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 JUNE 30, 2001
[ ] 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 Exchange Act 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 August 10, 2001
----- ---------------
Common Stock, $.01 par value 11,798,206
Transitional Small Business Disclosure Format: YES [ ] NO [X]
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
June 30, 2001 and December 31, 2000 3
Consolidated Statements of Operations
Three and Six Months Ended June 30, 2001 and 2000 4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2001 and 2000 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 2 - Changes in Securities 13
Item 6 - Exhibits and Reports on Form 8-K 13
2
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
2001 2000
------------ ------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 44,642 $ 302,392
Trade accounts receivable, net of allowance for
doubtful accounts of $29,532 and $41,179, respectively 572,589 327,777
Inventories 35,743 38,131
Costs of contracts in process 40,478 72,897
Other receivables 11,906 10,351
Prepaid expenses 231,364 84,236
------------ ------------
Total Current Assets 936,722 835,784
------------ ------------
PROPERTY AND EQUIPMENT
Property and equipment 1,293,570 1,193,421
Less accumulated depreciation (817,985) (707,507)
------------ ------------
Net Property and Equipment 475,585 485,914
------------ ------------
OTHER ASSETS
Patents, net of accumulated amortization of
$90,009 and $79,621, respectively 117,754 128,142
Patents pending 109,115 72,424
Refundable deposits and other assets 20,627 22,853
------------ ------------
Total Other Assets 247,496 223,419
------------ ------------
$ 1,659,803 $ 1,545,117
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 357,862 $ 105,227
Accrued wages 69,785 69,866
Current portion of notes payable 113,185 13,166
Customer Deposits 41,840 42,617
Other accrued expenses 129,395 108,300
------------ ------------
Total Current Liabilities 712,067 339,176
LONG-TERM LIABILITIES
Notes payable, net of current portion 7,532 --
------------ ------------
Total Liabilities 719,599 339,176
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $10.00 stated value; authorized
1,000,000 shares; no shares issued and outstanding -- --
Common Stock, $0.01 par value; authorized 40,000,000
shares; issued and outstanding 11,769,634 and
11,702,728 shares, respectively 117,696 117,027
Additional paid-in capital 14,001,416 13,990,085
Accumulated deficit (13,178,908) (12,901,171)
------------ ------------
Total Stockholders' Equity 940,204 1,205,941
------------ ------------
$ 1,659,803 $ 1,545,117
============ ============
The accompanying notes are an integral part of
these consolidated balance sheets.
3
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
SALES $ 1,337,130 $ 935,295 $ 2,571,008 $ 2,618,637
COST OF SALES 684,564 512,178 1,559,821 1,317,605
------------ ------------ ------------ ------------
GROSS PROFIT 652,566 423,117 1,011,187 1,301,032
SELLING EXPENSES 67,247 108,019 139,334 228,991
GENERAL AND ADMINISTRATIVE EXPENSES 610,378 438,320 1,178,547 914,415
------------ ------------ ------------ ------------
OPERATING PROFIT (LOSS) (25,059) (123,222) (306,694) 157,626
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Gain on sale of asset 52,378 -- 52,378 --
Interest expense (18,893) (2,614) (27,356) (12,596)
Miscellaneous 1,689 4,516 3,935 10,310
------------ ------------ ------------ ------------
Total other income (expense) 35,174 1,902 28,957 (2,286)
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES 10,115 (121,320) (277,737) 155,340
Income tax provision -- -- -- --
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 10,115 $ (121,320) $ (277,737) $ 155,340
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE - BASIC AND DILUTED
NET INCOME (LOSS) PER COMMON SHARE $ -- $ (0.01) $ (0.02) $ 0.01
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC 11,769,634 11,676,187 11,753,722 11,671,187
============ ============ ============ ============
DILUTED 11,771,420 11,676,187 11,753,722 11,801,423
============ ============ ============ ============
The accompanying notes are an integral part of
these consolidated balance sheets.
