================================================================================
U.S. 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, 1999
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)
275 North Middletown Road
Pearl River, New York 10965
(Address of principal executive offices) (ZIP Code)
Issuer's telephone number, including area code:
(914) 735-6000
---------------------
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past
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
past 90 days.
YES |X| NO |_|
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common stock, $0.01 par value 5,085,820 shares
----------------------------- ----------------
Class Outstanding at July 31,1999
================================================================================
<PAGE>
Hudson Technologies, Inc.
Index
Part I. Financial Information Page Number
- ------- --------------------- -----------
Item 1.- Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash flows 5
Notes to the Consolidated Financial Statements 6
Item 2.- Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II. Other information
- -------- -----------------
Item 1.- Legal Proceedings 17
Item 2.- Changes in Securities and Use of Proceeds 19
Item 6.- Exhibits and Reports on Form 8-K 19
Signatures 20
2
<PAGE>
Part 1 - Financial Information
Hudson Technologies, Inc. and subsidiaries
Consolidated Balance Sheets
(Amounts in thousands, except for share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Assets (unaudited)
Current assets:
Cash and cash equivalents $ 2,489 $ 776
Trade accounts receivable - net of allowance for doubtful
accounts of $236 and $240 2,026 1,075
Inventories 4,693 3,284
Prepaid expenses and other current assets 285 208
-------- --------
Total current assets 9,493 5,343
Property, plant and equipment, less accumulated depreciation 5,879 5,332
Other assets 124 184
-------- --------
Total Assets $ 15,496 $ 10,859
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 3,840 $ 4,250
Short-term debt 2,095 1,040
-------- --------
Total current liabilities 5,935 5,290
Deferred income 30 42
Long-term debt, less current maturities 1,732 1,885
-------- --------
Total Liabilities 7,697 7,217
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value; shares authorized
20,000,000; issued outstanding 5,085,820 51 51
Preferred stock shares authorized 5,000,000:
Series A convertible preferred stock, $.01 par value
($100 liquidation preference value) shares authorized
75,000; issued and outstanding 65,000 and none 6,500 --
Additional paid-in capital 21,845 22,545
Accumulated deficit (20,597) (18,954)
-------- --------
Total Stockholders' Equity 7,799 3,642
-------- --------
Total Liabilities and Stockholders' Equity $ 15,496 $ 10,859
======== ========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
3
<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,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 3,995 $ 8,820 $ 9,027 $ 15,525
Cost of sales 3,002 6,723 6,840 11,407
----------- ----------- ----------- -----------
Gross Profit 993 2,097 2,187 4,118
----------- ----------- ----------- -----------
Operating expenses:
Selling and marketing 469 384 852 776
General and administrative 882 1,194 2,135 2,436
Depreciation and amortization 328 274 664 547
----------- ----------- ----------- -----------
Total operating expenses 1,679 1,852 3,651 3,759
----------- ----------- ----------- -----------
Operating income (loss) (686) 245 (1,464) 359
----------- ----------- ----------- -----------
Other income (expense):
Interest expense (106) (114) (208) (198)
Loss on sale of equipment (80) -- (80) --
Other income 85 27 109 52
----------- ----------- ----------- -----------
Total other income (expense) (101) (87) (179) (146)
----------- ----------- ----------- -----------
Income (loss) before income taxes (787) 158 (1,643) 213
Income taxes -- -- -- --
----------- ----------- ----------- -----------
Net income (loss) $ (787) $ 158 $ (1,643) $ 213
=========== =========== =========== ===========
-----------
Net income (loss) per common share - basic $ (0.18) $ 0.03 $ (0.35) $ 0.04
=========== =========== =========== ===========
Weighted average number of shares outstanding 5,085,820 5,065,820 5,085,820 5,065,820
=========== =========== =========== ===========
Net income (loss) per common share - dilutive $ (0.18) $ 0.03 $ (0.35) $ 0.04
=========== =========== =========== ===========
Weighted average number of shares outstanding 5,085,820 5,079,781 5,085,820 5,076,313
=========== =========== =========== ===========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
4
<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,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,643) $ 213
Adjustments to reconcile net income (loss)
to cash provided (used) by operating activities:
Depreciation and amortization 664 547
Allowance for doubtful accounts 41 53
Changes in assets and liabilities:
Trade receivables (992) (2,224)
Inventories (1,409) 2,348
Prepaid and other current assets (76) (126)
Other assets 58 (28)
Accounts payable and accrued expenses (410) 5
Deferred income (12) (9)
------- -------
Cash provided (used) by operating activities (3,779) 779
------- -------
Cash flows from investing activities:
Additions to property, plant, and equipment (1,209) (312)
------- -------
Cash used by investing activities (1,209) (312)
------- -------
Cash flows from financing activities:
Proceeds from issuance of Preferred Stock - net 5,800 --
Proceeds (repayments) from short-term bank borrowings - net 784 (1,140)
Proceeds from long-term debt 437 950
Repayment of long-term debt (320) (119)
------- -------
Cash provided (used) by financing activities 6,701 (309)
------- -------
Increase in cash and cash equivalents 1,713 158
Cash and equivalents at beginning of period 776 626
------- -------
Cash and equivalents at end of period $ 2,489 $ 784
======= =======
Supplemental disclosure of cash flow information:
Cash paid during period for interest $ 208 $ 198
</TABLE>
See accompanying Notes to the Consolidated Financial Statement
5
<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 RefrigerantSide(TM)
Services performed at a customer's site, consisting of system decontamination to
remove moisture, oils and other contaminants and recovery and reclamation of the
refrigerants used in commercial air conditioning and refrigeration systems. The
Company operates through its wholly owned subsidiary Hudson Technologies
Company.
