U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): JULY 19, 1996
RECOVERY ENGINEERING, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 0-21232 41-1557115
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
2229 EDGEWOOD AVENUE SOUTH
MINNEAPOLIS, MINNESOTA 55426
(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code: (612) 541-1313
NOT APPLICABLE
(Former name or former address, if changed since last report.)
(The remainder of this page was intentionally left blank.)
ITEM 5. OTHER EVENTS.
On July 19, 1996, Recovery Engineering, Inc. (the "Company") issued and
sold its 5% Convertible Notes Due 2003, in the aggregate principal amount of
$15,000,000 (collectively, "Notes"), to certain investors (the "Limited
Partnerships" named below). The Notes were issued pursuant to a Securities
Purchase Agreement dated as of July 19, 1996 ("Purchase Agreement") by and among
the Company and the Limited Partnerships. The total consideration paid by the
Limited Partnerships for the purchase of the Notes was $15,000,000. The Limited
Partnerships are GS Capital Partners II, L.P., a Delaware limited partnership
("GSCP"); GS Capital Partners II Offshore L.P., a Cayman Island limited
partnership; Goldman, Sachs & Co. Verwaltungs GmbH; Stonestreet Fund 1996, L.P.,
a Delaware limited partnership; and Bridge Street Fund 1996, L.P., a Delaware
limited partnership.
The following description of the Purchase Agreement is qualified in its
entirety by reference to the Purchase Agreement, which is attached hereto as
Exhibit 4.1.
GENERAL TERMS. The total amount of the Notes may be converted into an
aggregate of 1,000,000 shares of the Company's common stock, $.01 per share par
value ("Common Stock"), subject to customary anti-dilution provisions, at any
time at the option of the Limited Partnerships or, if certain conditions are
satisfied, after January 18, 2000 by the Company. The price at which shares of
Common Stock will be delivered upon conversion of the Notes initially is $15.00
in principal amount of Notes per share of Common Stock. This price is adjustable
upon the occurrence of certain customary anti-dilution events. The 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, until
the principal of the Notes becomes due and payable. The principal on the Notes
is due and payable on July 18, 2003. The Company must pay interest at the rate
of 10% per annum on any overdue principal or interest. Principal and interest on
the Notes may be prepaid at any time by the Company, without penalty, provided
that if less than the entire indebtedness evidenced by the Notes is to be
prepaid by the Company, it must offer to repay the Notes pro rata from each
holder thereof.
REDEMPTION OF NOTES. After July 19, 2001, upon the request of any
holder of Notes, the Company will be required to redeem the Notes of such
holder, in whole or in part, for an amount of cash equal to the principal amount
of the Notes requested to be redeemed plus all accrued and unpaid interest
thereon to the date of redemption. However, from July 19, 2001 and through and
including July 18, 2002 ("First Redemption Period"), the Company will not be
required to redeem an aggregate principal amount of Notes in excess of
$5,000,000, and from July 19, 2002 through and including July 18, 2003, the
Company will not be required to redeem an aggregate principal amount of Notes in
excess of (i) $10,000,000 less (ii) the sum of the aggregate principal amount of
Notes redeemed by the Company during the First Redemption Period. In addition,
in the event of the occurrence of a Change in Control (as such term is defined
below), any record holder of Securities (as the term "Securities" is hereinafter
defined) may require the Company to redeem any or all of the Securities held by
such holder. A "Change in Control" is defined in the Purchase Agreement to mean
(a) the acquisition, other than from the Company, by any individual, entity or
group of the "beneficial ownership," as that term is used in Rule 13d-3 under
the Securities Exchange Act of 1934 ("Exchange Act"), of 35% or more of the
combined voting power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors but excluding, for this
purpose, any such acquisition by the Company or any of its subsidiaries or any
employee benefit plan of the Company or its subsidiaries; (b) a reorganization,
merger, or consolidation with respect to which all or substantially all of the
individuals and entities who were the respective beneficial owners of the voting
securities of the Company immediately prior to such reorganization, merger or
consolidation do not, following such a transaction, beneficially own, directly
or indirectly, more than a majority of the combined voting power of the then
outstanding voting securities entitled to vote generally in the election of
directors of the corporation resulting from such reorganization, merger or
consolidation; (c) the sale, lease or other disposition of all or a substantial
part of the assets or property of the Company in one transaction or series of
related transactions; or (d) the incumbent board of directors of the Company
shall cease to constitute at least 50% of the members of the Company's Board.
The term "Securities" means (x) the shares of Common Stock issued or issuable,
in each case, upon conversion of the Notes and (y) any shares of Common Stock
issued or issuable with respect to the Securities referred to in the foregoing
clause (x) by way of a stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization, and any person or entity that holds Notes will be deemed to be
the holder of the number of shares of Common Stock issuable upon conversion of
the Notes. As to any particular share of Common Stock which are "Securities,"
such shares cease to be "Securities" when they have been effectively registered
under the Securities Act of 1933, as amended ("Securities Act"), and disposed of
in accordance with the registration statement covering them or sold pursuant to
Rule 144 under the Securities Act.