4
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30,
-------------------------
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $(277,737) $ 155,340
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization 127,222 123,729
Gain on sale of asset (52,378) --
Common stock issued for services 12,000 7,999
(Increase) decrease in assets
Trade accounts receivable, net (244,812) 369,867
Inventories 2,388 13,160
Costs of contracts in progress 32,419 35,871
Other receivables (1,555) 6,173
Prepaid expenses (147,128) (58,356)
Refundable deposits and other assets 2,226 38,301
Increase (decrease) in liabilities
Accounts payable 252,635 (129,314)
Accrued wages and other accrued expenses 21,014 (155,532)
Customer deposits (777) 58,605
--------- ---------
Net cash provided by (used in) operating activities (274,483) 465,843
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (38,610) (76,077)
Cash received from sale of asset 135,000 --
Expenditures related to patents and patents pending (36,691) (12,738)
--------- ---------
Net cash provided by (used in) investing activities 59,699 (88,815)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable and long-term debt 198,262 151,870
Principal payments under notes payable (241,228) (98,793)
--------- ---------
Net cash provided by (used in) financing activities (42,966) 53,077
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (257,750) 430,105
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 302,392 65,722
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 44,642 $ 495,827
========= =========
The accompanying notes are an integral part of
these consolidated balance sheets.
5
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 included
herein should be reviewed in conjunction with the consolidated financial
statements and the accompanying footnotes included within our Form 10-KSB for
the year ended December 31, 2000.
The consolidated financial statements have been prepared in accordance with our
customary accounting practices and have not been audited. In the opinion of
management, the consolidated financial statements reflect all adjustments
necessary to fairly report our 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, 2001.
NOTE 2 - REVENUE RECOGNITION
We recognize revenue when products are shipped. We also perform pipe-cleaning
services and tank cleaning services, which are recorded when the work is
complete. Included in sales are certain reimbursable costs from our customers.
NOTE 3 - LONG TERM DEBT AND OTHER FINANCING ARRANGEMENTS
We have a factoring facility whereby the factor purchases eligible receivables
and advances 80% of the purchased amount to us. Purchased receivables may not
exceed $600,000 at any one time. Either party may cancel the arrangement with 30
days notice. At June 30, 2001, there was $390,932 of factored accounts
receivable. 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 us 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 us 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.
6
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - SEGMENT INFORMATION
Information by segment for the three months ended June 30, 2000:
Pipe
Cleaning Chemicals Corporate Consolidated
-------- --------- --------- ------------
Sales to unaffiliated customers $ 756,420 $ 178,875 $ -- $ 935,295
Income (loss) from continuing operations 44,464 114,151 (279,935) (121,320)
Total assets 1,202,590 124,775 752,928 2,080,293
Depreciation and amortization 44,908 1,877 16,239 63,024
Capital expenditures 34,446 -- 2,346 36,792
Information by segment for the three months ended June 30, 2001:
Pipe Tank
Cleaning Cleaning Chemicals Corporate Consolidated
-------- -------- --------- --------- ------------
Sales to unaffiliated customers $ 1,088,783 $ 198,397 $ 49,950 $ -- $ 1,337,130
Income (loss) from continuing operations 307,656 39,560 31,293 (368,394) 10,115
Total assets 1,115,807 135,097 71,154 337,745 1,659,803
Depreciation and amortization 42,015 7,210 1,535 9,875 60,635
Capital expenditures 2,779 4,482 -- -- 7,261
Information by segment for the six months ended June 30, 2000:
Pipe
Cleaning Chemicals Corporate Consolidated
-------- --------- --------- ------------
Sales to unaffiliated customers $ 2,335,413 $ 283,224 $ -- $ 2,618,637
Income (loss) from continuing operations 610,749 124,934 (580,343) 155,340
Total assets 1,202,590 124,775 752,928 2,080,293
Depreciation and amortization 87,627 3,755 32,347 123,729
Capital expenditures 56,579 13,757 5,741 76,077
Information by segment for the six months ended June 30, 2001:
Pipe Tank
Cleaning Cleaning Chemicals Corporate Consolidated
-------- -------- --------- --------- ------------
Sales to unaffiliated customers $ 2,201,332 $ 259,577 $ 110,099 $ -- $ 2,571,008
Income (loss) from continuing operations 401,479 (52,134) 65,932 (693,014) (277,737)
Total assets 1,115,807 135,097 71,154 337,745 1,659,803
Depreciation and amortization 90,769 10,869 3,154 22,430 127,222
Capital expenditures 20,162 17,237 -- 1,211 38,610
7
