U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934: For the Quarterly Period Ended September 30, 1996
Commission File Number 1-13012
H.E.R.C. PRODUCTS INCORPORATED
State of Incorporation: Delaware IRS Employer Identification Number: 86-0570800
2202 W. Lone Cactus Drive, Suite 15
Phoenix, Arizona 85027
(602) 492-0336
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
--------------
Class November 7, 1996
----- ----------------
Common stock, $.01 par value 6,290,487
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
September 30, 1996 and December 31, 1995 3
Consolidated Statements of Operations
Three Months and Nine Months Ended September 30, 1996 and 1995 4
Consolidated Statement of Stockholders' Equity
Nine Months Ended September 30, 1996 5
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION 12
Page 2
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
1996 1995
---- ----
(Unaudited)
Assets
Current Assets
Cash and cash equivalents $ 542,668 $ 331,601
Trade accounts receivable, net of an allowance for
doubtful accounts of $7,637 and $0, respectively 651,704 251,201
Inventories 833,261 577,836
Other receivables 25,308 22,422
Prepaid expenses 70,866 16,351
------------ ------------
Total Current Assets 2,123,807 1,199,411
------------ ------------
Property and Equipment
Property and equipment 447,982 352,638
Less accumulated depreciation 125,329 109,863
------------ ------------
Net Property and Equipment 322,653 242,775
------------ ------------
Other Assets
Patents, net of accumulated amortization of $57,659
and $39,801 respectively 195,377 205,757
Patents pending 134,627 78,083
Certificates of deposit, pledged - 75,628
Refundable deposits 21,279 5,817
Other 9,019 14,304
Goodwill, net of accumulated amortization of $122,951
and $57,154, respectively 1,717,152 1,649,377
------------ ------------
Total Other Assets 2,077,454 2,028,966
------------ ------------
$ 4,523,914 $ 3,471,152
============ ============
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable, including current portion of long-term debt $ 490,191 $ 245,131
Accounts payable 249,757 203,739
Accrued wages 20,628 18,198
Other accrued expenses 150,069 44,630
------------ ------------
Total Current Liabilities 910,645 511,698
------------ ------------
Long-Term Liabilities
Long-term debt, net of current portion 1,527 537,599
Deferred rent - 5,126
------------ ------------
Total Long-Term Liabilities 1,527 542,725
------------ ------------
Total Liabilities 912,172 1,054,423
------------ ------------
Stockholders Equity
Preferred stock, $0.01 par value;
authorized 1,000,000 shares, none issued - -
Common stock, $0.01 par value; authorized 40,000,000 shares;
issued and outstanding 6,200,178 and 2,928,441 respectively 62,002 29,284
Additional paid-in capital 10,186,571 7,812,619
Accumulated deficit (6,636,831) (5,425,174)
------------ ------------
Total Stockholders' Equity 3,611,742 2,416,729
------------ ------------
$ 4,523,914 $ 3,471,152
============ ============
Page 3
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Consolidated Statements Of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
Sales $ 1,082,522 $ 625,033 $ 2,051,507 $ 1,119,383
Cost of Sales 828,517 404,617 1,373,521 947,550
----------- ----------- ----------- -----------
Gross Profit 254,005 220,416 677,986 171,833
----------- ----------- ----------- -----------
Selling, General and Administrative Expenses 805,254 726,757 2,059,447 1,829,238
----------- ----------- ----------- -----------
Operating loss (551,249) (506,341) (1,381,461) (1,657,405)
----------- ----------- ----------- -----------
Other income (expense)
6,850 (8,384) 48,276 83,155
Interest expense (1,512) (5,806) (16,384) (12,720)
----------- ----------- ----------- -----------
Total other income (expenses) 5,338 (14,190) 31,892 70,435
----------- ----------- ----------- -----------
Loss before (benefit) taxes on income (545,911) (520,531) (1,349,569) (1,586,970)
(Benefit) Taxes on Income - - - -
----------- ----------- ----------- -----------
Loss before extraordinary item (545,911) (520,531) (1,349,569) (1,586,970)
Extraordinary item 137,912 - 137,912 -
----------- ----------- ----------- -----------
Net Loss $ (407,999) $ (520,531) $(1,211,657) $(1,586,970)
=========== =========== =========== ===========
