As filed with the Securities and Exchange Commission on June 4, 1996.
Registration No. 333-
No. 333-
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
Form S-3
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
----------
H.E.R.C. PRODUCTS INCORPORATED
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 86-0570800
- -------------------------------------------------------- --------------------------------------
(State or jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
</TABLE>
3622 North 34th Avenue
Phoenix, Arizona 85017
(602) 233-2212
(Address of principal executive offices)
----------
Gary S. Glatter, President
H.E.R.C. Products Incorporated
3622 North 34th Avenue
Phoenix, Arizona 85017
(602) 233-2212
(Name, address and telephone number, including area code, of agent for service)
with a copy to:
David Alan Miller, Esq.
Graubard Mollen & Miller
600 Third Avenue
New York, New York 10016-2097
(212) 818-8800
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================================================================
Proposed Proposed maximum Amount of
Title of Securities Amount to be maximum offering aggregate offering registration
to be registered registered price per share(1) price(2) fee
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01 3,214,902(3) $1.93 $6,204,760.86 $2,139.57
- ---------------------------------------------------------------------------------------------------------------------------------
Common Stock Purchase Warrants 3,214,902(3) -- -- (4)
- ---------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value, underlying 3,214,902(3) $1.93 $6,204,760.86 $2,139.57
Common Stock Purchase Warrants
- ---------------------------------------------------------------------------------------------------------------------------------
Purchase Options 321,490(3) -- -- (4)
- ---------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value, underlying 321,490(3) $1.93 $620,475.70 $213.96
Purchase Options
- ---------------------------------------------------------------------------------------------------------------------------------
Common Stock Purchase Warrants 321,490(3) -- -- (4)
underlying Purchase Options
- ---------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value, underlying
Common Stock Purchase Warrants 321,490(3) $1.93 $620,475.70 $213.96
underlying Purchase Options
- ---------------------------------------------------------------------------------------------------------------------------------
Total Fee....................................................................................................$4,707.06
=================================================================================================================================
</TABLE>
(footnotes on next page)
<PAGE>
(1) Based upon the market price of the Common Stock, as reported by The
Nasdaq Stock Market, on May 28, 1996, in accordance with Rule 457(c)
promulgated under the Securities Act of 1933, as amended ("Securities
Act").
(2) The proposed maximum aggregate offering price, based upon the market
price of the Common Stock, as reported by The Nasdaq Stock Market, on
May 28, 1996, in accordance with Rules 457(c) under the Securities Act.
(3) Pursuant to Rule 416, there are also being registered additional shares
of Common Stock as may become issuable pursuant to the antidilution
provisions in the option and warrant agreements under which the shares
of Common stock registered hereon are issuable.
(4) Pursuant to Rule 457(g), no registration fee is required.
In accordance with the provisions of Rule 462 promulgated under the
Securities Act, the Registration Statement will become effective upon filing
with the Securities and Exchange Commission.
The registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
The Registration Statement, including all exhibits and attachments,
contains 28 pages.
2
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Form S-3
Item Number and Heading Caption or Location in Prospectus
----------------------- ---------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and Outside Front Cover Page
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages Inside Front Cover Page
of Prospectus
3. Summary Information and Risk Factors Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Selling Stockholders and Plan of Distribution
6. Dilution Not Applicable
7. Selling Security Holders Selling Stockholders and Plan of Distribution
8. Plan of Distribution Outside Front Cover Page; Selling Stockholders and
Plan of Distribution
9. Description of Securities to Be Registered Not applicable
10. Interest of Named Experts and Counsel Legal Matters and Experts
11. Material Changes Recent Developments
12. Incorporation of Certain Information by Incorporation of Certain Documents by Reference
Reference
13. Disclosure of Commission Position on Selling Stockholders and Indemnification
Indemnification for Securities Act Liabilities
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PRELIMINARY PROSPECTUS DATED JUNE 4, 1996
SUBJECT TO COMPLETION
PROSPECTUS
H.E.R.C. PRODUCTS INCORPORATED
7,072,784 Shares of Common Stock
This Prospectus relates to up to 7,072,784 shares ("Shares") of Common
Stock, par value $.01 per share, of H.E.R.C. Products Incorporated ("Company")
that may be offered for sale for the account of certain stockholders ("Selling
Stockholders") of the Company as stated herein under the heading "Selling
Stockholders." No period of time has been fixed within which the Shares covered
by this Prospectus may be offered or sold, except that none of the Shares may be
sold prior to April 3, 1997 unless GKN Securities Corp., in its sole discretion,
consents to a transfer at an earlier date. The Company has agreed to keep the
Registration Statement, of which this Prospectus is a part, effective until all
the Shares are sold.
All 7,072,784 Shares offered hereby are being registered for the
account of the Selling Stockholders. The Company will not receive any of the
proceeds from the sale of the Shares. However, of the 7,072,784 Shares offered
hereby, 3,857,882 are issuable upon exercise of 3,536,392 warrants and 321,490
purchase options. If such warrants and purchase options are fully exercised, the
Company will receive up to an aggregate of $7,373,377 in gross proceeds. See
"Use of Proceeds" and "Selling Stockholders."
All costs, expenses and fees in connection with the registration of the
Shares offered by this Prospectus will be borne by the Company. Such expenses
are estimated at $33,000. Brokerage commissions and discounts, if any,
attributable to the sale of the Shares for the accounts of the Selling
Stockholders will be borne by them.
The Common Stock of the Company is quoted in The Nasdaq SmallCap Market
under the symbol "HERC" and on the Boston Stock Exchange under the symbol "HER."
----------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A
HIGH DEGREE OF RISK AND SHOULD NOT BE PURCHASED BY
INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR
ENTIRE INVESTMENT. SEE "RISK FACTORS."
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is June ___, 1996
<PAGE>
No person has been authorized to give any information or to make any
representations not contained or incorporated by reference in this Prospectus in
connection with the offer described in this Prospectus and, if given or made,
such information and representations must not be relied upon as having been
authorized by the Company or any of the Selling Stockholders. Neither the
delivery of this Prospectus nor any sale made under this Prospectus shall under
any circumstances create any implication that there has been no change in the
affairs of the Company since the date hereof or since the date of any documents
incorporated herein by reference. This Prospectus does not constitute an offer
or solicitation in any state to any person to whom it is unlawful to make such
offer in such state.
TABLE OF CONTENTS
Page
----
AVAILABLE INFORMATION....................................................... 2
DOCUMENTS INCORPORATED BY REFERENCE......................................... 3
THE COMPANY................................................................. 3
RECENT DEVELOPMENTS......................................................... 4
RISK FACTORS................................................................ 5
USE OF PROCEEDS............................................................. 10
SELLING STOCKHOLDERS........................................................ 11
PLAN OF DISTRIBUTION........................................................ 13
LEGAL MATTERS............................................................... 13
EXPERTS ................................................................... 14
INDEMNIFICATION............................................................. 14
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission
("Commission"), in Washington, D.C., a Registration Statement on Form S-3
("Registration Statement") under the Securities Act of 1933, as amended
("Securities Act") with respect to the Shares offered hereby. This Prospectus
does not contain all of the information set forth in the Registration Statement
and exhibits thereto. For further information with respect to the Company and
the Shares, reference is hereby made to the Registration Statement and exhibits.
