-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IHMXfjlztfKIyBUuHJLXydkj5cWzvAPo8wG0gSSOtROZX3fMggH8rPwzplxDwX8O pSVfwnx8m6tEhWvl3Cul2Q== 0000891554-00-000835.txt : 20000329 0000891554-00-000835.hdr.sgml : 20000329 ACCESSION NUMBER: 0000891554-00-000835 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HUDSON TECHNOLOGIES INC /NY CENTRAL INDEX KEY: 0000925528 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MACHINERY, EQUIPMENT & SUPPLIES [5080] IRS NUMBER: 133641530 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 033-80270-NY FILM NUMBER: 581529 BUSINESS ADDRESS: STREET 1: 25 TORNE VALLEY RD CITY: HILLBURN STATE: NY ZIP: 10931 BUSINESS PHONE: 9143684990 MAIL ADDRESS: STREET 1: 25 THORNE VALLEY RD CITY: HILLBURN STATE: NY ZIP: 10931 FORMER COMPANY: FORMER CONFORMED NAME: REFRIGERANT RECLAMATION INDUSTRIES INC DATE OF NAME CHANGE: 19940617 10KSB 1 FORM 10-KSB ================================================================================ Securities and Exchange Commission Washington, D.C. 20549 Form 10-KSB [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR [_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission file number 1-13412 --------------------- Hudson Technologies, Inc. --------------------- (Name of small business issuer as specified in its charter) New York 13-3641539 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 275 North Middletown Road Pearl River, New York 10965 (address of principal executive offices) (ZIP Code) Issuer's telephone number, including area code: (914) 735-6000 Securities registered under Section 12(b) of the Securities Exchange Act of 1934: None Securities registered under Section 12(g) of the Securities Exchange Act of 1934: Common Stock, $0.01 par value Check whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act 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 [_] Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form and no disclosure will be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] The Issuer's revenues for the fiscal year ended December 31, 1999 were $17,909,000 The aggregate market value of the Issuer's Common Stock held by non-affiliates as of March 13, 2000 was approximately $11,443,095. As of March 13, 2000, there were 5,085,820 shares of the Issuer's Common Stock outstanding. Documents incorporated by reference: None ================================================================================ Hudson Technologies, Inc. Index
Part Item Page ---- ---- ---- Part I. Item 1 - Description of Business 3 Item 2 - Description of Properties 7 Item 3 - Legal Proceedings 8 Item 4 - Submission of Matters to a Vote of Security Holders 10 Part II. Item 5 - Market for the Common Equity and Related Stockholder Matters 11 Item 6 - Management's Discussion and Analysis of Financial Condition 12 and Results of Operations Item 7 - Financial Statements 16 Item 8 - Changes in and Disagreements with Accountants on Accounting 16 and Financial Disclosure Part III. Item 9 - Directors, Executive Officers, Promoters and Control Persons; 17 Compliance with Section 16(a) of the Exchange Act Item 10 - Executive Compensation 19 Item 11 - Security Ownership of Certain Beneficial Owners and Management 23 Item 12 - Certain Relationships and Related Transactions 24 Item 13 - Exhibits and Reports on Form 8-K 25 Signatures 26 Financial Statements 27
2 Part I Item 1. Description of Business General Hudson Technologies, Inc., incorporated under the laws of New York on January 11, 1991, together with its subsidiaries (collectively, "Hudson" or the "Company"), primarily sells refrigerants, provides RefrigerantSide(TM) Services performed at a customer's site, consisting of system decontamination to remove moisture, oils and other contaminants and recovery and reclamation of the refrigerants used in commercial air conditioning and refrigeration systems. The Company operates through its wholly owned subsidiary Hudson Technologies Company. The Company's Executive Offices are located at 275 North Middletown Road, Pearl River, New York and its telephone number is (914) 735-6000. Industry background The production and use of refrigerants containing chlorofluorocarbons ("CFCs") and hydrochlorofluorocarbons ("HCFCs"), the most commonly used refrigerants are subject to extensive and changing regulation under the Clean Air Act (the "Act"). The Act, which was amended during 1990 in response to evidence linking the use of CFCs to damage to the earth's ozone layer, prohibits any person in the course of maintaining, servicing, repairing and disposing of air conditioning or refrigeration equipment, to knowingly vent or otherwise release or dispose of ozone depleting substances used as refrigerants. That prohibition also applies to substitute, non-ozone depleting refrigerants. The Act further requires the recovery of refrigerants used in residential, commercial and industrial air conditioning and refrigeration systems. In addition, the Act prohibited production of CFC refrigerants effective January 1, 1996 and limits the production of refrigerants containing HCFCs, which production is scheduled to be phased out by the year 2030. Owners, operators and companies servicing cooling equipment are responsible for the integrity of their systems regardless of the refrigerant being used and for the responsible management of their refrigerant. Products and Services Refrigerant Sales The Company sells reclaimed and virgin (new) refrigerants to a variety of customers in various segments of the air conditioning and refrigeration industry. Virgin refrigerants are primarily purchased by the Company from E.I. DuPont de Nemours and Company ("DuPont") as part of the Company's strategic alliance with DuPont (see "Strategic Alliance" below), and resold by the Company, typically at wholesale. In addition, the Company regularly purchases used or contaminated refrigerants from many different sources, which refrigerants are then reclaimed, using the Company's high volume proprietary reclamation equipment, and resold by the Company. RefrigerantSide(TM) Services The Company provides services that are performed at a customer's site through the use of portable, high volume, high-speed proprietary reclamation equipment, including its patented Zugibeast(R) reclamation machine. These services consist of RefrigerantSide(TM) Services, which encompass system decontamination, and refrigerant recovery and reclamation. The Company also provides complete refrigerant management services, which include testing and banking services tailored to individual customer requirements. Hudson also separates `crossed' (i.e.; commingled) refrigerants and provides re-usable cylinder repair and hydrostatic testing services. Hudson's Network Hudson operates from a network of facilities located in: o Hillburn, New York --RefrigerantSide(TM)Service depot o Rantoul, Illinois --Reclamation and cylinder refurbishment center and RefrigerantSide(TM)Service depot o Charlotte, North Carolina --Reclamation center and RefrigerantSide(TM)Service depot o Houston, Texas --RefrigerantSide(TM)Service depot o Chicago, Illinois --RefrigerantSide(TM)Service depot 3 o Baltimore, Maryland --RefrigerantSide(TM)Service depot o Seattle, Washington --RefrigerantSide(TM)Service depot o Plainview, New York --RefrigerantSide(TM)Service depot o Boston, Massachusetts --RefrigerantSide(TM)Service depot o Punta Gorda, Florida --Refrigerant separation and reclamation center and RefrigerantSide(TM)Service depot o Baton Rouge, Louisiana --RefrigerantSide(TM)Service depot o Fort Myers, Florida --Engineering center Strategic Alliance In January 1997, the Company entered into an Industrial Property Management Segment Marketer Appointment and Agreement and Refrigeration Reclamation Services Agreement with E.I. DuPont de Nemours and Company ("DuPont'), pursuant to which the Company (i) provides recovery, reclamation, separation, packaging and testing services directly to DuPont for marketing through DuPont's Authorized Distributor Network and (ii) markets DuPont's SUVA(TM) refrigerant products to selected market segments together with the Company's reclamation and refrigerant management services. Under the agreement, 100% of virgin refrigerants provided to specified market segment customers must be purchased from DuPont. In addition, in January 1997, the Company entered into a Stock Purchase Agreement with DuPont and DuPont Chemical and Energy Operations, Inc. ("DCEO") pursuant to which the Company issued to DCEO 500,000 shares of Common Stock in consideration of $3,500,000 in cash. Concurrently, the parties entered into a Standstill Agreement, Shareholders' Agreement and Registration Agreement which, among other things, provide that (i) subject to certain exceptions, neither DuPont nor any corporation or entity controlled by DuPont will, directly or indirectly, acquire any shares of any class of capital stock of the Company if the effect of such acquisition would be to increase DuPont's aggregate voting power to greater than 20% of the total combined voting power relating to any election of directors; (ii) at DuPont's request, the Company will cause two persons designated by DCEO and DuPont to be elected to the Company's Board of Directors; and (iii) subject to certain exceptions, DuPont will have a five-year right of first refusal to purchase shares of Common Stock sold by the Company's principal shareholders. The Company also granted to DuPont certain demand and "piggy-back" registration rights with respect to the shares. The Company has sold certain reclaimed refrigerants to DuPont. During the years ended December 31, 1999 and 1998, revenues from DuPont aggregated approximately $975,000 and $6,434,000, respectively. In 1999 revenues with DuPont decreased primarily due to the fact that the Company ceased selling reclaimed refrigerants directly to DuPont and now sells reclaimed refrigerants directly to DuPont's network of authorized distributors. Suppliers The Company's financial performance is in part dependent on its ability to obtain sufficient quantities of virgin and reclaimable refrigerants from manufacturers, wholesalers, distributors, bulk gas brokers and from other sources within the air conditioning and refrigeration and automotive aftermarket industries, and on corresponding demand for refrigerants. To the extent that the Company is unable to obtain sufficient quantities of refrigerants in the future, or resell refrigerants at a profit, the Company's financial condition and results of operations would be materially adversely affected. Customers The Company provides its services to commercial, industrial and governmental customers, as well as to refrigerant wholesalers, distributors, contractors and to refrigeration equipment manufacturers. Agreements with larger customers generally provide for standardized pricing for specified services. For the year ended December 31, 1999, one customer accounted for an aggregate of 17% of the Company's revenues. For the year ended December 31, 1998, two customers accounted for an aggregate of 42% of the Company's revenues. The loss of a principal customer or a decline in the economic prospects and purchases of the Company's products or services by any such customer, as incurred in 1999, would have a material adverse effect on the Company's financial position and results of operations. 4 Marketing Marketing programs are conducted through the efforts of the Company's executive officers, Company sales personnel, and third parties. Hudson employs various marketing methods, including direct mailings, technical bulletins, in-person solicitation, print advertising, response to quotation requests and participation in trade shows. The Company's sales personnel are compensated on a commission basis with a guaranteed minimum draw. The Company's executive officers devote significant time and effort to customer relationships. Competition The Company competes primarily on the basis of price, breadth of services offered (including RefrigerantSide(TM) Services and other on-site services), and performance of its high volume, high-speed equipment used in its operations. The Company competes with numerous regional companies, which provide refrigerant recovery and/or reclamation services, as well as companies marketing reclaimed and new alternative refrigerants. Certain of such competitors, including National Refrigerants, Inc., Refron, Inc., and Environmental Technologies Company, Inc., which may possess greater financial, marketing, distribution and other resources for the sale and distribution of refrigerants than the Company and, in some instances, provide services or products over a more extensive geographic area than the Company. The refrigerant recovery and reclamation industry is relatively new and emerging competition from existing competitors and new market entrants is expected to increase. Demand and market acceptance for Hudson's newly introduced RefrigerantSide(TM) services, and for the Company's refrigerant management products and services are subject to a high degree of uncertainty. There can be no assurance that the Company will be able to compete successfully or penetrate this market as rapidly as it anticipates. Insurance The Company carries insurance coverage the Company considers sufficient to protect the Company's assets and operations. The Company currently maintains general commercial liability insurance and excess liability coverage for claims up to $7,000,000 per occurrence and $7,000,000 in the aggregate. There can be no assurance that such insurance will be sufficient to cover potential claims or that an adequate level of coverage will be available in the future at a reasonable cost. The Company attempts to operate in a professional and prudent manner and to reduce its liability risks through specific risk management efforts, including employee training. Nevertheless, a partially or completely uninsured claim against the Company, if successful and of sufficient magnitude, would have a material adverse effect on the Company. The refrigerant industry involves potentially significant risks of statutory and common law liability for environmental damage and personal injury. The Company, and in certain instances, its officers, directors and employees, may be subject to claims arising from the Company's on-site or off-site services, including the improper release, spillage, misuse or mishandling of refrigerants classified as hazardous or non-hazardous substances or materials. The Company may be strictly liable for damages, which could be substantial, regardless of whether it exercised due care and complied with all relevant laws and regulations. Hudson maintains environmental impairment insurance of $1,000,000 for events occurring subsequent to November 1996. There can be no assurance that the Company will not face claims resulting in substantial liability for which the Company is uninsured, that hazardous substances or materials are not or will not be present at the Company's facilities, or that the Company will not incur liability for environmental impairment or personal injury (see Item 3 "Legal Proceedings"). Government Regulation The business of refrigerant reclamation and management is subject to extensive, stringent and frequently changing federal, state and local laws and substantial regulation under these laws by governmental agencies, including the Environmental Protection Agency ("EPA"), the United States Occupational Safety and Health Administration and the United States Department of Transportation. 5 Among other things, these regulatory authorities impose requirements which regulate the handling, packaging, labeling, transportation and disposal of hazardous and non-hazardous materials and the health and safety of workers, and require the Company and, in certain instances, its employees, to obtain and maintain licenses in connection with its operations. This extensive regulatory framework imposes significant compliance burdens and risks on the Company. Hudson and its customers are subject to the requirements of the Clean Air Act, and the regulations promulgated thereunder by the EPA, which make it unlawful for any person in the course of maintaining, servicing, repairing, and disposing of air conditioning or refrigeration equipment, to knowingly vent or otherwise release or dispose of ozone depleting substances, and non-ozone depleting substitutes, used as refrigerants. Pursuant to the Clean Air Act, reclaimed refrigerant must satisfy the same purity standards as newly manufactured refrigerants in accordance with standards established by the Air Conditioning and Refrigeration Institute ("ARI") prior to resale to a person other than the owner of the equipment from which it was recovered. The ARI and the EPA administer certification programs pursuant to which applicants are certified to reclaim refrigerants in compliance with ARI standards. Under such programs, the ARI issues a certification for each refrigerant and conducts periodic inspections and quality testing of reclaimed refrigerants. The Company has obtained ARI certification for most refrigerants at each of its reclamation facilities, and is certified by the EPA. The Company is required to submit periodic reports to the ARI and pay annual fees based on the number of pounds of reclaimed refrigerants. Certification by the ARI is not currently required to engage in the refrigerant management business. During February 1996, the EPA published proposed regulations, which, if enacted, would require participation in third-party certification programs similar to the ARI program. Such proposed regulations would also require laboratories designed to test refrigerant purity to undergo a certification process. Extensive comments to these proposed regulations were received by the EPA. The EPA is still considering these comments and no further or additional regulations have been proposed or published. In addition, the EPA has established a mandatory certification program for air conditioning and refrigeration technicians. Hudson's technicians have applied for or obtained such certification. The Company is subject to regulations adopted by the Department of Transportation which classify most refrigerants handled by the Company as hazardous materials or substances and impose requirements for handling, packaging, labeling and transporting refrigerants. The Resource Conservation and Recovery Act of 1976 ("RCRA") requires that facilities that treat, store or dispose of hazardous wastes comply with certain operating standards. Before transportation and disposal of hazardous wastes off-site, generators of such waste must package and label their shipments consistent with detailed regulations and prepare a manifest identifying the material and stating its destination. The transporter must deliver the hazardous waste in accordance with the manifest to a facility with an appropriate RCRA permit. Under RCRA, impurities removed from refrigerants consisting of oils mixed with water and other contaminants are not presumed to be hazardous waste. The Emergency Planning and Community Right-to-Know Act of 1986 requires the annual reporting of Emergency and Hazardous Chemical Inventories (Tier II reports) to the various states in which the Company operates and to file annual Toxic Chemical Release Inventory Forms with the EPA. The Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), establishes liability for clean-up costs and environmental damages to current and former facility owners and operators, as well as persons who transport or arrange for transportation of hazardous substances. Almost all states, including New York, have similar statutes regulating the handling and storage of hazardous substances, hazardous wastes and non-hazardous wastes. Many such statutes impose requirements, which are more stringent than their federal counterparts. The Company could be subject to substantial liability under these statutes to private parties and government entities, in some instances without any fault, for fines, remediation costs and environmental damage, as a result of the mishandling, release, or existence of any hazardous substances at any of its facilities. The Occupational Safety and Health Act of 1970 mandates requirements for safe work place for employees and special procedures and measures for the handling of certain hazardous and toxic substances. State laws, in certain circumstances, mandate additional measures for facilities handling specified materials. In February 1999, an inspection was performed, 6 at one of the Company's facilities, by the Occupational Safety and Health Administration in response to a complaint by an unnamed third party. The Company has not received a report on the results of that inspection. The Company believes that it is in substantial compliance with all material regulations relating to its material business operations. However, there can be no assurance that Hudson will be able to continue to comply with applicable laws, regulations and licensing requirements. Failure to comply could subject the Company to civil remedies, substantial fines, penalties, injunction, or criminal sanctions. Quality Assurance & Environmental Compliance The Company utilizes in-house quality and regulatory compliance control procedures. Hudson maintains its own analytical testing laboratories to assure that reclaimed refrigerants comply with ARI purity standards and employs portable testing equipment when performing on-site services to verify certain quality specifications. The Company employs three persons engaged full-time in quality control and to monitor the Company's operations for regulatory compliance. Employees The Company has approximately 99 full and part-time employees including air conditioning and refrigeration technicians, chemists, engineers, and sales and administrative personnel. None of the Company's employees are represented by a union. The Company believes that its employee relations are good. Patents and Proprietary Information The Company holds a United States patent relating to various high-speed equipment components and a process to reclaim refrigerants, and a registered trademark for its "Zugibeast(R)". The patent expires in January 2012. The Company believes that patent protection is important to its business and has received a notice of allowance for an additional United States patent relating to a high speed refrigerant recovery process. There can be no assurance as to the breadth or degree of protection that patents may afford the Company, that any patent applications will result in issued patents or that patents will not be circumvented or invalidated. Technological development in the refrigerant industry may result in extensive patent filings and a rapid rate of issuance of new patents. Although the Company believes that its existing patents and the Company's equipment do not and will not infringe upon existing patents or violate proprietary rights of others, it is possible that the Company's existing patent rights may not be valid or that infringement of existing or future patents or violations of proprietary rights of others may occur. In the event the Company's equipment infringe or are alleged to infringe patents or other proprietary rights of others, the Company may be required to modify the design of its equipment, obtain a license or defend a possible patent infringement action. There can be no assurance that the Company will have the financial or other resources necessary to enforce or defend a patent infringement or proprietary rights violation action or that the Company will not become liable for damages. The Company also relies on trade secrets and proprietary know-how, and employs various methods to protect its technology. However, such methods may not afford complete protection and there can be no assurance that others will not independently develop such know-how or obtain access to the Company's know-how, concepts, ideas and documentation. Failure to protect its trade secrets could have a material adverse effect on the Company. Item 2. Description of Properties The Company's headquarters are located in approximately 5,400 square feet of leased commercial space at Pearl River, New York. The building is leased from an unaffiliated third party pursuant to a three year agreement at an annual rental of approximately $87,500 through January 2002. In March 1995, the Company purchased, for $950,000, a facility in Ft. Lauderdale, Florida, consisting of a 32,000 square foot building on approximately 1.7 acres with rail and port access. The property was mortgaged during 1996 for $700,000. Annual real estate taxes are approximately $24,000. The Company has principally ceased its operations at this facility and has entered into a three year lease of the entire facility at the current level of $13,125 per month to an unaffiliated third party. The Company intends to sell this property in the foreseeable future. 