-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PDFld9rKBzonwwHJTxkKRAXY5aNVcTUuTdyY/XZeu0idWhBh9mStkqrnFdXugg3i yuR4R8oR3N9J9aq5KSC36w== 0000897101-99-000572.txt : 19990519 0000897101-99-000572.hdr.sgml : 19990519 ACCESSION NUMBER: 0000897101-99-000572 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990404 FILED AS OF DATE: 19990518 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RECOVERY ENGINEERING INC CENTRAL INDEX KEY: 0000818203 STANDARD INDUSTRIAL CLASSIFICATION: REFRIGERATION & SERVICE INDUSTRY MACHINERY [3580] IRS NUMBER: 411557115 STATE OF INCORPORATION: DE FISCAL YEAR END: 0103 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21232 FILM NUMBER: 99629346 BUSINESS ADDRESS: STREET 1: 9300 NORTH 75TH AVENUE CITY: MINNEAPOLIS STATE: MN ZIP: 55428 BUSINESS PHONE: 6125411313 MAIL ADDRESS: STREET 1: 9300 NORTH 75TH AVENUE CITY: MINNEAPOLIS STATE: MN ZIP: 55428 10-Q 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 - -------------------------------------------------------------------------------- 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 April 4, 1999 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 RECOVERY ENGINEERING, INC. (Exact name of registrant as specified in its charter) Minnesota 41-1557115 - ------------------------------- ----------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation organization) 9300 North 75th Avenue Minneapolis, MN 55428 (Address of principal executive offices) Registrant's telephone number, including area code: (612) 315-5500 N/A - -------------------------------------------------------------------------------- (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 - 6,024,366 shares as of April 29, 1999 -------------------------------------------------------------------- ================================================================================ 1 of 15 RECOVERY ENGINEERING, INC. INDEX PART I. FINANCIAL INFORMATION Page No. -------- Item 1. Financial Statements (Unaudited): Balance Sheets April 4, 1999 and January 3, 1999.............................. 3 Statements of Operations Three-month periods ended April 4, 1999 and April 5, 1998...... 4 Statements of Cash Flows Three-month periods ended April 4, 1999 and April 5, 1999...... 5 Notes to Financial Statements.................................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 7 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............ 12 Item 5. Other Information.............................................. 12 Item 6. Exhibits and Reports on Form 8-K............................... 13 Signatures..................................................... 14 Exhibit Index to Form 10-Q..................................... 15 2 of 15 RECOVERY ENGINEERING, INC. BALANCE SHEETS (In thousands, except share data)
April 4, January 3, 1999 1999 ---------- ---------- ASSETS (Unaudited) Current assets: Cash and cash equivalents ................................. $ 14,685 $ 14,000 Accounts receivable (net of allowance of $270 for 1999 and $308 for 1998) .......................... 15,021 15,389 Inventory ................................................. 11,930 10,661 Other current assets ...................................... 746 620 ---------- ---------- Total Current Assets ................................... 42,382 40,670 Property and equipment: Tooling ................................................... 9,832 9,547 Equipment and fixtures .................................... 14,392 14,109 ---------- ---------- 24,224 23,656 Less accumulated depreciation ............................. 7,887 7,004 ---------- ---------- 16,337 16,652 Deferred income taxes ........................................ 1,512 1,512 Patents (net of accumulated amortization) .................... 722 729 Other assets ................................................. 288 313 ---------- ---------- Total assets ........................................... $ 61,241 $ 59,876 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable .......................................... $ 2,238 $ 5,740 Accrued marketing expenses ................................ 3,796 1,003 Accrued co-op advertising ................................. 3,082 2,994 Other accrued expenses .................................... 4,268 2,868 ---------- ---------- Total current liabilities .............................. 13,384 12,605 Long-term debt ............................................... 15,000 15,000 Shareholders' equity: Common stock, $.01 par value: Authorized shares -- 100,000,000 Issued and outstanding shares: 1999 - 6,022,919 and 1998 - 4,558,000 .................. 60 60 Additional paid-in capital ................................ 60,093 59,977 Note receivable from sale of stock ........................ (498) (498) Retained earnings (deficit) ............................... (26,798) (27,268) ---------- ---------- Total shareholders' equity ............................. 32,857 32,271 ---------- ---------- Total liabilities and shareholders' equity ................ $ 61,241 $ 59,876 ========== ==========
