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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 4, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-21232
RECOVERY ENGINEERING, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1557115
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation organization)
9300 North 75th Avenue
Minneapolis, MN 55428
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 315-5500
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.01 Par Value - 6,024,366 shares as of April 29, 1999
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<PAGE>
RECOVERY ENGINEERING, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements (Unaudited):
Balance Sheets
April 4, 1999 and January 3, 1999.............................. 3
Statements of Operations
Three-month periods ended April 4, 1999 and April 5, 1998...... 4
Statements of Cash Flows
Three-month periods ended April 4, 1999 and April 5, 1999...... 5
Notes to Financial Statements.................................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................. 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 11
Item 2. Changes in Securities and Use of Proceeds...................... 11
Item 3. Defaults upon Senior Securities................................ 11
Item 4. Submission of Matters to a Vote of Security Holders............ 12
Item 5. Other Information.............................................. 12
Item 6. Exhibits and Reports on Form 8-K............................... 13
Signatures..................................................... 14
Exhibit Index to Form 10-Q..................................... 15
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<PAGE>
RECOVERY ENGINEERING, INC.
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
April 4, January 3,
1999 1999
---------- ----------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................. $ 14,685 $ 14,000
Accounts receivable (net of allowance of
$270 for 1999 and $308 for 1998) .......................... 15,021 15,389
Inventory ................................................. 11,930 10,661
Other current assets ...................................... 746 620
---------- ----------
Total Current Assets ................................... 42,382 40,670
Property and equipment:
Tooling ................................................... 9,832 9,547
Equipment and fixtures .................................... 14,392 14,109
---------- ----------
24,224 23,656
Less accumulated depreciation ............................. 7,887 7,004
---------- ----------
16,337 16,652
Deferred income taxes ........................................ 1,512 1,512
Patents (net of accumulated amortization) .................... 722 729
Other assets ................................................. 288 313
---------- ----------
Total assets ........................................... $ 61,241 $ 59,876
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................... $ 2,238 $ 5,740
Accrued marketing expenses ................................ 3,796 1,003
Accrued co-op advertising ................................. 3,082 2,994
Other accrued expenses .................................... 4,268 2,868
---------- ----------
Total current liabilities .............................. 13,384 12,605
Long-term debt ............................................... 15,000 15,000
Shareholders' equity:
Common stock, $.01 par value:
Authorized shares -- 100,000,000
Issued and outstanding shares:
1999 - 6,022,919 and 1998 - 4,558,000 .................. 60 60
Additional paid-in capital ................................ 60,093 59,977
Note receivable from sale of stock ........................ (498) (498)
Retained earnings (deficit) ............................... (26,798) (27,268)
---------- ----------
Total shareholders' equity ............................. 32,857 32,271
---------- ----------
Total liabilities and shareholders' equity ................ $ 61,241 $ 59,876
========== ==========
</TABLE>
See accompanying notes.
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<PAGE>
RECOVERY ENGINEERING, INC.
STATEMENTS OF OPERATIONS
(Unaudited - in thousands, except per share data)
<TABLE>
<CAPTION>
Three months Three months
ended April 4, 1999 ended April 5, 1998
------------------- -------------------
<S> <C> <C>
Net sales .......................................... $ 20,566 $ 17,225
Cost of products sold .............................. 10,265 9,033
---------- ----------
Gross profit ....................................... 10,301 8,192
Operating expenses:
Selling, general and administrative ............ 8,755 7,865
Research and development ....................... 961 1,011
---------- ----------
9,716 8,876
Income (loss) from operations ...................... 585 (684)
Other income (expense):
Interest income and other ...................... 227 --
Interest expense and other ..................... (259) (540)
---------- ----------
(32) (540)
---------- ----------
Income (loss) before income taxes .................. 553 (1,224)
Income tax benefit (expense) ....................... (83) 185
---------- ----------
Net income (loss) .................................. $ 470 $ (1,039)
========== ==========
Net income (loss) per share - basic
and diluted ...................................... $ 0.08 $ (.23)
========== ==========
Weighted average shares - basic
and diluted ...................................... 6,016 4,553
========== ==========
</TABLE>
See accompanying notes.
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RECOVERY ENGINEERING, INC.