7 The Company's Hillburn facility is located in approximately 21,000 square feet of leased industrial space at Hillburn, New York. The building is leased from an unaffiliated third party pursuant to a five-year agreement at an annual rental of approximately $90,000 through May 2004. The Company's Rantoul, Illinois facility is located in a 29,000 square foot building leased from an unaffiliated third party at an annual rental of approximately $ 78,000 pursuant to an agreement expiring in September 2002. The Company also leases warehouse space from an unaffiliated third party in a 7,500 square foot building on a month to month basis at a monthly rent of $1,600. The Company's Charlotte, North Carolina facility is located in a 12,000 square foot building leased from an unaffiliated third party at an annual rent of approximately $42,000 pursuant to an agreement expiring in April 2000. The Company's Houston, Texas depot facility, which consists of 1,555 square feet located in a larger building, is leased from an unaffiliated third party at an annual rent of $8,000 pursuant to an agreement which expires in May 2000. The Company's Villa Park (Chicago), Illinois depot facility is located in a 3,500 square foot building leased from an unaffiliated third party at an annual rent of approximately $23,000 pursuant to an agreement expiring in August 2002. The Company's Baltimore, Maryland depot facility is located in a 2,700 square foot building leased from an unaffiliated third party at an annual rent of approximately $25,000 pursuant to an agreement expiring in August 2002. The Company's Seattle, Washington depot facility is located in a 3,000 square foot building leased from an unaffiliated third party at an annual rent of approximately $16,200 pursuant to an agreement expiring in March 2001. The Company's Plainview, New York depot facility is located in a 2,000 square foot building leased from an unaffiliated third party at an annual rent of approximately $16,440 pursuant to an agreement expiring in July 2000. The Company's Haverhill (Boston), Massachusetts depot facility is located in a 3,000 square foot building leased from an unaffiliated third party at an annual rent of $13,200 pursuant to an agreement expiring in February 2001. The Company's Punta Gorda, Florida separation facility is located in a 15,000 square foot building leased from an unaffiliated third party at an annual rent of $60,000 pursuant to an agreement expiring in April 2001. The Company's Baton Rouge, Louisiana facility is located in a 3,800 square foot building leased from an unaffiliated third party at an annual rental of approximately $18,000 pursuant to an agreement expiring in July 2002. The Company's Ft. Myers, Florida engineering facility is located in a 15,000 square foot building leased from an unaffiliated third party at an annual rent of $48,600 pursuant to an agreement expiring in July 2000. Item 3. Legal Proceedings During June 1995, United Water of New York Inc. ("United") alleged that it discovered that two of its wells within close proximity to the Company's Hillburn, New York facility showed elevated levels of refrigerant contamination, specifically Trichlorofluoromethane (R-11). During December 1997, United alleged that it discovered levels of Dichlorodifluoromethane (R-12) in two of its wells within close proximity to the Company's facility, and has alleged that the Company is the source. Sampling by the Company of various monitoring wells installed around the Company's facilities have been taken on a monthly basis since August 1996 and have detected levels of R-11 in the groundwater, but have failed to detect any levels of R-12 in the groundwater in and around the Company's facility. In January 1998, the Company agreed to install a remediation system at the Company's facility to remove any remaining R-11 levels in the groundwater under and around the Company's facility. In August 1998, the New York State Department of Environmental Conservation ("DEC") accepted the Company's proposal and requested that the Company proceed with the installation of the system. The cost of this remediation system was $100,000. In June 1998, United commenced an action against the Company in the Supreme Court of the State of New York, Rockland County, seeking damages in the amount of $1.2 million allegedly sustained as a result of the foregoing alleged contamination. In December 1998, United served an amended complaint asserting a claim pursuant to the Resource 8 Conservation and Recovery Act, 42 U.S.C. ss. 6901, et. seq. ("RCRA") In January 1999, the Company filed a motion to dismiss the RCRA cause of action. On April 1, 1999, the Company reported a release at the Company's Hillburn, New York facility of what was ultimately determined to be approximately 7,800 lbs. of R-11, as a result of a failed hose connection to one of the Company's outdoor storage tanks allowing liquid R-11 to discharge from the tank into the concrete secondary containment area in which the subject tank was located. An amount of the R-11 escaped the secondary containment area through an open drain from the secondary containment area for removing accumulated rainwater and entered the ground. The Company immediately commenced excavation operations to remove contaminated soil and has taken a number of other steps to mitigate and minimize contamination, including acceleration of the installation of the planned remediation system. In April 1999, the Company was advised by United that one of its wells within close proximity to the Company's facility showed elevated levels of R-11 in excess of 200 ppb. and was taking certain steps and would be incurring costs in an attempt to remediate any contamination. In response to the release, the Company requested, and in May 1999, received permission from the DEC to operate the planned remediation system pending negotiation and finalization of a Consent Order covering the operation of the system. The remediation system was put into operation on May 7, 1999. The level of R-11 in the affected United well have steadily decreased since June 1, after rising to a level in excess of 700 ppb. and on March 13, 2000 was reduced to 5.5 ppb. In December 1999, a second United well within close proximity to the Company's facility began showing elevated levels of R-11 in excess of 5 ppb. and increased to a high of 26 ppb. in February 2000. The Company continues to work with the DEC, United and with the Company's experts to determine the scope of any contamination, and to develop plans for the construction of a separate remediation system to directly treat contaminated water from United's well. In July 1999, United filed a motion seeking permission to amend its complaint in the action it commenced in June 1998 to allege facts relating to, and to seek damages allegedly resulting from the April 1, 1999 release. In August 1999, the Company entered into a stipulation accepting service of the amended complaint subject to the Company's pending motion to dismiss. On August 26, 1999, the Court issued a decision which granted the Company's motion to dismiss that portion of United's RCRA claims which seek past cleanup costs, and held in abeyance a ruling whether United can assert a claim for present/future cleanup under RCRA until the date of trial. The Company continues to defend the claims asserted by United. The Company carries $1,000,000 of pollution liability insurance per occurrence and has put the insurance carrier on notice of the release and possible claims of United. There can be no assurance that this action, or any settlement thereof, will be resolved in a manner favorable to the Company, or that the ultimate outcome of any legal action or settlement, or the effects of the April 1, 1999 release, will not have a material adverse effect on the Company's financial condition and results of operations. During March and April 1998, six (6) complaints, each alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, were filed by a total of eight shareholders, on behalf of themselves and all others similarly situated, against the Company and certain of its officers and directors in the United States District Court for the Southern District of New York. Each of the complaints alleged that the defendants, among other things, misrepresented material information about the Company's financial results and prospects, and its customer relationships. In October 1998, a consolidated complaint on behalf of the plaintiffs was served upon the Company. In December 1998, a motion was made on behalf of the Company to dismiss each of the claims asserted against the Company in the consolidated complaint. On September 26, 1999, the Court issued an opinion and order dismissing with prejudice three of the five claims asserted by the plaintiffs and further dismissing the remaining two claims without prejudice to the plaintiffs filing a second amended consolidated complaint within thirty (30) days of the date of the Court's opinion and order. The plaintiffs failed to serve a second amended consolidated complaint, and as a result, in November 1999, a final judgment was entered dismissing the consolidated complaint in its entirety. In June 1999, an action was commenced in the Baton Rouge Supreme Court by William Freeman and three others against the Company seeking unspecified damages for alleged personal injuries allegedly suffered as a result of an ammonia release at the Company's Louisiana facility in January 1999. The Company maintains that the allegations in the 9 complaint are without merit and that no damages were suffered by the plaintiffs in that action. There can be no assurance that this action, or any settlement thereof, will be resolved in a manner favorable to the Company. The Company and its subsidiaries are subject to various other claims and/or lawsuits from both private and governmental parties arising from the ordinary course of business, none of which are material. Item 4. Submission of Matters to a Vote of Security Holders. Not Applicable. 10 Part II Item 5. Market for the Common Equity and Related Stockholder Matters The Company's Common Stock traded from November 1, 1994 to September 20, 1995 on the NASDAQ Small-Cap Market under the symbol `HDSN'. Since September 20, 1995, the Common Stock has traded on the NASDAQ National Market. The following table sets forth, for the periods indicated the range of the high and low sale prices for the Common Stock as reported by NASDAQ. - ------------------------------------------------------------------------- 1998 High Low - ---- ---- --- - ------------------------------------------------------------------------- o First Quarter $ 4 3/4 $ 3 - ------------------------------------------------------------------------- o Second Quarter $ 5 3/4 $ 3 1/2 - ------------------------------------------------------------------------- o Third Quarter $ 4 7/16 $ 2 1/2 - ------------------------------------------------------------------------- o Fourth Quarter $ 3 7/8 $ 1 1/2 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- 1999 - ---- - ------------------------------------------------------------------------- o First Quarter $ 2 1/2 $ 1 1/2 - ------------------------------------------------------------------------- o Second Quarter $ 3 5/8 $ 1 3/4 - ------------------------------------------------------------------------- o Third Quarter $ 2 5/8 $ 1 1/2 - ------------------------------------------------------------------------- o Fourth Quarter $ 4 7/16 $ 1 1/4 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- The number of record holders of the Company's Common Stock was approximately 250 as of March 13, 2000. The Company believes that there are in excess of 4,000 beneficial owners of its Common Stock. To date, the Company has not declared or paid any cash dividends on its Common Stock. The payment of dividends, if any, in the future is within the discretion of the Board of Directors and will depend upon the Company's earnings, its capital requirements and financial condition, borrowing covenants, and other relevant factors. The Company presently intends to retain all earnings, if any, to finance the Company's operations and development of its business and does not expect to declare or pay any cash dividends in the foreseeable future. In addition, the Company has entered into a credit facility with CIT Group/Credit Finance Group, Inc. ("CIT") which, among other things, restricts the Company's ability to declare or pay any dividends on its capital stock. The Company has obtained a waiver from CIT to permit the payment of dividends on its Series A Preferred Stock. The Series A Preferred Stock carries a dividend rate of 7%. The Company will pay dividends, in arrears, on the Series A Preferred Stock, semi annually, either in cash or additional shares, at the Company's option, during the first two years after which dividends will be paid in cash (see Item 6 "Management's Discussion and Analysis of Financial Condition and Results of Operations" - Liquidity). During the three months ended December 31, 1999, the Company granted options to purchase 70,000 and 35,000 shares of common stock to certain employees pursuant to its 1994 and 1997 Stock Option Plans, respectively. With respect to these grants, the Company relied on the exemption from registration provided by Section 4(2) under the Securities Act of 1933 as transactions by an issuer not involving a public offering. 11 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations Safe Harbor Statement Under The Private Securities Litigation Reform Act of 1995 Certain statements contained in this section and elsewhere in this Form 10-KSB constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve a number of known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, changes in the markets for refrigerants (including unfavorable market conditions adversely affecting the demand for, and the price of refrigerants), regulatory and economic factors, seasonality, competition, litigation, the nature of supplier or customer arrangements which become available to the Company in the future, adverse weather conditions, possible technological obsolescence of existing products and services, possible reduction in the carrying value of long-lived assets, estimates of the useful life of its assets, potential environmental liability, customer concentration and other risks detailed in the Company's other periodic reports filed with the Securities and Exchange Commission. The words "believe", "expect", "anticipate", "may", "plan", and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. Overview Sales of refrigerants continue to represent a significant portion of the Company's revenues. The Company believes that in the industry overall, there will be a trend towards lower sales prices, volume and gross profit margins on refrigerant sales in the foreseeable future, which will continue to have an adverse effect on the Company's operating results. Historically, the Company has derived a majority of its revenues from the sale of refrigerants. The Company has changed its business focus towards service revenues through the development of a service offering known as RefrigerantSide(TM) Services. These services are offered in addition to the Company's traditional refrigerant management services, consisting principally of recovery and reclamation of refrigerants used in commercial air conditioning, industrial processing and refrigeration systems. Pursuant to this change in business focus, the Company has developed, and is currently implementing, a strategic business plan which provides for the creation of a network of service depots and the exiting of certain operations which may not support the growth of service sales. Consistent with its plan, the Company anticipates a reduction in automotive refrigerant sales related to the sale of its aerosol packaging equipment and the exit of the Congers, New York facility. In March 1999, the Company completed the sale of its Series A Preferred Stock and received net proceeds of $5,800,000. The net proceeds of the sale of the Company's Series A Preferred Stock are being used to expand the Company's service offering through a network of depots that provide a full range of the Company's on site RefrigerantSide(TM) Services and to provide working capital. Management believes that its RefrigerantSide(TM) Services represent the Company's long term growth potential. However, while the Company believes it will experience an increase in revenues from its RefrigerantSide(TM) Services, in the short term, such an increase will not be sufficient to offset a substantial reduction in refrigerant revenue. The Company expects that it will incur additional expenses and losses during the year related to the expansion and development of its depot network. The change in business focus towards revenues generated from service may cause a material reduction in revenues derived from the sale of refrigerants. In addition, to the extent that the Company is unable to obtain refrigerants on commercially reasonable terms or experiences a decline in demand for refrigerants, the Company could realize reductions in refrigerant processing, and possible loss of revenues which would have a material adverse effect on operating results. Results of Operations Year ended December 31, 1999 as compared to year ended December 31, 1998 Revenues for 1999 were $17,909,000, a decrease of $5,402,000 or 23% from the $23,311,000 reported during the comparable 1998 period. The decrease was primarily attributable to lower revenues generated from a principal customer and the lack of revenues from the Company's former subsidiary Environmental Support Solutions ("ESS"), which was sold in the first quarter of 1999, partially offset by an increase in RefrigerantSide(TM) Services revenue. In addition, the Company experienced a short fall of certain refrigerant product availability on a timely basis to meet certain of its refrigerant sales. If the Company is unable to obtain refrigerant product in the future, the Company would experience a reduction in refrigerant revenues beyond the reduction that the Company anticipates relating to its change in focus 12 towards service revenues and the reduction in automotive refrigerant sales which would have a material adverse effect on operating results. Cost of sales for 1999 were $14,121,000, a decrease of $3,464,000 or 20% from the $17,585,000 reported during the comparable 1998 period primarily due to a reduction in refrigerant revenues. As a percentage of sales, cost of sales were 79% of revenues for 1999, an increase from the 75% reported for the comparable 1998 period. The increase in cost of sales as a percentage of revenues was primarily attributable to an increase in labor and other operating costs and the lack of revenues from ESS. Operating expenses for 1999 were $7,395,000, a decrease of $720,000 or 9% from the $8,115,000 reported during the comparable 1998 period. The decrease was primarily attributable to a lack of operating expenses from ESS offset by an increase in depreciation and amortization and selling expenses primarily associated with the expansion of the Company's RefrigerantSide(TM) Service offering. Other income (expense) for 1999 was $(348,000), an increase of $81,000 or 30% from the $(267,000) reported during the comparable 1998 period. Other income (expense) includes interest expense of $454,000 and $399,000 for 1999 and 1998, respectively, offset by other income of $106,000 and $132,000 for 1999 and 1998, respectively. The increase in interest expense is primarily attributed to an increase in borrowings during 1999 as compared to 1998. Other income primarily relates to lease rental income. No income taxes for the years ended December 31, 1999 and 1998 were recognized. The Company recognized a reserve allowance against the deferred tax benefit for the 1999 and 1998 losses. The tax benefits associated with the Company's net operating loss carry forwards would be recognized to the extent that the Company recognizes net income in future periods. Net loss for 1999 was $3,955,000 an increase of $1,299,000 from the $2,656,000 net loss reported during the comparable 1998 period. The increase in net loss was primarily attributable to a lower volume of refrigerant sales. Liquidity and Capital Resources At December 31, 1999, the Company had working capital of approximately $1,677,000, an increase of $1,624,000 from the $53,000 at December 31, 1998. The increase in working capital is primarily attributable to the sale of the Company's Series A Convertible Preferred Stock pursuant to which the Company received net proceeds of $5,800,000 offset by the net losses incurred during the year ended December 31, 1999. A principal component of current assets is inventory. At December 31, 1999, the Company had inventories of $2,480,000, a decrease of $804,000 or 24% from the $3,284,000 at December 31, 1998. The Company's ability to sell and replace its inventory on a timely basis and the prices at which it can be sold are subject, among other things, to current market conditions and the nature of supplier or customer arrangements (see "Seasonality and Fluctuations in Operating Results"). The Company has historically financed its working capital requirements through cash flows from operations, the issuance of debt and equity securities, bank borrowings and loans from officers. Net cash used by operating activities for the year ended December 31, 1999, was $3,442,000 compared with net cash provided by operating activities of $574,000 for the comparable 1998 period. Net cash used by operating activities was primarily attributable to the increase in trade receivables, a decrease in accounts payable and accrued expenses and by the net loss for the 1999 period offset by a decrease in inventories. Net cash used by investing activities for the year ended December 31, 1999, was $1,822,000 compared with net cash used by investing activities of $591,000 for the prior comparable 1998 period. The net cash usage primarily consisted of equipment additions primarily associated with the expansion of the Company's depot network. Net cash provided by financing activities for the year ended December 31, 1999, was $6,971,000 compared with net cash used by financing activities of $167,000 for