See accompanying notes. 3 of 15 RECOVERY ENGINEERING, INC. STATEMENTS OF OPERATIONS (Unaudited - in thousands, except per share data)
Three months Three months ended April 4, 1999 ended April 5, 1998 ------------------- ------------------- Net sales .......................................... $ 20,566 $ 17,225 Cost of products sold .............................. 10,265 9,033 ---------- ---------- Gross profit ....................................... 10,301 8,192 Operating expenses: Selling, general and administrative ............ 8,755 7,865 Research and development ....................... 961 1,011 ---------- ---------- 9,716 8,876 Income (loss) from operations ...................... 585 (684) Other income (expense): Interest income and other ...................... 227 -- Interest expense and other ..................... (259) (540) ---------- ---------- (32) (540) ---------- ---------- Income (loss) before income taxes .................. 553 (1,224) Income tax benefit (expense) ....................... (83) 185 ---------- ---------- Net income (loss) .................................. $ 470 $ (1,039) ========== ========== Net income (loss) per share - basic and diluted ...................................... $ 0.08 $ (.23) ========== ========== Weighted average shares - basic and diluted ...................................... 6,016 4,553 ========== ==========
See accompanying notes. 4 of 15 RECOVERY ENGINEERING, INC. STATEMENTS OF CASH FLOWS (Unaudited - in thousands)
Three months Three months ended ended April 4, 1999 April 5, 1998 ------------- ------------- Operating activities Net income (loss) ........................................ $ 470 $ (1,039) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization ............................ 918 612 Changes in operating assets and liabilities: Accounts receivable .................................... 368 (1,442) Inventory .............................................. (1,269) (749) Other assets ........................................... (101) 519 Accounts payable ....................................... (3,502) (1,415) Accrued expenses ....................................... 4,281 (781) ---------- ---------- Net cash provided by (used in) operating activities ...... 1,165 (4,295) Investing activities Purchase of property and equipment ....................... (568) (2,130) Purchase of patents ...................................... (28) (35) ---------- ---------- Net cash used in investing activities .................... (596) (2,165) Financing activities Net proceeds from bank line of credit .................... -- 6,045 Issuance of common stock ................................. 116 154 ---------- ---------- Net cash provided by financing activities ................ 116 6,199 ---------- ---------- Increase (decrease) in cash and cash equivalents .............. 685 (261) Cash and cash equivalents at beginning of period .............. 14,000 261 ---------- ---------- Cash and cash equivalents at end of period .................... $ 14,685 $ -- ========== ==========
See accompanying notes. 5 of 15 RECOVERY ENGINEERING, INC. NOTES TO FINANCIAL STATEMENTS (Unaudited) April 4, 1999 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 day period ended April 4, 1999 are not necessarily indicative of the results that may be expected for the year ending January 2, 2000, or any other period. For further information, refer to the financial statements and footnotes thereto for the year ended January 3, 1999 included in the Company's latest annual report on Form 10-K. Commencing with fiscal 1998, the Company's fiscal year ends on the Sunday closest to December 31 (January 2, 2000) and each quarter ends on the last Sunday of a thirteen-week period. As a result, the first quarters ended April 4, 1999 and April 5, 1998 included 91 and 95 days, respectively. 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: April 4, January 3, 1999 1999 ----------- ----------- Finished products $ 6,307,000 $ 4,378,000 Work in process 286,000 258,000 Raw materials 5,337,000 6,025,000 ----------- ----------- $11,930,000 $10,661,000 =========== =========== Note C -- 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. In 1998, the FASB issued Statements No. 132 EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS, and No. 133 ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. Statement No. 132 is effective for fiscal years beginning after December 15, 1997, and Statement No. 133 is effective for fiscal years beginning after June 15, 1999. The adoption by the Company of these statements in January 1998 and January 1999, respectively, did not and is not expected to have a material impact on the Company's financial statements. 