REPRESENTATION ON BOARD OF DIRECTORS. Pursuant to the Purchase
Agreement, the Board of Directors of the Company increased the size of the
Company's Board by one and on July 19, 1996 elected a designee of GSCP to the
Board. For so long as at least 25% of the initial number of Securities remain
outstanding and GSCP, together with its "Affiliates" (with the term "Affiliate"
having the meaning ascribed to it in Rule 12b-2 of the General Rules and
Regulations under the Exchange Act) hold in excess of a majority of the
outstanding Securities, 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 GSCP ("Representative"). 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. Under the
Purchase Agreement, the Company has agreed that if at any meeting for the
election of directors, the Representative is not elected to the Company's Board,
or if for any other reason, at any time, the Representative is not a member of
the Company's Board of Directors, (i) GSCP, so long as GSCP, together with its
Affiliates, holds in excess of a majority of the Securities, and (ii)
thereafter, the holders of a majority of the Securities, will be entitled to
have one observer selected by GSCP or the holders of a majority of the
Securities, as applicable, present at all meetings of the Company's Board. Such
observer will have the same access to information concerning the business and
operations of the Company and its subsidiaries and at the same time as directors
of the Company and shall be entitled to participate in discussions and consult
with, and make proposals and furnish advice to, the Company's Board, without
voting. However, the Company's Board of Directors shall be under no obligation
to take any action with respect to any proposals made or advice furnished by any
such observer other than to take such proposals or advice seriously and give due
consideration thereto. The Company has also agreed to reimburse and indemnify
each Representative and any non-voting observer for all reasonable expenses and
any losses incurred by such person in such person's capacity as a director of
the Company, or as an observer, as applicable. This indemnification is in
addition to, and not in lieu of, any indemnification or reimbursement
obligations of the Company under the Articles of Incorporation or Bylaws of the
Company or pursuant to applicable law.
FINANCIAL STATEMENTS AND OTHER REPORTS. Under the Purchase Agreement,
the Company is obligated to deliver to GSCP and to each holder of a number of
Securities equal to not less than 10% of the Securities issued as of the July
19, 1996 certain current and historical financial data and other information. In
addition, the Company is obligated to permit representatives of GSCP and each
holder of a number of Securities equal to not less than 10% of the Securities
issued as of July 19, 1996 to visit and inspect the properties of the Company
and its subsidiaries and to discuss the affairs, finances and accounts of the
Company and its subsidiaries with, and to make proposals and furnish advice with
respect thereto to, the principal officers of the Company.
RESTRICTIONS ON THE COMPANY. The Purchase Agreement provides that, so
long as the number of Securities outstanding is at least 25% of the initial
number of Securities, and so long as GSCP, together with its Affiliates, holds a
majority of the Securities, the Company will not, without the affirmative vote
or the prior written consent of GSCP (i) authorize, issue or enter into any
agreement providing for the issuance of any notes or debt securities ranking
senior to, or PARI PASSU with, the Notes, except for up to $5,000,000 of debt
issued in connection with real property leases and current liabilities; (ii)
pay, declare or set aside any sums for the payment of any dividends, or make any
distributions, in respect of any shares of its capital stock or other equity
securities; (iii) redeem, purchase or otherwise acquire any shares of its
capital stock or other equity securities, other than such redemptions, purchases
or acquisitions pursuant to any stock option or stock purchase plan approved by
the Board of Directors of the Company and by the holders of a majority of the
Securities; (iv) consolidate or merge with or into any person or enter into any
similar business combination transaction or effect any transaction or series of
transactions pursuant to which more than 50% of the voting securities of the
Company are transferred to another person; (v) acquire a majority of the shares
of capital stock or other equity interest or a majority of the assets of any
person; (vi) enter into any transaction with any Affiliate of the Company or any
of its subsidiaries, including, without limitation, any director or officer of
the Company or any of its subsidiaries, other than any such transaction or
series of related transactions which are not material to the Company or any of
its subsidiaries and which are on terms no less favorable to the Company and its
subsidiaries than would be obtained in a comparable arms'-length transaction
with any person not an Affiliate of the Company or any of its subsidiaries; or
(vii) enter into any line of business other than designing, manufacturing and
marketing small-scale drinking water treatment systems and related household and
consumer products. Notwithstanding the foregoing, for purposes of determining
whether the Company has obtained the affirmative vote or prior written consent
of the holders of a majority of the Securities for actions listed in the
foregoing clauses (i), (ii), and (iii), shares of Common Stock which were issued
upon the conversion of any Notes will not be considered Securities.
