U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934: FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to ____________.
Commission File Number 1-13012
H.E.R.C. PRODUCTS INCORPORATED
(Name of small business issuer as specified in its charter)
Delaware 86-0570800
State of Incorporation: IRS Employer Identification Number:
2202 W Lone Cactus Drive #15
Phoenix, Arizona 85027
(Address of principal executive offices)
(602) 492-0336
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES ___X___ NO _______
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
OUTSTANDING AT
CLASS NOVEMBER 4, 1998
----- ----------------
Common Stock, $.01 par value 11,470,588
Transitional Small Business Development Format: YES _____ NO __X__
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
<TABLE>
<CAPTION>
Index To Consolidated Financial Statements
<S> <C>
PART I. FINANCIAL INFORMATION Page No.
Consolidated Financial Statements:
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations
Three Months and Nine Months Ended September 30, 1998 and 1997 4
Consolidated Statement of Stockholders' Equity
Nine Months Ended September 30, 1998 5
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 2 - Changes in Securities 13
Item 5 - Other Information 13
Item 6 - Exhibits and Reports on Form 8-K 14
</TABLE>
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 358,738 $ 135,396
Trade accounts receivable, net of allowance for
doubtful accounts of $22,911 and $36,205 respectively 437,065 166,751
Inventories 147,453 87,738
Other receivables 28,755 11,963
Prepaid expenses 120,100 98,757
------------ ------------
Total Current Assets 1,092,111 500,605
------------ ------------
PROPERTY AND EQUIPMENT
Property and equipment 1,047,985 1,057,470
Less accumulated depreciation 316,342 235,253
------------ ------------
Net Property and Equipment 731,643 822,217
------------ ------------
OTHER ASSETS
Patents, net of accumulated amortization of
$99,596 and $93,789 respectively 55,892 62,642
Patents pending 105,254 71,146
Refundable deposits and other assets 93,439 93,021
Goodwill, net of accumulated amortization of
$12,225 and $8,150 respectively 96,444 100,519
------------ ------------
Total Other Assets 351,029 327,328
------------ ------------
$ 2,174,783 $ 1,650,150
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 224,593 $ 583,571
Accrued wages 35,998 91,450
Current portion of notes payable 314,130 287,856
Net liabilities of discontinued operation -- 261,272
Other accrued expenses 332,727 110,928
------------ ------------
Total Current Liabilities 907,448 1,335,077
------------ ------------
LONG-TERM LIABILITIES
Notes payable, net of current portion 39,771 66,938
------------ ------------
Total Liabilities 947,219 1,402,015
------------ ------------
STOCKHOLDERS' EQUITY
Common Stock, $0.01 par value; authorized 40,000,000 shares;
issued and outstanding 11,470,588 and 8,230,588 shares respectively 114,706 82,306
Additional paid-in capital 13,918,006 12,947,406
Accumulated deficit (12,805,148) (12,781,577)
------------ ------------
Total Stockholders' Equity 1,227,564 248,135
------------ ------------
$ 2,174,783 $ 1,650,150
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
SALES $ 965,653 $ 950,562 $ 3,104,626 $ 2,500,372
COST OF SALES 535,736 668,923 1,636,785 1,932,500
------------ ------------ ------------ ------------
GROSS PROFIT 429,917 281,639 1,467,841 567,872
SELLING EXPENSES 131,482 235,841 414,677 724,970
GENERAL AND ADMINISTRATIVE EXPENSES 395,945 547,970 1,233,800 1,867,082
------------ ------------ ------------ ------------
OPERATING LOSS (97,510) (502,172) (180,636) (2,024,180)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (17,001) (7,499) (74,397) (13,132)
Loss on disposal of equipment (98,139) (103,835)
Miscellaneous 6,818 554 13,891 24,323
Expenses relating to settlement of lawsuits (65,000) -- (120,000) --
Gain on sale of patent -- -- 77,597 --
------------ ------------ ------------ ------------
Total Other Income (Expense) (173,322) (6,945) (206,744) 11,191
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (270,832) (509,117) (387,380) (2,012,989)
INCOME FROM OPERATIONS OF DISCONTINUED SEGMENT -- 37,665 -- 78,521
INCOME FROM DISPOSITION OF DISCONTINUED SEGMENT 363,809 -- 363,809 --
------------ ------------ ------------ ------------
NET PROFIT (LOSS) 92,977 (471,452) (23,571) (1,934,468)
NON-CASH DIVIDEND ON PREFERRED STOCK -- 10,707 -- 62,842
------------ ------------ ------------ ------------
NET PROFIT (LOSS) ALLOCABLE TO COMMON STOCKHOLDERS $ 92,977 $ (482,159) $ (23,571) $ (1,997,310)
