-----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, ToT/PxF7g55JkAD7v/iM8BJzXg9Yt8KnYNzaTzlSflOA22n7anaSg8xjrUuv26x3 hrzHEBhZiZAaSGebsLiV8A== 0000950116-98-002217.txt : 19981116 0000950116-98-002217.hdr.sgml : 19981116 ACCESSION NUMBER: 0000950116-98-002217 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HUDSON TECHNOLOGIES INC /NY CENTRAL INDEX KEY: 0000925528 STANDARD INDUSTRIAL CLASSIFICATION: HAZARDOUS WASTE MANAGEMENT [4955] IRS NUMBER: 133641530 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 033-80270-NY FILM NUMBER: 98748483 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 10QSB 1 ================================================================================ Securities and Exchange Commission Washington, D.C. 20549 Form 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO 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. --------------------- (Exact name of small business issuer as specified in its charter) New York 13-3641539 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification number) 25 Torne Valley Road Hillburn, New York 10931 (Address of principal executive offices) (ZIP Code) Issuer's telephone number, including area code: (914) 368-4990 --------------------- Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding twelve 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 last 90 days. YES X NO --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common stock, $0.01 par value 5,065,820 shares ----------------------------- ---------------- Class Outstanding at October 15, 1998 ================================================================================ Hudson Technologies, Inc. Index Part I. Financial Information Page Number Item 1 Consolidated Balance Sheets 2 Consolidated Statements of Operations 3 Consolidated Statements of Cash flows 4 Notes to the Consolidated Financial Statements 5 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Part II. Other information Item 1.- Legal Proceedings 13 Item 2.- Changes in Securities 14 Item 6.- Exhibits and Reports on Form 8-K 14 Signatures 15
1 Part I - Financial Information Hudson Technologies, Inc. and subsidiaries Consolidated Balance Sheets (Amounts in thousands, except for share amounts)
September 30, December 31, 1998 1997 -------- -------- (unaudited) Assets Current assets: Cash and cash equivalents $ 1,213 $ 626 Trade accounts receivable; net of allowance for doubtful accounts of $221 and $283 1,323 1,737 Inventories 1,356 3,755 Income taxes receivable 149 167 Prepaid expenses and other current assets 250 185 -------- -------- Total current assets 4,291 6,470 Property, plant and equipment, less accumulated depreciation 5,528 5,939 Other assets 118 95 -------- -------- Total assets $ 9,937 $ 12,504 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Accounts payable and accrued expenses $ 2,411 $ 3,429 Short-term debt 418 1,602 -------- -------- Total current liabilities 2,829 5,031 Deferred income 42 55 Long-term debt, less current maturities 1,676 1,155 -------- -------- Total liabilities 4,547 6,241 -------- -------- Commitments and contingencies Stockholders' equity Common stock, $0.01 par value; shares authorized 20,000,000; issued 5,086,820 and outstanding 5,065,820 51 51 Additional paid-in capital 22,683 22,683 Accumulated deficit (17,171) (16,298) -------- -------- 5,563 6,436 Less: Treasury stock, 21,000 shares at cost (173) (173) -------- -------- Total Stockholders' equity 5,390 6,263 -------- -------- Total liabilities and stockholders' equity $ 9,937 $ 12,504 ======== ========
See accompanying Notes to the Consolidated Financial Statements. 2 Hudson Technologies, Inc. and subsidiaries Consolidated Statements of Operations (Amounts in thousands, except for share and per share amounts) (unaudited)
Three month period Nine month period ended September 30, ended September 30, 1998 1997 1998 1997 ---- ---- ---- ---- Revenues $ 5,153 $ 6,960 $ 20,678 $ 20,459 Cost of sales 4,094 5,365 15,501 16,785 Inventory write down to net realizable value - - - 983 ---------- --------- ---------- --------- Gross Profit 1,059 1,595 5,177 2,691 ---------- --------- ---------- ---------- Operating expenses: Selling and marketing 551 350 1,327 1,248 General and administrative 1,231 1,205 3,667 3,962 Depreciation and amortization 303 380 850 1,041 ---------- --------- ---------- ---------- Total operating expenses 2,085 1,935 5,844 6,251 ---------- --------- ---------- ---------- Operating loss (1,026) (340) (667) (3,560) ---------- --------- ---------- ---------- Other income (expense): Interest expense (95) (166) (293) (524) Other income 35 26 87 80 -- -- -- -- Total other income (expense) (60) (140) (206) (444) ---------- --------- ---------- ---------- Loss before income taxes (1,086) (480) (873) (4,004) Income taxes - - - - ---------- --------- ---------- ---------- Net loss $ (1,086) $ (480) $ (873) $ (4,004) ========== ========= ========== ========== - -------------------------------------------- Net loss per common share - basic ($0.21) ($0.09) ($0.17) ($0.81) ========== ========= ========== ========== Weighted average number of shares outstanding 5,065,820 5,065,820 5,065,820 4,961,677 ========== ========= ========== ========== Net loss per common share - dilutive ($0.21) ($0.09) ($0.17) ($0.81) ========== ========= ========== ========== Weighted average number of shares outstanding 5,065,820 5,065,820 5,065,820 4,961,677 ========== ========= ========== ==========