6 of 15 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Ninety-one Day Period ended April 4, 1999) RESULTS OF OPERATIONS: Net sales for the quarter ended April 4, 1999 increased 19.4 percent to $20,566,000 from $17,225,000 for the quarter ended April 5, 1998. Increased sales were driven by a 36% increase in sell-through of the Company's household and outdoor water filtration products at retail, according to sell-through data collected by the Company. Gross profit margin for the quarter ended April 4, 1999 was 50.1 percent compared to 47.6 percent for the quarter ended April 5, 1998. This increase was driven largely by increased replacement filter sales as a percent of total sales and by a reduction in manufacturing costs. The Company ramped-up two new filtration manufacturing processes in 1998 for its household water filter products. These processes were developed to both enhance filter contaminant reduction performance and to reduce manufacturing costs. By the end of the fourth quarter in 1998, these processes reached the Company's internal yield targets, leading to a reduction in its overall cost of goods sold that was realized in the first quarter of 1999. Selling, general and administrative expenses increased to $8,755,000 for the quarter ended April 4, 1999 from $7,865,000 for the quarter ended April 5, 1998, representing 42.6% and 45.7% of net sales, respectively. 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, general and administrative expenses decreased as a percentage of sales in the first quarter of 1999 compared to the same period last year. Although the Company expects to continue its investment in marketing and advertising expenditures, the Company believes that selling, general and administrative expenses will, as a percentage of net sales, decrease for the year in 1999 compared to 1998. Research and development expense decreased to $961,000 for the quarter ended April 4, 1999, compared to $1,011,000 for the quarter ended April 5, 1998. The Company continues to be committed towards developing new products and technology. Development of product line extensions and other new technology will require continued emphasis and may require increased spending on research and development. Other expenses decreased to $32,000 for the quarter ended April 4, 1999 compared to $540,000 for the quarter ended April 5, 1998. Interest income and other income increased to $227,000 for the first quarter of 1999 compared to no interest income and other income for the same period in 1998. This was mainly due to increased balances of cash and cash equivalents as a result of the Company's public offering which was completed in the second quarter of 1998. Interest expense and other expense decreased to $259,000 for the first quarter of 1999 compared to $540,000 for the same period in 1998. The decrease was due mainly to lower 7 of 15 interest expense on the Company's bank line of credit, which was established in March 1997 and repaid by the Company subsequent to its public offering in the second quarter of 1998. The Company's effective income tax rate was 15% for the quarters ended April 4, 1999 and April 5, 1998, respectively. 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: During the quarter ended April 4, 1999, operations provided cash of $1,165,000, compared to $4,295,000 of cash used in operations in the same period the prior year. In the first quarter of 1999, cash was provided by net income and a decrease in the level of accounts receivable and an increase in the level of accrued expenses, while cash was used to increase the level of inventories and decrease the level of accounts payable. In the first quarter of 1998, cash was used to fund the net loss and increase the level of inventories and accounts receivable, as well as decrease the level of accounts payable and accrued expenses. Capital expenditures were $568,000 for the quarter ended April 4, 1999, compared to $2,130,000 for the quarter ended April 5, 1998. The capital expenditures in both periods were primarily to purchase tooling and manufacturing equipment. The Company anticipates continued expenditures for tooling and manufacturing equipment purchases associated with product development and an increase in overall production capacity. In July 1996, the Company issued $15.0 million of Convertible Notes to certain investment partnerships affiliated with The Goldman Sachs Group, L.P. ("GS Group") which bear interest at 5% per annum and expire in 2003. Interest on the loan is paid quarterly. GS Group may convert the outstanding balance of the loan into shares of Common Stock at a conversion price of $14.85 per share at any time during the life of the loan. If not converted, the loan is payable in annual installments starting August 2001. The estimated fair value of the convertible loan based on the Company's incremental