UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 3, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-21232
RECOVERY ENGINEERING, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1557115
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9300 NORTH 75TH AVENUE, MINNEAPOLIS, MN 55428
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 315-5500
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of class)
Indicate by checkmark 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 [ ]
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 5, 1999, based on the closing sale price of the Common
Stock on such date as reported on the Nasdaq National Market, was $51,142,000.
On March 5, 1999, the Company had outstanding 6,019,698 shares of Common Stock,
par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the fiscal year
ended January 3, 1999 (the "Annual Report to Shareholders"), are incorporated by
reference into Part II. Portions of the registrant's definitive Proxy Statement
for the Annual Meeting of Shareholders to be held on April 29, 1999 (the "Proxy
Statement"), are incorporated by reference into Part III.
TABLE OF CONTENTS
PAGE
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PART I
FORWARD-LOOKING STATEMENTS........................................................................................1
ITEM 1. BUSINESS............................................................................................1
General.............................................................................................1
Industry Overview...................................................................................1
Business Strategy...................................................................................2
Products............................................................................................3
Marketing and Distribution..........................................................................6
Research and Development............................................................................7
Manufacturing.......................................................................................8
Patents.............................................................................................8
Competition.........................................................................................8
Government Regulation...............................................................................9
Employees...........................................................................................9
ITEM 1A. IMPORTANT INFORMATION...............................................................................9
ITEM 2. PROPERTIES.........................................................................................13
ITEM 3. LEGAL PROCEEDINGS..................................................................................13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................13
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS............................................14
ITEM 6. SELECTED FINANCIAL DATA............................................................................14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..........................................................................14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........................................14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................................14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................................................................14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS...................................................................15
ITEM 11. EXECUTIVE COMPENSATION.............................................................................15
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.....................................................................................15
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................................................15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K................................................................................16
SIGNATURES.......................................................................................................18
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PART I
FORWARD-LOOKING STATEMENTS
The information included or incorporated by reference in this Annual
Report on Form 10-K contains statements relating to future events or the future
financial performance of Recovery Engineering, Inc. (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. Certain statements in the Company's
press releases and oral statements made by or with the approval of the Company's
executive officers also constitute or will constitute "forward-looking
statements." 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 herein. See "Important Information."
ITEM 1. BUSINESS
GENERAL
The Company designs, manufactures and markets proprietary small-scale
drinking water systems under the PUR(R) brand name for the household,
recreational and military markets. These products include a line of
self-monitoring water filters for household use, a rugged line of portable
drinking water systems for outdoor enthusiasts and international travelers and a
line of low-energy, reverse osmosis desalinators for offshore marine, commercial
life raft and military use. PUR household water filters, which accounted for
more than 87% of the Company's net sales in fiscal 1998, are offered in a
variety of configurations, including pitchers and dispensers which are filled
from the tap ("pour-through" systems) and faucet-mounted, countertop and
under-sink filter systems which are connected to the water lines ("in-line"
systems). Each PUR household water filter system incorporates a replaceable
filtration cartridge. PUR household products are distributed through
approximately 35,000 retail outlets in the United States and Canada, including
Costco, Wal-Mart, Sears, Target, Kmart, Macy's and Walgreens.
The Company was founded in 1986, and initially developed a line of reverse
osmosis desalinators for the United States Navy and other military and offshore
marine users. The Company subsequently developed a line of PUR antimicrobial
water purifiers and microfilters for use by outdoor enthusiasts and
international travelers.
The Company entered the retail water filter market in late 1994.
Recognizing that a significant portion of revenues in the household market would
be derived from recurring sales of replacement cartridges, the Company pursued a
strategy of building brand name recognition for PUR products and developing an
installed base of its products to promote recurring sales of replacement
cartridges. To implement this strategy, the Company invested significant
resources to develop advanced filtration and monitoring technologies, launch a
broad range of products at a variety of price points, expand distribution of its
products, and provide high levels of customer and trade advertising support. The
Company has also developed and implemented automated manufacturing and assembly
processes for its household products, which enables it to manufacture nearly all
of the filter elements for such products, reducing the Company's costs and
enhancing its ability to respond to retailers' needs.
INDUSTRY OVERVIEW
During the last half of this century, reliable drinking water has largely
been taken for granted in the United States and other industrialized countries.
However, lead and other impurities can make water potentially unsafe or
unpleasant in taste and odor. In addition, much of the populated world,
including parts of Asia, Africa and Latin America, does not have adequate sewage
or water treatment facilities, leaving tap water unfit for human consumption.
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HOUSEHOLD MARKET
The household market consists of tap water substitutes (primarily bottled
water) and drinking water treatment equipment (such as water filters, water
softeners and whole house systems). The Company believes that increasing
awareness and concern about water quality has contributed significantly to a
steady increase in the size of the market in the United States for household tap
water substitutes and drinking water equipment. Despite heightened awareness of
water quality and safety issues, the domestic market penetration of household
drinking water treatment systems is estimated by the Company to be less than 25%
of United States households.
OUTDOOR MARKETS
The outdoor market consists of reverse osmosis desalinators for offshore
marine and military applications, as well as portable water treatment systems
for recreational outdoor use. The reverse osmosis desalinator segment includes
large motorized systems for use aboard larger vessels, as well as smaller
systems which are hand-operated or powered by 12-volt DC motors for use aboard
life rafts or as a back-up system on a boat or ship. The recreational segment
includes a variety of portable, hand-operated water purifiers and microfilters
which eliminate harmful microorganisms from outdoor or other questionable water
sources, such as tap water in developing countries. These products are typically
used by outdoor enthusiasts and international travelers.
BUSINESS STRATEGY
The Company's objective is to establish and maintain PUR as the leading
brand of consumer drinking water treatment equipment and attain a leading
position in each of the market segments it enters. The Company's key strategies
to accomplish this objective are:
o DEVELOP PROPRIETARY TECHNOLOGY TO ADDRESS CONSUMER CONCERNS.
The Company's research and development efforts are focused on
creating innovative and technologically superior products that
provide performance characteristics exceeding those of
competing products. Consumer research conducted by the Company
in 1993 and 1996 revealed that the performance of water
filters from other manufacturers failed to meet consumers'
expectations because (i) consumers were uncertain whether a
filter had reached the end of its useful life and (ii) such
filters treated primarily the aesthetic properties of drinking
water and generally did not remove contaminants related to
health concerns. In response to these findings, the Company
developed the ASM(R)(Automatic Safety Monitor(TM)) monitoring
technology and higher performance filters such as the PUR
ULTIMATE faucet-mounted filter and the PUR PLUS pour-through
pitcher and dispenser.
o OFFER A BROAD LINE OF SUPERIOR PRODUCTS WHICH CATER TO A WIDE
CONSUMER SEGMENT. The Company has established a leading
position in its consumer drinking water treatment categories
by developing a broad range of products with superior
performance characteristics at a number of retail price
points. The Company's products are offered in a variety of
configurations with varying performance characteristics.