============ ============ ============ ============
BASIC AND DILUTED EARNINGS PER COMMON SHARE
LOSS FROM CONTINUING OPERATIONS $ (0.02) $ (0.06) $ (0.04) $ (0.27)
INCOME FROM OPERATIONS OF DISCONTINUED SEGMENT -- 0.00 -- 0.01
INCOME FROM DISPOSITION OF DISCONTINUED SEGMENT 0.03 -- 0.04 --
------------ ------------ ------------ ------------
NET PROFIT (LOSS) PER COMMON SHARE $ 0.01 $ (0.06) $ (0.00) $ (0.26)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC 11,470,588 8,230,588 10,026,559 7,620,067
DILUTED 11,503,014 8,230,588 10,026,559 7,620,067
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional
Paid-in Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1998 8,230,588 $ 82,306 $ 12,947,406 $(12,781,577) $ 248,135
Net Loss -- -- -- (23,571) (23,571)
Warrants issued for services -- -- 3,600 -- 3,600
Issuance of shares of Common Stock 3,240,000 32,400 967,000 -- 999,400
---------- ------------ ------------ ------------ ------------
BALANCE,
SEPTEMBER 30, 1998 11,470,588 $ 114,706 $ 13,918,006 $(12,805,148) $ 1,227,564
========== ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (23,571) $(1,934,468)
----------- -----------
Adjustments to reconcile net profit (loss) to net cash
used in operating activities
Depreciation and amortization 245,551 238,161
Loss on sale or disposal of equipment 103,835 3,255
(Increase) decrease in assets
Trade accounts receivable (270,314) (486,916)
Inventories (59,715) 178,147
Other receivables (16,792) 19,117
Prepaid expenses (63,343) (39,546)
Other assets (57,423) (6,363)
Increase (decrease) in liabilities
Accounts payable (358,978) 547,712
Accrued expenses 166,347 97,265
Change in net liabilities of discontinued operation (261,272) --
Other liabilities -- 145,201
----------- -----------
Total adjustments (572,104) 696,033
----------- -----------
Net cash used in operating activities (595,675) (1,238,435)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (149,059) (287,711)
Cash received from the sale of equipment 4,504 --
Expenditures related to patents and patents pending (34,935) (95,537)
----------- -----------
Net cash used in investing activities (179,490) (383,248)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of Common Stock 999,400 --
Proceeds from exercise of stock options -- 19,375
Proceeds from exercise of warrant -- 140,250
Proceeds from issuance of notes payable
and long-term debt 137,431 250,000
Private offering costs -- (30,393)
Principal payments under notes payable (138,324) (23,377)
----------- -----------
Net cash provided by financing activities 998,507 355,855
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 223,342 (1,265,828)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 135,396 1,369,843
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 358,738 $ 104,015
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
During 1997, 1,714,101 shares of Common Stock were issued upon the conversion of 170,000 shares of Preferred Stock.
During 1997, certain adjustments were made to assets and liabilities acquired in the purchase of the 50% interest of
H.E.R.C. Consumer Products Company and, accordingly, goodwill was reduced by $22,673.
During 1997, inventory with a value of $211,685 was reclassified to property and equipment.
During 1998, the value attributed to warrants issued to prepay future expenses was $3,600.
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - Basis of Presentation
The unaudited consolidated financial statements are presented in accordance with
the requirements of Form 10-QSB and consequently do not include all of the
disclosures normally made in an annual Form 10-KSB filing. Accordingly, the
consolidated financial statements of H.E.R.C. Products Incorporated ("Company")
included herein should be reviewed in conjunction with the consolidated
financial statements and the accompanying footnotes included within the
Company's Form 10-KSB for the year ended December 31, 1997.
The consolidated financial statements have been prepared in accordance with the
Company's customary accounting practices and have not been audited. In the
opinion of management, the consolidated financial statements reflect all
adjustments necessary to report fairly the Company's financial position and
results of operations for the interim period. All such adjustments are normal
and recurring in nature. The interim consolidated results of operations are not
necessarily indicative of results to be expected for the year ending December
31, 1998.
