SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
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[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
RECOVERY ENGINEERING, INC.
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(Name of Registrant as Specified In Its Charter)
N/A
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
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RECOVERY ENGINEERING, INC.
9300 North 75th Avenue
Minneapolis, Minnesota 55428
(612) 315-5500
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 23, 1998
TO THE SHAREHOLDERS OF
RECOVERY ENGINEERING, INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Recovery
Engineering, Inc., a Minnesota corporation (the "Company"), will be held on
Thursday, April 23, 1998, at 3:30 p.m. (Minneapolis time), at the offices of
Robins, Kaplan, Miller & Ciresi L.L.P., 2800 LaSalle Plaza, 800 LaSalle Avenue,
Minneapolis, Minnesota 55402, for the following purposes:
1. To elect seven directors of the Company for the coming year.
2. To consider and act upon a proposal to amend the 1994 Stock Option
and Incentive Plan to increase the number of shares reserved for
issuance thereunder.
3. To consider and act upon a proposal to amend the 1993 Director Stock
Option Plan to increase the number of shares subject to each option
granted thereunder.
4. To ratify the appointment of Ernst & Young LLP as independent
auditors for the fiscal year ending December 31, 1998.
5. To transact such other business as may properly come before the
meeting or any adjournment thereof.
Holders of record of the Company's Common Stock at the close of business
on March 17, 1998 are entitled to notice of and to vote at the Annual Meeting or
any adjournment thereof.
Each of you is invited to attend the Annual Meeting in person if possible.
Whether or not you plan to attend in person, please mark, date and sign the
enclosed proxy, and mail it promptly. A return envelope is enclosed for your
convenience.
By Order of the Board of Directors
Eric O. Madson, SECRETARY
March 20, 1998
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WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING,
PLEASE SIGN THE PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE.
-------------------------------------------------------------
RECOVERY ENGINEERING, INC.
9300 North 75th Avenue
Minneapolis, Minnesota 55428
(612) 315-5500
---------------
PROXY STATEMENT
---------------
SOLICITATION OF PROXIES
The enclosed proxy is solicited by and on behalf of the Board of Directors
of Recovery Engineering, Inc., a Minnesota corporation (the "Company"), for use
at the Annual Meeting of Shareholders ("Annual Meeting") to be held on April 23,
1998, and any adjournment thereof. This Proxy Statement and the accompanying
form of proxy are being mailed to shareholders on or about March 20, 1998.
The expense of the solicitation of proxies for the Annual Meeting,
including the cost of mailing, has been or will be borne by the Company.
Arrangements will be made with brokerage houses and other custodian nominees and
fiduciaries to send proxies and proxy materials to their principals, and the
Company will reimburse them for their expense in so doing. In addition to
solicitation by mail, proxies may be solicited by telephone, telegraph or
personally.
VOTING AND REVOCATION OF PROXY
The record date for the Annual Meeting is the close of business on March
17, 1998. On the record date, 4,557,704 shares of Common Stock were outstanding.
Holders of record of the Company's Common Stock on the record date are entitled
to notice of and to vote at the Annual Meeting. Each share of Common Stock
entitles the holder thereof to one vote upon each matter to be presented at the
Annual Meeting.
Each proxy returned to the Company will be voted in accordance with the
instructions indicated thereon. If no instructions are indicated, the shares
will be voted (i) FOR the election of the nominees for the Board of Directors
named in this Proxy Statement; (ii) FOR the approval of an amendment to the 1994
Stock Option and Incentive Plan to increase the number of shares reserved for
issuance thereunder; (iii) FOR the approval of an amendment to the 1993 Director
Stock Option Plan to increase the number of shares subject to each option
granted thereunder; and (iv) FOR the ratification of the appointment of Ernst &
Young LLP as independent auditors for the fiscal year ending December 31, 1998.
While the Board of Directors knows of no other matters to be presented at the
Annual Meeting or any adjournment thereof, all proxies returned to the Company
will be voted on any such matter in accordance with the judgment of the proxy
holders.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (a) giving
written notice of such revocation to the Secretary of the Company, (b) giving
another written proxy bearing a later date, or (c) attending the Annual Meeting
and voting in person (although attendance at the Annual Meeting will not in and
of itself constitute a revocation of a proxy).
A quorum, consisting of a majority of the shares of Common Stock entitled
to vote at the Annual Meeting, must be present in person or by proxy before
action may be taken at the Annual Meeting. If
an executed proxy is returned and the shareholder has abstained from voting on
any matter, the shares represented by such proxy will be considered present at
the meeting for purposes of determining a quorum and for purposes of calculating
the vote, but will not be considered to have been voted in favor of such matter.
If an executed proxy is returned by a broker holding shares in "street name"
which indicates that the broker does not have discretionary authority as to
certain shares to vote on one or more matters, such shares will be considered
present at the meeting for purposes of determining a quorum, but will not be
considered to be represented at the meeting for purposes of calculating the vote
with respect to such matter.
ELECTION OF DIRECTORS
(PROPOSAL 1)
The business and affairs of the Company are managed under the direction of
its Board of Directors. Each director is elected for a term of one year or until
his or her successor is elected.
Shareholders will be asked at the Annual Meeting to elect seven directors.
The Board has nominated the seven individuals named below to serve as directors
of the Company. Unless authority is withheld, all proxies received in response
to this solicitation will be voted FOR the election of the nominees named below.
Each of the nominees named below is now a director of the Company and has served
continuously as a director since the year indicated. Each of the nominees was
elected by the shareholders at the 1997 Annual Meeting, except for Mr. Gheewalla
who was appointed by the Board of Directors in February 1998. All nominees have
indicated a willingness to serve if elected. If any nominee becomes unable to
serve prior to the Annual Meeting, the proxies received in response to this
solicitation will be voted for a replacement nominee selected in accordance with
the best judgment of the proxy holders named therein.
DIRECTOR
NAME POSITIONS WITH COMPANY AGE SINCE
- ---- ---------------------- ------ --------
Robert R. Gheewalla Director 30 1998
John E. Gherty Director 54 1988
Sanjay H. Patel Director 37 1996
Brian F. Sullivan President, Chief Executive Officer
and Director 36 1986
William D. Thompson Director 76 1995
William F. Wanner, Jr. Director 55 1986
Richard J. Zeckhauser Director 57 1987
SHAREHOLDER APPROVAL
The affirmative vote of a plurality of the shares of Common Stock
represented at the Annual Meeting either in person or by proxy, assuming a
quorum is present, is required for the election of directors.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE
FOR THE ELECTION OF THE NOMINEES FOR THE BOARD OF DIRECTORS AS SET
FORTH IN PROPOSAL 1.
INFORMATION CONCERNING DIRECTORS,
NOMINEES AND EXECUTIVE OFFICERS
DIRECTORS AND NOMINEES
All of the nominees for election to the Company's Board of Directors are
presently serving as directors of the Company. The following discussion sets
forth certain information concerning the directors and nominees of the Company.
ROBERT R. GHEEWALLA has been a director of the Company since February
1998. Mr. Gheewalla has been an Associate in the Principal Investment Area of
Goldman, Sachs & Co. since 1994. From 1989 to 1994, he worked in the Global
Finance Department of Goldman, Sachs & Co. Mr. Gheewalla also serves on the
Advisory Committees or Boards of Directors of Marcus Cable Co., L.P. and North
American Railnet, Inc.
JOHN E. GHERTY has been a director of the Company since 1988. Mr. Gherty
has been President and Chief Executive Officer of Land O' Lakes, Inc., a food
and agricultural company, since 1989 and prior thereto was Group Vice President
and Chief Administrative Officer of Land O' Lakes, Inc. Mr. Gherty is also a
director of CF Industries, Inc., the National Council of Farmer Cooperatives and
the Minnesota Business Partnership.
SANJAY H. PATEL has been a director of the Company since July 1996. Mr.
Patel is expected to join Greenwich Street Capital Partners as a managing
director in April 1998. Mr. Patel was a Managing Director in the Principal
Investment Area of Goldman, Sachs & Co. from 1996 to January 1998, and worked in
the Leveraged Buyout Group of Goldman, Sachs & Co. from 1987 to 1996. Mr. Patel
is also a director of Stirling Cooke Brown Holdings Limited.
BRIAN F. SULLIVAN has been the President and Chief Executive Officer and a
director of the Company since its inception in 1986, and also served as Chief
Financial Officer of the Company from 1986 to 1994. Mr. Sullivan has established
and directed the implementation of the Company's strategic direction since its
inception. He has led the Company from the development stage through its initial
contracts with the United States armed forces, the introduction of reverse
osmosis desalinators and portable drinking water systems, and the development
and introduction of the Company's household drinking water systems. Mr. Sullivan
is named as an inventor on four United States patents held by the Company. Mr.
Sullivan is also a director of North Central Life Insurance Company and Simple
Simon, Inc.
WILLIAM D. THOMPSON has been a director of the Company since December
1995. Mr. Thompson served as Executive Vice President of the New York City
advertising firm of Young & Rubicam, Inc. until his retirement in 1989. During
37 years of service for Young & Rubicam, Mr. Thompson oversaw accounts for
numerous companies, including General Foods, Merrill Lynch, General Electric,
Warner-Lambert, Bristol-Meyers Squibb, and Johnson & Johnson.
WILLIAM F. WANNER, JR. has been a director of the Company since its
inception in 1986. Mr. Wanner served as Chairman of the Board of the Company
from 1986 to 1994. Since 1973, Mr. Wanner has been the Chief Executive Officer
and principal shareholder of Wanner Engineering, Inc. and its affiliated
companies, which design, produce and market a range of high pressure pumps and
controls.
RICHARD J. ZECKHAUSER has been a director of the Company since 1987. Dr.
Zeckhauser has been a professor of political economy at the John F. Kennedy
School of Government at Harvard University since 1968. Dr. Zeckhauser was a
co-founder of Niederhoffer, Cross and Zeckhauser, a New York-based investment
firm specializing in mergers and acquisitions and money management.
BOARD COMMITTEES AND ACTIONS
During calendar year 1997, the Board of Directors met four times. The
Board of Directors has two standing committees, a Compensation Committee and an
Audit Committee, which met three times and one time, respectively, during 1997.
Each director attended at least 75% of the total number of meetings of the Board
and of committees on which the director served.
The Compensation Committee reviews and makes recommendations to the Board
of Directors regarding salaries, compensation and benefits of executive officers
of the Company and administers the Company's 1986 Stock Option Plan and 1994
Stock Option and Incentive Plan. The members of the Compensation Committee are
Mr. Gherty and Mr. Wanner.
The Audit Committee reviews the internal and external financial reporting
of the Company and reviews the scope of the independent audit. During 1997, the
members of the Audit Committee were Dr. Zeckhauser and Mr. Ronald W. Weber, an
incumbent director whose service as a director will not continue after the
Annual Meeting.
The Board of Directors acts as the nominating committee. See "Information
Concerning Directors, Nominees and Executive Officers - Nomination of
Directors."
DIRECTOR COMPENSATION
Directors of the Company currently receive no cash fee for their service
as directors. Non-employee directors of the Company have been granted stock
options in connection with their service as directors, including options
automatically granted under the 1993 Director Stock Option Plan. See
"Information Concerning Directors, Nominees and Executive Officers - Director
Stock Option Plan" and "Approval of Amendment to 1993 Director Stock Option Plan
(Proposal 3)."
NOMINATION OF DIRECTORS
Directors of the Company are elected annually to serve until the next
annual meeting of shareholders or until their successors are duly elected.
Pursuant to a Securities Purchase Agreement dated July 19, 1996, between the
Company and five investment partnerships affiliated with The Goldman Sachs
Group, L.P. (collectively, "GS Group"), GS Group has the right to nominate one
person to serve on the Company's Board of Directors, and the Company has agreed
to use its best efforts to secure the election of such nominee to the Board of
Directors. See "Information Concerning Directors, Nominees and Executive
Officers - Certain Transactions." Mr. Gheewalla has been nominated by GS Group
and has been elected director pursuant to such arrangement. The Company knows of
no other arrangements or understandings between a director or nominee and any
other person pursuant to which he has been selected as a director or nominee.
There is no family relationship between any of the nominees, directors or
executive officers of the Company.
The Board of Directors acts as the nominating committee for selecting the
Board's nominees for election as directors. The Company's Bylaws require that
shareholder nominations for director be made pursuant to timely notice in
writing to the Company. To be timely, written notice must be delivered to the
Company not less than 60 nor more than 90 days prior to the date of the
scheduled annual meeting; however, if the Company gives less than 70 days'
notice of such meeting, the shareholder may deliver notice no later than the
tenth day following the earlier of the day on which the Company's notice of the
date of the meeting was mailed or the day on which such date was publicly
disclosed. The Bylaws further provide that the shareholder's notice shall set
forth certain information concerning each nominee, including (i) the name, age,
business address and residence address of such person, (ii) the principal
occupation or employment of such person, (iii) the class and number of shares of
the Company's stock
beneficially owned by such person on the date of the notice, and (iv) any other
information relating to such person that would be required to be disclosed
pursuant to Regulation 13D and Regulation 14A under the Securities Exchange Act
of 1934. In addition, the shareholder giving the notice is required to state the
name and address of such shareholder and the identity of other shareholders
known by such shareholder to be supporting such nominees and the extent of such
shareholders' beneficial ownership of the Company's stock. A majority of the
Continuing Directors may reject a nomination by a shareholder not timely made in
accordance with the requirements of the Bylaws. In case of a deficiency in such
shareholder's notice, the shareholder has the opportunity to cure the deficiency
by providing additional information within five days of the date that such a
deficiency notice is given to the shareholder. A majority of the Continuing
Directors determines whether the deficiency has been cured by the shareholder.