See accompanying Notes to the Consolidated Financial Statements. 3 Hudson Technologies, Inc. and subsidiaries Consolidated Statements of Cash Flows Increase (Decrease) in Cash and Cash Equivalents (unaudited) (Amounts in thousands)
Nine month period ended September 30, 1998 1997 ------- ------- Cash flows from operating activities: Net loss $ (873) $(4,004) Adjustments to reconcile net loss to cash provided by operating activities: Depreciation and amortization 850 1,041 Deferred income taxes -- 29 Allowance for doubtful accounts 80 87 Changes in assets and liabilities: Trade receivables 334 (1,951) Inventories 2,399 4,764 Income taxes receivable 18 727 Prepaid and other current assets (65) (131) Other assets (23) 25 Accounts payable and accrued expenses (1,018) 243 Deferred income (13) (10) Reserve for restructuring -- (127) ------- ------- Cash provided by operating activities 1,689 693 ------- ------- Cash flows from investing activities: Additions to property, plant, and equipment (439) (982) ------- ------- Cash used by investing activities (439) (982) ------- ------- Cash flows from financing activities: Proceeds from issuance of stock -- 4,173 Proceeds from issuance of long-term debt 950 -- Payments of short-term bank borrowings (1,368) -- Payments of long-term debt (245) (3,638) ------- ------- Cash provided (used) by financing activities (663) 535 ------- ------- Increase in cash and cash equivalents 587 246 Cash and equivalents at beginning of period 626 422 ------- ------- Cash and equivalents at end of period $ 1,213 $ 668 ======= ======= Supplemental disclosure of cash flow information: Cash paid during period for interest $ 293 $ 524 Supplemental schedule of non-cash investing and financing activities: Conversion of debt to common stock $ -- $ 625
See accompanying Notes to the Consolidated Financial Statements 4 Hudson Technologies, Inc. and subsidiaries Notes to Consolidated Financial Statements 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 and provides refrigerant management services, consisting primarily of recovery and reclamation of the refrigerants used in commercial air conditioning and refrigeration systems, as well as RefrigerantSide(TM) services, through which the Company performs decontamination to remove moisture, oils and other contaminants in such systems. The Company operates through its wholly owned subsidiaries Hudson Technologies Company and Environmental Support Solutions, Inc. ("ESS"). The Company participates in an industry that is substantially regulated, changes in which could affect operating results. Currently the Company purchases virgin and reclaimable refrigerants from domestic suppliers. The Company's inability to obtain refrigerants could cause delays in refrigerant processing, possible loss of revenues, and resulting possible adverse affects on operating results. Note 1- Summary of Significant Accounting Policies The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and with the instructions of Regulation SB. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial information included in the quarterly report should be read in conjunction with the Company's audited financial statements and related notes thereto for the year ended December 31, 1997. The results of operations for the nine-month period ended September 30, 1998 are not necessarily indicative of the results expected for the full year. In the opinion of management, all estimates and adjustments considered necessary for a fair presentation have been included and all such adjustments were normal and recurring. Consolidation The consolidated financial statements represent all companies of which Hudson directly or indirectly has majority ownership or otherwise controls. Significant inter-company accounts and transactions have been eliminated. The Company's consolidated financial statements include the accounts of wholly owned subsidiaries Hudson Holdings, Inc., Hudson Technologies Company, and ESS. Fair value of financial instruments The carrying values of financial instruments including trade accounts receivable, and accounts payable approximate fair value at September 30, 1998 and December 31, 1997, 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. 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 United States. 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 nine months ended September 30, 1998, two customers accounted for 41% of revenues. 5 Hudson Technologies, Inc. and subsidiaries Notes to Consolidated Financial Statements 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 reclamation sites. 