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, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT For
the transition period from ____________ to ____________.
Commission File Number 1-13012
H.E.R.C. PRODUCTS INCORPORATED
(Name of small business issuer as specified in its charter)
State of Incorporation: Delaware IRS Employer Identification Number:
86-0570800
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, 1999
----- ------------
Common Stock, $.01 par value 11,549,325
Transitional Small Business Development Format: YES NO X
----- -----
H.E.R.C. PRODUCTS INCORPORATED
Index To Consolidated Financial Statements
PART I. FINANCIAL INFORMATION Page No.
Consolidated Financial Statements:
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998 3
Consolidated Statements of Operations
Three Months Ended March 31, 1999 and 1998 4
Consolidated Statement of Stockholders' Equity
Three Months Ended March 31, 1999 5
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998 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 12
Item 6 - Exhibits and Reports on Form 8-K 12
H.E.R.C. PRODUCTS INCORPORATED
Consolidated Balance Sheets
March 31, December 31,
1999 1998
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 290,503 $ 242,867
Trade accounts receivable, net of allowance
for doubtful accounts of $18,210 and
$11,630, respectively 598,987 616,356
Inventories 40,187 19,430
Net assets of discontinued operations 25,342 114,192
Costs in excess of billings 766 13,993
Other receivables 5,716 4,255
Prepaid expenses 136,665 62,832
------------ ------------
Total Current Assets 1,098,166 1,073,925
------------ ------------
PROPERTY AND EQUIPMENT
Property and equipment 1,010,872 958,736
Less accumulated depreciation 366,672 322,311
------------ ------------
Net Property and Equipment 644,200 636,425
------------ ------------
OTHER ASSETS
Patents, net of accumulated amortization of
$98,292 and $95,407, respectively 109,086 64,971
Patents pending 50,771 95,182
Refundable deposits and other assets 51,940 76,993
------------ ------------
Total Other Assets 211,797 237,146
------------ ------------
$ 1,954,163 $ 1,947,496
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 94,263 $ 155,650
Accrued wages 55,468 42,030
Billings in excess of costs -- 42,447
Current portion of notes payable 123,024 66,109
Liabilities of discontinued operation 77,559 154,506
Other accrued expenses 218,064 164,042
------------ ------------
Total Current Liabilities 568,378 624,784
LONG-TERM LIABILITIES
Notes payable, net of current portion 20,681 25,147
------------ ------------
Total Liabilities 589,059 649,931
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common Stock, $0.01 par value; authorized
40,000,000 shares; issued and outstanding
11,526,053 and 11,491,921, respectively 115,260 114,919
Additional paid-in capital 13,931,452 13,923,793
Accumulated deficit (12,681,608) (12,741,147)
------------ ------------
Total Stockholders' Equity 1,365,104 1,297,565
------------ ------------
$ 1,954,163 $ 1,947,496
============ ============
The accompanying notes are an integral part of these consolidated balance sheets
3
H.E.R.C. PRODUCTS INCORPORATED
Consolidated Statements of Operations
(Unaudited)
Three Months Ended March 31,
1999 1998
------------ ------------
SALES $ 966,588 $ 597,817
COST OF SALES 415,078 195,448
------------ ------------
GROSS PROFIT 551,510 402,369
SELLING EXPENSES 105,316 86,384
GENERAL AND ADMINISTRATIVE EXPENSES 386,757 426,551
------------ ------------
OPERATING INCOME (LOSS) 59,437 (110,566)
------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (4,855) (24,541)
Miscellaneous 4,957 380
Gain on sale of patent -- 77,597
------------ ------------
Total Other Income 102 53,436
------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 59,539 (57,130)
DISCONTINUED OPERATIONS:
Income from Operations of
Discontinued Segments -- 35,272
------------ ------------
NET INCOME (LOSS ) $ 59,539 $ (21,858)
============ ============
INCOME (LOSS) PER COMMON SHARE -
BASIC AND DILUTED
INCOME (LOSS) FROM CONTINUING OPERATIONS $ 0.01 $ (0.01)
INCOME FROM DISCONTINUED OPERATIONS -- 0.01
------------ ------------
NET INCOME (LOSS) PER COMMON SHARE $ 0.01 $ --
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC 11,526,053 8,230,588
============ ============
DILUTED 11,547,991 8,230,588
============ ============
The accompanying notes are an integral part of these consolidated statements
4
H.E.R.C. PRODUCTS INCORPORATED
Consolidated Statement of Stockholders' Equity
