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, 1999
[ ] 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
2215 W Melinda Lane, Suite A
Phoenix, Arizona 85027
(Address of principal executive offices)
(623) 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 8, 1999
----- ----------------
Common Stock, $.01 par value 11,652,853
Transitional Small Business Development Format: YES [ ] NO [X]
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED
Index To Consolidated Financial Statements
PART I. FINANCIAL INFORMATION Page No.
--------
Consolidated Financial Statements:
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 1999 and 1998 4
Consolidated Statement of Stockholders' Equity
Nine Months Ended September 30, 1999 5
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 2 - Changes in Securities 14
Item 6 - Exhibits and Reports on Form 8-K 14
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED
Consolidated Balance Sheets
September 30, December 31,
1999 1998
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 500,323 $ 242,867
Trade accounts receivable, net of allowance
for doubtful accounts of $16,630 and
$11,630, respectively 200,437 616,356
Inventories 31,523 19,430
Net assets of discontinued operations 10,000 114,192
Costs in excess of billings 12,743 13,993
Other receivables 19,944 4,255
Prepaid expenses 167,111 62,832
------------ ------------
Total Current Assets 942,081 1,073,925
------------ ------------
PROPERTY AND EQUIPMENT
Property and equipment 1,048,621 958,736
Less accumulated depreciation 453,614 322,311
------------ ------------
Net Property and Equipment 595,007 636,425
------------ ------------
OTHER ASSETS
Patents, net of accumulated amortization of
$105,951 and $95,407, respectively 111,532 64,971
Patents pending 81,249 95,182
Refundable deposits and other assets 54,135 76,993
------------ ------------
Total Other Assets 246,916 237,146
------------ ------------
$ 1,784,004 $ 1,947,496
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 104,921 $ 155,650
Accrued wages 36,243 42,030
Billings in excess of costs -- 42,447
Current portion of notes payable 61,453 66,109
Net Liabilities of discontinued operations 41,887 154,506
Other accrued expenses 167,605 164,042
------------ ------------
Total Current Liabilities 412,109 624,784
LONG-TERM LIABILITIES
Notes payable, net of current portion 9,056 25,147
------------ ------------
Total Liabilities 421,165 649,931
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common Stock, $0.01 par value; authorized
40,000,000 shares; issued and outstanding
11,641,089 and 11,491,921, respectively 116,411 114,919
Additional paid-in capital 13,968,701 13,923,793
Accumulated deficit (12,722,273) (12,741,147)
------------ ------------
Total Stockholders' Equity 1,362,839 1,297,565
------------ ------------
$ 1,784,004 $ 1,947,496
============ ============
The accompanying notes are an integral part of these consolidated balance sheets
3
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
SALES $ 683,348 $ 686,542 $ 2,298,101 $ 2,146,452
COST OF SALES 288,432 348,911 996,108 949,554
------------ ------------ ------------ ------------
GROSS PROFIT 394,916 337,631 1,301,993 1,196,898
SELLING EXPENSES 97,519 79,075 296,286 260,208
GENERAL AND ADMINISTRATIVE EXPENSES 340,827 390,367 1,136,250 1,221,938
------------ ------------ ------------ ------------
OPERATING LOSS (43,430) (131,811) (130,543) (285,248)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (4,245) (16,985) (13,517) (73,735)
Miscellaneous 6,128 6,818 20,624 13,890
Expenses relating to settlement of lawsuits -- (65,000) -- (120,000)
Gain (loss) on sale or disposal of equipment 96,028 (98,139) 96,028 (103,835)
Gain on sale of patent -- -- -- 77,597
------------ ------------ ------------ ------------
Total Other Income (Expense) 97,911 (173,306) 103,135 (206,083)
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 54,481 (305,117) (27,408) (491,331)
DISCONTINUED OPERATIONS:
Income from Operations of Discontinued Segments -- 34,285 -- 103,951
Income from Disposition of Discontinued Segments -- 363,809 46,282 363,809
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 54,481 $ 92,977 $ 18,874 $ (23,571)
============ ============ ============ ============
INCOME (LOSS) PER COMMON SHARE - BASIC AND DILUTED
INCOME (LOSS) FROM CONTINUING OPERATIONS $ -- $ (0.02) $ -- $ (0.04)
INCOME FROM DISCONTINUED OPERATIONS -- 0.03 -- 0.04
------------ ------------ ------------ ------------
NET INCOME (LOSS) PER COMMON SHARE $ -- $ 0.01 $ -- $ --
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC 11,641,089 11,470,588 11,577,266 10,026,559
============ ============ ============ ============
DILUTED 11,664,800 11,470,588 11,577,266 10,026,559
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements
4
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED
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,
DECEMBER 31, 1998 11,491,921 $ 114,919 $ 13,923,793 $(12,741,147) $ 1,297,565
Net Income -- -- -- 18,874 18,874
Common Stock issued to
Board of Directors and
Officers as compensation 149,168 1,492 44,908 -- 46,400
------------ ------------ ------------ ------------ ------------
BALANCE,
SEPTEMBER 30, 1999 11,641,089 $ 116,411 $ 13,968,701 $(12,722,273) $ 1,362,839