the comparable 1998 period. The net cash provided by financing activities primarily consisted of proceeds from the sale of the Company's Series A Preferred Stock and net proceeds from long and short term debt for the 1999 period. At December 31, 1999, the Company had cash and equivalents of $2,483,000. During 1996, the Company mortgaged its property and building located in Ft. Lauderdale with Turnberry Savings Bank, NA. The mortgage of $660,000, at December 31, 1999, bears interest rate of 9.5% and is repayable over 20 years 13 through January 2017. The Company has principally ceased its operations at this facility and has entered into a three year lease of the entire facility at the current level of $13,125 per month to an unaffiliated third party. The Company intends to sell this property in the foreseeable future. During January 1997, in connection with the execution of various agreements with E.I. DuPont de Nemours ("DuPont'), the Company obtained additional equity funds of $3,500,000 from an affiliate of DuPont. The proceeds were primarily utilized to retire debt. On April 28, 1998, the Company entered into a credit facility with CIT which made available borrowings to the Company of up to $5,000,000. The credit facility was increased to $6,500,000 in 1999. The facility requires minimum borrowings of $1,250,000. The facility provides for a revolving line of credit and a six-year term loan and expires in April 2001. Advances under the revolving line of credit are limited to (i) 80% of eligible trade accounts receivable and (ii) 50% of eligible inventory (which inventory amount shall not exceed 200% of eligible trade accounts receivable or $3,250,000). As of December 31, 1999, the Company had availability under its revolving line of credit of approximately $700,000. Advances available to the Company under the term loan are based on existing fixed asset valuations and future advances under the term loan up to an additional $1,000,000 are based on future capital expenditures. During 1999, the Company received advances of $166,000 based on capital expenditures. As of December 31, 1999, the Company has approximately $861,000 outstanding under its term loans. As of December 31, 1999, the Company had $1,500,000 outstanding under its revolving line of credit. The facility bears interest at the prime rate plus 1.5%, 10% at December 31, 1999, and substantially all of the Company's assets are pledged as collateral for obligations to CIT. In addition, among other things, the agreements restrict the Company's ability to declare or pay any dividends on its capital stock. The Company has obtained a waiver from CIT to permit the payment of dividends on its Series A Preferred Stock. In connection with the loan agreements, the Company issued to CIT warrants to purchase 30,000 shares of the Company's common stock at an exercise price equal to 110% of the then fair market value of the stock, which on the date of issuance was $4.33 per share, and expires April 29, 2001. The value of the warrants were not deemed to be material. Effective March 19, 1999, the Company sold 75% of its stock ownership in ESS to one of ESS's founders. The consideration for the Company's sale of its interest was $100,000 in cash and a six year 6% interest bearing note in the amount of $380,000. The Company will recognize as income the portion of the proceeds associated with the net receivables upon the receipt of cash. This sale did not have a material effect on the Company's financial condition or results of operation. It is not anticipated that the Company will be involved in, or control, the operations of ESS. Effective October 11, 1999, the Company sold to three of ESS's employees an additional 5.4% ownership in ESS. The Company received $37,940 from the sale of this additional ESS stock. The Company is continuing to evaluate opportunities to rationalize its other operating facilities based on its emphasis on the expansion of its service sales. As a result, the Company may discontinue certain operations which it believes do not support the growth of service sales and, in doing so, may incur future charges to exit certain operations. On March 30, 1999, the Company completed the sale of 65,000 shares of its Series A Preferred Stock, with a liquidation value of $100 per share, to Fleming US Discovery Fund III, L.P. and Fleming US Discovery Offshore Fund III, L.P. The gross proceeds from the sale of the Series A Preferred Stock is $6,500,000. The Series A Preferred Stock has voting rights on an as-if converted basis. The number of votes applicable to the Series A Preferred Stock is equal to the number of shares of Common Stock into which the Series A Preferred Stock is then convertible. However, the holders of the Series A Preferred Stock will provide the Chief Executive Officer and Secretary of the Company a proxy to vote all shares currently owned and subsequently acquired above 29% of the votes entitled to be cast by all shareholders of the Company. The Preferred Stock carries a dividend rate of 7%, which will increase to 16%, if the stock remained outstanding, on the fifth anniversary date, and converts to Common Stock at a rate of $2.375 per share, which was 27% above the closing market price of Common Stock on March 29, 1999. The conversion rate may be subject to certain antidilution provisions. The Company is using the net proceeds from the issuance of the Series A Preferred Stock to expand its RefrigerantSide(TM) Services and for working capital purposes. The Company will pay dividends, in arrears, on the Series A Preferred Stock, semi annually, either in cash or additional shares, at the Company's option, during the first two years after which the dividends will be paid in cash. On September 30, 1999, the Company declared and paid, in-kind, the dividends of outstanding on the Series A Preferred Stock. The Company issued a total of 2,314 additional shares of its Series A Preferred Stock in satisfaction of the dividends due. The Company may redeem the Series A Preferred Stock on March 31, 2004 either in cash or shares of Common Stock valued at 90% of the average trading price of the Common Stock for the 30 days preceding March 31, 2004. In addition, after March 30, 2001, the Company may call the Series A Preferred Stock if the market price of its Common Stock is 14 equal or greater than 250% of the conversion price and the Common Stock has traded with an average daily volume in excess of 20,000 shares for a period of thirty consecutive days. The Company has provided certain registration, preemptive and tag along rights to the holders of the Series A Preferred Stock. The holders of the Series A Preferred Stock, voting as a separate class, have the right to elect up to two members to the Company's Board of Directors or at their option, to designate up to two advisors to the Company's Board of Directors who will have the right to attend and observe meetings of the Board of Directors. Currently, the holders have elected two members to the Board of Directors. The Company engaged an advisor to facilitate the Company's efforts in connection with the sale of its Series A Preferred Stock. In addition to the advisor fees, the Company issued to the advisor, warrants to purchase 136,482 shares of the Company's Common Stock at an exercise price per share of $2.73. The Company incurred an aggregate of $700,000 in costs associated with the sale of the Series A Preferred Stock and such costs have been charged to additional paid-in capital. The Company believes that its anticipated cash flow from operations, together with the proceeds from the sale of its Preferred Stock, and its credit facility, will be sufficient to satisfy the Company's working capital requirements and proposed expansion of its service business for the next twelve months. Any additional expansion or acquisition opportunities that may arise in the future may affect the Company's future capital needs. However, there can be no assurances that the Company's proposed or future expansion plans will be successful, and as such, the Company may have future capital needs. Acquisitions In April 1996, the Company acquired all the outstanding capital stock of ESS, a developer and provider of environmental software, training, and management services in consideration of $2,375,000, consisting of cash of $700,000 and promissory notes in the principal amount of $1,675,000 which were repaid during October 1996. The acquisition was accounted for as a purchase from the date of acquisition with the assets acquired and liabilities assumed recorded at fair values, resulting in an excess of cost over assets acquired of approximately $800,000. In June 1996, ESS acquired all the net assets, subject to liabilities, of E-Soft, Inc. ("E-Soft"), a developer and marketer of software programs related to hazardous material management, in consideration of a cash payment of $50,000 and 41,560 shares of common stock with the acquired assets and liabilities assumed recorded at fair values, resulting in an excess of cost over assets acquired of approximately $500,000. Effective March 19, 1999, the Company sold 75% of its stock ownership in ESS to one of its founders. The consideration for the Company's sale of its interest was $100,000 in cash and a six year note in the amount of $380,000. The Company will recognize, as income, the portion of the proceeds associated with the note receivable upon the receipt of cash. This sale did not have a material adverse effect on the Company's financial position or results of operations. It is not anticipated that the Company will be involved in or control the operations of ESS. Effective October 11, 1999, the Company sold to three of ESS' employees an additional 5.4% ownership in ESS. The Company received $37,940 from the sale of the additional ESS stock. Inflation Inflation has not historically had a material impact on the Company's operations. Reliance on Suppliers and Customers The Company's financial performance is in part dependent on its ability to obtain sufficient quantities of virgin and reclaimable refrigerants from manufacturers, wholesalers, distributors, bulk gas brokers, and from other sources within the air conditioning and refrigeration and automotive aftermarket industries, and on corresponding demand for refrigerants. To the extent that the Company is unable to obtain sufficient quantities of refrigerants in the future, or resell reclaimed refrigerants at a profit, the Company's financial condition and results of operations would be materially adversely affected. The loss of a principal customer would have a material adverse effect on the Company. During January 1997, the Company entered into agreements with DuPont to market DuPont's SUVA(TM) refrigerants. Under the agreement, 100% of virgin refrigerants provided to specified market segment customers must be purchased from DuPont (see "Description of Business - Strategic Alliance"). 15 During the year ended December 31, 1999, one customer accounted for an aggregate of 17% of the Company's revenues. During the year ended December 31, 1998, two customers accounted for an aggregate of 42% of the Company's revenues. The loss of a principal customer or a decline in the economic prospects and purchases of the Company's products or services by any such customer, as incurred in 1999, would have a material adverse effect on the Company's financial position and results of operations. Seasonality and Fluctuations in Operating Results The Company's operating results vary from period to period as a result of weather conditions, requirements of potential customers, non-recurring refrigerant and service sales, availability and price of refrigerant products (virgin or reclaimable), changes in reclamation technology and regulations, timing in introduction and/or retrofit or replacement of CFC-based refrigeration equipment by domestic users of refrigerants, the rate of expansion of the Company's operations, and by other factors. The Company's business has historically been seasonal in nature with peak sales of refrigerants occurring in the first half of each year. Accordingly, the second half of the year results of operations have reflected additional losses due to a decrease in revenues. Delays in securing adequate supplies of refrigerants at peak demand periods, lack of refrigerant demand, increased expenses, declining refrigerant prices and a loss of a principal customer could result in significant losses. There can be no assurance that the foregoing factors will not occur and result in a material adverse effect on the Company's financial position and significant losses. Recent Accounting Pronouncements The Company adopted SFAS No. 133 as of January 1, 1999. The adoption did not have a material effect on the Company's financial position or results of operations. Item 7. Financial Statements. The financial statements appear in a separate section of this report following Part III. Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None 16 Part III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act The following table sets forth information with respect to the directors and officers of the Company:
- --------------------------------------------------- ------------------------------------------------------------ Name Age Position ---- --- -------- - --------------------------------------------------- ------------------------------------------------------------ Kevin J. Zugibe 36 Chairman of the Board; President and Chief Executive Officer - --------------------------------------------------- ------------------------------------------------------------ Thomas P. Zugibe 47 Executive Vice President and Director - --------------------------------------------------- ------------------------------------------------------------ Stephen P. Mandracchia 40 Executive Vice President and Secretary - --------------------------------------------------- ------------------------------------------------------------ Brian F. Coleman 38 Vice President and Chief Financial Officer - --------------------------------------------------- ------------------------------------------------------------ Walter A. Phillips 47 Vice President Marketing and Strategic Planning - --------------------------------------------------- ------------------------------------------------------------ Harry C. Schell 65 Director - --------------------------------------------------- ------------------------------------------------------------ Vincent Abbatecola 53 Director - --------------------------------------------------- ------------------------------------------------------------ Otto C. Morch 66 Director - --------------------------------------------------- ------------------------------------------------------------ Dominic J. Monetta 58 Director - --------------------------------------------------- ------------------------------------------------------------ Robert L. Burr 48 Director - --------------------------------------------------- ------------------------------------------------------------ Robert M. Zech 34 Director - --------------------------------------------------- ------------------------------------------------------------
Kevin T. Zugibe, P.E. is a founder of the Company and has been a director, President and Chief Executive Officer of the Company since its inception in 1991. Since May 1994, Mr. Zugibe has devoted his full business time to the Company's affairs. From May 1987 to May 1994, Mr. Zugibe was employed as a power engineer with Orange and Rockland Utilities, Inc. Mr. Zugibe is a licensed professional engineer, and from December 1990 to May 1994, he was a member of Kevin J. Zugibe & Associates, a professional engineering firm. Kevin J. Zugibe and Thomas P. Zugibe are brothers. Thomas P. Zugibe has been a Vice President of the Company since its inception in 1991 and a director since April 1995. Mr. Zugibe is responsible for overseeing the day to day operations of the Company. He has been engaged in the practice of law in the State of New York since 1980 and is on extended leave from the law firm of Ferraro, Zugibe, and Albrecht, Garnerville, New York. Stephen P. Mandracchia has been a Vice President of the Company since January 1993 and Secretary of the Company since April 1995. Mr. Mandracchia served as a director from June 1994 until August 1996 and was reelected to the Board of Directors in August 1999 . Mr. Mandracchia is responsible for corporate, administrative and regulatory legal affairs of the Company. Mr. Mandracchia was a member of the law firm of Martin, Vandewalle, Donohue, Mandracchia & McGahan, Great Neck, New York until December 31, 1995 (having been affiliated with such firm since August 1983). Brian F. Coleman has been Vice President and Chief Financial Officer of the Company since May 1997. Prior to joining the Company, Mr. Coleman was employed by and since July 1995, was a partner with BDO Seidman, LLP, the Company's independent auditors. Walter A. Phillips has been Vice President of Marketing and Strategic Planning of the Company since October 1996. Prior to joining the Company, Mr. Phillips was employed in various sales and marketing roles with York International. Vincent P. Abbatecola has been a director of the Company since June 1994. Mr. Abbatecola is the owner of Abbey Ice & Spring Water Company, Spring Valley, New York, where he has been employed since May 1971. Otto C. Morch has been a director of the Company since March 1996. Mr. Morch was a Senior Vice President, of Commercial Banking at Provident Bank and retired from that position in December 1997. Dominic J. Monetta has been a director of the Company since April 1996. Since August 1993, Mr. Monetta has been the President of Resource Alternatives, Inc., a corporate development firm concentrating on solving management and technological problems facing chief executive officers and their senior executives. From December 1991 to May 1993, Mr. Monetta served as the Director of Defense Research and Engineering for Research and Advanced Technology for the United States Department of Defense. From June 1989 to December 1991, Mr. Monetta served as the Director of the Office of New Production Reactors of the United States Department of Energy. 17 Harry C. Schell has been a director of the Company since August 1998. Mr. Schell is the former chairman and chief executive officer of BICC Cables Corporation, and has served on the board of directors of the BICC Group (London), Phelps Dodge Industries, the National Electrical Manufacturers Association and the United Way of Rockland (New York). Robert L. Burr has been a Director of the Company since August 1999. Mr. Burr has been a Director of Fleming Asset Management, a subsidiary of Robert Fleming, Inc., a global merchant bank, since 1995. From 1992 to 1995, Mr. Burr was head of Private Equity at Kidder, Peabody & Co., Inc. Prior to that time, Mr. Burr served as the Managing General Partner of Morgan Stanley Ventures and General Partner of Morgan Stanley Venture Capital Fund I, L.P. and was a corporate lending officer with Citibank, N.A. Mr. Burr serves on the Board of Directors of Global Pharmaceutical Corporation. Robert M. Zech has been a Director of the Company since June 1999. Mr. Zech has been a Vice President of Fleming Asset Management, a subsidiary of Robert Fleming Inc., a global merchant bank, since 1996. From 1994 to 1996, Mr. Zech was an Investment Analyst with Cramer Rosenthal McGlynn Inc., an investment management firm. Prior to that time, Mr. Zech served as an Associate with Wolfensohn & Co., a mergers & acquisitions advisory firm, and was a Financial Analyst at leveraged buyout sponsor Merrill Lynch Capital Partners, Inc. and in the investment banking division of Merrill Lynch & Co. The Company has established a Compensation /Stock Option Committee of the Board of Directors, which is responsible for recommending the compensation of the Company's executive officers and for the administration of the Company's Stock Option Plans. The members of the such Committee are Messrs. Abbatecola, Morch, Burr and Schell. The Company also has an Audit Committee of the Board of Directors, which supervises the audit and financial procedures of the Company. The members of the Audit Committee are Messrs. Abbatecola, Morch and Zech. The Company also has an Executive Committee of the Board of Directors, which is authorized to exercise the powers of the board of directors in the general supervision and control of the business affairs of the Company during the intervals between meetings of the board. The members of the Executive Committee are Messrs. Schell, Zech and Kevin J. Zugibe. In 1999, the Company established an Occupational, Safety And Environmental Protection Committee, which is responsible for satisfying the Board that the Company's Environmental, Health and Safety policies, plans and procedures are adequate. The members of the Occupational, Safety and Environmental Protection Committee are Messrs. Mandracchia, Monetta and Thomas P. Zugibe. The By-laws of the Company provide that the Board of Directors is divided into two classes. Each class is to have a term of two years, with the term of each class expiring in successive years, and is to consist, as nearly as possible, of one-half of the number of directors constituting the entire Board. The By-laws provide that the number of directors shall be fixed by the Board of Directors but in any event, shall be no less than seven (7) (subject to decrease by a resolution adopted by the shareholders). In 1999, the Board of Directors was increased to nine members. Two members of the board, Messrs. Burr and Zech, were elected by vote of the Holders of the Company's Series A Preferred Stock at the Company's August 19, 1999 Annual Meeting of the Shareholders. The Company currently maintains directors and officers liability insurance for covered claims up to $2,000,000 in the aggregate. Compliance with Section 16(a) of the Securities Exchange Act Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who own more than 10 percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission ("SEC"). Officers, directors, and greater than 10 percent stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. Based solely on the Company's review of the copies of such forms received by the Company, the Company believes that during the year ended December 31, 1999 all filing requirements applicable to its officers, directors, and greater than 10 percent beneficial stockholders were complied with except that (i) Messrs Burr and Zech failed to timely file a Form 3 upon becoming directors of the Company, (ii) Messrs. Kevin Zugibe, Thomas P. Zugibe, Stephen Mandracchia, Brian Coleman and Walter Philips failed to timely file a Form 4 with respect to options to purchase 1,000 shares of the Company's common stock granted to each of them in March 1999, (iii) Messrs. Abbatecola, Morch and Monetta failed to timely file a Form 4 with respect to options to purchase 5,000 shares of the Company's common stock granted to each of them in August 1999, (iv) Mr. Schell failed to timely file a Form 4 with respect to options to purchase 10,000 shares of the Company's common stock granted to him in August 1999; and (v) Mr. Abbatecola failed to timely file a Form 4 with respect to the 1,500 shares of the company's common stock purchased by him in 1999. 18 Item 10. Executive Compensation The following table discloses, for the years indicated, the compensation for the Company's Chief Executive Officer and each executive officer that earned over $100,000 during the year ended December 31, 1999 (the "Named Executives").