The statements contained in this Prospectus as to the contents of any contract
or other document filed as an exhibit are not complete and the description of
such contract or document is qualified in its entirety by reference to such
contract or document. The Registration Statement, together with the exhibits,
may be inspected at the Commission's principal office in Washington, D.C. and
copies may be obtained upon payment of the fees prescribed by the Commission.
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Copies of such information, reports, proxy statements and other
information filed by the Company under the Exchange Act may be examined without
charge at the public reference facilities of the Commission, Judiciary Plaza,
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as at the
following Regional Offices: 14th Floor, 75 Park Place, New York, NY 10007; and
Room 3190, John C. Kluczynski Federal Building, 230 South Dearborn Street,
Chicago, IL 60604. Copies can also be obtained at prescribed rates from the
Commission's Public Reference Section, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Common Stock is listed on The Boston Stock Exchange
and information concerning the Company can be inspected and copied at The Boston
Stock Exchange, Inc., One Boston Place, Boston, Massachusetts 02108.
2
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated by reference into this Prospectus and made a part hereof:
(a) The Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1995, filed with the Commission pursuant to
Section 13(a) of the Exchange Act;
(b) The Company's Quarterly Report on Form 10-QSB for the fiscal
quarter ended March 31, 1996, filed with the Commission
pursuant to Section 13(a) of the Exchange Act; and
(c) The Current Report of the Company on Form 8-K, dated February
5, 1996.
The description of the Company's Common Stock is contained in the
Company's Registration Statement on Form 8-A, declared effective by the
Commission on May 10, 1994, which registration statement is also incorporated
into this Prospectus by reference and made a part hereof.
All documents filed by the Company with the Commission pursuant to
Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of this offering shall be deemed to be
incorporated by reference in this Prospectus and shall be a part hereof from the
date of filing of such documents. Any statement contained in a document
incorporated by reference in this Prospectus and filed with the Commission prior
to the date of this Prospectus shall be deemed to be modified or superseded for
purposes of this Prospectus to the extent that a statement contained herein, or
in any other subsequently filed document which is deemed to be incorporated by
reference herein, modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request of such person, a copy of
any or all of the foregoing documents incorporated herein by reference (other
than exhibits to such documents, unless such exhibits are specifically
incorporated by reference into such documents). A written or telephone request
should be directed to H.E.R.C. Products Incorporated, 3622 North 34th Avenue,
Phoenix, Arizona 85017, telephone number (602) 233-2212, Attention: Investor
Relations.
THE COMPANY
The Company develops, manufactures and markets two principal lines of
products: (i) products incorporating the Company's proprietary chemical
technology, Eliminate(R), which clean and control scaling, corrosion and
biological growth on surfaces and containers which are exposed to water, and
(ii) biorational agricultural products which are comprised of components
existing in nature rather than components that are artificially synthesized or
man-made. Until recently, the Company concentrated on developing its
Eliminate-based products and its water system treatment technologies, obtaining
patents and acquiring CCT Corporation ("CCT"). The Company currently is focusing
on marketing its industrial and agricultural products.
The Company's Eliminate technology was developed to respond to the
disadvantages of current methods of treating water systems. Many of the
chemicals used in treating water systems are corrosive and can cause scaling,
and it is often difficult to achieve and maintain the correct combination of
chemicals. Moreover, to the extent that chemicals used in treating water systems
are toxic, corrosive or non-biodegradable, they are considered to be pollutants,
subjecting the water systems to expensive clean-up and regulatory compliance
costs. Many water systems also require expensive monitoring. The Company's
Eliminate-based products, when added to water, dissolve and prevent scaling from
the deposit of water-borne minerals and corrosion caused by oxidation, while
suppressing the environment that supports components of scale and corrosion in
solution. Even in its concentrated form, the Eliminate technology is non-fuming,
non-abrasive and non-flammable. Many of the Company's Eliminate
3
<PAGE>
products are also biodegradable. The Eliminate-based products for the industrial
market include Well Klean II(R) and Pipe Klean(R) (which remove encrustations
from water pumping and distribution systems), Chlor*Rid(R) (which aids in the
removal of chlorides, sulfates and other soluble salts from surfaces prior to
coating) and Compounds 400, 360, 260, 200, COC 10-30M and Slug (which are
designed for use with the Eliminate technology for treatment of cooling and
other water treatment systems). These products (other than Chlor*Rid which is
sold by Chlor*Rid International, Inc., an unaffiliated distributor) are sold
directly by the Company. The Company's consumer products include Eliminate
Shower, Tub and Tile Cleaner, Clean Sweep(R) (a swimming pool cleaner),
Eliminate Evaporate Cooler Cleaner and Treatment (used to clean and maintain
evaporative cooler systems) and Eliminate Toilet Bowl Cleaner are sold to the
consumer market by H.E.R.C. Consumer Products Company LLC ("HCPC"), an Illinois
Limited Liability Company, jointly owned by the Company and Conair Corporation
("Conair").
Through CCT, the Company's wholly-owned subsidiary acquired in May
1995, the Company develops, manufactures and markets biorational pest management
and plant growth products for the agricultural and horticultural markets. The
Company believes that, in addition to expanding the Company's product offerings
through the addition of CCT's product lines, CCT's established marketing
organization will facilitate the Company's sales of its existing water system
treatment products, although there can be no assurance of this.
The Company was incorporated under the laws of the State of Arizona in
December 1986 and was reincorporated in the State of Delaware in February 1994.
The Company acquired all of the outstanding capital stock of CCT on May 1, 1995
in a merger by which CCT became a wholly-owned subsidiary of the Company. CCT
was incorporated under the laws of the State of Arizona in May 1981. The
Company's executive offices and manufacturing facility for its Eliminate-based
products are located in Phoenix, Arizona and its telephone number is (602)
233-2212. CCT's office is located in Carlsbad, California and its telephone
number is (619) 929-9228.
RECENT DEVELOPMENTS
Private Offering. On April 3, 1996, the Company completed a private
equity offering ("Private Placement") to accredited investors of 3,214,902 units
("Units") pursuant to an Agency Agreement ("Agency Agreement") with GKN
Securities Corp. ("Placement Agent" or "GKN"). Each Unit consisted on one share
of Common Stock ("Private Placement Shares") and a warrant to purchase one share
of Common Stock at an exercise price of $2.00 per share ("Private Placement
Warrants"). The per-Unit offering price was $.85 and the aggregate net proceeds
to the Company were approximately $2,331,000. During the first three months of
1996, the Company's Chief Executive Officer, Mr. S. Steven Carl, and Chairman
Emeritus, Mr. Shelby A. Carl, advanced a total of $325,000 to the Company, which
debt was satisfied through the issuance of 382,353 Units in the Private
Placement.
The Private Placement Warrants are exercisable during the three-year
period commencing April 3, 1996 and ending on April 3, 1999. In the event the
Company has an effective registration statement covering the shares of Common
Stock underlying the Private Placement Warrants ("Private Placement Warrant
Shares") and provided that the last sale price of the Company's Common Stock has
been at least $5.00 per share (subject to adjustment in certain circumstances)
on all twenty of the trading days ending on the third business day prior to the
day on which notice is given, the Company has the right to call the Private
Placement Warrants for redemption at a redemption price of $.01 per Private
Placement Warrant.
