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, 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)
Delaware 86-0570800
- ------------------------ ------------------------------------
(State of Incorporation) (IRS Employer Identification Number)
2215 W Melinda Lane, Suite A
Phoenix, Arizona 85027
----------------------------------------
(Address of principal executive offices)
(623) 492-0336
---------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Outstanding at
Class August 10, 1999
----- ---------------
Common Stock, $.01 par value 11,641,089
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
June 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations
Three and Six Months Ended June 30, 1999 and 1998 4
Consolidated Statement of Stockholders' Equity
Six Months Ended June 30, 1999 5
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 2 - Changes in Securities 14
Item 6 - Exhibits and Reports on Form 8-K 14
2
H.E.R.C. PRODUCTS INCORPORATED
Consolidated Balance Sheets
June 30, December 31,
1999 1998
------------ ------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 434,286 $ 242,867
Trade accounts receivable, net of allowance
for doubtful accounts of $16,630 and
$11,630, respectively 321,380 616,356
Inventories 35,368 19,430
Net assets of discontinued operations 10,000 114,192
Costs in excess of billings 6,537 13,993
Other receivables 7,012 4,255
Prepaid expenses 138,215 62,832
------------ ------------
Total Current Assets 952,798 1,073,925
------------ ------------
PROPERTY AND EQUIPMENT
Property and equipment 1,003,263 958,736
Less accumulated depreciation 404,836 322,311
------------ ------------
Net Property and Equipment 598,427 636,425
------------ ------------
OTHER ASSETS
Patents, net of accumulated amortization of
$102,260 and $95,407, respectively 105,119 64,971
Patents pending 63,654 95,182
Refundable deposits and other assets 53,018 76,993
------------ ------------
Total Other Assets 221,791 237,146
------------ ------------
$ 1,773,016 $ 1,947,496
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 125,671 $ 155,650
Accrued wages 25,921 42,030
Billings in excess of costs -- 42,447
Current portion of notes payable 116,348 66,109
Liabilities of discontinued operation 42,653 154,506
Other accrued expenses 146,947 164,042
------------ ------------
Total Current Liabilities 457,540 624,784
LONG-TERM LIABILITIES
Notes payable, net of current portion 11,118 25,147
------------ ------------
Total Liabilities 468,658 649,931
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common Stock, $0.01 par value; authorized
40,000,000 shares; issued and outstanding
11,629,325 and 11,491,921, respectively 116,293 114,919
Additional paid-in capital 13,964,819 13,923,793
Accumulated deficit (12,776,754) (12,741,147)
------------ ------------
Total Stockholders' Equity 1,304,358 1,297,565
------------ ------------
$ 1,773,016 $ 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 June 30, Six Months Ended June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
SALES $ 648,165 $ 862,093 $ 1,614,753 $ 1,459,910
COST OF SALES 292,598 405,195 707,676 600,643
------------ ------------ ------------ ------------
GROSS PROFIT 355,567 456,898 907,077 859,267
SELLING EXPENSES 93,451 94,749 198,767 181,133
GENERAL AND ADMINISTRATIVE EXPENSES 408,666 405,018 795,423 831,570
------------ ------------ ------------ ------------
OPERATING LOSS (146,550) (42,869) (87,113) (153,436)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (4,417) (32,210) (9,272) (56,750)
Miscellaneous 9,539 997 14,496 1,377
Expenses relating to settlement of lawsuits -- (55,000) -- (55,000)
Gain on sale of patent -- -- -- 77,597
------------ ------------ ------------ ------------
Total Other Income (Expense) 5,122 (86,213) 5,224 (32,776)
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (141,428) (129,082) (81,889) (186,212)
DISCONTINUED OPERATIONS:
Income from Operations of Discontinued Segments -- 34,392 -- 69,664
Income from Disposal of Discontinued Segments 46,282 -- 46,282 --
------------ ------------ ------------ ------------
NET LOSS $ (95,146) $ (94,690) $ (35,607) $ (116,548)
============ ============ ============ ============
INCOME (LOSS) PER COMMON SHARE - BASIC AND DILUTED
LOSS FROM CONTINUING OPERATIONS $ (0.01) $ (0.01) $ -- $ (0.02)
INCOME FROM DISCONTINUED OPERATIONS -- -- -- 0.01
------------ ------------ ------------ ------------
NET LOSS PER COMMON SHARE $ (0.01) $ (0.01) $ -- $ (0.01)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC 11,563,391 10,342,896 11,544,825 9,292,577
