U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) July 1, 1996
H.E.R.C. PRODUCTS INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 1-13012 86-0570800
(State or other jurisdiction (Commission File No. (IRS Employer
of incorporation) Identification No.)
3622 North 34th Avenue 85017
Phoenix, Arizona (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (602) 233-2212
Item 2. Acquisition or Disposition of Assets
On July 1, 1996, H.E.R.C. Consumer Products, Inc., an Arizona
corporation ("HCP"), and a wholly-owned subsidiary of H.E.R.C. Products
Incorporated ("Company"), acquired all of the right, title and ownership
interest in H.E.R.C. Consumer Products Company, L.L.C., a limited liability
company organized in the State of Illinois ("LLC"), owned by Conair Corporation,
a Delaware corporation ("Conair"). The LLC, prior to July 1, 1996, was owned
jointly by the Company and Conair to conduct the production and marketing of the
Company's consumer products.
Under the terms of the agreement, for the acquisition of Conair's
interest in the LLC, HCP paid Conair $276,000 on July 1, 1996 and all the
parties agreed to terminate their respective obligations under certain existing
agreements, including, but not limited to, the partnership agreement, operating
agreement and supply agreement related to the LLC which resulted in, among other
things, the settlement of the Company's obligation to pay Conair approximately
$230,000 and the LLC's obligation to pay the Company approximately $165,000. The
agreement further provides for payment of certain other amounts as follows: (i)
within 14 days after receipt by HCP of the financial statements of the LLC for
the period June 1, 1996 through June 30, 1996, HCP will pay additional purchase
consideration to Conair in an amount equal to 50% of the net profit of the LLC
for such period plus 5% of the net sales of the LLC for such period, and (ii)
the LLC will pay Conair for certain inventory products manufactured by Conair
for the LLC before June 28, 1996 ("Conair Inventory"), plus shipping and
handling expenses, such payments to be in six equal monthly installments
commencing July 31, 1996. The LLC has pledged as security for the payments due
under the agreement all of the Conair Inventory being purchased and all the
other assets of the LLC. The Company has agreed to guarantee the amounts payable
by the LLC for the Conair Inventory.
The LLC has also agreed to purchase from Conair, at designated prices,
all of its requirements for certain shower, tub and tile cleaner products until
September 26, 1996, and the LLC has committed to purchase not less than $169,309
worth of such products. After September 26, 1996, the LLC may manufacture or
purchase from other sources any shower, tub and tile cleaner products.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Unaudited Financial Statements of Business Acquired
The unaudited financial statements included herein present the
financial position of the LLC as of March 31, 1996 and December 31, 1995 and the
results of operations and cash flows for the years ended December 31, 1995 and
1994 and for the quarters ended March 31, 1996 and 1995. Audited financial
statements of the LLC are not available, and the Company has availed itself of
the automatic waiver from providing audited financial statements set forth in
310(c)(3)(ii) of Regulation S-B.
(b) Unaudited Pro Forma Financial Information
The pro forma consolidated combined balance sheet as of March 31, 1996
and the consolidated combined statement of operations for the year ended
December 31, 1995 and the period ended March 31, 1996 included herein give
effect to the acquisition described in Item 2 of this report.
The pro forma information is based on the historical financial
statements of the Company, and the LLC, giving effect to the transactions under
the purchase method of accounting and the assumptions and adjustments in the
accompanying notes to the pro forma financial statements.
The pro forma balance sheet gives effect to the transactions as if they
occurred on the balance sheet date. The pro forma statements of operations for
the year ended December 31, 1995 and the period ended March 31, 1996 give effect
to these transactions as if they occurred at the beginning of the calendar year
presented. The historical statement of operations of the Company will reflect
the effect of these transactions from the date of acquisition onward.
The pro forma combined financial statements have been prepared by the
Company's management based upon the historical financial statements of the
Company and the LLC. These pro forma financial statements may not be indicative
of what would have occurred if the combination had been in effect on the date
indicated.
(c) Exhibits
2.1 Settlement Agreement among the Company, HCP, Conair and
the LLC, dated June 28, 1996, including exhibits thereto.
H.E.R.C. CONSUMER PRODUCTS COMPANY, L.L.C.
