UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 1996 Commission File Number 0-21232
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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)
2229 Edgewood Avenue S.
Minneapolis, MN 55426
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 541-1313
Not applicable
(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 ) 4,324,065 shares as of September 30, 1996
RECOVERY ENGINEERING, INC.
INDEX
PART I. FINANCIAL INFORMATION Page
No.
Item 1. Financial Statements (unaudited):
Balance Sheets
September 30, 1996 and December 31, 1995........................ 3
Statements of Operations
Three and nine month periods ended September 30, 1996 and 1995.. 4
Statements of Cash Flows
Nine months ended September 30, 1996 and 1995................... 5
Notes to Financial Statements................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................... 7
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............. 9
Item 6. Exhibits and Reports on Form 8-K................................ 9
Signatures...................................................... 10
RECOVERY ENGINEERING, INC.
BALANCE SHEETS
(In thousands, except share data)
September 30, December 31,
1996 1995
----------- ---------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents ....................... $ 10,364 $ 1,291
Marketable securities ........................... -- 1,022
Accounts receivable (net of allowance of
$86 for 1996 and $57 for 1995) .................. 8,274 4,196
Inventory ....................................... 5,344 6,173
Refundable income taxes ......................... -- 1,177
Prepaid expenses ................................ 79 321
Deferred income taxes ........................... 63 63
-------- --------
Total current assets ......................... 24,124 14,243
Property and equipment:
Tooling ......................................... 5,838 4,449
Equipment and fixtures .......................... 6,299 4,587
-------- --------
12,137 9,036
Less accumulated depreciation ................... 2,829 1,870
-------- --------
9,308 7,166
Deferred income taxes .............................. 1,512 1,512
Patents ............................................ 1,631 1,523
Less accumulated amortization ................... 897 822
-------- --------
734 701
Other assets .................................... 547 --
-------- --------
Total assets ................................. $ 36,225 $ 23,622
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................ $ 3,682 $ 2,912
Accrued expenses ................................ 4,484 1,280
-------- --------
Total current liabilities .................... 8,166 4,192
Long-term debt ..................................... 15,000 --
Shareholders' equity:
Common stock, $.01 par value:
Authorized shares -- 100,000,000
Issued and outstanding shares:
1996 - 4,324,065 and 1995 - 4,256,723 ........ 43 42
Additional paid-in capital ...................... 20,301 20,114
Accumulated deficit ............................. (7,285) (726)
-------- --------
Total shareholders' equity ................... 13,059 19,430
-------- --------
Total liabilities and shareholders' equity ...... $ 36,225 $ 23,622
======== ========
See accompanying notes
RECOVERY ENGINEERING, INC.
STATEMENTS OF OPERATIONS
(Unaudited - in thousands, except per share amounts)
Three months ended Nine months ended
September 30, September 30,
-------------------- --------------------
1996 1995 1996 1995
---- ---- ---- ----
Net sales ......................... $ 11,001 $ 8,211 $ 24,039 $ 17,027
Cost of products sold ............. 6,762 4,540 14,824 9,415
-------- -------- -------- --------
Gross profit ...................... 4,239 3,671 9,215 7,612
Operating expenses:
Selling, general and administrative 6,596 3,297 14,112 7,705
Research and development .......... 469 572 1,540 1,383
-------- -------- -------- --------
7,065 3,869 15,652 9,088
-------- -------- -------- --------
Loss from operations .............. (2,826) (198) (6,437) (1,476)
Other income (expense):
Interest income ................... 102 126 116 494
Interest expense .................. (196) -- (236) --
Other income (expense) ............ 4 (51) (2) (51)
-------- -------- -------- --------
(90) 75 (122) 443
-------- -------- -------- --------
Loss before income taxes .......... (2,916) (123) (6,559) (1,033)
Income tax benefit ................ -- (38) -- (320)
-------- -------- -------- --------
Net loss .......................... $ (2,916) $ (85) $ (6,559) $ (713)
======== ======== ======== ========
Net loss per share ................ $ (.67) $ (.02) $ (1.52) $ (.17)
======== ======== ======== ========
Weighted average number of
common shares outstanding ......... 4,323 4,250 4,301 4,234
======== ======== ======== ========
See accompanying notes.
RECOVERY ENGINEERING, INC.
STATEMENTS OF CASH FLOWS
(Unaudited - in thousands)
Nine months ended
September 30
------------
1996 1995
--------- ---------
Operating activities
Net loss ................................... $ (6,559) $ (713)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization .............. 1,034 593
Deferred income taxes ...................... -- 204
Provision for losses on accounts receivable 187 59
Changes in operating assets and liabilities:
Accounts receivable ...................... (4,265) (2,581)
Inventory ................................ 829 (2,640)
Refundable income taxes .................. 1,177 --
Prepaid expenses ......................... 242 (766)
Other assets ............................. (547) --
Accounts payable ......................... 770 583
Accrued expenses ......................... 3,204 372
-------- --------
Net cash used in operating activities .... (3,928) (4,889)
Investing activities
Purchase of property and equipment ......... (3,101) (3,402)
Purchase of marketable securities .......... -- (2,615)
Sale of marketable securities .............. 1,022 5,381
Purchase of patents ........................ (108) (140)
-------- --------
Net cash used in investing activities ...... (2,187) (776)
Financing activities
Net proceeds from long term debt ........... 15,000 --
Exercise of stock options .................. 188 1,188
-------- --------
Net cash provided by financing activities .. 15,188 1,188
-------- --------
Increase (decrease) in cash and cash equivalents 9,073 (4,477)
Cash and cash equivalents at beginning of period 1,291 5,913
-------- --------
Cash and cash equivalents at end of period ...... $ 10,364 $ 1,436
======== ========
See accompanying notes.