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of this consolidated statement
5
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
----------------------
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ 18,874 $ (23,571)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization 161,294 245,551
(Gain) loss on sale or disposal of equipment (96,028) 103,835
Common stock issued for services 36,500 --
(Increase) decrease in assets
Trade accounts receivable 415,919 (270,314)
Inventories (12,093) (59,715)
Costs in excess of billings 1,250 --
Other receivables (15,689) (16,792)
Prepaid expenses (107,179) (63,343)
Refundable deposits and other assets 22,858 (57,423)
Change in net assets of discontinued operations 104,192 --
Increase (decrease) in liabilities
Accounts payable (50,729) (358,978)
Accrued wages and other accrued expenses (2,224) 166,347
Billings in excess of costs (42,447) --
Change in net liabilities of discontinued
operations (112,619) (261,272)
--------- ---------
Net cash provided by (used in)
operating activities 321,879 (595,675)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (106,506) (149,059)
Cash received from the sales of equipment 106,000 4,504
Expenditures related to patents and patents pending (43,171) (34,935)
--------- ---------
Net cash used in investing activities (43,677) (179,490)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock -- 999,400
Proceeds from issuance of notes payable
and long-term debt 155,996 137,431
Principal payments under notes payable (176,742) (138,324)
--------- ---------
Net cash provided by (used in)
financing activities (20,746) 998,507
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 257,456 223,342
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 242,867 135,396
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 500,323 $ 358,738
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 13,517 $ 74,397
========= =========
The accompanying notes are an integral part of these consolidated statements
6
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED
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 ("HERC")
included herein should be reviewed in conjunction with the consolidated
financial statements and the accompanying footnotes included within HERC's Form
10-KSB for the year ended December 31, 1998.
The consolidated financial statements have been prepared in accordance with
HERC's customary accounting practices and have not been audited. In the opinion
of management, the consolidated financial statements reflect all adjustments
necessary to fairly report HERC'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, 1999.
NOTE 2 - LONG TERM DEBT AND OTHER FINANCING ARRANGEMENTS
In October 1997, HERC concluded an arrangement for a factoring facility whereby
the factor purchases eligible receivables and advances 80% of the purchased
amount to HERC. Purchased receivables may not exceed $600,000 at any one time.
The arrangement may be canceled by either party with 30 days notice. If HERC
cancels, certain penalties may apply. At September 30, 1999, there were no
factored receivables. This arrangement is accounted for as a sale of receivables
on which the factor has recourse to the 20% residual of aggregate receivables
purchased and outstanding.
NOTE 3 - DISCONTINUED OPERATIONS
During the fourth quarter of 1998, HERC concluded the sale of its wholly owned
subsidiary, Herc Consumer Products, Inc., which is accounted for as a
discontinued operation in the accompanying financial statements. Accordingly,
the Consolidated Statements of Operations for the three and nine months ended
September 30, 1998 have been reclassified.
NOTE 4 - SEGMENT INFORMATION
Information by segment as of and for the three months ended September 30, 1999
was:
<TABLE>
<CAPTION>
Pipe Industrial
Cleaning Chemicals Corporate Consolidated
---------- --------- --------- ------------
<S> <C> <C> <C> <C>
Sales $645,765 $ 37,583 $ -- $ 683,348
Income (loss) from continuing operations 270,692 6,925 (223,136) 54,481
Total assets 907,699 75,914 800,391 1,784,004
Depreciation and amortization 40,706 1,500 10,263 52,469
Capital expenditures 45,359 -- -- 45,359
</TABLE>
Management did not maintain segment information for the three months ended
September 30, 1998 in the same manner presented above. It would be impracticable
for management to restate these results as of and for the three months ended
September 30, 1998, to conform to the September 30, 1999 presentation.
7
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Information by segment as of and for the nine months ended September 30, 1999
was:
<TABLE>
<CAPTION>
Pipe Industrial
Cleaning Chemicals Corporate Consolidated
---------- --------- --------- ------------
<S> <C> <C> <C> <C>
Sales $2,082,235 $215,866 $ -- $2,298,101
Income (loss) from continuing operations 681,792 76,133 (785,333) (27,408)
Total assets 907,699 75,914 800,391 1,784,004
Depreciation and amortization 113,734 4,499 43,061 161,294
Capital expenditures 103,331 -- 3,175 106,506
</TABLE>
Management did not maintain segment information for the nine months ended
September 30, 1998 in the same manner presented above. It would be impracticable
for management to restate these results as of and for the nine months ended
September 30, 1998, to conform to the September 30, 1999 presentation.