EXECUTIVE OFFICERS
The following discussion sets forth information about the executive
officers of the Company who are not directors.
OFFICER
NAME POSITIONS WITH COMPANY AGE SINCE
- ---- ---------------------- --- -------
Jeffrey T. Dekko Vice President - Marketing 31 1995
Richard D. Hembree Vice President - Engineering 45 1987
Charles F. Karpinske Vice President and Chief Financial
Officer 43 1996
Sally S. Mainquist Vice President - Manufacturing 42 1994
Barry B. Van Lerberghe Vice President - Sales 36 1995
JEFFREY T. DEKKO has served as Vice President - Marketing of the Company
since July 1995. Mr. Dekko served as Vice President of Recreational Products for
the Company from October 1994 to July 1995. Mr. Dekko directs the Company's
marketing efforts in the consumer household water products category. From 1988
to October 1994, Mr. Dekko was marketing manager for General Mills, Inc.
RICHARD D. HEMBREE has served as chief engineer of the Company since 1986
and Vice President - Engineering since 1987. Mr. Hembree has been principally
responsible for the development of new technologies incorporated into the
Company's products. Mr. Hembree is named as an inventor on eight United States
patents held by the Company. From 1983 to 1986, Mr. Hembree was a senior design
engineer at Seagold Industries Corporation, a manufacturer of desalinators,
where he designed several energy recovery pumps and was engaged in the design
and development of manual desalinators and hydraulic energy recovery devices.
CHARLES F. KARPINSKE has served as the Company's Vice President and Chief
Financial Officer since February 1996. Prior to joining the Company, Mr.
Karpinske served as Vice President of Operations and Chief Financial Officer of
Goretek Data Systems, a software development company, from April 1995 to
February 1996. From August 1993 to March 1995, Mr. Karpinske was the Chief
Operating Officer and Chief Financial Officer for Decision Data, a manufacturer
and distributor of computer equipment. From October 1986 to July 1993, Mr.
Karpinske worked for Apertus Technologies (formerly Lee Data), a manufacturer
and distributor of computer equipment, serving in a number of financial
positions including Chief Financial Officer, Vice President of Finance and
Administration and Corporate Controller.
SALLY S. MAINQUIST has served as Vice President - Manufacturing of the
Company since March 1994. Ms. Mainquist directs the Company's manufacturing
operations and is responsible for establishing
automated manufacturing processes for the Company's household drinking water
systems. From 1982 to February 1994, Ms. Mainquist served in various positions
with Graco Inc., a manufacturer of fluid handling equipment, most recently as a
factory operations manager.
BARRY B. VAN LERBERGHE has served as Vice President - Sales of the Company
since July 1995. Prior to joining the Company, Mr. Van Lerberghe was Western
Regional Manager for Sunbeam Household Products from 1992 to 1995, and District
Sales Manager for Polaroid Corporation from 1988 to 1992.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth certain information
regarding compensation of the Chief Executive Officer and each of the other
executive officers of the Company for the years ended December 31, 1997, 1996
and 1995.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL ------------
COMPENSATION AWARDS
-------------------- ----------- OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) OPTIONS (#) COMPENSATION (2)
- --------------------------- ---- -------- --------- ----------- ----------------
Brian F. Sullivan 1997 $205,000 $150,000 -- $3,200
(President and Chief Executive 1996 150,000 -- 250,000 --
Officer) 1995 150,000 -- 121,500 --
Jeffrey T. Dekko (3) 1997 $110,000 $60,345 12,000 $2,575
(Vice President - Marketing) 1996 88,500 -- 14,000 1,312
1995 82,000 -- 11,000 --
Richard D. Hembree 1997 $112,000 $49,164 10,000 $2,382
(Vice President - Engineering) 1996 99,900 -- -- 1,996
1995 82,000 -- 45,000 --
Charles F. Karpinske (4) 1997 $140,000 $64,280 40,000 $3,023
(Vice President and Chief 1996 112,500 -- 25,000 --
Financial Officer) 1995 N/A N/A N/A N/A
Sally S. Mainquist 1997 $107,000 $47,304 10,000 $2,191
(Vice President - Manufacturing) 1996 99,000 -- 20,000 1,974
1995 82,000 -- -- --
Barry B. Van Lerberghe (3)(5) 1997 $110,000 $57,020 12,000 $2,491
(Vice President - Sales) 1996 96,300 -- 13,000 2,140
1995 41,885 -- 12,000 39,440 (6)
- -----------------
(1) The executive officers of the Company are eligible to earn annual cash
bonuses tied to the level of achievement of annual performance targets.
(2) Represents the Company's matching contribution under its 401(k) Retirement
Savings Plan, unless otherwise indicated.
(3) Mr. Dekko and Mr. Van Lerberghe became executive officers of the Company
in April 1997.
(4) Mr. Karpinske's employment with the Company commenced in February 1996.
(5) Mr. Van Lerberghe's employment with the Company commenced in July 1995.
(6) Represents relocation costs in connection with the hiring of Mr. Van
Lerberghe.
AGREEMENTS WITH EXECUTIVES
The Company, GS Group and Brian F. Sullivan entered into an Executive
Restriction Agreement dated July 19, 1996 in connection with the Company's sale
of Convertible Notes to the GS Group. See "Information Concerning Directors,
Nominees and Executive Directors - Certain Transactions."
The Company and Charles F. Karpinske entered into an Executive Severance
Pay Agreement dated March 24, 1997 which provides that if Mr. Karpinske's
employment with the Company is terminated within 24 months following a "change
in control" of the Company, other than termination for cause, voluntary
termination by Mr. Karpinske, or termination on account of death or disability,
the Company will pay to Mr. Karpinske an amount equal to two times his average
annual compensation, including bonus, for the three-year period ending in the
year in which his employment terminates, will provide continued coverage under
the Company's insurance programs, and will pay him an amount equal to the
difference between the aggregate fair market value of shares subject to stock
options which are forfeited or become unexercisable as a result of his
termination of employment, and the aggregate exercise price of such options. For
these purposes, a "change in control" means (i) the dissolution or liquidation
of the Company, or a merger, consolidation or other corporate reorganization in
which the Company is not the surviving party; (ii) the sale of all or
substantially all of the business or assets of the Company; (iii) the
acquisition by any person of securities representing more than 25% of the voting
power of the Company's outstanding securities; or (iv) individuals who
constitute the Board of Directors at the beginning of any two-year period
ceasing to constitute at least a majority of the Board of Directors, unless each
new director is approved by a two-thirds vote of the directors then in office
who were directors at the beginning of such period.
RETIREMENT SAVINGS PLAN
The Company maintains a profit sharing and savings plan (the "401(k)
Plan") under Section 401(k) of the Internal Revenue Code of 1986, as amended
(the "Code"), which allows employees to contribute up to 15% of their pre-tax
income to the 401(k) Plan. The 401(k) Plan includes a discretionary matching
contribution by the Company and provides that the Company may make an additional
discretionary contribution out of profits at the end of any year. The Company
made discretionary matching contributions of $98,000, $61,000 and $34,000 for
1997, 1996 and 1995, respectively. No additional discretionary contributions
were made by the Company for 1997, 1996 or 1995.
STOCK OPTIONS
Since its inception, the Company has utilized stock and stock options to
provide incentives and rewards to its employees and directors. The Recovery
Engineering, Inc. 1986 Stock Option Plan (the "1986 Option Plan") permits the
granting of awards to directors and employees of the Company in the form of
stock options. Stock options granted under the 1986 Option Plan may be
"incentive stock options" meeting the requirements of Section 422 of the Code or
non-qualified options which do not meet the requirements of Section 422. At
December 31, 1997, options for an aggregate of 21,650 shares were outstanding
under the 1986 Plan. The outstanding options are presently exercisable with
respect to 15,950 shares. No additional options may be granted under the 1986
Plan.
The Recovery Engineering, Inc. 1994 Stock Option and Incentive Plan (the
"1994 Plan") permits the granting of awards to employees, consultants and other
service providers in the form of incentive stock options, non-qualified stock
options and grants of restricted stock. At December 31, 1997, options for an
aggregate of 875,300 shares were outstanding under the 1994 Plan, and 154,015
shares were available for grant, assuming the shareholders approve the proposed
amendment to the 1994 Plan at the Annual Meeting. See "Approval of Amendment to
1994 Stock Option and Incentive Plan (Proposal 2)."
The outstanding stock options are presently exercisable with respect to 278,676
shares. Awards may be granted under the 1994 Plan through January 31, 2004. The
1994 Plan may be terminated earlier by the Board of Directors in its sole
discretion.
The 1986 Option Plan and the 1994 Plan are administered by the
Compensation Committee of the Board of Directors. These Plans give broad powers
to the Committee to administer and interpret the plans, including the authority
to select the individuals to be granted awards and to prescribe the particular
form and conditions of each award granted. Awards are granted on the basis of
various factors, including the individual's capacity for contributing to the
successful performance of the Company, the nature of the operations for which
the individual is responsible, and the period for which the individual has
served or will have served the Company at the vesting of the award.
The following table sets forth certain information regarding stock options
granted to the executive officers named in the Summary Compensation Table during
the Company's 1997 fiscal year.
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable
Individual Grants Value at Assumed
-------------------------------------------------------- Annual Rates of Stock
Percent of Total Price Appreciation for
Options Granted Exercise Option Term (1)
Options to Employees Price Expiration ----------------------
Name Granted (#) in Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- ---- ------------ ----------------- -------- ----------- ---------- ----------
Brian F. Sullivan............ -- -- -- -- -- --
Jeffrey T. Dekko............. 12,000 (2) 4.8% $7.00 02/02/2007 $52,827 $133,874
Richard D. Hembree........... 10,000 (2) 4.0% $7.00 02/02/2007 $44,023 $111,562
Charles F. Karpinske......... 40,000 (2) 16.0% $7.00 02/02/2007 $176,090 $446,248
Sally S. Mainquist........... 10,000 (2) 4.0% $7.00 02/02/2007 $44,023 $111,562
Barry B. Van Lerberghe....... 12,000 (2) 4.8% $7.00 02/02/2007 $52,827 $133,874
- --------------
(1) Represents the potential net realizable value of each grant of options
assuming that the market price of the underlying Common Stock appreciates
in value from its fair market value on the date of grant to the end of the
option term at the indicated annual rates.
(2) Each option was granted on February 2, 1997 and vests with respect to 25%
of the option shares on the first, second, third and fourth anniversaries
of the grant date.
The following table sets forth certain information regarding the number
and value of unexercised stock options held by the executive officers named in
the Summary Compensation Table as of the end of the Company's fiscal year ended
December 31, 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
Value of Unexercised
Number of Unexercised In-the-Money Options
Shares Options at Year-End (#) at Year-End ($)(1)
Acquired on Value --------------------------- ---------------------------
Name Exercise (#) Realized ($) Exercisable / Unexercisable Exercisable / Unexercisable
- ---- ------------ ------------ --------------------------- ---------------------------
Brian F. Sullivan........... 199,000 $771,125 (2) 121,500 / 250,000 $1,275,750 / $2,625,000
Jeffrey T. Dekko............ -- -- 14,750 / 22,250 $231,313 / $380,438
Richard D. Hembree.......... -- -- 41,250 / 18,750 $612,188 / $291,563
Charles F. Karpinske........ -- -- 22,500 / 42,500 $371,875 / $721,875
Sally S. Mainquist.......... 200 $3,075 (3) 19,800 / 17,500 $291,500 / $275,000
Barry B. Van Lerberghe...... -- -- 12,250 / 24,750 $194,875 / $413,625
- ----------------
(1) Based on the difference between the December 31, 1997 closing price of
$24.50 per share as reported on the Nasdaq National Market and the
exercise price of the options.
(2) Based on the difference between the closing price of $6.375 per share on
April 21, 1997, the date of exercise, as reported on the Nasdaq National
Market and the exercise price of the options.
(3) Based on the difference between the closing price of $25.50 per share on
November 13, 1997, the date of exercise, as reported on the Nasdaq
National Market and the exercise price of the option.