Loss Per Share before extraordinary item $ (0.09) $ (0.18) $ (0.27) $ (0.62)
Gain on extraordinary item 0.02 - 0.03 -
----------- ----------- ----------- -----------
Net Loss Per Share $ (0.07) $ (0.18) $ (0.24) $ (0.62)
=========== =========== =========== ===========
Weighted Average Common Shares
and Share Equivalents Outstanding 6,172,675 2,884,660 5,044,767 2,579,612
=========== =========== =========== ===========
Page 4
HERC PRODUCTS INCORPORATED AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
(Unaudited)
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
Balance,
January 1, 1996 2,928,441 $ 29,284 $ 7,812,619 $(5,425,174) $ 2,416,729
Net Loss (1,211,657) (1,211,657)
Issuance of shares
of common stock 3,271,737 32,718 2,373,952 - 2,406,670
--------- ----------- ----------- ----------- -----------
Balance,
September 30, 1996 6,200,178 $ 62,002 $10,186,571 $(6,636,831) $ 3,611,742
========= =========== =========== =========== ===========
Page 5
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
1996 1995
---- ----
Cash Flows From Operating Activities
Net Loss $(1,211,657) $(1,586,970)
----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 130,497 76,501
Cost of equipment sold in the ordinary course of business - 160,971
Extraordinary item, before tax (137,912)
Loss on sale of equipment 1,522 19,473
(Increase) decrease in assets, net of effect of acquisition
Trade accounts receivable (225,857) 525,824
Inventories 21,267 (229,083)
Other receivables (2,886) (9,347)
Prepaid expenses (50,660) 25,040
Other assets (10,177) (12,214)
Increase (decrease) in liabilities, net of effect of acquisition
Accounts payable 25,130 (355,468)
Accrued wages 2,430 (48,194)
Other liabilities 30,297 (101,215)
----------- -----------
Total adjustments (216,349) 52,288
----------- -----------
Net cash used in operating activities (1,428,006) (1,534,682)
----------- -----------
Cash Flows From Investing Activities
Capital expenditures (149,242) (101,427)
Cash received from the sale of equipment 21,000 -
Proceeds from redemption of certificates of deposit 75,628 -
Expenditures related to patents and product labels (64,022) (69,895)
Cash paid in acquisition of subsidiary, net of cash acquired (220,969) (52,063)
----------- -----------
Net cash used in investing activities (337,605) (223,385)
----------- -----------
Cash Flows From Financing Activities
Proceeds from issuance of common stock 1,981,670 621,875
Proceeds from issuance of notes payable
and long term debt 410,943 50,000
Principal payments under long-term debt obligations (415,935) (28,103)
Principal payments to Good-Miles Partnership - (91,799)
----------- -----------
Net cash provided by financing activities 1,976,678 551,973
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 211,067 (1,206,094)
Cash and Cash Equivalents, at beginning of period 331,601 2,016,241
----------- -----------
Cash and Cash Equivalents, at end of period $ 542,668 $ 810,147
=========== ===========
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for interest $ 10,109 $ 5,395
=========== ===========
During 1996 notes payable to shareholder of $325,000 were repaid through the issuance of common stock
During 1996 note payable of $237,912 was paid in full by issuing common stock with a market value of
$100,000 resulting in an extraordinary gain
In conjunction with the 1996 acquisition described in Note 4, the Company acquired current assets of
$469,807, goodwill of $125,490 and current liabilities of $367,795
Page 6
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, these
consolidated financial statements included herein should be reviewed in
conjunction with the consolidated financial statements and the footnotes therein
included within the Company's Form 10-KSB for the year ended December 31, 1995.
The consolidated financial statements have been prepared in accordance with the
Company's customary accounting practices and have not been audited. In the
opinion of management, the consolidated financial statements reflect all
adjustments necessary to report fairly the Company's financial position and
results of operations for the interim period. All such adjustments are normal
and recurring in nature. The interim consolidated results of operations are not
necessarily indicative of results to be expected for the year ending December
31, 1996.