NOTE 5 - EARNINGS PER SHARE
A reconciliation of the numerators and denominators (weighted average number of
shares outstanding) of the basic and diluted earnings per share (EPS)
computation for the three and nine months ended September 30, 1999 and 1998 is
as follows:
Three Months Ended
September 30, 1999
-------------------------
Net Income Shares Per Share
(Numerator) (denominator) Amount
---------- ---------- ----------
Basic EPS $ 54,481 11,641,089 $ --
==========
Effect of stock options and warrants -- 23,711
---------- ----------
Diluted EPS $ 54,481 11,664,800 $ --
========== ========== ==========
Three Months Ended
September 30, 1998
-------------------------
Net Income Shares Per Share
(Numerator) (denominator) Amount
---------- ---------- ----------
Basic EPS $ 92,977 11,470,588 $ .01
==========
Effect of stock options and warrants -- --
---------- ----------
Diluted EPS $ 92,977 11,470,588 $ .01
========== ========== ==========
8
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended
September 30, 1999
-------------------------
Net Income Shares Per Share
(Numerator) (denominator) Amount
---------- ---------- ----------
Basic EPS $ 18,874 11,577,266 $ --
==========
Effect of stock options and warrants -- --
---------- ----------
Diluted EPS $ 18,874 11,577,266 $ --
========== ========== ==========
Nine Months Ended
September 30,1998
-------------------------
Net Loss Shares Per Share
(Numerator) (denominator) Amount
---------- ---------- ----------
Basic EPS $ (23,571) 10,026,559 $ --
==========
Effect of stock options and warrants -- --
---------- ----------
Diluted EPS $ (23,571) 10,026,559 $ --
========== ========== ==========
For all periods presented, except the three months ended September 30, 1999, no
common stock equivalents were considered in the EPS calculations, as their
effect was anti-dilutive.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
LITIGATION
HERC is a defendant in various legal actions and claims incidental to the
conduct of its business. Although the ultimate resolution of these matters is
not known, management and its legal counsel believe HERC has meritorious
defenses and the outcome will have no material effect on HERC's financial
position.
ENVIRONMENTAL MATTERS
Management believes HERC is in compliance with federal and state environmental
regulations that pertain to the sale and use of its products.
9
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED
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 HERC with the Securities
and Exchange Commission ("SEC"), in HERC's press releases and in oral statements
made with the approval of an authorized executive officer of HERC, the words or
phrases "are expected", "HERC anticipates", "will continue", "believe",
"project", "estimated", "will enhance" or similar expressions (including
confirmations by an authorized executive officer of HERC of any such expressions
made by a third party with respect to HERC) 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, adequate cash flow and financing for
implementation of its business plan, continued growth in its various customer
segments, effective marketing of its products directly by HERC and through
marketing partners and the other risks detailed in the HERC Form 10-KSB filed
with the SEC. HERC has no obligation to publicly release the result of any
revisions that 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, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Sales of $683,000 in the third quarter were $3,000 less than 1998 third quarter
sales because of a decrease in industrial chemical sales, offset for the most
part by increases in fire protection and marine revenue. Marine revenue was
$599,000 compared to $596,000 in the third quarter of 1998. Of the marine work,
$454,000 was performed pursuant to a contract with the United States Navy
compared to $474,000 in 1998. Additionally, HERC generated fire protection
revenue of $46,000 and industrial chemical revenue of $38,000 in the third
quarter of 1999.
Consolidated gross margins were 58% and 49% in 1999 and 1998, respectively. The
increase in gross margin percentage in 1999 is the result of cost overages
related to a fire protection job in 1998 that were not incurred in 1999 in
addition to changes in revenue mix and volume. HERC expects that gross margin
percentages will continue to fluctuate as changes in revenue mix and volume
occur.
Gross profit increased from $338,000 in 1998 to $395,000 in 1999 primarily
because of the project cost overages mentioned above. General and administrative
expenses decreased by $50,000 in 1999 while selling expenses increased by
$18,000 in 1999. The decrease in general and administrative expenses was the
result of reductions in amortization, printing, rent and other expenses. The
higher selling expense can be attributed primarily to increased marketing
efforts in the fire protection area.
10
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
HERC had an operating loss of $43,000 in 1999 compared with an operating loss of
$132,000 in 1998. The smaller operating loss was the result of the 1998 project
cost overages combined with the lower general and administrative expenses offset
somewhat by the higher selling expenses.
