S. STEVEN CARL - H.E.R.C. PRODUCTS - (HERC.OB)
CEO Interview - published 07/10/00

DOCUMENT # KAC602

S. STEVEN CARL has been the Chief Executive Officer and a Director of HERC Products, Inc. since August 1995 and was President of HERC from August 1995 to February 28, 1996. Effective February 28, 1996, Mr. Carl became Chairman of the Board and resigned as President of HERC Mr. Carl was re-appointed President in May 1997. From May 1992 to August 1995, Mr. Carl was President and Chief Executive Officer of CCT Corporation, a wholly owned subsidiary of HERC acquired in May 1995.

Sector: Industrial Equipment & Components

TWST: Could you begin by giving us a brief overview of HERC Products, Inc. — the company’s history, products, services, and customers?

Mr. Carl: HERC is essentially a chemical, engineering and technology company that produces patented products and services for cleaning out potable water lines and industrial pipelines. We developed chemistry that removes corrosion and scale that builds up in all water pipes and systems, and we began pursuing opportunities cleaning the potable water lines in municipal drinking water distribution systems. In 1997 the EPA published cost estimates on rehabilitating water systems in the United States, the original estimate being $138 billion over the next 20 years, $77 billion of which was earmarked for potable water lines. We viewed these figures in conjunction with our ability to keep pipes clean as a perfect growth opportunity and confirmation of the essential strengths on which the company went public. As we gained greater visibility in that field, customers from other pipe cleaning markets began approaching us with pipeline problems they could not solve and on which they had already spent too much money. The US Navy, currently our longest customer, happened to be one of those that approached us. HERC was being interviewed on a stock report radio program at 6:00 on a Saturday morning in Manhattan, figuring that very few people were listening. However, a U.S. Coast Guard lieutenant heard the show and called in to ask if HERC could clean pipes aboard ships. We asked him to send a sample of pipe to test, which we received soon after. At that time, the Coast Guard was spending about $75,000 a year per ship using high-pressure water to keep the systems clean aboard their ships. This method was only about 50% effective and required taking the ship’s entire pipe systems out of service for a week. With HERC’s technology, the ship’s entire pipe systems could be cleaned and returned to its original specifications in about six hours. The Coast Guard was so impressed with the results that they gave us several more ships to clean. In addition, they took the liberty of showing our engineering specs to the U.S. Navy, suggesting that they take a look at our technology and cleaning results. A year later, we signed a five-year contract with the US Navy to clean the CHT pipe systems for the surface fleet in the Atlantic, out of the Supervisor of Shipbuilding Office in Portsmouth, Virginia. We’ve now expanded to every port that the U.S. Navy uses. We’re cleaning ships in Sasebo and Yokuska, Japan as we speak. Orders have increased in San Diego, California and Seattle, Washington, as well as in Mayport, Florida, and Engleside, Texas, so our Marine Services Division is really growing. We’ve gone from targeting primarily municipal water pipes to becoming a marine cleaner simply because of the need in the market, and we continue to develop that area. But we have found that the same type of scale exists in many industrial applications. We received a call from McCarran International Airport in Las Vegas, Nevada because they had heard of our chemical pipe cleaning technology through a Naval consultant with whom we had been working. McCarran had been having problems with their fire protection system in the airport’s international terminal. When we examined the airport’s fixtures, we discovered that the pipe was approximately 50% clogged with scale and corrosion, drastically limiting water flow. We recognized that our cleaning technology could be further adapted, expanded our patents accordingly to include this new application, and began rehabilitating fire protection systems, creating a totally new market. At this point we began asking ourselves, just how big could this business be? How many different applications had we not yet perceived? We discussed the possibilities with Hartford Steam Boiler IRI and Factory Mutual, two of the foremost insurance companies, regulating a large percentage of the fire protection industry in the United States, and were told that they, too, recognized that the problems in fire protection systems that HERC could address had gone without solution until our technology came to light. The most common problem for the fire protection industry is known as Microbiologically Influenced Corrosion, or simply MIC, iron bacteria which grow into scale, building up inside a fire protection system pipe and blocking water flow. The bacteria also eat through the pipe wall, causing pin-hole leaks, which in turn cause property damage and further reduce the efficiency of the fire protection system. With HERC’s technology, we are able to clean out a clogged system in about a 12-hour shift. Pin-hole leaks produced by MIC present a particular challenge and one we came across at Allied Signal here in Phoenix. A leak occurred in a sprinkler system inside Allied Signal’s mainframe computer room that controlled their systems worldwide, making it necessary for them to shut down their mainframe computer at a cost of about $4 million per hour of down time. Obviously, this was a very unpleasant experience for them, but it caused them to start examining all of the sprinkler pipeline systems through their facilities, discovering MIC in most of them. HERC cleaned the system for Allied Signal, and we continue to work with them. We’re finding now that there is a significant need for this application in what we consider to be critical or sensitive areas: the computer room at Allied Signal or work we’ve done in areas where software companies keep their tape backup computer systems. We’ve talked with Intel and Motorola about critical areas they have in their facilities. Ace Hardware in Chicago, Illinois had us clean some sprinkler systems located in warehouse areas where expensive inventory is kept. This is a growing business for us that has a lot of opportunity. I think that we’ll continue to see great expansion in critical area cleaning until the insurance companies and the fire protection industry develop some guidelines to help customers like hotels, bank buildings and malls deal with this problem inside their buildings.