Mr. Sullivan's options that are not currently exercisable will become
exercisable in 2005 and may become exercisable earlier if certain sales and
income objectives established by the Compensation Committee are achieved by the
Company. In addition, the options will become exercisable if Mr. Sullivan's
employment with the Company is terminated by reason of his death or disability,
or within 24 months following a "change in control" of the Company. For these
purposes, a "change in control" means (i) the dissolution or liquidation of the
Company, or a merger, consolidation or other corporate reorganization in which
the Company is not the surviving party; (ii) the acquisition by any person,
other than Wanner Engineering, Inc., of securities representing more than 50% of
the voting power of the Company's outstanding securities; or (iii) individuals
who constitute the Board of Directors at the beginning of any two-year period
ceasing to constitute at least a majority of the Board of Directors, unless each
new director is approved by a two-thirds vote of the directors then in office
who were directors at the beginning of such period.
DIRECTOR STOCK OPTION PLAN
The Company's 1993 Director Stock Option Plan (the "Director Option Plan")
provides for the automatic granting of an option for shares of Common Stock to
each non-employee director of the Company on the date of his or her initial
election or appointment as a director, and additional options on the date of
each annual meeting of shareholders at which the director is reelected by the
shareholders. The number of shares covered by such options was 1,000 shares per
grant through 1996, and 4,000 shares per grant for 1997 and subsequent years.
See "Approval of Amendment to 1993 Director Stock Option Plan (Proposal 3)." The
exercise price of options granted under the Director Option Plan is equal to 85%
of the fair market value of the Common Stock on the date of grant. A total of
100,000 shares of the Company's Common Stock has been reserved for issuance
pursuant to options granted under the Director Option Plan. At March 1, 1998,
options for an aggregate of 53,000 shares were outstanding under the Director
Option Plan and 47,000 shares were available for grant.
EMPLOYEE STOCK PURCHASE PLAN
In 1994, the Company's 1994 Stock Purchase Plan was adopted by the Board
of Directors and approved by the shareholders of the Company. The Stock Purchase
Plan permits eligible employees to make voluntary contributions through payroll
deductions, to be used to purchase stock from the Company on a monthly basis at
a price equal to 85% of the fair market value of a share of Common Stock on the
purchase date. An aggregate of 100,000 shares has been reserved for issuance
under the Stock Purchase Plan. The number of shares that an employee may
purchase under the Stock Purchase Plan may not exceed 500 shares during any
calendar year, and the aggregate purchase price of shares purchased by any
employee under the Stock Purchase Plan may not exceed $10,000 during any
calendar year. The Company issued 9,501 shares, 6,874 shares and 5,312 shares
under the Stock Purchase Plan in 1997, 1996 and 1995, respectively.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Decisions and recommendations regarding compensation paid to the Company's
executive officers in 1997 were made by a Compensation Committee consisting of
John E. Gherty and William F. Wanner, Jr., each of whom is a non-employee
director of the Company. Brian F. Sullivan, the only executive officer of the
Company who serves on the Board of Directors, abstains from voting on
compensation matters affecting his compensation. See "Report of the Compensation
Committee."
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company's directors, executive officers and any persons holding more
than 10% of the outstanding Common Stock of the Company are required to file
with the Securities and Exchange Commission reports concerning their initial
ownership of Common Stock and any subsequent changes in such ownership. The
Company believes that during 1997 the filing requirements were satisfied on a
timely basis by all such persons, except as follows: Initial reports of
beneficial ownership by Mr. Dekko and Mr. Van Lerberghe were not timely filed;
and one transaction by Mr. Hembree and one transaction by Mr. Thompson were not
reported on a timely basis. In making this disclosure, the Company has relied
solely on written representations of its directors, officers and beneficial
owners of more than 10% of the Common Stock and copies of the reports they have
filed with the Securities and Exchange Commission and furnished to the Company.
CERTAIN TRANSACTIONS
On July 19, 1996, the Company entered into a Securities Purchase Agreement
with GS Group, pursuant to which the Company issued to GS Group $15 million
principal amount of its 5% Convertible Notes Due 2003 (the "Convertible Notes").
The Convertible Notes are convertible into shares of the Company's Common Stock
at a conversion price of $14.85 per share, subject to customary anti-dilution
provisions. The Convertible Notes may be converted to Common Stock at any time
at the option of GS Group or, if certain conditions are satisfied, after January
18, 2000 by the Company. The Convertible Notes bear interest at the rate of 5%
per annum, payable quarterly on March 31, June 30, September 30, and December 31
in each year, commencing September 30, 1996, until the principal of the
Convertible Notes becomes due and payable. The principal amount of the
Convertible Notes is due and payable on July 18, 2003. The Convertible Notes may
be prepaid in whole or in part at any time by the Company, without penalty,
provided that if less than the entire indebtedness evidenced by the Convertible
Notes is to be prepaid by the Company, it must offer to repay the Convertible
Notes pro rata from each holder thereof.
Under the Securities Purchase Agreement, for so long as at least 25% of
the initial amount of Convertible Notes remain outstanding and GS Group holds at
least a majority of the outstanding Convertible Notes, at each meeting for the
election of directors of the Company, the Company is to use its best efforts to
cause to be elected to, and maintained as a member of, the Company's Board of
Directors, one person designated by GS Group. The representative is to be a
member of the Company's executive and finance committees, if any, or any other
committee performing substantially similar functions and, upon request by the
representative, any other committee of the Board of Directors. The Company has
also agreed that if, at any time, GS Group does not have a representative on the
Company's Board of Directors, GS Group will be entitled to have an observer
present at all meetings of the Company's Board. Robert R. Gheewalla currently
serves as a director of the Company as the designee of GS Group.
In connection with the sale of the Convertible Notes, the Company, GS
Group and Brian F. Sullivan entered into an Executive Restriction Agreement,
dated July 19, 1996. The Executive Restriction Agreement prohibits, subject to
certain exceptions, Mr. Sullivan's sale of Common Stock of the Company until
July 19, 1998. After that date, Mr. Sullivan may not sell or otherwise transfer
in any transaction more than 25% of the Common Stock (including shares subject
to stock options) which he held as of July 19, 1996 unless the holders of the
Convertible Notes are allowed to participate in such sale on a pro rata basis.
Under the Executive Restriction Agreement, Mr. Sullivan also has agreed to
refrain from competing with the Company for three years after (i) his employment
with the Company is terminated for cause or (ii) he resigns from the Company
other than for good reason (as defined in the Executive Restriction Agreement).
In April 1997, Brian F. Sullivan exercised stock options for an aggregate
of 199,000 shares of Common Stock, and paid the exercise price of the options by
delivering to the Company a Promissory Note in the principal amount of $497,500.
The Note bears interest at the rate of 9.25% per annum, and matures on June 30,
1999.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors (the "Committee") is
composed of non-employee directors of the Company. For 1997 the Committee
consisted of John E. Gherty and William F. Wanner, Jr. The Committee is
responsible for assuring that compensation for executives is consistent with the
Company compensation philosophy. The Committee also administers and makes grants
under the Company's stock option plans with respect to the Company's executive
officers.
The Company's executive compensation program is based on a
pay-for-performance philosophy. Under the Company's program, an executive's
compensation consists of three components: base salary, an annual incentive
(bonus) payment, and long-term incentives (principally stock options). Base
salaries generally are set at levels competitive with base salaries for
comparable positions in the marketplace. In addition, base salaries reflect the
executive's individual job responsibilities, his or her sustained performance in
fulfilling those responsibilities and the impact of such performance on the
business results of the Company. Base salaries for executive officers were
increased in 1997 based on the Company's achievements in the market for
household water filter products and the additional responsibilities assumed by
the executive officers in connection with the growth of the Company's
operations. Mr. Sullivan's base salary was increased in 1997 based on the
Company's achievements and to reduce the difference between his base salary and
the base salaries of chief executive officers of comparable companies.
Payments under the Company's management bonus program are tied to the
level of achievement of performance objectives for business functions under the
executive's direction and performance objectives for the Company as a whole.
Performance objectives are based on the Company's annual strategic plan as
reviewed by the Board of Directors. An executive's annual bonus potential is a
percentage of his or her base salary. Under the management bonus program,
executives other than Mr. Sullivan earned bonuses in 1997 based on the
achievement of various operating objectives. Mr. Sullivan is eligible to earn a
cash bonus based on the Company's net income before income taxes. While the
Company incurred a loss before income taxes in 1997, the Committee awarded Mr.
Sullivan a discretionary bonus based on his role in directing the implementation
of the Company's strategic plan and the Company's overall progress in the market
for household water filter products.
The Company's long-term incentives are in the form of stock options. The
objectives of these awards is to advance the longer term interests of the
Company and its shareholders, complement incentives tied to annual performance,
and align the interests of executives more closely with those of shareholders.
The Company also believes that the entrepreneurial character of its executives
makes the long-term incentives provided by its stock option program especially
significant in the motivation and retention of its executives. The number of
stock options awarded to an executive is based on the executive's position and
his or her performance in that position. The executive's right to the stock
options generally vests over a four-year period and each option is exercisable,
to the extent it has vested, over a ten-year period following its grant. In the
case of Mr. Sullivan, a significant portion of his stock options vest upon the
achievement of certain sales and income objectives established by the Committee.
The Committee believes that the Company's executives are focused on the
attainment of a sustained high rate of growth and profitability for the benefit
of the Company and its shareholders, and that the Company's compensation
program, with its emphasis on performance-based and long-term incentive
compensation, serves to reinforce this focus.
By the Compensation Committee
John E. Gherty
William F. Wanner, Jr.
PERFORMANCE GRAPH
The Company's Common Stock has been traded on The Nasdaq National Market
since March 4, 1993. Prior to that date there was no public market for the
Company's Common Stock. The following graph shows changes during the period from
March 4, 1993 (the date on which the Company's Common Stock was first traded on
The Nasdaq National Market) to December 31, 1997, in the value of $100 invested
in: (1) the Company's Common Stock; (2) the CRSP Total Return Index for The
Nasdaq Stock Market (US); and (3) Nasdaq Non-Financial Stocks. The values of
each investment as of the dates indicated are based on share prices plus any
dividends paid in cash, with the dividends reinvested on the date they were
paid. The calculations exclude trading commissions and taxes.
[GRAPH]
3/4/93 12/31/93 12/30/94 12/29/95 12/31/96 12/31/97
------ -------- -------- -------- -------- --------
Recovery Engineering, Inc. $100.00 $176.79 $264.29 $217.86 $100.00 $350.00
CRSP Index for Nasdaq Stock Market (US) $100.00 $114.20 $111.63 $157.87 $194.19 $238.40
Nasdaq Non-Financial Stocks $100.00 $116.64 $112.16 $156.30 $189.91 $223.04
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth information as of December 31, 1997,
regarding the beneficial ownership of shares of Common Stock of the Company by
each director and executive officer of the Company, by all directors and
executive officers of the Company as a group, and by each shareholder known by
the Company to own beneficially more than five percent (5%) of the outstanding
shares of the Company's Common Stock. Unless otherwise noted, each person or
group identified possesses sole voting and investment power with respect to such
shares.
NUMBER OF SHARES PERCENT OF
BENEFICIALLY OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED (1) SHARES (2)
- ------------------------------------ ---------------- -----------
Certain investment funds affiliated with
The Goldman Sachs Group, L.P. (3)............... 1,015,101 18.2%
85 Broad Street
New York, NY 10004
Investment Advisers, Inc. (4)..................... 620,300 13.6%
3700 First Bank Place
Minneapolis, MN 55440
Wanner Engineering, Inc. (5)...................... 596,100 13.1%
1204 Chestnut Avenue
Minneapolis, MN 55403
US Trust Company of New York (6).................. 370,036 8.1%
114 West 47th Street
New York, NY 10036
Nevis Capital Management, Inc. (7)................ 311,300 6.8%
1119 St. Paul Street
Baltimore, MD 21202
DIRECTORS AND EXECUTIVE OFFICERS:
Brian F. Sullivan (8) (9)......................... 530,000 11.3%
Jeffrey T. Dekko (8).............................. 15,263 *
Richard D. Hembree (8)............................ 72,150 1.6%
Charles F. Karpinske (8).......................... 22,500 *
Sally S. Mainquist (8)............................ 20,615 *
Barry B. Van Lerberghe (8)........................ 16,050 *
Robert R. Gheewalla (10).......................... -- *
John E. Gherty (8)(11)............................ 56,451 1.2%
Sanjay H. Patel (8)(12)........................... 5,700 *
William D. Thompson (8)........................... 21,000 *
William F. Wanner, Jr. (8)(13).................... 660,150 14.5%
Ronald W. Weber (8)............................... 28,000 *
Richard J. Zeckhauser (8)(14)..................... 92,500 2.0%
All directors and executive officers as a group
(13 persons, including those named above) (8).. 1,540,379 31.9%
- ----------------------
* Less than one percent.
(1) Each person has sole voting and sole power with respect to all outstanding
shares, except as noted.
(2) Based on 4,548,249 shares outstanding at December 31, 1997. Such amount
does not include 2,094,051 shares of Common Stock issuable upon exercise
of stock options and warrants or conversion of Convertible Notes
outstanding at December 31, 1997. Each figure showing the percentage of
outstanding shares owned beneficially has been calculated by treating as
outstanding and owned the shares which could be purchased by the indicated
person(s) within 60 days upon the exercise of existing stock options or
the conversion of the Convertible Notes.