Registration Rights of Private Placement Shares and Private Placement
Warrant Shares. Under the terms of the Agency Agreement and the subscription
agreement with each investor in the Private Placement, the Company has agreed to
register the re-offer and re-sale of the Private Placement Shares and the
Private Placement Warrant Shares, and certain other securities of the Company
described below, by filing the registration statement of which this Prospectus
is a part ("Registration Statement") under the Securities Act with the
Commission and the securities laws of states reasonably selected by GKN. The
Company will bear all the expenses and pay all the fees incurred in connection
with the preparation, filing and modification or amendment of this Registration
Statement. Each
4
<PAGE>
Selling Shareholder has agreed that it will not sell any of the Private
Placement Shares or Private Placement Warrant Shares registered herein prior to
April 3, 1997, without the prior written consent of the Placement Agent. See
"Selling Stockholders."
Agency Agreement. The Company paid the Placement Agent a commission of
$253,265 (10% of the offering price of the Units sold to non-affiliates of the
Company, plus 5% of the offering price of the Units sold to affiliates of the
Company) and a non-accountable expense allowance of $81,980 (3% of the gross
offering proceeds). The Company has issued to the Placement Agent and its
designees for $100.00 a five-year purchase option ("Purchase Option") to
purchase 321,490 Units. The Purchase Option is exercisable at any time in whole
or in part between April 3, 1997 and April 3, 2001, at a price per Unit of $.935
and the Units underlying the Purchase Option contain identical terms, conditions
and rights as those Units sold in the Private Placement, except that the
warrants underlying the Purchase Option ("Purchase Option Warrants") are not
redeemable by the Company. All shares underlying the Purchase Option are being
included in the Registration Statement.
The Placement Agent has been granted a right of first refusal to
underwrite any public or private sale of debt or equity securities of the
Company or any subsidiary or successor of the Company during the three-year
period following April 3, 1996. In addition, pursuant to the Agency Agreement,
all of the officers and directors of the Company and CCT, and affiliates of such
persons ("Insiders") have agreed that for a period of three years from April 3,
1996, the Placement Agent has the right, in certain circumstances, to purchase
for its account or sell for the account of the Insiders, any securities sold by
such persons. In addition, the Agency Agreement provides that for a period of
five years from April 3, 1996, the Company will recommend and use its best
efforts to elect a designee of the Placement Agent as a member of its Board of
Directors. Alternatively, the Placement Agent may send an individual to observe
meetings of the Board of Directors, but such observer will not be a member of
the Board of Directors and will not be entitled to vote on any matters before
the Board of Directors. The Placement Agent has not exercised its right to
designate such a person. Such designee will receive no more or less compensation
than is paid to other non-management directors of the Company and such designee
or representative will be entitled to receive reimbursement for all reasonable
costs incurred in attending such meeting.
RISK FACTORS
The Shares being offered hereby are speculative and should not be
purchased by anyone who cannot afford a loss of their entire investment. Before
making an investment in the Company, prospective investors should give careful
consideration to the following risk factors inherent in and affecting the
business of the Company and this offering.
Absence of Substantial Historical Profitability; Recent Losses;
Accumulated Deficit; Future Operating Results. During the last several years,
the Company has concentrated on developing its various technologies, obtaining
patents and acquiring the business of CCT. The Company had limited profitability
in 1992 and incurred losses of $487,173, $2,068,888 and $2,482,110 in 1993, 1994
and 1995, respectively, and $424,522 for the three months ended March 31, 1996.
As of March 31, 1996, the Company had an accumulated deficit of $5,849,696.
Effective January 1, 1994, the Company transferred rights to manufacture and
sell its consumer products to HCPC, which products accounted for 88% of the
Company's revenues in 1993. As a result, the Company accounts for its investment
in HCPC on the equity method and the Company's post-1993 revenues do not include
sales of consumer products. There can be no assurance as to the amount of
income, if any, that the Company will recognize from HCPC. The Company's
revenues consist primarily of sales of its industrial products and biorational
agricultural products and in the future may include the consumer products if
HCPC is terminated. Inasmuch as the Company will continue to have a high level
of operating expense, the Company's ability to achieve future profitability will
depend upon its ability to attain corresponding increases in revenues. Given the
Company's limited financial resources, high level of expenses and the
competitive environments in which the Company operates, there can be no
assurance that the Company will be able to generate sufficient revenues to fund
its current operations. There
5
<PAGE>
can be no assurance that the Company will be able to generate sufficient
revenues to fund its current or future operations or that the Company's future
operations will be profitable.
Significant Capital Requirements; Need for Additional Financing. The
Company's capital requirements have been and will continue to be significant.
The Company is not currently generating sufficient cash flow to fund its
operations, and there can be no assurance that the Company will be able to
generate cash flows in the future which will be sufficient to fund its
operations. Assuming no change in the level of the business of the Company, it
is anticipated that the proceeds from the Private Placement will be sufficient
to meet its anticipated working capital requirements for approximately 12 months
thereafter. If additional financing is needed, the Company will be required to
borrow, sell additional securities or seek other new sources of financing or may
be required to curtail or reduce its activities. The Company has no current
arrangements with respect to additional financing. There can be no assurance
that any sources of additional financing will be available to the Company on
acceptable terms, or at all. To the extent that any future financing involves
the sale of the Company's equity securities, the interest of the Company's
then-stockholders could be substantially diluted.
Dependence on Third Party for Sales of Consumer Products; Amounts Owed
by Company to Conair. HCPC was formed by Conair and the Company to manufacture
and market the Company's consumer products. The Company accounts for its
investment in HCPC on the equity method. Accordingly, sales of HCPC are not
reported as sales of the Company. Distribution of profits are subject to
Conair's reasonable determination as to the availability of distributable
profits that are not required for the future successful operation of HCPC. HCPC
had net sales of $1,381,000 and a net loss of $10,000 for the year ended
December 31, 1995. There can be no assurance that HCPC will be profitable in the
future or that profits will be distributed from HCPC to the Company.
Additionally, because the Company's investment in HCPC is zero, its
proportionate share of cumulative losses (approximately $42,500 at December 31,
1995) has not been recognized to date. Through December 31, 1995, the Company
received $200,000 in advances from Conair against expected profits of HCPC,
which have been included in Notes Payable in the Company's financial statements.
The Company has not paid this debt because it is currently having negotiations
with Conair regarding an agreement pursuant to which (i) this debt will be
reduced by certain amounts owed or to become owed by Conair to the Company, (ii)
repayment will be made only from any cash distributions to which the Company is
entitled from the HCPC joint venture and/or (iii) the debt will be paid in
installments over time. There can be no assurance that the Company will be
successful in its negotiations. If the sales of HCPC do not meet certain targets
by December 31, 1996, it will be dissolved, in which case, the Company will
market those products itself and, thereafter, the sales will be included in the
consolidated sales of the Company.
Dependence on Significant Customers for Industrial and Agricultural
Products. In 1994, approximately 68%, or $282,000, of the revenues of the
Company were derived from sales to Drilling Equipment Supply, Inc. ("DESI"), a
wholly-owned subsidiary of Layne, Inc.; however, the Company's contract with
DESI expired on August 31, 1995 and sales to DESI for 1995 were insignificant.
During the Company's most recent fiscal year, Western Farm Service Inc.
accounted for approximately 15% of the Company's revenues. The Company, through
CCT, has had a relationship with this customer since 1981, formalized in a
written agreement which is renewable on a yearly basis. While CCT considers its
commercial relationship with this customer to be good, a loss of it or a
significant decrease in purchases by it could have a material adverse effect on
the Company's operations.