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 six months ended June 30, 2000 and 2001 is as
follows:
Three Months Ended
June 30, 2000
---------------------------
Net Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS $ (121,320) 11,676,187 $ (0.01)
======
Effect of stock options and warrants -- --
---------- ----------
Diluted EPS $ (121,320) 11,676,187 $ (0.01)
========== ========== ======
Three Months Ended
June 30, 2001
---------------------------
Net Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS $ 10,115 11,769,634 $ --
======
Effect of stock options and warrants -- 1,786
---------- ----------
Diluted EPS $ 10,115 11,771,420 $ --
========== ========== ======
Six Months Ended
June 30, 2000
---------------------------
Net Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS $ 155,340 11,671,187 $ 0.01
======
Effect of stock options and warrants -- 130,236
---------- ----------
Diluted EPS $ 155,340 11,801,423 $ 0.01
========== ========== ======
Six Months Ended
June 30, 2001
---------------------------
Net Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS $ (277,737) 11,753,722 $(0.02)
======
Effect of stock options and warrants -- --
---------- ----------
Diluted EPS $ (277,737) 11,753,722 $(0.02)
========== ========== ======
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133 (as amended by SFAS No. 138), ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES, which requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The issuance of SFAS No. 137, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE
OF FASB STATEMENT NO. 133, delayed the required effective date of SFAS No. 133
to all fiscal years beginning after June 15, 2000. We adopted SFAS No. 133, as
amended, on January 1, 2001. The adoption of SFAS No. 133, as amended, did not
have a material impact on our results of operations or financial position.
In July 2001, the FASB issued SFAS No. 141, BUSINESS COMBINATIONS, and SFAS No.
142, GOODWILL AND OTHER INTANGIBLE ASSETS. We will be required to adopt these
standards on January 1, 2001. We do not believe the adoption of SFAS No. 141 or
142 will be material to our financial position or results of operations.
NOTE 7 - ASSET PURCHASE
On February 9, 2001, we acquired certain tank and boiler cleaning assets of
Industrial Chemical Cleaning Incorporated. In exchange, the company assumed the
existing debt that was secured by the particular assets. The actual amount of
debt assumed was $61,539. The company is still negotiating the assumption of
approximately $20,000 of debt related to a vehicle.
On February 9, 2001, we acquired a barge with a capacity of 19,500 barrels from
Hampton Roads Barge Rental, LLC. In exchange, we assumed $88,978 of debt that
was secured by the barge. During the second quarter, we sold the barge for
$135,000 and realized a gain of $52,378.
9
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 in our press releases, and in oral statements
made with the approval of an authorized executive officer of the company, the
words or phrases "are expected", "we anticipate", "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, 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 our business
plan, continued growth in our various customer segments, effective marketing of
our products and services directly by and through marketing partners and the
other risks detailed in the latest Form 10-KSB filed with the SEC. We have 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
Our company derives the majority of its revenue from two sources, cleaning
piping systems on U.S. Navy and U.S. Coast Guard vessels and cleaning bilge,
fuel and CHT tanks on ships. This subjects our company to certain business risks
that can cause volatility in our revenue stream and our gross margins. We are
subject to the deployment and servicing schedules of the U.S. Navy as well as
the available maintenance funds in the Navy budget. These factors can cause
revenue to change dramatically from one quarter to the next. Additionally, we
are required by our contract to perform work on different classes of ships.
Performing work on different classes of ships can cause our gross margins to
vary widely from one quarter to the next because we make higher gross margins on
certain classes of ships than we do on others. Moreover, we are often asked to
perform work on ships outside of the state of Virginia. When we perform work
under the Navy contract outside of the state of Virginia, we incur certain
reimbursable travel costs that are included in both revenue and cost of goods
sold. These reimbursable travel costs cause gross margins to be lower than the
margins that would have otherwise been recognized had the work been performed in
Virginia. During the first quarter of 2001, our company purchased certain tank
cleaning assets of Industrial Chemical Cleaning Incorporated and entered the
business of tank cleaning. Sales generated from tank cleaning have already
become a significant portion of our revenue and we expect this to continue in
the future.
Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000
Sales during the second quarter of 2001 were $1,337,000 compared to sales of
$935,000 during the second quarter of 2000. During the first quarter of 2001,
our company entered the tank cleaning business by purchasing certain assets of
Industrial Chemical Cleaning, Inc. Sales from tank cleaning services were
$198,000 during the second quarter of 2001.
Sales increased 43% during the second quarter of 2001 compared to sales during
the second quarter of 2000. The increase is due to the addition of the sales
from the tank cleaning services mentioned above as well as an increase in
10
revenue generated from pipe cleaning services. These increases were partially
offset by a decline in chemical product sales. Sales of pipe cleaning services
during the second quarter of 2001 were $1,089,000 compared to pipe cleaning
sales of $756,000 during the second quarter of 2000. Of the pipe cleaning work
performed during the second quarter of 2001, $593,000 (44% of total revenue) was
performed pursuant to a five-year CHT chemical cleaning contract with the United
States Navy compared to $632,000 (68% of total revenue) during the second
quarter of 2000. Chemical sales decreased to $50,000 during the second quarter
of 2001 compared to $179,000 during the second quarter of 2000. The decline came
from decreases in Well Klean and Line-Out product sales.
Consolidated gross margins were 49% and 45% for the three months ended June 30,
2001 and 2000, respectively. The increase in gross margin is attributable to the
various types of ships and systems cleaned as well as the location of the work
being performed and the customer we are servicing. We expect that gross margin
percentages will continue to fluctuate as changes in revenue mix occur.
Gross profit increased to $653,000 during the second quarter of 2001 compared to
$423,000 during the second quarter of 2000 as a result of the higher gross
margin and revenue discussed above. General and administrative expenses
increased by $172,000. The increase in general and administrative expenses is
primarily attributable to our entrance into the tank cleaning business.
Personnel and other general and administrative expenses needed to operate the
tank cleaning business increased our general and administrative expenses during
the second quarter by $86,000. Increases in salaries, insurance and other
general expenses were responsible for the balance of the increase. Selling
expenses decreased to $67,000 during the second quarter of 2001 compared to
$108,000 during the second quarter of 2000. The decline in selling expenses was
caused by the temporary freeze of our employee incentive commission plan, which
resulted in lower commission expense.
Our company had an operating loss of $25,000 during the second quarter of 2001
compared to an operating loss of $123,000 during the second quarter of 2000. Net
income was $10,000 during the second quarter of 2001 compared to a net loss of
$121,000 during the second quarter of 2000. Included in net income for the
second quarter of 2001 is a gain of $52,000 on the sale of an asset.
Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000
Sales during the six months ended June 30, 2001 were $2,571,000 compared to
sales of $2,619,000 during the six months ended June 30, 2000. During the first
quarter of 2001, our company entered the business of tank cleaning by purchasing
certain assets of Industrial Chemical Cleaning Incorporated. Sales from tank
cleaning services were $260,000 during the six months ended June 30, 2001.
Sales decreased 2% during the six months ended June 30, 2001 compared to sales
during the same period in 2000 because of decreases in pipe cleaning service and
chemical product revenue, offset by the addition of the tank cleaning revenue
mentioned above. Sales of pipe cleaning services during the six months ended
June 30, 2001 were $2,201,000 compared to pipe cleaning sales of $2,335,000
during the six months ended June 30, 2000. Of the pipe cleaning work performed
during the six months ended June 30, 2001, $1,412,000 (55% of total revenue) was
performed pursuant to a 5-year CHT chemical cleaning contract with the U.S. Navy
compared to $2,042,000 (78% of total revenue) during the six months ended June
30, 2000. Chemical sales decreased to $110,000 during the six months ended June
30, 2001 compared to $283,000 during the six months ended June 30, 2000. The
decline was from lower Line-Out, Well Klean and Process Water product sales.