============ ============ ============ ============
DILUTED 11,563,391 10,342,896 11,544,825 9,292,577
============ ============ ============ ============
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,
DECEMBER 31, 1998 11,491,921 $114,919 $13,923,793 $(12,741,147) $1,297,565
Net Loss -- -- -- (35,607) (35,607)
Common Stock issued to Board of Directors
and Officers as compensation 137,404 1,374 41,026 -- 42,400
---------- -------- ----------- ------------ ----------
BALANCE,
JUNE 30, 1999 11,629,325 $116,293 $13,964,819 $(12,776,754) $1,304,358
========== ======== =========== ============ ==========
The accompanying notes are an integral part of this consolidated statement
5
H.E.R.C. PRODUCTS INCORPORATED
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30,
-------------------------
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (35,607) $ (116,548)
----------- -----------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation and amortization 108,825 164,874
(Gain) loss on sale or disposal of equipment (28) 5,696
Common stock issued for services 29,200 --
(Increase) decrease in assets
Trade accounts receivable 294,976 (411,022)
Inventories (15,938) (70,991)
Costs in excess of billings 7,456 --
Other receivables (2,757) (5,268)
Prepaid expenses (74,983) (90,604)
Refundable deposits and other assets 23,975 (54,346)
Change in net assets of discontinued
operations 104,192 --
Increase (decrease) in liabilities
Accounts payable (29,979) (242,665)
Accrued wages and other accrued expenses (33,204) 159,077
Billings in excess of costs (42,447) --
Change in net liabilities of discontinued
operations (111,853) 68,658
----------- -----------
Total adjustments 257,435 (476,591)
----------- -----------
Net cash provided by (used in) operating
activities 221,828 (593,139)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (61,148) (98,562)
Cash received from the sale of equipment 10,000 7,005
Expenditures related to patents and patents pending (15,471) (21,891)
----------- -----------
Net cash used in investing activities (66,619) (113,448)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock -- 999,400
Proceeds from issuance of notes payable and
long-term debt 155,996 125,470
Principal payments under notes payable (119,786) (78,615)
----------- -----------
Net cash provided by financing activities 36,210 1,046,255
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 191,419 339,668
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 242,867 135,396
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 434,286 $ 475,064
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 9,272 $ 57,396
=========== ===========
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 June 30, 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 Statements of Operations for the three and six months ended
June 30, 1998 have been reclassified.
NOTE 4 - SEGMENT INFORMATION
Information by segment for the three months ended June 30, 1999:
Fire Industrial
Marine Municipal Protection Chemicals Corporate Consolidated
------ --------- ---------- --------- --------- ------------
Sales $461,752 $ 52,251 $ 43,713 $ 90,449 $ -- $ 648,165
Income (loss) from continuing
operations 144,643 (7,260) (22,600) 35,286 (291,497) (141,428)
Total assets 564,581 290,982 113,338 106,133 697,982 1,773,016
Depreciation and amortization 20,747 10,090 5,903 1,500 14,539 52,779
Capital expenditures 12,173 -- -- -- (3,161) 9,012
Segment information for the three months ended June 30, 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 June
30, 1998, to conform with the June 30, 1999 presentation.
7
H.E.R.C. PRODUCTS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Information by segment for the six months ended June 30, 1999:
Fire Industrial
Marine Municipal Protection Chemicals Corporate Consolidated
----------- ----------- ----------- ----------- ----------- -----------
Sales $1,188,073 $193,104 $ 55,293 $178,283 $ -- $1,614,753
Income (loss) from continuing
operations 467,217 (4,252) (51,866) 69,208 (562,196) (81,889)
Total assets 564,581 290,982 113,338 106,133 697,982 1,773,016
Depreciation and amortization 41,044 20,179 11,805 3,000 32,797 108,825
Capital expenditures 57,973 -- -- -- 3,715 61,148
Segment information for the six months ended June 30, 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 six months ended June 30,
1998, to conform with the June 30, 1999 presentation.