o ESTABLISH A BROAD DISTRIBUTION NETWORK. The Company's entry
into the household water filter market in 1994 required it to
establish new distribution channels for its products. Since
then, the Company has expanded its distribution network
aggressively. The Company's broad product line and range of
price points and its ability to provide retailers with
differentiated product configurations has enabled PUR products
to be sold by a wide variety of retailers including department
stores, mass merchants, drug stores, grocery stores, hardware
stores and warehouse clubs. PUR household products are
currently sold throughout the United States and Canada through
approximately 35,000 retail outlets. The Company continues to
seek additional retail outlets and distribution channels for
its household products.
o PROMOTE BRAND AWARENESS THROUGH EFFECTIVE MARKETING. The
Company entered the growing household water filter market with
the belief that it could capture a significant share of the
market
2
by quickly establishing its PUR brand. The Company therefore
invested and continues to invest significant resources in
advertising and promotional activities to increase awareness
of its products and build the PUR brand name. These activities
include providing its retailers with point-of-sale displays,
cooperative advertising programs, product flyers and in-store
product demonstrations. The Company also utilizes television
commercials as well as print and radio advertisements. These
efforts have enabled the Company to establish PUR products as
the number one brand of in-line water filters and the number
two brand of all household water filters sold in the United
States.
o GENERATE RECURRING SALES OF REPLACEMENT FILTER CARTRIDGES. The
Company has pursued a strategy of building brand name
recognition for PUR products and developing an installed base
of its products to promote recurring sales of replacement
cartridges. The Company anticipates that, as the installed
base of PUR water filter systems grows, an increasing portion
of its net sales will be derived from recurring sales of
replacement cartridges, which on average carry a higher margin
than the Company's other products. All PUR household products
incorporate the Company's proprietary ASM technology which
measures the filter's usage and indicates its remaining
capacity. The Company believes that this visible indication of
when to replace the filter cartridge encourages consumers to
purchase replacement filters more frequently than they
otherwise would.
o DEVELOP LOW-COST, HIGH-VOLUME FLEXIBLE MANUFACTURING
PROCESSES. The Company has invested heavily in automating the
manufacturing and assembly processes for its household water
filters, including the development of several proprietary,
automated processes for manufacturing filter elements used in
certain of its products. These automated processes have
enabled the Company to improve its manufacturing efficiencies
while enhancing its ability to provide high volumes of
differentiated products to respond to retailers' needs. The
Company intends to continue implementing processes to reduce
the cost of manufacturing it products.
PRODUCTS
Since its formation in 1986, the Company has utilized its mechanical and
chemical engineering expertise to develop new water filtration and purification
products with superior performance characteristics to address the identified
concerns of consumers. The Company believes it is a leader in introducing new
technology to the markets its serves.
o In 1988, the Company introduced the world's first
hand-operated reverse osmosis desalinator.
o In 1991, the Company launched its line of PUR portable systems
employing the Company's proprietary Tritek(R) disinfection
technology which enables the elimination of microorganisms
from water.
o In 1994, the Company introduced the first faucet-mounted water
filter capable of removing CRYPTOSPORIDIUM and GIARDIA
LAMBLIA.
o In 1994, the Company introduced the first faucet-mounted water
filter with a device that automatically monitors the useful
life of the filter cartridge.
o In 1996, the Company introduced the first gravity-fed,
pour-through pitcher with an automatic monitoring device.
o In 1997, the Company introduced the first faucet-mounted water
filter to remove mercury, particulates, atrazine and lindane.
o In 1998, the Company introduced two new pour-through systems,
the PUR PLUS pitcher and the PUR PLUS dispenser, the first
gravity-fed water filter systems capable of removing
microorganisms as small as CRYPTOSPORIDIUM and GIARDIA
LAMBLIA.
3
The Company believes its track record of introducing leading edge
technology to the marketplace ahead of its competitors has enabled it to attain
the number one market share in the outdoor product and reverse osmosis market
segments in which it competes, as well as the number one market share in in-line
household water filter systems.
HOUSEHOLD WATER FILTERS
The Company believes it offers the broadest line of household water
filters widely available at retail. PUR household water filters are offered in a
variety of configurations, including pour-through pitchers and dispensers and
in-line faucet-mounted, countertop and under-sink filters. Each PUR household
water filter system incorporates a replaceable filter cartridge. Within each
configuration, the Company offers different levels of contaminant reduction
capabilities and a range of price points. In addition, the Company's flexible
manufacturing processes allow it to make minor modifications to its products to
meet the preferences of retailers.
All PUR household water filters incorporate the Company's ASM technology
which measures the filter's usage and indicates its remaining capacity, enabling
consumers to anticipate the need to purchase a replacement filter cartridge. The
PUR in-line products also include a feature that automatically shuts off the
water flow when the filter cartridge needs changing. Replacement filter
cartridges are sold at suggested retail prices ranging from $7.99 to $29.99
which allow consumers to obtain filtered water at a small fraction of the cost
of bottled water.
PUR faucet-mounted water filters, introduced to the market in 1994, were
the first household water filters offered by the Company. These compact units
are approximately five inches high and incorporate a proprietary carbon block
filter developed by the Company. The filter cartridges for these units have a
useful life of about two to three months based on the Company's surveys of
consumer usage. The Company introduced its PUR countertop water filter systems
in 1996 and its PUR under-sink water filter system in 1997, with filter
cartridges having a useful life of four to six months. Each of these products is
approximately nine inches high and offers greater contaminant reduction and
longer filter life than the faucet-mounted units. The filter cartridge for the
countertop and under-sink units employ the same proprietary carbon block
technology as the faucet-mounted units. The Company estimates, based on survey
information from Intelect, that its line of faucet-mounted PUR water filters
accounted for approximately 82% of all household faucet-mounted water filtration
sales in the United States in 1998.
The initial PUR pour-through product, introduced to the market in January
1996, is a water pitcher which holds approximately a half-gallon of filtered
water. In 1998, the Company introduced its PUR PLUS pitcher and PUR PLUS
dispenser, which are the only gravity-fed water filters capable of filtering
microorganisms as small as CRYPTOSPORIDIUM and GIARDIA LAMBLIA. The PUR
pour-through products incorporate a proprietary three-stage filtration
cartridge, developed and manufactured by the Company, which employs activated
carbon, ion exchange resin and a microfilter and has a useful life of
approximately one to two months based on the Company's surveys of consumer
usage. The Company estimates, based on survey information from Intelect, that
its line of PUR pour-through products accounted for approximately 14% of all
water filtration pitcher sales in the United States in 1998.
The products comprising the PUR line of household water filters are as
follows:
POUR-THROUGH PRODUCTS:
o PUR Pitcher - Pitcher capacity: 1/2 gallon; filter capacity:
40 gallons (1-2 mos.)
o PUR PLUS Pitcher - Pitcher capacity: 1/2 gallon; filter
capacity: 40 gallons (1-2 mos.)
o PUR PLUS Dispenser - Dispenser capacity: 2 gallons; filter
capacity: 40 gallons (1-2 mos.)