(Unaudited)
Common Stock Additional
Paid-in Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
BALANCE, JANUARY 1, 1999 11,491,921 $114,919 $ 13,923,793 $ (12,741,147) $ 1,297,565
Net Income -- -- -- 59,539 59,539
Common Stock issued to outside Board
of Directors as compensation 34,132 341 7,659 -- 8,000
---------- -------- ------------ ------------- -----------
BALANCE,
MARCH 31, 1999 11,526,053 $115,260 $ 13,931,452 $ (12,681,608) $ 1,365,104
========== ======== ============ ============= ===========
The accompanying notes are an integral part of this consolidated statement
5
H.E.R.C. PRODUCTS INCORPORATED
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31,
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ 59,539 $ (21,858)
--------- ---------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization 56,046 80,694
Common stock issued for services 8,000 --
(Increase) decrease in assets
Trade accounts receivable 17,369 (226,129)
Inventories (20,757) (62,735)
Costs in excess of billings 13,227 --
Other receivables (1,461) (5,119)
Prepaid expenses (82,633) (34,019)
Refundable deposits and other assets 25,053 (52,213)
Change in net assets of discontinued operations 88,850 --
Increase (decrease) in liabilities
Accounts payable (61,387) 156,656
Accrued wages and other accrued expenses 67,460 89,664
Billings in excess of costs (42,447) --
Change in net liabilities of discontinued operations (76,947) (11,688)
--------- ---------
Total adjustments (9,627) (64,889)
--------- ---------
Net cash provided by (used in) operating activities 49,912 (86,747)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (52,136) (11,804)
Expenditures related to patents and patents pending (2,589) (10,164)
--------- ---------
Net cash used in investing activities (54,725) (21,968)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable and long-term debt 113,996 45,492
Principal payments under notes payable (61,547) (32,340)
--------- ---------
Net cash provided by financing activities 52,449 13,152
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 47,636 (95,563)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 242,867 135,396
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 290,503 $ 39,833
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 4,855 $ 35,919
========= =========
The accompanying notes are an integral part of these consolidated statements
6
H.E.R.C. PRODUCTS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The unaudited consolidated financial statements are presented in accordance with
the requirements of Form 10-QSB and consequently do not include all of the
disclosures normally made in an annual Form 10-KSB filing. Accordingly, the
consolidated financial statements of H.E.R.C. Products Incorporated ("HERC")
included herein should be reviewed in conjunction with the consolidated
financial statements and the accompanying footnotes included within HERC's Form
10-KSB for the year ended December 31, 1998.
The consolidated financial statements have been prepared in accordance with
HERC's customary accounting practices and have not been audited. In the opinion
of management, the consolidated financial statements reflect all adjustments
necessary to fairly report HERC's financial position and results of operations
for the interim period. All such adjustments are normal and recurring in nature.
The interim consolidated results of operations are not necessarily indicative of
results to be expected for the year ending December 31, 1999.
NOTE 2 - LONG TERM DEBT AND OTHER FINANCING ARRANGEMENTS
In October 1997, HERC concluded an arrangement for a factoring facility whereby
the factor purchases eligible receivables and advances 80% of the purchased
amount to HERC. Purchased receivables may not exceed $600,000 at any one time.
The arrangement may be canceled by either party with 30 days notice. If HERC
cancels, certain penalties may apply. At March 31, 1999, there were no factored
receivables. This arrangement is accounted for as a sale of receivables on which
the factor has recourse to the 20% residual of aggregate receivables purchased
and outstanding.
NOTE 3 - DISCONTINUED OPERATIONS
During the fourth quarter of 1998, HERC concluded the sale of its wholly owned
subsidiary, Herc Consumer Products, Inc., which is accounted for as a
discontinued operation in the accompanying financial statements. Accordingly,
the Consolidated Statement of Operations for the three months ended March 31,
1998 has been reclassified.