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. Property, plant, and equipment Property, plant, and equipment are stated at cost; including internally manufactured equipment. Provisions 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 the equipment's useful life periods may change in the future. Income taxes The Company utilizes the asset 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. Treasury stock Common stock, acquired by the Company under a repurchase program authorized by the Board of Directors is carried at acquisition cost (market price at acquisition date). Loss per common and equivalent shares Loss per common share (Basic) is computed on the weighted average number of shares, less treasury stock. If dilutive, common equivalent shares (common shares assuming exercise of options and warrants) utilizing the treasury stock method are considered in the presentation of dilutive earnings per share. Recent accounting pronouncements Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income" established standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise", establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and 6 Hudson Technologies, Inc. and subsidiaries Notes to Consolidated Financial Statements major customers. SFAS No. 131 defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by Management in deciding how to allocate resources and in assessing performance. The Company adopted both SFAS Nos. 130 and 131, as of January 1, 1998. 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. The Company has increased its inventory turnover rate and has less inventory than historically maintained. The Company's inability to obtain refrigerants on commercially reasonable terms or a decline in demand for refrigerant could cause delays in refrigerant processing, possible loss of revenues, and could have a material adverse affect on operating results. Note 2 - 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 increases 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 September 30, 1998, the Company has availability under its revolving line of credit of approximately $630,000. Advances, available to the Company, under the term loan (currently approximately $1,000,000) 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. As of September 30, 1998, the Company had $772,000 outstanding under this facility. The facility bears interest at the prime rate plus 1.5%, 10% at September 30, 1998, 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. This facility replaces the Company's previous line of credit with MTB Bank ("MTB"). All obligations with MTB have been satisfied subject to certain indemnification rights pursuant to an indemnity agreement among CIT, MTB and the Company. 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. 7 Hudson Technologies, Inc. and subsidiaries 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-QSB 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, including the need of the Company to obtain additional working capital, 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, potential environmental liability, customer concentration and other risks detailed in the Company's other periodic reports filed with the Securities and Exchange Commission. 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 The Company is primarily engaged in the sale of refrigerants. The Company also provides refrigerant management services, consisting principally of recovery and reclamation of refrigerant used in commercial air conditioning and refrigeration systems. At the beginning of 1997, the Company was carrying significant inventories of refrigerant, which it was unable to sell at a profit during 1997 due to declining market prices caused, in part, by adverse weather conditions. Accordingly, during the second quarter of 1997, the Company recognized a write down of its inventory to net realizable value. During the third quarter of 1997, in an attempt to lower its exposure to market conditions, the Company began to increase its inventory turnover rate. As a result, the Company's inventories declined, primarily from increased sales of refrigerants, from approximately $9,062,000 at January 1, 1997 to approximately $3,755,000 at December 31, 1997. Subsequent sales of refrigerant have resulted in a further decline of inventory to $1,356,000 at September 30, 1998. In 1997, the Company began to review its operations and focus its sales and marketing efforts towards the expansion of its service sales. For the nine months ended September 30 1998, refrigerant sales continue to represent a substantial portion of the Company's total revenues. While sales of refrigerants will continue to represent a significant portion of the Company's sales, service revenues, which management believes represents the Company's long term growth potential, have begun to increase in both absolute dollars and as a percentage of the Company's total revenues. The Company believes that there will be a trend towards lower sales prices and lower gross profit margins on refrigerant sales in the foreseeable future, which will continue to have an adverse affect on operating results. See "Liquidity