NOTE 2 - Inventories
Inventories are summarized as follows:
SEPTEMBER 30, 1998 DECEMBER 30, 1997
------------------ -----------------
Raw Materials $ 11,709 $ 4,136
Work in Progress 69,700 2,131
Finished goods 66,044 81,471
--------- ----------
Total $147,453 $ 87,738
NOTE 3 - Long Term Debt and Other Financing Arrangements
In September 1997, the Company closed on a five year term loan and borrowed
$250,000. Interest is payable monthly at an annual rate of 14%; principal
repayments are over 54 months and begin 6 months after take-down. In connection
with the closing of such loan, the Company issued two warrants to the lender,
each to purchase 62,500 shares of Common Stock at $1.18 (market price at
closing) and $1.475 (25% premium over market price at closing), respectively.
The Company may prepay the loan; certain fees and conditions, including the
issuance of two identical warrants, apply if prepayment is not made within two
years of takedown.
At September 30, 1998, the Company is not in compliance with certain covenants
in the loan agreement; accordingly, the total indebtedness is classified as a
current liability in the accompanying Consolidated Balance Sheets.
In October 1997, the Company concluded arrangements for a factoring facility
whereby 80% of a maximum of $600,000 in eligible receivables may be financed at
an effective annual interest rate of approximately 16%. The initial term of the
facility is two years which may be extended.
Substantially all of the Company's assets are pledged as security pursuant to
the above agreements.
7
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - Stockholders' Equity
During the second quarter of 1998, the Company sold 3,240,000 shares of Common
Stock at $0.31 per share and received net proceeds of $999,400.
NOTE 5 - Discontinued Operation
During the fourth quarter of 1997, the Company determined that it would exit the
agricultural business and commenced efforts to dispose of its investment in its
wholly owned subsidiary, CCT Corporation, which is accounted for as a
discontinued operation in the accompanying financial statements. During the
third quarter the Company completed the liquidation of CCT and recognized a gain
of approximately $364,000 related to the sale of inventory previously written
off, final adjustments of certain accruals and settlement of a licensing
agreement. Accordingly, the Consolidated Statements of Operations for the three
months and nine months ended September 30, 1997 are reclassified.
NOTE 6 - Settlement of Lawsuits
During 1998 the Company settled all outstanding lawsuits and the financial
impact of these settlements is represented in the financial statements for the
nine months ended September 30, 1998.
NOTE 7 - Subsequent Event
In October, 1998, the Company signed a non-binding letter of intent to
sell the assets of its consumer products subsidiary, H.E.R.C. Consumer Products,
Inc. The proposal calls for cash consideration to be paid for the assets and
inventory as of the closing date and a percentage of the adjusted revenue from
the sale of former H.E.R.C. consumer products in excess of certain minimum
dollar amounts for three years after the closing date. The sale of the
subsidiary is subject to the negotiation and execution of a definitive purchase
agreement which will contain customary representations, warranties, covenants
and conditions to be met before closing, and the due diligence review by the
proposed purchaser. No assurance can be given that the Company will conclude the
purchase agreement on favorable terms, if at all, or that the sale will be
consummated pursuant to the final purchase agreement.
8
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
When used in this Form 10-QSB and in future filings by the Company with the
Securities and Exchange Commission ("SEC") , in the Company's press releases and
in oral statements made with the approval of an authorized executive officer of
the Company, the words or phrases "are expected", "the Company anticipates",
"will continue", "believe", "project", "estimated", "will enhance" or similar
expressions (including confirmations by an authorized executive officer of the
Company of any such expressions made by a third party with respect to the
Company) are intended to identify "forward-looking statements" within the
meaning of that term in Section 27A of the Securities Act of 1933, as amended
("the Act"), and Section 21E of the Securities Exchange Act of 1934 as amended.
Readers are cautioned not to place undue reliance on any such forward-looking
statements, each of which speak only as of the date made. Such statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from historical earnings and those currently anticipated or
projected. Such risks include, but are not limited to, (i) a history of losses,
accumulated deficit and periodically inadequate cash flow, (ii) the possible
need for additional financing, (iii) a competitive market for some of its
products, (iv) the need to expand its marketing program, (v) limited market
acceptance of its industrial products and (vi) dependence on a limited number of
customers. The Company has no obligation to publicly release the result of any
revisions which may be made to any forward-looking statements to reflect any
anticipated events or circumstances occurring after the date of such statements.
This discussion and analysis of financial condition and results of operations
should be read in conjunction with the unaudited consolidated financial
statements and the related disclosures included elsewhere herein.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
Sales of $966,000 during the third quarter of 1998 were 1% ahead of
1997 third quarter sales of $951,000. Although sales remained relatively flat in
total, Industrial Products sales increased 33% to $687,000 in 1998 from $517,000
in 1997 primarily because of growth in marine ship pipe line cleaning projects.