Competition; Technological and Product Obsolescence. The markets for
the Company's products are highly competitive. The Company competes with
numerous, well established chemical, agricultural and consumer products
companies, all of which possess substantially greater experience, financial,
marketing, personnel, and other resources and have also established greater
recognition for their brand names than the Company. The Company believes that
these competitors have the resources to develop and have developed, are
developing, or may develop and market products directly competitive with
products incorporating the Company's technology. Current competitors or new
market entrants could produce new or enhanced products with features that render
the Company's products obsolete or less marketable. The Company's ability to
compete successfully will depend on the Company's continuing research and
development of new and improved products and on the Company's ability to adapt
to technological changes and advances in the treatment of water system and
biorational agricultural products
6
<PAGE>
industries. There can be no assurance that the Company will be able to compete
successfully, that competitors will not develop technologies or products that
render the Company's products obsolete or less marketable, or that the Company
will be able to successfully enhance its products or develop new products.
Government Regulation. The Company's water system treatment and
agricultural products contain, or require the use of, various chemicals and are
therefore subject to various environmental regulations and other applicable
laws. Certain of the Company's water system treatment products require the use
of chemicals which are classified under applicable laws as hazardous substances.
The Company does not maintain insurance to compensate it for any liabilities it
may incur if it were to violate environmental laws or regulations. Although the
Company does not believe it has incurred any such liability to date, there can
be no assurance that such environmental liabilities will not be incurred in the
future. The use of certain chemicals contained in the Company's products is
subject to frequently changing federal, state and local laws and substantial
regulation under these laws by governmental agencies, including the United
States Environmental Protection Agency ("EPA"), the Occupational Health and
Safety Administration, various state agencies and county and local authorities
acting in conjunction with Federal and state authorities. Among other things,
these regulatory bodies impose requirements to control air, soil and water
pollution, to protect against occupational exposure to such chemicals, including
health and safety risks, and to require notification of the storage, use and
release of certain hazardous chemicals and substances. The Company believes that
it is in substantial compliance with all material federal, state and local laws
and regulations governing its material business operations and has obtained all
material licenses, authorizations, approvals, orders, certificates and permits
required for the operation of its business. There can be no assurance that the
Company in the future will be able to comply with current or future government
regulations in every jurisdiction in which it will conduct its material business
operations without substantial cost or interruption of its operations, or that
any present or future federal, state or local environmental protection
regulations may not restrict the Company's current and possible future
activities. In the event that the Company is unable to comply with such
requirements, the Company could be subject to substantial sanctions, including
restrictions on its business operations, monetary liability and criminal
sanctions, any of which could have a material adverse effect upon the Company's
business.
Reliance on Sale of Industrial and Biorational Agricultural Products;
Uncertainty of Widespread Market Acceptance of Industrial and Biorational
Agricultural Products; Limited Marketing Experience. The Company is
concentrating its efforts on the sale of industrial water system treatment
products and biorational agricultural products. The Company recently has
developed and introduced its municipal and industrial water system treatment
products, to date, and sales have been limited. Additionally, the Company
recently acquired CCT and although many of the biorational agricultural products
have established market acceptance, some of them are relatively new and not yet
universally accepted by consumers. As is typical with new products, demand and
market acceptance for the Company's industrial and new agricultural products are
subject to a high level of uncertainty. Achieving widespread market acceptance
for these products will require substantial marketing efforts and the
expenditure of significant funds to create brand recognition and customer demand
for such products and to cause potential customers to consider the benefits of
the Company's products as against the traditional products to which they have
been accustomed. There can be no assurance that the Company's products will
achieve market acceptance or that sales of the Company's industrial water system
treatment and biorational agricultural products will generate revenues
sufficient to fund the Company' operations.
Seasonality. Sales of the Company's agricultural products are seasonal,
with strongest sales during the first two quarters of the calendar year.
Additionally, periods of inclement weather can serve to delay purchases by
consumers of agricultural products. Sales of the Pipe Klean and Well Klean II
products are also seasonal in those parts of the United States in the snow belt.
Such seasonal or delayed sales can result in uneven cash flow for the Company,
which may require the Company to be dependent on cash flows from sales of its
water system treatment products during those portions of the year when sales of
agricultural products are slow and may require the Company to obtain and
maintain short-term financing arrangements. In the event such financing
arrangements are not available or, once acquired, cease to be available, the
Company's operations and financial condition could be materially adversely
affected.
7
<PAGE>
Limited Patent and Proprietary Information Protection. The Company has
received a patent for the use of Eliminate technology in cleaning potable water
distribution systems. The Company has several patents covering its automated
control system for using the Company's Eliminate technology for controlling
scale and corrosion in water distribution systems and on its process for
cleaning water distribution systems. The Company also has a patent for its
multi-purpose cleaning formulation which is sold by HCPC. The Company has been
allowed a patent in respect of Clean Sweep. Additionally, the Company has two
United States patents pending related to the process for cleaning water
distribution systems. The Company currently is executing a foreign patent
program on the Company's basic United States patent technology. There can be no
assurance that any patents will afford the Company commercially significant
protection of its technology or that the Company will have adequate resources to
enforce its patents. The Company believes that it has independently developed
its proprietary Eliminate technology for controlling scale and corrosion in
water distribution systems and that its technology does not infringe the
proprietary rights of others. Although the Company has received no claims of
infringement, it is possible that infringement of existing or future patents or
proprietary rights may occur. In the event that the Company's products infringe
patent or proprietary rights of others, the Company may be required to modify
its processes or obtain a license. There can be no assurance that the Company
would be able to do so in a timely manner, upon acceptable terms and conditions
or at all. The failure to do so would have a material adverse effect on the
Company. In addition, there can be no assurance that the Company will have the
financial or other resources necessary to defend a patent infringement or
proprietary rights action. Moreover, if any of the Company's products infringe
patents or propriety rights of others, the Company under certain circumstances
could become liable for damages which could have a material adverse effect on
the Company.
The Company's registered trademarks for its consumer products are
Eliminate, Clean Sweep and h.e.r.c.(R) The Company also has the Eliminate(R)
Man(C) registered as a copyright. The Company's registered trademarks for
industrial products include some of the foregoing as well as Well Klean II and
Pipe Klean. CCT's registered trademarks for its agricultural products are
Stressguard(R), COoBACIL(R), Coax(R), Deny(R), Line-Out(R) and Spark(R).
The Company also relies on proprietary know-how and confidential
information and employs various methods to protect the processes, concepts,
ideas and documentation associated with its technology. However, such methods
may not afford complete protection and there can be no assurance that others
will not independently develop such processes, concepts, ideas and
documentation. Although the Company requires all of its employees to sign
confidentiality agreements, there can be no assurance that such agreements will
be enforceable or will provide meaningful protection to the Company. There can
be no assurance that the Company will be able to adequately protect its trade
secrets or that other companies will not acquire information that the Company
considers to be proprietary. Moreover, there can be no assurance that other
companies will not independently develop know-how comparable to or superior to
that of the Company.
Product Liability. The Company is engaged in a business which could
expose it to possible claims for personal injury from the use of its consumer
and industrial products. The Company maintains liability insurance in the
aggregate amount of $2,000,000 with a per-occurrence limit of $1,000,000.
Although no claims have been made against the Company or any of the customers
using its industrial products to date, there can be no assurance that such
claims will not arise in the future or that the insurance coverage will be
sufficient to pay such claims. A partially or completely uninsured claim, if
successful and of significant magnitude, could have a material adverse effect on
the Company.