Balance Sheet
(Unaudited)
December 31, 1995
Assets
Current Assets
Cash $ 13,481
Trade accounts receivable, net of an allowance
for doubtful accounts of $24,000 135,246
Inventories 353,989
Prepaid expenses 1,361
-----------
Total Current Assets 504,076
-----------
$ 504,076
===========
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 588,783
-----------
Total Current Liabilities 588,783
-----------
Stockholders' Equity
Accumulated deficit ( 84,707)
-----------
Total Stockholders' Equity ( 84,707)
------------
$ 504,076
===========
H.E.R.C. CONSUMER PRODUCTS COMPANY, L.L.C.
.
Balance Sheet
(Unaudited)
March 31, 1996
Assets
Current Assets
Cash $ -
Trade accounts receivable net of an allowance
for doubtful accounts of $30,000 158,633
Inventories 277,875
Prepaid expenses 2,447
--------------
Total Current Assets 438,955
--------------
$ 438,955
==============
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 509,975
--------------
Total Current Liabilities 509,975
--------------
Total Liabilities 509,975
--------------
Stockholders' Equity
Accumulated deficit (71,020)
--------------
Total Stockholders' Equity (71,020)
--------------
$ 438,955
==============
H.E.R.C. CONSUMER PRODUCTS COMPANY, L.L.C.
Statement of Operations
(Unaudited)
Years Ended December 31,
1995 1994
-------------- --------------
Sales $ 1,380,573 $ 1,202,834
Cost of Sales 801,583 664,553
-------------- --------------
Gross profit 578,990 538,281
-------------- --------------
Selling Expenses 453,102 515,332
-------------- --------------
General and Administrative Expenses 135,500 97,644
-------------- --------------
Net Loss $ (9,612) $ (74,695)
============== ==============
H.E.R.C. CONSUMER PRODUCTS COMPANY, L.L.C.
Statement of Operations
(Unaudited)
Three Months Ended March 31,
1996 1995
---- ----
Sales $ 400,205 $ 404,144
Cost of Sales 234,529 228,746
-------- ---------
Gross profit 165,676 175,398
-------- ---------
Selling Expenses 113,005 129,644
-------- ---------
General and Administrative Expenses 38,984 38,460
-------- ---------
Net Income $ 13,687 $ 7,296
======== =========
H.E.R.C. CONSUMER PRODUCTS COMPANY, L.L.C.
Statement of Accumulated Deficit
(Unaudited)
Balance as of January 1, 1994 $ -
Net Loss Year Ended December 31,1994 (75,095)
------------
(75,095)
Net Loss Year Ended December 31,1995 (9,612)
------------
(84,707)
Net Income Quarter Ended March 31, 1996 13,687
------------
$(71,020)
============
H.E.R.C. CONSUMER PRODUCTS COMPANY, L.L.C.
Statements of Cash Flows
Years Ended December 31,
(Unaudited)
1995 1994
-------- --------
Cash Flows From Operating Activities
Net loss $ (9,612) $(75,095)
-------- ---------
Adjustments to reconcile net loss
to net cash used in operating activities
(Increase) decrease in assets
Trade accounts receivable 26,659 (161,905)
Inventories (173,886) (180,103)
Prepaid expenses 3,195 (4,556)
Increase in liabilities
Accounts payable 165,817 422,966
-------- ---------
Total adjustments 21,785 76,402
-------- ---------
Net cash provided by operating activities 12,173 1,307
-------- ---------
Cash flows From Investing Activities
Net cash used in investing activities - -
-------- ---------
Cash Flows From Financing Activities
Net cash provided by
financing activities - -
-------- ---------
Net Increase in Cash 12,173 1,307
Cash at beginning of year 1,307 -
-------- ---------
Cash at end of year $ 13,480 $ 1,307
======== =========
H.E.R.C. CONSUMER PRODUCTS COMPANY, L.L.C.