4
IN-LINE PRODUCTS:
o PUR FM (standard) - Faucet-mounted; filter capacity: 100
gallons (2-3 mos.)
o PUR FM PLUS - Faucet-mounted; filter capacity: 100 gallons
(2-3 mos.)
o PUR FM ULTIMATE - Faucet-mounted; filter capacity: 100 gallons
(2-3 mos.)
o PUR CT PLUS - Countertop; filter capacity: 200 gallons (4-6
mos.)
o PUR US PLUS - Under-sink; filter capacity: 200 gallons (4-6
mos.)
The number of months of estimated useful life of the filters is based on
Company surveys of consumer usage.
OUTDOOR PRODUCTS
The Company believes that it offers the broadest line of small-scale
drinking water systems for recreational and offshore marine use. The Company's
outdoor products include a rugged line of portable drinking water systems for
outdoor enthusiasts and international travelers and a line of low-energy,
reverse osmosis desalinators for offshore marine, commercial life raft and
military use.
Various chemicals and methods have historically been used to disinfect
fresh water, including chlorine gas, iodine, silver nitrate, hydrogen peroxide
and boiling. These methods involve a significant amount of time to be effective
and, therefore, are not convenient or practical for use on a consistent basis to
produce drinking water. In addition, chemical disinfectants are relatively
ineffective against cyst forms of various parasites, including GIARDIA LAMBLIA,
and leave residual concentrations in water, which may render the water
unpalatable. Although filtration is also commonly used to treat contaminated
water and is an effective means of removing larger microorganisms like protozoa
and bacteria, filtration is not a practical means of removing viruses.
PUR fresh water purifiers incorporate the Company's proprietary Tritek(R)
disinfection technology, which combines microfiltration and an iodinated resin
matrix to produce safe drinking water in seconds. The microfilter is used to
remove sediment and the largest and most chemically resistant microorganisms.
Smaller microorganisms, like bacteria and viruses, are killed upon contact with
the iodinated resin. The result is a process that takes advantage of the
positive attributes of microfiltration and iodinated resin, without suffering
the drawbacks of each approach when used alone. Each of the PUR fresh water
purifiers is registered with the EPA, which has established minimum performance
guidelines for microbiological water purifiers. See "Business - Government
Regulation."
The Company offers a range of PUR water purifiers and microfilters for use
by backpackers, campers and other outdoor enthusiasts. The PUR Voyageur(TM) is a
compact water purifier which produces approximately 1.0 liter of water per
minute. The Voyageur incorporates the Company's proprietary Anti-Clog Filter
Technology ("AFT") which extends the life of the filter, eliminating the need
for the user to clean or maintain it. The PUR Scout(R) also incorporates the AFT
filter technology and produces approximately 0.5 liter of water per minute. The
PUR Explorer(R) has a double-action pump which enables one person to produce
over 1.5 liters of water per minute. The Explorer includes a self-cleaning
mechanism, permitting the filter to be cleaned conveniently without disassembly.
The Company's microfilter products include the PUR Pioneer(R), an entry level
product which features a disposable microfilter designed to filter up to 20
gallons, and the PUR Hiker(R), which incorporates the Company's AFT filter
technology and is designed to filter up to 100 gallons.
The Company also offers a line of PUR reverse osmosis desalinators for
converting seawater to potable water when sources of energy are either
unavailable or in limited supply. These products are used primarily in offshore
marine, commercial life raft and military applications. Reverse osmosis
desalination, which has been in use in large-scale systems for over 20 years,
occurs when feed water with dissolved solids (such as salt) is forced against a
semipermeable membrane at high pressure, typically 800 pounds per square inch.
The
5
membrane acts as a barrier to contaminants such as salts, viruses and bacteria,
separating them from the pure water that passes through the membrane. In a
conventional reverse osmosis system, approximately 10% of the seawater forced
against the membrane passes through as pure water. The remaining high-pressure
waste brine stream is discharged. This process requires a large amount of
energy, making it impractical for small-scale applications. In 1988, the Company
introduced the world's first hand-operated reverse osmosis desalinator, a
compact unit incorporating a patented high-pressure energy recovery pump that is
designed to recover and effectively use energy that is wasted in a conventional
reverse osmosis system. The pump recycles the high-pressure waste brine stream,
redirecting it to the backside of the pump's piston, providing a power assist to
the pumping operation. By thus recovering energy contained in the high-pressure
waste brine stream, the Company's energy recovery pump reduces the external
power needed to operate a desalinator by approximately 90%, and makes possible a
small-scale low-energy desalinator.
The PUR Survivor(R) models are hand-operated desalinators, designed
primarily for emergency life raft use. The Survivor-35, the first desalinator
built by the Company, was designed for use by the United States Navy in
25-person life rafts and is also available in commercial versions. The
Survivor-06, the smallest reverse osmosis desalinator manufactured in the world,
can produce a pint of fresh water in less than 30 minutes. It is recommended for
4-to 12-person life rafts and individual survival kits. The Company is not aware
of any other hand-operated desalinators on the market. The PUR PowerSurvivor
models are driven by a 12-volt DC motor with power supplied by a boat's battery.
The products comprising the PUR line of outdoor products are as follows:
PORTABLE SYSTEMS:
o PUR Pioneer - Microfilter; special feature: disposable filter
o PUR Hiker - Microfilter; special feature: anti-clog filter
o PUR Voyageur - Purifier; special features: anti-clog filter with
iodinated resin
o PUR Scout - Purifier; special features: anti-clog filter with
iodinated resin and dirt shield
o PUR Explorer - Purifier; special features: double-action pump;
self-cleaning filter with iodinated resin
DESALINATORS:
o PUR Survivor-06 - Desalinator; special features: hand-operated, 6
gallons per day ("gpd")
o PUR Survivor-35 - Desalinator; special features: hand-operated, 35
gpd
o PUR PowerSurvivor-40E - Desalinator; special features: powered by
12-volt DC motor, 40 gpd
o PUR PowerSurvivor-80E - Desalinator; special features: powered by
12-volt DC motor, 80 gpd
o PUR PowerSurvivor-160E - Desalinator; special features: powered by
12-volt DC motor, 160 gpd
MARKETING AND DISTRIBUTION
The Company entered the growing household water filter market with the
belief that it could capture a significant share of the market by quickly
establishing its PUR brand name. The Company therefore invested and continues to
invest significant resources in advertising and promotional activities to create
awareness of its products and recognition of the PUR brand name. These
activities include providing its retailers with point-of-sale displays,
cooperative advertising programs, product flyers and in-store product
demonstrations. The Company also utilizes television commercials which air on a
variety of national cable channels and local broadcast stations, as well as
print and radio advertisements. These efforts have enabled the Company to
establish PUR products as the number one brand of in-line water filters and the
second leading brand of all household water filters sold in the United States.
6
The Company's entry into the household water filter market in 1994
required it to establish new distribution channels for its products. Since then,
the Company has expanded its distribution network aggressively, and currently
sells its household water filters in the United States and Canada through a wide
variety of mass retail channels, including mass merchants, department stores,
drug stores, grocery stores, home center and hardware stores, warehouse clubs
and specialty retailers. The Company's household products are distributed in
approximately 35,000 stores in the United States and Canada. The accounts are
serviced by a network of more than 30 independent manufacturers' representative
agencies. The Company continues to seek additional retail outlets and
distribution channels for its household products.