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 S-B. 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 ending December 31,
1998. Operating results for the six months ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 1999.
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
intercompany accounts and transactions have been eliminated. The Company's
consolidated financial statements include the accounts of wholly-owned
subsidiaries Hudson Holdings, Inc. and Hudson Technologies Company. Effective
March 19, 1999 the Company sold 75% of its ownership interest in Environmental
Support Solutions, Inc. ("ESS") and as of that date no longer includes the
results of that operation in the consolidated results of the Company (See Note
3).
Fair value of financial instruments
The carrying values of financial instruments including trade accounts
receivable, and accounts payable approximate fair value at June 30, 1999 and
December 31, 1998, because of the relatively short maturity of these
instruments. The carrying value of short-and long-term debt approximates fair
value, based upon quoted market rates of similar debt issues, as of June 30,
1999 and December 31, 1998.
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, 1999, two customers accounted for 19% and
10%, respectively, of the Company's revenues. During the six months ended June
30, 1998, two customers accounted for 36% and 15%, respectively, of the
Company's revenues. The loss of a principal customer or a decline in the
economic prospects and purchases of the Company's products or services by any
such customer would have a material adverse effect on the Company's financial
position and results of operations.
6
<PAGE>
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. Provision for depreciation is recorded (for financial
reporting purposes) using the straight-line method over the useful lives of the
respective assets. Leasehold improvements are amortized on a straight-line basis
over the shorter of economic life or terms of the respective leases.
Due to the specialized nature of the Company's business, it is possible that the
Company's estimates of equipment useful life periods may change in the future.
Revenues and cost of sales
Revenues are recorded upon completion of service or product shipment or passage
of title to customers in accordance with contractual terms. Cost of sales is
recorded based on the cost of products shipped or services performed and related
direct operating costs of the Company's facilities.
Income taxes
Hudson utilizes the assets and liability method for recording deferred income
taxes, which provides for the establishment of deferred tax asset or liability
accounts based on the difference between tax and financial reporting bases of
certain assets and liabilities.
The Company recognized a reserve allowance against the deferred tax benefit for
the current and prior period losses. The tax benefit associated with the
Company's net operating loss carry forwards would be recognized to the extent
that the Company recognizes net income in future periods.
Income (Loss) per common and equivalent shares
Income (Loss) per common share (Basic) is calculated based on the Net Income
(Loss) for the period less accrued dividends on the outstanding preferred stock,
$113,000 as of June 30, 1999, divided by the weighted average number of shares
outstanding. If dilutive, common equivalent shares (common shares assuming
exercise of options and warrants or conversion of preferred stock) utilizing the
treasury stock method are considered in the presentation of dilutive earnings
per share.
Estimates and Risks
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts of certain assets and liabilities, the disclosure of
contingent assets and liabilities, and the results of operations during the
reporting period. Actual results could differ from these estimates.
The Company participates in an industry that is highly regulated, changes in
which could affect operating results. Currently the Company purchases virgin and
reclaimable refrigerants from domestic suppliers and its customers. To the
extent that the Company is unable to obtain refrigerants on commercially
reasonable terms or experiences a decline in demand for refrigerants, the
Company could realize reductions in refrigerant processing and possible loss of
revenues which would have a material adverse affect on operating results.
Impairment of long-lived assets and long-lived assets to be disposed of
The Company reviews for impairment long-lived assets whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the assets to the future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is
7
<PAGE>
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less the cost to sell.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, ("SFAS No. 133") "Accounting for
Derivative Instruments and Hedging Activities," which requires entities to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS No. 133 is
effective for all fiscal years beginning after June 15, 1999.