HERC realized net income of $54,000 in the third quarter of 1999 and net income
of $93,000 in the third quarter of 1998. The net income in 1998 contained income
from operations of discontinued segments of $34,000, income from the disposition
of discontinued segments of $364,000, a loss on the disposal of equipment of
$98,000, expenses relating to the settlement of lawsuits of $65,000 and interest
expense of $17,000. The net income in 1999 contained income from the sale of
equipment of $96,000 and interest expense of $4,000. The reduction in interest
expense was achieved by paying down long-term debt and by non-use of HERC's
factoring facility.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Sales of $2,298,000 for the nine months ended September 30, 1999 were $152,000
ahead of sales for the nine months ended September 30, 1998 primarily because of
increased fire protection and municipal revenue in addition to higher marine and
industrial chemical revenue. Marine revenue for the nine months ended September
30, 1999 increased $10,000 to $1,787,000 compared to $1,777,000 in 1998. Of the
marine work, $1,540,000 was performed pursuant to a contract with the United
States Navy compared to $1,449,000 in 1998. Additionally, HERC generated
municipal revenue of $193,000, fire protection revenue of $102,000 and
industrial chemical revenue of $216,000 during the nine months ended September
30, 1999.
Consolidated gross margins were 57% and 56% in 1999 and 1998 respectively. The
increase in gross margin percentage is due to changes in revenue mix and volume.
HERC anticipates that gross margins will continue to fluctuate as revenue mix
and volume changes.
Gross profit increased from $1,197,000 in 1998 to $1,302,000 in 1999. The
increase in gross profit was the result of increased revenue over the prior
period and project cost overages incurred in 1998. Selling expenses increased by
$36,000 in 1999 while general and administrative expenses decreased by $86,000
during 1999. The changes in selling, general and administrative expenses were
caused by a variety of factors including changes in employees, commissions,
amortization, rent, insurance, travel and trade show expenses and several other
factors working in combination with each other.
HERC had an operating loss of $131,000 in 1999 compared to $285,000 in 1998. The
smaller operating loss is a function of the increase in revenue and gross profit
combined with the decrease in general and administrative expenses offset
somewhat by higher selling expenses.
HERC realized net income of $19,000 in 1999 compared to a net loss of $24,000 in
1998. The net income in 1999 included income from the disposition of the
consumer products company of $46,000 relating to settlement of a disputed
marketing agreement, income from the sale of equipment of $96,000 and interest
expense of $14,000. The net loss in 1998 included interest expense of $74,000, a
gain on the sale of a patent of $78,000, expenses relating to the settlement of
lawsuits of $120,000, income from the disposition of the agricultural subsidiary
of $364,000, a loss on the disposal of equipment of $104,000 and income from
operations of the consumer products company of $104,000. The lower interest
expense in 1999 was the result of non-utilization of HERC's factoring
arrangement combined with the pay down of HERC's long-term debt.
11
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $500,000 and $243,000 at September 30, 1999 and
December 31, 1998 and working capital was $530,000 and $449,000 at those
respective dates. The increase in cash during 1999 is a function of cash
provided by operating activities offset by cash used in investing and financing
activities.
Sales to the U.S. Navy under the U.S. Navy contract accounted for 66% and 69% of
consolidated revenues for the three months ended September 30, 1999 and 1998,
respectively. Sales to the U.S. Navy under the U.S. Navy contract accounted for
67% of consolidated revenues for the nine months ended September 30, 1999 and
1998, respectively. HERC expects this high concentration of revenue from the
U.S. Navy to continue throughout 1999 and 2000. Any material delay, cancellation
or reduction of orders from the U.S. Navy could have a material adverse effect
on HERC's operations.
Because of the high concentration level of revenue being generated by one
customer, HERC is actively pursuing ways to minimize the associated risk by
diversifying its revenue base and expanding the applications of its technology
to new markets. This includes, but is not limited to, securing new marine
customers, generating additional revenue from different divisions within the
U.S. Navy, focussing on the continual development and expansion of HERC's fire
protection system cleaning services utilizing its patented process, marketing
its chemical cleaning process toward industrial and municipal customers and
securing strategic partnerships with entities that can help develop and market
HERC's products and services.
Management has no plans to sell additional securities to raise cash and can make
no guarantee that it could sell additional securities. However, any such sale,
if necessary, would substantially dilute the interest of HERC's existing
stockholders.
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.