(3) Reflects information included on a Schedule 13D, dated October 1, 1997,
filed with the Securities and Exchange Commission by certain investment
partnerships, of which affiliates of The Goldman Sachs Group, L.P. ("GS
Group") are the general partner, managing general partner, managing
partner or investment manager. Includes (i) 1,010,101 shares which may be
acquired upon the conversion of Convertible Notes owned by the investment
partnerships, and (ii) 5,000 shares subject to options held for the
benefit of the GS Group by Mr. Patel (see Notes 8 and 12). Includes
Convertible Notes held of record by GS Capital Partners II, L.P.,
currently convertible into 633,766 shares, Convertible Notes held of
record by GS Capital Partners II Offshore, L.P., currently convertible
into 251,948 shares, Convertible Notes held of record by Stone Street Fund
1996, L.P., currently convertible into 60,191 shares, Convertible Notes
held of record by Bridge Street Fund 1996, L.P. , currently convertible
into 40,819 shares, and Convertible Notes held of record by Goldman, Sachs
& Co. Verwaltungs GmbH, currently convertible into 23,377 shares. Does not
include up to 367,309 aggregate shares of Common Stock in respect of
certain reset rights held by the investment partnerships. GS Group
disclaims beneficial ownership of the shares owned by such investment
partnerships to the extent attributable to partnership interests therein
held by persons other than GS Group and its affiliates. Each of such
investment partnerships shares voting and investment power with certain of
its respective affiliates.
(4) Reflects information as of December 31, 1997, based on a Schedule 13G,
dated January 30, 1998, filed by such company with the Securities and
Exchange Commission, which indicates that the shareholder has sole voting
power and sole dispositive power with respect to 464,500 shares and shared
voting power and shared dispositive power with respect to 155,800 shares.
(5) Mr. Wanner, a director of the Company, is a director, officer and
principal shareholder of Wanner Engineering, Inc. Such shares are also
included in the shares beneficially owned by Mr. Wanner.
(6) Reflects information as of December 31, 1997, based on a Schedule 13G,
dated February 6, 1998, filed by such company with the Securities and
Exchange Commission, which indicates that the shareholder has shared
voting power and shared dispositive power with respect to said shares.
(7) Reflects information as of December 31, 1997, based on a Schedule 13G,
dated February 19, 1998, filed by such company with the Securities and
Exchange Commission, which indicates that the shareholder has sole voting
power and sole dispositive power with respect to said shares.
(8) Includes shares which could be purchased within 60 days upon the exercise
of stock options as follows: Mr. Sullivan, 121,500 shares; Mr. Dekko,
14,750 shares; Mr. Hembree, 41,250 shares; Mr. Karpinske, 22,500 shares;
Ms. Mainquist, 19,800 shares, Mr. Van Lerberghe, 12,250 shares; Mr.
Gherty, 9,000 shares; Mr. Patel, 5,000 shares; Mr. Thompson, 6,000 shares;
Mr. Wanner, 10,000 shares; Mr. Weber, 8,000 shares; Dr. Zeckhauser, 8,500
shares; and all directors and executive officers as a group, 278,550
shares.
(9) Mr. Sullivan's address is 9300 North 75th Avenue, Minneapolis, MN 55428.
(10) Does not include securities that may be deemed to be beneficially owned by
GS Group (see Note 3). Mr. Gheewalla, a director of the Company, is an
associate of Goldman, Sachs & Co., the investment manager for certain of
the investment partnerships. Mr. Gheewalla disclaims beneficial ownership
of such securities.
(11) Includes 10,701 shares held by Mr. Gherty as custodian for his minor
children.
(12) Includes 5,000 shares subject to options held for the benefit of GS Group
with which Mr. Patel was previously associated. Mr. Patel disclaims
beneficial ownership of such securities.
(13) Includes 2,200 shares held by Mr. Wanner as trustee for members of his
family and 596,100 shares owned by Wanner Engineering, Inc., of which Mr.
Wanner is a director, officer and principal shareholder.
(14) Includes 25,000 shares owned by Dr. Zeckhauser's wife. Dr. Zeckhauser,
having no voting or dispositive powers with respect to such shares,
disclaims beneficial ownership of such shares.
APPROVAL OF AMENDMENT TO
1994 STOCK OPTION AND INCENTIVE PLAN
(PROPOSAL 2)
The Recovery Engineering, Inc. 1994 Stock Option and Incentive Plan (the
"1994 Plan") permits the granting of awards to employees, consultants and other
service providers in the form of incentive stock options, non-qualified stock
options ("Options"), awards of restricted stock or any combination thereof. The
1994 Plan is intended to assist the Company in hiring and retaining qualified
personnel by allowing them to participate in the ownership and growth of the
Company. Management believes that the granting of Options and restricted stock
awards gives employees, consultants and other service providers an additional
inducement to remain in the service of the Company and provides them with an
increased incentive to work for the Company's success.
The shareholders of the Company have previously approved the 1994 Plan and
the issuance of up to 800,000 shares thereunder. In 1997, the Board of Directors
amended the 1994 Plan to increase the number of shares reserved for issuance
thereunder to 1,050,000 shares. The shareholders are being asked to approve such
increase at the Annual Meeting.
The principal features and effects of the 1994 Plan are discussed below.
ADMINISTRATION
The 1994 Plan is administered by the Compensation Committee of the Board
of Directors, which selects the employees, consultants, and other service
providers who will be granted Options and restricted stock awards under the 1994
Plan. Subject to the provisions of the 1994 Plan, the Compensation Committee
also determines the type, amount, size and terms of Options and restricted stock
awards; the time when Options and awards should be granted; whether any
restrictions should be placed on shares purchased pursuant to any Option or
issued pursuant to any restricted stock award; and all other determinations
necessary or advisable for the administration of the 1994 Plan. The
determinations by the Compensation Committee are final and conclusive. Grants of
Options and restricted stock awards and other decisions of the Compensation
Committee are not required to be made on a uniform basis.
SHARES SUBJECT TO 1994 PLAN
The 1994 Plan, as amended, provides that the total number of shares of
Common Stock that may be purchased pursuant to the exercise of Options and the
grant of restricted stock awards shall not exceed 1,050,000 shares, subject to
adjustment as provided in the 1994 Plan. The shares to be issued upon the
exercise of Options and restricted stock awards granted under the 1994 Plan will
be currently authorized but unissued shares of Common Stock of the Company. The
number of shares of Common Stock available under the 1994 Plan, the exercise
price of an Option, or the value of a restricted stock award, may be adjusted by
the Compensation Committee in its sole discretion upon any stock dividend or
split, recapitalization, reclassification, combination, exchange of shares, or
other similar corporate change, if the Compensation Committee determines that
such change necessarily or equitably requires such an adjustment.
ELIGIBILITY
Employees of the Company and any of its "Affiliates" (as such term is
defined in the 1994 Plan) are eligible for selection to receive Options
qualified as incentive stock options ("ISOs") under Section 422 of the Code.
Employees, consultants and other service providers of the Company or its
Affiliates may be granted non-qualified Options ("NQOs") or restricted stock
awards. Options have been granted under the 1994 Plan to approximately 180
persons.
The following table sets forth certain information regarding the
allocation of the 250,000 additional shares under the 1994 Plan that are the
subject of this Proposal 2, to the extent such allocation is presently
determinable
NEW PLAN BENEFITS
1994 STOCK OPTION AND INCENTIVE PLAN
OPTIONS EXERCISE EXPIRATION
NAME AND POSITION GRANTED (#) PRICE ($/Sh) DATE
- ----------------- ------------ ------------ ----------
Brian F. Sullivan (President & Chief Executive Officer) -- -- --
Jeffrey T. Dekko (Vice President - Marketing) 9,000 (1) $23.38 01/12/2008
Richard D. Hembree (Vice President - Engineering) 15,000 (1) $23.38 01/12/2008
Charles F. Karpinske (Vice President & Chief Financial Officer) 10,000 (1) $23.38 01/12/2008
Sally S. Mainquist (Vice President - Manufacturing) 6,000 (1) $23.38 01/12/2008
Barry B. Van Lerberghe (Vice President - Sales) 9,000 (1) $23.38 01/12/2008
All current executive officers as a group (6 persons named above) 49,000 (1) $23.38 01/12/2008
All other employees 201,000
- ----------------------
(1) Each option will vest and become exercisable in four equal installments on
the first, second, third and fourth anniversaries of the date of grant,
and will expire ten years after the date of grant.
The additional shares which are not currently allocated, together with
shares previously authorized and available for issuance under the Plan, may be
allocated to such employees as the Compensation Committee may determine. No
options or shares under the 1994 Plan will be allocated to directors who are not
employees of the Company. At March 17, 1998, the closing price for the Company's
Common Stock as reported on The Nasdaq Stock Market was $29.00 per share.
TERMS OF OPTIONS
Upon the grant of an Option, the Compensation Committee fixes the number
of shares of Common Stock that the optionee may purchase upon exercise of the
Option and the price at which the shares may be purchased. With regard to ISOs,
the exercise price cannot be less than the "fair market value" of the Common
Stock at the time the ISO is granted or 110% of such fair market value in
certain cases (as set forth below). NQOs may be granted at less than the fair
market value of the Common Stock. See "Federal Income Tax Consequences."
With regard to ISOs only, the aggregate fair market value of Common Stock
(determined at the time the ISO is granted) subject to ISOs granted to an
employee under all stock option plans of the Company and any Affiliate of the
Company that become exercisable for the first time by such employee during any
calendar year may not exceed $100,000. Furthermore, no ISO may be granted to any
employee who, immediately after the grant of such ISO, would own more than 10%
of the total combined voting power of all classes of the Company's stock unless
such ISO has an exercise price equal to at least 110% of the fair market value
of the Common Stock at the time of grant and the term of the ISO is no longer
than five years.
Each Option will be exercisable by the optionee only during the term fixed
by the Compensation Committee, with such term ending not later than 121 months
after the date of grant (ten years in the case of ISOs). Upon exercise of any
Option, payment for shares as to which the Option is exercised may be made in
cash, in shares of Common Stock of the Company having an aggregate fair market
value on the
date of exercise which is not less than the exercise price of the Option, or by
a combination of cash and such shares, as the Compensation Committee may
determine.
TRANSFERABILITY OF OPTIONS; TERMINATION OF EMPLOYMENT
Options granted under the 1994 Plan are non-transferable except to the
extent permitted by the agreement evidencing such Option. However, no Option
will be transferable by any optionee other than by will or the laws of descent
and distribution. If, pursuant to the agreement evidencing any Option, such
Option remains exercisable after the optionee's death, it may be exercised to
the extent permitted by such agreement by the personal representative of the
optionee's estate or by any person who acquired the right to exercise such
option by bequest, inheritance, or otherwise, by reason of the optionee's death.
RESTRICTED STOCK AWARDS
Restricted stock awards granted pursuant to the 1994 Plan entitle the
holder to receive shares of Common Stock, which will be subject to forfeiture to
the Company if specified conditions are not satisfied by the end of a specified
period, as determined in each case by the Compensation Committee. The
Compensation Committee is to establish a period (the "Restricted Period") at the
time a restricted stock award is granted during which the holder will not be
permitted to sell, transfer, pledge, encumber, or assign the shares of Common
Stock subject to the award. During the Restricted Period, the holder of shares
subject to the restricted stock award shall have all of the rights of a
shareholder of the Company with respect to such shares, including the right to
vote the shares and to receive any dividends and other distributions with
respect to the shares. However, any and all stock dividends, stock rights, and
stock issued upon split-ups or reclassifications of shares subject to restricted
stock awards shall be subject to the same restrictions as the shares with
respect to which such stock dividends, rights, or additional stock are issued.
Except to the extent otherwise provided in the restricted stock agreement
governing each restricted stock award, all shares of Common Stock then subject
to any restriction will be forfeited to the Company without further obligation
of the Company to the holder thereof, and all rights of the holder with respect
to such shares will terminate, if the holder ceases to provide services to the
Company or its Affiliates as an employee, consultant or other service provider,
or if any condition established by the Compensation Committee for the release of
any restriction has not occurred, prior to the expiration of the Restricted
Period. The Compensation Committee may permit a gift of restricted stock to the
holder's spouse, child, stepchild, grandchild, or legal dependent, or to a trust
whose sole beneficiary or beneficiaries is the holder of the stock, and/or any
one or more of such persons. However, the donee must enter into an agreement
with the Company pursuant to which it agrees that the restricted shares shall be
subject to the same restrictions in the hands of such donee as it was in the
hands of the donor.
