<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 June 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 July 15, 1998
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<PAGE>
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 12
Item 2.- Changes in Securities 13
Item 6.- Exhibits and Reports on Form 8-K 13
Signatures 14
- ----------
1
<PAGE>
Part I - Financial Information
Hudson Technologies, Inc. and subsidiaries
Consolidated Balance Sheets
(Amounts in thousands, except for share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 784 $ 626
Trade accounts receivable; net of allowance
for doubtful accounts of $248,000 and $283,000 3,908 1,737
Inventories 1,407 3,755
Income taxes receivable 167 167
Prepaid expenses and other current assets 311 185
-------- --------
Total current assets 6,577 6,470
Property, plant and equipment, less accumulated depreciation 5,704 5,939
Other assets 124 95
-------- --------
Total assets $ 12,405 $ 12,504
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 3,435 $ 3,429
Short-term debt 640 1,602
-------- --------
Total current liabilities 4,075 5,031
Deferred income 46 55
Long-term debt, less current maturities 1,808 1,155
-------- --------
Total liabilities 5,929 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 (16,085) (16,298)
-------- --------
6,649 6,436
Less: Treasury stock, 21,000 shares at cost (173) (173)
-------- --------
Total Stockholders' equity 6,476 6,263
-------- --------
Total liabilities and stockholders' equity $ 12,405 $ 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 Six month period
ended June 30, ended June 30,
-------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 8,820 $ 5,477 $ 15,525 $ 13,499
Cost of sales 6,723 4,586 11,407 11,420
Inventory write down to net realizable value - 983 - 983
--------- --------- --------- ---------
Gross Profit 2,097 (92) 4,118 1,096
--------- --------- --------- ---------
Operating expenses:
Selling and marketing 384 479 776 898
General and administrative 1,194 1,768 2,436 2,757
Depreciation and amortization 274 378 547 661
--------- --------- --------- ---------
Total operating expenses 1,852 2,625 3,759 4,316
--------- --------- --------- ---------
Operating income (loss) 245 (2,717) 359 (3,220)
--------- --------- --------- ---------
Other income (expense):
Interest expense (114) (173) (198) (358)
Other income 27 24 52 54
--------- --------- --------- ---------
Total other income (expense) (87) (149) (146) (304)
--------- --------- --------- ---------
Income (loss) before income taxes 158 (2,866) 213 (3,524)
Income taxes - - - -
--------- --------- --------- ---------
Net income (loss) $158 $ (2,866) $213 $ (3,524)
========= ========= ========= =========
- --------------------------------------------
Net income (loss) per common share - basic $0.03 ($0.57) $0.04 ($0.72)
===== ======= ===== =======
Weighted average number of shares outstanding 5,065,820 5,031,784 5,065,820 4,871,407
========= ========= ========= =========
Net income (loss) per common share - dilutive $0.03 ($0.57) $0.04 ($0.72)
===== ======= ===== =======
Weighted average number of shares outstanding 5,079,781 5,031,784 5,076,313 4,871,407
========= ========= ========= =========
</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>
Six month period
ended June 30,
--------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 213 $(3,524)
Adjustments to reconcile net income (loss)
to cash provided (used) by operating activities:
Depreciation and amortization 547 661
Deferred income taxes -- 29
Allowance for doubtful accounts 53 100
Changes in assets and liabilities:
Trade receivables (2,224) (1,373)
Inventories 2,348 1,469
Income taxes receivable -- 10
Prepaid and other current assets (126) (143)
Other assets (28) 35
Accounts payable and accrued expenses 5 1,440
Deferred income (9) (8)
Reserve for restructuring -- (127)
------- -------
Cash provided (used) by operating activities 779 (1,431)
------- -------
Cash flows from investing activities:
Additions to property, plant, and equipment (312) (765)
------- -------
Cash used by investing activities (312) (765)
------- -------
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 (1,140) --
Payments of long-term debt (119) (2,007)
------- -------
Cash provided (used) by financing activities (309) 2,166
------- -------
Increase (decrease) in cash and cash equivalents 158 (30)
Cash and equivalents at beginning of period 626 422
------- -------
Cash and equivalents at end of period $ 784 $ 392
======= =======
- ------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during period for interest $ 198 $ 358
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"), 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.
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 June 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 U.S. The Company reviews each customer's
credit history before extending credit.
