PROSPECTUS Filed Pursuant to Rule 424(b)(3)
Registration Statement No. 333-5175
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 12, 1996
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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
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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.
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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
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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 products are
also biodegradable. The Eliminatebased 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.
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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 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
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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
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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 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.
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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 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
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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.
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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.
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
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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 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
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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
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<PAGE>
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 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
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<PAGE>
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.
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<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 Warrant # of
Shares Prior Shares Prior Shares to After
Name to Offering to Offering be Sold Offering
# of
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 29,412 29,412 58,824 -- *
JTWROS
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 & 29,412 29,412 58,824 -- *
Trust TTEE
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 -- *
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
# of Private
# of Private Placement
Placement Warrant # of
Shares Prior Shares Prior Shares to After
Name to Offering to Offering be Sold Offering
# of
Shares %(1)
<S> <C> <C> <C> <C> <C>
Rick Kaufman and Elaine J. 29,412 29,412 58,824 -- *
Lenart JTWROS
Norman Kurtz 29,412 29,412 58,824 -- *
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 58,824 58,824 117,648 -- *
3/24/94
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 Shares Option Warrant # of
Prior to Shares Prior to Shares to After
Name Offering Offering be Sold Offering
# of
Purchase
Option
Shares %(1)
<S> <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 -- *
<FN>
* Less than 1%.
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<PAGE>
(1) Assumes all the Private Placement Warrants, Purchase Options
and Purchase Option Warrants are exercised.
(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.
</FN>
</TABLE>
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
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<PAGE>
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
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.
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