Dependence on Third Party Suppliers and Manufacturers. The Company
purchases substantially all of its raw chemical supplies and agricultural
products from third parties. The Company believes that there are numerous
available sources of supply. While the Company attempts to maintain alternative
sources for the Company's supplies, the Company is subject to the risk of price
fluctuations and possible delays in deliveries. Failure by suppliers to continue
to supply the Company on commercially reasonable terms, or at all, would have a
material adverse effect on the Company. The Company generally does not maintain
long-term supply agreements with its suppliers and purchases raw materials and
agricultural products pursuant to purchase orders or short-term contracts in the
ordinary course of business. Failure or delay in receiving necessary raw
materials and agricultural products
8
<PAGE>
by the Company would adversely affect the Company's operations and its ability
in turn to deliver its products on a timely basis.
Dependence on Key Personnel. The success of the Company and CCT is
dependent on the personal efforts of S. Steven Carl, Chairman of the Board and
Chief Executive Officer of the Company, Gary S. Glatter, President, Chief
Operating Officer and Chief Financial Officer of the Company, Dr. Jerome H.
Ludwig, Executive Vice President and Secretary of the Company and Gilbert C.
Crowell, Jr., President and Chief Operating Officer of CCT, and certain other
key personnel. The Company or CCT has entered into employment agreements with
Messrs. S. Steven Carl, Gary S. Glatter, Dr. Jerome H. Ludwig and Gilbert C.
Crowell, Jr. expiring in May 1999, December 1998, May 1998 and May 1999,
respectively. The loss of their services could have a material adverse effect on
the Company's business and prospects. The success of the Company is also
dependent upon its ability to hire and retain additional qualified marketing,
technical and financial personnel. There can be no assurance that the Company
will be able to hire or retain such necessary personnel in the future.
No Dividends. The Company has paid no cash dividends on its Common
Stock to date. Payment of dividends on the Common Stock is within the discretion
of the Board of Directors and will depend upon the Company's earnings, its
capital requirements and financial condition, and other relevant factors. The
Company does not currently intend to declare any dividends on its Common Stock
in the foreseeable future.
Authorization and Discretionary Issuance of Preferred Stock. The
Certificate of Incorporation of the Company authorizes the issuance of "blank
check" preferred stock with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered, without stockholder approval, to issue preferred
stock with dividend, liquidation, conversion, voting or other rights which could
adversely affect the voting power or other rights of the holders of the Common
Stock. In the event of issuance, the preferred stock could be utilized, under
certain circumstances, as a method of discouraging, delaying or preventing a
change in control of the Company. Although the Company has no present intention
to issue any shares of its preferred stock, there can be no assurance that the
Company will not do so in the future.
Possible Volatility of Market Price; Limited Public Market Trading.
From time to time the market prices of certain chemical and consumer product
companies have been affected by various factors, including adverse publicity.
There can be no assurance that the market price of the Common Stock will not be
volatile as a result of factors such as the Company's financial results,
possible adverse publicity resulting from any infractions of governmental
regulations and various other factors affecting the chemical and consumer
product industries or the market generally. In recent years the stock market has
experienced wide price fluctuations not necessarily related to the operating
performance of such companies. Although the Common Stock has been listed on The
Nasdaq SmallCap Market since May 1994, there can be no assurance that a regular
trading market will be sustained. Further, in order to continue to trade on The
Nasdaq SmallCap Market, the Company must meet The Nasdaq SmallCap Market's
standards for continued listing. If, at any time, the Company's Common Stock
were de-listed from The Nasdaq SmallCap Market, the Company's securities would
become subject to the "penny stock rules" applicable to non-Nasdaq companies
whose common stock trades at less than $5.00 per share or which have tangible
net worth of less than $5,000,000 ($2,000,000 if the Company has been operating
for three or more years). Such rules require, among other things, that brokers
who trade "penny stock" to persons other than "established customers" complete
certain documentation, make suitability inquiries of investors and provide
investors with certain information concerning trading in the security, including
a risk disclosure document and quote information under certain circumstances.
Many brokers have decided not to trade "penny stock" because of the requirements
of the penny stock rules and, as a result, the number of broker-dealers willing
to act as market makers in such securities is limited.
Effect of Outstanding Warrants and Options. In addition to the Warrants
and Unit Options to which this Prospectus relates, the Company currently has
outstanding the following options and warrants, (i) warrants to purchase an
aggregate of 100,000 shares of Common Stock at $5.00 per share, (ii) warrants to
purchase an
9
<PAGE>
aggregate of 130,000 shares of Common Stock at $6.50 per share issued to the
underwriter of the Company's initial public offering, (iii) warrants to purchase
362,500 shares of Common Stock at $2.50 per share, (iv) 337,000 shares of Common
Stock granted and outstanding under the Stock Option Plan at exercises prices
ranging from $1.94 to $5.00, and (v) other options to purchase 822,000 shares of
Common Stock at prices ranging from $1.50 to $4.00 per share. All of the
foregoing securities (exercisable into an aggregate of 1,751,500 shares of
Common Stock), represent the right to acquire Common Stock of the Company during
various periods of time and at various prices. Holders of the foregoing
securities are given the opportunity to profit from a rise in the market price
of the Common Stock and are likely to exercise their securities at a time when
the Company would be able to obtain additional equity capital on more favorable
terms. Thus, the terms upon which the Company will be able to obtain additional
equity capital may be adversely affected since the holders of outstanding
options and warrants can be expected to exercise them at a time when the Company
would, in all likelihood, be able to obtain any needed capital on terms more
favorable to the Company than the exercise terms provided by such outstanding
securities.
Control by Current Stockholders. Shelby A. Carl beneficially owns
803,653 shares, or approximately 12.4%, of the outstanding shares of Common
Stock prior to this offering, and S. Steven Carl beneficially owns 869,851
shares, or approximately 13.1% of the outstanding shares Common Stock prior to
this offering, and together they beneficially own an aggregate of 1,693,504
shares, or approximately 24.5% of the outstanding shares of Common Stock prior
to this offering. Accordingly, they are able to substantially influence the
election of the Company's directors, increases in the authorized capital or the
dissolution, merger or sale of the assets of the Company and otherwise influence
the affairs of the Company. Moreover, additional shares may be issued to a
family trust created by Shelby A. Carl and to S. Steven Carl as further
consideration in connection with the acquisition of CCT.
Potential Adverse Effect of Warrant Redemption. The Private Placement
Warrants may be called for redemption by the Company at any time when the
Registration Statement is current and effective, at a redemption price of $.01
per Private Placement Warrant, upon not less than 30 days' prior written notice,
if the last sale price of the Common Stock has been at least $5.00 (subject to
adjustment in certain circumstances) on each of the twenty consecutive trading
days ending on the third day prior to the date on which the redemption notice is
given. Notice of redemption of the Private Placement Warrants could force the
holders to exercise the Private Placement Warrants and pay the exercise price at
a time when it may be disadvantageous for them to do so, to sell the Private
Placement Warrants (for which there will not be a public trading market) when
they may otherwise wish to hold the Private Placement Warrants, or to accept the
redemption price, which would be substantially less than the value of the
Private Placement Warrants at the time of redemption.
USE OF PROCEEDS
The Company is unable to estimate the number of Private Placement
Warrants, Purchase Options and Purchase Option Warrants that may be exercised.
The Company believes that the exercise of Private Placement Warrants, Purchase
Options and Purchase Option Warrants primarily will be dependent on the market
price of a share of Common Stock at the time of exercise and its relation to
their exercise price.