The Company establishes an allowance for doubtful accounts based on factors
associated with the credit risk of specific accounts, historical trends, and
other information.
During the six months ended June 30, 1998, two customers accounted for 52% 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).
Income (loss) per common and equivalent shares
Income (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 volume of refrigerant sales which has resulted in an
increase in its inventory turnover rate and 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 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 June 30, 1998, the Company has
availability under its revolving line of credit of approximately $1,500,000.
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 June 30, 1998 the Company had $996,000
outstanding under this facility. The facility bears interest at the prime rate
plus 1.5% 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
The statements contained herein which are not historical facts are forward
looking statements that involve risks and uncertainties, including but 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, increased competition, the
nature of supplier or customer arrangements which become available to the
Company in the future, adverse weather conditions, technological obsolescence
and potential environmental liability. The Company's actual results may differ
materially from the results discussed in any forward-looking statement.
Results of Operations
Three months ended June 30, 1998 as compared to the three months ended June
30, 1997
Revenues for the three months ended June 30, 1998 were $8,820,000, an increase
of $3,343,000 or 61% from the $5,477,000 reported during the comparable 1997
period. The increase was attributable primarily to an increase in the volume
of refrigerant sales due to favorable market conditions and an increase in
service sales.
Cost of sales for the three months ended June 30, 1998 were $6,723,000, an
increase of $1,154,000 or 21% from the $5,569,000 reported during the
comparable 1997 period due mainly to an increase in sales. As a percentage of
sales, cost of sales were 76% of revenues for the three-month period ended
June 30, 1998, a decrease from the 102% reported for the comparable 1997
period. The decrease in cost of sales as a percentage of revenues was
primarily attributable to a change in product mix with a higher volume of
higher margin refrigerant sales and the lack of a reduction of inventory
values to net realizable value by $983,000 which occurred during the 1997
period.
Operating expenses for the three months ended June 30, 1998 were $1,852,000, a
decrease of $773,000 or 29% from the $2,625,000 reported during the comparable
1997 period. The decrease was primarily attributable to a decrease in
professional fees and to a lesser extent a reduction in selling expense and
depreciation and amortization.
Net income for the three months ended June 30, 1998 was $158,000, as compared
to the net loss of $2,866,000 reported during the comparable 1997 period. The
increase in net income was primarily attributable to higher gross profits on
refrigerant sales due to favorable market conditions and a reduction in
operating expenses.
Six months ended June 30, 1998 as compared to the six months ended June 30,
1997.
Revenues for the six months ended June 30, 1998 were $15,525,000, an increase
of $2,026,000 or 15% from the $13,499,000 reported during the comparable 1997
period. The increase was attributable primarily to an increase in the volume
of refrigerant sales due to favorable market conditions and an increase in
service sales.
Cost of sales for the six months ended June 30, 1998 were $11,407,000, a
decrease of $996,000 or 8% from the $12,403,000 reported during the comparable
1997 period due mainly to a reduction in the volume of lower margin
refrigerant sales. As a percentage of sales, cost of sales were 74% of
revenues for the six-month period ended June 30, 1998, a decrease from the 92%
reported for the comparable 1997 period. The decrease in cost of sales as a
percentage of revenues was primarily attributable to a change in product mix
with a higher volume of higher margin refrigerant sales and the lack of a
reduction of inventory values to net realizable value by $983,000 which
occurred during the 1997 period.
8
<PAGE>
Hudson Technologies, Inc. and subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Operating expenses for the six months ended June 30, 1998 were $3,759,000, a
decrease of $557,000 or 13% from the $4,316,000 reported during the comparable
1997 period. The decrease was primarily attributable to a decrease in
professional fees and to a lesser extent a reduction in selling expense and
depreciation and amortization.
Net income for the six months ended June 30, 1998 was $213,000, as compared to
the net loss of $3,524,000 reported during the comparable 1997 period. The
increase in net income was primarily attributable to higher gross profits on
refrigerant sales due to favorable market conditions and a reduction in
operating expenses.
Liquidity and Capital Resources
At June 30, 1998, the Company had working capital of approximately $2,502,000.
A principle component of current assets is inventory. The Company's ability to
sell and replace its inventory and the prices at which it can be sold are
subject 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.