Summary Compensation Long Term Compensation Table Awards ---------------------- Annual Compensation(1) Securities Underlying -------------------- Name Position Year Salary Bonus Options ---- -------- ---- ------ ----- ------- Kevin J. Zugibe Chairman of the Board, 1999 $136,279 -- 1,000 shares President and Chief Executive 1998 $134,800 -- 40,000 shares Officer 1997 $158,631 -- 58,000 shares Eugene J. Tonkovich(2) President and Chief Operating 1999 $128,124 -- 1,000 shares Officer 1998 $ 91,238 -- 250,000 shares(3) 1997 -- -- -- Stephen P. Mandracchia Executive Vice President and 1999 $108,124 -- 1,000 shares Secretary 1998 $104,800 -- 25,000 shares 1997 $120,554 -- 40,000 shares Thomas P. Zugibe Executive Vice President 1999 $104,800 -- 1,000 shares 1998 $104,800 -- 25,000 shares 1997 $120,169 -- 40,000 shares Walter A. Phillips Vice President Marketing and 1999 $160,781 -- 1,000 shares Strategic Planning 1998 $148,312 -- 10,000 shares 1997 $213,145 -- 22,000 shares Brian F. Coleman Vice President and Chief 1999 $138,124 -- 1,000 shares Financial Officer 1998 $124,900 -- 25,000 shares 1997 $79,950 -- 42,000 shares
- ---------- (1) The value of personal benefits furnished to the Named Executives during 1997, 1998, and 1999 did not exceed 10% of their respective annual compensation. (2) Effective July 1999, Eugene J. Tonkovich resigned as President and Chief Operating Officer but continues to be compensated as an employee of the Company. (3) In 1999 options to purchase 100,000 of the 250,000 shares of Common Stock have been cancelled. 19 The Company granted options, vesting immediately on the date of grant, to the Named Executives during the fiscal year ended December 31, 1999, as shown in the following table: Summary of Stock Options Granted to Named Executives
Number of % of Total Securities Options Underlying Granted to Options Employees in Granted Fiscal year ---------- ----------- Exercise or Expiration Name Position Shares Percent Base price ($/sh) Date ---- -------- ------ ------- ----------------- ---------- Kevin J. Zugibe Chairman, President and 1,000 .4% $2.00 03/24/2004 Chief Executive Officer Thomas P. Zugibe Executive Vice President 1,000 .4% $2.00 03/24/2004 Stephen P. Executive Vice President 1,000 .4% $2.00 03/24/2004 Mandracchia Walter A. Phillips Vice President of Marketing and 1,000 .4% $1.78 03/24/2004 Strategic Operations Brian F. Coleman Vice President and Chief 1,000 .4% $1.78 03/24/2004 Financial Officer
Aggregated Fiscal Year End Option Values Table The following table sets forth information concerning the value of unexercised stock options held by the Named Executives at December 31, 1999. No options were exercised by the Named Executives during the fiscal year ended December 31, 1999.
Number of Securities Underlying (1) Value of Unexercised Options In-the-money Options Shares At December 31, 1999 At December 31, 1999 ------ --------------------- -------------------- Name Acquired on Value Realized Exercisable Unexercisable Exercisable Unexercisable ---- ----------- -------------- ----------- ------------- ----------- ------------- Exercise -------- Kevin J. Zugibe -- -- 81,000 18,000 0 0 Chairman; President and Chief Executive Officer Thomas P. Zugibe -- -- 66,000 0 0 0 Executive Vice President Stephen P. Mandracchia -- -- 66,000 0 0 0 Executive Vice President and Secretary Walter A. Phillips -- -- 48,000 0 0 0 Vice President of Marketing & Strategic Planning Brian F. Coleman -- -- 68,000 0 0 0 Vice President and Chief Financial Officer
- ---------- (1)Year-end values of unexercised in-the-money options represent the positive spread between the exercise price of such options and the year-end market value of the Common Stock of $1.50. 20 Compensation of Directors Non-employee directors receive an annual fee of $3,000 and receive reimbursement for out-of-pocket expenses incurred, and an attendance fee of $500 and $250, respectively, for attendance at meetings of the Board of Directors and Board committee meetings. In addition, commencing in August 1998, non-employee directors receive 5,000 nonqualified stock options per year of service under the Company's Stock Option Plans. To date, the Company has granted to Harry C. Schell nonqualified options to purchase 20,000 shares of Common Stock at exercise prices ranging from $2.38 to $3.00 per share. Such options vested and are fully exercisable as of December 31, 1999. The Company has also granted to each of Dominic J. Monetta, Otto Morch and Vincent Abbatecola, nonqualified options to purchase 10,000 shares of Common Stock at exercise prices ranging from $2.38 to $3.00 per share. Such options vested and are fully exercisable as of December 31, 1999. In addition, as members of the Board of Directors, the Company has granted to Fleming US Discovery Fund III, L.P. and Fleming US Discovery Offshore Fund III, L.P. nonqualified options to purchase 8,618 and 1,382 shares of common stock at an exercise price of $2.38 per share. All such options issued to the directors are vested and fully exercisable at December 31, 1999. Employment Agreements The Company has entered into a two-year employment agreement with Kevin J. Zugibe, which expires in May 2001 and is automatically renewable for two successive terms. Pursuant to the agreement, effective February 1, 2000, Mr. Zugibe is receiving an annual base salary of $70,000 with such increases and bonuses as the Board may determine. The Company is the beneficiary of a "key-man" insurance policy on the life of Mr. Zugibe in the amount of $1,000,000. The Company has entered into a three-year employment contract with Mr. Coleman which provides for an annual base salary of $130,000, which expires in May 2000. Stock Option Plan 1994 Stock Option Plan The Company has adopted an Employee Stock Option Plan (the "Plan") effective October 31, 1994 pursuant to which 725,000 shares of Common Stock are currently reserved for issuance upon the exercise of options designated as either (i) options intended to constitute incentive stock options ("ISOs") under the Internal Revenue Code of 1986, as amended (the "Code"), or (ii) nonqualified options. ISOs may be granted under the Plan to employees and officers of the Company. Non-qualified options may be granted to consultants, directors (whether or not they are employees), employees or officers of the Company. Stock appreciation rights may also be issued in tandem with stock options. The Plan is intended to qualify under Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and is administered by a committee of the Board of Directors, which currently consists of Messrs. Abbatecola, Morch, Burr and Schell. The committee, within the limitations of the Plan, determines the persons to whom options will be granted, the number of shares to be covered by each option, whether the options granted are intended to be ISOs, the duration and rate of exercise of each option, the exercise price per share and the manner of exercise and the time, manner and form of payment upon exercise of an option. Unless sooner terminated, the Plan will expire on December 31, 2004. ISOs granted under the Plan may not be granted at a price less than the fair market value of the Common Stock on the date of grant (or 110% of fair market value in the case of persons holding 10% or more of the voting stock of the Company). The aggregate fair market value of shares for which ISOs granted to any employee are exercisable for the first time by such employee during any calendar year (under all stock option plans of the Company) may not exceed $100,000. Non-qualified options granted under the Plan may not be granted at a price less than 85% of the market value of the Common Stock on the date of grant. Options granted under the Plan will expire not more than ten years from the date of grant (five years in the case of ISOs granted to persons holding 10% or more of the voting stock of the Company). All options granted under the Plan are not transferable during an optionee's lifetime but are transferable at death by will or by the laws of descent and distribution. In general, upon termination of employment of an optionee, all options granted to such person which are not exercisable on the date of such termination immediately terminate, and any options that are exercisable terminate 90 days following termination of employment. 21 As of December 31, 1999, options to purchase 248,266 shares of Common Stock were issued under the Plan. During 1999, the Company granted options to purchase 70,000 shares to employees, exercisable at prices ranging from $1.94 to $2.50 per share (see Note 11 to the Notes to the Consolidated Financial Statements). 1997 Stock Option Plan The Company has adopted the 1997 Stock Option Plan (the "1997 Plan"), pursuant to which 2,000,000 shares of Common Stock are currently reserved for issuance upon the exercise of options designated as either (i) options intended to constitute incentive stock options ("ISOs") under the Internal Revenue Code of 1986, as amended (the "Code"), or (ii) nonqualified options. ISOs may be granted under the 1997 Plan to employees and officers of the Company. Non-qualified options may be granted to consultants, directors (whether or not they are employees), employees or officers of the Company. Stock appreciation rights may also be issued in tandem with stock options. The 1997 Plan is intended to qualify under Rule 16b-3 under the Exchange Act and is administered by a committee of the Board of Directors, which currently consists of Messrs. Abbatecola and Morch. The committee, within the limitations of the 1997 Plan, determines the persons to whom options will be granted, the number of shares to be covered by each option, whether the options granted are intended to be ISOs, the duration and rate of exercise of each option, the exercise price per share and the manner of exercise and the time, manner and form of payment upon exercise of an option. Unless sooner terminated, the 1997 Plan will expire on June 11, 2007. ISOs granted under the 1997 Plan may not be granted at a price less than the fair market value of the Common Stock on the date of grant (or 110% of fair market value in the case of persons holding 10% or more of the voting stock of the Company). The aggregate fair market value of shares for which ISOs granted to any employee are exercisable for the first time by such employee during any calendar year (under all stock option plans of the Company) may not exceed $100,000. Non-qualified options granted under the 1997 Plan may not be granted at a price less than 85% of the market value of the Common Stock on the date of grant. Options granted under the 1997 Plan will expire not more than ten years from the date of grant (five years in the case of ISOs granted to persons holding 10% or more of the voting stock of the Company). All options granted under the 1997 Plan are not transferable during an optionee's lifetime but are transferable at death by will or by the laws of descent and distribution. In general, upon termination of employment of an optionee, all options granted to such person which are not exercisable on the date of such termination immediately terminate, and any options that are exercisable terminate 90 days following termination of employment. As of December 31, 1999, the Company granted options to purchase 786,266 shares of Common Stock under the 1997 Plan. During 1997, options to purchase 40,000, 25,000 and 25,000 shares at an exercise price of $4.47 per share were granted to Kevin J. Zugibe, Stephen P. Mandracchia and Thomas P. Zugibe, respectively. Such options vested and are fully exercisable. Additionally, during 1997, options to purchase 18,000, 15,000 and 15,000 shares at an exercise price of $3.85 were granted to, respectively, Kevin J. Zugibe, Stephen P. Mandracchia and Thomas P. Zugibe. Such options vested and are fully exercisable except for options to purchase 17,000 shares of Common Stock issued to Kevin J. Zugibe which become exercisable November 3, 2000. During 1997, the Company also granted options to purchase 99,100 shares to certain officers and employees, exercisable at prices ranging from $3.50 to $4.06 per share. During 1998, the Company granted non-qualified options to purchase 40,000, 25,000, and 25,000 shares at an exercise price of $3.00 per share to Kevin J. Zugibe, Stephen P. Mandracchia and Thomas P. Zugibe, respectively. Such options vested on August 31, 1998. In addition during 1998, the Company also granted options to purchase 420,666 shares to certain officers, directors and employees, exercisable at prices ranging from $2.50 to $4.375 per share. During 1999, the Company granted options to purchase 1,000, 1,000 and 1,000 shares at an exercise price of $2.00 per share to Kevin J. Zugibe, Stephen P. Mandracchia and Thomas P. Zugibe, respectively. Such options vested and are fully exercisable as of November 3, 2000; November 3, 1999 and November 3, 1999, respectively. In addition, during 1999, the Company also granted options to purchase 153,500 shares to certain officers, directors and employees, exercisable at prices ranging from $1.781 to $2.63 per share (see Note 11 to the Notes to the Consolidated Financial Statements). 22 Item 11. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth information as of March 13, 2000 based on information obtained from the persons named below, with respect to the beneficial ownership of the Company's Common Stock by (i) each person known by the Company to be the beneficial owner of more than 5% of the Company's outstanding Common Stock, (ii) the Named Executives, (iii) each director of the Company, and (iv) all directors and executive officers of the Company as a group: Amount and Nature of Percentage of Beneficial Common Name and Address of Beneficial Owner (1) Ownership (2) Shares Owned - ---------------------------------------- ------------ ------------- Kevin J. Zugibe 318,728 (3) 6.15% Thomas P. Zugibe 305,668 (4) 5.93% Stephen P. Mandracchia 300,128 (5) 5.83% Walter A. Phillips 48,000 (6) * Brian F. Coleman 68,000 (7) * Vincent P. Abbatecola 15,000 (8) * Robert L. Burr 0 (12) * Dominic J. Monetta 20,000 (8) * Otto C. Morch 10,600 (8) * Harry C. Schell 49,000 (9) * Robert M. Zech 0 (12) * DuPont Chemical and Energy Operations, Inc. 500,000 (10) 9.83% Fleming Funds 2,844,273 (11) 35.87% All directors and executive officers as a group (11 persons) 1,135,124 (13) 20.77% * = Less than 1% - ---------- (1) Unless otherwise indicated, the address of each of the persons listed above is the address of the Company, 275 North Middletown Road, Pearl River, New York 10965. (2) A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from the date of this report. Each beneficial owner's percentage ownership is determined by assuming that options and warrants that are held by such person (but not held by any other person) and which are exercisable within 60 days from the date hereof have been exercised. Unless otherwise noted, the Company believes that all persons named in the table have sole voting and investment power with respect to all shares of Common stock beneficially owned by them. (3) Includes (i) 40,000 shares which may be purchased at $4.47 per share; (ii) 40,000 shares which may be purchased at $3.00 per share; (iii) 18,000 shares which may be purchased at $3.85 per share and (iv) 1,000 shares which may be purchased at $2.00 per share under immediately exercisable options. Does not give effect to any voting rights held by Mr. Zugibe as a result of the Company's agreement with the holders of the Series A Preferred Stock as discussed in (11) below. (4) Includes (i) 25,000 shares which may be purchased at $4.47 per share; (ii) 15,000 shares which may be purchased at $3.85 per share (iii) 25,000 shares which may be purchased at $3.00 per share and (iv) 1,000 shares which may be purchased at $2.00 per share under immediately exercisable options. (5) Includes (i) 25,000 shares which may be purchased at $4.47 per share; (ii) 15,000 shares which may be purchased at $3.85 per share (iii) 25,000 shares which may be purchased at $3.00 per share and (iv) 1,000 shares which may be purchased at $2.00 per share under immediately exercisable options. Does not give effect to any voting rights held by Mr. Mandracchia as a result of the Company's agreement with the holders of the Series A Preferred Stock as discussed in (11) below. 23 (6) Represents (i) 15,000 shares which may be purchased at $5.625 per share; (ii) 10,000 shares which may be purchased at $4.06 per share; (iii) 12,000 shares which may be purchased at $3.50 per share; (iv) 10,000 shares which may be purchased at $3.06 per share and (v) 1,000 shares which may be purchased at $1.78 per share under immediately exercisable options. (7) Represents (i) 30,000 shares which may be purchased at $4.06 per share; (ii) 12,000 shares which may be purchased at $3.50 per share; (iii) 25,000 shares which may be purchased at $2.50 per share and (iv) 1,000 shares which may be purchased at $1.78 per share under immediately exercisable options. (8) Includes 5,000 shares which may be purchased at $3.00 per share and 5,000 shares which may be purchased at $2.375 under immediately exercisable options. (9) Includes 10,000 shares which may be purchased at $3.00 per share and 10,000 shares which may be purchased at $2.375 per share under immediately exercisable options. (10) According to a Schedule 13D filed with the Securities and Exchange Commission, DuPont Chemical and Energy Operations, Inc. ("DCEO") and E.I. DuPont de Nemours and Company claim shared voting and dispositive power over the shares. DCEO's address is DuPont Building, Room 8045, 1007 Market Street, Wilmington, DE 19898. (11) Fleming US Discovery Fund III, L.P. and Fleming US Discovery Offshore Fund III, L.P., and their general partner, Fleming U.S. Discovery Partners, L.P. and its general partner, Fleming U.S. Discovery Partners LCC, collectively referred to as ("Flemings Funds") are affiliates. The beneficial ownership of Flemings assumes the conversion of Series A Preferred Stock owned by Flemings to Common Stock at a conversion rate of $2.375 per share. The holders of shares of Series A Preferred Stock vote together with the holders of the Common Stock based upon the number of shares of Common Stock into which the Series A Preferred Stock is then convertible. Flemings Funds has provided to the Chief Executive Officer and Secretary of the Company a Proxy to vote that number of voting shares held by Flemings which exceed 29% of the then voting shares. Also includes 10,000 shares which may be purchased at $2.375 per share under immediately exercisable options. The address of all of the Fleming Funds is 320 Park Avenue, 11th Floor, New York, New York 10022, except for the Fleming U.S. Discovery Offshore Fund III, L.P. whose address is c/o Bank of Bermuda Ltd., 6 Front Street, Hamilton HM11 Bermuda. (12) Messers. Burr and Zech have been appointed directors by the Flemings Funds. Their share ownership excludes all shares of common stock beneficially owned by Flemings Funds. (13) Includes exercisable options to purchase 379,000 shares of Common Stock owned by the directors and officers as a group. Excludes 2,834,273 shares beneficially owned by the Flemings Funds. Kevin J. Zugibe, Thomas P. Zugibe and Stephen P. Mandracchia may be deemed to be "parents" of the Company as such term is used under the Securities Act of 1933. Item 12. Certain Relationships and Related Transactions In May 1998, an officer and a former director of the Company made unsecured loans of $300,000 to the Company which were payable on demand and bore interest at 10%. The note was repaid on June 30, 1998. In February 1999, a former director of the Company made an unsecured loan of $365,000 to the Company which was payable on demand and bore interest at 12%. The note was repaid on April 16, 1999. In the regular course of its business, the Company purchases refrigerants from and sells refrigerants to DuPont and performs recovery, reclamation, RefrigerantSide(TM) Services and other services (see "Description of Business - Strategic Alliance). 