 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.
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
Individual Grants Value at Assumed
------------------------------------------------------- Annual Rates of Stock
Percent of Total Price Appreciation for
Options Granted Exercise Option Term (1)
Options to Employees Price Expiration ----------------------
Name Granted (#) in Fiscal Year ($/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 $335,284
</TABLE>
- --------------
(1) Represents the potential net realizable value of each grant of options
assuming that the market price of the underlying Common Stock appreciates
in value from its fair market value on the date of grant to the end of the
option term at the indicated annual rates.
(2) Each option was granted on January 12, 1998 and vests with respect to 25%
of the option shares on the first, second, third and fourth anniversaries
of the grant date.
The following table shows information for the executive officers named in
the Summary Compensation Table regarding the exercise of stock options during
fiscal 1998 and the number and value of unexercised stock options held by as of
the end of fiscal 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money Options
Shares Options at Year-End (#) at Year-End ($)(1)
Acquired on Value --------------------------- ---------------------------
Name Exercise (#) 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 National Market was less than the exercise price of all of the
options held by the executive officers named in the Summary Compensation
Table.
13
<PAGE>
Mr. Sullivan's options that are not currently exercisable will become
exercisable in 2005 and may become exercisable earlier if certain sales and
income objectives established by the Compensation Committee are achieved by the
Company. In addition, the options will become exercisable if Mr. Sullivan's
employment with the Company is terminated by reason of his death or disability,
or within 24 months following a "change in control" of the Company. For these
purposes, a "change in control" means (i) the dissolution or liquidation of the
Company, or a merger, consolidation or other corporate reorganization in which
the Company is not the surviving party; (ii) the acquisition by any person,
other than Wanner Engineering, Inc., of securities representing more than 50% of
the voting power of the Company's outstanding securities; or (iii) individuals
who constitute the Board of Directors at the beginning of any two-year period
ceasing to constitute at least a majority of the Board of Directors, unless each
new director is approved by a two-thirds vote of the directors then in office
who were directors at the beginning of such period.
DIRECTOR STOCK OPTION PLAN
The Company's 1993 Director Stock Option Plan (the "Director Option Plan")
provides for the automatic granting of an option for shares of Common Stock to
each non-employee director of the Company on the date of his or her initial
election or appointment as a director, and additional options on the date of
each annual meeting of shareholders at which the director is reelected by the
shareholders. The number of shares covered by such options was 1,000 shares per
grant through 1996, and 4,000 shares per grant for 1997 and subsequent years.
The exercise price of options granted under the Director Option Plan is equal to
85% of the fair market value of the Common Stock on the date of grant. 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,
assuming the shareholders approve the proposed amendment to the Director Option
Plan at the Annual Meeting. See "Approval of Amendment to 1993 Director Stock
Option Plan (Proposal 4)."
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 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. See "Report of the
Compensation Committee."
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company's directors, executive officers and any persons holding more
than 10% of the outstanding Common Stock of the Company are required to file
with the Securities and Exchange Commission reports concerning their initial
ownership of Common Stock and any subsequent changes
14
<PAGE>
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 Securities and Exchange Commission and furnished to the Company.
CERTAIN TRANSACTIONS
On July 19, 1996, the Company entered into a Securities Purchase Agreement
with GS Group, pursuant to which the Company issued to GS Group $15 million
principal amount of its 5% Convertible Notes Due 2003 (the "Convertible Notes").
The Convertible Notes are convertible into shares of the Company's Common Stock
at a conversion price of $14.85 per share. 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 in to Common Stock, the market price of
the Common Stock is below certain levels. The Convertible Notes may be converted
to Common Stock at any time at the option of GS Group or, if certain conditions
are satisfied, after January 18, 2000 by the Company. The Convertible Notes bear
interest at the rate of 5% per annum, payable quarterly on March 31, June 30,
September 30, and December 31 in each year, commencing September 30, 1996. 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 Company's Board of
Directors, one person designated by GS Group. The representative is to be a
member of the Company's executive and finance committees, if any, or any other
committee performing substantially similar functions and, upon request by the
representative, any other committee of the Board of Directors. The Company has
also agreed that if, at any time, GS Group does not have a representative on the
Company's Board of Directors, GS Group will be entitled to have an observer
present at all meetings of the Company's Board. Robert R. Gheewalla currently
serves as a director of the Company as the designee of GS Group.
In connection with the sale of the Convertible Notes, the Company, GS
Group and Brian F. Sullivan entered into an Executive Restriction Agreement,
dated July 19, 1996. The Executive Restriction Agreement prohibits, subject to
certain exceptions, Mr. Sullivan's sale of Common Stock of the Company until
July 19, 1998. After that date, Mr. Sullivan may not sell or otherwise transfer
in any transaction more than 25% of the Common Stock (including shares subject
to stock options) which he held as of July 19, 1996 unless the holders of the
Convertible Notes are allowed to participate in such sale on a pro rata basis.
Under the Executive Restriction Agreement, Mr. Sullivan also has agreed to
refrain from competing with the Company for three years after (i) his employment
with the Company is terminated for cause or (ii) he resigns from the Company
other than for good reason (as defined in the Executive Restriction Agreement).
In April 1997, Brian F. Sullivan exercised stock options for an aggregate
of 199,000 shares of Common Stock, and paid the exercise price of the options by
delivering to the Company a Promissory Note in the principal amount of $497,500.
The Note bears interest at the rate of 9.25% per annum, and matures on June 30,
2001.
15
<PAGE>
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 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 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
objectives 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.
16
<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 Company's 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>
17
<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table shows information as of February 28, 1999, regarding
the beneficial ownership of shares of Common Stock of the Company by (i) each
shareholder known by the Company to own beneficially more than five percent (5%)
of the Company's 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>
NUMBER OF SHARES PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED (1) OUTSTANDING SHARES (2)
- ------------------------------------ ---------------------- ----------------------
<S> <C> <C>
Certain investment funds affiliated with
The Goldman Sachs Group, L.P. (3).................. 1,023,101 14.5%
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 (5)..................... 570,100 9.5%
114 West 47th Street
New York, NY 10036
Investment Advisers, Inc. (6)........................ 506,494 8.4%
3700 First Bank Place
Minneapolis, MN 55440
Safeco Corp. (7)..................................... 446,750 7.4%
4333 Brooklyn Avenue NE
Seattle, WA 98185
Ashford Capital Management Inc. (8).................. 372,400 6.2%
P.O. Box 4172
Wilmington, DE 19807
Nevis Capital Management, Inc. (9)................... 311,300 5.2%
1119 St. Paul Street
Baltimore, MD 21202
DIRECTORS AND EXECUTIVE OFFICERS:
Brian F. Sullivan (10)(11)........................... 530,000 8.6%
Charles F. Karpinske (10)............................ 41,299 *
Richard D. Hembree (10).............................. 89,973 1.5%
Jeffrey T. Dekko (10)................................ 28,831 *
Barry B. Van Lerberghe (10).......................... 27,804 *
Robert R. Gheewalla (10)(12)......................... 8,000 *
John E. Gherty (10)(13).............................. 68,247 1.1%
Sanjay H. Patel (10)(14)............................. 12,700 *
William D. Thompson (10)............................. 25,000 *
William F. Wanner, Jr. (10)(15)...................... 658,150 10.9%
Richard J. Zeckhauser (10)(16)....................... 95,500 1.6%
All directors and executive officers as a group
(13 persons, including those named above) (10).... 1,585,804 25.0%
</TABLE>
- ----------------------
* Less than one percent.
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(1) Each person has sole voting and sole power with respect to all outstanding
shares, except as noted.
(2) Based on 6,018,397 shares outstanding at February 28, 1999. Such amount
does not include 2,271,183 shares of Common Stock issuable upon exercise
of stock options and warrants or conversion of Convertible Notes
outstanding at February 28, 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 Securities and Exchange Commission by certain investment
partnerships, of which affiliates of The Goldman Sachs Group, L.P. ("GS
Group") are the general partner, managing general partner, managing
partner or investment manager. Includes (i) 1,010,101 shares which may be
acquired upon the conversion of Convertible Notes owned by the investment
partnerships, and (ii) 13,000 shares subject to options held for the
benefit of the GS Group by Mr. Gheewalla and Mr. Patel (see Notes 10, 13
and 15). Includes Convertible Notes held of record by GS Capital Partners
II, L.P., currently convertible into 633,766 shares, Convertible Notes
held of record by GS Capital Partners II Offshore, L.P., currently
convertible into 251,948 shares, Convertible Notes held of record by Stone
Street Fund 1996, L.P., currently convertible into 60,191 shares,
Convertible Notes held of record by Bridge Street Fund 1996, L.P. ,
currently convertible into 40,819 shares, and Convertible Notes held of
record by Goldman, Sachs & Co. Verwaltungs GmbH, currently convertible
into 23,377 shares. Does not include up to 367,309 aggregate shares of
Common Stock in respect of certain reset rights held by the investment
partnerships. 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 Securities and
Exchange 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 January 29, 1999, filed by such company with the Securities and
Exchange Commission, which indicates that the shareholder has sole voting
power and sole dispositive power with respect to said shares.
(7) Reflects information as of December 31, 1998, based on a Schedule 13G,
dated February 11, 1999, filed by such company with the Securities and
Exchange Commission, which indicates that the shareholder has shared
voting power and shared dispositive power with respect to said shares.
(8) Reflects information as of December 31, 1998, based on a Schedule 13G,
dated February 2, 1999, filed by such company with the Securities and
Exchange Commission, which indicates that the shareholder has sole voting
power and sole dispositive power with respect to said shares.