The Company's household products are distributed through the following
channels:
o Mass merchants (including Wal-Mart, Target, Kmart and Fred Meyer)
o Department stores (including Dayton's, Marshall Fields, Macy's,
Robinson-May, Dillard's, Bloomingdale's, JC Penney and Sears)
o Drug stores (including Walgreens, Eckerd Drug, Long's Drug, American
Stores, Rite-Aid and CVS)
o Grocery stores (including Albertson's, Kroger, Super Valu, Fleming,
Wegman's, Winn-Dixie and Publix)
o Home center and hardware stores (including Home Depot, Lowes,
Menards, Payless Cashways, Builders Square, Ace Hardware, True Value
Hardware, Hardware Hank, Servistar and Coast-to- Coast)
o Warehouse clubs (including Costco, Sam's Club and B.J.'s)
o Specialty retailers (including Bed, Bath & Beyond, Linens 'N Things,
Home Place, Lechters and QVC).
As part of its continuing efforts to enhance communications with its
customers, the Company utilizes electronic data interchange with its customers
to generate electronic purchase orders and invoices. The Company also receives
point-of-sale information through this system from 35 retailers including most
of the Company's top 10 customers. This information allows the Company to track
and monitor consumer sales of its products and anticipate orders from its
principal customers.
The Company's portable drinking water systems are offered to outdoor
enthusiasts and international travelers through more than 1,550 outdoor and
travel stores and more than a dozen mail order catalogs. A network of
approximately 20 independent manufacturers' representatives services these
accounts. The Company's reverse osmosis desalinators can be purchased from more
than 450 marine dealers and service centers on the Atlantic, Pacific and Gulf
coasts and from several marine catalogs. Internal sales and service personnel
manage these accounts directly. The Company also sells directly to the United
States armed forces. Sales to foreign military forces and consumers are made
through approximately 30 distributors located in Europe, Asia and the Middle
East. To create awareness for its products, the Company advertises in consumer
and trade publications, participates in consumer and trade shows, and publishes
periodic newsletters to its retailers.
RESEARCH AND DEVELOPMENT
The Company believes that its research and development team gives it a
significant competitive advantage over others engaged in the design and
manufacture of consumer water filtration and purification equipment. Through the
efforts of its research and development team, the Company develops products
which incorporate proprietary technology to offer performance superior to
comparably priced products sold by competitors. The Company utilizes customer
surveys, focus groups, home user studies and field testing of its products to
assess consumer needs and preferences. Research and development efforts are then
focused on products where technological innovation can create a meaningful
difference between the Company's
7
products and competing products. The Company's research and development team
includes an advanced manufacturing design group which works to coordinate the
transition of new products from the research and development stage through the
manufacturing process and ultimately to a successful product launch. The
Company's expenditures for research and development were $2.0 million in 1996,
$3.1 million in 1997, and $4.2 million in fiscal 1998, representing 6.0%, 4.3%
and 5.5% of sales, respectively.
MANUFACTURING
Since entering the household water filter market in 1994, the Company has
invested heavily in developing and implementing automated assembly and
manufacturing processes. During this period, the Company has also implemented
management processes and information systems which it believes can accommodate
significant additional growth.
The Company currently assembles all of the filter elements used in its
household products. The manufacturing and assembly processes of some of its
filter units and most of its filter cartridges is automated. The assembly,
testing, quality control and packaging of the Company's products are conducted
by the Company's employees at its facilities in Minneapolis, Minnesota.
The principal raw materials utilized in the Company's manufacturing
operations are engineered thermoplastics, stainless steel and filtration media.
The Company relies on third party machine shops and injection molders to
manufacture components to the Company's specifications. The Company has
consolidated its supply relationships to two or three vendors for each component
to promote quality control. The Company has identified additional potential
suppliers for most of its components, and believes that alternate sources of
supply would be readily available to the Company if its relationships with
current suppliers were interrupted. The interruption of any of these supply
relationships could have a material adverse effect on the Company's results of
operations.
PATENTS
The Company is the owner of 13 United States utility patents and six
United States design patents related to its reverse osmosis desalinators,
portable drinking water systems and household drinking water systems. These
patents expire at various dates from 2001 to 2016. The Company has applied for
corresponding foreign patents where it deemed such applications necessary. The
Company has also applied for additional patents in the United States with
respect to its household drinking water products and for corresponding foreign
patents. The protection offered by these patents and the ability to obtain
protection with respect to new technology are important to the Company's future
performance.
COMPETITION
The Company competes with a number of companies in the manufacture and
marketing of household water filtration and purification systems. The most
significant competitors in this market currently are Brita U.S.A. (a subsidiary
of Clorox Company), Teledyne Waterpik (a subsidiary of Allegheny Teledyne,
Inc.), Culligan Water Technologies, Inc. (a subsidiary of U.S. Filter, Inc.),
Rubbermaid Inc. and Signature Brands Inc. As this market develops, the Company
may experience increased competition from public water utilities, appliance
manufacturers and consumer electronics companies. In addition, the Company
competes indirectly with suppliers of bottled water.
The Company is not aware of any other company which manufactures
hand-operated desalinators. The Company competes with several other companies in
the manufacture and sale of small-scale motorized reverse osmosis desalinators.
These companies include Sea Recovery Corp. and Village Marine Tec. The Company
also competes with several companies in the manufacture of water filters and
purifiers for personal and recreational uses. These companies include Katadyn
U.S.A., Inc., Mountain Safety Research Corporation (a subsidiary of Recreational
Equipment, Inc.), and Cascade Designs, Inc.
The Company competes in the sale of drinking water systems on the basis of
product features, product performance and reputation, price and service.
8
GOVERNMENT REGULATION
The manufacture, marketing, advertising and distribution of water
purification devices containing active ingredients, such as iodine, is regulated
by the EPA. The EPA generally requires registration of the manufacturer, the
active ingredients and the applicable device and its packaging prior to sale of
the product. Registration entails obtaining scientific data as to the efficacy
and toxicity of the device and its active ingredients. The PUR Explorer, Scout
and Voyageur, all of which contain iodinated resin, have been registered by the
EPA as "microbiological water purifiers."
In addition to EPA regulation, some states require registration of
household water filtration and purification products. The Company believes that
its current household products, and any future household products it develops,
comply and will comply with state regulations applicable to such products. There
can be no assurance, however, that such state registration requirements will not
result in delays in introduction of these products in certain markets.
The Company is also subject to regulation with respect to the handling and
disposal of the elemental iodine used in manufacturing resins. The Company
believes it is in compliance with applicable rules, and that it has properly
disposed of such material. There can be no assurance that more restrictive and
costly requirements will not be imposed in the future.
EMPLOYEES
At January 3, 1999, the Company had approximately 360 full-time employees,
of whom 31 were involved in research and development, 240 in engineering,
manufacturing, assembly and testing, 51 in sales, marketing, technical and
customer service, and 38 in administration. None of the Company's employees is
represented by a labor union or is covered by a collective bargaining agreement.
The Company has not experienced any work stoppages and believes that its
employee relations are excellent.