borrowing rate for similar liabilities, approximates its carrying value. The Company had no borrowings outstanding under its bank credit facility at April 4, 1999 and January 3, 1999. This credit facility, established in March 1997 and amended in March 1998, provides for total borrowings up to $15,000,000 secured by equipment, inventory, receivables, and intangibles. The credit facility is a discretionary working capital line of credit, limited to eligible receivables and inventory, which bears interest at the bank's reference rate plus 0.75 percent. Borrowings are due on demand. Pursuant to the Company's agreement with GS Group, borrowings are limited to $12,500,000 in 1999. The Company completed a public offering of Common Stock in the second quarter of 1998 netting approximately $38,200,000 from the sale of 1,368,500 shares. The Common Stock was priced at $30.00 per share. All of the shares were sold by the Company. 8 of 15 Management believes that anticipated cash flows from operations, funds available through its bank credit facility and the net proceeds from the sale of securities will provide sufficient capital resources for current operations, expansion of plant capacity and product development. The Board of Directors currently intends to retain all earnings for expansion of the Company's business. YEAR 2000 ISSUES The Company understands the Year 2000 ("Y2K") issue to be the result of computer programs using a two-digit format, as opposed to four digits, to indicate the year. Such computer systems would be unable to interpret dates beyond the year 1999, which could cause a system failure or other computer errors, leading to disruptions in operations either through internal failures or through the effect of failures which might happen externally, and which could have a material adverse effect on the Company's financial position. In 1998, the Company developed a three-phase program for Y2K information systems readiness. The intent of Phase I was to identify those systems with which the Company has exposure to Y2K issues and assess the ability to make them Y2K ready. The intent of Phase II was to implement corrective actions to remedy issues discovered in Phase I. The intent of Phase III is to test all remedial corrective actions taken and, if necessary, complete a contingency plan. The Company has identified three major areas determined to be critical for successful Y2K readiness: (1) financial and manufacturing information system applications, (2) manufacturing automation and (3) third-party relationships. The Company, in accordance with Phase I of the program, has completed an internal review of all systems and contacted all software suppliers to determine major areas of exposure to Y2K issues. In the financial and information system area, a number of applications have been identified as Y2K ready due to their recent implementation, and no material issues were discovered. These include the Company's core financial and reporting systems. In the manufacturing area, the Company has completed its review and did not find any material issues. In the third-party area, the Company continues its assessment of its major third-party relationships. Many of these parties state that they intend to be Y2K ready by 2000. The Company has recently completed Phase II of the program and intends to complete Phase III by mid 1999. The Company is in the process of determining what total costs will be incurred in connection with its Y2K readiness initiatives. Expenses incurred to date are not material and future expenses estimated by the Company are not expected to be material. The Company will fund all Y2K readiness expenses through operating cash flows. Management of the Company believes it has an effective program in place to resolve Y2K issues in a timely manner. As noted above, the Company has not yet completed all necessary phases of its Y2K readiness program. In the event that the Company does not complete any additional phases or is exposed to Y2K problems beyond its reasonable control, the Company 9 of 15 may be unable to take customer orders, manufacture and ship products, invoice customers or collect payments, and may be generally subject to litigation or disruptions in the economy which could materially adversely affect the Company. The amount of potential liability or lost revenue that might result from such events cannot be reasonably estimated at this time. FORWARD-LOOKING STATEMENTS This report (as well as press releases, other public documents, 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, continued customer acceptance of products, the Company's reliance on proprietary technology, pending patent litigation, product obsolescence, the Company's ability to manage growth, risks associated with international operations, competition, product liability, 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. Item 3. 