All 7,072,784 Shares offered hereby are being registered for the
account of the Selling Stockholders. The Company will not receive any of the
proceeds from the sale of the Shares. However, of the 7,072,784 Shares offered
hereby, 3,214,902 are issuable upon exercise of the Private Placement Warrants,
321,490 are issuable upon exercise of the Purchase Options and 321,490 are
issuable upon exercise of the Purchase Option Warrants. If these warrants and
options are fully exercised, the Company will receive up to an aggregate of
$7,373,377 in gross proceeds. See "Selling Stockholders."
The Company intends to use the net proceeds from the exercise of any
Private Placement Warrants, Purchase Options and Purchase Option Warrants for
working capital and general corporate purposes. Pending application of the
proceeds, the Company intends to place the funds in interest-bearing investments
such as bank accounts, certificates of deposit and United States government
obligations.
10
<PAGE>
SELLING STOCKHOLDERS
The 7,072,784 shares of Common Stock offered hereby consist of the
following (1) 3,214,902 Private Placement Shares; (2) 3,214,902 shares
underlying the Private Placement Warrants; (3) 321,490 shares issuable by the
Company upon the exercise of the Purchase Options ("Purchase Option Shares") and
(4) 321,490 shares underlying the Purchase Option Warrants contained in the
Units subject to the Purchase Options ("Purchase Option Warrant Shares"). The
following tables set forth certain information as of June 4, 1996 and is
adjusted to reflect the issuance of the above shares upon exercise of all the
Private Placement Warrants, Purchase Options and Purchase Option Warrants and
the sale of all of the Shares offered hereby. Unless otherwise indicated, the
Selling Stockholders each possess sole voting and investment power with respect
to the Shares shown and none of the Selling Stockholders has had a material
relationship with the Company or any of its predecessors or affiliates within
the past three years.
<TABLE>
<CAPTION>
# of Private # of Private
Placement Placement After Offering
Shares Prior to Warrant Shares # of Shares # of
Name Offering Prior to Offering to be Sold Shares %(1)
<S> <C> <C> <C> <C> <C>
Leonard J. Adams 58,824 58,824 117,648 -- *
American Stock Transfer 117,648 117,648 235,296 -- *
& Trust Company
Wissam Amoudi 88,236 88,236 176,472 -- *
Jan Arnett 58,824 58,824 117,648 -- *
Neil Bellet 58,824 58,824 117,648 -- *
Stanley H. Blum 29,412 29,412 58,824 -- *
S. Steven Carl(2) 352,942 352,942 705,884 -- *
Shelby & Margaret Carl JTWROS(3) 29,412 29,412 58,824 -- *
Robert & Josephine Cervantes JTWROS 29,412 29,412 58,824 -- *
Charles Schwab & Co. Inc. 29,412 29,412 58,824 -- *
FBO Bruce Foerster
IRA UTA Charles Schwab & Co. Inc.
Kenneth D. Cole 29,412 29,412 58,824 -- *
Grace Corso 29,412 29,412 58,824 -- *
Dalewood Associates L.P. 117,648 117,648 235,296 -- *
Dalton Trading S.A. 397,059 397,059 794,118 -- *
Delaware Charter Guaranty & Trust TTEE 29,412 29,412 58,824 -- *
FBO David Miller IRA Rollover(4)
Richard/Kenneth Etra JTWROS 29,412 29,412 58,824 -- *
Steven Etra 58,824 58,824 117,648 -- *
F&T Planning Centers, Inc. 29,412 29,412 58,824 -- *
Robert Feig 29,412 29,412 58,824 -- *
Rita Folger 58,824 58,824 117,648 -- *
Paul Giordano 58,824 58,824 117,648 -- *
Lloyd Goldman 29,412 29,412 58,824 -- *
Ernest Gottiener 58,824 58,824 117,648 -- *
Donald Greenberg 29,412 29,412 58,824 -- *
Jay & Clayre Haft JTWROS 29,412 29,412 58,824 -- *
Rita Hochberg 29,412 29,412 58,824 -- *
Alan Hooker 29,412 29,412 58,824 -- *
Carl C. Hsu 29,412 29,412 58,824 -- *
Rick Kaufman and Elaine J. 29,412 29,412 58,824 -- *
Lenart JTWROS
Norman Kurtz 29,412 29,412 58,824 -- *
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
# of Private # of Private
Placement Placement After Offering
Shares Prior to Warrant Shares # of Shares # of
Name Offering Prior to Offering to be Sold Shares %(1)
<S> <C> <C> <C> <C> <C>
Mariwood Investments 58,824 58,824 117,648 -- *
Herbert Maxwell 29,412 29,412 58,824 -- *
MLPFS Cust. FBO Margaret Carl 29,412 29,412 58,824 -- *
Sep/IRA (5)
Jules Nordlicht 117,648 117,648 235,296 -- *
PLR Associates 29,412 29,412 58,824 -- *
Robert T. Lurvey Trust DTD 3/24/94 58,824 58,824 117,648 -- *
Jonathan Robinson 29,412 29,412 58,824 -- *
Martin Rosenman 58,824 58,824 117,648 -- *
Alan J. Rubin 29,412 29,412 58,824 -- *
Wayne Saker 58,824 58,824 117,648 -- *
Leonard M. Schiller 29,412 29,412 58,824 -- *
Suzanne Schiller 29,412 29,412 58,824 -- *
Scoggin Capital, Mgt, L.P. 58,824 58,824 117,648 -- *
Dr. Mark Shnitkin 29,412 29,412 58,824 -- *
David Thalheim 58,824 58,824 117,648 -- *
Frank Turner 29,412 29,412 58,824 -- *
Wall Street Consultants, Inc. 58,824 58,824 117,648 -- *
Charles Warshaw 29,412 29,412 58,824 -- *
Michael Weissman 29,412 29,412 58,824 -- *
Woodland Partners 88,236 88,236 176,492 -- *
Daniel Bock 58,824 58,824 117,648 -- *
Killeba Holdings, S.A. 200,177 200,177 400,354 -- *
</TABLE>
<TABLE>
<CAPTION>
# of Purchase # of Purchase Option After Offering
Option Shares Warrant Shares # of Shares to # of Purchase
Name Prior to Offering Prior to Offering be Sold Option Shares %(1)
<S> <C> <C> <C> <C> <C> <C>
GKN Securities Corp.(6) 115,735 115,735 231,470 -- *
Neil Betoff(7) 1,607 1,607 3,214 -- *
Richard Buonocore(7) 6,430 6,430 12,860 -- *
Brian K. Coventry(7) 4,019 4,019 8,038 -- *
Robert Gladstone(7) 48,224 48,224 96,448 -- *
Roger Gladstone(7) 48,224 48,224 96,448 -- *
Raymond Jansen(7) 6,430 6,430 12,861 -- *
Andrew G. Lazarus(7) 2,411 2,411 4,822 -- *
David M. Nussbaum(7) 48,224 48,224 96,448 -- *
Lester Rosenkrantz(7) 32,149 32,149 64,298 -- *
Deborah L. Schondorf(7) 8,037 8,037 16,074 -- *
</TABLE>
- ----------
* Less than 1%.
(1) Assumes all the Private Placement Warrants, Purchase Options and
Purchase Option Warrants are exercised.