12
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
COMPANY'S STATE OF READINESS
HERC has assessed all of its internal and external systems and processes with
respect to the Year 2000 issue. HERC has received notification from its provider
of financial and accounting software that such software is structured to
accommodate the year 2000 and beyond. HERC has tested all of its mission
critical internal and external systems and processes (and the associated Year
2000 "fixes"). As part of this process, HERC assessed the potential impact of
Year 2000 failures from vendors and outside parties upon its business and has
taken steps to minimize that risk. Based on HERC's current state of readiness,
HERC does not believe that the Year 2000 problem will have a material adverse
effect on HERC's financial position, liquidity or operations.
COMPANY'S COSTS OF YEAR 2000 COMPLIANCE
HERC's total cost of Year 2000 compliance has been immaterial.
COMPANY'S RISKS OF YEAR 2000 ISSUES
HERC 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 HERC's vendors, service providers, and
customers have significant Year 2000 failures, HERC may be affected by their
inability to perform or from disruption in their providing services or orders.
COMPANY'S CONTINGENCY PLANS
HERC has developed contingency plans with respect to significant Year 2000
issues within its control. For example, HERC has assessed and verified the Year
2000 compliance of its largest raw material vendors. Verification was
accomplished through the use of written certifications. Any vendors not found to
be Year 2000 compliant were replaced, if possible, with vendors that were Year
2000 compliant. HERC will also stock enough inventory to continue providing
cleaning services well into the Year 2000. Management believes that HERC will be
able to perform its cleaning services without encountering any Year 2000
problems because HERC's cleaning process involves non-computer related equipment
and machinery.
13
<PAGE>
PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
RECENT SALES OF UNREGISTERED SECURITIES
During the third quarter of 1999, HERC issued 11,764 shares of common stock as
compensation to the non-employee members of its Board of Directors. These shares
were issued under an exemption from registration pursuant to section 4(2) of the
securities act of 1933.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
REPORTS ON FORM 8-K: NONE
EXHIBITS
Regulation S-B
Exhibit No. Exhibit
- ----------- -------
(10.26) Employment Agreement with S. Steven Carl dated June 15, 1999
(27) Financial Data Schedule
Signatures
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
H.E.R.C. PRODUCTS INCORPORATED
(Registrant)
Date: November 12, 1999 By: /s/ S. Steven Carl
------------------------------------
S. Steven Carl
Chief Executive Officer
By: /s/ Michael H. Harader
------------------------------------
Michael H. Harader
Chief Financial Officer (Principal
Financial and Accounting Officer)
14
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into as of this 15th day of June 1999 by and
between HERC Products Inc., a Delaware corporation (the "Corporation") and S.
STEVEN CARL ("Executive").
A. The Corporation has employed Executive as its President and Chief Executive
Officer and wishes to continue to employ Executive in such capacities.
B. Executive is willing to be employed by the Corporation on the terms and
conditions set forth below.
The Corporation and Executive agree as follows:
1. EMPLOYMENT.
(a) The Corporation will employ Executive as its President and Chief
Executive Officer. Executive will also serve in such other
capacities, as the Board of Directors of the Corporation shall
reasonably deem necessary. Executive will perform such duties as
may be required of him by the Corporation under and subject to
the instruction, direction and control of the Board of Directors
of the Corporation.
(b) The Corporation will use its best efforts to elect Executive as a
director of the Corporation during the term of this Agreement.
2. DEVOTION TO EMPLOYMENT.
Executive accepts employment with the Corporation on the terms and
conditions of this Agreement, and will devote all of his business time and
effort to perform his duties on behalf of the Corporation in his position
as set forth in Section 1, provided, however, that nothing herein shall be
construed to prevent Executive from making and supervising personal
investments. During the term of this Agreement, Executive shall not be
actively engaged in any other business activity which will in any way
impair his ability to properly meet his obligations to the Corporation or
represent any activity competitive with the Corporation or detrimental to
its business. Executive agrees to comply with the reasonable policies,
standards and regulations of the Corporation from time to time established.
3. COMPENSATION AND BENEFITS.
The Corporation agrees to pay Executive compensation for his services as
follows:
3.1 BASE SALARY.
The Corporation will pay Executive an annual base salary, subject to
withholding taxes and other normal payroll deductions, at the rate of
$115,500 per year with annual increases of 15% per year for the term
of this agreement.
3.2 BONUSES.
In addition to Executive's salary, Executive shall be paid a bonus
equal to the percentage specified below of the Corporation's annual
EBITDA, not including extraordinary accounting events or any
accounting impact from discontinued operations, during each of the
periods specified below during which this Agreement is in effect. Any
bonus earned pursuant to the preceding sentence shall be paid to
Executive in cash or stock of the Company within 30 days after the
amount thereof has been determined by HERC's independent auditors. If
<PAGE>
the Executive is paid in stock the closing bid price for December 31
of the year within which the bonus is due shall be used for the
calculation of the amount of stock. Executive may also receive such
other bonuses and increases in Base Salary, if any, as may be awarded
to him from time to time by the Corporation's Board of Directors:
Period Percentage
------ ----------
1/l/99 - 12/31/99 7.5%
1/1/2000 - 12/31/2000 7.5%
If the Company achieves its EBITDA, as projected in the approved
budget for the year, the Executive shall be provided an additional
incentive bonus of 25,000 shares of stock in the Company for each year
the budgeted EBITDA is achieved.