Statements of Cash Flows
Three Months Ended March 31,
(Unaudited)
1996 1995
------------ ------------
Cash Flows From Operating Activities
Net Income $ 13,687 $ 7,296
------------ ------------
Adjustments to reconcile net income
to net cash used in operating activities
(Increase) decrease in assets
Trade accounts receivable (23,387) (95,910)
Inventories 76,114 27,065
Prepaid expenses (1,086) -
Increase in liabilities
Accounts payable (78,809) 73,109
------------ ------------
Total adjustments (27,168) 4,264
------------ ------------
Net cash provided by (used in) operating activities (13,481) 11,560
------------ ------------
Cash flows From Investing Activities
Net cash used in investing activities - -
------------ ------------
Cash Flows From Financing Activities
Net cash provided by
financing activities - -
------------ ------------
Net Increase (Decrease) in Cash (13,481) 11,560
Cash at beginning of year 13,481 1,307
------------ ------------
Cash at end of period $ - $ 12,867
============ ============
H.E.R.C. CONSUMER PRODUCTS COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Business and Summary of Significant Accounting Policies
Nature of Business
In November 1993 and January 1994, H.E.R.C. Products, Inc. ("H.E.R.C.") entered
into an operating agreement and supply/service agreement with Conair Corporation
(Conair") to form a limited liability company (the "LLC"), H.E.R.C. Consumer
Products Company, under the Illinois Limited Liability Company Act effective
January 1, 1994. H.E.R.C. and Conair are the members of the LLC. Conair is
solely responsible for funding the operations of the LLC. At December 31, 1995
and March 31, 1996 the LLC owed Conair $267,000 and $349,000, respectively, and
these amounts are included in accounts payable.
H.E.R.C. will continue to develop consumer products to be sold by the LLC.
H.E.R.C. will be reimbursed by the LLC in an amount equal to 3% of the LLC's net
sales for the three-year period beginning on the effective date of the
agreement. After such three-year period, H.E.R.C. will be reimbursed for its
research and development costs directly attributable to products sold by the LLC
in an amount not to exceed 3% of the net sales for products sold by the LLC. For
the years ended December 31, 1995 and 1994, the LLC has recorded reimbursements
for research and development activities in the amounts of $34,442 and $34,538,
respectively. For the quarters ended March 31, 1996 and 1995, the LLC has
recorded reimbursements for research and development activities in the amount of
$12,000 and $12,124, respectively. At December 31, 1995, H.E.R.C. was owed
$153,129 by the LLC. At March 31, 1996, H.E.R.C. was owed $165,129 by the LLC.
Amounts owed to H.E.R.C. are included in accounts payable.
H.E.R.C. is entitled to 50% of the profit or loss of the LLC through December
31, 1996. After that date, the agreement provides for profit or loss sharing
based on the cumulative sales performance of the LLC for the three-year period
ending December 31, 1996 ("Initial Period"). For cumulative sales during the
Initial Period from $7.5 million to $16 million, H.E.R.C.'s profit sharing
percentage ranges from 100% to 50%. For cumulative sales during the Initial
Period from $16 million to $39 million, H.E.R.C.'s profit sharing percentage
ranges form 45% to 35%. H.E.R.C. is entitled to receive noncumulative
distributions of the profits of the LLC, to the extent available, equal to
$360,000 for each of the first two years and $280,000 for the third year of the
agreement. No such distributions have been made to date. Upon dissolution of the
LLC, its net assets will be distributed to its members based upon the terms of
various agreements.
Conair will act as the sole managing member and thereby direct the operations of
the LLC during the three-year period ending December 31, 1996. Thereafter,
management of the LLC shall be determined based on cumulative sales performance
during that same three-year period. For cumulative sales from $7.5 million to
$12 million, H.E.R.C. will be sole managing member. For cumulative sales from
$12 million to $16 million, H.E.R.C. and Conair will share management control.
If cumulative sales exceed $16 million, then Conair shall be the sole managing
member.
As managing member, Conair has agreed that when it determines that the
operations of the LLC have generated cash in excess of Conair's reasonable
determination of what is required for the future successful operation of the LLC
then Conair shall, after consulting with H.E.R.C., make a distribution of
profits to the members.
Under the terms of the supply/service agreement, H.E.R.C. and the LLC will
purchase all of their consumer products requirements, as defined, from Conair
during the term of the agreement. The LLC will purchase the products at a price
which results in a gross profit of 18% to Conair. These agreements will
terminate only upon agreement of the members or the failure of the LLC to
achieve cumulative sales of $7.5 million for the three-year period ending
December 31, 1996.
The LLC historically has had a concentration of significant customers.
Substantially all of the LLC's sales are to one customer and although the LLC
considers its commercial relationship with this customer to be good, the loss of
this customer, or a significant decrease in purchases by this customer, could
have an adverse effect on the LLC's operations.
Inventories
Inventories, consisting principally of finished goods, are stated at the lower
of cost or market (net realizable value). Cost is determined by using the
first-in, first-out ("FIFO") method.
