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, 1997 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
(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 - 4,545,750 shares as of October 31, 1997
RECOVERY ENGINEERING, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements (Unaudited):
Balance Sheets
September 30, 1997 and December 31, 1996.......................... 3
Statements of Operations
Three and nine month periods ended September 30, 1997 and 1996.... 4
Statements of Cash Flows
Nine months ended September 30, 1997 and 1996..................... 5
Notes to Financial Statements..................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................. 10
Signatures........................................................ 11
RECOVERY ENGINEERING, INC.
BALANCE SHEETS
(In thousands, except share data)
September 30, December 31,
1997 1996
-------- --------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents ................ $ 128 $ 5,988
Marketable securities .................... -- 1,542
Accounts receivable (net of allowance of
$232 for 1997 and $212 for 1996) ......... 17,037 8,109
Inventory ................................ 8,213 4,926
Other current assets ..................... 372 304
-------- --------
Total Current Assets .................. 25,750 20,869
Property and equipment:
Tooling .................................. 9,311 6,057
Equipment and fixtures ................... 7,620 6,569
-------- --------
16,931 12,626
Less accumulated depreciation ............ 4,380 3,003
-------- --------
12,551 9,623
Deferred income taxes ....................... 1,512 1,512
Patents (net of accumulated amortization) ... 757 766
Other assets ................................ 420 487
-------- --------
Total assets .......................... $ 40,990 $ 33,257
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank line of credit ...................... $ 8,182 $ --
Accounts payable ......................... 5,623 6,483
Accrued expenses ......................... 8,231 4,643
-------- --------
Total current liabilities ............. 22,036 11,126
Long-term debt .............................. 15,000 15,000
Shareholders' equity:
Common stock, $.01 par value:
Authorized shares -- 100,000,000
Issued and outstanding shares:
1997 - 4,544,000 and 1996 - 4,326,000 . 45 43
Additional paid-in capital ............... 20,972 20,313
Retained earnings (deficit) .............. (17,063) (13,225)
-------- --------
Total shareholders' equity ............ 3,954 7,131
-------- --------
Total liabilities and shareholders' equity $ 40,990 $ 33,257
======== ========
See accompanying notes.
RECOVERY ENGINEERING, INC.
STATEMENTS OF OPERATIONS
(Unaudited - in thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- --------
Net sales ......................... $ 22,371 $ 11,001 $ 48,180 $ 24,039
Cost of products sold ............. 11,790 6,762 26,443 14,824
-------- -------- -------- --------
Gross profit ...................... 10,581 4,239 21,737 9,215
Operating expenses:
Selling, general and administrative 9,777 6,596 22,390 14,112
Research and development .......... 797 469 2,255 1,540
-------- -------- -------- --------
10,574 7,065 24,645 15,652
-------- -------- -------- --------
Income (loss) from operations ..... 7 (2,826) (2,908) (6,437)
Other income (expense):
Interest income ................... -- 102 68 116
Interest expense .................. (455) (196) (988) (236)
Other income (expense) ............ -- 4 (10) (2)
-------- -------- -------- --------
(455) (90) (930) (122)
-------- -------- -------- --------
Loss before income taxes .......... (448) (2,916) (3,838) (6,559)
Income tax benefit ................ -- -- -- --
-------- -------- -------- --------
Net loss .......................... $ (448) $ (2,916) $ (3,838) $ (6,559)
======== ======== ======== ========
Net loss per share ................ $ (.10) $ (.67) $ (.87) $ (1.52)
======== ======== ======== ========
Weighted average number of
common shares outstanding ......... 4,540 4,323 4,434 4,301
======== ======== ======== ========
See accompanying notes.
RECOVERY ENGINEERING, INC.
STATEMENTS OF CASH FLOWS
(Unaudited - in thousands)
Nine months ended
September 30
----------------------
1997 1996
-------- --------
Operating activities
Net loss ................................... $ (3,838) $ (6,559)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization .............. 1,461 1,034
Provision for losses on accounts receivable -- 187
Changes in operating assets and liabilities:
Accounts receivable ...................... (8,928) (4,265)
Inventory ................................ (3,287) 829
Refundable income taxes .................. -- 1,177
Other assets ............................. -- (305)
Accounts payable ......................... (860) 770
Accrued expenses .......................... 3,588 3,204
-------- --------
Net cash used in operating activities ...... (11,864) (3,928)
Investing activities
Purchase of property and equipment ......... (4,305) (3,101)
Sale of marketable securities .............. 1,542 1,022
Purchase of patents ........................ (76) (108)
-------- --------
Net cash used in investing activities ...... (2,839) (2,187)
Financing activities
Net proceeds from long-term debt ........... -- 15,000
Net proceeds from bank line of credit ...... 8,182 --
Issuance of common stock ................... 661 188
-------- --------
Net cash provided by financing activities .. 8,843 15,188
-------- --------
Increase (decrease) in cash and cash equivalents (5,860) 9,073
Cash and cash equivalents at beginning of period 5,988 1,291
-------- --------
Cash and cash equivalents at end of period ...... $ 128 $ 10,364
======== ========
See accompanying notes.