STATEMENTS OF CASH FLOWS
(Unaudited - in thousands)
<TABLE>
<CAPTION>
Three months Three months
ended ended
April 4, 1999 April 5, 1998
------------- -------------
<S> <C> <C>
Operating activities
Net income (loss) ........................................ $ 470 $ (1,039)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation and amortization ............................ 918 612
Changes in operating assets and liabilities:
Accounts receivable .................................... 368 (1,442)
Inventory .............................................. (1,269) (749)
Other assets ........................................... (101) 519
Accounts payable ....................................... (3,502) (1,415)
Accrued expenses ....................................... 4,281 (781)
---------- ----------
Net cash provided by (used in) operating activities ...... 1,165 (4,295)
Investing activities
Purchase of property and equipment ....................... (568) (2,130)
Purchase of patents ...................................... (28) (35)
---------- ----------
Net cash used in investing activities .................... (596) (2,165)
Financing activities
Net proceeds from bank line of credit .................... -- 6,045
Issuance of common stock ................................. 116 154
---------- ----------
Net cash provided by financing activities ................ 116 6,199
---------- ----------
Increase (decrease) in cash and cash equivalents .............. 685 (261)
Cash and cash equivalents at beginning of period .............. 14,000 261
---------- ----------
Cash and cash equivalents at end of period .................... $ 14,685 $ --
========== ==========
</TABLE>
See accompanying notes.
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<PAGE>
RECOVERY ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
April 4, 1999
Note A -- Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and the instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the ninety-one day period
ended April 4, 1999 are not necessarily indicative of the results that may be
expected for the year ending January 2, 2000, or any other period. For further
information, refer to the financial statements and footnotes thereto for the
year ended January 3, 1999 included in the Company's latest annual report on
Form 10-K.
Commencing with fiscal 1998, the Company's fiscal year ends on the Sunday
closest to December 31 (January 2, 2000) and each quarter ends on the last
Sunday of a thirteen-week period. As a result, the first quarters ended April 4,
1999 and April 5, 1998 included 91 and 95 days, respectively. In the Company's
opinion, this difference in days does not materially affect the comparability of
the financial results of the periods presented.
Note B -- Inventory
The components of inventory consist of the following:
April 4, January 3,
1999 1999
----------- -----------
Finished products $ 6,307,000 $ 4,378,000
Work in process 286,000 258,000
Raw materials 5,337,000 6,025,000
----------- -----------
$11,930,000 $10,661,000
=========== ===========
Note C -- Accounting Statements
In 1997, the FASB issued Statements No. 130, REPORTING COMPREHENSIVE INCOME, and
No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION,
effective for fiscal years beginning after December 15, 1997. The adoption by
the Company of these Statements in January 1998 did not have a material impact
on the Company's financial statements. In 1998, the FASB issued Statements No.
132 EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS, and
No. 133 ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. Statement
No. 132 is effective for fiscal years beginning after December 15, 1997, and
Statement No. 133 is effective for fiscal years beginning after June 15, 1999.
The adoption by the Company of these statements in January 1998 and January
1999, respectively, did not and is not expected to have a material impact on the
Company's financial statements.
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<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Ninety-one Day Period ended April 4, 1999)
RESULTS OF OPERATIONS:
Net sales for the quarter ended April 4, 1999 increased 19.4 percent to
$20,566,000 from $17,225,000 for the quarter ended April 5, 1998. Increased
sales were driven by a 36% increase in sell-through of the Company's household
and outdoor water filtration products at retail, according to sell-through data
collected by the Company.
Gross profit margin for the quarter ended April 4, 1999 was 50.1 percent
compared to 47.6 percent for the quarter ended April 5, 1998. This increase was
driven largely by increased replacement filter sales as a percent of total sales
and by a reduction in manufacturing costs. The Company ramped-up two new
filtration manufacturing processes in 1998 for its household water filter
products. These processes were developed to both enhance filter contaminant
reduction performance and to reduce manufacturing costs. By the end of the
fourth quarter in 1998, these processes reached the Company's internal yield
targets, leading to a reduction in its overall cost of goods sold that was
realized in the first quarter of 1999.