12
<PAGE>
(2) Mr. S. Steven Carl is a director, officer and significant stockholder
of the Company. As of May 28, 1996, Mr. Carl beneficially owned 869,851
shares of Common Stock, including the 705,884 shares sold in this
offering.
(3) Mr. Shelby A. Carl is a director, officer and significant stockholder
of the Company. As of May 28, 1996, Mr. Carl beneficially owned 803,653
shares of Common Stock, including the 58,824 shares to be sold in this
offering and the shares of Common Stock to be sold in this offering by
MLPFS Cust. FBO Margaret Carl SEP IRA.
(4) Mr. David Alan Miller is a partner of the law firm Graubard Mollen &
Miller, general counsel to the Company.
(5) Margaret Carl is the wife of Mr. Shelby A. Carl.
(6) GKN was the placement agent for the Private Placement.
(7) Affiliate or associate of GKN.
The registration rights granted to certain of the Selling Stockholders
generally provide that the Company and the Selling Stockholders indemnify each
other against certain liabilities, including liabilities under the Securities
Act. In the opinion of the Commission, such indemnification is against public
policy and is, therefore unenforceable. See "Indemnification."
PLAN OF DISTRIBUTION
The Selling Stockholders have advised the Company that sales of the
Shares may be effected from time to time in transactions (which may include
block transactions) on the Nasdaq SmallCap Market or The Boston Stock Exchange,
in negotiated transactions, or a combination of such methods of sale, at fixed
prices which may be changed, at market prices prevailing at the time of sale, or
at negotiated prices. The Selling Stockholders have advised the Company that
they have not entered into any agreements, understandings or arrangements with
any underwriters or broker-dealers regarding the sale of their Shares. The
Selling Stockholders may effect such transactions by selling their Shares
directly to purchasers or to or through broker-dealers (including GKN), which
may act as agents or principals. Such broker-dealers may receive compensation in
the form of discounts, concessions, or commissions from the Selling Stockholders
and/or the purchasers of the Shares for whom such broker-dealers may act as
agents or to whom they sell as principal, or both (which compensation as to a
particular broker-dealer might be in excess of customary commissions). The
Selling Stockholders and any broker-dealers that act in connection with the sale
of the Shares might be deemed to be "underwriters' within the meaning of Section
2(11) of the Securities Act. The Selling Stockholders may agree to indemnify any
agent, dealer or broker-dealer that participates in transactions involving sales
of the securities against certain liabilities, including liabilities arising
under the Securities Act.
The Company has agreed to keep the Registration Statement, of which
this Prospectus is a part, effective until all the Shares are sold.
LEGAL MATTERS
Certain matters with respect to the legality of the issuance and sale
of the Shares offered hereby will be passed upon for the Company by Graubard
Mollen & Miller, New York, New York. Mr. David Alan Miller, a partner of
Graubard Mollen & Miller, owns 29,412 shares of Common Stock and 29,412 Private
Placement Warrants of the Company
13
<PAGE>
EXPERTS
The consolidated financial statements of H.E.R.C. Products Incorporated
appearing in the Annual Report of the Company on Form 10-KSB have been audited
by BDO Seidman, LLP, independent auditors, to the extent and for the periods set
forth in their report, included therein and incorporated herein by reference.
Such consolidated financial statements are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Company pursuant to the provisions described above, or otherwise, the
Company has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable. In the event that a claim for indemnification
against such liabilities is asserted by such director, officer or controlling
person in connection with the registration of the Shares, the Company will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
14
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. Other Expenses of Issuance and Distribution.
The table below sets forth the estimated expenses (except the SEC
registration fee which is an actual expense) of the Registrant in connection
with the offer and sale of the shares of Common Stock covered by this
Registration Statement.
SEC registration fee........................................$ 4,707.06
Accountant's fees and expenses..............................$ 3,000.00
Legal fees and expenses.....................................$20,000.00
Printing and engraving expenses.............................$ 2,000.00
Miscellaneous...............................................$ 3,292.94
----------
TOTAL..............................................$33,000.00
ITEM 15. Indemnification of Directors and Officers.
The Company's Certificate of Incorporation provides that all directors,
officers, employees and agents of the Registrant shall be entitled to be
indemnified by the Company to the fullest extent permitted by law. The
Certificate of Incorporation also provides as follows:
A director, or former director, shall not be liable to the
corporation or to any of its stockholders for monetary damages for
breach of fiduciary duty as a director, provided that this provision
shall not eliminate or limit the liability of a director: (i) for any
breach of the director's duty of loyalty to the corporation or its
stockholders; (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; (iii)
under ss.174 of the General Corporation Law of the State of Delaware,
pertaining to the liability of directors for unlawful payment of
dividends or unlawful stock purchase or redemption; or (iv) for any
transaction from which the director derived an improper personal
benefit.
Section 145 of the Delaware General Corporation Law concerning
indemnification of officers, directors, employees and agents is set forth below.
"Section 145. Indemnification of officers, directors, employees and
agents; insurance.
(a) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
II-1
<PAGE>
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgement in its favor
by reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable for negligence or misconduct in the performance of his duty to the
corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
(d) Any indemnification under sections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in subsections (a) and (b) of this
section. Such determination shall be made (1) by the board of directors by a
majority vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even
if obtainable, a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (3) by the stockholders.
(e) Expenses incurred by an officer or director in defending a civil or
criminal action, suite or proceeding may be paid by the corporation in advance
of the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer, to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the corporation as authorized in this section. Such expenses incurred by other
employees and agents may be so paid upon such terms and conditions, if any, as
the board of directors deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
(g) A corporation shall have power to purchase and maintain insurance
on behalf of any person who is or was director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under this section.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise,
II-2
<PAGE>
shall stand in the same position under this section with respect to the
resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued.
(i) For purposes of this section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith an in a manner he reasonably
believed to be in the interest of the participants and beneficiaries of an
employee benefit plan shall be deemed to have acted in a manner "not opposed to
the best interests of the corporation" as referred to in this section.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers, and controlling persons of the Company pursuant to the foregoing
provisions, or otherwise, the Company has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Company of expenses incurred or paid by a director, officer
or controlling person of the Company in a successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to the court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
Pursuant to the Agency Agreement between the Company and GKN Securities
Corp., the placement agent for certain securities described in this Registration
Statement and included as Exhibit 10.1 to this Registration Statement, the
officers and directors of the Company are indemnified by the GKN Securities
Corp., and GKN Securities Corp. and controlling persons of GKN Securities Corp.
are indemnified by the Company, against certain civil liabilities under the
Securities Act.
ITEM 16. Exhibits.