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. 10 of 15 PART II OTHER INFORMATION Item 1. 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 filed a Notice of Appeal regarding the Court's decision. The Company will continue to vigorously defend this case. 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 has been named as the defendant in a civil proceeding initiated in May 1999 by KX Industries, L.P., a former supplier to the Company, which asserts that the Company is infringing a KX patent relating to processes for manufacturing carbon blocks. The Company intends to vigorously defend this case. The Company was aware of the KX patent prior to developing its manufacturing processes and believes that it does not infringe KX's patent. 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 2. Changes in Securities and Use of Proceeds On April 29, 1999, the Board of Directors of the Company adopted Amendment No. 2 to the Rights Agreement, dated January 30, 1996, between the Company and Norwest Bank, N.A., as Rights Agent. The Rights Agreement previously required that a majority of the "Continuing Directors," as defined in the Rights Agreement, approve the redemption of the Rights, the exchange of the Rights after any person becomes an Acquiring Person, and certain other actions under the Rights Agreement. Pursuant to Amendment No. 2, these actions now require the approval of a majority of the Board of Directors. Item 3. Defaults upon Senior Securities Not applicable 11 of 15 Item 4. Submission of Matters to a Vote of Security Holders The Company's Annual Meeting of Shareholders was held on April 29, 1999. The following matters were submitted to a vote of the shareholders at the Annual Meeting: Approval of Amendment to the Company's Articles of Incorporation to authorize a classified board and to implement certain related matters. -------------------------------------------------------------- (2,512,146 votes FOR, 1,226,219 votes AGAINST, and 7,499 votes ABSTAINED, and 1,228,262 shares held by brokers were not voted on the resolution) Election of Directors. The following persons were elected to serve as directors, for the following terms: Terms expiring in 2000 Terms expiring in 2001 ---------------------- ---------------------- Robert R. Gheewalla John E. Gherty William D. Thompson Sanjay H. Patel Richard J. Zeckhauser Terms expiring in 2002 ---------------------- Brian F. Sullivan William F. Wanner, Jr. Approval of Amendment to 1994 Stock Option and Incentive Plan to increase the number of shares reserved for issuance thereunder. --------------------------------------------------------------- (3,412,243 votes FOR, 308,472 votes AGAINST, and 25,150 votes ABSTAINED, and 1,228,262 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 reserved for issuance thereunder. ------------------------------------------------------ (3,567,201 votes FOR, 199,246 votes AGAINST, and 36,009 votes ABSTAINED, and 1,171,670 shares held by brokers were not voted on the resolution) Ratification of Appointment of Ernst & Young, LLP as Independent Auditors. ---------------------------------------------------------------- (4,951,398 votes FOR, 13,140 votes AGAINST, and 9,589 votes ABSTAINED) Item 5. Other Information Not applicable 12 of 15 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3.1 Articles of Incorporation of Recovery Engineering, Inc., as amended. 4.1.2 Amendment No. 2 dated as of April 29, 1999 to Rights Agreement between Recovery Engineering, Inc. and Norwest Bank Minnesota, National Association, as Rights Agent. 27 Financial Data Schedule. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter covered by this Form 10-Q. 13 of 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Recovery Engineering, Inc. -------------------------------------------- (Registrant) Dated: May 14, 1999 /s/Brian F. Sullivan ------------- -------------------------------------------- Brian F. Sullivan Chairman and Chief Executive Officer (principal executive officer) Dated: May 14, 1999 /s/Charles F. Karpinske ------------- -------------------------------------------- Charles F. Karpinske Chief Financial Officer (principal financial and accounting officer) 14 of 15 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 EXHIBIT INDEX TO FORM 10-Q For the quarter ended Commission File No.: 0-21232 April 4, 1999 - -------------------------------------------------------------------------------- RECOVERY ENGINEERING, INC. - -------------------------------------------------------------------------------- Exhibit No. Description Method of Filing - ------- ----------- ---------------- 3.1 Articles of Incorporation of Recovery Filed Electronically Engineering, Inc., as amended Herewith 4.1.2 Amendment No. 2 dated as of April 29, Filed Electronically 1999 to Rights Agreement between Herewith Recovery Engineering, Inc. and Norwest