NOTE 4 - SEGMENT INFORMATION
Information by segment for the three months ended March 31, 1999:
Fire Industrial
Marine Municipal Protection Chemicals Corporate Consolidated
------ --------- ---------- --------- --------- ------------
Sales to unaffiliated customers $726,321 $ 140,853 $ 11,580 $ 87,834 $ -- $ 966,588
Income (loss) from continuing operations 322,574 3,008 (29,266) 33,922 (270,699) 59,539
Total assets 750,750 393,431 127,999 109,794 572,189 1,954,163
Depreciation and amortization 20,297 10,089 5,902 1,500 18,258 56,046
Capital expenditures 45,800 -- -- -- 6,336 52,136
Segment information for the three months ended March 31, 1998 was not maintained
by management in the same manner presented above. It would be impracticable for
management to restate these results as of and for the three months ended March
31, 1999, to conform with the March 31, 1999 presentation.
7
H.E.R.C. PRODUCTS INCORPORATED
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 months ended March 31, 1999 and 1998 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, 1998
---------------------------------
Income Shares Per Share
(Numerator) (denominator) Amount
----------- ------------- ------
Basic EPS $ (21,858) 8,230,588 $ --
========
Effect of stock options
and warrants -- --
---------- ----------
Diluted EPS $ (21,858) 8,230,588 $ --
========== ========== ========
NOTE 6 - COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is a defendant in various legal actions and claims incident to the
conduct of its business. Although the ultimate resolution of these matters is
not known, management and its legal counsel believe the Company has meritorious
defenses and the outcome will have no material effect on the Company's financial
position.
ENVIRONMENTAL MATTERS
Management believes the Company is in compliance with federal and state
environmental regulations that pertain to the sale and use of its products.
8
H.E.R.C. PRODUCTS INCORPORATED
Management's Discussion and Analysis of Financial
Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
When used in this Form 10-QSB and in future filings by HERC with the Securities
and Exchange Commission ("SEC"), in HERC's press releases and in oral statements
made with the approval of an authorized executive officer of HERC, the words or
phrases "are expected", "HERC anticipates", "will continue", "believe",
"project", "estimated", "will enhance" or similar expressions (including
confirmations by an authorized executive officer of HERC of any such expressions
made by a third party with respect to HERC) are intended to identify
"forward-looking statements" within the meaning of that term in Section 27A of
the Securities Act of 1933, as amended ("the Act"), and Section 21E of the
Securities Exchange Act of 1934 as amended. Readers are cautioned not to place
undue reliance on any such forward-looking statements, each of which speak only
as of the date made. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical earnings and those currently anticipated or projected. Such risks
include, but are not limited to, adequate cash flow and financing for
implementation of its business plan, continued growth in its various customer
segments, effective marketing of its products directly by HERC and through
marketing partners and the other risks detailed in the HERC Form 10-KSB filed
with the SEC. HERC has no obligation to publicly release the result of any
revisions that may be made to any forward-looking statements to reflect any
anticipated events or circumstances occurring after the date of such statements.
This discussion and analysis of financial condition and results of operations
should be read in conjunction with the unaudited consolidated financial
statements and the related disclosures included elsewhere herein.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Sales of $967,000 in the first quarter were $369,000 ahead of 1998 first quarter
sales primarily because of $726,000 of revenue generated from marine ship pipe
line chemical cleaning compared to $416,000 in the first quarter of 1998. Of the
marine work, $625,000 was performed pursuant to a contract with the United
States Navy compared to $343,000 in 1998. Additionally, HERC generated municipal
revenue of $141,000 primarily from the cleaning of an industrial power
generating facility, generated fire protection revenue of $12,000 from one
cleaning project and had industrial chemical sales of $88,000 in the first
quarter of 1999.
Consolidated gross margins were 57% and 67% in 1999 and 1998, respectively. The
reduction in gross margin percentage in 1999 is due principally to the lower
margin realized from cleaning the industrial power generating facility. HERC
expects that gross margin percentages will continue to fluctuate as changes in
revenue mix occur.