(9) Reflects information as of December 31, 1996, based on a Schedule 13G,
dated February 12, 1997, filed by such company with the Securities and
Exchange Commission, which indicates that the shareholder has sole voting
power and sole dispositive power with respect to said shares.
(10) 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, 58,750 shares; Mr. Dekko, 26,250 shares; Mr.
Van Lerberghe, 23,750 shares; Mr. Gheewalla, 8,000 shares; Mr. Gherty,
10,000 shares; Mr. Patel, 9,000 shares; Mr. Thompson, 10,000 shares; Mr.
Wanner, 4,000 shares; Dr. Zeckhauser, 11,000 shares; and all directors and
executive officers as a group, 323,500 shares.
(11) Mr. Sullivan's address is 9300 North 75th Avenue, Minneapolis, MN 55428.
(12) Includes 8,000 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.
(13) Includes 10,701 shares held by Mr. Gherty as custodian for his minor
children.
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(14) 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.
(15) 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.
(16) 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.
APPROVAL OF AMENDMENT TO
1994 STOCK OPTION AND INCENTIVE PLAN
(PROPOSAL 3)
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 ("Options"), awards of restricted stock or any combination thereof. The
1994 Plan is intended to assist the Company in hiring and retaining qualified
personnel by allowing them to participate in the ownership and growth of the
Company. Management believes that the granting of Options and restricted stock
awards gives employees, consultants and other service providers an additional
inducement to remain in the service of the Company and provides them with an
increased incentive to work for the Company's success.
The shareholders of the Company have previously approved the 1994 Plan and
the issuance of up to 1,050,000 shares thereunder. In January 1999, the Board of
Directors amended the 1994 Plan to increase the number of shares reserved for
issuance thereunder to 1,250,000 shares. The shareholders are being asked to
approve such increase at the Annual Meeting.
The principal features and effects of the 1994 Plan are discussed below.
ADMINISTRATION
The 1994 Plan is administered by the Compensation Committee of the Board
of Directors, which selects the employees, consultants, and other service
providers who will be granted Options and restricted stock awards under the 1994
Plan. Subject to the provisions of the 1994 Plan, the Compensation Committee
also determines the type, amount, size and terms of Options and restricted stock
awards; the time when Options and awards should be granted; whether any
restrictions should be placed on shares purchased pursuant to any Option or
issued pursuant to any restricted stock award; and all other determinations
necessary or advisable for the administration of the 1994 Plan. The
determinations by the Compensation Committee are final and conclusive. Grants of
Options and restricted stock awards and other decisions of the Compensation
Committee are not required to be made on a uniform basis.
SHARES SUBJECT TO 1994 PLAN
The 1994 Plan, as amended, provides that the total number of shares of
Common Stock that may be purchased pursuant to the exercise of Options and the
grant of restricted stock awards shall not exceed 1,250,000 shares, subject to
adjustment as provided in the 1994 Plan. The shares to be issued upon the
exercise of Options and restricted stock awards granted under the 1994 Plan will
be currently authorized but unissued shares of Common Stock of the Company. The
number of shares of Common Stock available under the 1994 Plan, the exercise
price of an Option, or the value of a restricted stock award, may be adjusted by
the Compensation Committee in its sole discretion upon any stock dividend or
split, recapitalization, reclassification, combination, exchange of shares, or
other similar corporate change,
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<PAGE>
if the Compensation Committee determines that such change necessarily or
equitably requires such an adjustment.
ELIGIBILITY
Employees of the Company and any of its "Affiliates" (as such term is
defined in the 1994 Plan) are eligible for selection to receive Options
qualified as incentive stock options ("ISOs") under Section 422 of the Code.
Employees, consultants and other service providers of the Company or its
Affiliates may be granted non-qualified Options ("NQOs") or restricted stock
awards. Options have been granted under the 1994 Plan to approximately 180
persons.
The 200,000 additional shares, together with shares previously authorized
and available for issuance under the Plan, may be allocated to such employees as
the Compensation Committee may determine. The allocation of the additional
shares under the 1994 Plan that are the subject of this Proposal 3 has not been
determined. No options or shares under the 1994 Plan will be allocated to
directors who are not employees of the Company.
TERMS OF OPTIONS
Upon the grant of an Option, the Compensation Committee fixes the number
of shares of Common Stock that the optionee may purchase upon exercise of the
Option and the price at which the shares may be purchased. With regard to ISOs,
the exercise price cannot be less than the "fair market value" of the Common
Stock at the time the ISO is granted or 110% of such fair market value in
certain cases (as set forth below). NQOs may be granted at less than the fair
market value of the Common Stock. See "Federal Income Tax Consequences."
With regard to ISOs only, the aggregate fair market value of Common Stock
(determined at the time the ISO is granted) subject to ISOs granted to an
employee under all stock option plans of the Company and any Affiliate of the
Company that become exercisable for the first time by such employee during any
calendar year may not exceed $100,000. Furthermore, no ISO may be granted to any
employee who, immediately after the grant of such ISO, would own more than 10%
of the total combined voting power of all classes of the Company's stock unless
such ISO has an exercise price equal to at least 110% of the fair market value
of the Common Stock at the time of grant and the term of the ISO is no longer
than five years.
Each Option will be exercisable by the optionee only during the term fixed
by the Compensation Committee, with such term ending not later than 121 months
after the date of grant (ten years in the case of ISOs). Upon exercise of any
Option, payment for shares as to which the Option is exercised may be made in
cash, in shares of Common Stock of the Company having an aggregate fair market
value on the date of exercise which is not less than the exercise price of the
Option, or by a combination of cash and such shares, as the Compensation
Committee may determine.
TRANSFERABILITY OF OPTIONS; TERMINATION OF EMPLOYMENT
Options granted under the 1994 Plan are non-transferable except to the
extent permitted by the agreement evidencing such Option. However, no Option
will be transferable by any optionee other than by will or the laws of descent
and distribution. If, pursuant to the agreement evidencing any Option, such
Option remains exercisable after the optionee's death, it may be exercised to
the extent permitted by such agreement by the personal representative of the
optionee's estate or by any person who acquired the right to exercise such
option by bequest, inheritance, or otherwise, by reason of the optionee's death.
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<PAGE>
RESTRICTED STOCK AWARDS
Restricted stock awards granted pursuant to the 1994 Plan entitle the
holder to receive shares of Common Stock, which will be subject to forfeiture to
the Company if specified conditions are not satisfied by the end of a specified
period, as determined in each case by the Compensation Committee. The
Compensation Committee is to establish a period (the "Restricted Period") at the
time a restricted stock award is granted during which the holder will not be
permitted to sell, transfer, pledge, encumber, or assign the shares of Common
Stock subject to the award. During the Restricted Period, the holder of shares
subject to the restricted stock award shall have all of the rights of a
shareholder of the Company with respect to such shares, including the right to
vote the shares and to receive any dividends and other distributions with
respect to the shares. However, any and all stock dividends, stock rights, and
stock issued upon split-ups or reclassifications of shares subject to restricted
stock awards shall be subject to the same restrictions as the shares with
respect to which such stock dividends, rights, or additional stock are issued.
Except to the extent otherwise provided in the restricted stock agreement
governing each restricted stock award, all shares of Common Stock then subject
to any restriction will be forfeited to the Company without further obligation
of the Company to the holder thereof, and all rights of the holder with respect
to such shares will terminate, if the holder ceases to provide services to the
Company or its Affiliates as an employee, consultant or other service provider,
or if any condition established by the Compensation Committee for the release of
any restriction has not occurred, prior to the expiration of the Restricted
Period. The Compensation Committee may permit a gift of restricted stock to the
holder's spouse, child, stepchild, grandchild, or legal dependent, or to a trust
whose sole beneficiary or beneficiaries is the holder of the stock, and/or any
one or more of such persons. However, the donee must enter into an agreement
with the Company pursuant to which it agrees that the restricted shares shall be
subject to the same restrictions in the hands of such donee as it was in the
hands of the donor.
IMMEDIATE ACCELERATION OF AWARDS
The 1994 Plan provides that, notwithstanding any other provisions
contained in the 1994 Plan or the agreement evidencing any Option or restricted
stock award thereunder, the restrictions on all shares of restricted stock shall
lapse immediately, and all outstanding Options will become exercisable
immediately, if any of the following events occur: (i) any person or group of
persons, other than the shareholders of record of the Company as of January 31,
1994 (the date the 1994 Plan was adopted by the Board) becomes a beneficial
owner of 30% or more of any equity security of the Company entitled to vote for
the election of directors; (ii) a change in the composition of the Board of
Directors of the Company within any consecutive two-year period occurs such that
the "Continuing Directors" cease to constitute a majority of the Board (as such
term is defined in the 1994 Plan); or (iii) the shareholders of the Company
approve an agreement to merge or consolidate with or into another corporation or
an agreement to sell or otherwise dispose of all or substantially all of the
Company's assets (including a plan of liquidation). However, a participant under
the 1994 Plan will not be entitled to the immediate acceleration of an award as
provided above if such acceleration would, with respect to such participant,
constitute a "parachute payment" for purposes of Section 280G of the Internal
Revenue Code of 1986, as amended, or any successor provision.
TERMINATION AND AMENDMENT
The 1994 Plan will terminate on the earlier of the date on which the 1994
Plan is terminated by the Board of Directors of the Company or January 31, 2004.
Options or restricted stock rights outstanding at the termination of the 1994
Plan may continue to be exercised in accordance with their terms after such
termination. The 1994 Plan may be amended at any time by the Board of Directors.