Conversely, Consumer Products sales decreased 36% from $434,000 in 1997 to
$279,000 in 1998 due to increased competition and loss of market share.
Consolidated gross margins were 45% and 30% in 1998 and 1997
respectively. The increase in gross margin percentage is attributable to the
change in revenue mix as noted above in addition to higher Industrial Products
margins in 1998. Consumer Products margin was 33% in 1998 compared to 29% in
1997. Industrial Products margin was 49% in 1998 compared to 30% in 1997. The
higher Industrial Products gross margin percentage is due to increased revenue
from higher margin marine ship pipe line cleaning and reduced revenue from
municipal water line cleaning.
Gross profit increased from $282,000 in 1997 to $430,000 in 1998 due to
the larger percentage of revenue from the industrial work discussed above. Loss
from continuing operations was $271,000 in 1998 compared to $509,000 in 1997
because of a decrease of $256,000 in aggregate selling, general and
administrative expenses combined with the above increase in gross profit offset
by other expenses relating to settlement of lawsuits and disposition of
equipment of approximately $165,000. The decrease in aggregate selling, general
and administrative expenses is a function of the Company's cost containment
program implemented in the third quarter of 1997. Net profit was $93,000 in 1998
compared to a net loss of $471,000 in 1997. The 1998 net profit includes income
from disposition of discontinued segment of $364,000. The 1997 net loss includes
income from operations of discontinued segment of $38,000.
9
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Sales of $3,105,000 during the first nine months of 1998 are 24% ahead
of 1997 sales of $2,500,000. Industrial Products sales were $2,146,000 and
$1,059,000 in 1998 and 1997 respectively, reflecting an increase of 103%. The
increase in Industrial Products revenue is attributable to the continued
expansion of the Company's marine ship pipe line chemical cleaning services.
Consumer products sales decreased 34% from $1,442,000 in 1997 to $958,000 in
1998 due to increased competition and loss of market share.
Consolidated gross margins were 47% and 23% in 1998 and 1997
respectively. Higher consolidated gross margin percentage in 1998 is a function
of the increase in higher margin Industrial Products sales and the comparative
decrease in lower margin Consumer Product sales in addition to higher Industrial
Product margins in general. Industrial Products margin increased to 56% in 1998
compared to 16% in 1997 because of a shift in revenue from municipal potable
water pipe cleaning to marine ship pipe line cleaning, fire protection system
cleaning and industrial chemical sales. Consumer Products margin was 28% in both
1998 and 1997.
Gross profit increased from $568,000 in 1997 to $1,468,000 in 1998
while aggregate selling, general and administrative expenses decreased by
$944,000 resulting in a loss from continuing operations of $387,000 in 1998
compared to $2,013,000 in 1997. The reduction in selling, general and
administrative expenses is a function of the cost containment program
implemented during the third quarter of 1997. Net loss was $24,000 in 1998
compared to a net loss of $1,934,000 in 1997. The 1998 net loss includes income
from disposition of discontinued segment of $364,000. The 1997 net loss includes
income from operations of discontinued segment of $79,000.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $359,000 and $135,000 at September 30,
1998 and December 31, 1997 respectively while working capital was $185,000
compared to a working capital deficit of $834,000 at those respective dates. The
increase in working capital is a function of the sale of Common Stock during the
second quarter of 1998.
In the second quarter of 1998, the Company sold 3,240,000 shares of
Common Stock at $0.31 per share and received net proceeds of $999,400.
As of September 30, 1998 , the Company was not in compliance with
certain covenants pertaining to its term loan. However, all payments required to
service the debt have been made on a timely basis and the lender has taken no
action to accelerate repayment of principal.
Through the first nine months of 1998, the Company was able to generate
cash flow necessary to support its ongoing business. The Company instituted a
cost containment program for its selling, general and administrative expenses
during the third quarter of 1997 and continues to look for ways to contain
costs. Management cannot assure that financial results for the balance of 1998
will provide sufficient positive cash flow to fund ongoing operations.
10
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
If the subsequent event transaction discussed in the footnotes to the financial
statements is consummated, the proceeds from the sale and the reduction of
overhead will allow the Company to focus on the operations of the higher margin
industrial products. Furthermore, if this deal is consummated, the Company will
account for the sale as part of discontinued operations.