Selling, general and administrative expenses increased to $8,755,000 for the
quarter ended April 4, 1999 from $7,865,000 for the quarter ended April 5, 1998,
representing 42.6% and 45.7% of net sales, respectively. The increase in
selling, general and administrative expenses was attributable primarily to
advertising and promotional expenses related to the continued rollout and
expansion of the Company's line of household water filters. Selling, general and
administrative expenses decreased as a percentage of sales in the first quarter
of 1999 compared to the same period last year. Although the Company expects to
continue its investment in marketing and advertising expenditures, the Company
believes that selling, general and administrative expenses will, as a percentage
of net sales, decrease for the year in 1999 compared to 1998.
Research and development expense decreased to $961,000 for the quarter ended
April 4, 1999, compared to $1,011,000 for the quarter ended April 5, 1998. The
Company continues to be committed towards developing new products and
technology. Development of product line extensions and other new technology will
require continued emphasis and may require increased spending on research and
development.
Other expenses decreased to $32,000 for the quarter ended April 4, 1999 compared
to $540,000 for the quarter ended April 5, 1998. Interest income and other
income increased to $227,000 for the first quarter of 1999 compared to no
interest income and other income for the same period in 1998. This was mainly
due to increased balances of cash and cash equivalents as a result of the
Company's public offering which was completed in the second quarter of 1998.
Interest expense and other expense decreased to $259,000 for the first quarter
of 1999 compared to $540,000 for the same period in 1998. The decrease was due
mainly to lower
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interest expense on the Company's bank line of credit, which was
established in March 1997 and repaid by the Company subsequent to its public
offering in the second quarter of 1998.
The Company's effective income tax rate was 15% for the quarters ended April 4,
1999 and April 5, 1998, respectively. The Company has a $1,512,000 net deferred
tax asset primarily related to net operating loss carryforwards. The Company has
recorded a valuation allowance for the majority of its deferred tax asset due to
the uncertainty of future realization.
LIQUIDITY AND CAPITAL RESOURCES:
During the quarter ended April 4, 1999, operations provided cash of $1,165,000,
compared to $4,295,000 of cash used in operations in the same period the prior
year. In the first quarter of 1999, cash was provided by net income and a
decrease in the level of accounts receivable and an increase in the level of
accrued expenses, while cash was used to increase the level of inventories and
decrease the level of accounts payable. In the first quarter of 1998, cash was
used to fund the net loss and increase the level of inventories and accounts
receivable, as well as decrease the level of accounts payable and accrued
expenses.
Capital expenditures were $568,000 for the quarter ended April 4, 1999, compared
to $2,130,000 for the quarter ended April 5, 1998. The capital expenditures in
both periods were primarily to purchase tooling and manufacturing equipment. The
Company anticipates continued expenditures for tooling and manufacturing
equipment purchases associated with product development and an increase in
overall production capacity.
In July 1996, the Company issued $15.0 million of Convertible Notes to certain
investment partnerships affiliated with The Goldman Sachs Group, L.P. ("GS
Group") which bear interest at 5% per annum and expire in 2003. Interest on the
loan is paid quarterly. GS Group may convert the outstanding balance of the loan
into shares of Common Stock at a conversion price of $14.85 per share at any
time during the life of the loan. If not converted, the loan is payable in
annual installments starting August 2001. The estimated fair value of the
convertible loan based on the Company's incremental borrowing rate for similar
liabilities, approximates its carrying value.
The Company had no borrowings outstanding under its bank credit facility at
April 4, 1999 and January 3, 1999. This credit facility, established in March
1997 and amended in March 1998, provides for total borrowings up to $15,000,000
secured by equipment, inventory, receivables, and intangibles. The credit
facility is a discretionary working capital line of credit, limited to eligible
receivables and inventory, which bears interest at the bank's reference rate
plus 0.75 percent. Borrowings are due on demand. Pursuant to the Company's
agreement with GS Group, borrowings are limited to $12,500,000 in 1999.
The Company completed a public offering of Common Stock in the second quarter of
1998 netting approximately $38,200,000 from the sale of 1,368,500 shares. The
Common Stock was priced at $30.00 per share. All of the shares were sold by the
Company.
