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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 5, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 0-21232
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RECOVERY ENGINEERING, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1557115
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation organization)
9300 North 75th Avenue
Minneapolis, MN 55428
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 315-5500
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(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ___X___ No______
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.01 Par Value - 5,949,758 shares as of July 22, 1998
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RECOVERY ENGINEERING, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements (Unaudited):
Balance Sheets
July 5, 1998 and December 31, 1997............................... 3
Statements of Operations
Three and six-month periods ended July 5, 1998 and June 30, 1997. 4
Statements of Cash Flows
Six-month periods ended July 5, 1998 and June 30, 1997........... 5
Notes to Financial Statements.................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 11
Item 2. Changes in Securities and Use of Proceeds........................ 11
Item 3. Defaults upon Senior Securities.................................. 11
Item 4. Submission of Matters to a Vote of Security Holders.............. 11
Item 5. Other Information................................................ 11
Item 6. Exhibits and Reports on Form 8-K................................. 12
Signatures....................................................... 13
RECOVERY ENGINEERING, INC.
BALANCE SHEETS
(In thousands, except share data)
July 5, December 31,
1998 1997
--------- -----------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents ..................... $ 19,567 $ 261
Marketable securities ......................... 2,000 --
Accounts receivable (net of allowance of
$337 for 1998 and $314 for 1997) .............. 17,752 16,236
Inventory ..................................... 8,654 7,594
Other current assets .......................... 950 1,522
-------- --------
Total Current Assets ....................... 48,923 25,613
Property and equipment:
Tooling ....................................... 9,011 7,307
Equipment and fixtures ........................ 13,325 11,200
-------- --------
22,336 18,507
Less accumulated depreciation ................. 6,013 4,771
-------- --------
16,323 13,736
Deferred income taxes ............................ 1,512 1,512
Patents (net of accumulated amortization) ........ 737 732
Other assets ..................................... 432 676
-------- --------
Total assets ............................... $ 67,927 $ 42,269
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank line of credit ........................... $ -- $ 7,161
Accounts payable .............................. 4,684 8,336
Accrued facility relocation costs ............. 167 217
Accrued marketing expenses .................... 1,673 1,781
Accrued co-op advertising ..................... 1,720 2,138
Other accrued expenses ........................ 2,232 3,405
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Total current liabilities .................. 10,476 23,038
Long-term debt ................................... 15,000 15,000
Shareholders' equity:
Common stock, $.01 par value:
Authorized shares -- 100,000,000
Issued and outstanding shares:
1998 - 5,948,000 and 1997 - 4,548,000 ...... 59 45
Additional paid-in capital .................... 59,789 21,364
Note receivable from sale of stock ............ (498) (498)
Retained earnings (deficit) ................... (16,899) (16,680)
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Total shareholders' equity ................. 42,451 4,231
--------- --------
Total liabilities and shareholders' equity .... $ 67,927 $ 42,269
========= ========
See accompanying notes.
RECOVERY ENGINEERING, INC.
STATEMENTS OF OPERATIONS
(Unaudited - in thousands, except per share data)
Three months ended Six months ended
July 5, 1998 June 30, 1997 July 5, 1998 June 30, 1997
------------ ------------- ------------ -------------
Net sales .................................. $ 21,724 $ 15,462 $ 38,949 $ 25,809
Cost of products sold ...................... 10,626 8,461 19,659 14,653
-------- -------- -------- --------
Gross profit ............................... 11,098 7,001 19,290 11,156
Operating expenses:
Selling, general and administrative..... 8,857 7,457 16,722 12,613
Research and development ............... 1,089 704 2,100 1,458
-------- -------- -------- --------
9,946 8,161 18,822 14,071
-------- -------- -------- --------
Income (loss) from operations .............. 1,152 (1,160) 468 (2,915)
Other income (expense):
Interest income ........................ 207 -- 207 68
Interest expense ....................... (394) (332) (934) (543)
-------- -------- -------- --------
(187) (332) (727) (475)
-------- -------- -------- --------
Income (loss) before income taxes .......... 965 (1,492) (259) (3,390)
Income tax benefit (expense) ............... (145) -- 40 --
-------- -------- -------- --------
Net income (loss) .......................... $ 820 $ (1,492) $ (219) $ (3,390)
======== ======== ======== ========
Net income (loss) per share - basic ........ $ 0.15 $ (.33) $ (0.04) $ (.77)
======== ======== ======== ========
Weighted average shares - basic ............ 5,557 4,465 5,044 4,412
Net income (loss) per share - diluted ...... $ 0.14 $ (0.33) $ (0.04) $ (0.77)
======== ======== ======== ========
Weighted average shares - diluted .......... 7,200 4,465 5,044 4,412
See accompanying notes.