3.3 BENEFITS.
Executive shall be entitled to such medical, dental, disability, life
insurance and other benefits and perquisites, if any, no less
favorable than such as are afforded to other senior executives of the
Corporation, subject to applicable waiting periods and other
conditions. Medical, dental and other health insurance shall also
provide coverage for Executive's spouse and dependent children, if
any. Executive shall be entitled to three weeks of vacation in each
employment year and to a reasonable number of other days off for
religious and personal reasons.
3.4 BUSINESS EXPENSES.
The Corporation will pay or reimburse Executive for all
transportation, hotel and other expenses reasonably incurred by
Executive on business trips and for all other ordinary reasonable
out-of-pocket expenses actually incurred by him in the conduct of the
business of the Corporation against itemized vouchers submitted with
respect to any such expenses approved in accordance with customary
procedures.
3.5 AUTO ALLOWANCE.
The Corporation shall either, at the Corporation's option, pay
Executive the sum of $500 per month as an automobile allowance for
business use or provide Executive with a suitable automobile for
business use at the expense of the Corporation.
4. STOCK GRANTS.
In consideration of Executive's employment hereunder, H.E.R.C. Products
Incorporated will grant Executive 50,000 shares of H.E.R.C.'s Restricted
Common Stock. Such stock to have the terms set forth in Schedule A annexed
hereto.
5. TERM.
The term of this Agreement shall commence as of the date thereof, and shall
continue for a term of two (2) years, unless sooner terminated as provided
herein. This agreement is subject to automatic renewal under the terms
hereof for one year periods provided, however, that on or before six (6)
months prior to the termination date under paragraph 5 hereof, upon written
notice provided to the Executive by the Company or to the Company by the
Executive, the terms of this Agreement shall be renegotioated between
Executive and Company or written notice of intent to terminate this
Agreement shall otherwise be given on such date. If the agreement is
automatically renewed for any one year term the salary per paragraph 3.1
shall remain the same as the second year of this agreement unless adjusted
by the Board.
<PAGE>
6. TERMINATION.
This Agreement shall terminate prior to the end of its term: (a) upon the
death of Executive, or (b) if Executive fails, because of illness or
incapacity, to render the services contemplated by this Agreement for a
period of six consecutive months. The Corporation may terminate this
Agreement prior to the end of its term for cause, upon notice to Executive
by the Corporation. As used herein, "cause" shall mean: (a) the refusal or
failure by Executive to carry out specific directions of the Board of
Directors of the Corporation which are of a material nature and consistent
with his status as Chairman of the Board, President and Chief Executive
Officer, or the refusal or failure by Executive to perform a material part
of Executive's duties hereunder, or a breach of any of Executive's
fiduciary duties to the Corporation; (b) fraudulent or dishonest action by
Executive in his relations with the Corporation or any of its Affiliates,
or with any customer or business contact of the Company or any of its
Affiliates ("dishonest" for these purposes shall mean Executive's knowingly
or recklessly making of a material misstatement or omission for his
personal benefit); or (c) the conviction of Executive of any crime
involving an act of moral turpitude. Notwithstanding the foregoing, no
"cause" for termination shall be deemed to exist with respect to
Executive's acts described in clause (a) above unless the Company shall
have given written notice to Executive specifying the "cause" with
reasonable particularity and, within five business days after such notice,
Executive shall not have cured or eliminated the problem or thing giving
rise to such of cause.
7. RESIGNATION AS DIRECTOR.
If, for any reason, (a) Executive terminates his employment with the
Corporation, or (b) the Corporation terminates Executive's employment under
the terms of this Agreement, or (c) this Agreement expires without being
renewed or extended, then Executive will resign as a director, effective
upon the occurrence of such termination or expiration, whichever is
applicable.
8. PROTECTION OF CONFIDENTIAL INFORMATION; NON-COMPETITION.
8.1 CONFIDENTIAL INFORMATION.
Executive warrants that he is not subject to any restriction on his
executing and performing this Agreement, and acknowledges that:
(a) As a result of his employment by the Corporation, Executive has
obtained and will obtain secret and confidential information
concerning the business of the Corporation and its Affiliates,
including, without limitation, financial information, patents and
other proprietary rights, trade secrets and "know-how," customers, and
certain methodologies ("Confidential Information").