ITEM 1A. IMPORTANT INFORMATION
Certain statements in this Annual Report on Form 10-K and in the Company's
press releases and oral statements made by or with the approval of the Company's
executive officers constitute or will constitute "forward-looking statements."
Forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from those suggested in the forward-looking
statement, including without limitation the effects of economic conditions,
product demand, competitive products and other risks detailed herein.
RECENT HISTORY OF OPERATING LOSSES
The Company has experienced a net loss in each of the last three years due
primarily to costs associated with entering the household market including,
among other things, costs of creating brand name awareness, developing broader
product line offerings, and establishing a wide distribution network for its
products. The net losses were incurred despite substantial increases in net
sales that resulted from the Company's entry into the household water filter
market. The Company intends to continue investing significant amounts in
development of additional extensions of its product lines, advertising and
promotional activities to support existing products and new product
introductions, and continued development of enhanced manufacturing processes and
expanded production capacity. Thus, the Company may continue to generate losses
even if revenues increase, and there can be no assurance that the Company will
become consistently profitable. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation."
CONTINUED ACCEPTANCE OF PRODUCTS
The Company's ability to continue to increase its sales and return to
consistent profitability will depend to a significant degree on the continued
successful retail sell-through of new and existing household drinking water
treatment products for consumer markets in the United States and other
countries. The success of the Company's products will depend in part on the
Company's continued ability to educate consumers about the
9
advantages of such products over other means of addressing drinking water
concerns, including bottled water and alternative products for water filtration.
Additionally, there can be no assurance that the Company's household water
filtration products will continue to be successfully sold through the Company's
established network of retail outlets or that the Company will be able to
maintain its distribution network. The Company's performance will also depend on
consumers' willingness to continue using the Company's products and to buy
replacement filter cartridges. See "Business - Industry Overview - Household
Market" and "Business - Products - Household Water Filters."
RELIANCE ON PROPRIETARY TECHNOLOGY
The Company's ability to compete depends in part on its proprietary
technology, which it seeks to protect with patents and trademarks. The Company
is the owner of numerous United States utility patents, United States design
patents, and United States registered trademarks related to its desalinator,
recreational, and household water filtration products. Additionally, the Company
has applied for several patents related to its new and existing household water
filtration products and recreational products. The Company has also applied for
and received various corresponding foreign patents where it deemed such
applications necessary. The laws of certain foreign countries do not protect the
Company's intellectual property rights to the same extent as do the laws of the
United States. The Company intends to vigorously defend and protect its patents
and other proprietary technology against infringement or misappropriation by
others. There can be no assurance, however, that steps taken by the Company will
prevent misappropriation of its technology, that any patents from pending patent
applications or from any future patent application will be issued, that the
scope of any patent protection will provide competitive advantages to the
Company or preclude competitors from developing products similar to the
Company's products, that any of the Company's patents will be held valid if
subsequently challenged, or that others will not claim rights in or ownership of
the patents and other proprietary rights held by the Company. In addition, there
can be no assurance that third parties will not assert infringement claims with
respect to the Company's current or future products or that any such claims will
not require the Company to enter into license arrangements or result in
litigation, regardless of the merits of such claims. No assurance can be given
that any necessary licenses could be obtained on commercially reasonable terms,
or at all. Litigation or regulatory proceedings may also be necessary to enforce
patent or other intellectual property rights of the Company or to determine the
scope and validity of other parties' proprietary rights. Such litigation could
be expensive and time consuming and could have a material adverse effect on the
Company's business, financial condition or results of operations regardless of
the outcome of such litigation. See "Business - Patents."
PATENT LITIGATION
The Company has been involved in litigation from time to time with respect
to certain aspects of its technology and may become involved in similar
litigation in the future. The costs associated with such litigation and
potential adverse decisions resulting from such litigation could have a material
adverse effect on the Company's business, prospects and financial condition. See
"Legal Proceedings"
TECHNOLOGICAL CHANGE AND PRODUCT OBSOLESCENCE
The water treatment markets in which the Company competes are subject to
technological changes, and the Company's business strategy is based to a
substantial extent on the Company's ability to offer technologically superior
products. The ability of the Company to compete successfully will depend in part
on its ability to continue to respond effectively to technological changes,
enhance its technology and develop and market new products and new applications
for its existing technology. Although the Company expends a significant portion
of its revenues on research and development and product enhancement efforts,
there can be no assurance that the Company can successfully develop and bring
any new products to the market in a timely manner, that such products will be
commercially successful, or that competitors' technologies or services will not
render the Company's products or services non-competitive or obsolete. The
Company relies on product effectiveness certifications from the National
Sanitation Foundation ("NSF"), a nationally recognized not-for-profit agency for
the certification of water filters, to support its claims to consumers.
10
There can be no assurance that NSF will certify each of the claims the Company
may submit from time-to-time with respect to the performance of its products.
Furthermore, the failure to receive, or a delay in receiving, the anticipated
certification could impair the Company's ability to market such products. See
"Business - Products" and "Business - Research and Development."
MANAGEMENT OF GROWTH
During the last three years, as a result of significant increases in sales
of the Company's household water filter systems, the Company was not able at all
times to adjust its production capacity quickly enough to keep pace with the
demand for its products. In addition, the Company's shipments of one of its
products were interrupted because of inconsistent raw materials. To manage
further growth successfully, the Company will be required to continue improving
its operations, management and financial systems and controls and expand its
facilities and its employee workforce. Any future growth can be expected to
place significant additional responsibilities on the Company's management,
operations, employees and resources. There can be no assurance the Company will
be able to maintain or accelerate its current growth, effectively manage its
expanding operations or achieve planned growth on a timely or profitable basis.
To the extent that the Company is unable to manage its growth efficiently and
effectively, the Company's business, financial condition and results of
operations could be materially adversely affected. Furthermore, in pursuing its
growth strategy, the Company may need to incur additional debt or issue
additional equity securities, resulting in increased financial leverage or
potential dilution to holders of Common Stock. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business -
Business Strategy."
COMPETITION
The Company encounters and expects to continue to encounter intense
competition in the sale of its products. The Company believes that the principal
competitive factors affecting the market for its products include product
features, product performance and reputation, price and service. The Company's
competitors include companies with established reputations in the consumer,
household water filtration and purification field and substantially greater
financial, technical, marketing and other resources than the Company. As a
result, such companies may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements or to devote greater resources
to the promotion and sale of their products than the Company. Competition could
increase if new companies enter the market or if existing competitors expand
their product lines or intensify efforts within existing product lines. The
Company also indirectly competes on the retail consumer level with suppliers of
prepackaged bottled water and bulk water dispensing systems. There can be no
assurance that the Company's current products, products under development or
ability to discover new technologies will be sufficient to enable it to compete
effectively. See "Business Competition."
PRODUCT LIABILITY
The Company could be liable for personal injuries allegedly caused by a
defect in one of the Company's products. While to date the Company has not
experienced any such claims, there can be no assurance that such claims will not
be made in the future. The Company currently carries product liability insurance
covering its products with policy limits of $2.0 million in the aggregate and
$1.0 million per occurrence. The Company also maintains umbrella coverage over
this amount to $15.0 million. It cannot be predicted, however, whether such
insurance is sufficient to adequately cover the Company's product liability
risk. Lack of sufficient insurance could expose the Company to substantial
damages in connection with product liability claims or product recalls. In
addition, the costs related to defending any claim, and/or the negative
publicity resulting from any liability action could have a material adverse
effect on the Company's sales and profitability.