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, 1999 and 1998 is as
follows:
Three Months Ended June 30, 1999
--------------------------------
Net Loss Shares Per Share
(Numerator) (denominator) Amount
---------- ---------- ----------
Basic EPS $ (95,146) 11,563,391 $ (0.01)
==========
Effect of stock options
and warrants -- --
---------- ----------
Diluted EPS $ (95,146) 11,563,391 $ (0.01)
========== ========== ==========
Three Months Ended June 30, 1998
--------------------------------
Net Loss Shares Per Share
(Numerator) (denominator) Amount
---------- ---------- ----------
Basic EPS $ (94,690) 10,342,896 $ (0.01)
==========
Effect of stock options
and warrants -- --
---------- ----------
Diluted EPS $ (94,690) 10,342,896 $ (0.01)
========== ========== ==========
8
H.E.R.C. PRODUCTS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 30, 1999
------------------------------
Net Loss Shares Per Share
(Numerator) (denominator) Amount
---------- ---------- ----------
Basic EPS $ (35,607) 11,544,825 $ --
==========
Effect of stock options
and warrants -- --
---------- ----------
Diluted EPS $ (35,607) 11,544,825 $ --
========== ========== ==========
Six Months Ended June 30, 1998
------------------------------
Net Loss Shares Per Share
(Numerator) (denominator) Amount
---------- ---------- ----------
Basic EPS $ (116,548) 9,292,577 $ (0.01)
==========
Effect of stock options
and warrants -- --
---------- ----------
Diluted EPS $ (116,548) 9,292,577 $ (0.01)
========== ========== ==========
For all periods presented, no common stock equivalents were considered in the
EPS calculations, as their effect was anti-dilutive.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
LITIGATION
HERC is a defendant in various legal actions and claims incidental to the
conduct of its business. Although the ultimate resolution of these matters is
not known, management and its legal counsel believe HERC has meritorious
defenses and the outcome will have no material effect on HERC's financial
position.
ENVIRONMENTAL MATTERS
Management believes HERC is in compliance with federal and state environmental
regulations that pertain to the sale and use of its products.
9
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 JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Sales of $648,000 in the second quarter were $214,000 less than 1998 second
quarter sales because of a decrease in revenue generated from marine ship pipe
line chemical cleaning, offset somewhat by increases in fire protection,
municipal and industrial chemical revenue. Marine revenue was $462,000 compared
to $765,000 in the second quarter of 1998. HERC believes the shortfall of
$303,000 in marine revenue was caused by a lack of funding of HERC's Navy
contract during the month of June and by the sudden deployment of certain U.S.
Navy vessels that were scheduled for cleaning in June, both in response to the
military situation in the Kosovo region. Of the marine work, all $462,000 was
performed pursuant to a contract with the United States Navy compared to
$632,000 in 1998. Additionally, HERC generated municipal revenue of $52,000,
fire protection revenue of $44,000 and industrial chemical revenue of $90,000 in
the second quarter of 1999.
Consolidated gross margins were 55% and 53% in 1999 and 1998, respectively. The
increase in gross margin percentage in 1999 is due changes in revenue mix and
revenue volume. HERC expects that gross margin percentages will continue to
fluctuate as changes in revenue mix and volume occur.
Gross profit decreased from $457,000 in 1998 to $356,000 in 1999 because of the
decrease in revenue. General and administrative expenses and selling expenses
remained relatively flat from one period to the next.
10
H.E.R.C. PRODUCTS INCORPORATED
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
HERC had an operating loss of $147,000 in 1999 compared with an operating loss
of $43,000 in 1998. The increased operating loss was caused by the decrease in
HERC's revenue.