Gross profit increased from $402,000 in 1998 to $552,000 in 1999 due to
increased revenues. In addition, general and administrative expenses decreased
by $40,000 because of reductions in corporate overhead, while higher revenues
resulted in an increase in selling expenses of $19,000 for the same period. The
changes discussed above produced operating income of $59,000 in 1999 compared
with an operating loss of $111,000 in 1998.
9
H.E.R.C. PRODUCTS INCORPORATED
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
HERC realized net income of $60,000 in the first quarter of 1999 compared to a
net loss of $22,000 in 1998. The net loss in 1998 contained income from
discontinued operations of $35,000 and other income of $53,000 that consisted of
a gain from the sale of a patent of $78,000 offset by interest expense of
$25,000.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $291,000 and $243,000 at March 31, 1999 and
December 31, 1998 and working capital was $530,000 and $449,000 at those
respective dates. The increase in cash during 1999 is a function of cash
provided by operating and financing activities offset by cash used in investing
activities.
As of March 31, 1999, HERC had no factored receivables under its factoring
facility although this credit facility is available as a source of cash if HERC
needs it. (See Note 2 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
1999. Thus, any material delay, cancellation or reduction of orders from this
customer could have a material adverse effect on HERC's operations. Sales to the
U.S. Navy under the U.S. Navy contract accounted for 65% and 57% of consolidated
revenues for the three months ended March 31, 1999 and 1998, 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.
YEAR 2000 COMPLIANCE DISCLOSURE
Many existing computer programs and databases use only two digits to identify a
year in the date field (i.e., 99 would represent 1999). These programs and
databases were designed and developed without considering the impact of the
upcoming millennium. Consequently, in the Year 2000, date sensitive computer
programs may interpret the date "00" as 1900 rather than 2000. If not corrected,
many computer systems could fail or create erroneous results in the Year 2000.
COMPANY'S STATE OF READINESS
HERC is currently assessing all of its internal and external systems and
processes with respect to the Year 2000 issue. HERC has received notification
from its provider of financial and accounting software that such software is
structured to accommodate the year 2000 and beyond. HERC plans to continue to
test all of its mission critical internal and external systems and processes
(and the associated Year 2000 "fixes") for Year 2000 compliance during 1999. As
part of this process, HERC is assessing the potential impact of Year 2000
failures from vendors and outside parties upon its business and is currently
taking steps to minimize that risk. Based on HERC's current state of readiness
and the steps currently being taken (i.e., installing backup processes and
systems), HERC does not believe that the Year 2000 problem will have a material
adverse effect on HERC's financial position, liquidity or operations.
10
H.E.R.C. PRODUCTS INCORPORATED
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
COMPANY'S COSTS OF YEAR 2000 COMPLIANCE
HERC estimates its total cost of Year 2000 compliance to be immaterial.
COMPANY'S RISKS OF YEAR 2000 ISSUES
HERC believes that the risk of failure of its software due to the Year 2000
issue is minimal; however, there may be latent defects of which it is not aware
that may cause disruption. To the extent HERC's vendors, service providers, and
customers have significant Year 2000 failures, HERC may be affected by their
inability to perform or from disruption in their providing services or orders.
COMPANY'S CONTINGENCY PLANS
HERC is developing contingency plans with respect to significant Year 2000
issues within its control. For example, HERC is in the process of assessing and
verifying the Year 2000 compliance of its raw material vendors. Verification
will be accomplished through the use of written certifications. Any vendors not
found to be Year 2000 compliant will be replaced, if possible, with vendors that
are Year 2000 compliant. Management believes, but can not guarantee, that HERC's
ability to perform its cleaning services will not be affected by the Year 2000
because the cleaning process involves non-computer related equipment and
machinery.
11
PART II: OTHER INFORMATION
Item 2. Changes in Securities
RECENT SALES OF UNREGISTERED SECURITIES
During the first quarter of 1999, HERC issued 34,132 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.
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 14, 1999 By: /s/ S. Steven Carl
----------------------------------------
S. Steven Carl
Chief Executive Officer
By: /s/ Michael H. Harader
----------------------------------------
Michael H. Harader
Chief Financial Officer (Principal
Financial and Accounting Officer)
12