<PAGE>
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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
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Hudson Technologies, Inc.
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(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
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<PAGE>
Hudson Technologies, Inc.
Index
<TABLE>
<S> <C> <C>
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
</TABLE>
1
<PAGE>
Part I - Financial Information
Hudson Technologies, Inc. and subsidiaries
Consolidated Balance Sheets
(Amounts in thousands, except for share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------- --------
(unaudited)
<S> <C> <C>
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
======== ========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
2
<PAGE>
Hudson Technologies, Inc. and subsidiaries
Consolidated Statements of Operations
(Amounts in thousands, except for share and per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three month period Nine month period
ended September 30, ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
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
========== ========= ========== ==========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
3
<PAGE>
Hudson Technologies, Inc. and subsidiaries
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
(unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
Nine month period
ended September 30,
1998 1997
------- -------
<S> <C> <C>
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
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
4
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-QSB AT
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FINANCIAL STATEMENTS.
</LEGEND>
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