(b) The Corporation and its Affiliates will suffer substantial damage,
which will be difficult to compute if, during the period of his
employment with the Corporation or thereafter, Executive should
divulge Confidential Information or, thereafter, Executive should
enter a business competitive with those of the Corporation.
(c) The provisions of this Agreement are reasonable and necessary for the
protection of the business of the Corporation and its Affiliates.
8.2 MAINTAIN CONFIDENTIALITY.
Executive agrees that he will not at any time, either during the term of
this Agreement or thereafter, divulge to any person or entity any
Confidential Information obtained or learned by him as a result of his
employment with the Corporation or any of its Affiliates, except (a) in the
course of performing his duties hereunder, (b) with the Corporation's
<PAGE>
express written consent; (c) to the extent that any such information is in
the public domain other than as a result of Executive's breach of any of
his obligations hereunder; or (d) where required to be disclosed by court
order subpoena or other government process. If Executive shall be required
to make disclosure pursuant to the provisions of clause (d) of the
preceding sentence, Executive promptly, but in no event more than 72 hours
after learning of such subpoena, court order, or other government process,
shall notify, by personal delivery or by electronic means, confirmed by
mail, the Corporation and, at the Corporation's expense, Executive shall:
(i) take all reasonably necessary steps required by the Corporation to
defend against the enforcement of such subpoena, court order or other
government process, and (ii) permit the Corporation to intervene and
participate with counsel of its choice in any proceeding relating to the
enforcement thereof.
8.3 RECORDS.
Upon termination of his employment with the Corporation, Executive will
promptly deliver to the Corporation all original memoranda, notes, records,
reports, manuals, drawings, blueprints, formula and other documents
relating to the business of the Corporation and its Affiliates and all
property associated therewith, which he may then possess or have under his
control; provided, however, that Executive shall be entitled to retain
copies of such documents reasonably necessary to document his financial
relationship (both past and future) with the Corporation.
8.4 NON-COMPETE.
During the term of this Agreement and the eighteen-month period following
the termination of Executive's employment with the Corporation under the
terms of this Agreement, Executive, without the prior written permission of
the Corporation, shall not, anywhere in the United States of America,
directly or indirectly, (a) enter into the employ of or render any services
to any person, firm or corporation engaged in any business which is a
"Competitive Business" (as defined below); (b) engage in any Competitive
Business for his own account; (c) become associated with or interested in
any Competitive Business as an individual, partner, shareholder, creditor,
director, officer, principal, agent, employee, trustee, consultant, advisor
or in any other relationship or capacity; (d) employ or retain, or have or
cause any other person or entity to employ or retain, any person who was
employed or retained by the Corporation in the six-month period prior to
the termination of Executive's employment; or (e) solicit, interfere with,
or endeavor to entice away from the Corporation, for the benefit of a
Competitive Business, any of its customers or other persons with whom the
Corporation has a contractual relationship. However, nothing in this
Agreement shall preclude Executive from investing his personal assets in
the securities of any corporation or other business entity which is engaged
in a Competitive Business if such securities are traded on a national stock
exchange or in the over-the-counter market and if such investment does not
result in his beneficially owning, at any time, more than 1% of the
publicly-traded equity securities of such Competitive Business.
8.5 INJUNCTIVE RELIEF.
If Executive breaches, or threatens to breach, any of the provisions of
Sections 8.2, 8.3 or 8.4, the Corporation shall have the right and remedy
to have the provisions of this Agreement specifically enforced by any court
having equity jurisdiction, it being acknowledged and agreed by Executive
that the services being rendered hereunder to the Corporation are of a
special, unique and extraordinary character and that any such breach or
threatened breach will cause irreparable injury to the Corporation and that
money damages will not provide an adequate remedy in the Corporation.
8.6 MODIFICATION OF SCOPE.
If any provision of Section 8.2 or 8.4 is held to be unenforceable because
of the scope, duration or area of its applicability, the tribunal making
such determination shall have the power to modify such scope, duration, or
area, or all of them, and such provision or provisions shall then be
applicable in such modified form.
<PAGE>
9. DEFINITIONS. AS USED IN THIS AGREEMENT:
9.1. "Affiliate" shall mean any entity that, directly or indirectly, is
controlled by, controlling, or under common control with the Corporation.
9.2. "Competitive Business" shall mean a business which is directly
competitive with any business engaged in by the Corporation or any
Affiliate of the Corporation.