and Capital Resources". Results of Operations Three months ended September 30, 1998 as compared to the three months ended September 30, 1997 Revenues for the three months ended September 30, 1998 were $5,153,000, a decrease of $1,807,000 or 26% from the $6,960,000 reported during the comparable 1997 period. The decrease was attributable primarily to a decrease in the volume of refrigerant sales, due in part to a weaker demand in the marketplace and a reduction in sales of refrigerants to the Company's significant customers, and to a lesser extent, a reduction in service revenues which was due to a decrease in selling prices offset, in part, by an increase in volume of service jobs. 8 Hudson Technologies, Inc. and subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Cost of sales for the three months ended September 30, 1998 were $4,094,000, a decrease of $1,271,000 or 24% from the $5,365,000 reported during the comparable 1997 period due mainly to a decrease in refrigerant sales. As a percentage of sales, cost of sales were 79% of revenues for the three-month period ended September 30, 1998, an increase from the 77% reported for the comparable 1997 period. The increase in cost of sales as a percentage of revenues was primarily attributable to lower margin refrigerant sales, due to weaker demand and a reduction in refrigerant sales to significant customers. Operating expenses for the three months ended September 30, 1998 were $2,085,000, an increase of $150,000 or 8% from the $1,935,000 reported during the comparable 1997 period. The increase was primarily attributable to an increase in selling and marketing expenses due to an increase in sales salaries and print advertising expenses, and severance cost associated with the elimination of certain positions offset by a reduction in depreciation and amortization. Net loss for the three months ended September 30, 1998 was $1,086,000, as compared to the net loss of $480,000 reported during the comparable 1997 period. The increase in net loss was primarily attributable to the decrease in, and lower gross profits on refrigerant sales and to a lesser extent an increase in operating expenses. Nine months ended September 30, 1998 as compared to the nine months ended September 30, 1997. Revenues for the nine months ended September 30, 1998 were $20,678,000, an increase of $219,000 or 1% from the $20,459,000 reported during the comparable 1997 period. The increase was attributable primarily to an increase in service sales. Cost of sales for the nine months ended September 30, 1998 were $15,501,000, a decrease of $2,267,000 or 13% from the $17,768,000 reported during the comparable 1997 period. As a percentage of sales, cost of sales were 75% of revenues for the nine-month period ended September 30, 1998, a decrease from the 87% reported for the comparable 1997 period. The decrease in cost of sales, both in absolute dollars and as a percentage of revenues, was primarily attributable to a change in product mix with a greater volume of higher margin refrigerant sales, an increase in service sales and the absence of a write-down of inventory values to net realizable value by $983,000 which occurred during the 1997 period. Operating expenses for the nine months ended September 30, 1998 were $5,844,000, a decrease of $407,000 or 7% from the $6,251,000 reported during the comparable 1997 period. The decrease was primarily attributable to a decrease in professional fees and depreciation and amortization. Net loss for the nine months ended September 30, 1998 was $873,000, as compared to the net loss of $4,004,000 reported during the comparable 1997 period. The decrease in net loss was primarily attributable to an increase in service sales, higher gross profits on refrigerant sales that primarily occurred during the first six months of 1998, due to favorable market conditions and a reduction in operating expenses. Liquidity and Capital Resources At September 30, 1998, the Company had working capital of approximately $1,462,000, an increase of $23,000 or 2% from the $1,439,000 at December 31, 1997. The increase in working capital is primarily attributable to the conversion of short term debt to long term debt offset by the net loss incurred during the nine months ended September 30, 1998. A principal component of current assets is inventory. As of September 30, 1998, the Company had inventories of $1,356,000, a decrease of $2,399,000 or 64% from the $3,755,000 at December 31, 1997. Commencing in the third quarter of 1997, the Company began to increase its inventory turnover rate and has less inventory than historically maintained. The Company's ability to sell and replace its inventory and the prices at which it can be sold are subject, among other things, to current market conditions. 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. 