The Company has also agreed pursuant to the Purchase Agreement that so
long as at least 25% of the initial number of Securities remain outstanding, it
will (a) comply in all material respects with all applicable laws with respect
to the conduct of its business and the ownership of its properties; (b) refrain
from entering into any agreement which would prohibit the Company from paying
principal and interest on the Notes, effecting the conversion of the Notes, or
complying with any of the terms of the Purchase Agreement, the Executive
Restriction Agreement dated July 19, 1996 by and among the Company, the Limited
Partnerships and Brian F. Sullivan ("Executive Agreement") and the Registration
Rights Agreement dated July 19, 1996 by and among the Company and the Limited
Partnerships ("Registration Rights Agreement") or the Notes; (c) maintain its
corporate existence, rights and franchises in full force and effect; (d)
maintain, with responsible insurers, such insurance, in such amounts and of such
types as are customarily carried under similar circumstances by companies
engaged in the same or a similar business or having similar properties similarly
situated; (e) maintain directors' and officers' liability insurance at least as
favorable in terms and coverage as that maintained on July 19, 1996, which
insurance must cover the Representative; (f) pay its taxes, assessments and
other governmental charters or levies imposed upon it or any of its properties
or income; (g) comply with the Employee Retirement Income Security Act of 1974,
as amended; and (h) upon receipt of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of any certificate
representing any of the Securities, and in the case of loss, theft or
destruction, upon delivery of an indemnity satisfactory to the Company, or, in
the case of mutilation, upon surrendering for cancellation thereof, issue a new
share certificate replacing the lost, stolen, destroyed or mutilated
certificate.
PREEMPTIVE RIGHTS. The Purchase Agreement grants to the Limited
Partnerships certain preemptive rights. For so long as any of the Limited
Partnerships is the holder of record of any Securities, such Limited Partnership
shall have the right to purchase a pro rata portion (consisting of the ratio of
the number of Securities which the Limited Partnership then owns to the total
number of shares of Common Stock of the Company then outstanding) of "New Equity
Securities" which the Company, from time to time, proposes to sell or issue. The
Purchase Agreement defines "New Equity Securities" as any capital stock of the
Company and any capital stock equivalents of the Company; however, the term does
not include capital stock equivalents granted to the Company's officers or
directors pursuant to any stock option or similar plan approved by the Company's
Board of Directors, Common Stock issued upon the exercise or conversion of such
common stock equivalents, Common Stock issued upon conversion of the Notes, and
Common Stock issued upon the exercise of rights to purchase Common Stock issued
pursuant to the Rights Agreement dated as of January 30, 1996 between the
Company and Norwest Bank Minnesota, National Association, as rights agent.
EVENTS OF DEFAULT AND REMEDIES. The following events, among others, are
events of default with respect to the Notes: (i) the Company fails to pay the
principal of or any other sum (other than interest), if any, due on any Note,
when such amount becomes due and payable; (ii) the Company fails to pay interest
on any of the Notes in full when and as the same becomes due and payable, and
such failure continues for five business days; (iii) the Company or any of its
subsidiaries files a petition of bankruptcy or for reorganization or for an
arrangement or any composition, readjustment, liquidation, dissolution or
similar relief pursuant to the federal Bankruptcy Code of 1978, as amended, or
under any similar present or future federal law or the law of any other
jurisdiction or shall be adjudicated a bankrupt or become insolvent; (iv) a
petition or answer is filed proposing the adjudication of the Company or any of
its subsidiaries as a bankrupt or its reorganization or arrangement, or any
composition, readjustment, liquidation, dissolution or similar relief with
respect to it pursuant to the federal Bankruptcy Code of 1978, as amended, and
the Company or such subsidiary shall consent to or acquiesce in the filing
thereof, or such petition or answer is not discharged or denied within 60 days
after the filing thereof; (v) a decree or order is rendered by a court having
jurisdiction for the appointment of a receiver, custodian, liquidator, trustee,
sequestrator or assignee in bankruptcy or insolvency of the Company or any of
its subsidiaries or of all or a substantial part of its property, or for the
winding-up or liquidation of its affairs, and such decree or order shall have
remained in force undischarged and unstayed for a period of 60 days; (vi)
default is made with respect to any indebtedness of the Company (other than the
Notes) with a principal amount outstanding in excess of $1,000,000 with the
result that such indebtedness can be accelerated so that the same will become
due and payable prior to the date on which the same would otherwise have become
due and payable; (vii) the Company has breached in any material respect any of
the covenants of the Company set forth in the Purchase Agreement, the Executive
Agreement, or the Registration Rights Agreement (collectively, the
"Agreements"), or Brian F. Sullivan shall have breached in any respect any of
his covenants contained in any of Sections 2, 3 or 4 of the Executive Agreement
and, if capable of being remedied, such breach continues for 15 days after
notice in writing by any holder of Securities to the Company; (viii) the
representations and warranties of the Company set forth in the Agreements shall
not have been true and correct in any material respect as of July 19, 1996; or
(iv) a final judgment or judgments entered by a court of competent jurisdiction
for the payment of money aggregating in excess of $3,000,000 is or are
outstanding against the Company or any subsidiary and any one such judgment in
excess of $3,000,000 has, or such judgments aggregating in excess of $3,000,000
have, remain unpaid, unvacated, unbonded or unstayed by appeal or otherwise for
a period 15 days from the date of entry.