NOTE 2 - Inventories
Inventories are summarized as follows:
September 30, 1996 December 31, 1995
------------------ -----------------
Raw Materials $153,762 $ 40,064
Work in Progress 2,364 46,889
Finished Goods 677,135 490,883
------- -------
Total $833,261 $577,836
======== ========
NOTE 3 - Agreement of Merger
On May 1, 1995, the Company acquired all of the outstanding capital stock of CCT
Corporation ("CCT") in a merger transaction by which CCT has become a
wholly-owned subsidiary of the Company. CCT, based in Carlsbad, California,
manufactures and distributes environmentally friendly proprietary agriculture
products. Shelby A. Carl, Chairman Emeritus of the Board of the Company, was
(through the Shelby A. Carl Trust) the majority stockholder of CCT, and his son,
S. Steven Carl, Chief Executive Officer of the Company, was the minority
stockholder. The merger transaction has been accounted for as a purchase with
the results of operations of CCT included in the Company's consolidated
financial statements from the date of the acquisition. As a result of this
transaction, goodwill of $1,714,613 was recorded. The selling shareholders are
eligible to receive additional compensation under certain circumstances.
NOTE- 4 Acquisition of H.E.R.C. Consumer Products Company
On July 1 1996, the Company acquired the fifty percent interest of H.E.R.C.
Consumer Products Company ("LLC") owned by Conair Corporation ("Conair"). Prior
to that date the Company and Conair equally owned LLC which was formed to
produce and market the Company's consumer products. The Company had accounted
for its 50% investment in the LLC by the equity method of accounting, and
accordingly, sales of the LLC prior to July 1, 1996, were not reported as sales
of the Company.
Page 7
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE-4 Acquisition of H.E.R.C. Consumer Products Company (Continued)
Under the terms of the acquisition agreement, the Company paid Conair $276,000
on July 1, 1996, and the parties terminated their respective obligations under
certain existing agreements, including, but not limited to, the partnership
agreement, operating agreement and supply agreement related to LLC resulting in
the settlement of the Company's obligation to pay Conair approximately $230,000
and of the obligation of LLC to pay the Company approximately $176,000. The
Company also paid additional consideration to Conair of $5,165 for 50% of the
net profit of LLC for the month of June 1996 and became obligated to pay
$276,690 to Conair in six monthly installments of $46,115 commencing July 31,
1996, for certain inventory products manufactured by Conair for the LLC before
June 28, 1996 ("Conair Inventory"), plus shipping and handling expenses. The
Conair Inventory and other assets of LLC are pledged as security for the
payments due under the agreement. The transaction resulted in $125,490 in
goodwill to the Company which will be amortized over 20 years.
NOTE-5 Non-Cash Investing Activities.
For the purpose of the Statements of Cash Flows, for the quarter ended September
30, 1995, equipment with a cost of $292,324 was reclassified as inventory held
for sale. Of that total $160,971 was sold during the nine months ended September
30, 1995.
During the nine months ended September 30, 1995, the Company acquired all the
common stock of CCT through the issuance of 409,691 shares of the Common Stock
of the Company valued at $3.69 per share. The Company acquired $798,652 in
current assets of CCT, $42,181 of net property and equipment and $17,276 in
other assets. Additionally, the Company assumed current liabilities of CCT of
$790,207 and long-term liabilities of $191,557.
NOTE 6 - Private Placement of Units
In April 1996, the Company completed the private placement of 3,214,902 units.
Each unit consisted of one common share and one warrant. The Company received
proceeds of approximately $2,277,000, net of approximately $456,000 in expenses
directly related to the offering. Each warrant entitles the holder to purchase
one share of common stock at a price of $2.00 per share, subject to adjustment
until April 3, 1999. The shares and the shares underlying the warrants have been
registered under the Securities Act of 1933 for resale by the holders and are
subject to an agreement of each holder not to sell the shares until April 3,
1997 without the consent of GKN Securities Corporation (GKN) which acted as the
exclusive placement agent of the offering. GKN was paid a commission of
$273,267, non-accountable expenses of $81,980 and issued an option entitling it
to purchase 321,490 units, within five years from the closing date, at a price
of $.935 per unit.
During 1996, the Company's Chief Executive Officer and Chairman Emeritus
advanced an aggregate of $325,000 to the Company. Concurrent with the
aforementioned private placement, the Company satisfied its repayment obligation
through the issuance of 382,353 units. The units issued to these individuals are
included in the amounts noted above.