10. NOTICES.
All notices provided for by this Agreement shall be made in writing and
shall be deemed given when (a) personally delivered to the party entitled
to receive it: (b) transmitted by electronic means; or (c) mailed first
class mail, by certified mail, return receipt requested, addressed to the
person entitled to it at the address set forth below (or at such other
address as may have been designated by written notice). The notice shall be
deemed to be received on the date of its actual delivery or electronic
transmission to the party entitled thereto, or three days after mailing. If
sent to the Corporation, notices shall be delivered to:
HERC Products Incorporated
2215 West Melinda Lane, Suite A
Phoenix, Arizona 85027
Attention: Chairman of the Board of Directors Compensation Committee
Telecopier: (623) 233-1107
and, if sent to Executive, notices shall be delivered to:
S. Steven Carl
c/o HERC Products Incorporated
2215 West Melinda Lane, Suite A
Phoenix, Arizona 85027
Telecopier: (623) 233-1107
Marked "Personal and Confidential"
11. ASSIGNMENT.
The rights and benefits of the Corporation under this Agreement shall be
transferable, and all covenants and agreements hereunder shall inure to the
benefit of and be enforceable by, its successors and assigns. Executive may
not assign this Agreement, but it shall inure to the benefit of and be
binding upon his heirs and legal representatives.
12. ARBITRATION.
In the event of any dispute between the parties as to the interpretation of
any of the terms and provisions of this agreement, the matter shall be
submitted to arbitration in the following manner:
Either party shall serve written notice upon the other party that they
desire to submit the dispute to arbitration and within fifteen (15) days of
the date of any such written notice each party shall appoint an arbitrator
within ten (10) days thereafter the two arbitrators so selected shall
appoint a third. In the event either party shall fail to appoint an
arbitrator within such fifteen-day period or if the two arbitrators so
appointed shall fail to select a third within such ten-day period, then a
judge of the Superior Court of Maricopa County, Arizona, or such other
court as may have jurisdiction thereover shall appoint such arbitrator. The
three arbitrators shall determine the controversy in accordance with the
Rules of the American Arbitration Association and a decision of the
majority of the arbitrators shall bind and be conclusive upon the parties.
The parties shall pay the expense of arbitration in the manner determined
by the arbitrators and judgment upon the award rendered by the arbitrators
may, if permissible, be entered in any court having jurisdiction.
<PAGE>
13. MISCELLANEOUS.
13.1 GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with the
laws of the State of Arizona.
13.2 WAIVER.
No waiver or modification of this Agreement shall be valid unless in
writing and duly executed by the party to be charged therewith. Waiver
by either party hereto of any breach or default by the other party of
any of the terms and provisions of this Agreement shall not operate as
a waiver of any other breach or default, whether similar to or
different from the breach or default waiver.
13.3 SEVERABILITY.
All agreements, provisions, representations, warranties and covenants
contained herein are severable, and in the event that any one or more
of them shall be held to be invalid, illegal or unenforceable in any
respect by any court of competent jurisdiction, the validity, legality
and enforceability of the remaining provisions contained herein shall
not in any way be affected thereby, and this Agreement shall be
interpreted as if such invalid, illegal or unenforceable agreements,
provisions or covenants were not contained herein.
13.4 ENTIRE AGREEMENT.
This Agreement constitutes and embodies the full and complete
understanding and agreement of the parties hereto provided, and
supersedes all prior understandings or agreements, whether oral or in
writing.
The parties have executed this Agreement the day and year first above written.
HERC Products Incorporated
By: _______________________________ S. Steven Carl: ________________________
Signature: ________________________
Title: ____________________________
<PAGE>
SCHEDULE A
TERMS OF STOCK GRANT
1. Shares granted price is the closing bid price on June 15, 1999
2. Shares will vest over 2 years on the following schedule:
Shares: Vesting Date:
------- -------------
25,000 shares 6/l5/99
25,000 shares 6/15/2000
3. In the event HERC is acquired by another company all stock becomes
immediately vested.
4. In the event HERC issues stock in a public or private placement the shares
will be adjusted in proportion to the new stock issued (Anti-dilutive
clause).
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 500,323
<SECURITIES> 0
<RECEIVABLES> 217,067
<ALLOWANCES> 16,630
<INVENTORY> 31,523
<CURRENT-ASSETS> 942,081
<PP&E> 1,048,621
<DEPRECIATION> 453,614
<TOTAL-ASSETS> 1,784,004
<CURRENT-LIABILITIES> 412,109
<BONDS> 0
0
0
<COMMON> 116,411
<OTHER-SE> 1,246,428
<TOTAL-LIABILITY-AND-EQUITY> 1,784,004
<SALES> 2,298,101
<TOTAL-REVENUES> 2,298,101
<CGS> 996,108
<TOTAL-COSTS> 2,428,644
<OTHER-EXPENSES> (116,652)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,517
<INCOME-PRETAX> (27,408)
<INCOME-TAX> 0
<INCOME-CONTINUING> (27,408)
<DISCONTINUED> 46,282
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,874
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