If any event of default has occurred and is continuing, the holders of
a majority of the outstanding principal amount of the Notes may, by notice to
the Company, declare the entire outstanding principal balance of the Notes, and
all accrued and unpaid interest thereon, to be due and payable immediately.
However, if an event of default under the foregoing clause (iii), (iv) or (v)
shall have occurred, the outstanding principal amount of all of the Notes, and
all accrued and unpaid interest thereon, will immediately become due and payable
without any declaration and without presentment, demand, protest or other notice
whatsoever.
REGISTRATION RIGHTS. In connection with the purchase of the Notes, the
Company and the Limited Partnerships entered into the Registration Rights
Agreement, a copy of which is included in this Current Report on Form 8-K as
Exhibit 99.1. The following description of the Registration Rights Agreement is
qualified in its entirety by reference to the Registration Rights Agreement
included herein.
Under the Registration Rights Agreement, beginning July 19, 1998, the
holders of the Notes or the shares of Common Stock into which the Notes are
convertible (collectively, "Registerable Securities") will have certain rights
with respect to the registration of the Registerable Securities under the
Securities Act, subject to certain limitations. All expenses incurred in
connection with such registrations will be paid by the Company. In addition,
beginning July 19, 1998, the Registration Rights Agreement entitles the holders
of the Registerable Securities to "piggyback" registration rights, consisting of
the right to participate, subject to certain exceptions, in registrations by the
Company of offerings of its equity securities under the Securities Act. All
expenses incurred in connection with such registrations will be paid by the
Company. The Registration Rights Agreement contains customary indemnity
provisions with respect to the registration of the Registerable Securities in
certain circumstances.
Under the Registration Rights Agreement, the Company has agreed that it
will use its best efforts to provide and maintain the requisite public
information to facilitate sales pursuant to Rule 144 under the Securities Act of
the Notes and the shares of Common Stock into which the Notes are convertible.
EXECUTIVE AGREEMENT. In connection with the purchase of the Notes, the
Company, the Limited Partnerships and Brian F. Sullivan (who is the President
and Chief Executive Officer of the Company ("Executive")), entered into the
Executive Agreement. The following description of the Executive Agreement is
qualified in its entirety by reference to the Executive Agreement, a copy of
which is attached to this Current Report on Form 8-K as Exhibit 99.2.
The Executive Agreement prohibits, subject to certain exceptions, the
sale by the Executive of Common Stock and "common stock equivalents" (as the
term "common stock equivalents" is defined in the Executive Agreement) until
July 19, 1998. After that date, the Executive may not sell or otherwise transfer
in any transaction in excess of 25% of the Common Stock and common stock
equivalents he holds in the Company as of July 19, 1996 unless the holders of
the Securities are allowed to participate in such sale on a pro rata basis.
Under the Executive Agreement, the Executive 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 Agreement).
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(A) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
Not applicable.
(B) PRO FORMA FINANCIAL INFORMATION.
Not applicable.
(C) EXHIBITS.
Exhibit 4.1 Securities Purchase Agreement dated July 19,
1996 by and among the Company and the Limited
Partnerships (including form of Note
attached thereto as Exhibit A).
Exhibit 99.1 Registration Rights Agreement dated July 19,
1996 by and among the Company and the Limited
Partnerships.
Exhibit 99.2 Executive Restriction Agreement dated July 19,
1996 by and among the Company, the Limited
Partnerships and the Executive.
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 hereunto duly authorized.
Recovery Engineering, Inc.
(Registrant)
Dated: November 26, 1996 /s/ Charles F. Karpinske
Charles F. Karpinske
Chief Financial Officer
(principal financial and accounting officer)
EXHIBIT INDEX
Exhibit Number Description of Exhibit Page No.
- -------------- ---------------------- --------
4.1 Securities Purchase Agreement dated July 19, 1996 by and
among the Company and the Limited Partnerships (including
form of Note attached thereto as Exhibit A).
99.1 Registration Rights Agreement dated July 19, 1996 by and
among the Company and the Limited Partnerships.
99.2 Executive Restriction Agreement dated July 19, 1996 by and
among the Company, the Limited Partnerships and the Executive.