NOTE 7 - Pro Forma Adjustments
The pro forma condensed consolidated income statement data for the nine months
ended September 30, 1996 and 1995 give effect to the acquisitions described in
notes 3 and 4 of this report.
The pro forma information is based on the historical financial statements of the
Company, CCT and the LLC, giving effect to the transactions under the purchase
method of accounting.
Page 8
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 - Pro Forma Adjustments - (Continued)
The pro forma condensed consolidated income statement data for the nine months
ended September 30, 1996 and 1995 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 reflect these transactions from the dates
of acquisitions forward.
The pro forma condensed consolidated financial statements have been prepared by
the Company's Management based upon the historical financial statements of the
Company, CCT and the LLC. These pro forma condensed consolidated financial
statements may not be indicative of what would have occurred if the combination
had been in effect on the dates indicated.
The following table illustrates the pro forma effects on sales, net loss, and
net loss per share for the nine months ended September 30, 1996 and 1995.
Nine Months Ended
September 30
1996 1995
---- ----
Sales $2,812,753 $3,072,307
Loss before Extraordinary Item $(1,259,081) $(1,397,931)
Net Loss $(1,121,169) $(1,397,931)
Loss per share before Extraordinary Item $(0.25) $(0.54)
Net Loss per share $(0.22) $(0.54)
NOTE 8 - Extraordinary Item
In September 1996, the Company agreed to issue 37,210 shares of common stock,
with recorded market value of $100,000, in full satisfaction of certain
long-term debt obligations in the amount of $237,912. As a result of this
transaction, the Company recognized an extraordinary gain from the
extinguishment of debt in the amount of $137,912.
Page 9
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Three Months Ended September 30, 1996 Compared to Three Months Ended September
- --------------------------------------------------------------------------------
30, 1995
- --------
Sales during the third quarter of 1996 totaled $1,082,522, for an increase of
73% from sales of $625,033 during the third quarter in 1995 as a result of
increased sales of products and services. Sales for the third quarter of 1996
consisted of $402,968 from agricultural products, $487,674 from consumer
products and $191,880 from water treatment products and services.
The gross profit margin as a percentage of sales decreased to 23% for the third
quarter of 1996 compared to 35% for the third quarter of 1995. The decrease is
due partially to certain start up costs associated with the Company's initial
commercial pipeline rehabilitation projects and to the write down of certain
equipment used in the water system treatment process which reduced gross margin
for that business segment to a negative 2%. The gross margin on agricultural
chemical sales and consumer products sales was 34% and 24% respectively. Gross
margin on consumer product sales was depressed in 1996 as the Company absorbed
certain product and freight costs associated with the movement of Conair
inventory after the acquisition (see Note 4). Because of the non-recurring
nature of the water system treatment process and consumer product expenses
discussed above, management expects that the Company's overall gross margin will
significantly improve in early 1997. However, management expects that gross
margin will continue to fluctuate from quarter to quarter based on the
seasonality of sales.
The Company incurred $805,254 of selling, general and administrative expenses in
the third quarter of 1996 compared to $726,757 in the third quarter of 1995, for
an increase of $78,497. The increase is due to additional personnel and related
costs necessary to support revenue growth and the Company's expanding operations
and services. As revenues increase, the Company believes it will be necessary to
expand the operational and administrative infrastructure in future quarters to
service its customers and sustain continued growth.
The Company incurred a loss of $407,998 for the quarter ended September 30,
1996, compared to a loss of $520,531 for the quarter ended September 30, 1995.
The smaller loss was due primarily to an extraordinary gain of approximately
$137,000 on the retirement of debt in exchange for common stock as of September
6, 1996.
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 30,
- --------------------------------------------------------------------------------
1995
- ----
Sales during the nine months ended September 30, 1996 totaled $2,051,507, for an
increase of 83% from sales during the same period in 1995 of $1,119,383. Sales
for the nine months ended September 30, 1996 consisted of $1,304,160 from
agricultural products, $487,674 from consumer products and $259,673 from water
treatment products and services.
The gross profit margin as a percentage of sales increased to 33% for the nine
months ended September 30, 1996 compared to a gross margin of 15% for the same
period in 1995. Sales of agricultural products and consolidation of H.E.R.C.