IMMEDIATE ACCELERATION OF AWARDS
The 1994 Plan provides that, notwithstanding any other provisions
contained in the 1994 Plan or the agreement evidencing any Option or restricted
stock award thereunder, the restrictions on all shares of restricted stock shall
lapse immediately, and all outstanding Options will become exercisable
immediately, if any of the following events occur: (i) any person or group of
persons, other than the shareholders of record of the Company as of January 31,
1994 (the date the 1994 Plan was adopted by the Board) becomes a beneficial
owner of 30% or more of any equity security of the Company entitled to vote for
the election of directors; (ii) a change in the composition of the Board of
Directors of the Company within any consecutive two-year period occurs such that
the "Continuing Directors" cease to constitute a majority of the Board (as such
term is defined in the 1994 Plan); or (iii) the shareholders of the Company
approve an agreement to merge or consolidate with or into another corporation or
an agreement to sell or otherwise dispose of all or substantially all of the
Company's assets (including a plan
of liquidation). However, a participant under the 1994 Plan will not be entitled
to the immediate acceleration of an award as provided above if such acceleration
would, with respect to such participant, constitute a "parachute payment" for
purposes of Section 280G of the Internal Revenue Code of 1986, as amended, or
any successor provision.
TERMINATION AND AMENDMENT
The 1994 Plan will terminate on the earlier of the date on which the 1994
Plan is terminated by the Board of Directors of the Company or January 31, 2004.
Options or restricted stock rights outstanding at the termination of the 1994
Plan may continue to be exercised in accordance with their terms after such
termination. The 1994 Plan may be amended at any time by the Board of Directors.
However, without the approval of a majority of the Company's shareholders voting
at a meeting at which a quorum is present, no such amendment may (i) materially
increase the benefits accruing to participants under the 1994 Plan; (ii)
increase the number of shares available for issuance or sale pursuant to the
1994 Plan (other than as permitted in certain circumstances provided by the 1994
Plan); or (iii) materially modify the requirements as to eligibility for
participation in the 1994 Plan, without the affirmative vote of shareholders
holding at least the majority of the voting stock of the Company represented in
person or by proxy at a duly held shareholders' meeting.
FEDERAL INCOME TAX CONSEQUENCES
The following description is a general summary of the current federal
income tax provisions relating to the grant and exercise of ISOs and NQOs under
the 1994 Plan, the grant of restricted stock awards thereunder, and the sale of
shares of Common Stock acquired upon exercise of Options or under a restricted
stock award. The provisions summarized below are subject to changes in federal
income tax laws and regulations, and the effects of such provisions may vary
with individual circumstances.
INCENTIVE STOCK OPTIONS
ISOs granted under the 1994 Plan are intended to be "incentive stock
options" as defined by Section 422 of the Code. Under present law, the recipient
of an ISO will not realize taxable income upon the grant or the exercise of an
ISO, and the Company will not receive an income tax deduction at either such
time. Generally, if an optionee exercises an ISO at any time prior to three
months after termination of the optionee's employment and does not sell the
shares acquired upon exercise of an ISO within either (i) two years after the
grant of the ISO or (ii) one year after the date of exercise of the ISO, the
gain upon a subsequent sale of the shares will be taxed as capital gain. If the
optionee does not satisfy these requirements, the optionee generally will
recognize ordinary income in an amount equal to the difference between the
exercise price paid in connection with exercise of the ISO and the fair market
value of the shares acquired as of the date of exercise of the ISO, and will
recognize capital gain on the difference between the sale price of the shares
and the fair market value of the shares as of the date of exercise. In such
event, the Company would be entitled to a corresponding income tax deduction
equal to the amount recognized as ordinary income by the optionee.
Upon the exercise of an ISO, the excess of the stock's fair market value
on the date of exercise over the exercise price will be included in the
optionee's alternative minimum taxable income ("AMTI") and may result in the
imposition of a tax on such AMTI. Liability for the alternative minimum tax is
complex and depends upon an individual's overall tax situation.
NON-STATUTORY STOCK OPTIONS
Generally, upon the grant of an NQO, neither the Company nor the optionee
will experience any tax consequences. Upon exercise of an NQO granted under the
1994 Option Plan, or upon the exercise of an Option initially intended to be an
ISO that does not qualify for the tax treatment described above, the optionee
will realize ordinary income in an amount equal to the excess of the fair market
value of the shares of Common Stock received over the exercise price paid by the
optionee with respect to such shares. The amount recognized as ordinary income
by the optionee will increase the optionee's basis in the stock acquired
pursuant to the exercise of the NQO. the Company will be allowed a federal
income tax deduction for the amount recognized as ordinary income by the
optionee upon the optionee's exercise of the NQO. Upon a subsequent sale of the
stock, the optionee will recognize short-term or long-term gain or loss
depending upon the holding period for the stock and upon the stock's subsequent
appreciation or depreciation in value.
RESTRICTED STOCK AWARDS
A participant who receives an award of restricted stock under the 1994
Plan generally will recognize ordinary income at the time at which the
restrictions on such shares (the "Restrictions") lapse, in an amount equal to
the excess of (i) the fair market value of such shares at the time the
Restrictions lapse, over (ii) the price, if any, paid for such shares. If the
participant makes an election with respect to such shares under Section 83(b) of
the Internal Revenue Code of 1986, as amended (the "Code"), not later than 30
days after the date shares are transferred to the participant pursuant to such
award, the participant will recognize ordinary income at the time of transfer in
an amount equal to the excess of (i) the fair market value of the shares covered
by the award (determined without regard to any restriction other than a
restriction which by its terms will never lapse) at the time of such transfer
over (ii) the price, if any, paid for such shares.
A participant's tax basis in shares received pursuant to a restricted
stock award granted under the 1994 Plan will be equal to the sum of the price
paid for such shares, if any, and the amount of ordinary income recognized by
such participant with respect to the transfer of such shares or the lapse of the
Restrictions thereon. The participant's holding period for such shares for
purposes of determining gain or loss on a subsequent sale will begin immediately
after the transfer of such shares to the participant, if a Section 83(b)
election is made with respect to such shares, or immediately after the
Restrictions on such shares lapse, if no Section 83(b) election is made.
Generally, a deduction will be allowed to the Company, for federal income
tax purposes, in an amount equal to the ordinary income recognized by a
participant with respect to shares awarded pursuant to the 1994 Plan, provided
that such amount constitutes an ordinary and necessary business expense of the
Company and is reasonable.
If, subsequent to the lapse of Restrictions on his or her shares, the
participant sells such shares, the difference, if any, between the amount
realized from such sale and the tax basis of such shares to the holder will be
taxed as long-term or short-term capital gain or loss, depending on whether the
participant's holding period for such shares exceeds the applicable holding
period at the time of sale and provided that the participant holds such shares
as a capital asset at such time.
If a Section 83(b) election is made and, before the Restrictions on the
shares lapse, the shares which are subject to such election are resold to the
Company or are forfeited, (i) no deduction would be allowed to such participant
for the amount included in the income of such participant by reason of such
Section 83(b) election, and (ii) the participant would realize a loss in an
amount equal to the excess, if any, of the amount paid for such shares over the
amount received by the participant upon such resale or forfeiture
(which loss would be a capital loss if the shares are held as a capital asset at
such time). In such event, the Company would be required to include in its
income the amount of any deduction previously allowable to it in connection with
the transfer of such shares.
The Compensation Committee will have the discretion to provide with
respect to any restricted stock award that upon a change in control of the
Company, any Restrictions on the shares of Common Stock covered by the award
will lapse. In general, if the total amount of payments in the nature of
compensation that are contingent upon a "change in control" of the Company (as
defined in Section 280G of the Code) equals or exceeds three times a recipient's
"base amount" (generally, such recipient's average annual compensation for the
five years preceding the change in control), then, subject to certain
exceptions, the payments may be treated as parachute payments under Section 280G
of the Code, in which case a portion of the payments would be nondeductible to
the Company and the recipient would be subject to a 20% excise tax on such
portion of the payments under Section 4999 of the Code.
SHAREHOLDER APPROVAL
The affirmative vote of a majority of the shares of Common Stock
represented at the Annual Meeting either in person or by proxy, assuming a
quorum is present, is required to approve the amendment to the 1994 Plan
increasing the number of shares reserved for issuance thereunder.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE
FOR APPROVAL OF THE AMENDMENT TO THE 1994 STOCK OPTION AND INCENTIVE
PLAN AS SET FORTH IN PROPOSAL 2.
APPROVAL OF AMENDMENT TO
1993 DIRECTOR STOCK OPTION PLAN
(PROPOSAL 3)
The Company's 1993 Director Stock Option Plan (the "Director Option Plan")
provides for the automatic granting of an option for shares of Common Stock to
each non-employee director of the Company on the date of his or her initial
election or appointment as a director, and additional options on the date of
each annual meeting of shareholders at which the director is reelected by the
shareholders. The purpose of the Director Option Plan is to promote the
interests of the Company and its stockholders by attracting and retaining highly
qualified independent directors by providing an opportunity to invest in the
Company and participate in its future success.
The number of shares covered by such options was 1,000 shares per grant
through 1996. In 1997 the Board of Directors amended the Director Option Plan,
subject to approval by the shareholders at the Annual Meeting, to increase the
number of shares covered by such options to 4,000 shares per grant for 1997 and
subsequent years. The exercise price of options granted under the Director
Option Plan is equal to 85% of the fair market value of the Common stock on the
date of grant. A total of 100,000 shares of the Company's Common Stock has been
reserved for issuance pursuant to options granted under the Director Option
Plan. At March 1, 1998, options for an aggregate of 53,000 shares were
outstanding under the Director Option Plan, and 47,000 shares were available for
grant.
DESCRIPTION OF THE DIRECTOR OPTION PLAN
The following is a summary of the principal provisions of the Director
Option Plan and is qualified in its entirety by reference to the complete text
of the Director Option Plan.
The Director Option Plan provides for the automatic granting of an option
for shares of Common Stock to each non-employee director of the Company (an
"Eligible Director") on the date of his or her initial election or appointment
as a director, and additional options on the date of each annual meeting of
shareholders at which the director is reelected by the shareholders. A maximum
of 100,000 shares of Common Stock is available for purchase upon the exercise of
options granted or to be granted under the Director Option Plan. Shares to be
delivered at the time a stock option is exercised shall be made available from
authorized and unissued shares of the Company's Common Stock. If any outstanding
option granted under the Director Option Plan expires prior to its exercise for
any reason, then the shares of Common Stock subject to such unexercised option
shall be available for future grants of options under the Director Option Plan.
The Board of Directors may in its discretion make such proportionate
adjustments in the number of shares available under the Director Option Plan;
the number of shares of Common Stock subject to, and the exercise price of,
stock options outstanding under the Director Option Plan; and such other
adjustments as are required, to prevent any dilution or enlargement of rights
that would otherwise result from any reorganization, merger, recapitalization,
stock split, stock dividend, or similar change in the capital structure of the
Company.
The following table sets forth certain information regarding the
allocation of shares under the Director Option Plan subsequent to the date of
the amendment that is the subject of this Proposal 3.
NEW PLAN BENEFITS
1993 DIRECTOR STOCK OPTION PLAN
OPTIONS EXERCISE EXPIRATION
NAME AND POSITION GRANTED (#) PRICE ($/Sh) DATE
- ----------------- ----------- ------------ ----------
Directors who are not
executive officers, as a group 75,000 (1)(2) (1)(3) (2)
- ----------------------
(1) Includes options for 24,000 shares granted in April 1997 at an exercise
price of $5.84 per share, options for 4,000 shares granted in February
1998 at an exercise price of $24.01 per share, options for 24,000 shares
to be granted at the date of the Annual Meeting, and 23,000 shares
available for future grants.
(2) Each option is vested in full at the date of grant, becomes exercisable
six months after the date of grant, and expires five years after the date
of grant.
(3) The exercise price of options granted under the Plan is 85% of the fair
market value at the date of grant.
Each option granted under the Director Option Plan is evidenced by an
option agreement executed on behalf of the Company and by the Eligible Director
to whom such option is granted. The exercise price per share for each option
granted under the Director Option Plan is equal to 85% of the "fair market
value" (as that term is defined in the Director Option Plan) of a share of
Common Stock on the date such option is granted. At March 17, 1998, the closing
price for the Company's Common Stock as reported on The Nasdaq Stock Market was
$29.00 per share. Options granted under the Director Option Plan are fully
vested when granted but cannot be exercised until six months following the date
of grant. Options granted under the Director Option Plan are not assignable or
transferrable during the lifetime of the Eligible Director, and are exercisable
during an Eligible Director's lifetime only by the Eligible Director. After the
death of an Eligible Director, such options may be transferred by will or the
laws of descent and distribution and may be exercised by the executors or
administrators of the Eligible Director's estate or by the person to whom the
Eligible Director's rights under the option pass by will or the laws of descent
and distribution.
Payment for the exercise price of options granted under the Director
Option Plan may be made in cash, by delivery of shares of Common Stock of the
Company having an aggregate fair market value on the date of exercise which is
not less than the exercise price of the option, or by a combination thereof.
The Board of Directors may suspend or terminate the Director Option Plan
or any portion thereof at any time, and the Board may amend the Director Option
Plan in any respect subject, in certain circumstances, to the approval of the
Company's shareholders. However, no termination, suspension, or amendment of the
Director Option Plan may alter any option outstanding thereunder without the
consent of the holder of such option. Unless terminated by earlier action of the
Board, the Director Option Plan will terminate on September 7, 2003, and no
option can be granted under the Director Option Plan after such date. However,
options outstanding upon termination of the Director Option Plan may continue to
be exercised in accordance with their terms.