24 Item 13. Exhibits and Reports on Form 8-K. (a) Exhibits 3.1 Certificate of Incorporation and Amendment. (1) 3.2 Amendment to Certificate of Incorporation, dated July 20,1994. (1) 3.3 Amendment to Certificate of Incorporation, dated October 26, 1994. (1) 3.4 By-Laws. (1) 3.5 Certificate of Amendment of the Certificate of Incorporation dated March 16, 1999. (12) 3.6 Certificate of Correction of the Certificate of Amendment dated March 25, 1999. (12) 3.7 Certificate of Amendment of the Certificate of Incorporation dated March 29, 1999. (12) 10.1 Lease Agreement between the Company and Ramapo Land Co., Inc. (1) 10.2 Consulting Agreement with J.W. Barclay & Co., Inc. (1) 10.3 1994 Stock Option Plan of the Company. (1) (*) 10.4 Employment Agreement with Kevin J. Zugibe. (1) (*) 10.5 Assignment of patent rights from Kevin J. Zugibe to Registrant. (1) 10.6 Agreement dated August 12, 1994 between the Company and PAACO International, Inc. (1) 10.7 Agreement between the Company and James T. and Joan Cook for the purchase of premises 3200 S.E. 14th Avenue, Ft. Lauderdale, Florida. (1) 10.8 Agreement dated as of December 12, 1994, by and between the Company and James Spencer d/b/a CFC Reclamation. (2) 10.9 Employment agreement, dated December 12, 1994, between the Company and James Spencer. (2) 10.10 Agreement, dated July 25, 1995, between the Company and Refrigerant Reclamation Corporation of America. (3) 10.11 Employment Agreements with Thomas P. Zugibe, Stephen P. Mandracchia and Stephen J. Cole-Hatchard. (4) (*) 10.12 Contract of Sale with ESS, Stephen Spain, Robert Johnson and the Company dated April 23, 1996. (5) 10.13 Agreement dated June 14, 1996 between Environmental Support, Solutions, Inc. and E-Soft, Inc. (7) 10.14 Agreement dated July 24, 1996 between the Company and GRR Co., Inc. (7) 10.15 Agreements dated June 18, 1996 and September 30, 1996 between Cameron Capital and the Company. (7) 10.16 Employment agreement, dated October 1, 1996, between the Company and Walter Phillips. (7) (*) 10.17 Agreement dated February 4, 1997 between Wilson Art, Inc. and the Company for the purchase of 100 Brenner Drive, Congers, New York. (7) 10.18 Employment agreement, dated April 16, 1997, between the Company and Brian Coleman. (8) (*) 10.19 Agreements dated January 29, 1997 between E.I. DuPont de Nemours, DCEO, and the Company. (6) 10.20 Loan and security agreements and warrant agreements dated April 29, 1998 between the Company and CIT Group/Credit Financing Group, Inc. (9) 10.21 Stock Purchase Agreement, Registration Rights Agreement and Stockholders Agreement dated March 30, 1999 between the Company and Flemings US Discovery Partners, L.P. (10) 10.22 Contract of Sale, dated March 19, 1999, for 75% interest in Environmental Support Solutions, Inc. (11) 10.23 1997 Stock Option Plan of the Company, as amended. (*) 23.1 Consent of BDO Seidman, LLP. 27 Financial Data Schedule. - ---------- (1) Incorporated by reference to the comparable exhibit filed with the Company's Registration Statement on Form SB-2 (No. 33-80279-NY). (2) Incorporated by reference to the comparable exhibit filed with the Company's Report on Form 8-K dated December 12, 1994. (3) Incorporated by reference to the comparable exhibit filed with the Company's Report on Form 10-QSB for the quarter ended June 30, 1995. (4) Incorporated by reference to the comparable exhibit filed with the Company's Annual Report on Form 10-KSB for the year ended December 31, 1995. (5) Incorporated by reference to the comparable exhibit filed with the Company's Report on Form 8-K dated April 29, 1996. (6) Incorporated by reference to the comparable exhibit filed with the Company Report in Form 8-K dated January 29, 1997. (7) Incorporated by reference to the comparable exhibit filed with the Company's Annual Report on Form 10-KSB for the year ended December 31, 1996. (8) Incorporated by reference to the comparable exhibit filed with the Company's Annual Report on Form 10-KSB for the year ended December 31, 1997. (9) Incorporated by reference to the comparable exhibit filed with the Company's Report on Form 10-QSB for the quarter ended March 31, 1998. (10) Incorporated by reference to the comparable exhibit filed with the Company's Report on Form 10-KSB for the year ended December 31, 1998. (11) Incorporated by reference to the comparable exhibit filed with the Company's Report on Form 10-QSB for the quarter ended March 31, 1999. (12) Incorporated by reference to the comparable exhibit filed with the Company's Report on Form 10-QSB for the quarter ended June 30, 1999. (*) Denotes Management Compensation Plan, agreement or arrangement. (b) Reports on Form 8-K: During the quarter ended December 31, 1999, no report on Form 8-K was filed. 25 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HUDSON TECHNOLOGIES, INC. By: /s/ Kevin J. Zugibe -------------------------- Kevin J. Zugibe, President Date: March 28, 2000 In accordance with the Exchange Act, this report has been signed below by the following persons, on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Kevin J. Zugibe Chairman of the Board; President and Chief Executive March 28, 2000 - -------------------------- Officer (Principal Executive Officer) Kevin J. Zugibe /s/ Thomas P. Zugibe Executive Vice President and Director March 28, 2000 - -------------------------- Thomas P. Zugibe /s/ Stephen P. Mandracchia Executive Vice President; Secretary and Director March 28, 2000 - -------------------------- Stephen P. Mandracchia /s/ Brian F. Coleman Vice President and Chief Financial Officer (Principal March 28, 2000 - -------------------------- Financial and Accounting Officer) Brian F. Coleman /s/ Harry C. Schell Director March 28, 2000 - -------------------------- Harry C. Schell /s/ Vincent Abbatecola Director March 28, 2000 - -------------------------- Vincent Abbatecola /s/ Otto C. Morch Director March 28, 2000 - -------------------------- Otto C. Morch /s/ Dominic J. Monetta Director March 28, 2000 - -------------------------- Dominic J. Monetta /s/ Robert L. Burr Director March 28, 2000 - -------------------------- Robert L. Burr /s/ Robert M. Zech Director March 28, 2000 - -------------------------- Robert M. Zech
26 Hudson Technologies, Inc. Consolidated Financial Statements Contents - -------------------------------------------------------------------------------- Report of Independent Certified Accountants 28 Audited Consolidated Financial Statements: o Consolidated Balance Sheet 29 o Consolidated Statements of Operations 30 o Consolidated Statements of Stockholders' Equity 31 o Consolidated Statements of Cash Flows 32 o Notes to the Consolidated Financial Statements 33 27 Report of Independent Certified Accountants To Stockholders and Board of Directors Hudson Technologies, Inc. Pearl River, New York We have audited the accompanying consolidated balance sheet of Hudson Technologies, Inc. and subsidiaries as of December 31, 1999 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the two years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hudson Technologies, Inc. and subsidiaries as of December 31, 1999, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. /s/ BDO Seidman, LLP Valhalla, New York February 29, 2000 28 Hudson Technologies, Inc. and subsidiaries Consolidated Balance Sheet (Amounts in thousands, except for share and par value amounts) December 31, ------------ 1999 ---- Assets (Note 8) - ------ Current assets: Cash and cash equivalents $ 2,483 Trade accounts receivable - net (Note 5) 1,916 Inventories (Note 6) 2,480 Prepaid expenses and other current assets 203 -------- Total current assets 7,082 Property, plant and equipment, less accumulated depreciation (Note 7) 5,785 Other assets 112 -------- Total Assets $ 12,979 ======== Liabilities and Stockholders' Equity - ------------------------------------ Current liabilities: Accounts payable and accrued expenses $ 3,375 Short-term debt (Note 8) 2,030 -------- Total current liabilities 5,405 Deferred income 22 Long-term debt, less current maturities (Note 8) 2,065 -------- Total Liabilities 7,492 -------- Commitments and contingencies (Note 10) Stockholders' equity (Notes 9 and 11): Preferred stock shares authorized 5,000,000: Series A Convertible Preferred stock, $.01 par value ($100 liquidation preference value); shares authorized 75,000; issued and outstanding 67,314 6,731 Common stock, $0.01 par value; shares authorized 20,000,000; issued outstanding 5,085,820 51 Additional paid-in capital 21,614 Accumulated deficit (22,909) -------- Total Stockholders' Equity 5,487 -------- Total Liabilities and Stockholders' Equity $ 12,979 ======== See accompanying Notes to the Consolidated Financial Statements. 29 Hudson Technologies, Inc. and subsidiaries Consolidated Statements of Operations (Amounts in thousands, except for share and per share amounts) For the year ended December 31, ------------------------------- 1999 1998 ----------- ---------- Revenues $ 17,909 $ 23,311 Cost of sales 14,121 17,585 ----------- ---------- Gross Profit 3,788 5,726 ----------- ---------- Operating expenses: Selling and marketing 1,823 1,744 General and administrative 4,223 5,176 Depreciation and amortization 1,349 1,195 ----------- ---------- Total operating expenses 7,395 8,115 ----------- ---------- Operating loss (3,607) (2,389) ----------- ----------- Other income (expense): Interest expense (454) (399) Other income (Note 3) 106 132 ----------- ----------- Total other (expense) (348) (267) ----------- ----------- Loss before income taxes (3,955) (2,656) Income taxes (Note 4) -- -- ----------- ----------- Net loss $ (3,955) $ (2,656) =========== =========== Net loss per common share - basic and diluted $ (.85) $ (.52) =========== =========== Weighted average number of shares outstanding (Note 1) 5,085,820 5,068,320 =========== =========== See accompanying Notes to the Consolidated Financial Statements. 30 Hudson Technologies, Inc. and subsidiaries Consolidated Statements of Stockholders' Equity (Amounts in thousands, except for share amounts)
Preferred Stock Common Stock Additional --------------- ------------ Treasury Paid-in Accumulated Shares Amount Shares Amount Stock Capital Deficit Total -------- -------- ----------- ----------- ------- ---------- ---------- ---------- Balance at December 31, 1997 -- $ -- 5,086,820 $51 $(173) $22,683 $(16,298) $6,263 Retired treasury stock -- -- (21,000) -- 173 (173) -- -- Issuance of common stock for services -- -- 20,000 -- -- 35 -- 35 Net loss -- -- -- -- -- -- (2,656) (2,656) -------- -------- ----------- ----------- ------- ---------- ---------- ---------- Balance at December 31, 1998 -- -- 5,085,820 51 -- 22,545 (18,954) 3,642 Issuance of Series A Preferred Stock - Net 65,000 6,500 -- -- -- (700) -- 5,800 Dividends paid in-kind on Series A Preferred Stock 2,314 231 -- -- -- (231) -- -- Net Loss -- -- -- -- -- -- (3,955) (3,955) -------- -------- ----------- ----------- ------- ---------- ---------- ---------- Balance at December 31, 1999 67,314 $ 6,731 5,085,820 $51 $ -- $21,614 $(22,909) $5,487 ======== ======== =========== =========== ======= ========== ========== ==========
See accompanying Notes to the Consolidated Financial Statements. 31 Hudson Technologies, Inc. and subsidiaries Consolidated Statements of Cash Flows Increase (Decrease) in Cash and Cash Equivalents (Amounts in thousands)
For the year ended December 31, ------------------------------- 1999 1998 ------- ------- Cash flows from operating activities: Net Loss $(3,955) $(2,656) Adjustments to reconcile net loss to cash provided (used) by operating activities: Depreciation and amortization 1,349 1,195 Allowance for doubtful accounts 41 80 Common stock issued for services -- 35 Changes in assets and liabilities: Trade accounts receivable (883) 581 Inventories 804 471 Income taxes receivable -- 167 Prepaid expenses and other current assets 6 (23) Other assets 91 (85) Accounts payable and accrued expenses (876) 822 Deferred income (19) (13) ------- ------- Cash provided (used) by operating activities (3,442) 574 ------- ------- Cash flows from investing activities: Additions to property, plant, and equipment (1,822) (591) ------- ------- Cash used by investing activities (1,822) (591) ------- ------- Cash flows from financing activities: Proceeds from issuance of preferred stock - net 5,800 -- Proceeds (repayment) of short-term debt - net 737 (480) Proceeds from long-term debt 1,064 1,102 Repayment of long-term debt (630) (455) ------- ------- Cash provided by financing activities 6,971 167 ------- ------- Increase in cash and cash equivalents 1,707 150 Cash and equivalents at beginning of period 776 626 ------- ------- Cash and equivalents at end of period $ 2,483 $ 776 ======= ======= - ------------------------------------------------------ Supplemental disclosure of cash flow information: Cash paid during period for interest $ 454 $ 399
See accompanying Notes to the Consolidated Financial Statements. 32 Hudson Technologies, Inc. and subsidiaries Notes to the Consolidated Financial Statements Note 1- Summary of Significant Accounting Policies Business Hudson Technologies, Inc., incorporated under the laws of New York on January 11, 1991, together with its subsidiaries (collectively, "Hudson" or the "Company"), primarily sells refrigerants and provides RefrigerantSide(TM) Services performed at a customer's site, consisting of system decontamination to remove moisture and oils and other contaminants and recovery and reclamation of the refrigerants used in commercial air conditioning and refrigeration systems. The Company operates as a single segment through its wholly owned subsidiary Hudson Technologies Company. Consolidation The consolidated financial statements represent all companies of which Hudson directly or indirectly has majority ownership or otherwise controls. Significant intercompany accounts and transactions have been eliminated. The Company's consolidated financial statements include the accounts of wholly-owned subsidiaries Hudson Holdings, Inc. and Hudson Technologies Company. Effective March 19, 1999, the Company sold 75% of its ownership interest in Environmental Support Solutions, Inc. ("ESS") and as of that date, no longer includes the results of that operation in the consolidated results of the Company. Effective October 11, 1999, the Company sold an additional 5.4% ownership interest in ESS. Fair value of financial instruments The carrying values of financial instruments including trade accounts receivable, and accounts payable approximate fair value at December 31, 1999, because of the relatively short maturity of these instruments. The carrying value of short-and long-term debt approximates fair value, based upon quoted market rates of similar debt issues, as of December 31, 1999. Credit risk Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of temporary cash investments and trade accounts receivable. The Company maintains its temporary cash investments in highly-rated financial institutions. The Company's trade accounts receivables are due from companies throughout the U.S. The Company reviews each customer's credit history before extending credit. The Company establishes an allowance for doubtful accounts based on factors associated with the credit risk of specific accounts, historical trends, and other information. During the year ended December 31, 1999, one customer accounted for 17% of revenues. During the year ended December 31, 1998, one customer, an affiliate, accounted for 28% and another customer accounted for 14%. The loss of a principal customer or a decline in the economic prospects and purchases of the Company's products or services by any such customer, as incurred in 1999, would have an adverse effect on the Company's financial position and results of operations. Cash and cash equivalents Temporary investments with original maturities of ninety days or less are included in cash and cash equivalents. Inventories Inventories, consisting primarily of reclaimed refrigerant products available for sale, are stated at the lower of cost, on a first-in first-out basis, or market. 33 Property, plant, and equipment Property, plant, and equipment are stated at cost; including internally manufactured equipment. The cost to complete equipment that is under construction is not considered to be material to the Company's financial position. Provision for depreciation is recorded (for financial reporting purposes) using the straight-line method over the useful lives of the respective assets. Leasehold improvements are amortized on a straight-line basis over the shorter of economic life or terms of the respective leases. Due to the specialized nature of the Company's business, it is possible that the Company's estimates of equipment useful life periods may change in the future. Revenues and cost of sales Revenues are recorded upon completion of service or product shipment or passage of title to customers in accordance with contractual terms. Cost of sales is recorded based on the cost of products shipped or services performed and related direct operating costs of the Company's facilities. Income taxes The Company utilizes the assets and liability method for recording deferred income taxes, which provides for the establishment of deferred tax asset or liability accounts based on the difference between tax and financial reporting bases of certain assets and liabilities. The Company recognized a reserve allowance against the deferred tax benefit for the current and prior period losses. The tax benefit associated with the Company's net operating loss carry forwards would be recognized to the extent that the Company recognized net income in future periods. Loss per common and equivalent shares Loss per common share (Basic) is calculated based on the net loss for the period less dividends on the outstanding Series A Preferred Stock, $349,000 for 1999 of which $231,000 was paid in kind on September 30, 1999, divided by the weighted average number of shares outstanding. If dilutive, common equivalent shares (common shares assuming exercise of options and warrants or conversion of Preferred Stock) utilizing the treasury stock method are considered in the presentation of dilutive earnings per share. Diluted loss per share was not presented since the effect was not dilutive. Estimates and Risks The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of certain assets and liabilities, the disclosure of contingent assets and liabilities, and the results of operations during the reporting period. Actual results could differ from these estimates. The Company participates in an industry that is highly regulated, changes in which could affect operating results. Currently the Company purchases virgin and reclaimable refrigerants from domestic suppliers and its customers. To the extent that the Company is unable to obtain refrigerants on commercially reasonable terms or experiences a decline in demand for refrigerants, the Company could realize reductions in refrigerant processing and possible loss of revenues, which would have a material adverse affect on operating results. The Company is subject to various legal proceedings. The Company assesses the merits and potential liability associated with each of these proceedings. The Company estimates potential liability, if any, related to these matters. To the extent that these estimates are not accurate, or circumstances change in the future, the Company could realize liabilities which would have a material adverse affect on operating results and its financial position. Impairment of long-lived assets and long-lived assets to be disposed of The Company reviews for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the 34 carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less the cost to sell. Recent accounting pronouncements The Company adopted SFAS No. 133 as of January 1, 1999. SFAS No. 133 requires that an entity recognize derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The adoption did not have a material effect on the Company's financial position or results of operations. Note 2 - Acquisitions On April 23, 1996, the Company acquired all the outstanding capital stock of ESS, a developer and provider of environmental software, training, and management services in consideration of $2,375,000, consisting of cash of $700,000 and promissory notes of $1,675,000 which were repaid during October 1996. The acquisition was accounted for as a purchase from the date of acquisition with the assets acquired and liabilities assumed recorded at fair values, resulting in an excess of cost over assets acquired of approximately $800,000. Results of ESS's operations were included in the Company's consolidated financial statements from the date of acquisition. On June 14, 1996, ESS acquired all the net assets, subject to liabilities, of E-Soft, Inc. ("E-Soft"), a developer and marketer of software programs related to hazardous material management, in consideration of a cash payment of $50,000 and 41,560 unregistered shares of the Company's stock. E-Soft acquired assets and liabilities were recorded at fair values, resulting in an excess of cost over assets acquired of approximately $500,000. Subsequent to the acquisition, all E-Soft assets and activities were relocated to ESS headquarters in Arizona. Effective March 19, 1999, the Company sold 75% of its stock ownership in ESS to one of its founders. The consideration for the Company's sale of its interest was $100,000 in cash and a six year note in the amount of $380,000. The Company recognized a valuation allowance for 100% of the note receivable. The Company will recognize as income the portion of the proceeds associated with the note receivable upon the receipt of cash. This sale did not have a material effect on the Company's financial condition or results of operations. It is not anticipated that the Company will be involved in or control the operations of ESS. Effective October 11, 1999, the Company sold to three of ESS' employees an additional 5.4% ownership in ESS. The Company received $37,940 from the sale of the additional ESS stock. Note 3 - Other income For the year ended December 31, 1999, and 1998, other income of $106,000 and $132,000, respectively, consisted mainly of lease rental income from the Company's Ft. Lauderdale facility. Note 4 - Income taxes During the years ended December 31, 1999 and 1998, there were no income tax expense recognized due to the Company's net losses. Reconciliation of the Company's actual tax rate to the U.S. Federal statutory rate is as follows: Year ended December 31, 1999 1998 (in percents) ---- ---- Income tax rates ---------------- - Statutory U.S. Federal rate (34%) (34%) - States, net U.S. benefits (4%) (4%) - Valuation allowance 38% 38% ----- ----- Total --% --% ===== ===== As of December 31, 1999, the Company has net operating loss carryforwards, ("NOL's") of approximately $20,000,000 expiring 2007 through 2014 for which a 100% valuation allowance has been recognized. Refrigerant Reclamation Corporation of America ("RRCA"), acquired during 1995 as a subsidiary of the Company, has available NOL's expiring 2007 through 2010 of approximately $4,660,000 subject to annual limitations of approximately $367,000. 