However, without the approval of a majority of the Company's shareholders voting
at a meeting at which a quorum is present, no such amendment may (i) materially
increase the benefits accruing to participants under
22
<PAGE>
the 1994 Plan; (ii) increase the number of shares available for issuance or sale
pursuant to the 1994 Plan (other than as permitted in certain circumstances
provided by the 1994 Plan); or (iii) materially modify the requirements as to
eligibility for participation in the 1994 Plan, without the affirmative vote of
shareholders holding at least the majority of the voting stock of the Company
represented in person or by proxy at a duly held shareholders' meeting.
FEDERAL INCOME TAX CONSEQUENCES
The following description is a general summary of the current federal
income tax provisions relating to the grant and exercise of ISOs and NQOs under
the 1994 Plan, the grant of restricted stock awards thereunder, and the sale of
shares of Common Stock acquired upon exercise of Options or under a restricted
stock award. The provisions summarized below are subject to changes in federal
income tax laws and regulations, and the effects of such provisions may vary
with individual circumstances.
INCENTIVE STOCK OPTIONS
ISOs granted under the 1994 Plan are intended to be "incentive stock
options" as defined by Section 422 of the Code. Under present law, the recipient
of an ISO will not realize taxable income upon the grant or the exercise of an
ISO, and the Company will not receive an income tax deduction at either such
time. Generally, if an optionee exercises an ISO at any time prior to three
months after termination of the optionee's employment and does not sell the
shares acquired upon exercise of an ISO within either (i) two years after the
grant of the ISO or (ii) one year after the date of exercise of the ISO, the
gain upon a subsequent sale of the shares will be taxed as capital gain. If the
optionee does not satisfy these requirements, the optionee generally will
recognize ordinary income in an amount equal to the difference between the
exercise price paid in connection with exercise of the ISO and the fair market
value of the shares acquired as of the date of exercise of the ISO, and will
recognize capital gain on the difference between the sale price of the shares
and the fair market value of the shares as of the date of exercise. In such
event, the Company would be entitled to a corresponding income tax deduction
equal to the amount recognized as ordinary income by the optionee.
Upon the exercise of an ISO, the excess of the stock's fair market value
on the date of exercise over the exercise price will be included in the
optionee's alternative minimum taxable income ("AMTI") and may result in the
imposition of a tax on such AMTI. Liability for the alternative minimum tax is
complex and depends upon an individual's overall tax situation.
NON-STATUTORY STOCK OPTIONS
Generally, upon the grant of an NQO, neither the Company nor the optionee
will experience any tax consequences. Upon exercise of an NQO granted under the
1994 Option Plan, or upon the exercise of an Option initially intended to be an
ISO that does not qualify for the tax treatment described above, the optionee
will realize ordinary income in an amount equal to the excess of the fair market
value of the shares of Common Stock received over the exercise price paid by the
optionee with respect to such shares. The amount recognized as ordinary income
by the optionee will increase the optionee's basis in the stock acquired
pursuant to the exercise of the NQO. the Company will be allowed a federal
income tax deduction for the amount recognized as ordinary income by the
optionee upon the optionee's exercise of the NQO. Upon a subsequent sale of the
stock, the optionee will recognize short-term or long-term gain or loss
depending upon the holding period for the stock and upon the stock's subsequent
appreciation or depreciation in value.
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<PAGE>
RESTRICTED STOCK AWARDS
A participant who receives an award of restricted stock under the 1994
Plan generally will recognize ordinary income at the time at which the
restrictions on such shares (the "Restrictions") lapse, in an amount equal to
the excess of (i) the fair market value of such shares at the time the
Restrictions lapse, over (ii) the price, if any, paid for such shares. If the
participant makes an election with respect to such shares under Section 83(b) of
the Internal Revenue Code of 1986, as amended (the "Code"), not later than 30
days after the date shares are transferred to the participant pursuant to such
award, the participant will recognize ordinary income at the time of transfer in
an amount equal to the excess of (i) the fair market value of the shares covered
by the award (determined without regard to any restriction other than a
restriction which by its terms will never lapse) at the time of such transfer
over (ii) the price, if any, paid for such shares.
A participant's tax basis in shares received pursuant to a restricted
stock award granted under the 1994 Plan will be equal to the sum of the price
paid for such shares, if any, and the amount of ordinary income recognized by
such participant with respect to the transfer of such shares or the lapse of the
Restrictions thereon. The participant's holding period for such shares for
purposes of determining gain or loss on a subsequent sale will begin immediately
after the transfer of such shares to the participant, if a Section 83(b)
election is made with respect to such shares, or immediately after the
Restrictions on such shares lapse, if no Section 83(b) election is made.
Generally, a deduction will be allowed to the Company, for federal income
tax purposes, in an amount equal to the ordinary income recognized by a
participant with respect to shares awarded pursuant to the 1994 Plan, provided
that such amount constitutes an ordinary and necessary business expense of the
Company and is reasonable.
If, subsequent to the lapse of Restrictions on his or her shares, the
participant sells such shares, the difference, if any, between the amount
realized from such sale and the tax basis of such shares to the holder will be
taxed as long-term or short-term capital gain or loss, depending on whether the
participant's holding period for such shares exceeds the applicable holding
period at the time of sale and provided that the participant holds such shares
as a capital asset at such time.
If a Section 83(b) election is made and, before the Restrictions on the
shares lapse, the shares which are subject to such election are resold to the
Company or are forfeited, (i) no deduction would be allowed to such participant
for the amount included in the income of such participant by reason of such
Section 83(b) election, and (ii) the participant would realize a loss in an
amount equal to the excess, if any, of the amount paid for such shares over the
amount received by the participant upon such resale or forfeiture (which loss
would be a capital loss if the shares are held as a capital asset at such time).
In such event, the Company would be required to include in its income the amount
of any deduction previously allowable to it in connection with the transfer of
such shares.
The Compensation Committee will have the discretion to provide with
respect to any restricted stock award that upon a change in control of the
Company, any Restrictions on the shares of Common Stock covered by the award
will lapse. In general, if the total amount of payments in the nature of
compensation that are contingent upon a "change in control" of the Company (as
defined in Section 280G of the Code) equals or exceeds three times a recipient's
"base amount" (generally, such recipient's average annual compensation for the
five years preceding the change in control), then, subject to certain
exceptions, the payments may be treated as parachute payments under Section 280G
of the Code, in which case a portion of the payments would be nondeductible to
the Company and the recipient would be subject to a 20% excise tax on such
portion of the payments under Section 4999 of the Code.
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<PAGE>
SHAREHOLDER APPROVAL
The affirmative vote of a majority of the shares of Common Stock
represented at the Annual Meeting either in person or by proxy and voting on the
proposal, assuming a quorum is present, is required to approve the amendment to
the 1994 Plan increasing the number of shares reserved for issuance thereunder.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR APPROVAL
OF THE AMENDMENT TO THE 1994 STOCK OPTION AND INCENTIVE PLAN AS SET FORTH IN
PROPOSAL 3.
APPROVAL OF AMENDMENT TO
1993 DIRECTOR STOCK OPTION PLAN
(PROPOSAL 4)
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 reelected by the
shareholders. The purpose of the Director Option Plan is to promote the
interests of the Company and its stockholders by attracting and retaining highly
qualified independent directors by providing an opportunity to invest in the
Company and participate in its future success.
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.
The shareholders of the Company have previously approved the Director
Option Plan and the issuance of up to 100,000 shares thereunder. In January
1999, the Board of Directors amended the Director Option Plan to increase the
number of shares reserved for issuance thereunder to 130,000 shares. The
shareholders are being asked to approve such increase at the Annual Meeting.
DESCRIPTION OF THE DIRECTOR OPTION PLAN
The following is a summary of the principal provisions of the Director
Option Plan and is qualified in its entirety by reference to the complete text
of the Director 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 (an
"Eligible Director") on the date of his or her initial election or appointment
as a director, and additional options on the date of each annual meeting of
shareholders at which the director is reelected by the shareholders. Shares to
be delivered at the time a stock option is exercised shall be made available
from authorized and unissued shares of the Company's Common Stock. If any
outstanding option granted under the Director Option Plan expires prior to its
exercise for any reason, then the shares of Common Stock subject to such
unexercised option shall be available for future grants of options under the
Director Option Plan. 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, assuming the shareholders approve the proposed amendment to
the Director Option Plan at the Annual Meeting.
Options under the Director Option Plan are granted only to non-employee
directors of the Company. Accordingly, all 30,000 additional shares that are the
subject of this Proposal 4 will be allocated to non-employee directors who are
elected in the future.
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The Board of Directors may in its discretion make such proportionate
adjustments in the number of shares available under the Director Option Plan;
the number of shares of Common Stock subject to, and the exercise price of,
stock options outstanding under the Director Option Plan; and such other
adjustments as are required, to prevent any dilution or enlargement of rights
that would otherwise result from any reorganization, merger, recapitalization,
stock split, stock dividend, or similar change in the capital structure of the
Company.
Each option granted under the Director Option Plan is evidenced by an
option agreement executed on behalf of the Company and by the Eligible Director
to whom such option is granted. The exercise price per share for each option
granted under the Director Option Plan is equal to 85% of the "fair market
value" (as that term is defined in the Director Option Plan) of a share of
Common Stock on the date such option is granted. At March 1, 1999, the closing
price for the Company's Common Stock as reported on The Nasdaq Stock Market was
$10.88 per share. Options granted under the Director Option Plan are fully
vested when granted but cannot be exercised until six months following the date
of grant. Options granted under the Director Option Plan are not assignable or
transferrable during the lifetime of the Eligible Director, and are exercisable
during an Eligible Director's lifetime only by the Eligible Director. After the
death of an Eligible Director, such options may be transferred by will or the
laws of descent and distribution and may be exercised by the executors or
administrators of the Eligible Director's estate or by the person to whom the
Eligible Director's rights under the option pass by will or the laws of descent
and distribution.