TAX TREATMENT
All options granted under the Director Option Plan will be non-statutory
options not entitled to special tax treatment under Section 422 of the Code, as
amended. For a more detailed discussion of the tax treatment of these options,
see the discussion under "Federal Income Tax Consequences" in Proposal 2.
SHAREHOLDER APPROVAL
The affirmative vote of a majority of the shares of Common Stock
represented at the Annual Meeting either in person or by proxy, assuming a
quorum is present, is required to approve the amendment to the Director Option
Plan increasing the number of shares subject to each option granted thereunder.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE
FOR APPROVAL OF THE AMENDMENT TO THE 1993 DIRECTOR STOCK OPTION PLAN
AS SET FORTH IN PROPOSAL 3.
RATIFICATION OF THE APPOINTMENT
OF INDEPENDENT AUDITORS
(PROPOSAL 4)
The Board of Directors has appointed the firm of Ernst & Young LLP as
independent auditors for the fiscal year ending December 31, 1998. The firm of
Ernst & Young LLP has served as the Company's auditors since 1986. A
representative of Ernst & Young LLP will be present at the Annual Meeting, will
have an opportunity to make a statement if he desires to do so, and will be
available to respond to appropriate questions from shareholders.
All proxies received in response to this solicitation will be voted in
favor of the ratification of the appointment of the independent auditors, unless
other instructions are indicated thereon.
SHAREHOLDER APPROVAL
The affirmative vote of a majority of the shares of Common Stock
represented at the Annual Meeting either in person or by proxy, assuming a
quorum is present, is required to ratify the appointment of Ernst & Young LLP as
independent auditors for the Company for the year ending December 31, 1998.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS INDEPENDENT AUDITORS AS
SET FORTH IN PROPOSAL 4.
PROPOSALS OF SHAREHOLDERS
Any shareholder wishing to have a proposal considered for inclusion in the
Company's proxy solicitation materials for the Annual Meeting of Shareholders to
be held in 1999 must set forth such proposal in writing and file it with the
Secretary of the Company no later than November 20, 1998. Shareholders are also
required to comply with the provisions of the Company's Bylaws with respect to
any proposal to be presented at the 1999 Annual Meeting of Shareholders of the
Company.
The Company's Bylaws provide that, except for shareholder proposals filed
in accordance with the proxy rules promulgated under the Exchange Act, a
shareholder seeking to bring new business before an annual meeting is required
to comply with the provisions described below. The Bylaws require that
shareholder proposals for new business, together with certain accompanying
information, be filed with the Company no less than 60 nor more than 90 days
prior to the scheduled annual meeting, provided that the Company has given at
least 70 days' notice of such meeting. If the Company has not given at least 70
days' notice, shareholder proposals must be submitted no later than the tenth
day following the earlier
of the date that notice of the date of the annual meeting was mailed to the
shareholders or the day on which public disclosure of such date was made. The
Bylaws require that the shareholder's notice set forth as to each proposal (i) a
description of and the reasons for such proposal, (ii) the names and addresses
of the shareholder making the proposal and of any shareholders known to be
supporting the proposal, (iii) such persons' beneficial ownership of the
Company's stock, and (iv) any financial interest in the proposal of the
shareholder offering the proposal. If the information supplied by the
shareholder is deficient in any material aspect, the Board of Directors may
reject the shareholder proposal. The shareholder may cure the deficiency within
five days after notification. The Board of Directors determines whether the
deficiency has been cured by the shareholder.
Shareholders are also required to comply with the provisions of the
Company's Bylaws with respect to any nomination of candidates for election as
directors at such Annual Meeting. See "Information Concerning Directors,
Nominees and Executive Officers - Nomination of Directors."
OTHER BUSINESS
At the date of this Proxy Statement, management knows of no other business
that may properly come before the Annual Meeting. However, if any other matters
properly come before the meeting, the persons named in the enclosed form of
proxy will vote the proxies received in response to this solicitation in
accordance with their best judgment on such matters.
FINANCIAL INFORMATION
The Company's 1997 Annual Report to Shareholders, including, but not
limited to, the balance sheets as of December 31, 1997 and 1996 and the related
statements of operations, changes in shareholders' equity and cash flows for the
years ended December 31, 1997, 1996 and 1995, accompanies these materials. A
copy of the 1997 Annual Report to Shareholders may be obtained without charge
upon request to the Company. In addition, the Company will provide without
charge to any shareholder solicited hereby, upon written request of such
shareholder, a copy of its 1997 Annual Report on Form 10-K filed with the
Securities and Exchange Commission. Requests should be directed to the Chief
Financial Officer, Recovery Engineering, Inc., 9300 North 75th Avenue,
Minneapolis, Minnesota 55428.
By Order of the Board of Directors
Eric O. Madson, SECRETARY
March 20, 1998
RECOVERY ENGINEERING, INC.
1994 STOCK OPTION AND INCENTIVE PLAN
The purpose of the Recovery Engineering, Inc. 1994 Stock Option and
Incentive Plan (the "Plan") is to promote the growth and profitability of
Recovery Engineering, Inc. (the "Company") and its Affiliates by providing its
employees, consultants and other service providers with an incentive to achieve
long-term corporate objectives, to attract and retain persons of outstanding
competence, and to provide such persons with an equity interest in the Company.
1. STOCK SUBJECT TO PLAN. An aggregate of 350,000 shares (the "Shares")
of the Common Stock, par value $.0l per share ("Common Stock"), of the Company
may be subject to awards granted under the Plan. The number of shares authorized
for issuance under the Plan may be increased from time to time by approval of
the Board of Directors and, if required pursuant to Rule 16b-3 under the
Securities Exchange Act of 1934 or the applicable rules of any securities
exchange or the NASD, the shareholders of the Company. Such Shares may be
authorized but unissued Common Stock or authorized and issued Common Stock that
has been or may be acquired by the Company. Shares that are subject to an award
which expires or is terminated unexercised, or which are reacquired by the
Company upon the forfeiture of restricted Shares, shall again be available for
issuance under the Plan.
2. ADMINISTRATION.
a. COMMITTEE. The Plan shall be administered by the
Compensation Committee (the "Committee") of the Board of Directors of
the Company (the "Board"). The Committee shall be comprised of the
entire Board or, if the Board so determines, of two or more members of
the Board.
b. POWERS AND DUTIES. The Committee shall have the authority
to make rules and regulations governing the administration of the Plan;
to select the eligible employees, consultants and other service
providers to whom awards shall be granted; to determine the type,
amount, size, and terms of awards; to determine the time when awards
shall be granted; to determine whether any restrictions shall be placed
on Shares purchased pursuant to any option or issued pursuant to any
award; and to make all other determinations necessary or advisable for
the administration of the Plan. The Committee's determinations need not
be uniform, and may be made by it selectively among persons who are
eligible to receive awards under the Plan, whether or not such persons
are similarly situated. All interpretations, decisions, or
determinations made by the Committee pursuant to the Plan shall be
final and conclusive.
3. ELIGIBILITY; PARTICIPANTS.
a. Any person who provides services to the Company or any of
its Affiliates as an employee, consultant or other service provider
shall be eligible to receive awards under the Plan. Eligible persons
may be selected to receive awards individually or by group or category
(for example, by pay grade) as the Committee may determine. The
selection of officers of the Company to receive awards under the Plan
and the terms of
any award granted to such officers shall be approved by the Committee.
The Committee, in its sole discretion, may delegate to one or more
officers of the Company the authority to select persons who are not
officers to receive awards under the Plan and to establish the terms of
awards granted to such persons.
b. A person who has been granted an award under this Plan, or
under any predecessor plan, may be granted additional awards if the
Committee shall so determine. Except to the extent otherwise provided
in the agreement evidencing an award, the granting of an award under
this Plan shall not affect any outstanding award previously granted
under this Plan or under any other plan of the Company or any
Affiliate.
c. For purposes of this Plan, the term "Affiliate" shall mean
any "parent corporation" or "subsidiary corporation" of the Company, as
those terms are defined in Sections 424(e) and 424(f) of the Internal
Revenue Code of 1986, as amended.
4. AWARDS. The Committee may make awards to eligible persons in the
form of stock options which are intended to qualify as "Incentive Stock Options"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, or stock options which are not intended to so qualify ("Non-qualified
Options"), or awards of restricted stock, or any combination thereof.
5. STOCK OPTIONS. A stock option granted pursuant to the Plan shall
entitle the optionee, upon exercise, to purchase Shares at a specified price
during a specified period. Options shall be subject to such terms and conditions
as the Committee shall from time to time approve; provided, that each option
shall be subject to the following requirements:
a. TYPE OF OPTION. Each option shall be identified in the
agreement pursuant to which it is granted as an Incentive Stock Option
or as a Non-qualified Option, as the case may be.
b. TERM. No option shall be exercisable more than 121 months
after the date on which it is granted.
c. PAYMENT. The purchase price of Shares subject to an option
shall be payable in full at the time the option is exercised. Payment
may be made in cash, in shares of Common Stock having an aggregate fair
market value on the date of exercise which is not less than the option
price, or by a combination of cash and such shares, as the Committee
may determine, and subject to such terms and conditions as the
Committee deems appropriate.
d. OPTIONS NOT TRANSFERABLE. Options shall not be transferable
except to the extent permitted by the agreement evidencing such option;
provided, that in no event shall any option be transferable by the
optionee, other than by will or the laws of descent and distribution.
Options shall be exercisable during an optionee's lifetime only by such
optionee. If, pursuant to the agreement evidencing any option, such
option remains exercisable after the optionee's death, it may be
exercised, to the extent permitted by such agreement, by the personal
representative of the optionee's estate or by any person
who acquired the right to exercise such option by bequest, inheritance,
or otherwise by reason of the optionee's death.
e. INCENTIVE STOCK OPTIONS. If an option is an Incentive Stock
Option, it shall be subject to the following additional requirements:
i. Incentive Stock Options may be granted only to
persons who are employees of the Company or of an Affiliate.
ii. The purchase price of Shares that are subject to
an Incentive Stock Option shall not be less than 100% of the
fair market value of such Shares at the time the option is
granted, as determined in good faith by the Committee.
iii. The aggregate fair market value (determined at
the time the option is granted) of the Shares with respect to
which Incentive Stock Options are exercisable by the optionee
for the first time during any calendar year, under this Plan
or any other plan of the Company or any Affiliate, shall not
exceed $100,000.
iv. An Incentive Stock Option shall not be
exercisable more than ten years after the date on which it is
granted.
v. The purchase price of Shares that are subject to
an Incentive Stock Option granted to an employee who, at the
time such option is granted, owns 10% or more of the total
combined voting power of all classes of stock of the Company
or of any Affiliate shall not be less than 110% of the fair
market value of such Shares on the date such option is
granted, and such option may not be exercisable more than five
years after the date on which it is granted. For the purposes
of this subparagraph, the rules of Section 424(d) of the Code
shall apply in determining the stock ownership of any
employee.
Subject to the foregoing, options may be made exercisable in one or more
installments, upon the happening of certain events, upon the fulfillment of
certain conditions, or upon such other terms and conditions as the Committee
shall determine.
6. RESTRICTED STOCK. Restricted stock awards granted pursuant to the
Plan shall entitle the holder to receive Shares, subject to forfeiture if
specified conditions are not satisfied at the end of a specified period.
Restricted stock awards shall be subject to such terms and conditions as the
Committee shall from time to time approve; provided, that each award shall be
subject to the following requirements:
a. RESTRICTED PERIOD. The Committee shall establish a period
(the "Restricted Period") at the time an award is granted during which
the holder will not be permitted to sell, transfer, pledge, encumber,
or assign the Shares subject to the award. The Committee may provide
for the lapse of restrictions in installments, or upon the occurrence
of certain events, where deemed appropriate. Any attempt by a holder to
dispose of restricted Shares in a manner contrary to the applicable
restrictions shall be void, and of no force and effect.
b. RIGHTS DURING RESTRICTED PERIOD. Except to the extent
otherwise provided in this paragraph 6 or under the terms of any
restricted stock agreement, during the Restricted Period the holder of
restricted Shares shall have all of the rights of a shareholder in the
Company with respect to such Shares, including the right to vote the
Shares and to receive dividends and other distributions with respect to
the Shares; provided, that all stock dividends, stock rights, and stock
issued upon split-ups or reclassifications of Shares shall be subject
to the same restrictions as the Shares with respect to which such stock
dividends, rights, or additional stock are issued, and may be held in
custody as provided below in this paragraph 6 until the restrictions
thereon shall have lapsed.
c. FORFEITURES. Except to the extent otherwise provided in the
restricted stock agreement, all Shares then subject to any restriction
shall be forfeited to the Company without further obligation of the
Company to the holder thereof, and all rights of the holder with
respect to such Shares shall terminate, if the holder shall cease to
provide services to the Company and its Affiliates as an employee,
consultant or other service provider, or if any condition established
by the Committee for the release of any restriction shall not have
occurred, prior to the expiration of the Restricted Period.
d. CUSTODY. The Committee may provide that the certificates
evidencing restricted Shares shall be held in custody by a bank or
other institution, or by the Company or any Affiliate, until the
restrictions thereon have lapsed, and may require that the holder of
any restricted Shares shall have delivered to the Company one or more
stock powers, endorsed in blank, relating to the restricted Shares as a
condition of receiving the award.
e. CERTIFICATES. A recipient of a restricted stock award shall
be issued a certificate or certificates evidencing the Shares subject
to such award. Such certificates shall be registered in the name of the
recipient, and may bear an appropriate legend referring to the terms,
conditions, and restrictions applicable to such award, which legend
shall be in substantially the following form:
"The transferability of this certificate and the
shares represented hereby are subject to the terms
and conditions (including forfeiture) of the
Recovery Engineering, Inc. 1994 Stock Option and
Incentive Plan and an Agreement entered into between
the registered owner and Recovery Engineering, Inc.