TWST: Your company is really moving fast.

Mr. Carl: Yes, we are, and very quickly. Since the EPA came out with their original estimates for municipal water lines, those that run beneath everybody’s cities, funding has started becoming available. That will be the largest market that we approach, but it will be the slowest moving because the funds that come from the customers, in this case being a municipality or a private water utility, are going to come from either tax increases or federal government grants or bond issues. As most people are aware, that’s a pretty slow moving way to finance projects. We consider underground pipelines as the hidden infrastructure because no one can see them. What is out of sight is usually out of mind, so, unlike the potholes in the street that everybody has to drive over every day, people don’t think about their city’s pipes or consider them important. However, if they really knew what the pipes they’re using looked like inside, especially those carrying their drinking water, most people would be up in arms. So the funding now is increasing, and we’re starting to see much more activity in this area. We’ve been called from several cities in California, Arizona, and Upstate New York, where projects have been proposed.

TWST: How’s the competition? What’s HERC’s competitive edge, and what sets the company apart?

Mr. Carl: Really, the ability to clean chemically is our competitive advantage. Potable water distribution systems (anything involving a city pipe, including fire protection systems because those systems are tied into city water systems) are covered by patents, so no one can chemically clean those except HERC There are mechanical methods, but they are normally only effective in large diameter pipes. HERC can usually clean those systems at about 20%-50% of the cost of replacement, and replacement is cheaper than mechanical cleaning in a fire protection system. Regarding municipal water systems, the Europeans really have perfected many of the mechanical cleaning methods, but when they perform that work, it’s very hard on the pipes. Their return on investment scheduled was planned to be about 20 years before the pipes would again need cleaning. What they’re finding, however, is that with mechanical cleaning methods, the pipes require cleaning again in about eight years. So their schedule hasn’t really worked out for them. Then after cleaning the pipes using a mechanical method, they want to apply some type of lining to the interior, either an epoxy lining, or a cement mortar lining. HERC’s chemical cleaning technology is a gentler application in comparison with mechanical methods. Working with Calgon, which now has become Nalco, we provide post-cleaning water treatment that preserves the pipes. So we not only clean the pipe, we have the relationship that allows us to maintain the pipe integrity in the long run. Add to this the fact that HERC’s chemical cleaning is normally less expensive than the cost of mechanical cleaning methods for municipal pipe.

TWST: Where would you like to see HERC in three years?

Mr. Carl: Really, right now we’ve split the company up into four operating divisions. Our Marine Services Division is still the driving force with the expansion in the work we do for the U.S. Navy. That division has really been the catalyst in developing all these other applications. We’ve been able to increase the amount of equipment needed and the number of people that are able to perform the work, so that we can respond to just about any customer at any time now. Plus with the cash flow that we get from that business we are now able to respond to just about any customer at any time. Beyond these benefits, the cash flow from that division will allow us to upgrade for any other market fairly rapidly. The second division we have is the Fire Protection Division. With our ability to borrow from Marine Services operations personnel as needed, we can effect significant growth there as well as in the municipal market. The third and fourth pieces of our business are what we call the Municipal Industrial Division and the Industrial Chemical Product Division. One of the competitive advantages we have when we venture into a non-patented area like the marine cleaning field is the company development of a chemical formulation that is an oxide scavenger, which enhances acid cleaning of pipes. So we can function at very safe levels. The product will remove scale and corrosion used at very dilute levels or at full concentration. We actually have three patents on the product itself, and we’ve recently licensed those patents to DuPont. DuPont, in turn, is private labeling the product as Glyclean®, manufactured by HERC for them, and pursuing a huge market in water treatment for cooling towers and applications for closed loop systems. When we look at the four directions in which we’re taking this technology, I think that we’ll see fire protection grow significantly over the next two to three years, with municipal pipe cleaning continuing at a moderate increase. The most significant issue that people can understand about the municipal field is that municipal contracts are not like $30,000-$50,000 contracts that you typically see in marine cleaning or fire protection cleaning. An average size municipal contract may be $1-$5 million. There will be fewer contracts but, again, they will be significant contracts. So, I think over the next three years we’ll see this company grow considerably, both in revenues and in the bottom line.