Payment for the exercise price of options granted under the Director
Option Plan may be made in cash, by delivery of shares of Common Stock of the
Company having an aggregate fair market value on the date of exercise which is
not less than the exercise price of the option, or by a combination thereof.
The Board of Directors may suspend or terminate the Director Option Plan
or any portion thereof at any time, and the Board may amend the Director Option
Plan in any respect subject, in certain circumstances, to the approval of the
Company's shareholders. However, no termination, suspension, or amendment of the
Director Option Plan may alter any option outstanding thereunder without the
consent of the holder of such option. Unless terminated by earlier action of the
Board, the Director Option Plan will terminate on September 7, 2003, and no
option can be granted under the Director Option Plan after such date. However,
options outstanding upon termination of the Director Option Plan may continue to
be exercised in accordance with their terms.
TAX TREATMENT
All options granted under the Director Option Plan will be non-statutory
options not entitled to special tax treatment under Section 422 of the Code, as
amended. For a more detailed discussion of the tax treatment of these options,
see the discussion under "Federal Income Tax Consequences" in Proposal 3.
SHAREHOLDER APPROVAL
The affirmative vote of a majority of the shares of Common Stock
represented at the Annual Meeting either in person or by proxy and voting on the
proposal, assuming a quorum is present, is required to approve the amendment to
the Director Option Plan increasing the number of shares reserved for issuance
thereunder.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR APPROVAL
OF THE AMENDMENT TO THE 1993 DIRECTOR STOCK OPTION PLAN AS SET FORTH IN PROPOSAL
4.
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RATIFICATION OF THE APPOINTMENT
OF INDEPENDENT AUDITORS
(PROPOSAL 5)
The Board of Directors has appointed the firm of Ernst & Young LLP as
independent auditors for the fiscal year ending January 2, 2000. The firm of
Ernst & Young LLP has served as the Company's auditors since 1986. A
representative of Ernst & Young LLP will be present at the Annual Meeting, will
have an opportunity to make a statement if he desires to do so, and will be
available to respond to appropriate questions from shareholders.
All proxies received in response to this solicitation will be voted in
favor of the ratification of the appointment of the independent auditors, unless
other instructions are indicated thereon.
SHAREHOLDER APPROVAL
The affirmative vote of a majority of the shares of Common Stock
represented at the Annual Meeting either in person or by proxy, assuming a
quorum is present, is required to ratify the appointment of Ernst & Young LLP as
independent auditors for the Company for the year ending January 2, 2000.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS INDEPENDENT AUDITORS AS
SET FORTH IN PROPOSAL 5.
PROPOSALS OF SHAREHOLDERS
Any shareholder wishing to have a proposal considered for inclusion in the
Company's proxy solicitation materials for the Annual Meeting of Shareholders to
be held in 2000 must set forth such proposal in writing and file it with the
Secretary of the Company no later than November 23, 1999. Shareholders are also
required to comply with the provisions of the Company's Bylaws with respect to
any proposal to be presented at the 2000 Annual Meeting of Shareholders of the
Company.
The Company's Bylaws provide that, except for shareholder proposals filed
in accordance with the proxy rules promulgated under the Exchange Act, a
shareholder seeking to bring new business before an annual meeting is required
to comply with the provisions described below. The Bylaws require that
shareholder proposals for new business, together with certain accompanying
information, be filed with the Company no less than 60 nor more than 90 days
prior to the scheduled annual meeting, provided that the Company has given at
least 70 days' notice of such meeting. If the Company has not given at least 70
days' notice, shareholder proposals must be submitted no later than the tenth
day following the earlier of the date that notice of the date of the annual
meeting was mailed to the shareholders or the day on which public disclosure of
such date was made. The Bylaws require that the shareholder's notice set forth
as to each proposal (i) a description of and the reasons for such proposal, (ii)
the names and addresses of the shareholder making the proposal and of any
shareholders known to be supporting the proposal, (iii) such persons' beneficial
ownership of the Company's stock, and (iv) any financial interest in the
proposal of the shareholder offering the proposal. If the information supplied
by the shareholder is deficient in any material aspect, the Board of Directors
may reject the shareholder proposal. The shareholder may cure the deficiency
within five days after notification. The Board of Directors determines whether
the deficiency has been cured by the shareholder.
Shareholders are also required to comply with the provisions of the
Company's Bylaws with respect to any nomination of candidates for election as
directors at such Annual Meeting. See "Information Concerning Directors,
Nominees and Executive Officers - Nomination of Directors."
27
<PAGE>
OTHER BUSINESS
At the date of this Proxy Statement, management knows of no other business
that may properly come before the Annual Meeting. However, if any other matters
properly come before the meeting, the persons named in the enclosed form of
proxy will vote the proxies received in response to this solicitation in
accordance with their best judgment on such matters.
FINANCIAL INFORMATION
The Company's 1998 Annual Report to Shareholders, which includes the
balance sheets of the Company as of December 31, 1997 and January 3, 1999 and
the related statements of operations, changes in shareholders' equity and cash
flows for each of the three years in the period ended January 3, 1999,
accompanies these materials. A copy of the 1998 Annual Report to Shareholders
may be obtained without charge upon request to the Company. In addition, the
Company will provide without charge to any shareholder solicited hereby, upon
written request of such shareholder, a copy of its 1998 Annual Report on Form
10-K filed with the Securities and Exchange Commission. Requests should be
directed to the Chief Financial Officer, Recovery Engineering, Inc., 9300 North
75th Avenue, Minneapolis, Minnesota 55428.
By Order of the Board of Directors
Eric O. Madson, SECRETARY
March 22, 1999
28
<PAGE>
EXHIBIT A
AMENDMENT TO ARTICLES OF INCORPORATION
OF
RECOVERY ENGINEERING, INC.
A MINNESOTA CORPORATION
The Articles of Incorporation shall be amended by adding a new Article
10, as follows:
ARTICLE 10.
BOARD OF DIRECTORS
10.a. Number of Directors. The business and affairs of the Corporation
shall be managed by or under the direction of a board of directors (the "Board
of Directors"). The Board of Directors shall consist of not fewer than five nor
more than eleven directors. Within such limits, the exact number of directors
shall be fixed from time to time pursuant to a resolution adopted by a majority
of the directors then in office, although less than a quorum.
10.b. Election of Directors. The directors of the Corporation shall be
divided into three classes, as nearly equal in number as possible: Class 1,
Class 2, and Class 3. Each director shall serve for a term ending on the third
annual meeting following the annual meeting at which the class was elected;
provided, however, that the directors first elected to Class 1 shall 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 first elected to Class 2 shall
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 first
elected to Class 3 shall serve for a term ending upon the election of directors
at the third annual meeting following the end of the calendar year 1999.
At each annual election, the successors to the class of directors whose
term expires at that time shall be elected by the shareholders to hold office
for a term of three years (or until their successors are elected and qualified)
to succeed those directors whose term expires, so that the term of one class of
directors shall expire each year, unless, by reason of any intervening changes
in the authorized number of directors, the Board of Directors shall have
designated one or more directorships whose term then expires as directorships of
another class in order to more nearly achieve an equal number of directors among
the classes of directors.
Notwithstanding the requirement that the three classes of directors
shall be as nearly equal in number of directors as possible, in the event of any
change in the authorized number of directors, each director then continuing to
serve as such shall nevertheless continue as a director of the class of which he
or she is a member until the expiration of his or her current term, or his or
her prior resignation, disqualification, or removal from office.
10.c. Vacancies and Newly Created Directorships. Any vacancies on the
Board of Directors resulting from death, resignation, retirement,
disqualification, removal from office or other cause shall be filled by the
affirmative vote of a majority of directors then in office, although less than a
quorum, or by the sole remaining director, or, in the event of the failure of
the directors or the sole remaining director so to act, by the shareholders at
the next election of directors; provided that, if the holders of any class or
classes of stock or series thereof of the Corporation, voting separately, are
entitled to elect one or more directors, vacancies and newly created
directorships of such class or classes or series may be filled by a majority of
the directors elected by such class or classes or series thereof then in office,
A-1
<PAGE>
or by a sole remaining director so elected. Directors so chosen shall hold
office for a term expiring at the annual meeting of shareholders at which the
term of the class to which they have been elected expires. A director elected to
fill a vacancy by reason of an increase in the number of directorships shall be
elected by a majority vote of the directors then in office, although less than a
quorum, to serve until the next election of the class for which such director
shall have been chosen. If the number of directors is changed, any increase or
decrease shall be apportioned among the three classes so as to make all classes
as nearly equal in number as possible. If, consistent with the preceding
requirement, the increase or decrease may be allocated to more than one class,
the increase or decrease may be allocated to any such class the Board of
Directors selects in its discretion. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
10.d. Removal. A director may be removed only for cause by the
affirmative vote of the holders of at least a majority of the shares then
entitled to vote in an election of directors, which vote may only be taken at a
meeting of shareholders, the notice of which meeting expressly states such
purpose. Cause for removal shall be deemed to exist only if the director whose
removal is proposed has been convicted of a felony by a court of competent
jurisdiction or has been adjudged by a court of competent jurisdiction to be
liable for gross negligence or intentional misconduct in the performance of such
director's duty to the Corporation and such adjudication is no longer subject to
direct appeal.
10.d. Amendment or Repeal. Notwithstanding anything to the contrary
contained in these Articles of Incorporation, any amendment or repeal of all or
any part of this Article 10, or the adoption of any provision inconsistent
therewith, shall require the affirmative vote of the holders of at least
two-thirds of the voting power of the outstanding shares of the Corporation
entitled to vote thereon.
A-2
<PAGE>
RECOVERY ENGINEERING, INC.