Bank Minnesota, National Association, as Rights Agent 27 Financial Data Schedule Filed Electronically Herewith 15 of 15 EX-3.1 2 ARTICLES OF INCORPORATION EXHIBIT 3.1 ARTICLES OF INCORPORATION OF RECOVERY ENGINEERING, INC. The undersigned, for purposes of forming a corporation under Chapter 302A of the Minnesota Statutes, hereby adopts the following Articles of Incorporation: ARTICLE 1. NAME The name of the Corporation is Recovery Engineering, Inc. ARTICLE 2. REGISTERED OFFICE The registered office of the Corporation in the State of Minnesota is located at 2229 Edgewood Avenue South, St. Louis Park, Minnesota 55426. ARTICLE 3. CAPITAL STOCK 3.a. The Corporation is authorized to issue One Hundred Million (100,000,000) shares of capital stock, having a par value of $.01 per share in the case of common stock, and having a par value as determined by the Board of Directors in the case of preferred stock. 3.b. In addition to any and all powers conferred upon the Board of Directors by the laws of the State of Minnesota, the Board of Directors shall have the authority to establish by resolution more than one class or series of shares, either preferred or common, and to fix the relative rights, restrictions and preferences of any such different class or series, and the authority to issue shares of a class or series, shares of which may then be outstanding, to holders of shares of another class or series to effectuate share dividends, splits or conversions of the Corporation's outstanding shares. 3.c. The Board of Directors shall also have the authority to issue rights to convert any of the Corporation's securities into shares of stock of any class or classes, the authority to issue options to purchase or subscribe for shares of stock of any class or classes, and the authority to issue share purchase or subscription warrants or any other evidence of such option rights which set forth the terms, provisions and conditions thereof, including the price or prices at which such shares may be subscribed for or purchased. Such options, warrants and rights may be either transferable or nontransferable and either separable or inseparable from other securities of the Corporation. The Board of Directors is authorized to fix the terms, provisions and conditions of such options, warrants and rights, including the conversion basis or bases and the option price or prices at which shares may be subscribed for or purchased. -1- ARTICLE 4. PURPOSES AND POWERS The Corporation shall have general business purposes and shall possess all powers necessary to conduct any business in which it is authorized to engage, including but not limited to, all those powers expressly conferred upon business corporations by Chapter 302A of the Minnesota Statutes, as it may from time to time be amended, together with those powers implied therefrom. ARTICLE 5. DURATION The Corporation shall have perpetual duration. ARTICLE 6. NO PREEMPTIVE RIGHTS; NO CUMULATIVE VOTING 6.a. The shareholders of the Corporation shall not have the preemptive rights provided by Section 302A.413 of the Minnesota Statutes to subscribe for or to purchase any or all of the shares or other securities, or rights to purchase shares or other securities, of the Corporation, now or hereafter authorized. 6.b. The shareholders of the Corporation shall not have the right of cumulative voting. ARTICLE 7. INCORPORATOR The name and address of the incorporator of this Corporation is: Eric O. Madson 3000 Dain Bosworth Plaza 60 South 6th Street Minneapolis, Minnesota 55402 ARTICLE 8. LIMITATION OF LIABILITY A director of the Corporation shall not be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except for liability (a) for any breach of the director's duty of loyalty to the Corporation or its shareholders, (b) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (c) under Section 302A.559 or Section 80A.23 of the Minnesota Statutes, or (d) for any transaction from which the director derived an improper personal benefit. If the Minnesota Statutes are amended after this Article becomes effective to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability -2- of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Minnesota Statutes, as so amended. Any repeal or modification of this Article 8 by the shareholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. ARTICLE 9. ACTION WITHOUT A MEETING An action required or permitted to be taken at a meeting of the directors may be taken by written action signed by all of the directors, and in the case of an action which need not be approved by the shareholders, such action may be taken by written action signed by the number of directors that would be required to take such action at a meeting of the directors at which all directors were present. IN WITNESS WHEREOF, the undersigned has signed this 26th day of March, 1996. /s/ ERIC O. MADSON -------------------------------------- Eric O. Madson, Incorporator -3- ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION OF RECOVERY ENGINEERING, INC. The undersigned, being the Chief Executive Officer of Recovery Engineering, Inc., a Minnesota corporation (the "Corporation"), hereby certifies that the following resolutions were duly adopted on April 29, 1999, pursuant to the Minnesota Business Corporation Act, Chapter 302A, Minnesota Statutes, and the Bylaws of the Corporation: RESOLVED, that the Articles of Incorporation of Recovery Engineering, Inc. shall be amended by adding a new Article 10, as follows: ARTICLE 10. BOARD OF DIRECTORS 10.a. Number of Directors. The business and affairs of the Corporation shall be managed by or under the direction of a board of directors (the "Board of Directors"). The Board of Directors shall consist of not fewer than five nor more than eleven directors. Within such limits, the exact number of directors shall be fixed from time to time pursuant to a resolution adopted by a majority of the directors then in office, although less than a quorum. 10.b. Election of Directors. The directors of the Corporation shall be divided into three classes, as nearly equal in number as possible: Class 1, Class 2, and Class 3. Each director shall serve for a term ending on the third annual meeting following the annual meeting at which the class was elected; provided, however, that the directors first elected to Class 1 shall serve for a term ending upon the election of directors at the first annual meeting following the end of the calendar year 1999, the directors first elected to Class 2 shall serve for a term ending upon the election of directors at the second annual meeting following the end of the calendar year 1999, and the directors first elected to Class 3 shall serve for a term ending upon the election of directors at the third annual meeting following the end of the calendar year 1999. At each annual election, the successors to the class of directors whose term expires at that time shall be elected by the shareholders to hold office for a term of three years (or until their successors are elected and qualified) to succeed those directors whose term expires, so that the term of one class of directors shall expire each year, unless, by reason of any intervening changes in the authorized number of directors, the Board of Directors shall have designated one or more directorships whose term then expires as -1- directorships of another class in order to more nearly achieve an equal number of directors among the classes of directors. Notwithstanding the requirement that the three classes of directors shall be as nearly equal in number of directors as possible, in the event of any change in the authorized number of directors, each director then continuing to serve as such shall nevertheless continue as a director of the class of which he or she is a member until the expiration of his or her current term, or his or her prior resignation, disqualification, or removal from office. 10.c. Vacancies and Newly Created Directorships. Any vacancies on the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause shall be filled by the affirmative vote of a majority of directors then in office, although less than a quorum, or by the sole remaining director, or, in the event of the failure of the directors or the sole remaining director so to act, by the shareholders at the next election of directors; provided that, if the holders of any class or classes of stock or series thereof of the Corporation, voting separately, are entitled to elect one or more directors, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. Directors so chosen shall hold office for a term expiring at the annual meeting of shareholders at which the term of the class to which they have been elected expires. A director elected to fill a vacancy by reason of an increase in the number of directorships shall be elected by a majority vote of the directors then in office, although less than a quorum, to serve until the next election of the class for which such director shall have been chosen. If the number of directors is changed, any increase or decrease shall be apportioned among the three classes so as to make all classes as nearly equal in number as possible. If, consistent with the preceding requirement, the increase or decrease may be allocated to more than one class, the increase or decrease may be allocated to any such class the Board of Directors selects in its discretion. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. 