TWST: Are there any other changes you expect in your markets over the next several years?

Mr. Carl: I think the biggest differences or changes we’ll see over the next several years will really be the positioning of the markets from a regulatory standpoint and an insurance standpoint in the fire protection business. In the municipal market we’ll see increased funding and public awareness. With fire protection, as the insurance industry draws conclusions, they will begin to push customers and the industry toward inspection and remediation of corrosion problems in the pipes. The National Fire Protection Association is the umbrella organization that writes the codes and guidelines for installation, planning and maintenance of all fire protection systems. HERC has two men sitting on the development committee involved with MIC for the National Fire Protection Association Code Book, called Section 25. The other members of that committee are people from the insurance industry as well as fire protection contractors and state agencies. We’re able to observe first hand and influence how those guidelines that customers use when dealing with MIC are adopted and clarified, and it’s going to open us another important opportunity for the company. In the municipal market, it’s going to be awareness of the problem. I think everyone has seen the growth in bottled drinking water. Unfortunately, a portion of the population in the United States really can’t afford to always have bottled water. If we want to make sure that the drinking water is safe, and not over-treated, then we need to start with clean pipes; we need to start with a clean system. There was a very well written article in USA Today about a year ago on the challenges in the water system in the United States. The issues it addressed are the types of things that keep coming back into the public eye to create awareness of the problem. I believe that once awareness increases, increased funding will follow. Once cities have the funding to deal with the problem, you’ll see a significant amount of growth in municipal water system rehabilitation.

TWST: How is the company taking advantage of the Internet?

Mr. Carl: We have a Website, www.hercprod.com, and we’ve found that people are becoming sophisticated in looking for answers to their problems on the Internet. We receive eight to 10 hits a week on our Internet site from people who have pipeline problems. They would have a pipeline break, for instance, and when they pulled samples of the pipe and actually looked at them they realized that they had to do something to rectify the situation. They were able to find our Website just with the keywords “pipe” and “cleaning” and came to us asking how to deal with these. We plan to continually upgrade the content and functionality of our Website in order to provide current and potential customers and investors with useful and accurate information about our company and its products and services.

TWST: How about acquisitions, joint ventures and partnerships? Will they play a part in your future?

Mr. Carl: I believe they will. We have no definite plans to look at acquisitions right now. That would be difficult to do when you are starting at a $0.35-$0.40 stock price. You know, the company went public on about an $8-$10 million market cap, and if you followed the history of the company prior to being de-listed from NASDAQ, that’s typically where we stayed. No matter what we’ve done in terms of financings through the years, our market cap would always come back to $8-$12 million. The only time it deviated from that cap was during periods of excess enthusiasm or excess negativity. We ran into that situation toward the end of 1997 when we were one of the few stocks that you could take a tax loss on, so we saw some tax loss selling that pushed the stock price down. Then in early 1998 we were engaged in extensive discussions with NASDAQ about the new listing standards and about being de-listed. Ultimately we were de-listed late that same year because we did not meet the net asset value standard, a few million dollars. We also did not meet the stock price minimum of $1. However, we had a choice. At that point, we could have chosen to do a stock offering and a reverse split to stay on NASDAQ. Instead, we looked at the company, at the fact that our business was growing, we were beginning to cash flow, we were developing significant relationships with companies like Calgon and DuPont. We began to realize that a decision to do an offering, or to do a reverse split, would be bad for our shareholders. We decided to take the long-term view and continue to develop our markets and work our way out of this situation. We even presented NASDAQ with a plan stating our strategy. NASDAQ de-listed us anyway, but we’ve managed to stay true to our plan. Our intent is to go back to NASDAQ some time this year and request a review of the plan with which we previously petitioned them, and further petition to go back on NASDAQ under the old standards. I think that’s going to be critical. But as we look at the growth opportunities with our current markets we begin to see the success momentum improve and increase for us. As the stock begins to reflect that improvement, we will look at possible opportunities for very specific acquisitions in some areas that would help us develop our technology faster.

TWST: What rate of gain or percentage of gain in sales and earnings should investors expect in HERC over the next few years?

Mr. Carl: I think it will consistently produce 30%-50% top and bottom line growth.

TWST: What are the risks or general concerns regarding the company? Is there anything about HERC that keeps you awake at night?