35 Elements of deferred income tax assets (liabilities) are as follows: December 31, 1999 (in thousands) -------- Deferred tax assets (liabilities) --------------------------------- - Depreciation & amortization $ (55) - Reserves for doubtful accounts 63 - NOL 8,000 - Other (8) ------- Subtotal 8,000 - NOL valuation allowance (8,000) ------- Total $ -- ======= Note 5- Trade accounts receivable - net At December 31, 1999, trade accounts receivable are net of reserves for doubtful accounts of $158,000. Note 6 - Inventories Inventories consisted of the following: December 31, 1999 ------- (in thousands) Refrigerant and cylinders $ 2,142 Packaged refrigerants 338 ------- Total $ 2,480 ======= During January 1998, the Company entered into several agreements, with E.I. DuPont de Nemours and Company ("DuPont") to market DuPont's SUVA(TM) refrigerants. Under the agreement, 100% of virgin refrigerants provided to specified market segment customers must be purchased from DuPont (see Note 9 to the Notes to Consolidated Financial Statements). Note 7 - Property, plant, and equipment Elements of property, plant, and equipment are as follows: December 31, (in thousands) 1999 -------- Property, plant, & equipment ---------------------------- - Land $ 335 - Buildings & improvements 754 - Equipment 7,055 - Equipment under capital lease 1,159 - Furniture & fixtures 175 - Leasehold improvements 853 - Equipment under construction 246 -------- Subtotal 10,577 Accumulated depreciation & amortization (4,792) -------- Total $ 5,785 ======== The Company's land, building, and improvements, with a net book value of approximately $953,000, are currently being leased to a third party. The Company intends to sell this property in the foreseeable future. 36 Note 8 - Short-term and long-term debt Elements of short-term and long-term debt are as follows: December 31, 1999 (in thousands) ------- Short-term & long-term debt --------------------------- Short-term debt: - Bank credit line $ 1,500 - Long-term debt: current 530 ------- Subtotal 2,030 ------- Long-term debt: - Bank credit line 861 - Mortgage payable 660 - Capital lease obligations 289 - Vehicle loans 781 - RRCA priority claims 4 - Less: current maturities (530) ------- Subtotal 2,065 ------- Total $ 4,095 ======= Bank credit line On April 28, 1998, the Company entered into a credit facility with CIT Group/Credit Finance Group, Inc. ("CIT") which makes available borrowings to the Company of up to $5,000,000 and increased to $6,500,000 in 1999. The facility requires minimum borrowings of $1,250,000. The facility provides for a revolving line of credit and a six-year term loan and expires in April 2001. Advances under the revolving line of credit are limited to (i) 80% of eligible trade accounts receivable and (ii) 50% of eligible inventory (which inventory amount shall not exceed 200% of eligible trade accounts receivable or $3,250,000). As of December 31, 1999, the Company has availability under its revolving line of credit of approximately $700,000. Advances, available to the Company, under the term loan are based on existing fixed asset valuations and future advances under the term loan up to an additional $1,000,000 are based on future capital expenditures. During 1999, the Company received advances of $166,000 based on capital expenditures. As of December 31, 1999, the Company has approximately $861,000 outstanding under its term loans. As of December 31, 1999, the Company had $1,500,000 outstanding under its revolving line of credit. The facility bears interest at the prime rate plus 1.5%, 10% at December 31, 1999, and substantially all of the Company's assets are pledged as collateral for obligations to CIT. In addition, among other things, the agreements restrict the Company's ability to declare or pay any dividends on its capital stock. The Company has obtained a waiver from CIT to permit the payment of dividends on its Series A Preferred Stock. Mortgage payable During 1996, the Company mortgaged its property and building located in Ft. Lauderdale with Turnberry Savings Bank, NA. The mortgage of $660,000, at December 31, 1999 bears interest at a rate of 9.5% and repayable over 20 years through January 2017. Vehicle Loans During 1999, the Company entered into various vehicle loans. The vehicles are primarily used in connection with the Company's on-site services. The loans are payable in 60 monthly payments through October 2004 and bear interest at 9.0% through 9.98%. RRCA Priority Claims In connection with its bankruptcy reorganization in June 1994, prior to its acquisition by Hudson, RRCA had unsecured obligations, as modified by a settlement during April 1996, payable in periodic payments to bankruptcy creditors through January 2000. 37 Related Party Loan In February 1999, a former director made an unsecured loan in the aggregate principal amount of $365,000 to the Company. The loan was repaid on April 16, 1999 and bore interest at 12% per annum. Scheduled maturities of the Company's debts and capital lease obligations are as follows: Debts and capital lease obligations ----------------------------------- Years ended December 31, Amount ------------------------ ------ (in thousands) -2000 $2,030 -2001 414 -2002 428 -2003 429 -2004 211 -Thereafter 583 ------ Total $4,095 ====== The Company rents certain equipment with a net book value of about $410,000 for leases which have been classified as capital leases. Scheduled future minimum lease payments under capital leases net of interest are as follows: Scheduled capital lease obligation payments ------------------------------------------- Years ended December 31, Amount ------------------------ ------ (in thousands) -2000 $ 175 -2001 47 -2002 43 -2003 24 ------ Total $ 289 ====== Average short-term debt for the year ended December 31, 1999 totaled $964,000 with a weighted average interest rate of approximately 9.6%. Note 9 - Stockholders' equity On May 10, 1996, the Board of Directors authorized the Company to acquire, from publicly traded markets, a maximum of 25,000 issued and outstanding shares of its own Common Stock. In 1996, the Company had repurchased 21,000 shares at an average price of $8.25 per share. No shares were subsequently purchased. During 1998, the Company retired the 21,000 shares of stock held in treasury. In September 1996 and October 1997, in connection with the then outstanding convertible debentures, the Company issued warrants to purchase an aggregate of 16,071 and 66,000 shares of the Company's Common Stock at an exercise price of $18.00 and $10.00, respectively, per share. These warrants expire through August 6, 2002. On January 29, 1997, the Company entered into a Stock Purchase Agreement with DuPont and DuPont Chemical and Energy Operations, Inc. ("DCEO") pursuant to which the Company issued to DCEO 500,000 shares of Common Stock in consideration of $3,500,000 in cash. Simultaneous with the execution of the Stock Purchase Agreement, the parties entered into a Standstill Agreement, Shareholders' Agreement and Registration Agreement. The Standstill Agreement provides, subject to certain exceptions, that neither DuPont nor any corporation or entity controlled by DuPont will, directly or indirectly, acquire any shares of any class of capital stock of the Company if the effect of such acquisition would be to increase DuPont's aggregate voting power to greater than 20% of the total combined voting power relating to any election of directors. The Standstill Agreement also provides that the Company will cause two persons designated by DCEO and DuPont to be elected to the Company's Board of Directors. The Shareholders' Agreement provides that, subject to certain exceptions, DuPont shall have a right of first refusal to purchase any shares of Common Stock intended to be sold by the Company's principal shareholders. 38 Pursuant to the Registration Agreement, the Company granted to DuPont certain demand and "piggy-back" registration rights. During 1998, the Company issued, to a vendor, 20,000 shares of common stock for services rendered during the year. The value of the services was recognized based on the fair value of the stock at the time of issuance. On April 28, 1998, in connection with the loan agreements with CIT, the Company issued to CIT warrants to purchase 30,000 shares of the Company's common stock at an exercise price equal to 110% of the then fair market value of the stock, which on the date of issuance was $4.33 per share and expires April 29, 2001. The value of the warrants were not deemed to be material and expire on April 29, 2001. In addition, among other things, the agreements restrict the Company's ability to declare or pay any dividends on its capital stock. The Company has obtained a waiver from CIT to permit the payment of dividends on its Series A Preferred Stock. On March 16, 1999, the shareholders of the Company approved an amendment to the Certificate of Incorporation to authorize the issuance of 5,000,000 shares of Preferred Stock. This authorization allows the Board of Directors to, among other things, set the number of shares, the dividend rate and the voting rights on any issuance of Preferred Stock. On March 30, 1999, the Company completed the sale of 65,000 shares of its Series A Preferred Stock, with a liquidation value of $100 per share, to Fleming US Discovery Fund III, L.P. and Fleming US Discovery Offshore Fund III, L.P. The gross proceeds from the sale of the Series A Preferred Stock is $6,500,000. The Series A Preferred Stock has voting rights on an as-if converted basis. The number of votes applicable to the Series A Preferred Stock is equal to the number of shares of Common Stock into which the Series A Preferred Stock is then convertible. However, the holders of the Series A Preferred Stock will provide the Chief Executive Officer and Secretary of the Company a proxy to vote all shares currently owned and subsequently acquired above 29% of the votes entitled to be cast by all shareholders of the Company. The Preferred Stock carries a dividend rate of 7%, which will increase to 16%, if the stock remained outstanding, on the fifth anniversary date, and converts to Common Stock at a rate of $2.375 per share, which was 27% above the closing market price of Common Stock on March 29, 1999. The conversion rate may be subject to certain antidilution provisions. The Company is using the net proceeds from the issuance of the Series A Preferred Stock to expand its RefrigerantSide(TM) Services and for working capital purposes. The Company will pay dividends, in arrears, on the Series A Preferred Stock, semi annually, either in cash or additional shares, at the Company's option, during the first two years after which the dividends will be paid in cash. On September 30, 1999, the Company declared and paid, in-kind, the dividends of outstanding on the Series A Preferred Stock. The Company issued a total of 2,314 additional shares of its Series A Preferred Stock in satisfaction of the dividends due. The Company may redeem the Series A Preferred Stock on March 31, 2004 either in cash or shares of Common Stock valued at 90% of the average trading price of the Common Stock for the 30 days preceding March 31, 2004. In addition, after March 30, 2001, the Company may call the Series A Preferred Stock if the market price of the Common Stock is equal or greater than 250% of the conversion price and the Common Stock has traded with an average daily volume in excess of 20,000 shares for a period of thirty consecutive days. The Company has provided certain registration, preemptive and tag along rights to the holders of the Series A Preferred Stock. The holders of the Series A Preferred Stock, voting as a separate class, have the right to elect up to two members to the Company's Board of Directors or at their option, to designate up to two advisors to the Company's Board of Directors who will have the right to attend and observe meetings of the Board of Directors. Currently, the holders have elected two members to the Board of Directors. The Company engaged an advisor to facilitate the Company's efforts in connection with the sale of the Series A Preferred Stock. In addition to the advisor fees, the Company issued to the advisor, warrants to purchase 136,482 shares of the Company's Common Stock at an exercise price per share of $2.73. The Company incurred an aggregate of $700,000 in costs associated with the sale of the Series A Preferred Stock and such costs have been charged to additional paid-in capital. 39 Note 10 - Commitments and contingencies Rents, operating leases and contingent income Hudson utilizes leased facilities and operates equipment under non-cancelable operating leases through December 31, 2001. In addition, the Company leases its owned Ft. Lauderdale facility to a third party. Properties The Company's headquarters are located in approximately 5,400 square feet of leased commercial space at Pearl River, New York. The building is leased from an unaffiliated third party pursuant to a three year agreement at an annual rental of approximately $87,500 through January 2002. In March 1995, the Company purchased, for $950,000, a facility in Ft. Lauderdale, Florida, consisting of a 32,000 square foot building on approximately 1.7 acres with rail and port access. The property was mortgaged during 1996 for $700,000. Annual real estate taxes are approximately $24,000. The Company has principally ceased its operations at this facility and has entered into a three year lease of the entire facility at the current level of $13,125 per month to an unaffiliated third party. The Company intends to sell this property in the foreseeable future. The Company's Hillburn facility is located in approximately 21,000 square feet of leased industrial space at Hillburn, New York. The building is leased from an unaffiliated third party pursuant to a five-year agreement at an annual rental of approximately $90,000 through May 2004. The Company's Rantoul, Illinois facility is located in a 29,000 square foot building leased from an unaffiliated third party at an annual rental of approximately $ 78,000 pursuant to an agreement expiring in September 2002. The Company also leases warehouse space from an unaffiliated third party in a 7,500 square foot building on a month to month basis at a monthly rent of $1,600. The Company's Charlotte, North Carolina facility is located in a 12,000 square foot building leased from an unaffiliated third party at an annual rent of approximately $42,000 pursuant to an agreement expiring in April 2000. The Company's Houston, Texas depot facility, which consists of 1,555 square feet located in a larger building, is leased from an unaffiliated third party at an annual rent of $8,000 pursuant to an agreement which expires in May 2000. The Company's Villa Park (Chicago), Illinois depot facility is located in a 3,500 square foot building leased from an unaffiliated third party at an annual rent of approximately $23,000 pursuant to an agreement expiring in August 2002. The Company's Baltimore, Maryland depot facility is located in a 2,700 square foot building leased from an unaffiliated third party at an annual rent of approximately $25,000 pursuant to an agreement expiring in August 2002. The Company's Seattle, Washington depot facility is located in a 3,000 square foot building leased from an unaffiliated third party at an annual rent of approximately $16,200 pursuant to an agreement expiring in March 2001. The Company's Plainview, New York depot facility is located in a 2,000 square foot building leased from an unaffiliated third party at an annual rent of approximately $16,440 pursuant to an agreement expiring in July 2000. The Company's Haverhill (Boston), Massachusetts depot facility is located in a 3,000 square foot building leased from an unaffiliated third party at an annual rent of $13,200 pursuant to an agreement expiring in February 2001. The Company's Punta Gorda, Florida separation facility is located in a 15,000 square foot building leased from an unaffiliated third party at an annual rent of $60,000 pursuant to an agreement expiring in April 2001. The Company's Baton Rouge, Louisiana facility is located in a 3,800 square foot building leased from an unaffiliated third party at an annual rental of approximately $18,000 pursuant to an agreement expiring in July 2002. The Company's Ft. Myers, Florida engineering facility is located in a 15,000 square foot building leased from an unaffiliated third party at an annual rent of $48,600 pursuant to an agreement expiring in July 2000. 