Research and Development
Costs incurred in connection with research and development activities are
expensed as incurred
Taxes on Income
The LLC is taxed as a partnership for Federal income tax purposes. Therefore,
the LLC's individual members record their proportional share of the LLC's income
or loss on their respective income tax returns and the LLC is not responsible
for payment of Federal income taxes.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported assets and liabilities at December 31,
1995 and March 31, 1996 and the amounts of revenue and expenses during the years
ended December 31, 1995 and 1994 and the quarters ended March 31, 1996 and 1995.
Actual results could differ from those estimates.
2. Related Party Transactions
The LLC is responsible for paying Conair a management fee equal to 5% of gross
revenues of the LLC. Management fee expenses recorded by the LLC were $62,500
for the year ended December 31, 1994, $74,250 for the year ended December 31,
1995 and $21,000 for the quarters ended March 31, 1996 and 1995.
Substantially all of the LLC's inventory and resulting cost of sales arise from
purchases from Conair pursuant to the LLC's supply/service agreement (See Note
1).
3. Subsequent Events
A wholly-owned subsidiary of H.E.R.C. has acquired Conair's interest in the LLC
effective July 1, 1996. Certain of the agreements between H.E.R.C., Conair and
the LLC have been terminated as a result of this transaction.
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Pro Forma Consolidated Combined Balance Sheets
As of March 31, 1996
(Unaudited)
Historicals
---------------------------------- Pro Forma Pro Forma
H.E.R.C. HCPC,LLC. Adjustments Combined
-------- --------- ----------- --------
Assets
Current Assets
Cash and cash equivalents $ 168,217 $ - $ - $ 168,217
Trade accounts receivable, net of an
allowance for doubtful accounts 318,163 158,633 (165,136) (1) 311,660
Inventories 625,614 277,875 - 903,489
Other receivables 14,613 - - 14,613
Prepaid expenses 17,136 2,447 - 19,583
---------------- ---------------- --------------- ------------------
Total Current Assets 1,143,743 438,955 (165,136) $ 1,417,562
---------------- ---------------- --------------- ------------------
Property and Equipment
Property and equipment 330,412 - - 330,412
Less accumulated depreciation 110,408 - - 110,408
---------------- ---------------- --------------- ------------------
Net Property and Equipment 220,004 - - 220,004
---------------- ---------------- --------------- ------------------
Other Assets
Patents, net of accumulated
amortization 207,283 - - 207,283
Patents pending 97,513 - - 97,513
Deferred private offering costs 101,462 - - 101,462
Goodwill, net of accumulated
amortization 1,636,026 - 75,681 (5) 1,711,707
Refundable deposits 6,192 - - 6,192
Other 13,270 - - 13,270
---------------- ---------------- --------------- ------------------
Total Other Assets 2,061,746 - 75,681 2,137,427
---------------- ---------------- --------------- ------------------
$ 3,425,493 $ 438,955 $ (89,455) $ 3,774,993
================ ================ =============== ==================
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Pro Forma Consolidated Combined Balance Sheets
As of March 31, 1996
(Unaudited)
Historicals
---------------------------------- Pro Forma Pro Forma
H.E.R.C. HCPC,LLC. Adjustments Combined
-------- --------- ----------- --------
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable, including
current portion of long-term debt 241,034 - (225,500) (2) 15,534
Accounts payable 336,742 509,975 65,025 (1) 911,742
Accrued wages 16,797 - - 16,797
Other accrued expenses 42,426 - - 42,426
---------------- ---------------- --------------- ------------------
Total Current Liabilities 636,999 509,975 (160,475) 986,499
---------------- ---------------- --------------- ------------------
Long-Term Liabilities
Long-term debt, net of current portion 791,161 - - 791,161
Deferred rent 5,126 - - 5,126
---------------- ---------------- --------------- ------------------
Total Long-Term Liabilities 796,287 - - 796,287
---------------- ---------------- --------------- ------------------
Total Liabilities 1,433,286 509,975 (160,475) 1,782,786
---------------- ---------------- --------------- ------------------
Stockholders' Equity
Preferred stock, $0.01 par value;
authorized 1,000,000 shares, none issued - - - -
Common stock, $0.01 par value; authorized
10,000,000 shares; issued and
outstanding 2,928,441 shares 29,284 - - 29,284
Additional paid-in capital 7,812,619 - - 7,812,619
Accumulated deficit (5,849,696) (71,020) 71,020 (3) (5,849,696)