9 Hudson Technologies, Inc. and subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Net cash provided by operating activities was $1,689,000 for the nine months ended September 30, 1998 compared with net cash provided by operating activities of $693,000 for the comparable 1997 period. Net cash provided by operating activities was primarily attributable to a reduction in inventories offset by a reduction in accounts payable and accrued expenses for the period. Net cash used by investing activities was $439,000 for the nine months ended September 30, 1998 compared with net cash used by investing activities of $982,000 for the comparable 1997 period. The net cash usage consisted primarily of equipment additions. Net cash used by financing activities was $663,000 for the nine months ended September 30, 1998 compared with net cash provided by financing activities of $535,000 for the comparable 1997 period. The net cash used by financing activities in 1998 consisted of short and long term debt repayment. Net cash provided by financial activities in 1997 consisted of proceeds from the sale of stock to E.I DuPont de Nemours ("DuPont") offset by repayment of debt. At September 30, 1998, the Company had cash and equivalents of $1,213,000. During 1996, the Company obtained financing from two lending institutions which enabled it to rent an additional $1.7 million of equipment under terms of operating leases. Hudson utilized these facilities to acquire automated aerosol packaging equipment of approximately $1,000,000, ten refrigerant gas bulk-tank storage units of approximately $400,000, and other industrial equipment of $300,000. 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. As of December 31, 1996, the Company had repurchased 21,000 shares at an average price of $8.25 per share. No repurchases were made subsequently. On June 18, and September 30, 1996, the Company issued convertible debentures with a combined face value of $5.3 million. These debentures were retired or converted to common stock through January 1997. In connection with its bankruptcy reorganization in June 1994, prior to its acquisition by Hudson, Refrigerant Reclamation Corporation of America ("RRCA") has obligations (as modified by a settlement during April 1996) totaling $144,000 at September 30, 1998 payable in periodic payments to bankruptcy creditors through July 2000. On November 14, 1996, certain officers and stockholders of Hudson made unsecured loans in the principal amount of $678,000 to the Company; repayable upon receipt of proceeds from property mortgage discussed below or on subsequent demand. On January 29, 1997, the Company repaid the officer loans together with accrued interest outstanding. During 1996, the Company mortgaged its property and building located in Ft. Lauderdale, Florida with Turnberry Savings Bank, NA. The mortgage of $678,000 at September 30, 1998 bears interest at a rate of 9.5% and is repayable over 20 years through January 2017. During January 1997, in connection with the execution of various agreements with DuPont, the Company obtained additional equity funds of $3,500,000 from an affiliate of DuPont. Proceeds were primarily utilized to retire debt. During January 1997, the Company entered into a commitment to purchase a 29,000 square foot facility on 5.15 acres in Congers, New York for about $1.4 million; subject to approvals and ability to obtain financing. The Company is leasing the facility in the interim period. In October 1998, the Company cancelled the 10 Hudson Technologies, Inc. and subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) contract pursuant to its contingency provisions, and remains in occupancy under a monthly lease until terminated no earlier than December 1, 1998. During May 1997, certain officers of Hudson made unsecured loans in the aggregate principal amount of $585,000 to the Company. Such loans were due on demand and bore interest from 8% to 8.88% per annum. On August 12, 1997, the Company repaid the loans together with outstanding interest. During May 1998, certain officers of Hudson made unsecured loans in the aggregate principal amount of $300,000 to the Company. Such loans were due on demand and bore interest at 10% per annum. On June 30, 1998, the Company repaid the loans together with outstanding interest. 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 increases 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 September 30, 1998, the Company has availability under its revolving line of credit at approximately $630,000. Advances, available to the Company, under the term loan (currently approximately $1,000,000) 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. As of September 30, 1998, the Company had $772,000 outstanding under this facility. The facility bears interest at the prime rate plus 1.5%, 10% at September 30, 1998, 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. This facility replaces the Company's previous line of credit with MTB Bank ("MTB"). All obligations with MTB have been satisfied subject to certain indemnification rights pursuant to an indemnity agreement among CIT, MTB and the Company. 