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON
THURSDAY, APRIL 29, 1999
3:30 P.M. CENTRAL DAYLIGHT SAVINGS TIME
AT THE OFFICES OF
ROBINS, KAPLAN, MILLER & CIRESI L.L.P
2800 LASALLE PLAZA
800 LASALLE AVENUE
MINNEAPOLIS, MINNESOTA 55402
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
RECOVERY ENGINEERING, INC.
9300 NORTH 75TH AVENUE
MINNEAPOLIS, MN 55428 PROXY
- --------------------------------------------------------------------------------
The undersigned, revoking all prior proxies, hereby appoints Brian F. Sullivan
and William F. Wanner, Jr., or either of them, as proxy or proxies, with full
power of substitution and revocation, to vote all shares of Common Stock of
Recovery Engineering, Inc. (the "Company") of record in the name of the
undersigned at the close of business on March 5, 1999, at the Annual Meeting of
Shareholders to be held on Thursday, April 29, 1999, or at any adjournment
thereof, upon the matters set forth below.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. When properly
executed, this proxy will be voted in the manner directed herein by the
undersigned shareholder. If no direction is made, this proxy will be voted FOR
each proposal.
(CONTINUED ON OTHER SIDE)
<PAGE>
VOTE BY MAIL
Please mark, sign and date your proxy card and return it in the postage-paid
envelope that we have provided.
Please detach here
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1,2, 3, 4 AND 5
<TABLE>
<S> <C>
1. Approval of Amendment of the Company's Articles
of Incorporation to authorize [_] For [_] Against [_] Abstain
2. Election of Directors:
01 Robert R. Gheewalla 05 Richard J. Zeckhauser [_] Vote FOR [_] Vote WITHHELD
02 William D. Thompson 06 Brian F. Sullivan all nominees from all
03 John E. Gherty 07 William F. Wanner, Jr. nominees
04 Sanjay H. Patel
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY ____________________________________
INDICATED NOMINEE, WRITE THE NUMBER(S) OF THE | |
NOMINEE(S) IN THE BOX PROVIDED TO THE RIGHT.) |____________________________________|
3. Approval of amendment to the 1994 Stock Option and
Incentive Plan to increase the number of shares
reserved for issuance thereunder. [_] For [_] Against [_] Abstain
4. Approval of amendment to the 1993 Director Stock
Option Plan to increase the number of shares
reserved for issuance thereunder. [_] For [_] Against [_] Abstain
5. Ratification of appointment of Ernst & Young LLP as
independent auditors for the fiscal year ending
January 2, 2000. [_] For [_] Against [_] Abstain
6. In their discretion the Proxies are authorized
to vote upon such matters as may properly come
before the meeting. [_] For [_] Against [_] Abstain
Address Change? Mark Box [_] Dated: _____________________________, 1999.
Indicate changes below: ________________________________________________
| |
|________________________________________________|
Please sign your names(s) exactly as it appears at
left. In the case of shares owned in joint tenancy
or as tenants in common, all should sign.
Fiduciaries should indicate their title and
authority.
</TABLE>
<PAGE>
RECOVERY ENGINEERING, INC.
1994 STOCK OPTION AND INCENTIVE PLAN
The purpose of the Recovery Engineering, Inc. 1994 Stock Option and
Incentive Plan (the "Plan") is to promote the growth and profitability of
Recovery Engineering, Inc. (the "Company") and its Affiliates by providing its
employees, consultants and other service providers with an incentive to achieve
long-term corporate objectives, to attract and retain persons of outstanding
competence, and to provide such persons with an equity interest in the Company.
1. STOCK SUBJECT TO PLAN. An aggregate of 350,000 shares (the "Shares")
of the Common Stock, par value $.0l per share ("Common Stock"), of the Company
may be subject to awards granted under the Plan. The number of shares authorized
for issuance under the Plan may be increased from time to time by approval of
the Board of Directors and, if required pursuant to Rule 16b-3 under the
Securities Exchange Act of 1934 or the applicable rules of any securities
exchange or the NASD, the shareholders of the Company. Such Shares may be
authorized but unissued Common Stock or authorized and issued Common Stock that
has been or may be acquired by the Company. Shares that are subject to an award
which expires or is terminated unexercised, or which are reacquired by the
Company upon the forfeiture of restricted Shares, shall again be available for
issuance under the Plan.
2. ADMINISTRATION.
a. COMMITTEE. The Plan shall be administered by the
Compensation Committee (the "Committee") of the Board of Directors of
the Company (the "Board"). The Committee shall be comprised of the
entire Board or, if the Board so determines, of two or more members of
the Board.
b. POWERS AND DUTIES. The Committee shall have the authority
to make rules and regulations governing the administration of the Plan;
to select the eligible employees, consultants and other service
providers to whom awards shall be granted; to determine the type,
amount, size, and terms of awards; to determine the time when awards
shall be granted; to determine whether any restrictions shall be placed
on Shares purchased pursuant to any option or issued pursuant to any
award; and to make all other determinations necessary or advisable for
the administration of the Plan. The Committee's determinations need not
be uniform, and may be made by it selectively among persons who are
eligible to receive awards under the Plan, whether or not such persons
are similarly situated. All interpretations, decisions, or
determinations made by the Committee pursuant to the Plan shall be
final and conclusive.
3. ELIGIBILITY; PARTICIPANTS.
a. Any person who provides services to the Company or any of
its Affiliates as an employee, consultant or other service provider
shall be eligible to receive awards under the Plan. Eligible persons
may be selected to receive awards individually or by group or category
(for example, by pay grade) as the Committee may determine. The
selection of
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<PAGE>
officers of the Company to receive awards under the Plan and the terms
of any award granted to such officers shall be approved by the
Committee. The Committee, in its sole discretion, may delegate to one
or more officers of the Company the authority to select persons who are
not officers to receive awards under the Plan and to establish the
terms of awards granted to such persons.
b. A person who has been granted an award under this Plan, or
under any predecessor plan, may be granted additional awards if the
Committee shall so determine. Except to the extent otherwise provided
in the agreement evidencing an award, the granting of an award under
this Plan shall not affect any outstanding award previously granted
under this Plan or under any other plan of the Company or any
Affiliate.
c. For purposes of this Plan, the term "Affiliate" shall mean
any "parent corporation" or "subsidiary corporation" of the Company, as
those terms are defined in Sections 424(e) and 424(f) of the Internal
Revenue Code of 1986, as amended.
4. AWARDS. The Committee may make awards to eligible persons in the
form of stock options which are intended to qualify as "Incentive Stock Options"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, or stock options which are not intended to so qualify ("Non-qualified
Options"), or awards of restricted stock, or any combination thereof.
5. STOCK OPTIONS. A stock option granted pursuant to the Plan shall
entitle the optionee, upon exercise, to purchase Shares at a specified price
during a specified period. Options shall be subject to such terms and conditions
as the Committee shall from time to time approve; provided, that each option
shall be subject to the following requirements:
a. TYPE OF OPTION. Each option shall be identified in the
agreement pursuant to which it is granted as an Incentive Stock Option
or as a Non-qualified Option, as the case may be.
b. TERM. No option shall be exercisable more than 121 months
after the date on which it is granted.
c. PAYMENT. The purchase price of Shares subject to an option
shall be payable in full at the time the option is exercised. Payment
may be made in cash, in shares of Common Stock having an aggregate fair
market value on the date of exercise which is not less than the option
price, or by a combination of cash and such shares, as the Committee
may determine, and subject to such terms and conditions as the
Committee deems appropriate.
d. OPTIONS NOT TRANSFERABLE. Options shall not be transferable
except to the extent permitted by the agreement evidencing such option;
provided, that in no event shall any option be transferable by the
optionee, other than by will or the laws of descent and distribution.
Options shall be exercisable during an optionee's lifetime only by such
optionee. If, pursuant to the agreement evidencing any option, such
option remains exercisable after the optionee's death, it may be
exercised, to the extent permitted by such
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<PAGE>
agreement, by the personal representative of the optionee's estate or
by any person who acquired the right to exercise such option by
bequest, inheritance, or otherwise by reason of the optionee's death.
e. INCENTIVE STOCK OPTIONS. If an option is an Incentive Stock
Option, it shall be subject to the following additional requirements:
i. Incentive Stock Options may be granted only to
persons who are employees of the Company or of an Affiliate.
ii. The purchase price of Shares that are subject to
an Incentive Stock Option shall not be less than 100% of the
fair market value of such Shares at the time the option is
granted, as determined in good faith by the Committee.
iii. The aggregate fair market value (determined at
the time the option is granted) of the Shares with respect to
which Incentive Stock Options are exercisable by the optionee
for the first time during any calendar year, under this Plan
or any other plan of the Company or any Affiliate, shall not
exceed $100,000.
iv. An Incentive Stock Option shall not be
exercisable more than ten years after the date on which it is
granted.
v. The purchase price of Shares that are subject to
an Incentive Stock Option granted to an employee who, at the
time such option is granted, owns 10% or more of the total
combined voting power of all classes of stock of the Company
or of any Affiliate shall not be less than 110% of the fair
market value of such Shares on the date such option is
granted, and such option may not be exercisable more than five
years after the date on which it is granted. For the purposes
of this subparagraph, the rules of Section 424(d) of the Code
shall apply in determining the stock ownership of any
employee.
Subject to the foregoing, options may be made exercisable in one or more
installments, upon the happening of certain events, upon the fulfillment of
certain conditions, or upon such other terms and conditions as the Committee
shall determine.
6. RESTRICTED STOCK. Restricted stock awards granted pursuant to the
Plan shall entitle the holder to receive Shares, subject to forfeiture if
specified conditions are not satisfied at the end of a specified period.