The Company currently contracts with a few customers responsible for a
majority of the Company's revenues, and the Company expects the high
concentration levels to continue through 1998 and 1999. Thus, any material
delay, cancellation or reduction of orders from these customers could have a
material adverse effect on the Company's operations.
Although the Company has sought to contain costs and its revenues have
improved during the first nine months of 1998, the financial condition of the
Company may not be able to sustain operations on a current basis because of its
dependence on a limited industrial business which is relatively new. Moreover,
sales of its consumer products remain at low levels due to the competitiveness
of the business, the comparable cost and limited marketing resources of the
Company. The Company has required regular financings to continue its operations
and anticipates it may need further financing in the future. There can be no
assurance that the Company will be able to sell additional securities in the
future or borrow needed funds. Substantially all the assets of the Company are
pledged for its loan and receivables financings. 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.
YEAR 2000 COMPLIANCE DISCLOSURE
Many existing computer programs and databases use only two digits to identify a
year in the date field ( i.e., 99 would represent 1999). These programs and
databases were designed and developed without considering the impact of the
upcoming millennium. Consequently, in the Year 2000, date sensitive computer
programs may interpret the date "00" as 1900 rather than 2000. If not corrected,
many computer systems could fail or create erroneous results in the Year 2000.
The following disclosure is as required by SEC Release No. 33-7558.
Company's State of Readiness
The Company is currently assessing all of its internal and external systems and
processes with respect to the Year 2000 issue. The Company has received
notification from its provider of financial and accounting software that such
software is structured to accommodate the year 2000 and beyond. The Company
plans to continue to test all of its internal and external systems and processes
(and the associated Year 2000 "fixes") for Year 2000 compliance during 1998 and
1999. As part of this process, the Company is assessing the potential impact of
Year 2000 failures from vendors and outside parties upon its business and is
currently taking steps to minimize that risk. Based on the Company's current
state of readiness and the steps currently being taken (i.e., installing backup
processes and systems), the Company does not believe that the Year 2000 problem
will have a material adverse effect on the Company's financial position,
liquidity or operations.
Company's Costs of Year 2000 Compliance
The Company estimates its total cost of Year 2000 compliance to be immaterial.
Company's Risks of Year 2000 Issues
The Company believes that the risk of failure of its software due to
the Year 2000 issue is minimal; however, there may be latent defects of which it
is not aware that may cause disruption. To the extent the Company's vendors,
service providers, and customers have significant Year 2000 failures, the
Company may be affected by their inability to perform or from disruption in
their providing services or orders.
11
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Company's Contingency Plans
The Company is developing contingency plans with respect to significant
Year 2000 issues within its control. For example, the Company is in the process
of assessing and verifying the Year 2000 compliance of its raw material vendors.
Verification will be accomplished through the use of written certifications. Any
vendors not found to be Year 2000 compliant will be replaced, if possible, with
vendors that are Year 2000 compliant.
12
<PAGE>
PART II: OTHER INFORMATION
Item 2. Changes in Securities
Recent Sales of Unregistered Securities
None
Item 5. Other Information
None
13
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
REPORTS ON FORM 8-K: NONE
EXHIBITS
Regulation S-B
Exhibit No. Exhibit
---------------------------
(27) Financial Data Schedule
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
H.E.R.C. PRODUCTS INCORPORATED
(Registrant)
Date: November 12, 1998
/s/ S. Steven Carl
-------------------
S. Steven Carl
Chief Executive Officer
/s/ Michael H. Harader
-----------------------
Michael H. Harader
Chief Financial Officer
(Principal Accounting and Financial Officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 358,738
<SECURITIES> 0
<RECEIVABLES> 459,976
<ALLOWANCES> 22,911
<INVENTORY> 147,453
<CURRENT-ASSETS> 1,092,111
<PP&E> 1,047,985
<DEPRECIATION> 316,342
<TOTAL-ASSETS> 2,174,783
<CURRENT-LIABILITIES> 907,448
<BONDS> 0
0
0
<COMMON> 114,706
<OTHER-SE> 1,112,858
<TOTAL-LIABILITY-AND-EQUITY> 2,174,783
<SALES> 3,104,626
<TOTAL-REVENUES> 3,104,626
<CGS> 1,636,785
<TOTAL-COSTS> 3,285,262
<OTHER-EXPENSES> 132,347
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 74,397
<INCOME-PRETAX> (387,380)
<INCOME-TAX> 0
<INCOME-CONTINUING> (387,380)
<DISCONTINUED> 363,809
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,571)
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