Mr. Carl: I sleep pretty well in general. The opportunities are what I think about; that’s why I can afford such an easy sleep. We have so many positive things happening, and our biggest challenge right now is staying focused on these markets in which we’re already involved. We haven’t even discussed the industrial aspects of the business. For instance, Salt River Project, a large power utility out here in the West, asked us to clean a 100-megawatt power facility last year. The project was a success so they’ve asked us to come back and do more. That market now has some competitive chemical cleaners in it, but the customers are telling us that our chemical technology makes the cleaning go a lot faster and is much more thorough. So we continue to maintain a strategic advantage. We’re applying a technology in what really is a construction environment, and the real cost in a construction environment is men and equipment. If we can reduce the amount of time it takes to get that work done then we become a much better value to the customer. We try to stay focused on providing the customer with value and making sure the customer knows that value is available in these markets.

TWST: As Chairman, President and CEO, where are you spending your time in the company? What are you focusing on?

Mr. Carl: Right now, I’m focused primarily in marketing and operations, staying targeted on these markets I’ve mentioned. When we were back in the start-up phase and we were doing several financings, I spent all my time in front of investment bankers and stockbrokers, helping to sell the concept of the company. We’ve turned the corner, and we’ve been very thinly capitalized all the way along. We’ve never had an excess amount of funding to work with. But once we began to turn that corner, we decided to stop spending time on financing and really get out and let people know about the company and the stock opportunity. We’ll focus on operations and on demonstrating the type of financial growth that comes from revenues and profits. We will file our 10Qs and 10Ks and issue press releases on those and other significant events for the company. As we continue in this vein we’re confident that the market’s going to realize we’re for real.

TWST: How’s your management team doing? Are they equipped to handle your very ambitious growth strategy?

Mr. Carl: It’s exceptional. I work with a lot of exceptional people. Beginning in early 2000, we are, actually for the first time ever, very well organized in each one of our markets. In the last three months, we’ve hired division managers for the Fire Protection Division and for the Municipal Industrial area. These two gentlemen are very experienced in their respective areas of trade. They have a history with the company, so extensive education on our field of technology wasn’t necessary. One gentleman had been a consultant, helping us develop the fire protection industry. He was a manager for Grinnell Fire Protection, but he became enthused with the opportunity and the ability to remove corrosion or MIC from inside fire protection systems and eventually ended up working for us. Our Municipal Industrial area is headed by what I call an experienced guerrilla marketer. He came out of Honeywell and had been one of the guys who developed small business units for them. He was able to take new product ideas with no revenues and a limited budget and build a $30-$50 million business unit. He’s done this a couple of times. He’s also been a shareholder since the first private placement we did after the company went public, so he’s followed the company very closely, is very aware of our technology, and brings management and marketing experience to what should be our largest market going forward.

TWST: What should long-term investors focus on or look at in your financials, your numbers?

Mr. Carl: You hit on a key word there. I would hope that our investors would be long term. This is not a company for somebody who wants to get in, make a quick buck, and get out. This is a company that grows consistently in some very large markets over the next few years. What I would like our long-term investors to do is continue to watch that revenue growth, quarter-to-quarter and year-to-year. I think what everyone is going to start seeing now is that the basic chemical technology and the patents surrounding these markets are coming to fulfillment. That’s really been the big question mark. Was the technology for real? And were these markets really out there? As we start to see these markets open up and the technology gain more acceptance, then I think you are going to see the type of results we want.

TWST: What two or three reasons would you give a long-term investor to buy stock now in HERC?

Mr. Carl: Because it’s a great value. Like I said earlier, we consistently maintained that $8-$12 million market cap for really the first three years after going public. And since the NASDAQ de-listing and going to over-the-counter bulletin board, we’ve moved much below that. We currently have a much stronger company than we did when our stock was trading in the $1 to $5 range. We’ve secured a long-term contract with the US Navy. We’ve signed marketing and manufacturing agreements with DuPont for the licensing of our patents and chemical formulations, and we have an excellent management team in place to execute our strategy. These markets for protecting and preserving pipelines are brand new. We’re looking at pipeline systems that are 50 to 100 years old that we have been able to clean successfully while saving the communities a lot of money. They don’t have to tear out ceilings and spend money for new pipes. We confirmed this with the Las Vegas Airport. Had they gone in and replaced that system inside the international terminal, they would not have been able to receive flights in and out of Asia, Japan, South America, flights for all the business that comes into Las Vegas. In four days we did what would have taken them three months to do. The non-disruption factor in itself is a huge advantage for us. We have these markets, we’re starting to see that acceptance, the technology is for real; these are new markets, and the value is going to be there. And we have 16 patents, three around the product and 13 around cleaning pipe.

TWST: Is there anything I’ve missed or overlooked that you would like to bring up?

Mr. Carl: I think, that, over the next year to year and a half, we are going to produce the type of results in revenue growth that people always expected of us.

TWST: Thank you.

S. STEVEN CARL
 Chairman, President & CEO
 HERC Products, Inc.
 2215 West Melinda Lane
 Suite A
 Phoenix, AZ 85027-2652
 (623) 492-0336
 (623) 492-9324 - FAX

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