11
CUSTOMER CONCENTRATION
Sales of PUR household water filtration products to the Company's five
largest customers accounted for more than 51% of the Company's net sales in
1998, with Wal-Mart (16.8%) and Sam's Club (10.5%) each representing more than
10% of net sales. A reduction, delay or cancellation of orders from one or more
of these customers, or the loss of one or more of such customers, could have a
material adverse effect on the Company's operating results. See "Business -
Marketing and Distribution."
SEASONALITY; QUARTERLY FLUCTUATIONS; POSSIBLE VOLATILITY OF STOCK PRICE
Management believes that the Company's business is to some extent
seasonal, with its highest sales levels occurring during the fourth quarter,
although its recent sales growth and interruptions of shipments of certain
products due to inconsistent raw materials may have masked seasonal patterns.
Results for any quarter are not necessarily indicative of the results that the
Company may achieve for any subsequent quarter or a full fiscal year. Quarterly
results may fluctuate as a result of the timing of merchandise shipments, timing
of expenditures for product development and other factors. There can be no
assurance that results in future periods will not fluctuate on a quarterly
basis. In addition, the market price for the Common Stock may be highly volatile
depending on various factors, including the general economy, stock market
conditions, the establishment or loss of major customer relationships,
technological innovations, new product introductions by the Company or its
competitors, and fluctuations in the Company's operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
POTENTIAL ADVERSE EFFECT OF STOCK OPTIONS, WARRANTS AND CONVERTIBLE SECURITIES
A substantial number of shares of Common Stock are issuable upon the
exercise of outstanding stock options and warrants or the conversion of the
Company's 5% Convertible Notes which expire in 2003 and are payable in annual
installments beginning in August 2001 (the "Convertible Notes"). When issued,
such shares may become available for sale in the public market. Sales of
substantial amounts of such shares in the public market could adversely affect
the market price of the Common Stock.
EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS
The Company has adopted a Shareholder Rights Plan and is subject to
certain anti-takeover provisions of the Minnesota Business Corporation Act. In
addition, the Company proposes to amend its Articles of Incorporation to create
a classified Board of Directors. This proposal will be presented to the
shareholders of the Company for their approval at the Annual Meeting to be held
on April 29, 1999. Such anti-takeover provisions could have the effect of
discouraging a takeover proposal or tender offer not approved by management and
the Board of Directors of the Company. Accordingly, shareholders may be denied
the opportunity to participate in a transaction which offers a premium to the
prevailing market price of the Common Stock. Furthermore, the Company's Board of
Directors is authorized, without further action by the holders of Common Stock,
to establish various series of Preferred Stock from time to time and to
determine the rights, preferences and restrictions of any wholly unissued
series, including, among other matters, dividend, liquidation and voting rights.
Thus, the Board of Directors may, without shareholder approval, issue shares of
a class or series of Preferred Stock with voting and conversion rights which
could adversely affect the voting power of the holders of the Common Stock and
could have the effect of delaying, deferring or preventing a change in control
of the Company. The creation and issuance of shares of such a class or series of
Preferred Stock could also adversely affect the market price of the Common
Stock.
12
ITEM 2. PROPERTIES
The Company is headquartered in a leased facility of 188,000 square feet
at 9300 North 75th Avenue, Minneapolis, Minnesota 55428, pursuant to a lease
which expires in May 2008. The Company believes this facility will provide
sufficient space to support the Company's anticipated requirements for the
near-term, and that additional or alternate facilities would be available on
terms acceptable to the Company if the Company's operations were to require
additional space.
The Company was formerly headquartered in a leased facility of 52,000
square feet in St. Louis Park, Minnesota pursuant to a seven-year lease which
expires on December 31, 2000. The Company has obtained a replacement tenant for
26,000 square feet of that facility and the remainder of the facility is
currently vacant. The original lease remains in effect and the Company may have
continuing financial obligations under such lease to the extent the facility is
not occupied by another tenant or the tenant does not assume or perform the
Company's obligations under the original lease.
The Company owns manufacturing and engineering equipment, located at its
facilities in Minneapolis, used in its assembly operations and research and
development efforts. Such equipment is available from a variety of sources, and
the Company believes that it currently owns or can readily acquire equipment
required for its current and anticipated levels of operations.
ITEM 3. LEGAL PROCEEDINGS
The Company and several other water filtration companies were named as
defendants in a civil proceeding initiated in January 1997 by Brita U.S.A., a
subsidiary of Clorox Company, which asserted that the defendants infringed one
of Brita's patents relating to pitcher products. On March 3, 1999, summary
judgment was entered in the United States District Court for the Northern
District of Illinois, dismissing all claims against the Company and the other
defendants. Brita has the right to appeal the decision within 30 days from the
date the decision was entered. If the decision is appealed, the Company intends
to defend vigorously its right to market and sell its products. The Company was
aware of Brita's patent prior to developing the PUR pitcher design and believes
that it does not infringe Brita's patent. The design of the PUR PLUS pitcher,
dispenser and related filter cartridge differs in material respects from the
design of the pitcher products that are the subject of this litigation.
The Company was also a defendant in a civil proceeding initiated in April
1997 by UltraPure Systems, Inc., a subsidiary of Culligan Water Technologies,
Inc., which asserted that the Company infringed an UltraPure patent on a
faucet-mounted filter system. All claims against the Company were dismissed in
an order of summary judgment entered in the United States District Court for
Minnesota. A subsequent agreement between the Company and UltraPure Systems,
Inc. dismissed the entire case with prejudice and without opportunity for
appeal.
The Company from time to time is involved in various other legal
proceedings arising in the normal course of business, none of which is expected
to result in any material loss to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter ended January 3, 1999.
13
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Common stock market and dividend information on page 20 of the Annual
Report to Shareholders is incorporated herein by reference in response to this
item.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data on page 20 of the Annual Report to Shareholders is
incorporated herein by reference in response to this item.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations on pages 7 through 12 of the Annual Report to Shareholders is
incorporated herein by reference in response to this item.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's operations are not currently subject to market risks
for interest rates, foreign currency rates, commodity prices or other market
price risks of a material nature.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The report of independent auditors and financial statements included on
pages 13 through 20 of the Annual Report to Shareholders are incorporated herein
by reference in response to this item.
The quarterly financial information on page 20 of the Annual Report to
Shareholders is incorporated herein by reference in response to this item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
14
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS
The information contained on pages 8 through 11 of the Proxy Statement
with respect to directors and executive officers of the Company is hereby
incorporated by reference in response to this item.
The information contained on pages 14 and 15 of the Proxy Statement with
respect to compliance with Section 16(a) of the Exchange Act is hereby
incorporated by reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION
The information contained on pages 11 through 14 of the Proxy Statement
with respect to executive compensation is hereby incorporated by reference in
response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information contained on pages 18 through 20 of the Proxy Statement
with respect to security ownership of certain beneficial owners and management
is hereby incorporated by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained on page 15 of the Proxy Statement with respect
to certain relationships and related transactions is hereby incorporated by
reference in response to this item.