RECOVERY ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
September 30, 1996
Note A -- Basis of Presentation
The accompanying unaudited condensed 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 nine months
ended September 30, 1996 are not necessarily indicative of the results that may
be expected for the year ended December 31, 1996, or any other period. For
further information, refer to the financial statements and footnotes thereto for
the year ended December 31, 1995 included in the Company's latest annual report
on Form 10-K.
Note B -- Inventory
The components of inventory consist of the following:
September 30, December 31,
1996 1995
---- ----
Raw materials $3,208,000 $3,562,000
Work in process 103,000 303,000
Finished products 2,033,000 2,308,000
----------- ---------
$5,344,000 $6,173,000
========== ==========
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Third Quarter Ended September 30, 1996)
RESULTS OF OPERATIONS:
The report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ significantly from
those discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, changes in the
Company's materials costs, new product introductions by the Company or its
competitors, and changes in general conditions in the market for household
goods.
Net sales increased 34% for the three months and 41% for the nine months ended
September 30, 1996, compared to the same periods in the prior year. The
increases were led by a more than three fold increase in sales of the Company's
PUR(R) Self-Monitoring Water Filters (TM) for the household market. Sales of
faucet-mount water filters were up significantly, and acceptance of the
Company's new pitcher water filter exceeded initial expectations. The Company
expects to sell out its total production capacity for this product in 1996 and
additional production capacity is now being added. Price increases did not have
a significant impact on net sales for the nine months ended September 30, 1996
or 1995.
Gross margins were 38.5% for the third quarter and 38.3% year-to-date, 1996
respectively, versus 44.7% for the same periods in 1995. The decrease in gross
margins was due to lower margins on the OEM product line, higher overhead costs
and product introduction costs related to the Company's new pitcher water
filter.
Selling, general and administrative expenses increased 100% for the quarter
ended September 30, 1996 and 83% year-to-date, compared to the same periods last
year. This increase reflects management's decision to expand the Company's
aggressive marketing campaign by increasing advertising and marketing
expenditures in the third and fourth quarters of 1996. The primary goal of these
expenditures is to ensure a level of retail movement sufficient to motivate
retailers to carry the new products the Company expects to introduce in 1997.
Research and development expenses decreased by 18% for the third quarter and
increased 11% year-to-date 1996, respectively, compared to the same periods in
1995. Year to date increases in research and development reflect the Company's
continued emphasis on product development. Development of product line
extensions and other new products require continued emphasis and research and
development in 1996.
Other income (expense) was ($90,000) for the third quarter and ($122,000)
year-to-date 1996, compared to $75,000 and $443,000 for the same periods the
prior year. The decrease resulted from increased interest expense corresponding
to the incurrance of debt in 1996, combined with decreased interest income
related to decreases in cash, cash equivalents and marketable securities.
The Company's effective income tax rate was 0% for the three months ended
September 30, 1996 and year-to-date compared to 31% for the same periods in
1995. The Company has a $1,512,000 tax benefit related to losses incurred in
1995. The Company has recorded a valuation allowance for the tax benefit related
to the current net operating loss. In 1995, research and development tax credits
and reduced tax rates from the Company's foreign sales corporation and tax
exempt interest on certain investments in the current year, caused the effective
rates to be below the statutory level.
LIQUIDITY AND CAPITAL RESOURCES:
Cash used in operations was $3,928,000 for the nine months ended September 30,
1996, compared to $4,889,000 for the same period in 1995. In 1996, net loss as
well as increased accounts receivable related to strong third quarter sales,
partially offset by the collection of an income tax refund and an increase in
accounts payable were the primary components of cash used in operation. In 1995,
net loss, together with increased inventory and accounts receivable levels
related to sales growth were the primary components of cash used in operations.
Capital expenditures were $3,101,000 for the nine months ended September 30,
1996, compared to $3,402,000 for the same period the prior year. Expenditures in
both years were primarily for tooling and manufacturing equipment purchases
associated with new product introductions and an increase in overall production
capacity.
During the third quarter 1996, the Company received $15 million from a private
placement of convertible notes. The notes bear interest at a rate of five
percent and are convertible into one million shares of common stock. The Company
used a portion of the proceeds from these notes to repay and close an existing
bank line of credit.
Management believes that anticipated cash flows from operations, and the
proceeds from the convertible note will provide sufficient capital resources for
current operations and planned product introductions.
The Company has not paid cash dividends. The Board of Directors currently
intends to retain all earnings for expansion of the Company's business.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company from time to time is involved in various 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
Not applicable
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on page following signature
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
covered by this Form 10-Q.
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: November 14, 1996. /s/ Brian F. Sullivan
-------------------------------------------
Brian F. Sullivan
President, Chief Executive Officer
and Director
(principal executive officer)
Dated: November 14, 1996. /s/ Charles F. Karpinske
-------------------------------------------
Charles F. Karpinske
Chief Financial Officer
(principal financial and accounting officer)
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBIT INDEX TO FORM 10-Q
For the quarter ended Commission File No.: 0-21232
September 30, 1996
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RECOVERY ENGINEERING, INC.
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Page Number in
Sequential
Numbering of
All Pages
Including Exhibits
Exhibit
11 Statement re computation of loss per share 12
27 Financial data schedule 13