RECOVERY ENGINEERING, INC.
STATEMENTS OF CASH FLOWS
(Unaudited - in thousands)
Six months ended
July 5, 1998 June 30, 1997
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Operating activities
Net loss ...................................... $ (219) $ (3,390)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization ................. 1,308 864
Changes in operating assets and liabilities:
Accounts receivable ......................... (1,516) (3,815)
Inventory ................................... (1,060) (3,469)
Other assets ................................ 816 (102)
Accounts payable ............................ (3,652) (1,138)
Accrued expenses ............................ (1,749) 1,636
-------- --------
Net cash used in operating activities ......... (6,072) (9,414)
Investing activities
Purchase of property and equipment ............ (3,829) (2,424)
Sale of marketable securities ................. -- 1,542
Purchase of marketable securities ............. (2,000) --
Purchase of patents ........................... (71) (39)
-------- --------
Net cash used in investing activities ......... (5,900) (921)
Financing activities
Net proceeds (repayments) - bank line of credit (7,161) 3,788
Issuance of common stock ...................... 38,439 559
-------- --------
Net cash provided by financing activities ..... 31,278 4,347
-------- --------
Increase (decrease) in cash and cash equivalents ... 19,306 (5,988)
Cash and cash equivalents at beginning of period ... 261 5,988
-------- --------
Cash and cash equivalents at end of period ......... $ 19,567 $ --
======== ========
See accompanying notes.
RECOVERY ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
July 5, 1998
Note A -- Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and the instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the ninety-one and one
hundred eighty-six day periods ended July 5, 1998 are not necessarily indicative
of the results that may be expected for the fiscal year ending January 3, 1999,
or any other period. For further information, refer to the financial statements
and footnotes thereto for the year ended December 31, 1997 included in the
Company's latest annual report on Form 10-K.
In 1998, the Company's fiscal year will end on the Sunday closest to December 31
(January 3, 1999) and each quarter ends on the last Sunday of a thirteen week
period. As a result, the first quarters ended April 5, 1998 and March 31, 1997
included 95 and 90 days, respectively, and the second quarters ended July 5,
1998 and June 30, 1997 included 91 days. In the Company's opinion, this
difference in days does not materially affect the comparability of the financial
results of the periods presented.
Note B -- Inventory
The components of inventory consist of the following:
July 5, December 31,
1998 1997
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Raw materials $5,372,000 $5,456,000
Work in process 114,000 157,000
Finished products 3,168,000 1,981,000
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$8,654,000 $7,594,000
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Note C -- Net Loss Per Share
In 1997, the Financial Accounting Standards Board (FASB) issued Statement No.
128, EARNINGS PER SHARE. Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to Statement 128
requirements.
Note D -- Accounting Statements
In 1997, the FASB issued Statements No. 130, REPORTING COMPREHENSIVE INCOME, and
No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION,
effective for fiscal years beginning after December 15, 1997. The adoption by
the Company of these Statements in January 1998 did not have a material impact
on the Company's financial statements.
Note E -- Public Offering
The Company completed a public offering of Common Stock on April 28, 1998
netting approximately $33,200,000 from the sale of 1,190,000 shares. The Common
Stock was priced at $30.00 per share. All of the shares were sold by the
Company. On May 18, 1998, the underwriters purchased an additional 178,500
shares of Common Stock pursuant to the exercise of their overallotment option,
which resulted in additional net proceeds to the Company of approximately
$5,000,000.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Three and Six-Month Periods ended July 5, 1998)
RESULTS OF OPERATIONS:
Net sales increased 40.5% and 50.9% for the three and six-month periods ended
July 5, 1998 compared to the same periods the prior year. This growth is due to
increased sales of the Company's existing PUR household water filtration
products and the continued rollout of new products introduced at the
International Housewares Show in January. New products shipped this quarter
include the PUR PLUS pitcher, the PUR PLUS Dispenser and the PUR ULTIMATE faucet
mount water filter. The Company continued to expand its distribution base during
the 13-week period ended July 5, 1998, including the addition of 1,000 retail
outlets in the grocery channel and Office Max, a 700-store office supply chain.