40 The Company rents properties and various equipment under operating leases. Rent expense, net of sublease rental income, for the years ended December 31, 1999 and 1998 totaled approximately $925,000 and $928,000, respectively. Future commitments under operating leases, are summarized as follows: Rent expense ------------ Years ended December 31, Amount ------------------------ ------ (in thousands) -2000 $ 641 -2001 513 -2002 230 -2003 105 -2004 46 ------ Total $1,535 ====== Legal Proceedings During June 1995, United Water of New York Inc. ("United") alleged that it discovered that two of its wells within close proximity to the Company's Hillburn, New York facility showed elevated levels of refrigerant contamination, specifically Trichlorofluoromethane (R-11). During December 1997, United alleged that it discovered levels of Dichlorodifluoromethane (R-12) in two of its wells within close proximity to the Company's facility, and has alleged that the Company is the source. Sampling by the Company of various monitoring wells installed around the Company's facilities have been taken on a monthly basis since August 1996 and have detected levels of R-11 in the groundwater, but have failed to detect any levels of R-12 in the groundwater in and around the Company's facility. In January 1998, the Company agreed to install a remediation system at the Company's facility to remove any remaining R-11 levels in the groundwater under and around the Company's facility. In August 1998, the New York State Department of Environmental Conservation ("DEC") accepted the Company's proposal and requested that the Company proceed with the installation of the system. The cost of this remediation system was $100,000. In June 1998, United commenced an action against the Company in the Supreme Court of the State of New York, Rockland County, seeking damages in the amount of $1.2 million allegedly sustained as a result of the foregoing alleged contamination. In December 1998, United served an amended complaint asserting a claim pursuant to the Resource Conservation and Recovery Act, 42 U.S.C. ss. 6901, et. seq. ("RCRA") In January 1999, the Company filed a motion to dismiss the RCRA cause of action. On April 1, 1999, the Company reported a release at the Company's Hillburn, New York facility of what was ultimately determined to be approximately 7,800 lbs. of R-11, as a result of a failed hose connection to one of the Company's outdoor storage tanks allowing liquid R-11 to discharge from the tank into the concrete secondary containment area in which the subject tank was located. An amount of the R-11 escaped the secondary containment area through an open drain from the secondary containment area for removing accumulated rainwater and entered the ground. The Company immediately commenced excavation operations to remove contaminated soil and has taken a number of other steps to mitigate and minimize contamination, including acceleration of the installation of the planned remediation system. In April 1999, the Company was advised by United that one of its wells within close proximity to the Company's facility showed elevated levels of R-11 in excess of 200 ppb. and was taking certain steps and would be incurring costs in an attempt to remediate any contamination. In response to the release, the Company requested, and in May 1999, received permission from the DEC to operate the planned remediation system pending negotiation and finalization of a Consent Order covering the operation of the system. The remediation system was put into operation on May 7, 1999. The level of R-11 in the affected United well have steadily decreased since June 1, after rising to a level in excess of 700 ppb. and on March 13, 2000 was reduced to 5.5 ppb. In December 1999, a second United well within close proximity to the Company's facility began showing elevated levels of R-11 in excess of 5 ppb. and increased to a high of 26 ppb. in February 2000. The Company continues to work with the DEC, United and with the Company's experts to determine the scope of any contamination, and to develop plans for the construction of a separate remediation system to directly treat contaminated water from United's well. In July 1999, United filed a motion seeking permission to amend its complaint in the action it commenced in June 1998 to allege facts relating to, and to seek damages allegedly resulting from the April 1, 1999 release. In August 1999, the Company entered into a stipulation accepting service of the amended complaint subject to the Company's pending 41 motion to dismiss. On August 26, 1999, the Court issued a decision which granted the Company's motion to dismiss that portion of United's RCRA claims which seek past cleanup costs, and held in abeyance a ruling whether United can assert a claim for present/future cleanup under RCRA until the date of trial. The Company continues to defend the claims asserted by United. The Company carries $1,000,000 of pollution liability insurance per occurrence and has put the insurance carrier on notice of the release and possible claims of United. There can be no assurance that this action, or any settlement thereof, will be resolved in a manner favorable to the Company, or that the ultimate outcome of any legal action or settlement, or the effects of the April 1, 1999 release, will not have a material adverse effect on the Company's financial condition and results of operations. During March and April 1998, six (6) complaints, each alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, were filed by a total of eight shareholders, on behalf of themselves and all others similarly situated, against the Company and certain of its officers and directors in the United States District Court for the Southern District of New York. Each of the complaints alleged that the defendants, among other things, misrepresented material information about the Company's financial results and prospects, and its customer relationships. In October 1998, a consolidated complaint on behalf of the plaintiffs was served upon the Company. In December 1998, a motion was made on behalf of the Company to dismiss each of the claims asserted against the Company in the consolidated complaint. On September 26, 1999, the Court issued an opinion and order dismissing with prejudice three of the five claims asserted by the plaintiffs and further dismissing the remaining two claims without prejudice to the plaintiffs filing a second amended consolidated complaint within thirty (30) days of the date of the Court's opinion and order. The plaintiffs failed to serve a second amended consolidated complaint, and as a result, in November 1999, a final judgment was entered dismissing the consolidated complaint in its entirety. In June 1999, an action was commenced in the Baton Rouge Supreme Court by William Freeman and three others against the Company seeking unspecified damages for alleged personal injuries allegedly suffered as a result of an ammonia release at the Company's Louisiana facility in January 1999. The Company maintains that the allegations in the complaint are without merit and that no damages were suffered by the plaintiffs in that action. There can be no assurance that this action, or any settlement thereof, will be resolved in a manner favorable to the Company. The Company and its subsidiaries are subject to various other claims and/or lawsuits from both private and governmental parties arising from the ordinary course of business; none of which are material. Employment agreements The Company has entered into a two-year employment agreement with Kevin J. Zugibe, which expires in May 2001 and is automatically renewable for two successive terms. Pursuant to the agreement, effective February 1, 2000, Mr. Zugibe is receiving an annual base salary of $70,000 with such increases and bonuses as the Board may determine. The Company has entered into a five year employment agreement with an employee which expires in July 2001 and is renewable for successive two year terms. The agreement provided for a minimum annual salary of $85,000 per year and bonuses up to $115,000 per year based on certain production volumes. 42 Note 11 - Stock Option Plan Effective October 31, 1994, the Company adopted an Employee Stock Option Plan ("Plan") pursuant to which 725,000 shares of common stock are reserved for issuance upon the exercise of options designated as either (i) options intended to constitute incentive stock options ("ISOs") under the Internal Revenue Code of 1986, as amended, or (ii) nonqualified options. ISOs may be granted under the Plan to employees and officers of the Company. Non-qualified options may be granted to consultants, directors (whether or not they are employees), employees or officers of the Company. Stock appreciation rights may also be issued in tandem with stock options. Unless sooner terminated, the Plan will expire on December 31, 2004. ISOs granted under the Plan may not be granted at a price less than the fair market value of the Common Stock on the date of grant (or 110% of fair market value in the case of persons holding 10% or more of the voting stock of the Company). Non-qualified options granted under the Plan may not be granted at a price less than 85% of the market value of the Common Stock on the date of grant. Options granted under the Plan expire not more than ten years from the date of grant (five years in the case of ISOs granted to persons holding 10% or more of the voting stock of the Company). Effective July 25, 1997, and as amended on August 19, 1999, the Company adopted its 1997 Employee Stock Option Plan ("1997 Plan") pursuant to which 2,000,000 shares of common stock are reserved for issuance upon the exercise of options designated as either (i) options intended to constitute incentive stock options ("ISOs") under the Internal Revenue Code of 1986, as amended, or (ii) nonqualified options. ISOs may be granted under the 1997 Plan to employees and officers of the Company. Non-qualified options may be granted to consultants, directors (whether or not they are employees), employees or officers of the Company. Stock appreciation rights may also be issued in tandem with stock options. Unless sooner terminated, the 1997 Plan will expire on June 11, 2007. ISOs granted under the 1997 Plan may not be granted at a price less than the fair market value of the Common Stock on the date of grant (or 110% of fair market value in the case of persons holding 10% or more of the voting stock of the Company). Non-qualified options granted under the 1997 Plan may not be granted at a price less than 85% of the market value of the Common Stock on the date of grant. Options granted under the 1997 Plan expire not more than ten years from the date of grant (five years in the case of ISOs granted to persons holding 10% or more of the voting stock of the Company). All stock options have been granted to employees and non-employees at exercise prices equal to or in excess of the market value on the date of the grant. The Company applies APB Opinion 25, `Accounting for Stock Issued to Employees', and related Interpretations in accounting for its stock option plan by recording as compensation expense the excess of the fair market value over the exercise price per share as of the date of grant. Under APB Opinion 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of the grant, no compensation cost is recognized. SFAS No. 123 requires the Company to provide pro forma information regarding net loss and net loss per share as if compensation cost for the Company's stock option plan had been determined in accordance with the fair value based method prescribed in SFAS No. 123. The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants since 1995. Years ended December 31, 1999 1998 Assumptions ---- ----- ----------- Dividend Yield 0% 0% Risk free interest rate 5.3% 5.5% Expected volatility 46.5% 46.1% Expected lives 5 5 43 Under the accounting provisions of FASB Statement 123, the Company's net loss and net loss per share would have been adjusted to the pro forma amounts indicated below: Years ended December 31, 1999 1998 --------- ------- Pro forma results ----------------- (In thousands, except per share amounts) Net loss: As reported $ (3,955) $(2,656) Pro forma $ (4,723) $(3,438) Loss per common share-basic and diluted As reported $ (.85) $ (.52) Pro forma $ (1.00) $ (.68) A summary of the status of the Company's stock option plan as of December 31, 1999 and 1998 and changes for the years ending on those dates is presented below: Weighted Average Stock Option Plan Grants Shares Exercise Price ------------------------ Outstanding at December 31, 1997 880,526 $6.03 o Granted 520,666 $3.50 o Forfeited (26,550) $5.74 --------- Outstanding at December 31, 1998 1,374,642 $5.08 o Granted 226,500 $2.24 o Forfeited (566,610) $5.23 --------- Outstanding at December 31, 1999 1,034,532 $4.37 ========= ===== Data summarizing year-end options exercisable and weighted average fair-value of options granted during the years ended December 31, 1999 and 1998 is shown below: Options Exercisable Year ended Year ended December 31, December 31, 1999 1998 Options exercisable at year-end 925,532 1,052,525 ----------- --------- Weighted average exercise price $ 4.07 $ 5.15 ----------- --------- Weighted average fair value of options granted during the year $ .83 $ 1.21 ----------- --------- Options Exercisable at December 31, 1999 Weighted-average Exercise Range of Prices Number Outstanding Price --------------- ------------------ ------ $1 to $4 636,000 $ 2.86 $4 to $10 190,532 $ 4.55 $10 to $16 99,000 $10.91 ------- $1 to $16 925,532 $ 4.07 ======= 44 The following table summarizes information about stock options outstanding at December 31, 1999: Options Outstanding At December 31, 1999 Weighted-average Weighted- Range of Remaining average -------- Number Contractual Exercise Prices Outstanding Life Price ------ ----------- ---- ----- $1 to $4 701,000 4.2 years $ 3.01 $4 to $10 190,532 3.0 years $ 4.55 $10 to $16 143,000 2.0 years $ 10.79 --------- $1 to $16 1,034,532 3.7 years $ 4.37 ========= During the initial phase-in period of SFAS 123, the effects on the pro-forma results are not likely to be representative of the effects on pro-forma results in future years since options vest over several years and additional awards could be made each year. 45 EX-10.23 2 1997 STOCK OPTION PLAN Exhibit 10.23: 1997 STOCK OPTION PLAN OF HUDSON TECHNOLOGIES, INC. 1. Purpose Hudson Technologies, Inc. (the "Company") desires to attract and retain the best available talent and encourage the highest level of performance in order to continue to serve the best interests of the Company, and its shareholder(s). By affording key personnel the opportunity to acquire proprietary interests in the Company and by providing them incentives to put forth maximum efforts for the success of the business, the 1997 Stock Option Plan of Hudson Technologies, Inc. (the "1997 Plan") is expected to contribute to the attainment of those objectives. The word "Parent" as used herein, shall mean any corporation that owns fifty percent or more of the voting stock of the Company. The word "Subsidiary" or "Subsidiaries" as used herein, shall mean any corporation, fifty percent or more of the voting stock of which is owned by the Company. 2. Scope and Duration Options under the 1997 Plan may be granted in the form of incentive stock options ("Incentive Options") as provided in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or in the form of nonqualified stock options ("Non-Qualified Options"). (Unless otherwise indicated, references in the 1997 Plan to "options" include Incentive Options and Non-Qualified Options.) The maximum aggregate number of shares as to which options may be granted from time to time under the 1997 Plan is 2,000,000* shares of the Common Stock of the Company ("Common Stock"), which shares may be, in whole or in part, authorized but unissued shares or shares reacquired by the Company. The maximum number of shares with respect to which options may be granted to any employee during the term of the 1997 Plan is 500,000. Except as otherwise provided in Paragraph 7(b) hereof, if an option shall expire, terminate or be surrendered for cancellation for any reason without having been exercised in full, the shares represented by the option or portion thereof not so exercised shall (unless the 1997 Plan shall have been terminated) become available for subsequent option grants under the 1997 Plan. As provided in Paragraph 13, the 1997 Plan shall become effective on June 12, 1997, and unless terminated sooner pursuant to Paragraph 14, the 1997 Plan shall terminate on June 11, 2007, and no option shall be granted hereunder after that date. *Increased to 2,000,000 shares by shareholder resolution made August 19,1999 3. Administration The 1997 Plan shall be administered by the Board of Directors of the Company, or, at their discretion, by a committee which is appointed by the Board of Directors to perform such function (the "Committee"). The Committee shall consist of not less than two members of the Board of Directors, each of whom shall serve at the pleasure of the Board of Directors and shall be a "Non-Employee Director" as defined in Rule l6b-3 under the Securities Exchange Act of 1934 (the "Act"). Vacancies occurring in the membership of the Committee shall be filled by appointment by the Board of Directors. The Board of Directors or the Committee, as the case may be, shall have plenary authority in its discretion, subject to and not inconsistent with the express provisions of the 1997 Plan, to grant options, to determine the purchase price of the Common Stock covered by each option, the term of each option, the persons to whom, and the time or times at which, options shall be granted and the number of shares to be covered by each option; to designate options as Incentive Options or Non-Qualified Options; to interpret the 1997 Plan; to prescribe, amend and rescind rules and regulations relating to the 1997 Plan; to determine the terms and provisions of the option agreements (which need not be identical) entered into in connection with options under the 1997 Plan; and to make all other determinations deemed necessary or advisable for the administration of the 1997 Plan. The Board of Directors or the Committee, as the case may be, may delegate to one or more of its members or to one or more agents such administrative duties as it may deem advisable, and the Board of Directors or the Committee, as the case may be, or any person to whom it has delegated duties as aforesaid may employ one or more persons to render advice with respect to any responsibility the Board of Directors or the Committee, as the case may be, or such person may have under the 1997 Plan. 46 4. Eligibility; Factors to be Considered in Granting Options Incentive Options shall be limited to persons who are employees of the Company or, if applicable, its Parent, or the Company's present and future Subsidiaries and at the date of grant of any option are in the employ of the Company or its Parent or the Company's present and future Subsidiaries. In determining the employees to whom Incentive Options shall be granted and the number of shares to be covered by each Incentive Option, the Board of Directors or the Committee, as the case may be, shall take into account the nature of employees' duties, their present and potential contributions to the success of the Company and such other factors as it shall deem relevant in connection with accomplishing the purposes of the 1997 Plan. An employee who has been granted an option or options under the 1997 Plan may be granted an additional option or options, subject, in the case of Incentive Options, to such limitations as may be imposed by the Code on such options. Except as provided below, a Non-Qualified Option may be granted to any person, including, but not limited to, employees, independent agents, consultants and attorneys, who the Board of Directors or the Committee, as the case may be, believes has contributed, or will contribute, to the success of the Company. 5. Option Price The purchase price of the Common Stock covered by each option shall be determined by the Board of Directors or the Committee, as the case may be. In the case of Incentive Options, the purchase price shall not be less than 100% (110% if granted to an employee referred to in Paragraph 8(b) hereof) of the Fair Market Value (as defined in Paragraph 15 below) of a share of the Common Stock on the date on which the option is granted. In the case of Non-Qualified Options the purchase price per share of Common Stock covered by each option shall be such price, not less than the par value a share of Common Stock, as shall be determined by the Board of Directors or the Committee, as the case may be. Such purchase prices shall be subject to adjustment as provided in Paragraph 12 below. The Board of Directors or the Committee, as the case may be, shall determine the date on which an option is granted; in the absence of such a determination, the date on which the Board of Directors or the Committee, as the case may be, adopts a resolution granting an option shall be considered the date on which such option is granted. 