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. During the third quarter of 1998, the Company completed the planned closure of two of its reclamation facilities. The Company's Sparks, Nevada facility was closed on October 20, 1998 and it is expected that its Fort Lauderdale, Florida facility will be closed by November 15, 1998. The closure of these facilities did not result in a material effect to the Company's results of operations or financial position. The Company is continuing to evaluate each of 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 changes to operations. The Company anticipates that it may require significant cash infusions to expand its service business and continue operations as currently conducted. The Company is currently exploring alternatives to raise additional capital. Such additional financing could consist of additional debt or the issuance of equity or a combination thereof. There can be no assurance that the Company will obtain necessary financing on acceptable terms, or at all. Failure to obtain additional financing, if required, would have a material adverse effect on the Company's financial condition and results of operations. See "Overview". 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; and on corresponding demand for refrigerants. To the extent that the Company is unable to 11 Hudson Technologies, Inc. and subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 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. 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. During the nine months ended September 30, 1998, two customers accounted for 41% of revenues. 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 sales and service; 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. Delays in securing adequate supplies of refrigerants at peak demand periods, lack of refrigerant demand, increased expenses, and declining refrigerant prices could result in significant losses. There can be no assurance that the foregoing factors will not occur and result in a material adverse affect on the Company's financial position and significant losses. Year 2000 Compliance As previously discussed in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1997, the Company is currently assessing and modifying its computer, production and facility systems and business processes to provide for their continued functionality at the Year 2000. The Company is also continuing to assess the readiness of third parties and is seeking to address the Year 2000 issue with those entities. However, the Company has no control over the actions taken by these parties, and accordingly, there can be no assurance that all third parties with which the Company does business will successfully resolve all of the Year 2000 compliance issues. The Company is augmenting previously scheduled computer maintenance with procedures designed to locate and correct Year 2000 problems. The Company continues to expect that substantially all new system upgrades or reprogramming efforts will be completed by December 31, 1998. The costs associated with these procedures have not been and are not expected to be material to the Company's financial condition or results of operations. The Company believes that modification of existing software and conversions to new software should result in Year 2000 compliance. However, given the complexity of the Year 2000 issue, the impact on business operations due to failure by the Company to achieve compliance or failure by external entities, such as suppliers and vendors, to achieve compliance, which the Company cannot control, could adversely affect the Company's future results of operations. The Company's intention is to address its Year 2000 issues prior to being affected by them. However, if the Company identifies significant risks associated with Year 2000 compliance issues or if the progress of its current projects deviates from the expected timeline, the Company will develop a contingency plan at that time. 12 PART II. OTHER INFORMATION Hudson Technologies, Inc. and subsidiaries Item 1. 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 facility showed elevated levels of refrigerant contamination, specifically trichlorofluoromethane (R-11). During June 1996, United notified the Company that it was seeking indemnification by the Company for costs incurred to date as well as costs expected to be incurred in connection with United taking remedial action. During July 1996, United threatened to institute legal action in the event that the Company declined to settle this matter. During August 1996, the Company received a letter from the New York State Department of Environmental Conservation ("DEC") which stated that, in the opinion of DEC, the Company was the cause of the contamination of United's wells. The DEC letter states that it is not aware of the extent of the contamination or how the refrigerants entered the groundwater. During December 1996, the Company and United entered into an interim settlement agreement which provided for (a) reimbursement ($84,000) of United's operating costs associated with certain wells through August 1996, (b) reimbursement, subject to a dollar cap of $12,650 per month, of United's monthly