15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THE REPORT:
1. FINANCIAL STATEMENTS.
The following financial statements of Recovery Engineering, Inc.
included in the Annual Report to Shareholders, are incorporated by
reference in Item 8:
Balance Sheets as of December 31, 1997 and January 3, 1999
Statements of Operations for the Years ended December 31, 1996 and
1997, and January 3, 1999
Statements of Cash Flows for the Years ended December 31, 1996 and
1997, and January 3, 1999
Statement of Changes in Shareholders' Equity for the Years
ended December 31, 1996 and 1997, and January 3, 1999
Notes to Financial Statements
2. FINANCIAL STATEMENT SCHEDULES.
The following schedule supporting financial statements for the three
years ended January 3,1999 is filed herewith:
Schedule II - Valuation and Qualifying Accounts.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore
have been omitted.
3. LISTING OF EXHIBITS.
EXHIBIT
NO. DESCRIPTION
3.1 Articles of Incorporation of Recovery Engineering, Inc.
3.2 Bylaws of Recovery Engineering, Inc.
4.1 Rights Agreement dated as of January 30, 1996 between Recovery
Engineering, Inc. and Norwest Bank Minnesota, National
Association, as Rights Agent
4.1.1 Amendment No. 1 dated as of February 3, 1998 to Rights
Agreement between Recovery Engineering, Inc. and Norwest Bank
Minnesota, National Association, as Rights Agent
10.1* Recovery Engineering, Inc. 1986 Stock Option Plan, as amended
10.2* Recovery Engineering, Inc. 1993 Director Stock Option Plan
10.3* Recovery Engineering, Inc. 1994 Stock Purchase Plan
10.4* Recovery Engineering, Inc. 1994 Stock Option and Incentive
Plan
10.5 Supplier Agreement dated November 25, 1996, between Thermotech
and Recovery Engineering, Inc.
10.6 Financing Agreement dated March 31, 1997 between Recovery
Engineering, Inc. and U.S. Bank National Association, f/k/a
First Bank National Association
10.6.1 First Amendment to Financing Agreement dated March 16, 1998,
between Recovery Engineering, Inc. and U.S. Bank National
Association, f/k/a First Bank National Association
10.6.2 Waiver Letter dated November 16, 1998, from U.S. Bank National
Association
10.7 Securities Purchase Agreement dated July 19, 1996 by and among
Recovery Engineering, Inc. and investment partnerships
affiliated with The Goldman Sachs Group, L.P. ("GS Group")
16
10.8 Registration Rights Agreement dated July 19, 1996 by and among
Recovery Engineering, Inc. and GS Group
10.9* Executive Restriction Agreement dated July 19, 1996 by and
among Recovery Engineering, Inc., GS Group and Brian F.
Sullivan
10.10* Executive Severance Pay Agreement dated March 24, 1997 between
Recovery Engineering, Inc. and Charles F. Karpinske
10.11* Change-in-Control Severance Pay Agreement dated November 2,
1998 between Recovery Engineering, Inc. and Brian F. Sullivan
10.12* Change-in-Control Severance Pay Agreement dated November 2,
1998 between Recovery Engineering, Inc. and Richard D. Hembree
10.13* Change-in-Control Severance Pay Agreement dated November 2,
1998 between Recovery Engineering, Inc. and Jeffrey T. Dekko
10.14* Change-in-Control Severance Pay Agreement dated November 2,
1998 between Recovery Engineering, Inc. and Barry B. Van
Lerberghe
10.15* Change-in-Control Severance Pay Agreement dated November 2,
1998 between Recovery Engineering, Inc. and Daniel B. Seebart
10.16* Change-in-Control Severance Pay Agreement dated February 8,
1999 between Recovery Engineering, Inc. and Reed A. Watson
10.17 Lease Agreement dated November 8, 1996 between Ryan Companies
US, Inc. and Recovery Engineering, Inc.
10.17.1 First Amendment to Lease dated December 20, 1996, between Ryan
Companies US, Inc. and Recovery Engineering, Inc.
10.17.2 Second Amendment to Lease dated May 1, 1997, between Ryan
Recovery, LLC and Recovery Engineering, Inc.
10.17.3 Third Amendment to Lease dated December 22, 1997, between Ryan
Recovery, LLC and Recovery Engineering, Inc.
13.1 Annual Report to Shareholders for the fiscal year ended
January 3, 1999
21.1 Subsidiary of Recovery Engineering, Inc.
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule
- -------------
* Management Contracts
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
January 3, 1999.
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 31, 1999 By /s/ Brian F. Sullivan
-------------------------------------------
Brian F. Sullivan
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Brian F. Sullivan Chairman, Chief Executive Officer March 31, 1999
- -------------------------------------------- and Director (Principal Executive
Brian F. Sullivan Officer)
/s/ Charles F. Karpinske Vice President and Chief Financial March 31, 1999
- -------------------------------------------- Officer (Principal Financial and
Charles F. Karpinske Accounting Officer)
/s/ Robert Gheewalla Director March 31, 1999
- --------------------------------------------
Robert Gheewalla
/s/ John E. Gherty Director March 31, 1999
- --------------------------------------------
John E. Gherty
/s/ Sanjay H. Patel Director March 31, 1999
- --------------------------------------------
Sanjay H. Patel
/s/ William D. Thompson Director March 31, 1999
- --------------------------------------------
William D. Thompson
/s/ William F. Wanner, Jr. Director March 31, 1999
- --------------------------------------------
William F. Wanner, Jr.
/s/ Richard J. Zeckhauser Director March 31, 1999
- --------------------------------------------
Richard J. Zeckhauser
18
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
RECOVERY ENGINEERING, INC.
(in thousands)
ADDITIONS
--------------------------
BALANCE AT CHARGED TO
BEGINNING COSTS AND CHARGED TO BALANCE AT END
DESCRIPTION OF PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS OF PERIOD
- ----------- --------- -------- -------------- ---------- ---------------
YEAR ENDED JANUARY 3, 1999
Reserves & allowances deducted from
asset accounts:
Allowance for uncollectible accounts $314 $ 52 $ 58 (1) $308
Reserve for inventory obsolescence $418 $587 $318 (2) $687
YEAR ENDED DECEMBER 31, 1997
Reserves & allowances deducted from
asset accounts:
Allowance for uncollectible accounts $212 $148 $ 46 (1) $314
Reserve for inventory obsolescence $226 $471 $279 (2) $418
YEAR ENDED DECEMBER 31, 1996
Reserves & allowances deducted from
asset accounts:
Allowance for uncollectible accounts $ 57 $315 $160 (1) $212
Reserve for inventory obsolescence $112 $430 $316 (2) $226
- ---------------
(1) Uncollectible accounts written off, net of recoveries.
(2) Inventory written off.
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION METHOD OF FILING
- --- ----------- ----------------
3.1 Articles of Incorporation of Recovery Filed as Appendix 1 to the Company's Proxy
Engineering, Inc. Statement dated March 27, 1996 (File No.