PUR household water filter systems and replacement filters are now available at
over 29,700 retail outlets nationwide. Although sales increased for the three
and six-month periods ended July 5, 1998 compared to the same periods the prior
year, sales for the second quarter were affected by a delay in shipping the PUR
ULTIMATE faucet mount product and delays by certain retailers in getting the PUR
PLUS pour-through products properly displayed. In addition, the Company's main
competitor has recently announced aggressive marketing initiatives, which the
Company believes to be in response to its new product introductions. The Company
expects that these factors could adversely affect its results in the near term.
Gross profit margins increased to 51.1% and 49.5% for the three and six-month
periods ended July 5, 1998, respectively, compared to 45.3% and 43.2% for the
same periods in the prior year. This improvement was due to the implementation
of automated manufacturing and assembly processes, reductions in costs of
materials, and an increase in sales of higher-margin household products,
including replacement filter cartridges, as a percentage of total sales.
Selling, general and administrative expenses increased to $8.9 million (40.8% of
net sales) and $16.7 million (42.9% of net sales) for the three and six-month
periods ended July 5, 1998 from $7.5 million (48.2% of net sales) and $12.6
million (48.9% of net sales) for the three and six-month periods ended June 30,
1997. The increase in selling, general and administrative expenses was
attributable primarily to advertising and promotional expenses related to the
continued rollout and expansion of the Company's line of household water
filters. Selling expenses are expected to be above 1997 levels throughout the
remainder of the year to support the continued roll-out of the household
drinking water systems and product line extensions.
Research and development expense increased to $1,089,000 and $2,100,000 for the
three and six-month periods ended July 5, 1998, compared to $704,000 and
$1,458,000 for the three and six-month periods ended June 30, 1997, reflecting
the Company's commitment towards developing new products and technology.
Development of product line extensions and other
new products will require continued emphasis and increased spending on research
and development.
Other expenses were $187,000 and $727,000 for the three and six-month periods
ended July 5, 1998 compared to $332,000 and $475,000 for the three and six-month
periods ended June 30, 1997. The decrease in other expenses for the quarter
compared to the second quarter of 1997 is due to higher interest income for the
quarter because of the increased balance of cash and cash equivalents and
marketable securities as a result of the Company's public offering which was
completed April 28, 1998, as well as the proceeds from the overallotment option
completed May 18, 1998. The increase in other expense for the six-month period
ended July 5, 1998 compared to the same period last year is mostly due to
increased payments of interest on the Company's line of credit which was
established in March 1997.
The Company's effective income tax rate was 15% for the three and six-month
periods ended July 5, 1998, compared to 0% for the three and six-month periods
ended June 30, 1997. The Company has a $1,512,000 net deferred tax asset
primarily related to net operating loss carryforwards. The Company has recorded
a valuation allowance for the majority of its deferred tax asset due to the
uncertainty of future realization.
LIQUIDITY AND CAPITAL RESOURCES:
Cash used in operations was $6,072,000 for the six-month period ended July 5,
1998, compared to cash used in operations of $9,414,000 for the six-month period
ended June 30, 1997. Cash was used to fund operations and increase the level of
inventories and receivables, as well as reduce the level of accounts payable and
accrued expenses.
Capital expenditures were $3,829,000 for the six-month period ended July 5,
1998, compared to $2,424,000 for the six-month period ended June 30, 1997. The
capital expenditures were primarily to purchase tooling and manufacturing
equipment for both periods. The Company anticipates increased expenditures for
tooling and manufacturing equipment purchases associated with new product
introductions and an increase in overall production capacity.
The Company had no bank debt at July 5, 1998, as compared to $7,161,000 at
December 31, 1997. This credit facility, established in March 1997 and amended
in March 1998, provides for total borrowings of up to $25.0 million, secured by
equipment, inventory, receivables and intangibles. The credit facility consists
of $15.0 million discretionary working capital line of credit, limited to
eligible receivables and inventory, which bears interest at the bank's reference
rate plus 0.75%, and a $10.0 million equipment loan which bears interest at the
bank's reference rate plus 1.25%. Borrowings under the equipment loan are made
in increments of $2.0 million and are payable over a 48-month period commencing
the first full month following each separate advance. Other borrowings under the
credit facility are due on demand. Pursuant to the Company's agreement with GS
Group, borrowings under the bank credit facility were limited to $10.0 million
in 1997 and are limited to $12.5 million in 1998. However, the Company received
waivers from GS Group allowing it to borrow up to $14.0 million under the credit
facility during the fourth quarter of 1997 and up to $16.0 million in 1998.