Consumer Products operations into the 1996 financial statements accounted for
the increase (see Note 4).
The Company incurred $2,059,447 of selling, general and administrative expenses
in the nine months ended September 30, 1996 compared with $1,829,238 for the
same period in 1995. The increase of $230,209 is a function of the Company's
expanding operations.
The Company incurred a loss of $1,211,657 for the nine months ended September
30, 1996 compared to $1,586,970 for the same period in 1995. This smaller loss
is attributable to improved gross margins and to an extraordinary gain on the
early retirement of debt.
Page 10
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
On April 3, 1996, the Company sold securities in a private placement receiving
net proceeds of approximately $2,277,000 ("Private Placement"). The Company used
such proceeds (i) to purchase Conair Corporation's 50% share of H.E.R.C.
Consumer Products Company; (ii) to purchase consumer and agricultural product
inventory to meet its anticipated sales; (iii) to market its water system
treatment products; (iv) to develop, license and purchase the rights of new
biorational agricultural products; and (v) for working capital for general
corporate purposes.
Net cash used in operating activities was lower for the nine months ended
September 30, 1996 by $106,676 compared to the same quarter in 1995 because of a
reduced loss in 1996, an increase in accounts receivable and accounts payable
and a decrease in inventory. Working capital increased during the nine months
ended September 30, 1996 through the Private Placement offset by the loss from
operations.
The Company's capital requirements have been and will continue to be
significant. The Company is not currently generating sufficient cash flow to
support ongoing operations, and there can be no assurance that the Company will
generate sufficient future revenue to fund its operations. The Company believes
it has sufficient cash resources to continue its operations as they are
currently conducted until February, 1997 when additional financing will be
required. After February, 1997, if additional financing is not obtained, the
Company will have to curtail operations until it finds additional capital or its
revenues increase to the level that they cover expenses. During the second
quarter of 1997 revenues and cash flow are expected to improve as a result of
seasonal factors inherent to all segments of the Company's business.
The Company is currently discussing additional financing with potential lenders
and investors, but no arrangements have been concluded nor is there any
assurance such arrangements will be concluded. To the extent that any future
financing involves the sale of the Company's equity securities, the interest of
the Company's then stockholders could be substantially diluted.
Page 11
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
PART II: OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on July 18, 1996. The
matters presented to the stockholders were the election of directors, approval
of the 1996 Performance Equity Plan and approval of an amendment to the
Company's Certificate of Incorporation to increase the number of authorized
shares of the Common Stock to 40,000,000 shares of Common Stock. The votes cast
on the issues are as follows:
(i) Election of directors:
Name For Abstain
---- --- -------
S. Steven Carl 5,074,807 25,100
Shelby A. Carl 5,074,807 25,100
Gary S. Glatter 5,074,807 25,100
Jerome H. Ludwig 5,074,807 25,100
Robert M. Leopold 5,074,807 25,100
(ii) Adoption of 1996 Performance Equity Plan:
For Against Abstain
--- ------- -------
4,099,819 105,624 12,100
(iii) Approval of the amendment to the Certificate of Incorporation
of the Company:
For Against Abstain
--- ------- -------
4,791,975 177,282 8,150
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Amendment NO. 2 To Repayable Cooperative Agreement
NO. 93-AARC-1-0015
27.1 Financial Data Schedule
(b) On July 1, 1996, the Company reported under Item 2, Acquisition or
Disposition of Assets, on Form 8-K, its acquisition of the interest in the LLC
that was previously owned by Conair. The Company also filed unaudited financial
statements of the business acquired as of March 31, 1996 and December 31, 1995,
and results of operations and cash flows for the years ended December 31, 1995
and 1994. Audited financial statements for the business acquired were not
required under Section 310(c)(3)(ii) of Regulation S-B. The Company also filed a
pro forma consolidated 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. (see Note 4 to accompanying financial statements)
Page 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
H.E.R.C. PRODUCTS INCORPORATED
(Registrant)
Date: November 14, 1996 By /s/ S. Steven Carl
------------------------------
S. Steven Carl
Chief Executive Officer
By /s/ Gary S. Glatter
-------------------------------
Gary S. Glatter
Chief Financial Officer
Page 13