---------------- ---------------- --------------- ------------------
Total Stockholders' Equity 1,992,207 (71,020) 71,020 1,992,207
---------------- ---------------- --------------- ------------------
$ 3,425,493 $ 438,955 $ (89,455) $ 3,774,993
================ ================ =============== ==================
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Pro Forma Combined Statements of Operations
(Unaudited)
Year Ended December 31, 1995
Historicals
------------------------------------ Pro Forma Pro Forma
H.E.R.C. HCPC, LLC. Adjustments Combined
----------------- ---------------- --------------- ----------------
Sales $ 1,349,786 $ 1,380,573 $ - $ 2,730,359
Cost of Sales 1,327,755 801,583 - 2,129,338
--------------- ---------------- ----------------- ----------------
Gross profit 22,031 578,990 - 601,021
----------------- ---------------- ----------------- ----------------
Selling Expenses 849,812 453,102 - 1,302,914
----------------- ---------------- ----------------- ----------------
General and Administrative Expenses (41,417)(4) (41,417)
1,666,505 135,500 4,000 (6) 1,806,005
---------------- --------------- ---------------- -----------------
Research and Development 54,572 - 54,572
----------------- ---------------- --------------- ----------------
Operating Loss (2,548,858) (9,612) 37,417 (2,521,053)
----------------- ---------------- --------------- ----------------
Other Income (Expense)
Other Income 112,641 - (41,417)(4) 71,224
Interest Expense (44,952) - - (44,952)
----------------- ---------------- --------------- ----------------
Total other income (expense) 67,689 - (41,417) 26,272
----------------- ---------------- --------------- ----------------
Loss before Taxes on Income (2,481,169) (9,612) (4,000) (2,494,781)
Taxes on Income 941 - - 941
----------------- ---------------- --------------- ----------------
Net Loss $ (2,482,110) $ (9,612) $ (4,000) $ (2,495,722)
================ ================ =============== ================
Loss Per Share $ (0.93) $ (0.94)
================= ================
Weighted Average Common Shares and
Share Equivalents Outstanding 2,667,544 2,667,544
================= ================
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Pro Forma Combined Statements of Operations
(Unaudited)
Three Months Ended March 31, 1996
Historicals
----------------------------------- Pro Forma Pro Forma
H.E.R.C. HCPC, LLC. Adjustments Combined
--------------- ---------------- -------------- -----------------
Sales $ 473,549 $ 400,205 $ - $ 873,754
Cost of Sales 310,197 234,529 - 544,726
--------------- --------------- -------------- -----------------
Gross profit 163,352 165,676 - 329,028
---------------- ---------------- -------------- -----------------
Selling Expenses 200,725 113,005 - 313,730
---------------- ---------------- -------------- -----------------
General and Administrative Expenses 401,478 38,984 (12,006)(4) 428,456
1,000 (6) 1,000
---------------- ---------------- -------------- -----------------
Operating Income (Loss) (438,851) 13,687 11,006 (414,158)
---------------- ---------------- -------------- -----------------
Other Income (Expense)
Other Income 17,893 - (12,006)(4) 5,887
Interest Expense (3,564) - - (3,564)
---------------- ---------------- -------------- -----------------
Total other income (expense) 14,329 - (12,006) 2,323
---------------- ---------------- -------------- -----------------
Income (Loss) before Taxes on Income (424,522) 13,687 (1,000) (411,835)
(Benefit) Taxes on Income - - - -
---------------- ---------------- -------------- -----------------
Net (Loss) Income $ (424,522) $ 13,687 $ (1,000) $ (411,835)
================ ================ ============== =================
Loss Per Share $ (0.14) $ (0.14)
================ =================
Weighted Average Common Shares and
Share Equivalents Outstanding 2,928,441 2,928,441
================ =================
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED COMBINED FINANCIAL STATEMENTS
(Unaudited)
(1) To eliminate intercompany accounts payable and accounts receivable
(2) To eliminate note payable liquidated by purchase of the LLC
(3) To eliminate accumulated deficit of the LLC
(4) To eliminate intercompany administrative expenses and other income
(5) To record purchase price and goodwill
(6) To record goodwill which is amortized over a 20 year life
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
H.E.R.C. PRODUCTS INCORPORATED
------------------------------
(Registrant)
Date: June 15, 1996 By /s/ S. Steven Carl
--------------------------
S. Steven Carl
Chief Executive Officer
By /s/ Gary S. Glatter
--------------------------
Gary S. Glatter
Chief Financial Officer