RECOVERY ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
September 30, 1997
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 nine months ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1997, or any other period. For further
information, refer to the financial statements and footnotes thereto for the
year ended December 31, 1996 incorporated by reference 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,
1997 1996
---------- ---------
Raw materials $5,653,000 $3,353,000
Work in process 175,000 95,000
Finished products 2,385,000 1,478,000
---------- ---------
$8,213,000 $4,926,000
========== ==========
Note C - Net Loss Per Share
Net loss per share is computed using the weighted average number of common
shares outstanding during the period. Common equivalent shares from stock
options and warrants are excluded from the computation as their effect is
antidilutive. In February 1997, the Financial Accounting Standard Board (FASB)
issued FASB statement No. 128, "EARNINGS PER SHARE." This Statement replaces the
presentation of primary earnings per share (EPS) with basic EPS and also
requires dual presentation of basic and diluted EPS for entities with complex
capital structures. This Statement is effective for the fiscal year ended
December 31, 1997. For the quarter and nine months ended September 30, 1997,
there is no difference between basic loss per share under Statement No. 128 and
net loss per share as reported.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Three and Nine Month Periods ended September 30, 1997)
RESULTS OF OPERATIONS:
This report, along with quarterly press releases and discussions with
shareholders and analysts, contain 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 material costs, new product introductions by the Company or its
competitors, and changes in general conditions in the market for household
goods.
Net sales increased 103% and 100% for the three and nine months ended September
30, 1997, respectively, compared to the same periods the prior year. The
increase was due to a 246% increase of the Company's PUR Self-Monitoring
Water Filters(R) for the third quarter, and a 210% increase for the nine months
ended September 30, 1997. The Company also reported strong sales in the outdoor
systems market. The increase in the household market is primarily the result of
increased sell-through at retail as well as continued expansion of the Company's
distribution base. In addition to the previously announced expansion of product
offerings at Wal-Mart stores and the addition of Menards, the Company further
expanded its distribution base during the quarter by adding Sam's Club and
expanding its product offerings at K-Mart and Lowe's. With an expansion of
product offerings at Sears in the fourth quarter, the four largest mass
merchants will now all carry a full line of PUR's household products.
PUR household water filters are now available at over 23,000 retail outlets
nationwide.
Gross margins increased to 47.3% and 45.1% for the third quarter and nine months
ended September 30, 1997, respectively, compared to 38.5% and 38.3% for the same
periods in the prior year. Gross margins were significantly influenced by sales
volumes increasing at a much higher level than production costs, a higher mix of
household products, which carry a higher margin than the Company's other
products, as well as an increasing mix of replacement filters within the
household category.
Selling, general, and administrative expenses, while declining as a percentage
of sales, increased for the quarter and nine months ended September 30, 1997,
compared with the same periods last year. This increase reflects increased sales
and marketing expense related to the continued roll-out of the household
drinking water system products in the U.S. While selling expenses are expected
to be above 1996 levels throughout the remainder of the year to support the
continued roll-out of the household drinking water systems and product line
extensions, they are expected to decline as a percentage of sales.
Research and development expense increased to $797,000 and $2,255,000 for the
three months and nine months ended September 30, 1997, compared to $469,000 and
$1,540,000 for the same periods last year, reflecting the Company's commitment
towards developing new
products and technology. Development of product line extensions and other new
products will require continued emphasis and increased spending on research and
development.
Other expenses increased to $455,000 and $930,000 for the three and nine months
ended September 30, 1997, compared to $90,000 and $122,000 for the same periods
ended September 30, 1996. The increase is due to payments of interest on
long-term debt and the Company's line of credit as well as decreased interest
income corresponding to decreased balances of cash, cash equivalents and
marketable securities.
The Company's effective income tax rate was 0% for the three and nine months
ended September 30, 1997, as well as 0% for the same periods last year. 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
net operating loss in 1996 and the current year.
LIQUIDITY AND CAPITAL RESOURCES:
Cash used in operations was $11,864,000 for the nine months ended September 30,
1997, compared to cash used in operations of $3,928,000 for the same period in
1996. Cash was used to fund the operating loss and increase the level of
inventories and receivables.
Capital expenditures were $4,305,000 for the nine months ended September 30,
1997, compared to $3,101,000 for the same period last year. The capital
expenditures were used primarily to purchase tooling and manufacturing equipment
for both years. The Company anticipates increased expenditures for tooling and
manufacturing equipment purchases associated with new product introductions and
an increase in overall production capacity.
The Company had $8,182,000 of bank debt at September 30, 1997, as compared to $0
at December 31, 1996. The borrowings were made under a $14 million discretionary
credit facility consisting of a $10 million working capital line-of-credit
limited to eligible receivables and inventory as well as a $4 million equipment
loan which contains an eighteen month draw down period wherein only interest
payments are due. Principle payments on the equipment loan will be amortized
over 42 months thereafter. Borrowings under this agreement are limited to $10
million in 1997 and $12.5 million in 1998 by provisions in the Company's
convertible loan agreement. The Company received a waiver allowing it to make
full use of the $14 million credit facility for the remainder of 1997.
Management believes that anticipated cash flows from operations as well as funds
available through its bank credit agreement 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
-----------------
Not applicable
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
--------
Exh. 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.
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 12, 1997. /s/Brian F. Sullivan
----------------------------------------------
Brian F. Sullivan
President, Chief Executive Officer
and Director
(principal executive officer)
Dated: November 12, 1997. /s/Charles F. Karpinske
----------------------------------------------
Charles F. Karpinske
Chief Financial Officer
(principal financial and accounting officer)