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Management believes that anticipated cash flows from operations, funds available
through its bank credit facility and the net proceeds from the sale of
securities will provide sufficient capital resources for current operations,
expansion of plant capacity and product development. The Board of Directors
currently intends to retain all earnings for expansion of the Company's
business.
YEAR 2000 ISSUES
The Company understands the Year 2000 ("Y2K") issue to be the result of computer
programs using a two-digit format, as opposed to four digits, to indicate the
year. Such computer systems would be unable to interpret dates beyond the year
1999, which could cause a system failure or other computer errors, leading to
disruptions in operations either through internal failures or through the effect
of failures which might happen externally, and which could have a material
adverse effect on the Company's financial position.
In 1998, the Company developed a three-phase program for Y2K information systems
readiness. The intent of Phase I was to identify those systems with which the
Company has exposure to Y2K issues and assess the ability to make them Y2K
ready. The intent of Phase II was to implement corrective actions to remedy
issues discovered in Phase I. The intent of Phase III is to test all remedial
corrective actions taken and, if necessary, complete a contingency plan.
The Company has identified three major areas determined to be critical for
successful Y2K readiness: (1) financial and manufacturing information system
applications, (2) manufacturing automation and (3) third-party relationships.
The Company, in accordance with Phase I of the program, has completed an
internal review of all systems and contacted all software suppliers to determine
major areas of exposure to Y2K issues. In the financial and information system
area, a number of applications have been identified as Y2K ready due to their
recent implementation, and no material issues were discovered. These include the
Company's core financial and reporting systems. In the manufacturing area, the
Company has completed its review and did not find any material issues. In the
third-party area, the Company continues its assessment of its major third-party
relationships. Many of these parties state that they intend to be Y2K ready by
2000. The Company has recently completed Phase II of the program and intends to
complete Phase III by mid 1999.
The Company is in the process of determining what total costs will be incurred
in connection with its Y2K readiness initiatives. Expenses incurred to date are
not material and future expenses estimated by the Company are not expected to be
material. The Company will fund all Y2K readiness expenses through operating
cash flows.
Management of the Company believes it has an effective program in place to
resolve Y2K issues in a timely manner. As noted above, the Company has not yet
completed all necessary phases of its Y2K readiness program. In the event that
the Company does not complete any additional phases or is exposed to Y2K
problems beyond its reasonable control, the Company
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may be unable to take customer orders, manufacture and ship products, invoice
customers or collect payments, and may be generally subject to litigation or
disruptions in the economy which could materially adversely affect the Company.
The amount of potential liability or lost revenue that might result from such
events cannot be reasonably estimated at this time.
FORWARD-LOOKING STATEMENTS
This report (as well as press releases, other public documents, other written
statements and oral statements made or to be made by the Company) contains
statements relating to future events or the future financial performance of the
Company which are forward-looking statements within the meaning of the safe
harbor provisions of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements involve risks and uncertainties that could significantly affect
anticipated results in the future and, accordingly, actual results may differ
materially from those described in the forward-looking statements. These risks
and uncertainties include, but are not limited to, the effects of economic
conditions, continued customer acceptance of products, the Company's reliance on
proprietary technology, pending patent litigation, product obsolescence, the
Company's ability to manage growth, risks associated with international
operations, competition, product liability, and other factors described from
time to time in the Company's filings with the Securities and Exchange
Commission, including the Company's Annual Report on Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's operations are not currently subject to market risks for interest
rates, foreign currency rates, commodity prices or other market price risks of a
material nature.
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<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company and several other water filtration companies were named
as defendants in a civil proceeding initiated in January 1997 by
Brita U.S.A., a subsidiary of Clorox Company, which asserted that
the defendants infringed one of Brita's patents relating to pitcher
products. On March 3, 1999, summary judgment was entered in the
United States District Court for the Northern District of Illinois,
dismissing all claims against the Company and the other defendants.
Brita has filed a Notice of Appeal regarding the Court's decision.
The Company will continue to vigorously defend this case. The
Company was aware of Brita's patent prior to developing the PUR
pitcher design and believes that it does not infringe Brita's
patent. The design of the PUR Plus pitcher, dispenser and related
filter cartridge differs in material respects from the design of the
pitcher products that are the subject of this litigation.
