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 MARCH 31, 2000
[ ] 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 May 10, 2000
----- ------------
Common Stock, $.01 par value 11,676,187
Transitional Small Business Development Format: YES [ ] NO [X]
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Index To Consolidated Financial Statements
PART I. FINANCIAL INFORMATION Page No.
Consolidated Financial Statements:
Consolidated Balance Sheets
March 31, 2000 and December 31, 1999 3
Consolidated Statements of Operations
Three Months Ended March 31, 2000 and 1999 4
Consolidated Statement of Stockholders' Equity
Three Months Ended March 31, 2000 5
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2000 and 1999 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 11
Item 6 - Exhibits and Reports on Form 8-K 11
2
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheet
March 31, December 31,
2000 1999
------------ ------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 450,656 $ 65,722
Trade accounts receivable, net of
allowance for doubtful accounts
of $48,024 and $44,620, respectively 768,432 873,045
Inventories 62,042 45,990
Deferred expenses 29,125 118,443
Other receivables 10,897 8,611
Prepaid expenses 234,914 120,380
------------ ------------
Total Current Assets 1,556,066 1,232,191
------------ ------------
PROPERTY AND EQUIPMENT
Property and equipment 1,146,285 1,107,000
Less accumulated depreciation 561,816 508,773
------------ ------------
Net Property and Equipment 584,469 598,227
------------ ------------
OTHER ASSETS
Patents, net of accumulated amortization
of $65,154 and $109,465, respectively 114,959 108,017
Patents pending 84,481 89,104
Refundable deposits and other assets 29,431 62,579
------------ ------------
Total Other Assets 228,871 259,700
------------ ------------
$ 2,369,406 $ 2,090,118
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 151,842 $ 263,462
Accrued wages 47,470 77,503
Current portion of notes payable 104,858 30,592
Customer Deposits 47,197 --
Other accrued expenses 288,087 267,601
------------ ------------
Total Current Liabilities 639,454 639,158
LONG-TERM LIABILITIES
Notes payable, net of current portion 4,467 6,134
------------ ------------
Total Liabilities 643,921 645,292
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $10.00 stated value;
authorized 1,000,000 shares; issued
and outstanding zero shares -- --
Common Stock, $0.01 par value; authorized
40,000,000 shares; issued and outstanding
11,666,187 and 11,652,853 shares,
respectively 116,662 116,529
Additional paid-in capital 13,976,450 13,972,584
Accumulated deficit (12,367,627) (12,644,287)
------------ ------------
Total Stockholders' Equity 1,725,485 1,444,826
------------ ------------
$ 2,369,406 $ 2,090,118
============ ============
The accompanying notes are an integral part of these
consolidated balance sheets.
3
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three Months Ended March 31,
----------------------------
2000 1999
------------ ------------
SALES $ 1,683,342 $ 966,588
COST OF SALES 805,427 415,078
------------ ------------
GROSS PROFIT 877,915 551,510
SELLING EXPENSES 120,972 105,316
GENERAL AND ADMINISTRATIVE EXPENSES 476,095 386,757
------------ ------------
OPERATING PROFIT 280,848 59,437
------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (9,982) (4,855)
Miscellaneous 5,794 4,957
------------ ------------
Total Other Income (Expense) (4,188) 102
------------ ------------
INCOME FROM OPERATIONS BEFORE INCOME TAXES 276,660 59,539
Income tax provision -- --
------------ ------------
NET INCOME 276,660 59,539
============ ============
NET INCOME PER COMMON SHARE - BASIC AND DILUTED
NET INCOME PER COMMON SHARE $ 0.02 $ 0.01
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC 11,666,187 11,526,053
============ ============
DILUTED 11,803,671 11,547,991
============ ============
The accompanying notes are an integral part of these consolidated 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,
DECEMBER 31, 1999 11,652,853 $ 116,529 $ 13,972,584 $(12,644,287) $ 1,444,826
Net Income -- -- -- 276,660 276,660
Issuance of common stock 13,334 133 3,866 -- 3,999
------------ ------------ ------------ ------------ ------------
BALANCE,
MARCH 31, 2000 11,666,187 $ 116,662 $ 13,976,450 $(12,367,627) $ 1,725,485
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
5
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31
----------------------
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 276,660 $ 59,539
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 60,705 56,046
Common stock issued for services 4,000 8,000
(Increase) decrease in assets
Trade accounts receivable 104,613 17,369
Inventories (16,052) (20,757)
Deferred expenses 89,318 13,227
Other receivables (2,286) (1,461)