Restricted stock awards shall be subject to such terms and conditions as the
Committee shall from time to time approve; provided, that each award shall be
subject to the following requirements:
a. RESTRICTED PERIOD. The Committee shall establish a period
(the "Restricted Period") at the time an award is granted during which
the holder will not be permitted to sell, transfer, pledge, encumber,
or assign the Shares subject to the award. The Committee may provide
for the lapse of restrictions in installments, or upon the occurrence
of certain events,
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<PAGE>
where deemed appropriate. Any attempt by a holder to dispose of
restricted Shares in a manner contrary to the applicable restrictions
shall be void, and of no force and effect.
b. RIGHTS DURING RESTRICTED PERIOD. Except to the extent
otherwise provided in this paragraph 6 or under the terms of any
restricted stock agreement, during the Restricted Period the holder of
restricted Shares shall have all of the rights of a shareholder in the
Company with respect to such Shares, including the right to vote the
Shares and to receive dividends and other distributions with respect to
the Shares; provided, that all stock dividends, stock rights, and stock
issued upon split-ups or reclassifications of Shares shall be subject
to the same restrictions as the Shares with respect to which such stock
dividends, rights, or additional stock are issued, and may be held in
custody as provided below in this paragraph 6 until the restrictions
thereon shall have lapsed.
c. FORFEITURES. Except to the extent otherwise provided in the
restricted stock agreement, all Shares then subject to any restriction
shall be forfeited to the Company without further obligation of the
Company to the holder thereof, and all rights of the holder with
respect to such Shares shall terminate, if the holder shall cease to
provide services to the Company and its Affiliates as an employee,
consultant or other service provider, or if any condition established
by the Committee for the release of any restriction shall not have
occurred, prior to the expiration of the Restricted Period.
d. CUSTODY. The Committee may provide that the certificates
evidencing restricted Shares shall be held in custody by a bank or
other institution, or by the Company or any Affiliate, until the
restrictions thereon have lapsed, and may require that the holder of
any restricted Shares shall have delivered to the Company one or more
stock powers, endorsed in blank, relating to the restricted Shares as a
condition of receiving the award.
e. CERTIFICATES. A recipient of a restricted stock award shall
be issued a certificate or certificates evidencing the Shares subject
to such award. Such certificates shall be registered in the name of the
recipient, and may bear an appropriate legend referring to the terms,
conditions, and restrictions applicable to such award, which legend
shall be in substantially the following form:
"The transferability of this certificate and the shares
represented hereby are subject to the terms and conditions
(including forfeiture) of the Recovery Engineering, Inc. 1994
Stock Option and Incentive Plan and an Agreement entered into
between the registered owner and Recovery Engineering, Inc.
Copies of such Plan and Agreement are on file in the offices
of Recovery Engineering, Inc."
f. GIFTS, ETC. Notwithstanding any other provision of this
paragraph 6, the Committee may permit a gift of restricted stock to the
holder's spouse, child, stepchild, grandchild, or legal dependent, or
to a trust whose sole beneficiary or beneficiaries shall be the holder
and/or any one or more of such persons; provided, that the donee shall
have entered into an agreement with the Company pursuant to which it
agrees that the restricted
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<PAGE>
stock shall be subject to the same restrictions in the hands of such
donee as it was in the hands of the donor.
7. AGREEMENTS. Each option or award granted pursuant to the Plan shall
be evidenced by an agreement setting forth the terms and conditions upon which
it is granted. Multiple options or awards may be evidenced by a single
agreement. Subject to the limitations set forth in the Plan, the Committee may,
with the consent of the person to whom an award has been granted, amend any such
agreement to modify the terms or conditions governing the award evidenced
thereby.
8. ADJUSTMENTS. In the event of any change in the outstanding Shares of
Common Stock by reason of any stock dividend or split, recapitalization,
reclassification, combination, or exchange of Shares or other similar corporate
change, then if the Committee shall determine, in its sole discretion, that such
change necessarily or equitably requires an adjustment in the number of Shares
subject to an award, in the option price or value of an award, or in the maximum
number of Shares subject to this Plan, such adjustments shall be made by the
Committee and shall be conclusive and binding for all purposes of this Plan. No
adjustment shall be made in connection with the issuance by the Company of any
warrants, rights, or options to acquire additional Common Stock or of securities
convertible into Common Stock.
9. MERGER, CONSOLIDATION, REORGANIZATION, LIQUIDATION, ETC. Subject to
the provisions of the agreement evidencing any award, if the Company shall
become a party to any corporate merger, consolidation, major acquisition of
property for stock, reorganization, or liquidation, the Board of Directors of
the Company shall have the power to make any arrangement it deems advisable with
respect to outstanding awards and in the number of Shares subject to this Plan,
which shall be binding for all purposes of this Plan, including, but not limited
to, the substitution of new awards for any awards then outstanding, the
assumption of any such awards, and the termination of such awards.
10. EXPENSES OF PLAN. The expenses of administering this Plan shall be
borne by the Company and its Affiliates.
11. RELIANCE ON REPORTS. Each member of the Committee and each member
of the Board of Directors shall be fully justified in relying or acting in good
faith upon any report made by the independent public accountants of the Company
and its Affiliates and upon any other information furnished in connection with
this Plan by any person or persons other than himself. In no event shall any
person who is or shall have been a member of the Committee or of the Board of
Directors be liable for any determination made or other action taken or omitted
in reliance upon any such report or information, or for any action taken or
omitted, including the furnishing of information, in good faith.
12. RIGHTS AS SHAREHOLDER. Except to the extent otherwise specifically
provided hereon, no recipient of any award shall have any rights as a
shareholder with respect to Shares sold or issued pursuant to the Plan until
certificates for such Shares have been issued to such person.
13. GENERAL RESTRICTIONS. Each award granted pursuant to the Plan shall
be subject to the requirement that if, in the opinion of the Committee, the
listing, registration, or qualification of
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<PAGE>
any Shares related thereto upon any securities exchange or under any state or
federal law, the consent or approval of any regulatory body, or an agreement by
the recipient with respect to the disposition of any such Shares, is necessary
or desirable as a condition of the issuance or sale of such Shares, such award
shall not be consummated unless and until such listing, registration,
qualification, consent, approval, or agreement is effected or obtained in form
satisfactory to the Committee.
14. EMPLOYMENT RIGHTS. Nothing in this Plan, or in any agreement
entered into hereunder, shall confer upon any person the right to continue to
provide services to the Company or an Affiliate as an employee, consultant or
other service provider, or affect the right of the Company or Affiliate to
terminate such person's service at any time, with or without cause.
15. WITHHOLDING. If the Company proposes or is required to issue Shares
pursuant to the Plan, it may require the recipient to remit to it, or may
withhold from such award or from the recipient's other compensation, an amount,
in the form of cash or Shares, sufficient to satisfy any applicable federal,
state, or local tax withholding requirements prior to the delivery of any
certificates for such Shares.
16. AMENDMENTS. The Board of Directors of the Company may at any time,
and from time to time, amend the Plan in any respect, except that no amendment
that would:
a. materially increase the benefits accruing to participants
under the Plan;
b. increase the number of Shares available for issuance or
sale pursuant to the Plan (other than as permitted by paragraphs 8 and
9); or
c. materially modify the requirements as to eligibility for
participation in the Plan;
shall be made without the affirmative vote of shareholders holding at least a
majority of the voting stock of the Company represented in person or by proxy at
a duly held shareholders' meeting.
17. IMMEDIATE ACCELERATION OF AWARDS. Notwithstanding any provision in
this Plan or in any award to the contrary, the restrictions on all shares of
restricted stock shall lapse immediately and all outstanding options will become
exercisable immediately if, subsequent to the Effective Date of this Plan, any
of the following events occur:
a. Any person or group of persons, other than the shareholders
of record of the Company as of the date of this Plan is adopted by the
Board, becomes the beneficial owner of 30% or more of any equity
security of the Company entitled to vote for the election of directors;
b. A change in the composition of the Board within any
consecutive two-year period such that the "Continuing Directors" cease
to constitute a majority of the board. For purposes of this event, the
"Continuing Directors" shall mean those members of the Board who
either: (i) were directors at the beginning of such two-year period, or
(ii) were elected
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<PAGE>
by, or on nominations or recommendations of, a majority of the then-
existing Board members; or
c. The shareholders of the Company approve an agreement to
merge or consolidate with or into another corporation or an agreement
to sell or otherwise dispose of all or substantially all of the
Company's assets (including a plan of liquidation).
For purposes of this paragraph 17, beneficial ownership by a person or
group of persons shall be determined in accordance with Regulation 13D (or any
similar successor regulation) promulgated by the Securities and Exchange
Commission pursuant to the 1934 Act. Beneficial ownership of more than 30% of an
equity security may be established by any reasonable method, but shall be
presumed conclusively to exist as to any person who files a Schedule 13D report
with the Securities and Exchange Commission reporting such ownership. If the
restrictions and forfeiture periods are eliminated by reason of subparagraph a.,
the limitations of this Plan shall not become applicable again should the person
cease to own 30% or more of any equity security of the Company.
A participant shall not be entitled to the immediate acceleration of an
award as provided in this paragraph 17 if such acceleration would, with respect
to the participant, constitute a "parachute payment" for purposes of Internal
Revenue Code Section 280G, or any successor provision. The participant shall
have the right to designate those awards which would be reduced or eliminated so
that the participant will not receive a "parachute payment."