0-21232) and incorporated herein by
reference
3.2 Bylaws of Recovery Engineering, Inc. Filed as Appendix 2 to the Company's Proxy
Statement dated March 27, 1996 (File No.
0-21232) and incorporated herein by
reference
4.1 Rights Agreement dated as of January 30, Filed as Exhibit 4.1 to the Company's Form
1996 between Recovery Engineering, Inc. 8-A Registration Statement dated February
and Norwest Bank Minnesota, National 20, 1996 (File No. 0-21232) and incorporated
Association, as Rights Agent herein by reference
4.1.1 Amendment No. 1 dated as of February 3, Filed as Exhibit 4.1.1 to the Company's
1998 to Rights Agreement between Annual Report on Form 10-K for the year
Recovery Engineering, Inc. and Norwest ended December 31, 1997 (File No. 0-21232)
Bank Minnesota, National Association, and incorporated herein by reference
as Rights Agent
10.1 * Recovery Engineering, Inc. 1986 Stock Filed as Exhibit 10.6 to the Company's
Option Plan, as amended Registration Statement on Form SB-2 (No.
33-57826C) and incorporated herein by
reference
10.2 * Recovery Engineering, Inc. 1993 Director Filed as Exhibit 10.7 to the Company's
Stock Option Plan Annual Report on Form 10-K for the year
ended December 31, 1993 (File No. 0-21232)
and incorporated herein by reference
10.3 * Recovery Engineering, Inc. 1994 Stock Filed as Exhibit 10.8 to the Company's
Purchase Plan Annual Report on Form 10-K for the year
ended December 31, 1993 (File No. 0-21232)
and incorporated herein by reference
10.4 * Recovery Engineering, Inc. 1994 Stock Filed as Exhibit 99.1 to the Company's
Option and Incentive Plan, as amended Registration Statement on Form S-8 (No.
333-41621) and incorporated herein by
reference
10.5 Supplier Agreement dated November 25, Filed as Exhibit 10.5 to the Company's
1996, between Thermotech and Recovery Annual Report on Form 10-K for the year
Engineering, Inc. ended December 31, 1997 (File No. 0-21232)
and incorporated herein by reference.
EXHIBIT
NO. DESCRIPTION METHOD OF FILING
- --- ----------- ----------------
10.6 Financing Agreement dated March 31, Filed as Exhibit 99.1 to the Company's
1997 between Recovery Engineering, Inc. Quarterly Report on Form 10-Q for the
and U.S. Bank National Association, f/k/a quarter ended June 30, 1997 (File No.
First Bank National Association 0-21232) and incorporated herein by
reference
10.6.1 First Amendment to Financing Filed as Exhibit 10.7.1 to the Company's
Agreement dated March 16, 1998 Registration Statement on Form S-3 (No.
between Recovery Engineering, Inc. and 333-46833) and incorporated herein by
U.S. Bank National Association, f/k/a reference
First Bank National Association
10.6.2 Waiver Letter dated November 16, 1998, Filed electronically herewith
from U.S. Bank National Association
10.7 Securities Purchase Agreement dated Filed as Exhibit 4.1 to the Company's Report
July 19, 1996 by and among Recovery on Form 8-K dated July 19, 1996 (File No.
Engineering, Inc. and investment 0-21232) and incorporated herein by
partnerships affiliated with The Goldman reference
Sachs Group, L.P. ("GS Group")
10.8 Registration Rights Agreement dated Filed as Exhibit 99.1 to the Company's
July 19, 1996 by and among Recovery Report on Form 8-K dated July 19, 1996 (File
Engineering, Inc. and GS Group No. 0-21232) and incorporated herein by
reference
10.9 * Executive Restriction Agreement dated Filed as Exhibit 99.2 to the Company's
July 19, 1996 by and among Recovery Report on Form 8-K dated July 19, 1996 File
Engineering, Inc., GS Group and Brian F. No. 0-21232) and incorporated herein by
Sullivan reference
10.10 * Executive Severance Pay Agreement Filed as Exhibit 99.2 to the Company's
dated March 24, 1997 between Recovery Quarterly Report on Form 10-Q for the
Engineering, Inc. and Charles F. Quarter ended June 30, 1997 (File No.
Karpinske 0-21232) and incorporated herein by
reference
10.11 * Change-in-Control Severance Pay Agreement Filed electronically herewith
dated November 2, 1998 between Recovery
Engineering, Inc. and Brian F. Sullivan
10.12 * Change-in-Control Severance Pay Agreement Filed electronically herewith
dated November 2, 1998 between Recovery
Engineering, Inc. and Richard D.
Hembree
10.13 * Change-in-Control Severance Pay Agreement Filed electronically herewith
dated November 2, 1998 between Recovery
Engineering, Inc. and Jeffrey T. Dekko
EXHIBIT
NO. DESCRIPTION METHOD OF FILING
- --- ----------- ----------------
10.14 * Change-in-Control Severance Pay Agreement Filed electronically herewith
dated November 2, 1998 between Recovery
Engineering, Inc. and Barry B. Van
Lerberghe
10.15 * Change-in-Control Severance Pay Agreement Filed electronically herewith
dated November 2, 1998 between Recovery
Engineering, Inc. and Daniel B. Seebart
10.16 * Change-in-Control Severance Pay Agreement Filed electronically herewith
dated February 8, 1999 between Recovery
Engineering, Inc. and Reed A. Watson
10.17 Lease Agreement dated November 8, Filed as Exhibit 10.20 to the Company's
1996 between Ryan Companies US, Inc. Annual Report on Form 10-K for the year
and Recovery Engineering, Inc. ended December 31, 1996 (File No. 0-21232)
and incorporated herein by reference
10.17.1 First Amendment to Lease dated Filed as Exhibit 10.12.1 to the Company's
December 20, 1996, between Ryan Annual Report on Form 10-K for the year
Companies US, Inc. and Recovery ended December 31, 1997 (File No. 0-21232)
Engineering, Inc. and incorporated herein by reference.
10.17.2 Second Amendment to Lease dated Filed as Exhibit 10.12.2 to the Company's
May 1, 1997, between Ryan Recovery, Annual Report on Form 10-K for the year
LLC and Recovery Engineering, Inc. ended December 31, 1997 (File No. 0-21232)
and incorporated herein by reference
10.17.3 Third Amendment to Lease dated Filed as Exhibit 10.12.3 to the Company's
December 22, 1997, between Ryan Annual Report on Form 10-K for the year
Recovery, LLC and Recovery ended December 31, 1997 (File No. 0-21232)
Engineering, Inc. and incorporated herein by reference
13.1 Annual Report to Shareholders for the Filed electronically herewith
fiscal year ended January 3, 1999
21.1 Subsidiary of Recovery Engineering, Inc. Filed as Exhibit 21.1 to the Company's
Annual Report on Form 10-K for the year
ended December 31, 1997 (File No. 0-21232)
and incorporated herein by reference
23.1 Consent of Independent Auditors Filed electronically herewith
27.1 Financial Data Schedule Filed electronically herewith
- -------------
* Management Contracts