Prepaid expenses (117,834) (82,633)
Refundable deposits and other assets 33,148 25,053
Increase (decrease) in liabilities
Accounts payable (111,620) (61,387)
Accrued wages and other accrued expenses (9,549) 67,460
Customer Deposits 47,197 (42,447)
Change in net liabilities of discontinued operations -- 11,903
--------- ---------
Net cash provided by operating activities 358,300 49,912
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (39,285) (52,136)
Expenditures related to patents and patents pending (6,680) (2,589)
--------- ---------
Net cash used in investing activities (45,965) (54,725)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable and long-term debt 113,369 113,996
Principal payments under notes payable (40,770) (61,547)
--------- ---------
Net cash provided by financing activities 72,599 52,449
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 384,934 47,636
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 65,722 242,867
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 450,656 $ 290,503
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated 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 ("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, 1999.
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, 2000.
NOTE 2 - REVENUE RECOGNITION
HERC recognizes revenue when products are shipped. HERC also performs
pipe-cleaning services, which are recorded when the work is complete. Included
in sales are certain reimbursable costs from HERC's customers.
NOTE 3 - LONG TERM DEBT AND OTHER FINANCING ARRANGEMENTS
HERC has 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. Either party may cancel the arrangement with 30
days notice. At March 31, 2000, there were $8,617 of 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.
Interest payable by HERC to the factor is calculated as a fixed discount fee
equal to 1% of the amount of the receivable factored plus a variable discount
fee computed on the amount advanced to HERC and accruing on the basis of actual
days elapsed from the date of the 80% advance until 5 days after collection of
such account receivable by the factor at a per annum rate equal to an internal
rate set by the factor.
NOTE 4 - SEGMENT INFORMATION
Information by segment for the three months ended March 31, 1999:
Pipe Industrial
Cleaning Chemicals Corporate Consolidated
---------- --------- --------- ----------
Sales to unaffiliated customers $ 878,754 $ 87,834 $ -- $ 966,588
Income (loss) from operations 296,316 33,922 (270,699) 59,539
Total assets 1,272,180 109,794 572,189 1,954,163
Depreciation and amortization 36,288 1,500 18,258 56,046
Capital expenditures 45,800 -- 6,336 52,136
7
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Information by segment for the three months ended March 31, 2000:
Pipe Industrial
Cleaning Chemicals Corporate Consolidated
---------- --------- --------- ----------
Sales to unaffiliated customers $1,578,993 $ 104,349 $ -- $1,683,342
Income (loss) from operations 566,285 10,784 (300,409) 276,660
Total assets 1,465,591 113,451 790,364 2,369,406
Depreciation and amortization 42,719 1,878 16,108 60,705
Capital expenditures 22,133 13,757 3,395 39,285
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 months ended March 31, 1999 and 2000 is as follows:
Three Months Ended
March 31, 1999
-----------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
--------- ---------- ---------
Basic EPS $ 59,539 11,526,053 $ 0.01
=========
Effect of stock options and warrants -- 21,938
--------- ----------
Diluted EPS $ 59,539 11,547,991 $ 0.01
========= ========== =========
Three Months Ended
March 31, 2000
-----------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
--------- ---------- ---------
Basic EPS $ 276,660 11,666,187 $ 0.02
=========
Effect of stock options and warrants -- 137,484
--------- ----------
Diluted EPS $ 276,660 11,803,671 $ 0.02
========= ========== =========
NOTE 6 - COMMITMENTS AND CONTINGENCIES
LITIGATION
On or about January 14, 1999 in the Supreme Court of the State of New York,
County of Suffolk, the Suffolk County Water Authority and R & L Well Drilling,
LLC filed as a third-party plaintiff a civil claim against HERC in an action
filed on April 8, 1998 by five individual residents of Ronkonkoma, New York,
alleging negligence resulting in personal injury and seeking monetary damages of
$11 million. HERC, acting through its insurance carrier pursuant to the
submitted claim under its comprehensive general liability policy, has
substantially denied liability for the original claim. Although the resolution
of this matter is not known, management and its legal counsel believe HERC has
meritorious defenses and believes the outcome will have no material effect on
HERC's financial position or results of operations.