Prior to the occurrence of one of the events described in subparagraph
a., b. or c. above, the participant shall have no rights under this paragraph
17, and the Board shall have the power and right, within its sole discretion, to
rescind, modify or amend this paragraph 17 without any consent of the
participant. In all other cases, and notwithstanding the authority granted to
the Board or the Committee, as the case may be, to exercise discretion in
interpreting, administering, amending or terminating this Plan, neither the
Board nor the Committee shall, following the occurrence of one of the events
described in subparagraph a., b. or c. above, have the power to exercise such
authority or otherwise take any action which is inconsistent with the provisions
of this paragraph 17.
18. SHAREHOLDER APPROVAL. The Plan shall be subject to approval by the
shareholders holding at least a majority of the voting stock of the Company
represented in person or by proxy and voting thereon at a duly held
shareholders' meeting, and any award granted under the Plan prior to the date of
such approval shall be contingent upon such approval.
19. EFFECTIVE DATE; DURATION. This Plan shall be effective as of
January 31, 1994, subject to shareholder approval of the Plan as described above
on or before January 31, 1995. No options or rights shall be granted under the
Plan after the earlier of (a) the date on which the Plan is terminated by the
Board of Directors of the Company; or (b) January 31, 2004. Options or rights
outstanding at the termination of the Plan may continue to be exercised in
accordance with their terms after such termination.
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<PAGE>
FIRST AMENDMENT TO THE
RECOVERY ENGINEERING, INC.
1994 STOCK OPTION AND INCENTIVE PLAN
January 31, 1995
RECITALS:
A. The Recovery Engineering, Inc. 1994 Stock Option and Incentive Plan
(the "Plan") was adopted by the Board of Directors of Recovery
Engineering, Inc. (the "Company") on January 31, 1994, and was approved
by the shareholders of the Company on April 12, 1994. The Plan is now
in full force and effect.
B. The Company desires to amend the Plan to increase the number of shares
of common stock available for issuance under the Plan.
AMENDMENT:
THEREFORE, the Plan is hereby amended as follows:
1. The first sentence of paragraph 1 of the Plan is hereby amended to read
as follows:
"1. Stock Subject to Plan. An aggregate of 700,000 shares of
the Common Stock, par value $.01 per share, ("Common Stock") of the
Company may be subject to awards granted under the Plan."
2. The foregoing amendment shall be effective as of January 31, 1995, and
shall be subject to approval by the shareholders of the Company at its
next Annual or Special Meeting of shareholders.
<PAGE>
SECOND AMENDMENT TO THE
RECOVERY ENGINEERING, INC.
1994 STOCK OPTION AND INCENTIVE PLAN
January 28, 1997
RECITALS:
A. The Recovery Engineering, Inc. 1994 Stock Option and Incentive Plan
(the "Plan") was adopted by the Board of Directors of Recovery
Engineering, Inc. (the "Company") on January 31, 1994, and was approved
by the shareholders of the Company on April 12, 1994. The First
Amendment to the Plan, increasing the number of shares of common stock
available for issuance under the Plan from 350,000 shares to 700,000
shares, was adopted by the Board of Directors on January 31, 1995, and
was approved by the shareholders of the Company on April 25, 1995. The
Plan, as amended, is now in full force and effect.
B. The Company desires to amend the Plan to further increase the number of
shares of common stock available for issuance under the Plan.
AMENDMENT:
THEREFORE, the Plan is hereby amended as follows:
1. The first sentence of paragraph 1 of the Plan is hereby amended to read
as follows:
"1. Stock Subject to Plan. An aggregate of 800,000 shares of
the Common Stock, par value $.01 per share, ("Common Stock") of the
Company may be subject to awards granted under the Plan."
2. The foregoing amendment shall be effective as of January 28, 1997, and
shall be subject to approval by the shareholders of the Company at its
next Annual or Special Meeting of shareholders.
<PAGE>
THIRD AMENDMENT TO THE
RECOVERY ENGINEERING, INC.
1994 STOCK OPTION AND INCENTIVE PLAN
April 24, 1997
RECITALS:
A. The Recovery Engineering, Inc. 1994 Stock Option and Incentive Plan
(the "Plan") was adopted by the Board of Directors of Recovery
Engineering, Inc. (the "Company") on January 31, 1994, and was approved
by the shareholders of the Company on April 12, 1994. The First
Amendment to the Plan, increasing the number of shares of common stock
available for issuance under the Plan from 350,000 shares to 700,000
shares, was adopted by the Board of Directors on January 31, 1995, and
was approved by the shareholders of the Company on April 25, 1995. The
Second Amendment to the Plan, increasing the number of shares of common
stock available for issuance under the Plan from 700,000 shares to
800,000 shares, was adopted by the Board of Directors on January 28,
1997, and was approved by the shareholders of the Company on April 24,
1997. The Plan, as amended, is now in full force and effect.
B. The Company desires to amend the Plan to further increase the number of
shares of common stock available for issuance under the Plan.
AMENDMENT:
THEREFORE, the Plan is hereby amended as follows:
1. The first sentence of paragraph 1 of the Plan is hereby amended to read
as follows:
"1. Stock Subject to Plan. An aggregate of 850,000 shares of
the Common Stock, par value $.01 per share, ("Common Stock") of the
Company may be subject to awards granted under the Plan."
2. The foregoing amendment shall be effective as of April 24, 1997, and
shall be subject to approval by the shareholders of the Company at its
next Annual or Special Meeting of shareholders.
<PAGE>
FOURTH AMENDMENT TO THE
RECOVERY ENGINEERING, INC.
1994 STOCK OPTION AND INCENTIVE PLAN
August 5, 1997
RECITALS:
A. The Recovery Engineering, Inc. 1994 Stock Option and Incentive Plan
(the "Plan") was adopted by the Board of Directors of Recovery
Engineering, Inc. (the "Company") on January 31, 1994, and was approved
by the shareholders of the Company on April 12, 1994. The First
Amendment to the Plan, increasing the number of shares of common stock
available for issuance under the Plan from 350,000 shares to 700,000
shares, was adopted by the Board of Directors on January 31, 1995, and
was approved by the shareholders of the Company on April 25, 1995. The
Second Amendment to the Plan, increasing the number of shares of common
stock available for issuance under the Plan from 700,000 shares to
800,000 shares, was adopted by the Board of Directors on January 28,
1997, and was approved by the shareholders of the Company on April 24,
1997. The Third Amendment to the Plan, increasing the number of shares
of common stock available for issuance under the Plan from 800,000
shares to 850,000 shares, was adopted by the Board of Directors on
April 24, 1997, and is to be submitted to the shareholders of the
Company for approval at the next Annual or Special Meeting of
shareholders. The Plan, as amended, is now in full force and effect,
subject to approval of the Third Amendment to the Plan by the
shareholders of the Company.
B. The Company desires to amend the Plan to further increase the number of
shares of common stock available for issuance under the Plan.
AMENDMENT:
THEREFORE, the Plan is hereby amended as follows:
1. The first sentence of paragraph 1 of the Plan is hereby amended to read
as follows:
"1. Stock Subject to Plan. An aggregate of 1,050,000 shares of
the Common Stock, par value $.01 per share, ("Common Stock") of the
Company may be subject to awards granted under the Plan."
2. The foregoing amendment shall be effective as of August 5, 1997, and
shall be subject to approval by the shareholders of the Company at its
next Annual or Special Meeting of shareholders.
<PAGE>
FIFTH AMENDMENT TO THE
RECOVERY ENGINEERING, INC.
1994 STOCK OPTION AND INCENTIVE PLAN
January 28, 1999
RECITALS:
A. The Recovery Engineering, Inc. 1994 Stock Option and Incentive Plan
(the "Plan") was adopted by the Board of Directors of Recovery
Engineering, Inc. (the "Company") on January 31, 1994, and was approved
by the shareholders of the Company on April 12, 1994. The First
Amendment to the Plan, increasing the number of shares of common stock
available for issuance under the Plan from 350,000 shares to 700,000
shares, was adopted by the Board of Directors on January 31, 1995, and
was approved by the shareholders of the Company on April 25, 1995. The
Second Amendment to the Plan, increasing the number of shares of common
stock available for issuance under the Plan from 700,000 shares to
800,000 shares, was adopted by the Board of Directors on January 28,
1997, and was approved by the shareholders of the Company on April 24,
1997. The Third Amendment to the Plan, increasing the number of shares
of common stock available for issuance under the Plan from 800,000
shares to 850,000 shares, was adopted by the Board of Directors on
April 24, 1997, and approved by the shareholders on April 23, 1998. The
Fourth Amendment to the Plan, increasing the number of shares of common
stock available for issuance under the Plan from 850,000 to 1,050,000
was adopted by the Board of Directors on August 5, 1997 and approved by
the shareholders on April 23, 1998. The Plan, as amended, is now in
full force and effect.
B. The Company desires to amend the Plan to further increase the number of
shares of common stock available for issuance under the Plan.
AMENDMENT:
THEREFORE, the Plan is hereby amended as follows:
1. The first sentence of paragraph 1 of the Plan is hereby amended to read
as follows:
"1. Stock Subject to Plan. An aggregate of 1,250,000 shares of
the Common Stock, par value $0.01 per share, ("Common Stock") of the
Company may be subject to awards granted under the Plan."
2. The foregoing amendment shall be effective as of January 28, 1999, and
shall be subject to approval by the shareholders of the Company at its
next Annual or Special Meeting of shareholders.
<PAGE>
RECOVERY ENGINEERING, INC.
1993 DIRECTOR STOCK OPTION PLAN
The purpose of the Recovery Engineering, Inc. 1993 Director Stock
Option Plan (the "Option Plan") is to attract and retain persons of outstanding
competence to serve on the Board of Directors of Recovery Engineering, Inc. (the
"Company").
1. ADMINISTRATION. The Option Plan will be administered by the Board of
Directors of the Company. Grants of stock options under the Option Plan
("Options") and the amount and nature of the Options so granted will be
automatic, as described below.