The Company completed a public offering of Common Stock on April 28, 1998
netting approximately $33,200,000 from the sale of 1,190,000 shares. The Common
Stock was priced at $30.00 per share. All of the shares were sold by the
Company. On May 18, 1998, the underwriters purchased an additional 178,500
shares of Common Stock pursuant to the exercise of their overallotment option,
which resulted in additional net proceeds to the Company of approximately
$5,000,000.
Management believes that anticipated cash flows from operations, funds available
through its bank credit facility and the net proceeds from its public offering
of Common Stock will provide sufficient capital resources for current operations
and planned product introductions.
The Company has not paid cash dividends. The Board of Directors currently
intends to retain all earnings for expansion of the Company's business.
YEAR 2000 ISSUES
Many existing computer programs use only two digits to identify a year in the
date field, with the result that data referring to the year 2000 and subsequent
years may be misinterpreted by these programs. If present in the computer
applications of the Company or its suppliers and customers and not corrected,
this problem could cause computer applications to fail or to create erroneous
results and could cause a disruption in operations and have a short-term adverse
effect on the Company's business and results of operations. The Company has
evaluated its principal computer systems and has determined that they are
substantially Year 2000 compliant. The Company has initiated discussions with
its key suppliers and customers to determine whether they have any Year 2000
issues. The Company has not incurred any material expenses to date in connection
with this evaluation and does not anticipate material expenses in the future,
depending on the status of its suppliers and customers with respect to this
issue.
FORWARD-LOOKING STATEMENTS
This report (as well as press releases, other written statements and oral
statements made or to be made by the Company) contains statements relating to
future events or the future financial performance of the Company which are
forward-looking statements within the meaning of the safe harbor provisions of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking statements involve
risks and uncertainties that could significantly affect anticipated results in
the future and, accordingly, actual results may differ materially from those
described in the forward-looking statements. These risks and uncertainties
include, but are not limited to, the effects of economic conditions, product
demand, competitive products, and other factors described from time to time in
the Company's filings with the Securities and Exchange Commission, including the
Company's Annual Report on Form 10-K and certain registration statements of the
Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on April 23,
1998. The following matters were submitted to a vote of the
shareholders at the Annual Meeting:
Election of Directors. The following persons were elected to serve as
directors, for a term of one year:
Robert R. Gheewalla Brian F. Sullivan Richard J. Zeckhauser
John E. Gherty William D. Thompson
Sanjay H. Patel William F. Wanner, Jr.
Approval of Amendment to 1994 Stock Option and Incentive Plan to
increase the number of shares reserved for issuance thereunder.
(2,259,218 votes FOR, 420,103 votes AGAINST, and 4,665 votes
ABSTAINED, and 1,074,881 shares held by brokers were not voted on the
resolution)
Approval of Amendment to 1993 Director Stock Option Plan to increase
the number of shares subject to each option granted thereunder.
(2,325,551 votes FOR, 388,618 votes AGAINST, and 5,512 votes
ABSTAINED, and 1,039,186 shares held by brokers were not voted on the
resolution)
Ratification of Appointment of Ernst & Young, LLP as Independent
Auditors. (3,702,470 votes FOR, 6,444 votes AGAINST, and 49,953 votes
ABSTAINED)
Item 5. Other Information
On April 28, 1998, the Company completed a public offering of
1,190,000 shares of Common Stock at a public offering price of $30.00
per share, from which it received net proceeds of approximately $33.2
million. All of the shares were sold by the Company. On May 18, 1998,
the underwriters
purchased an additional 178,500 shares of Common Stock pursuant to
the exercise of their overallotment option, which resulted in
additional net proceeds to the Company of approximately $5,000,000.
The underwriters for the offering are NationsBanc Montgomery
Securities LLP and Deutsche Morgan Grenfell. The Company intends to
use the net proceeds to repay certain existing indebtedness and for
working capital and general corporate purposes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Not applicable.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
covered by this Form 10-Q.
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Recovery Engineering, Inc.
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(Registrant)
Dated: August 13, 1998. /s/Brian F. Sullivan
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Brian F. Sullivan
President, Chief Executive Officer
and Director
(principal executive officer)
Dated: August 13, 1998. /s/Charles F. Karpinske
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Charles F. Karpinske
Chief Financial Officer
(principal financial and accounting officer)