Exhibit No. Description
- ----------- -----------
3.1 Certificate of Incorporation (incorporated by reference
by Exhibit 3.1 of Registration Statement No. 33-75166 on
Form SB-2)
3.2 By-Laws (incorporated by reference from Exhibit 3.2 of
Registration Statement No. 33-75166 on Form SB-2)
4.1 Specimen of Common Stock (incorporated by reference from
Exhibit 4.1 of Registration Statement No. 33- 75166 on
Form SB-2)
5.1 Opinion of Graubard Mollen & Miller
II-3
<PAGE>
Exhibit No. Description
- ----------- -----------
10.1 Agency Agreement between Registrant and GKN Securities
Corp. dated March 4, 1996 (incorporated by reference
from Exhibit (10)(8) of Form 10-KSB for fiscal year
ended December 31, 1995 - File No. 1-13012)
10.2 Form of Purchase Option dated March 4, 1996
(incorporated by reference from Exhibit (10)(9) of Form
10-KSB for fiscal year ended December 31, 1995 - File
No. 1-13012)
10.3 Form of Warrant Agreement issued to investors dated
March 4, 1996 (incorporated by reference from Exhibit
(10)(10) of Form 10-KSB for fiscal year ended December
31, 1995 - File No. 1-13012)
10.4 Form of Subscription Agreement of investors dated March
4, 1996 (incorporated by reference from Exhibit (10)(11)
of Form 10-KSB for fiscal year ended December 31, 1995 -
File No. 1-13012)
22 Subsidiaries (incorporated by reference from Exhibit 22
of Form 10-KSB for fiscal year ended December 31, 1995 -
File No. 1-13012)
23.1 Consent of Graubard Mollen & Miller (included in Exhibit
5)
23.2 Consent of BDO Seidman, LLP
Item 17. Undertakings.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this Registration Statement;
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the Registration Statement (or the
most recent effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement;
(iii) To include any material information with
respect to the plan of distribution not previously disclosed in the
Registration Statement or any material change to such information in
the Registration Statement;
II-4
<PAGE>
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
Registration Statement is on Form S-3 or Form S-8, and the information required
to be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the Registrant pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934 that are incorporated by reference
in the Registration Statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Phoenix, Arizona on this 3rd day of June, 1996.
H.E.R.C. PRODUCTS INCORPORATED
By: /s/ Gary S. Glatter
------------------------
Gary S. Glatter, President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Gary S. Glatter his true and lawful
attorney-in-fact and agent, each acting alone, with full power of substitution
and re-substitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments to this Registration Statement,
including post-effective amendments, and to file the same, with all exhibits
thereto, and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, and hereby ratifies and confirms all
that said attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ S. Steven Carl Chairman of the Board, Chief June 3, 1996
- ---------------------------------------- Executive Officer and Director (Chief
S. Steven Carl Executive Officer)
/s/ Gary S. Glatter President, Chief Operating Officer, June 3, 1996
- ---------------------------------------- Treasurer and Director (Principal
Gary S. Glatter Financial and Accounting Officer)
/s/ Jerome H. Ludwig Executive Vice President, Secretary June 3, 1996
- ----------------------------------------- and Director
Jerome H. Ludwig
/s/ Shelby A. Carl Chairman Emeritus and Director June 3, 1996
- ----------------------------------------
Shelby A. Carl
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Description Page No.
- ----------- ----------- --------
3.1 Certificate of Incorporation (incorporated by
reference by Exhibit 3.1 of Registration Statement
No. 33-75166 on Form SB-2)
3.2 By-Laws (incorporated by reference from Exhibit
3.2 of Registration Statement No. 33-75166 on Form
SB-2)
4.1 Specimen of Common Stock (incorporated by
reference from Exhibit 4.1 of Registration
Statement No. 33- 75166 on Form SB-2)
5.1 Opinion of Graubard Mollen & Miller II-8
10.1 Agency Agreement between Registrant and GKN
Securities Corp. dated March 4, 1996 (incorporated
by reference from Exhibit (10)(8) of Form 10-KSB
for fiscal year ended December 31, 1995 - File No.
1-13012)
10.2 Form of Purchase Option dated March 4, 1996
(incorporated by reference from Exhibit (10)(9) of
Form 10-KSB for fiscal year ended December 31,
1995 - File No. 1-13012)
10.3 Form of Warrant Agreement issued to investors
dated March 4, 1996 (incorporated by reference
from Exhibit (10)(10) of Form 10-KSB for fiscal
year ended December 31, 1995 - File No. 1-13012)
10.4 Form of Subscription Agreement of investors dated
March 4, 1996 (incorporated by reference from
Exhibit (10)(11) of Form 10-KSB for fiscal year
ended December 31, 1995 - File No. 1-13012)
22 Subsidiaries (incorporated by reference from
Exhibit 22 of Form 10-KSB for fiscal year ended
December 31, 1995 - File No. 1-13012)
23.1 Consent of Graubard Mollen & Miller (included in
Exhibit 5)
23.2 Consent of BDO Seidman, LLP II-10
II-7
EXHIBIT 5.1
June 3, 1996
H.E.R.C. Products Incorporated
3622 North 34th Avenue
Phoenix, Arizona 85017
Dear Sirs:
Reference is made to the Registration Statement on Form S-3
("Registration Statement") filed by H.E.R.C. Products Incorporated ("Company")
under the Securities Act of 1933, as amended ("Act"), with respect to an
aggregate of 7,072,784 shares of common stock, par value $.01 per share ("Common
Stock"), including (i) 3,214,902 shares of common Stock currently issued and
outstanding and owned by certain persons listed in the Registration Statement as
Selling Stockholders ("Selling Stockholders"), (ii) 3,214,902 shares of Common
Stock to be issued by the Company to certain of the Selling Stockholders upon
exercise of outstanding Common Stock Purchase Warrants ("Warrants"), (iii)
321,490 shares of Common Stock to be issued by the Company to certain of the
Selling Stockholders upon exercise of outstanding Purchase Options ("Purchase
Options"), and (iv) 321,490 shares of Common Stock to be issued by the Company
to certain of the Selling Stockholders upon exercise of Warrants to be issued
upon exercise of the Purchase Options.
We have examined such documents and considered such legal
matters as we have deemed necessary and relevant as the basis for the opinion
set forth below. With respect to such examination, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals, the conformity to original documents of all documents submitted to
us as reproduced or certified copies, and the authenticity of the originals of
those latter documents. As to questions of fact material to this opinion, we
have, to the extent deemed appropriate, relied upon certain representations of
certain officers and employees of the Company.
Based upon the foregoing, it is our opinion that (i) the
shares of Common Stock currently outstanding and owned by certain of the Selling
Stockholders and being registered on the Registration Statement have been duly
authorized and legally issued, and are fully paid and non-assessable, and (ii)
the shares of Common Stock being registered on the Registration Statement, to be
issued by the Company to certain of the Selling Stockholders upon exercise of
the Warrants and Purchase Options have been duly authorized and, when sold to
the Selling Stockholders and paid for in the manner provided in the Registration
Statement and the various agreements governing the Warrants and Purchase Options
between each of the Selling Stockholders and the Company, will be legally
issued, fully paid and non-assessable.
In giving this opinion, we have assumed that all certificates
for the Company's shares of Common Stock have been or, prior to their issuance,
will be duly executed on behalf of the Company by the Company's transfer agent
and registered by the Company's registrar, if necessary, and will conform,
except as to denominations, to specimens which we have examined.
II-8
<PAGE>
We hereby consent to the use of this opinion as an exhibit to
the Registration Statement, to the use of our name as your counsel, and to all
references made to us in the Registration Statement and in the Prospectus
forming a part thereof. In giving this consent, we do not hereby admit that we
are in the category of persons whose consent is required under Section 7 of the
Act, or the rules and regulations promulgated thereunder.
Very truly yours,
GRAUBARD MOLLEN & MILLER
II-9
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this
Registration Statement on Form S-3 of our report dated February 2, 1996 (except
for Note 13 as to which the date is April 5, 1996), appearing on page F-2 of
H.E.R.C Products Incorporated's Annual Report on Form 10-KSB for the year ended
December 31, 1995.
We also consent to the reference to us under the caption "Experts" in
the Prospectus.
BDO SEIDMAN, LLP
Chicago, Illinois
June 3, 1996
II-10