10.d. Removal. A director may be removed only for cause by the affirmative vote of the holders of at least a majority of the shares then entitled to vote in an election of directors, which vote may only be taken at a meeting of shareholders, the notice of which meeting expressly states such purpose. Cause for removal shall be deemed to exist only if the director whose removal is proposed has been convicted of a felony by a court of competent jurisdiction or has been adjudged by a court of competent jurisdiction to be liable for gross negligence or intentional misconduct in the performance of such director's duty to the Corporation and such adjudication is no longer subject to direct appeal. 10.d. Amendment or Repeal. Notwithstanding anything to the contrary contained in these Articles of Incorporation, any amendment or repeal of all or any part of this Article 10, or the adoption of any provision inconsistent therewith, shall require -2- the affirmative vote of the holders of at least two-thirds of the voting power of the outstanding shares of the Corporation entitled to vote thereon. RESOLVED FURTHER, that the officers of the Corporation, or any one of them, are hereby authorized and directed to prepare, execute and file with the Minnesota Secretary of State, Articles of Amendment to Articles of Incorporation to give effect to the foregoing amendment. Dated: April 29, 1999. /s/ BRIAN F. SULLIVAN -------------------------------------- Brian F. Sullivan Chief Executive Officer -3- EX-4.1.2 3 AMENDMENT 2 TO THE RIGHTS AGREEMENT AMENDMENT NO. 2 EXHIBIT 4.1.2 RECOVERY ENGINEERING, INC. RIGHTS AGREEMENT This Amendment No. 2, dated as of April 29, 1999, between Recovery Engineering, Inc., a Minnesota corporation (the "Company"), and Norwest Bank Minnesota, N.A. (the "Rights Agent") amends certain terms and provisions of the Rights Agreement (the "Rights Agreement"), dated as of January 30, 1996 between Recovery Engineering, Inc., a Delaware corporation to which the Company is a successor entity by merger, and the Rights Agent as follows (each capitalized term used herein but not defined herein shall have the same meaning assigned to such term as in the Rights Agreement): 1. Amendment No. 1 to the Rights Agreement dated as of February 3, 1998 is hereby rescinded in its entirety. 2. Section 1 of the Rights Agreement entitled "Certain Definitions" is hereby amended as follows: 2.1 By deleting each reference to "20%" set forth in the definition of "Acquiring Person" contained in paragraph (a) thereof and in each case substituting therefore: "15%"; 2.2 By supplementing the definition of "Acquiring Person" set forth in paragraph (a) with the following subparagraph (iii): (iii) Notwithstanding the foregoing, at no time shall Brian F. Sullivan, William F. Wanner, Jr., Goldman, Sachs & Co. or any of their respective Affiliates or Associates be deemed to be an "Acquiring Person" by reason of any such Person being the beneficial owner of 15% or more of the shares of Common Stock of the Company then outstanding unless (in addition to (i) any shares of Common Stock of the Company beneficially owned by such Person as of February 3, 1998, and (ii) any shares of Common Stock of the Company in respect of which such Person becomes the beneficial owner after February 3, 1998 as a result of any acquisition of securities directly from the Company by such Person) such Person is also then the beneficial owner of shares of Common Stock of the Company that represent 3% or more of the shares of Common Stock of the Company then outstanding; 2.3 By deleting the definition of "Continuing Director" set forth in paragraph (g) of Section 1 in its entirety and substituting therefor the following definition: (g) "Director" shall mean any person who is a then-current member of the Board of Directors of the Company; and, 3. The Rights Agreement is hereby amended by deleting each and every reference to "Continuing Director" throughout the entirety of the Rights Agreement and substituting therefor the term "Director", whether appearing in singular or plural form. 4. All references in the Rights Agreement to "the Company" shall be deemed references to the Company as defined in this Amendment. 5. All terms and provisions of the Rights Agreement shall remain in full force and effect except to the extent specifically amended or modified by this Amendment No. 2. RECOVERY ENGINEERING, INC. ATTEST: BY: ----------------------------- ----------------------------- NAME: NAME: ----------------------------- ----------------------------- TITLE: TITLE: ----------------------------- ----------------------------- NORWEST BANK MINNESOTA N.A. ATTEST: BY: ----------------------------- ----------------------------- NAME: NAME: ----------------------------- ----------------------------- TITLE: TITLE: ----------------------------- ----------------------------- EX-27 4 ARTICLE 5 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS JAN-02-2000 JAN-04-1999 APR-04-1999 14,685 0 15,021 270 11,930 42,382 24,224 7,887 61,241 13,384 0 0 0 60 32,797 61,241 20,566 20,566 10,265 19,981 0 78 32 553 83 470 0 0 0 470 0.08 0.08
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