2. STOCK SUBJECT TO THE OPTION PLAN. An aggregate of 100,000 shares of
Common Stock, par value $.0l per share ("Common Stock"), of the Company are
reserved for issuance under the Option Plan. The number of shares authorized for
issuance under the Option Plan may be increased from time to time by approval of
the Board of Directors and, if required pursuant to Rule 16b-3 under the
Securities Exchange Act of 1934 or the applicable rules of any securities
exchange or the NASD, the shareholders of the Company. In the event of any
reorganization, merger, recapitalization, stock dividend, stock split, or
similar change in the corporate structure or shares of the Company, appropriate
adjustments will be made to the number and kind of shares reserved for issuance
under the Option Plan and pursuant to outstanding Options and to the exercise
price of outstanding Options.
3. AUTOMATIC OPTION GRANTS. Under the Option Plan, each non-employee
director will automatically be granted Options to purchase shares of Common
Stock as follows:
a. INITIAL OPTION GRANTS. Under the Option Plan, each current
and future non-employee director will be granted an initial Option (the
"Initial Grant") as follows:
i. CURRENT NON-EMPLOYEE DIRECTORS. Each person
serving as a non-employee director on the effective date of
the Option Plan will automatically be granted an Option on the
effective date to purchase the number of shares set forth
below:
Name Number of shares
---- ----------------
Eugene E. Erickson 1,000 shares
John E. Gherty 2,000 shares
William F. Wanner, Jr. 1,000 shares
Ronald W. Weber 1,000 shares
Richard J. Zeckhauser 0 shares
ii. FUTURE NON-EMPLOYEE DIRECTORS. Each person who is
first elected or appointed to serve as a non-employee director
after the effective date of the Option Plan will automatically
be granted an Option on the date of his or her initial
election
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<PAGE>
or appointment to the Company's Board of Directors to purchase
1,000 shares of Common Stock.
b. ADDITIONAL OPTION GRANTS. Under the Option Plan, each
non-employee director will automatically be granted additional Options
to purchase shares of Common Stock as follows:
i. On the date of the first annual meeting of
shareholders occurring after the Initial Grant to a
non-employee director under the Option Plan, such non-employee
director, if reelected at such meeting, will automatically be
granted an additional Option to purchase 1,000 shares of
Common Stock.
ii. Thereafter, on the date of each subsequent annual
meeting of shareholders at which the non-employee director is
reelected to the Board of Directors, the non-employee director
shall automatically be granted an additional Option to
purchase 1,000 shares of Common Stock.
4. VESTING, EXERCISABILITY AND EXPIRATION. All Options granted under
the Option Plan shall be fully vested when granted, but may not be exercised
until six months following the date of grant. All Options granted under the
Option Plan shall expire five years after the date of grant.
5. TRANSFERABILITY. No Option granted under the Option Plan is
assignable or transferable during the lifetime of the director, either
voluntarily or involuntarily. Options shall be exercisable during a director's
lifetime only by such director. In the event of the death of a non-employee
director, Options granted under the Option Plan may be transferred by will or
the laws of descent and distribution and may only be exercised by the executors
or administrators of such director's estate or by the person or persons to whom
such director's rights under the Option shall. pass by the director's will or
the laws of descent and distribution.
6. EXERCISE PRICE. The exercise price of Options granted under the
Option Plan shall be 85% of the fair market value of one share of Common Stock
on the date of grant; provided, however, that the exercise price of 1,000 of the
shares included in the initial option grant to Mr. Gherty shall be $2.50 per
share. For purposes of the Option Plan, "fair market value" is the average of
the high and low sales price of the Common Stock, as reported by the NASDAQ
National Market System on the date of grant. Payment for the exercise of Options
may be made in cash, by personal check payable to the Company, by delivery of
shares of Common Stock having an aggregate fair market value on the date of
exercise which is not less than the option price, or by a combination thereof.
7. PLAN AMENDMENT AND TERMINATION. The Board of Directors may suspend
or terminate the Option Plan or any portion thereof at any time, and may amend
the Option Plan from time to time in any respect, provided that no such
amendment will be effective without approval of the shareholders, if shareholder
approval is required pursuant to Rule 16b-3 under the Securities Exchange Act of
1934 or the applicable rules of any securities exchange or the NASD. To the
extent prohibited under Rule 16b-3 under the Securities Exchange Act of 1934,
the Option Plan may not be amended more than once every six months. No
termination, suspension or amendment of the
2
<PAGE>
Option Plan will alter an outstanding Option without the consent of the holder
of such Option. Unless earlier terminated by action of the Board, the Option
Plan will terminate on September 7, 2003, and no Option shall be granted after
any such termination. Options outstanding upon termination of the Option Plan
may continue to be exercised in accordance with their terms.
8. COMPLIANCE WITH SEC REGULATIONS. It is the Company's intent that the
Option Plan comply in all respects with Rule 16b-3 of the Act and any
regulations promulgated thereunder. If any provision of this plan is later found
not to be in compliance with the Rule, the provision shall be deemed null and
void. All grants and exercises of Options under the Option Plan shall be
executed in accordance with the requirements of Section 16 of the Act, as
amended, and any regulations promulgated thereunder.
9. SHAREHOLDER APPROVAL. The Option Plan shall be subject to approval
by the shareholders holding at least a majority of the voting stock of the
Company represented in person or by proxy at a duty held shareholders' meeting,
and any Option granted under the Option Plan prior to the date of such approval
shall be contingent upon such approval.
10. EFFECTIVE DATE. This Option Plan shall be effective as of September
7, 1993, subject to shareholder approval of the Option Plan as described above
on or before September 7, 1994.
11. MISCELLANEOUS. Except as otherwise provided herein, no non-employee
director shall have any claim or right to be granted an Option under the Option
Plan. Neither the Option Plan nor any action hereunder shall be construed as
giving any director any right to be retained in the service of the Company.
3
<PAGE>
FIRST AMENDMENT TO THE
RECOVERY ENGINEERING, INC.
1993 DIRECTOR STOCK OPTION PLAN
April 24, 1997
RECITALS:
A. The Recovery Engineering, Inc. 1993 Director Stock Option Plan (the
"Plan") was adopted by the Board of Directors of Recovery Engineering,
Inc. (the "Company") on September 7, 1993, and was approved by the
shareholders of the Company on April 12, 1994. The Plan is now in full
force and effect.
B. This First Amendment is adopted in order to increase the number of
shares subject to each option hereafter granted under the Plan.
AMENDMENT:
THEREFORE, the Plan is hereby amended as follows:
1. Amendment No. 1: Section 3.a.ii of the Plan is hereby amended to read
as follows:
"ii. FUTURE NON-EMPLOYEE DIRECTORS. Each person who
is first elected or appointed to serve as a non-employee
director on or after the effective date of the First Amendment
to the Option Plan will automatically be granted an Option on
the date of his or her initial election or appointment to the
Company's Board of Directors to purchase 4,000 shares of
Common Stock."
2. Amendment No. 2: Section 3.b of the Plan is hereby amended to read as
follows:
"b. ADDITIONAL OPTION GRANTS. Under the Option Plan, each
non-employee director will automatically be granted additional Options
to purchase shares of Common Stock as follows:
"i. On the date of the first annual meeting of
shareholders occurring (A) after the Initial Grant to a
non-employee director under the Option Plan and (B) on or
after the effective date of the First Amendment to the Option
Plan, such non-employee director, if reelected at such
meeting, will automatically be granted an additional Option to
purchase 4,000 shares of Common Stock.
"ii. Thereafter, on the date of each subsequent
annual meeting of shareholders at which the non-employee
director is reelected to the Board of Directors, the
non-employee director will automatically be granted an
additional Option to purchase 4,000 shares of Common Stock."
1
<PAGE>
3. Effective Date. This First Amendment shall be effective as of April 24,
1997, and with respect to Options granted under the Plan on or after
such effective date. If shareholder approval of this First Amendment is
required pursuant to Rule 16b-3 under the Securities Act of 1934 or the
applicable rules of any securities exchange or the NASD, then this
First Amendment and any Option granted under the Plan on or after the
date of this First Amendment (but only to the extent of the additional
shares which are subject to such Option as a result of this First
Amendment) shall be subject to and contingent upon such shareholder
approval.
2
<PAGE>
SECOND AMENDMENT TO THE
RECOVERY ENGINEERING, INC.
1993 DIRECTOR STOCK OPTION PLAN
January 28, 1999
RECITALS:
A. The Recovery Engineering, Inc. 1993 Director Stock Option Plan (the
"Option Plan") was adopted by the Board of Directors of Recovery
Engineering, Inc. (the "Company") on September 7, 1993, and was
approved by the shareholders of the Company on April 12, 1994. The
First Amendment to the Option Plan, increasing the number of shares of
Common Stock subject to each option thereafter granted under the Option
Plan, was adopted by the Board of Directors on April 24, 1997, and was
approved by the shareholders of the Company on April 23, 1998. The
Option Plan, as amended, is now in full force and effect.
B. This Second Amendment is adopted in order to increase the number of
shares of Common Stock available for issuance under the Option Plan.
AMENDMENT:
THEREFORE, the Option Plan is hereby amended as follows:
1. The first sentence of paragraph 2 of the Option Plan is hereby amended
to read as follows:
"2. STOCK SUBJECT TO THE OPTION PLAN. An aggregate of 130,000
shares of Common Stock, par value $.01 per share, ("Common Stock") of
the Company are reserved for issuance under the Option Plan."
2. The foregoing amendment shall be effective as of January 28, 1999, and
shall be subject to approval by the shareholders of the Company at its
next Annual or Special Meeting of shareholders.