Consolidated gross margins were 39% and 50% during the six months ended June 30,
2001 and 2000, respectively. Lower gross margins were primarily the result of
cleaning pipe systems on certain vessels that typically take more time to
complete than other vessels. This resulted in higher labor costs. Additionally,
we performed pipe-cleaning services on ships located outside of the state of
Virginia that resulted in certain reimbursable costs that are included both in
revenue and cost of goods sold. Lastly, our entrance into the tank cleaning
business during the first quarter prompted us to relocate our east coast
operating facility and created certain short term operating inefficiencies and
start up costs. We expect that gross margin percentages will continue to
fluctuate as changes in revenue mix occur.
11
Gross profit decreased to $1,011,000 during the six months ended June 30, 2001
compared to $1,301,000 during the six months ended June 30, 2000 as a result of
the lower gross margin and revenue discussed above. General and administrative
expenses increased by $264,000. The increase in general and administrative
expenses is primarily attributable to our entrance into the tank cleaning
business. Personnel and other general and administrative expenses needed to
operate the tank cleaning business as well as certain start up expenses related
to the new facility increased our general and administrative expenses during the
six months ended June 30, 2001 by $195,000. Increases in salaries, insurance and
other general expenses were responsible for the balance of the increase. Selling
expenses decreased to $139,000 during the six months ended June 30, 2001
compared to $229,000 during the six months ended June 30, 2000. The decline in
selling expenses was due mainly to lower commission expense.
Our company had an operating loss of $307,000 during the six months ended June
30, 2001 compared to operating profit of $158,000 during the six months ended
June 30, 2000. Net loss was $278,000 during the six months ended June 30, 2001
compared to net income of $155,000 during the six months ended June 30, 2000.
The net loss for the six months ended June 30, 2001 included a gain from the
sale of an asset of $52,000.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $45,000 at June 30, 2001 and $302,000 at December
31, 2000. Working capital was $225,000 and $497,000 at those respective dates.
The decrease in cash and working capital during the first six months of 2001 is
attributable to the net loss and cash used in operating activities.
Net cash provided by investing activities resulted from the sale of our barge
offset by capital and patent expenditures. Net cash used in financing activities
resulted from the pay down of notes payable offset by certain new notes payable
used to finance insurance premiums.
As of June 30, 2001, we had approximately $391,000 of factored receivables under
our factoring facility (See NOTE 3).
We currently have a contract with one customer responsible for a significant
portion of our revenue, but we expect the high concentration level to begin to
decline throughout the balance of 2001 and beyond. The entrance into the tank
cleaning business should reduce our dependence on the CHT chemical cleaning
contract with the U.S. Navy over time. Nonetheless, any material delay,
cancellation or reduction of orders from this customer would most likely have a
material adverse effect on our operations and financial position. Sales to the
U.S. Navy under the Navy contract accounted for 55% and 78% of consolidated
revenues for the six months ended June 30, 2001 and 2000, respectively.
Management has no current plans to sell additional securities to raise capital
and cannot assure you that any efforts to raise additional capital would be
successful. However, any such sale, if necessary, could substantially dilute the
interest of our existing stockholders.
12
PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
RECENT SALES OF UNREGISTERED SECURITIES
During the second quarter of 2001 we issued 32,001 shares of common stock as
compensation to the non-employee members of our Board of Directors. These shares
were issued under an exemption from registration pursuant to section 4(2) of the
securities act of 1933 as a transaction by an issuer not involving a public
offering.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our 2001 Annual Meeting of Stockholders was held on June 7, 2001. The following
nominees were elected to the Company's Board of Directors to serve as directors
for one-year terms or until their successors are elected and qualified:
Nominee Votes in Favor Against
------- -------------- -------
S. Steven Carl 6,159,578 1,850,252
Salvatore DiMascio 6,228,402 1,781,428
Robert Affholder 6,228,402 1,781,428
R. John Armstrong 6,825,202 1,184,628
The following additional item was voted upon by the our stockholders:
Proposal to ratify the appointment of Arthur Anderson LLP as our
independent auditors for the fiscal year ending December 31, 2001.
Votes in Favor Opposed Abstained
-------------- ------- ---------
6,814,602 1,174,953 20,275
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Reports on Form 8-K: None
Exhibits: None
13
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: August 13, 2001 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)