HERC incurred a net loss of $95,000 in the second quarter of 1999 and a net loss
of $95,000 in the second quarter of 1998. The net loss in 1998 contained income
from discontinued operations of $34,000 that were attributable to the operations
of the consumer products company, expenses relating to the settlement of
lawsuits of $55,000 and interest expense of $32,000. The net loss in 1999
contained income from the disposal of the consumer products company of $46,000
relating to the settlement of a disputed marketing agreement and interest
expense of $4,000. The reduction in interest expense was achieved by paying off
long-term debt and by non-use of the factoring facility.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Sales of $1,615,000 for the six months ended June 30, 1999 were $155,000 ahead
of sales for the six months ended June 30, 1998 primarily because of increased
municipal and industrial chemical revenue offset by lower fire protection
revenue. Marine revenue for the six months ended June 30, 1999 increased $7,000
to $1,188,000 compared to $1,181,000 in 1998. Of the marine work, $1,086,000 was
performed pursuant to a contract with the United States Navy compared to
$975,000 in 1998. Additionally, HERC generated municipal revenue of $193,000,
fire protection revenue of $55,000 and industrial chemical revenue of $178,000
during the six months ended June 30, 1999.
Consolidated gross margins were 56% and 59% in 1999 and 1998 respectively. The
decrease in gross margin percentage is due to changes in revenue mix and volume.
HERC anticipates that gross margins will continue to fluctuate as revenue mix
and volume changes.
Gross profit increased from $859,000 in 1998 to $907,000 in 1999. The increase
in gross profit was the result of increased revenue over the prior period.
Selling expenses increased by $18,000 in 1999 while general and administrative
expenses decreased by $36,000 during 1999. The changes in selling, general and
administrative expenses were caused by a variety of factors including changes in
employees, commissions, amortization, rent, insurance and many other factors
working in combination with each other.
HERC had an operating loss of $87,000 in 1999 compared to $153,000 in 1998. The
smaller operating loss is a function of the increase in revenue and gross profit
combined with the decrease in general and administrative expenses offset
somewhat by higher selling expenses.
HERC incurred a net loss of $36,000 in 1999 compared to a net loss of $117,000
in 1998. The net loss in 1999 included income from the disposal of the consumer
products company of $46,000 relating to settlement of a disputed marketing
agreement and interest expense of $9,000. The net loss in 1998 included interest
expense of $57,000, a gain on the sale of a patent of $78,000, expenses relating
to the settlement of lawsuits of $55,000 and income from operations of the
consumer products company of $70,000. The lower interest expense in 1999 was the
result of non-utilization of HERC's factoring arrangement combined with the
payoff of the majority of HERC's long-term debt.
11
H.E.R.C. PRODUCTS INCORPORATED
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $434,000 and $243,000 at June 30, 1999 and
December 31, 1998 and working capital was $495,000 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 June 30, 1999, HERC had no factored receivables under its factoring
facility although this credit facility is currently 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 and in the near future. Thus, any material delay, cancellation or reduction
of orders, such as what happened in the month of June 1999, 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 71% and 73% of consolidated
revenues for the three months ended June 30, 1999 and 1998, respectively. Sales
to the U.S. Navy under the U.S. Navy contract accounted for 67% of consolidated
revenues for the six months ended June 30, 1999 and 1998, respectively.
Because of the high concentration level of revenue being generated by one
customer, HERC is actively pursuing ways to minimize the associated risk by
diversifying its revenue base and expanding the applications of its technology
to new markets. This includes, but is not limited to, securing new marine
customers, generating additional revenue from different divisions within the
U.S. Navy, focussing on the continual development and expansion of HERC's fire
protection system cleaning services utilizing its patented process, marketing
its chemical cleaning process toward industrial and municipal applications and
securing strategic partnerships with entities that can help develop and market
HERC's products and services.
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.
12
H.E.R.C. PRODUCTS INCORPORATED
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
COMPANY'S STATE OF READINESS
HERC has assessed 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") as the year 2000 approaches. As part of this process, HERC
has assessed the potential impact of Year 2000 failures from vendors and outside
parties upon its business and has taken 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.
COMPANY'S COSTS OF YEAR 2000 COMPLIANCE
HERC's total cost of Year 2000 compliance has been and is estimated 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 has developed contingency plans with respect to significant Year 2000
issues within its control. For example, HERC has assessed and verified the Year
2000 compliance of its raw material vendors. Verification was accomplished
through the use of written certifications. Any vendors not found to be Year 2000
compliant were replaced, if possible, with vendors that were 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.
13
PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
RECENT SALES OF UNREGISTERED SECURITIES
During the second quarter of 1999, HERC issued 23,272 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: August 12, 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)
14