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 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 MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Sales of $1,683,000 in the first quarter were $716,000 ahead of 1999 first
quarter sales of $967,000 primarily because of $1,579,000 of revenue generated
from pipe cleaning services compared to $879,000 in the first quarter of 1999.
Of the pipe cleaning work, $1,410,000 was performed pursuant to a contract with
the United States Navy compared to $625,000 in 1999. Industrial chemical sales
increased to $104,000 for the first quarter of 2000 compared to $88,000 in 1999
because of sales to Dupont under the manufacturing and licensing agreements.
Consolidated gross margins were 52% and 57% in 2000 and 1999, respectively. The
reduction in gross margin percentage in 2000 was the result of cleaning pipe
systems on different classes of ships as well as cleaning ships outside of the
continental United States that resulted in higher cleaning costs. HERC expects
that gross margin percentages will continue to fluctuate as changes in revenue
mix occur.
Gross profit increased from $552,000 in 1999 to $878,000 in 2000 due to
increased revenue. In addition, general and administrative expenses increased by
$89,000 because of increases in payroll, insurance, research and development and
certain other expenses. Selling expenses increased by $16,000 because of
increased commissions generated by higher revenue.
Net income was $277,000 for the first quarter of 2000 compared to $60,000 for
the same period in 1999.
9
<PAGE>
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $451,000 and $66,000 at March 31, 2000 and
December 31, 1999, respectively, and working capital was $917,000 and $593,000
at those respective dates. The increase in cash during 2000 is a function of
cash provided by operating and financing activities offset by cash used in
investing activities.
As of March 31, 2000, HERC had $8,617 of factored receivables under its
factoring facility. (See Note 3 to the consolidated financial statements)
HERC currently contracts with one customer responsible for a majority of HERC's
revenues and HERC expects the high concentration level to continue throughout
2000. Thus, any material delay, cancellation or reduction of orders from this
customer could have a material adverse effect on HERC's operations and financial
position. Sales to the U.S. Navy under the Navy contract accounted for 84% and
65% of consolidated revenues for the three months ended March 31, 2000 and 1999,
respectively.
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.
10
<PAGE>
PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
RECENT SALES OF UNREGISTERED SECURITIES
During the first quarter of 2000 HERC issued 13,334 shares of common stock as
compensation to its outside Board of Directors. These shares were issued under
an exemption from registration pursuant to section 4(2) of the securities act of
1933.
During the first quarter of 2000 HERC issued to employees, under the 1996 Equity
Performance Plan, options to purchase 60,000 shares of common stock at exercise
prices ranging from $0.30 to $0.375 per share.
During the first quarter of 2000 HERC issued to various consultants warrants to
purchase 3,000 shares of common stock at an exercise price of $0.40 per share.
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
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: May 15, 2000 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)
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 450,656
<SECURITIES> 0
<RECEIVABLES> 816,456
<ALLOWANCES> 48,024
<INVENTORY> 62,042
<CURRENT-ASSETS> 1,556,066
<PP&E> 1,146,285
<DEPRECIATION> 561,816
<TOTAL-ASSETS> 2,369,406
<CURRENT-LIABILITIES> 639,454
<BONDS> 0
0
0
<COMMON> 116,662
<OTHER-SE> 1,608,823
<TOTAL-LIABILITY-AND-EQUITY> 2,369,406
<SALES> 1,683,342
<TOTAL-REVENUES> 1,683,342
<CGS> 805,427
<TOTAL-COSTS> 1,402,494
<OTHER-EXPENSES> (5,794)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,982
<INCOME-PRETAX> 276,660
<INCOME-TAX> 0
<INCOME-CONTINUING> 276,660
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 276,660
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02
</TABLE>