Copies of such Plan and Agreement are on file in the
offices of Recovery Engineering, Inc."
f. GIFTS, ETC. Notwithstanding any other provision of this
paragraph 6, the Committee may permit a gift of restricted stock to the
holder's spouse, child, stepchild, grandchild, or legal dependent, or
to a trust whose sole beneficiary or beneficiaries shall be the holder
and/or any one or more of such persons; provided, that the donee shall
have entered into an agreement with the Company pursuant to which it
agrees that the
restricted stock shall be subject to the same restrictions in the hands
of such donee as it was in the hands of the donor.
7. AGREEMENTS. Each option or award granted pursuant to the Plan shall
be evidenced by an agreement setting forth the terms and conditions upon which
it is granted. Multiple options or awards may be evidenced by a single
agreement. Subject to the limitations set forth in the Plan, the Committee may,
with the consent of the person to whom an award has been granted, amend any such
agreement to modify the terms or conditions governing the award evidenced
thereby.
8. ADJUSTMENTS. In the event of any change in the outstanding Shares of
Common Stock by reason of any stock dividend or split, recapitalization,
reclassification, combination, or exchange of Shares or other similar corporate
change, then if the Committee shall determine, in its sole discretion, that such
change necessarily or equitably requires an adjustment in the number of Shares
subject to an award, in the option price or value of an award, or in the maximum
number of Shares subject to this Plan, such adjustments shall be made by the
Committee and shall be conclusive and binding for all purposes of this Plan. No
adjustment shall be made in connection with the issuance by the Company of any
warrants, rights, or options to acquire additional Common Stock or of securities
convertible into Common Stock.
9. MERGER, CONSOLIDATION, REORGANIZATION, LIQUIDATION, ETC. Subject to
the provisions of the agreement evidencing any award, if the Company shall
become a party to any corporate merger, consolidation, major acquisition of
property for stock, reorganization, or liquidation, the Board of Directors of
the Company shall have the power to make any arrangement it deems advisable with
respect to outstanding awards and in the number of Shares subject to this Plan,
which shall be binding for all purposes of this Plan, including, but not limited
to, the substitution of new awards for any awards then outstanding, the
assumption of any such awards, and the termination of such awards.
10. EXPENSES OF PLAN. The expenses of administering this Plan shall be
borne by the Company and its Affiliates.
11. RELIANCE ON REPORTS. Each member of the Committee and each member
of the Board of Directors shall be fully justified in relying or acting in good
faith upon any report made by the independent public accountants of the Company
and its Affiliates and upon any other information furnished in connection with
this Plan by any person or persons other than himself. In no event shall any
person who is or shall have been a member of the Committee or of the Board of
Directors be liable for any determination made or other action taken or omitted
in reliance upon any such report or information, or for any action taken or
omitted, including the furnishing of information, in good faith.
12. RIGHTS AS SHAREHOLDER. Except to the extent otherwise specifically
provided hereon, no recipient of any award shall have any rights as a
shareholder with respect to Shares sold or issued pursuant to the Plan until
certificates for such Shares have been issued to such person.
13. GENERAL RESTRICTIONS. Each award granted pursuant to the Plan shall
be subject to the requirement that if, in the opinion of the Committee, the
listing, registration, or qualification of any Shares related thereto upon any
securities exchange or under any state or federal law, the consent or approval
of any regulatory body, or an agreement by the recipient with respect to the
disposition of any such Shares, is necessary or desirable as a condition of the
issuance or sale of such Shares, such award shall not be consummated unless and
until such listing, registration, qualification, consent, approval, or agreement
is effected or obtained in form satisfactory to the Committee.
14. EMPLOYMENT RIGHTS. Nothing in this Plan, or in any agreement
entered into hereunder, shall confer upon any person the right to continue to
provide services to the Company or an Affiliate as an employee, consultant or
other service provider, or affect the right of the Company or Affiliate to
terminate such person's service at any time, with or without cause.
15. WITHHOLDING. If the Company proposes or is required to issue Shares
pursuant to the Plan, it may require the recipient to remit to it, or may
withhold from such award or from the recipient's other compensation, an amount,
in the form of cash or Shares, sufficient to satisfy any applicable federal,
state, or local tax withholding requirements prior to the delivery of any
certificates for such Shares.
16. AMENDMENTS. The Board of Directors of the Company may at any time,
and from time to time, amend the Plan in any respect, except that no amendment
that would:
a. materially increase the benefits accruing to participants
under the Plan;
b. increase the number of Shares available for issuance or
sale pursuant to the Plan (other than as permitted by paragraphs 8 and
9); or
c. materially modify the requirements as to eligibility for
participation in the Plan;
shall be made without the affirmative vote of shareholders holding at least a
majority of the voting stock of the Company represented in person or by proxy at
a duly held shareholders' meeting.
17. IMMEDIATE ACCELERATION OF AWARDS. Notwithstanding any provision in
this Plan or in any award to the contrary, the restrictions on all shares of
restricted stock shall lapse immediately and all outstanding options will become
exercisable immediately if, subsequent to the Effective Date of this Plan, any
of the following events occur:
a. Any person or group of persons, other than the shareholders
of record of the Company as of the date of this Plan is adopted by the
Board, becomes the beneficial owner of 30% or more of any equity
security of the Company entitled to vote for the election of directors;
b. A change in the composition of the Board within any
consecutive two-year period such that the "Continuing Directors" cease
to constitute a majority of the board.
For purposes of this event, the "Continuing Directors" shall mean those
members of the Board who either: (i) were directors at the beginning of
such two-year period, or (ii) were elected by, or on nominations or
recommendations of, a majority of the then-existing Board members; or
c. The shareholders of the Company approve an agreement to
merge or consolidate with or into another corporation or an agreement
to sell or otherwise dispose of all or substantially all of the
Company's assets (including a plan of liquidation).
For purposes of this paragraph 17, beneficial ownership by a person or
group of persons shall be determined in accordance with Regulation 13D (or any
similar successor regulation) promulgated by the Securities and Exchange
Commission pursuant to the 1934 Act. Beneficial ownership of more than 30% of an
equity security may be established by any reasonable method, but shall be
presumed conclusively to exist as to any person who files a Schedule 13D report
with the Securities and Exchange Commission reporting such ownership. If the
restrictions and forfeiture periods are eliminated by reason of subparagraph a.,
the limitations of this Plan shall not become applicable again should the person
cease to own 30% or more of any equity security of the Company.
A participant shall not be entitled to the immediate acceleration of an
award as provided in this paragraph 17 if such acceleration would, with respect
to the participant, constitute a "parachute payment" for purposes of Internal
Revenue Code Section 280G, or any successor provision. The participant shall
have the right to designate those awards which would be reduced or eliminated so
that the participant will not receive a "parachute payment."
Prior to the occurrence of one of the events described in subparagraph
a., b. or c. above, the participant shall have no rights under this paragraph
17, and the Board shall have the power and right, within its sole discretion, to
rescind, modify or amend this paragraph 17 without any consent of the
participant. In all other cases, and notwithstanding the authority granted to
the Board or the Committee, as the case may be, to exercise discretion in
interpreting, administering, amending or terminating this Plan, neither the
Board nor the Committee shall, following the occurrence of one of the events
described in subparagraph a., b. or c. above, have the power to exercise such
authority or otherwise take any action which is inconsistent with the provisions
of this paragraph 17.
18. SHAREHOLDER APPROVAL. The Plan shall be subject to approval by the
shareholders holding at least a majority of the voting stock of the Company
represented in person or by proxy and voting thereon at a duly held
shareholders' meeting, and any award granted under the Plan prior to the date of
such approval shall be contingent upon such approval.
19. EFFECTIVE DATE; DURATION. This Plan shall be effective as of
January 31, 1994, subject to shareholder approval of the Plan as described above
on or before January 31, 1995. No options or rights shall be granted under the
Plan after the earlier of (a) the date on which the Plan is terminated by the
Board of Directors of the Company; or (b) January 31, 2004. Options or rights
outstanding at the termination of the Plan may continue to be exercised in
accordance with their terms after such termination.
FIRST AMENDMENT TO THE
RECOVERY ENGINEERING, INC.
1994 STOCK OPTION AND INCENTIVE PLAN
January 31, 1995
RECITALS:
A. The Recovery Engineering, Inc. 1994 Stock Option and Incentive Plan
(the "Plan") was adopted by the Board of Directors of Recovery
Engineering, Inc. (the "Company") on January 31, 1994, and was approved
by the shareholders of the Company on April 12, 1994. The Plan is now
in full force and effect.
B. The Company desires to amend the Plan to increase the number of shares
of common stock available for issuance under the Plan.
AMENDMENT:
THEREFORE, the Plan is hereby amended as follows:
1. The first sentence of paragraph 1 of the Plan is hereby amended to read
as follows:
"1. Stock Subject to Plan. An aggregate of 700,000 shares of
the Common Stock, par value $.01 per share, ("Common Stock") of the
Company may be subject to awards granted under the Plan."
2. The foregoing amendment shall be effective as of January 31, 1995, and
shall be subject to approval by the shareholders of the Company at its
next Annual or Special Meeting of shareholders.
SECOND AMENDMENT TO THE
RECOVERY ENGINEERING, INC.
1994 STOCK OPTION AND INCENTIVE PLAN
January 28, 1997
RECITALS:
A. The Recovery Engineering, Inc. 1994 Stock Option and Incentive Plan
(the "Plan") was adopted by the Board of Directors of Recovery
Engineering, Inc. (the "Company") on January 31, 1994, and was approved
by the shareholders of the Company on April 12, 1994. The First
Amendment to the Plan, increasing the number of shares of common stock
available for issuance under the Plan from 350,000 shares to 700,000
shares, was adopted by the Board of Directors on January 31, 1995, and
was approved by the shareholders of the Company on April 25, 1995. The
Plan, as amended, is now in full force and effect.
B. The Company desires to amend the Plan to further increase the number of
shares of common stock available for issuance under the Plan.
AMENDMENT:
THEREFORE, the Plan is hereby amended as follows:
1. The first sentence of paragraph 1 of the Plan is hereby amended to read
as follows:
"1. Stock Subject to Plan. An aggregate of 800,000 shares of
the Common Stock, par value $.01 per share, ("Common Stock") of the
Company may be subject to awards granted under the Plan."
2. The foregoing amendment shall be effective as of January 28, 1997, and
shall be subject to approval by the shareholders of the Company at its
next Annual or Special Meeting of shareholders.
THIRD AMENDMENT TO THE
RECOVERY ENGINEERING, INC.
1994 STOCK OPTION AND INCENTIVE PLAN
April 24, 1997
RECITALS:
A. The Recovery Engineering, Inc. 1994 Stock Option and Incentive Plan
(the "Plan") was adopted by the Board of Directors of Recovery
Engineering, Inc. (the "Company") on January 31, 1994, and was approved
by the shareholders of the Company on April 12, 1994. The First
Amendment to the Plan, increasing the number of shares of common stock
available for issuance under the Plan from 350,000 shares to 700,000
shares, was adopted by the Board of Directors on January 31, 1995, and
was approved by the shareholders of the Company on April 25, 1995. The
Second Amendment to the Plan, increasing the number of shares of common
stock available for issuance under the Plan from 700,000 shares to
800,000 shares, was adopted by the Board of Directors on January 28,
1997, and was approved by the shareholders of the Company on April 24,
1997. The Plan, as amended, is now in full force and effect.
B. The Company desires to amend the Plan to further increase the number of
shares of common stock available for issuance under the Plan.
AMENDMENT:
THEREFORE, the Plan is hereby amended as follows:
1. The first sentence of paragraph 1 of the Plan is hereby amended to read
as follows:
"1. Stock Subject to Plan. An aggregate of 850,000 shares of
the Common Stock, par value $.01 per share, ("Common Stock") of the
Company may be subject to awards granted under the Plan."
2. The foregoing amendment shall be effective as of April 24, 1997, and
shall be subject to approval by the shareholders of the Company at its
next Annual or Special Meeting of shareholders.