6. Term of Options The term of each option shall be determined by the Board of Directors or the Committee, as the case may be, provided, however, that the term of any option cannot be more than 10 years from the date of grant (five years in the case of an Incentive Option granted to an employee referred to in Paragraph 8(b) hereof). All options granted pursuant to the 1997 Plan are subject to earlier termination as provided in Paragraphs 10 and 11 below. 7. Exercise of Options (a) Subject to the provisions of the 1997 Plan and unless otherwise provided in the option agreement, options granted under the 1997 Plan shall become exercisable as determined by the Board of Directors or Committee. In its discretion, the Board of Directors or the Committee, as the case may be, may, in any case or cases, prescribe that options granted under the 1997 Plan become exercisable in installments or provide that an option may be exercisable in full immediately upon the date of its grant. The Board of Directors or the Committee, as the case may be, may, in its sole discretion, also provide that an option granted pursuant to the 1997 Plan shall immediately become exercisable in full upon the happening of any of the following events; (i) the first purchase of shares of Common Stock pursuant to a tender offer or exchange offer (other than an offer by the Company) for all, or any part of, the Common Stock, (ii) the approval by the shareholder(s) of the Company of an agreement for a merger in which the Company will not survive as an independent, publicly owned corporation, a consolidation, or a sale, exchange or other disposition of all or substantially all of the Company's assets, (iii) with respect to an employee, on his 65th birthday, or (iv) with respect to an employee, on the employee's involuntary termination from employment, except as provided in Section 10 herein. In the event of a question or controversy as to whether or not any of the events hereinabove described has taken place, a determination by the Board of Directors or the Committee, as the case may be, that such event has or has not occurred shall be conclusive and binding upon the Company and participants in the 1997 Plan. (b) Any option at any time granted under the 1997 Plan may contain a provision to the effect that the optionee (or any persons entitled to act under Paragraph 11 hereof) may, at any time at which Fair Market Value is in excess of the exercise price and prior to exercising the option, in whole or in part, request that the Company purchase all or any portion of the option as shall then be exercisable at a price (the "Purchase Price") equal to the difference between 47 (i) an amount equal to the option price multiplied by the number of shares subject to that portion of the option in respect of which such request shall be made and (ii) an amount equal to such number of shares multiplied by the fair market value of the Company's Common Stock (within the meaning of Section 422 of the Code and the treasury regulations promulgated thereunder) on the date of purchase. The Company shall have no obligation to make any purchase pursuant to such request, but if it elects to do so, such portion of the option as to which the request is made shall be surrendered to the Company. The Purchase Price for the portion of the option to be so surrendered shall be paid by the Company, less any applicable withholding tax obligations imposed upon the Company by reason of the purchase, at the election of the Board of Directors or the Committee, as the case may be, either in cash or in shares of Common Stock (valued as of the date and in the manner provided in clause (ii) above), or in any combination of cash and Common Stock, which may consist, in whole or in part, of shares of authorized but unissued Common Stock or shares of Common Stock held in the Company's treasury. No fractional share of Common Stock shall be issued or transferred and any fractional share shall be disregarded. Shares covered by that portion of any option purchased by the Company pursuant hereto and surrendered to the Company shall not be available for the granting of further options under the 1997 Plan. All determinations to be made by the Company hereunder shall be made by the Board of Directors or the Committee, as the case may be. (c) An option may be exercised, at any time or from time to time (subject, in the case of Incentive Options, to such restrictions as may be imposed by the Code), as to any or all full shares as to which the option has become exercisable until the expiration of the period set forth in Paragraph 6 hereof, by the delivery to the Company, at its principal place of business, of (i) written notice of exercise in the form specified by the Board of Directors or the Committee, as the case may be, specifying the number of shares of Common Stock with respect to which the option is being exercised and signed by the person exercising the option as provided herein, (ii) payment of the purchase price; and (iii) in the case of Non-Qualified Options, payment in cash of all withholding tax obligations imposed on the Company by reason of the exercise of the option. Upon acceptance of such notice, receipt of payment in full, and receipt of payment of all withholding tax obligations, the Company shall cause to be issued a certificate representing the shares of Common Stock purchased. In the event the person exercising the option delivers the items specified in (i) and (ii) of this Subsection (c), but not the item specified in (iii) hereof, if applicable, the option shall still be considered exercised upon acceptance by the Company for the full number of shares of Common Stock specified in the notice of exercise but the actual number of shares issued shall be reduced by the smallest number of whole shares of Common Stock which, when multiplied by the Fair Market Value of the Common Stock as of the date the option is exercised, is sufficient to satisfy the required amount of withholding tax. (d) Except as otherwise provided in subsection (b) of this Paragraph 7, the purchase price of the shares as to which an option is exercised shall be paid in full at the time of exercise. Payment shall be made in cash, which may be paid by check or other instrument acceptable to the Company; in addition, subject to compliance with applicable laws and regulations and such conditions as the Board of Directors or the Committee, as the case may be, may impose, the Board of Directors or the Committee, as the case may be, in its sole discretion, may on a case-by-case basis elect to accept payment in shares of Common Stock of the Company which are already owned by the option holder, valued at the Fair Market Value thereof (as defined in Paragraph 15 below) on the date of exercise; provided, however, that with respect to Incentive Options, no such discretion may be exercised unless the option agreement permits the payment of the purchase price in that manner. (e) Except as provided in Paragraphs 10 and 11 below, no option granted to an employee may be exercised at any time by such employee unless such employee is then an employee of the Company or a Subsidiary or Parent. 8. Incentive Options (a) With respect to Incentive Options granted, the aggregate Fair Market Value (determined in accordance with the provisions of Paragraph 15 at the time the Incentive Option is granted) of the Common Stock or any other stock of the Company or its current or future Subsidiaries with respect to which incentive stock options, as defined in Section 422 of the Code, are exercisable for the first time by any employee during any calendar year (under all incentive stock option plans of the Company and its parent and subsidiary corporation's, as those terms are defined in Section 424 of the Code) shall not exceed $100,000. (b) No Incentive Option may be awarded to any employee who immediately prior to the date of the granting of such Incentive Option owns more than 10% of the combined voting power of all classes of stock of the Company or any of its Subsidiaries unless the exercise price under the Incentive Option is at least 110% of the Fair Market Value and the option expires within 5 years from the date of grant. 48 (c) In the event of amendments to the Code or applicable regulations relating to Incentive Options subsequent to the date hereof, the provisions of the 1997 Plan and the provisions of outstanding option agreements between the Company and any optionee with respect to options issued pursuant to the 1997 Plan shall automatically, and without any action on the part of any person, be modified to conform to such amendments, provided, however, that no such amendment shall occur without the express approval of the Company and the optionee if the effect of such amendment were to result in the granting of a new option pursuant to Section 424(h) of the Code or any successor provision. 9. Transferability of Options Incentive Options granted under the 1997 Plan shall not be transferable otherwise than by will or the laws of descent and distribution, and Incentive Options may be exercised during the lifetime of the optionee only by the optionee. Non-Qualified Options are only transferable if such right is granted by the Board of Directors, or the Committee, as the case may be, and such provision is contained in the option agreement with respect to the Non-Qualified Options. No transfer of an option by the optionee by will or by the laws of descent and distribution or otherwise shall be effective to bind the Company unless the Company shall have been furnished with written notice thereof and a copy of the will and/or such other evidence as the Company may deem necessary to establish the validity of the transfer and the acceptance by the transferor or transferees of the terms and conditions of such option. 10. Termination of Employment In the event that the employment of an employee to whom an option has been granted under the 1997 Plan shall be terminated (except as set forth in Paragraph 11 below), such option may be, subject to the provisions of the 1997 Plan, exercised (to the extent that the employee was entitled to do so at the termination of his employment) at any time within three (3) months after such termination, but not later than the date on which the option terminates; provided, however, that any option which is held by an employee whose employment is terminated for cause or voluntarily without the consent of the Company shall, to the extent not theretofore exercised, automatically terminate as of the date of termination of employment. As used herein, "cause" shall mean conduct amounting to fraud, dishonesty, or engaging in competition or solicitations in competition with the Company and breaches of any applicable employment agreement between the Company and the optionee. Options granted to employees under the 1997 Plan shall not be affected by any change of duties or position so long as the holder continues to be a regular employee of the Company or any of its current or future Subsidiaries or Parent. Any option agreement or any rules and regulations relating to the 1997 Plan may contain such provisions as the Board of Directors or the Committee, as the case may be, shall approve with reference to the determination of the date employment terminates and the effect of leaves of absence. Nothing in the 1997 Plan or in any option granted pursuant to the 1997 Plan shall confer upon any employee any right to continue in the employ of the Company or any of the Subsidiaries or Parent or affiliated companies or interfere in any way with the right of the Company or any such Subsidiary or Parent or affiliated companies to terminate such employment at any time. 11. Death or Disability of Employee If an employee to whom an option has been granted under the 1997 Plan shall die while employed by the Company or a Parent or a Subsidiary or within three (3) months after the termination of such employment (other than termination for cause or voluntary termination without the consent of the Company or the consent of the Parent for an employee of the Parent, as the case may be), such option may be exercised, to the extent exercisable by the employee on the date of death, by a legatee or legatees of the employee under the employee's last will, or by the employee's personal representative or distributees, at any time within one year after the date of the employee's death, but not later than the date on which the option terminates. In the event that the employment of an employee to whom an option has been granted under the 1997 Plan shall be terminated as the result of a disability, such option may be exercised, to the extent exercisable by the employee on the date of such termination, at any time within one year after the date of such termination, but not later than the date on which the option terminates. 12. Adjustments Upon Changes in Capitalization, Etc. Notwithstanding any other provision of the 1997 Plan, the Board of Directors or the Committee, as the case may be, may, at any time, make or provide for such adjustments to the 1997 Plan, to the number and class of shares issuable thereunder or to any outstanding options as it shall deem appropriate to prevent dilution or enlargement of rights, including adjustments in the event of changes in the outstanding Common Stock by reason of stock dividends, split-ups, recapitalizations, mergers, consolidations, combinations or exchanges of shares, separations, reorganizations, liquidations and the like. In the event of any offer to holders of Common Stock generally relating to the acquisition of their shares, 49 the Board of Directors or the Committee, as the case may be, may make such adjustment as it deems equitable in respect of outstanding options and rights, including in its discretion revision of outstanding options and rights so that they may be exercisable for the consideration payable in the acquisition transaction. Any such determination by the Board of Directors or the Committee, as the case may be, shall be conclusive. Any fractional shares resulting from such adjustments shall be eliminated. 13. Effective Date The 1997 Plan shall become effective on June 12, 1997, the date of adoption by the Board of Directors, subject to approval of the 1997 Plan by the shareholders of the Company on or before June 11, 1998. 14. Termination and Amendment The Board of Directors of the Company may, without the approval of its shareholders, suspend, terminate, modify or amend the 1997 Plan, provided, however, that any amendment that would increase the aggregate number of shares which may be issued under the 1997 Plan, materially increase the benefits accruing to participants under the 1997 Plan, or materially modify the requirements as to eligibility for participation in the 1997 Plan, shall be subject to the approval of the Company's shareholder(s), except that any such increase or modification that may result from adjustments authorized by Paragraph 12 does not require such approval. Except as provided below and in Paragraph 8(c) hereof, no suspension, termination, modification or amendment of the 1997 Plan shall require the approval of any optionee. Notwithstanding the foregoing, no suspension, termination, modification or amendment of the 1997 Plan shall be made without the consent of the person to whom an option shall theretofore have been granted if it adversely effects the rights of such optionee under such option. 15. Miscellaneous As said term is used in the 1997 Plan, the "Fair Market Value" of a share of Common Stock on any day means: (a) if the principal market for the Common Stock is a national securities exchange or the National Association of Securities Dealers Automated Quotations System ("NASDAQ), the closing sales price of the Common Stock on such day as reported by such exchange or market system, or on a consolidated tape reflecting transactions on such exchange or market system, or (b) if the principal market for the Common Stock is not a national securities exchange and the Common Stock is not quoted on NASDAQ, the mean between the highest bid and lowest asked prices for the Common Stock on such day as reported by the National Quotation Bureau, Inc.; provided that if clauses (a) and (b) of this paragraph are both inapplicable, or if no trades have been made or no quotes are available for such day, the Fair Market Value of the Common Stock shall be determined by the Board of Directors or the Committee, as the case may be, shall be conclusive as to the Fair Market Value of the Common Stock. No shares of Common Stock shall be issued and delivered upon exercise of an option granted under the 1997 Plan unless and until (i) such shares of Common Stock have been duly listed, upon official notice of issuance, upon any stock exchange(s) on which the Common Stock is listed, (ii) a Registration Statement under the Securities Act of 1933, as amended, with respect to such shares shall be effective and any applicable state registration or qualification has been complied with, or, in the opinion of either counsel to the Company or counsel to the option holder reasonably acceptable to the Company, exemptions from such federal and state registration requirements are available and/or (iii) the person exercising such option delivers to the Company such documents, agreements and investment and other representations as the Board of Directors or the Committee, as the case may be, shall determine to be in the best interests of the Company. During the term of the 1997 Plan, the Board of Directors or the Committee, as the case may be, in its discretion, may offer one or more option holders the opportunity to surrender any or all unexpired options for cancellation or replacement. If any options are so surrendered, the Board of Directors or the Committee, as the case may be, may then grant new Non-Qualified or Incentive Options to such holders for the same or different numbers of shares at higher or lower exercise prices than the surrendered options. Such new options may have a different term and shall be subject to the provisions of the 1997 Plan the same as any other option. Anything herein to the contrary notwithstanding, the Board of Directors or the Committee, as the case may be, may, in their sole discretion, impose more restrictive conditions on the exercise of an option granted pursuant to the 1997 Plan; however, any and all such conditions shall be specified in the option agreement limiting and defining such option. 50 16. Privileges of Stock Ownership No person entitled to exercise any option granted under the 1997 Plan shall have any of the rights or privileges of a shareholder of the Company in respect of any shares of stock issuable upon exercise of such option until certificates representing such shares shall have been issued. 17. Compliance with SEC Regulations. It is the Company's intent that the 1997 Plan comply in all respects with Rule 16b-3 of the Act and any regulations promulgated thereunder. If any provision of the 1997 Plan is later found not to be in compliance with said Rule, the provisions shall be deemed null and void. 51 EX-23.1 3 CONSENT Exhibit 23.1: Consent of Independent Certified Public Accountants Hudson Technologies, Inc. Pearl River, New York We hereby consent to the incorporation by reference in the Registration Statement (No. 333-17133) on Form S-8 of our report dated February 29, 2000, relating to the consolidated financial statements of Hudson Technologies, Inc. for the year ended December 31, 1999 appearing in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999. We also consent to the reference to us under the caption "Experts" in the Prospectus. /s/ BDO SEIDMAN, LLP Valhalla, New York March 28, 2000 EX-27 4 FDS --
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-KSB AT DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1999 DEC-31-1999 2,483,000 0 2,074,000 158,000 2,480,000 7,082,000 10,577,000 4,792,000 12,979,000 5,405,000 0 0 6,731,000 51,000 (1,295,000) 12,979,000 17,909,000 17,909,000 14,121,000 14,121,000 1,349,000 0 454,000 (3,955,000) 0 (3,955,000) 0 0 0 (3,955,000) (0.85) (0.85)
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