The Company has been named as the defendant in a civil proceeding
initiated in May 1999 by KX Industries, L.P., a former supplier to
the Company, which asserts that the Company is infringing a KX
patent relating to processes for manufacturing carbon blocks. The
Company intends to vigorously defend this case. The Company was
aware of the KX patent prior to developing its manufacturing
processes and believes that it does not infringe KX's patent.
The Company from time to time is involved in various other legal
proceedings arising in the normal course of business, none of which
is expected to result in any material loss to the Company.
Item 2. Changes in Securities and Use of Proceeds
On April 29, 1999, the Board of Directors of the Company adopted
Amendment No. 2 to the Rights Agreement, dated January 30, 1996,
between the Company and Norwest Bank, N.A., as Rights Agent. The
Rights Agreement previously required that a majority of the
"Continuing Directors," as defined in the Rights Agreement, approve
the redemption of the Rights, the exchange of the Rights after any
person becomes an Acquiring Person, and certain other actions under
the Rights Agreement. Pursuant to Amendment No. 2, these actions now
require the approval of a majority of the Board of Directors.
Item 3. Defaults upon Senior Securities
Not applicable
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Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on April 29,
1999. The following matters were submitted to a vote of the
shareholders at the Annual Meeting:
Approval of Amendment to the Company's Articles of Incorporation to
authorize a classified board and to implement certain related
matters.
--------------------------------------------------------------
(2,512,146 votes FOR, 1,226,219 votes AGAINST, and 7,499 votes
ABSTAINED, and 1,228,262 shares held by brokers were not voted on
the resolution)
Election of Directors. The following persons were elected to serve
as directors, for the following terms:
Terms expiring in 2000 Terms expiring in 2001
---------------------- ----------------------
Robert R. Gheewalla John E. Gherty
William D. Thompson Sanjay H. Patel
Richard J. Zeckhauser
Terms expiring in 2002
----------------------
Brian F. Sullivan
William F. Wanner, Jr.
Approval of Amendment to 1994 Stock Option and Incentive Plan to
increase the number of shares reserved for issuance thereunder.
---------------------------------------------------------------
(3,412,243 votes FOR, 308,472 votes AGAINST, and 25,150 votes
ABSTAINED, and 1,228,262 shares held by brokers were not voted on
the resolution)
Approval of Amendment to 1993 Director Stock Option Plan to increase
the number of shares reserved for issuance thereunder.
------------------------------------------------------
(3,567,201 votes FOR, 199,246 votes AGAINST, and 36,009 votes
ABSTAINED, and 1,171,670 shares held by brokers were not voted on
the resolution)
Ratification of Appointment of Ernst & Young, LLP as Independent
Auditors.
----------------------------------------------------------------
(4,951,398 votes FOR, 13,140 votes AGAINST, and 9,589 votes
ABSTAINED)
Item 5. Other Information
Not applicable
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Incorporation of Recovery Engineering, Inc.,
as amended.
4.1.2 Amendment No. 2 dated as of April 29, 1999 to Rights
Agreement between Recovery Engineering, Inc. and Norwest
Bank Minnesota, National Association, as Rights Agent.
27 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter covered
by this Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Recovery Engineering, Inc.
--------------------------------------------
(Registrant)
Dated: May 14, 1999 /s/Brian F. Sullivan
------------- --------------------------------------------
Brian F. Sullivan
Chairman and Chief Executive Officer
(principal executive officer)
Dated: May 14, 1999 /s/Charles F. Karpinske
------------- --------------------------------------------
Charles F. Karpinske
Chief Financial Officer
(principal financial and accounting officer)
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<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBIT INDEX TO FORM 10-Q
For the quarter ended Commission File No.: 0-21232
April 4, 1999
- --------------------------------------------------------------------------------
RECOVERY ENGINEERING, INC.
- --------------------------------------------------------------------------------
Exhibit
No. Description Method of Filing
- ------- ----------- ----------------
3.1 Articles of Incorporation of Recovery Filed Electronically
Engineering, Inc., as amended Herewith
4.1.2 Amendment No. 2 dated as of April 29, Filed Electronically
1999 to Rights Agreement between Herewith
Recovery Engineering, Inc. and Norwest
Bank Minnesota, National Association,
as Rights Agent
27 Financial Data Schedule Filed Electronically
Herewith
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EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
RECOVERY ENGINEERING, INC.