FOURTH AMENDMENT TO THE
RECOVERY ENGINEERING, INC.
1994 STOCK OPTION AND INCENTIVE PLAN
August 5, 1997
RECITALS:
A. The Recovery Engineering, Inc. 1994 Stock Option and Incentive Plan
(the "Plan") was adopted by the Board of Directors of Recovery
Engineering, Inc. (the "Company") on January 31, 1994, and was approved
by the shareholders of the Company on April 12, 1994. The First
Amendment to the Plan, increasing the number of shares of common stock
available for issuance under the Plan from 350,000 shares to 700,000
shares, was adopted by the Board of Directors on January 31, 1995, and
was approved by the shareholders of the Company on April 25, 1995. The
Second Amendment to the Plan, increasing the number of shares of common
stock available for issuance under the Plan from 700,000 shares to
800,000 shares, was adopted by the Board of Directors on January 28,
1997, and was approved by the shareholders of the Company on April 24,
1997. The Third Amendment to the Plan, increasing the number of shares
of common stock available for issuance under the Plan from 800,000
shares to 850,000 shares, was adopted by the Board of Directors on
April 24, 1997, and is to be submitted to the shareholders of the
Company for approval at the next Annual or Special Meeting of
shareholders. The Plan, as amended, is now in full force and effect,
subject to approval of the Third Amendment to the Plan by the
shareholders of the Company.
B. The Company desires to amend the Plan to further increase the number of
shares of common stock available for issuance under the Plan.
AMENDMENT:
THEREFORE, the Plan is hereby amended as follows:
1. The first sentence of paragraph 1 of the Plan is hereby amended to read
as follows:
"1. Stock Subject to Plan. An aggregate of 1,050,000 shares of
the Common Stock, par value $.01 per share, ("Common Stock") of the
Company may be subject to awards granted under the Plan."
2. The foregoing amendment shall be effective as of August 5, 1997, and
shall be subject to approval by the shareholders of the Company at its
next Annual or Special Meeting of shareholders.
RECOVERY ENGINEERING, INC.
1993 DIRECTOR STOCK OPTION PLAN
The purpose of the Recovery Engineering, Inc. 1993 Director Stock
Option Plan (the "Option Plan") is to attract and retain persons of outstanding
competence to serve on the Board of Directors of Recovery Engineering, Inc. (the
"Company").
1. ADMINISTRATION. The Option Plan will be administered by the Board of
Directors of the Company. Grants of stock options under the Option Plan
("Options") and the amount and nature of the Options so granted will be
automatic, as described below.
2. STOCK SUBJECT TO THE OPTION PLAN. An aggregate of 100,000 shares of
Common Stock, par value $.0l per share ("Common Stock"), of the Company are
reserved for issuance under the Option Plan. The number of shares authorized for
issuance under the Option Plan may be increased from time to time by approval of
the Board of Directors and, if required pursuant to Rule 16b-3 under the
Securities Exchange Act of 1934 or the applicable rules of any securities
exchange or the NASD, the shareholders of the Company. In the event of any
reorganization, merger, recapitalization, stock dividend, stock split, or
similar change in the corporate structure or shares of the Company, appropriate
adjustments will be made to the number and kind of shares reserved for issuance
under the Option Plan and pursuant to outstanding Options and to the exercise
price of outstanding Options.
3. AUTOMATIC OPTION GRANTS. Under the Option Plan, each non-employee
director will automatically be granted Options to purchase shares of Common
Stock as follows:
a. INITIAL OPTION GRANTS. Under the Option Plan, each current
and future non-employee director will be granted an initial Option (the
"Initial Grant") as follows:
i. CURRENT NON-EMPLOYEE DIRECTORS. Each person
serving as a non-employee director on the effective date of
the Option Plan will automatically be granted an Option on the
effective date to purchase the number of shares set forth
below:
Name Number of shares
---------------------- ----------------
Eugene E. Erickson 1,000 shares
John E. Gherty 2,000 shares
William F. Wanner, Jr. 1,000 shares
Ronald W. Weber 1,000 shares
Richard J. Zeckhauser 0 shares
ii. FUTURE NON-EMPLOYEE DIRECTORS. Each person who is
first elected or appointed to serve as a non-employee director
after the effective date of the Option Plan will automatically
be granted an Option on the date of his or her initial
election
or appointment to the Company's Board of Directors to purchase
1,000 shares of Common Stock.
b. ADDITIONAL OPTION GRANTS. Under the Option Plan, each
non-employee director will automatically be granted additional Options
to purchase shares of Common Stock as follows:
i. On the date of the first annual meeting of
shareholders occurring after the Initial Grant to a
non-employee director under the Option Plan, such non-employee
director, if reelected at such meeting, will automatically be
granted an additional Option to purchase 1,000 shares of
Common Stock.
ii. Thereafter, on the date of each subsequent annual
meeting of shareholders at which the non-employee director is
reelected to the Board of Directors, the non-employee director
shall automatically be granted an additional Option to
purchase 1,000 shares of Common Stock.
4. VESTING, EXERCISABILITY AND EXPIRATION. All Options granted under
the Option Plan shall be fully vested when granted, but may not be exercised
until six months following the date of grant. All Options granted under the
Option Plan shall expire five years after the date of grant.
5. TRANSFERABILITY. No Option granted under the Option Plan is
assignable or transferable during the lifetime of the director, either
voluntarily or involuntarily. Options shall be exercisable during a director's
lifetime only by such director. In the event of the death of a non-employee
director, Options granted under the Option Plan may be transferred by will or
the laws of descent and distribution and may only be exercised by the executors
or administrators of such director's estate or by the person or persons to whom
such director's rights under the Option shall pass by the director's will or the
laws of descent and distribution.
6. EXERCISE PRICE. The exercise price of Options granted under the
Option Plan shall be 85% of the fair market value of one share of Common Stock
on the date of grant; provided, however, that the exercise price of 1,000 of the
shares included in the initial option grant to Mr. Gherty shall be $2.50 per
share. For purposes of the Option Plan, "fair market value" is the average of
the high and low sales price of the Common Stock, as reported by the NASDAQ
National Market System on the date of grant. Payment for the exercise of Options
may be made in cash, by personal check payable to the Company, by delivery of
shares of Common Stock having an aggregate fair market value on the date of
exercise which is not less than the option price, or by a combination thereof.
7. PLAN AMENDMENT AND TERMINATION. The Board of Directors may suspend
or terminate the Option Plan or any portion thereof at any time, and may amend
the Option Plan from time to time in any respect, provided that no such
amendment will be effective without approval of the shareholders, if shareholder
approval is required pursuant to Rule 16b-3 under the Securities Exchange Act of
1934 or the applicable rules of any securities exchange or the NASD. To the
extent prohibited under Rule 16b-3 under the Securities Exchange Act of 1934,
the Option Plan may not be amended more than once every six months. No
termination, suspension or amendment of the
Option Plan will alter an outstanding Option without the consent of the holder
of such Option. Unless earlier terminated by action of the Board, the Option
Plan will terminate on September 7, 2003, and no Option shall be granted after
any such termination. Options outstanding upon termination of the Option Plan
may continue to be exercised in accordance with their terms.
8. COMPLIANCE WITH SEC REGULATIONS. It is the Company's intent that the
Option Plan comply in all respects with Rule 16b-3 of the Act and any
regulations promulgated thereunder. If any provision of this plan is later found
not to be in compliance with the Rule, the provision shall be deemed null and
void. All grants and exercises of Options under the Option Plan shall be
executed in accordance with the requirements of Section 16 of the Act, as
amended, and any regulations promulgated thereunder.
9. SHAREHOLDER APPROVAL. The Option Plan shall be subject to approval
by the shareholders holding at least a majority of the voting stock of the
Company represented in person or by proxy at a duty held shareholders' meeting,
and any Option granted under the Option Plan prior to the date of such approval
shall be contingent upon such approval.
10. EFFECTIVE DATE. This Option Plan shall be effective as of September
7, 1993, subject to shareholder approval of the Option Plan as described above
on or before September 7, 1994.
11. MISCELLANEOUS. Except as otherwise provided herein, no non-employee
director shall have any claim or right to be granted an Option under the Option
Plan. Neither the Option Plan nor any action hereunder shall be construed as
giving any director any right to be retained in the service of the Company.
FIRST AMENDMENT TO THE
RECOVERY ENGINEERING, INC.
1993 DIRECTOR STOCK OPTION PLAN
April 24, 1997
RECITALS:
A. The Recovery Engineering, Inc. 1993 Director Stock Option Plan (the
"Plan") was adopted by the Board of Directors of Recovery Engineering,
Inc. (the "Company") on September 7, 1993, and was approved by the
shareholders of the Company on April 12, 1994. The Plan is now in full
force and effect.
B. This First Amendment is adopted in order to increase the number of
shares subject to each option hereafter granted under the Plan.
AMENDMENT:
THEREFORE, the Plan is hereby amended as follows:
1. Amendment No. 1: Section 3.a.ii of the Plan is hereby amended to read
as follows:
"ii. FUTURE NON-EMPLOYEE DIRECTORS. Each person who
is first elected or appointed to serve as a non-employee
director on or after the effective date of the First Amendment
to the Option Plan will automatically be granted an Option on
the date of his or her initial election or appointment to the
Company's Board of Directors to purchase 4,000 shares of
Common Stock."
2. Amendment No. 2: Section 3.b of the Plan is hereby amended to read as
follows:
"b. ADDITIONAL OPTION GRANTS. Under the Option Plan, each
non-employee director will automatically be granted additional Options
to purchase shares of Common Stock as follows:
"i. On the date of the first annual meeting of
shareholders occurring (A) after the Initial Grant to a
non-employee director under the Option Plan and (B) on or
after the effective date of the First Amendment to the Option
Plan, such non-employee director, if reelected at such
meeting, will automatically be granted an additional Option to
purchase 4,000 shares of Common Stock.
"ii. Thereafter, on the date of each subsequent
annual meeting of shareholders at which the non-employee
director is reelected to the Board of Directors, the
non-employee director will automatically be granted an
additional Option to purchase 4,000 shares of Common Stock."
3. Effective Date. This First Amendment shall be effective as of April 24,
1997, and with respect to Options granted under the Plan on or after
such effective date. If shareholder approval of this First Amendment is
required pursuant to Rule 16b-3 under the Securities Act of 1934 or the
applicable rules of any securities exchange or the NASD, then this
First Amendment and any Option granted under the Plan on or after the
date of this First Amendment (but only to the extent of the additional
shares which are subject to such Option as a result of this First
Amendment) shall be subject to and contingent upon such shareholder
approval.
PROXY
RECOVERY ENGINEERING, INC.
PROXY SOLICITED BY BOARD OF DIRECTORS
FOR ANNUAL MEETING OF SHAREHOLDERS
APRIL 23, 1998
The undersigned, revoking all prior proxies, hereby appoints Brian F. Sullivan
and William F. Wanner, Jr., or either of them, as proxy or proxies, with full
power of substitution and revocation, to vote all shares of Common Stock of
Recovery Engineering, Inc. (the "Company") of record in the name of the
undersigned at the close of business on March 17, 1998, at the Annual Meeting of
Shareholders to be held on Thursday, April 23, 1998, or at any adjournment
thereof, upon the following matters:
1. Election of the following nominees as directors:
ROBERT R. GHEEWALLA, JOHN E. GHERTY, SANJAY H. PATEL, BRIAN F. SULLIVAN,
WILLIAM D. THOMPSON, WILLIAM F. WANNER, JR., RICHARD J. ZECKHAUSER
[_] FOR ALL NOMINEES [_] WITHHOLD FOR ALL NOMINEES
[_] FOR ALL NOMINEES EXCEPT THE FOLLOWING:
(Write the name(s) of the nominee(s) withheld in the space provided
below.)
----------------------------------------------------------------------
2. Approval of amendment to the 1994 Stock Option and Incentive Plan to
increase the number of shares reserved for issuance thereunder.
[_] FOR [_] AGAINST [_] ABSTAIN
3. Approval of amendment to the 1993 Director Stock Option Plan to increase
the number of shares subject to each option granted thereunder.
[_] FOR [_] AGAINST [_] ABSTAIN
(CONTINUED ON OTHER SIDE)
(CONTINUED FROM OTHER SIDE)
4. Ratification of appointment of Ernst & Young LLP as independent auditors
for 1998.
[_] FOR [_] AGAINST [_] ABSTAIN
5. In their discretion the Proxies are authorized to vote upon such matters as
may properly come before the meeting.
Please mark, date, sign, and mail this proxy promptly in the enclosed envelope.
This proxy when properly executed will be voted in the manner directed herein by
the undersigned shareholder. If no direction is made, this proxy will be voted
FOR Proposals 1, 2, 3 and 4. The Board of Directors recommends a vote FOR
Proposals 1, 2, 3 and 4.
Please sign your name exactly as it appears below. In the case of shares owned
in joint tenancy or as tenants in common, all should sign. Fiduciaries should
indicate their title and authority.
Dated: , 1998.
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Signature(s)