Net cash provided by operating activities was $779,000 for the six months
ended June 30, 1998 compared with net cash used by operating activities of
$1,431,000 for the comparable 1997 period. Net cash provided by operating
activities was primarily attributable to the net income for the period.
Net cash used by investing activities was $312,000 for the six months ended
June 30, 1998 compared with net cash used by investing activities of $765,000
for the comparable 1997 period. The net cash usage consisted primarily of
equipment additions.
Net cash used by financing activities was $309,000 for the six months ended
June 30, 1998 compared with net cash provided by financing activities of
$2,166,000 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 offset by repayment of debt.
At June 30, 1998, the Company had cash and equivalents of $784,000.
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
$206,000 at June 30, 1998 payable in periodic payments to bankruptcy creditors
through July 2000.
9
<PAGE>
Hudson Technologies, Inc. and subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
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 $671,000
at June 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 E.I. DuPont de Nemours ("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.
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 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 June 30, 1998, the Company has
availability under its revolving line of credit at approximately $1,500,000.
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 June 30, 1998 the Company had $996,000
outstanding under this facility. The facility bears interest at the prime rate
plus 1.5% 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.
The Company believes, based on current plans and assumptions, that its credit
facility will be sufficient to support its current operating requirements for
the foreseeable future. However, in the event that the Company's plans change
or its assumptions prove to be inaccurate or its credit facility is
insufficient to satisfy its cash requirements, the Company could be required
to seek additional financing. There can be no assurance that such additional
financing will be available.
10
<PAGE>
Hudson Technologies, Inc. and subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
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 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 six months ended June 30, 1998, two customers accounted for 52% 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. During 1998, the
Company has increased its volume of refrigerant sales which has resulted in an
increase in its inventory turnover rate and less inventory than historically
maintained. 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 Issue
The Company has assessed the potential issues associated with the year 2000
and believes that its cost to address such issues would not be material. The
Company anticipates that all of its operating systems will be year 2000
compliant by December 31, 1998. The Company also believes that costs or
consequences of an incomplete or untimely resolution would not result in the
occurrence of a material event or uncertainty reasonably likely to have a
material adverse effect on the Company. However, the Company has not determined
whether its principle suppliers and customers are year 2000 compliant. In the
event any of the Company's principle suppliers and customers are not year 2000
compliant it may have a material adverse affect on the Company.
11
<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 to
install a remediation system at the Company's facility to remove any remaining
R-11 levels in the groundwater under and around the Company's facility. 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 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.
In June 1997, an action was commenced against the Company in the 19th Judicial
District Court, Parish East Baton Rouge, State of Louisiana, by a former
salesperson and her spouse, who was terminated by the Company in June 1996,
alleging that the Company wrongfully terminated the employee, and is seeking
unspecified damages. This action was settled in April 1998 in the amount of
approximately $15,000.
12
<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 June 30, 1998, the Company granted options to
purchase 301,366 shares of common stock to certain employees pursuant to its
1997 Stock Option Plan at exercise prices ranging from $3.81 to $4.00. In
addition, the Company issued to CIT warrants to purchase 30,000 shares of the
Company's common stock at an exercise price of $4.33. The Company relied on
Section 4(2) under the Securities Act of 1933 as transactions by an issuer not
involving a public offering.
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 June 30,
1998.
13
<PAGE>
Hudson Technologies, Inc. and subsidiaries
Form 10-QSB of June 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 August 10, 1998
------------------------------------------
Kevin J. Zugibe Date
Chairman/CEO
By: /s/ Brian F. Coleman August 10, 1998
------------------------------------------
Brian F. Coleman Date
Vice President and
Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB
AT JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 784,000
<SECURITIES> 0
<RECEIVABLES> 4,156,000
<ALLOWANCES> 248,000
<INVENTORY> 1,407,000
<CURRENT-ASSETS> 6,577,000
<PP&E> 5,704,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,405,000
<CURRENT-LIABILITIES> 4,075,000
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<COMMON> 51
<OTHER-SE> 6,425,000
<TOTAL-LIABILITY-AND-EQUITY> 12,405,000
<SALES> 15,525,000
<TOTAL-REVENUES> 15,525,000
<CGS> 11,407,000
<TOTAL-COSTS> 11,407,000
<OTHER-EXPENSES> 547,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 198,000
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