The undersigned, for purposes of forming a corporation under Chapter
302A of the Minnesota Statutes, hereby adopts the following Articles of
Incorporation:
ARTICLE 1.
NAME
The name of the Corporation is Recovery Engineering, Inc.
ARTICLE 2.
REGISTERED OFFICE
The registered office of the Corporation in the State of Minnesota is
located at 2229 Edgewood Avenue South, St. Louis Park, Minnesota 55426.
ARTICLE 3.
CAPITAL STOCK
3.a. The Corporation is authorized to issue One Hundred Million
(100,000,000) shares of capital stock, having a par value of $.01 per share in
the case of common stock, and having a par value as determined by the Board of
Directors in the case of preferred stock.
3.b. In addition to any and all powers conferred upon the Board of
Directors by the laws of the State of Minnesota, the Board of Directors shall
have the authority to establish by resolution more than one class or series of
shares, either preferred or common, and to fix the relative rights, restrictions
and preferences of any such different class or series, and the authority to
issue shares of a class or series, shares of which may then be outstanding, to
holders of shares of another class or series to effectuate share dividends,
splits or conversions of the Corporation's outstanding shares.
3.c. The Board of Directors shall also have the authority to issue
rights to convert any of the Corporation's securities into shares of stock of
any class or classes, the authority to issue options to purchase or subscribe
for shares of stock of any class or classes, and the authority to issue share
purchase or subscription warrants or any other evidence of such option rights
which set forth the terms, provisions and conditions thereof, including the
price or prices at which such shares may be subscribed for or purchased. Such
options, warrants and rights may be either transferable or nontransferable and
either separable or inseparable from other securities of the Corporation. The
Board of Directors is authorized to fix the terms, provisions and conditions of
such options, warrants and rights, including the conversion basis or bases and
the option price or prices at which shares may be subscribed for or purchased.
-1-
<PAGE>
ARTICLE 4.
PURPOSES AND POWERS
The Corporation shall have general business purposes and shall possess
all powers necessary to conduct any business in which it is authorized to
engage, including but not limited to, all those powers expressly conferred upon
business corporations by Chapter 302A of the Minnesota Statutes, as it may from
time to time be amended, together with those powers implied therefrom.
ARTICLE 5.
DURATION
The Corporation shall have perpetual duration.
ARTICLE 6.
NO PREEMPTIVE RIGHTS; NO CUMULATIVE VOTING
6.a. The shareholders of the Corporation shall not have the preemptive
rights provided by Section 302A.413 of the Minnesota Statutes to subscribe for
or to purchase any or all of the shares or other securities, or rights to
purchase shares or other securities, of the Corporation, now or hereafter
authorized.
6.b. The shareholders of the Corporation shall not have the right of
cumulative voting.
ARTICLE 7.
INCORPORATOR
The name and address of the incorporator of this Corporation is:
Eric O. Madson
3000 Dain Bosworth Plaza
60 South 6th Street
Minneapolis, Minnesota 55402
ARTICLE 8.
LIMITATION OF LIABILITY
A director of the Corporation shall not be personally liable to the
Corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, except for liability (a) for any breach of the director's
duty of loyalty to the Corporation or its shareholders, (b) for acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law, (c) under Section 302A.559 or Section 80A.23 of the Minnesota
Statutes, or (d) for any transaction from which the director derived an improper
personal benefit. If the Minnesota Statutes are amended after this Article
becomes effective to authorize corporate action further eliminating or limiting
the personal liability of directors, then the liability
-2-
<PAGE>
of a director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the Minnesota Statutes, as so amended.
Any repeal or modification of this Article 8 by the shareholders of the
Corporation shall not adversely affect any right or protection of a director of
the Corporation existing at the time of such repeal or modification.
ARTICLE 9.
ACTION WITHOUT A MEETING
An action required or permitted to be taken at a meeting of the
directors may be taken by written action signed by all of the directors, and in
the case of an action which need not be approved by the shareholders, such
action may be taken by written action signed by the number of directors that
would be required to take such action at a meeting of the directors at which all
directors were present.
IN WITNESS WHEREOF, the undersigned has signed this 26th day of March,
1996.