operating costs for certain wells from September 1996 through April 1997, and (c) continued monitoring of R-11 refrigerant groundwater levels. Under the agreement, United agreed not to commence legal action against the Company prior to May 1, 1997. Neither party waived their rights as a result of the interim agreement. During August and September 1997, various proposals for possible further remediation were discussed with the DEC and United in light of the reduction of levels of R-11 in United's Wells. Since August 1997 the levels of R-11 have remained nearly non-detectable and well under minimum contaminant levels established by the State of New York. In January 1998, the Company agreed, and is now in the process of installing 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. The cost of this remediation is estimated to be a range of approximately $80,000 to $100,000. During December 1997, United Water 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 failed to detect any levels of R-12 in the groundwater in and around the Company's facility. In June 1998, United Water 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. The Company maintains that the allegations in the complaint are without merit and that the damages claimed by United Water are significantly overstated and bear little relation to any damages that United Water allegedly sustained. The Company has served an answer to the complaint and intends to vigorously defend this action. 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 will not have a material adverse effect on the Company's financial condition and results of operations. 13 PART II. OTHER INFORMATION Hudson Technologies, Inc. and subsidiaries 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 alleges that the defendants, among other things, misrepresented material information about the Company's financial results and prospects, and its customer relationships. The complaints in five of these actions seek relief on behalf of persons purchasing common stock between August 8, 1995 and August 15, 1997, and the complaint in the sixth action seeks relief on behalf of persons purchasing common stock between March 31, 1997 and August 15, 1997. The Company maintains that the allegations of wrongdoing alleged in the complaints are without merit. The Company intends to vigorously defend the claims brought against it and has retained the law firm of Davis, Polk and Wardwell for that defense. There can be no assurance that any of these actions, or the settlement thereof, will be resolved in a manner favorable to the Company, or that the ultimate outcome of any legal action or settlement will not have a material adverse effect on the Company's financial condition and results of operations. In May 1998, an action was commenced in the Supreme Court of the State of New York, Rockland County, by BNY Financial Corporation ("BNY") against the Company seeking damages in the amount of $49,051 for legal fees and expenses allegedly incurred in connection with certain financial dealings and discussions engaged in between the Company and BNY. The Company denies any liability for such expenses and intends to defend the action vigorously, and has also asserted counterclaims seeking the return of certain fees paid by the Company to BNY in connection with those financial dealings. There can be no assurance that this action, or any settlement thereof, will be resolved in a manner favorable to the Company. Hudson Technologies 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 2. Changes in Securities During the three months ended September 30, 1998, the Company granted five year options to purchase 200,000 shares of common stock to certain employees and directors pursuant to its 1997 Stock Option Plan at exercise prices ranging from $2.50 to $3.00. The options were issued pursuant to exemptions from registration provided by Section 2 (3) or Section 4(2) under the Securities Act of 1933. Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are attached to this report. Exhibit 27: Financial Data Schedule (for SEC use only) (b) No report on Form 8-K was filed during the quarter ended September 30, 1998. 14 Hudson Technologies, Inc. and subsidiaries Form 10-QSB of September 30, 1998 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed in its behalf by the undersigned, thereunto duly authorized. HUDSON TECHNOLOGIES, INC. By: /s/ Kevin J. Zugibe November 13, 1998 ------------------------------------------ Kevin J. Zugibe Date Chairman/CEO By: /s/ Brian F. Coleman November 13, 1998 ------------------------------------------ Brian F. Coleman Date Vice President and Chief Financial Officer 15 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-QSB AT SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1998 SEP-30-1998 1,213,000 0 1,544,000 221,000 1,356,000 4,291,000 5,528,000 0 9,937,000 2,829,000 0 0 0 51,000 5,339,000 9,937,000 20,678,000 20,678,000 15,501,000 15,501,000 850,000 0 293,000 (873,000) 0 (873,000) 0 0 0 (873,000) (0.17) (0.17)
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