/s/ ERIC O. MADSON
--------------------------------------
Eric O. Madson, Incorporator
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<PAGE>
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
RECOVERY ENGINEERING, INC.
The undersigned, being the Chief Executive Officer of Recovery
Engineering, Inc., a Minnesota corporation (the "Corporation"), hereby certifies
that the following resolutions were duly adopted on April 29, 1999, pursuant to
the Minnesota Business Corporation Act, Chapter 302A, Minnesota Statutes, and
the Bylaws of the Corporation:
RESOLVED, that the Articles of Incorporation of Recovery Engineering, Inc. 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
-1-
<PAGE>
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, 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
-2-
<PAGE>
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.
RESOLVED FURTHER, that the officers of the Corporation, or any one of them, are
hereby authorized and directed to prepare, execute and file with the Minnesota
Secretary of State, Articles of Amendment to Articles of Incorporation to give
effect to the foregoing amendment.
Dated: April 29, 1999.
/s/ BRIAN F. SULLIVAN
--------------------------------------
Brian F. Sullivan
Chief Executive Officer
-3-
AMENDMENT NO. 2 EXHIBIT 4.1.2
RECOVERY ENGINEERING, INC.
RIGHTS AGREEMENT
This Amendment No. 2, dated as of April 29, 1999, between Recovery Engineering,
Inc., a Minnesota corporation (the "Company"), and Norwest Bank Minnesota, N.A.
(the "Rights Agent") amends certain terms and provisions of the Rights Agreement
(the "Rights Agreement"), dated as of January 30, 1996 between Recovery
Engineering, Inc., a Delaware corporation to which the Company is a successor
entity by merger, and the Rights Agent as follows (each capitalized term used
herein but not defined herein shall have the same meaning assigned to such term
as in the Rights Agreement):
1. Amendment No. 1 to the Rights Agreement dated as of February 3, 1998 is
hereby rescinded in its entirety.
2. Section 1 of the Rights Agreement entitled "Certain Definitions" is hereby
amended as follows:
2.1 By deleting each reference to "20%" set forth in the definition of
"Acquiring Person" contained in paragraph (a) thereof and in each
case substituting therefore: "15%";
2.2 By supplementing the definition of "Acquiring Person" set forth in
paragraph (a) with the following subparagraph (iii):
(iii) Notwithstanding the foregoing, at no time shall Brian F.
Sullivan, William F. Wanner, Jr., Goldman, Sachs & Co. or any
of their respective Affiliates or Associates be deemed to be
an "Acquiring Person" by reason of any such Person being the
beneficial owner of 15% or more of the shares of Common Stock
of the Company then outstanding unless (in addition to (i) any
shares of Common Stock of the Company beneficially owned by
such Person as of February 3, 1998, and (ii) any shares of
Common Stock of the Company in respect of which such Person
becomes the beneficial owner after February 3, 1998 as a
result of any acquisition of securities directly from the
Company by such Person) such Person is also then the
beneficial owner of shares of Common Stock of the Company that
represent 3% or more of the shares of Common Stock of the
Company then outstanding;
2.3 By deleting the definition of "Continuing Director" set forth in
paragraph (g) of Section 1 in its entirety and substituting therefor
the following definition:
(g) "Director" shall mean any person who is a then-current member
of the Board of Directors of the Company; and,
3. The Rights Agreement is hereby amended by deleting each and every
reference to "Continuing Director" throughout the entirety of the Rights
Agreement and substituting therefor the term "Director", whether appearing
in singular or plural form.
4. All references in the Rights Agreement to "the Company" shall be deemed
references to the Company as defined in this Amendment.
5. All terms and provisions of the Rights Agreement shall remain in full
force and effect except to the extent specifically amended or modified by
this Amendment No. 2.
<PAGE>
RECOVERY ENGINEERING, INC.
ATTEST: BY:
----------------------------- -----------------------------
NAME: NAME:
----------------------------- -----------------------------
TITLE: TITLE:
----------------------------- -----------------------------
NORWEST BANK MINNESOTA N.A.
ATTEST: BY:
----------------------------- -----------------------------
NAME: NAME:
----------------------------- -----------------------------
TITLE: TITLE:
----------------------------- -----------------------------
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