The Company adopted SFAS No. 133 as of January 1, 1999. The adoption did not
have a material effect on the Company's financial position or results of
operations.
Note 2 -Stockholders Equity
On March 16, 1999, the shareholders of the Company approved an amendment to the
Certificate of Incorporation to authorize the issuance of up to 5,000,000 shares
of Preferred Stock. This authorization allows the Board of Directors to, among
other things, set the number of shares, the dividend rate and the voting rights
on any issuance of Preferred Stock without further shareholder approval.
On March 30, 1999, the Company completed the sale of 65,000 shares of its Series
A Preferred Stock, with a liquidation value of $100 per share, to Fleming US
Discovery Fund III, L.P. and Fleming US Discovery Offshore Fund III, L.P. The
gross proceeds from the sale of the Preferred Stock were $6,500,000. The
Preferred Stock has voting rights on an as if converted basis. The number of
votes applicable to the Series A Preferred Stock is equal to the number of
shares of common stock into which the Series A Preferred Stock is then
convertible. However, the holders of the Preferred Stock will provide the CEO
and Secretary of the Company a proxy to vote all shares currently owned and
subsequently acquired above 29% of the votes entitled to be cast by all
shareholders of the Company. The Preferred Stock carries a dividend rate of 7%,
which will increase to 16% on the fifth anniversary date, and converts to Common
Stock at a rate of $2.375 per share, which was 27% above the closing market
price of Common Stock as of March 29, 1999. The conversion rate may be subject
to certain antidilution provisions. The Company engaged an advisor to facilitate
the Company's efforts in connection with this transaction. In addition to the
advisor fees of $560,000, the Company issued to the advisor, warrants to
purchase 136,842 shares of the Company's Common Stock at an exercise price per
share of $2.73. The Company is using the net proceeds from the issuance of
Preferred Stock to expand its RefrigerantSide(TM) Services and for working
capital purposes.
The Company will pay dividends, in arrears, on the Preferred Stock, semi
annually, either in cash or additional shares, at the Company's option, during
the first two years after which dividends will be paid in cash. The Company may
redeem the Preferred Stock on March 31, 2004 either in cash or shares of Common
Stock valued at 90% of the average trading price of the Common Stock for the 30
days preceding March 31, 2004. In addition, after March 30, 2001, the Company
may call the Preferred Stock if the market price of the Common Stock is equal to
or greater than 250% of the conversion price and the Common Stock has traded
with an average daily volume in excess of 20,000 shares for a period of thirty
consecutive days.
The Company has provided certain registration, preemptive and tag along rights
to the holders of the Preferred Stock. The holders of the Preferred Stock,
voting as a separate class, have the right to elect up to two members to the
Company's Board of Directors or at their option, to designate up to two
observers to the Company's Board of Directors who will have the right to attend
and observe meetings of the Board of Directors. Currently, the holders will
elect two members to the Board of Directors.
The Company incurred an aggregate of $700,000 in costs associated with the sale
of the Series A Preferred Stock and such costs have been charged to additional
paid-in capital.
8
<PAGE>
Note 3 - Sale of ESS
Effective March 19, 1999, the Company sold 75% of its stock ownership in
Environmental Support Solutions ("ESS") to one of ESS's founders. The
consideration for the Company's sale of its interest was $100,000 in cash and a
six year 6% interest bearing note in the amount of $380,000. It is not
anticipated that the Company will be involved in, or control, the operations of
ESS. The Company will recognize as income the portion of the proceeds associated
with the net receivables upon the receipt of cash. This sale did not have a
material effect on the Company's financial condition or results of operations.
9
<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, seasonality, competition,
litigation, the nature of supplier or customer arrangements which become
available to the Company in the future, adverse weather conditions, possible
technological obsolescence of existing products and services, possible reduction
in the carrying value of long-lived assets, estimates of the useful life of its
assets, potential environmental liability, customer concentration, uncertainties
related to the Company's year 2000 compliance efforts and the ability of key
suppliers and customers to be year 2000 compliant and other risks detailed in
the Company's other periodic reports filed with the Securities and Exchange
Commission. The words "believe", "expect", "anticipate", "may", "plan", and
similar expressions identify forward looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date the statement was made.
Overview
Sales of refrigerants continue to represent a significant portion of the
Company's revenues. The Company believes that there will be a trend towards
lower sales prices, volume and gross profit margins on refrigerant sales in the
foreseeable future, which will continue to have an adverse effect on operating
results.
Historically, the Company has derived a majority of its revenues from the sale
of refrigerants. The Company has changed its business focus towards service
revenues through the development of a service offering known as
RefrigerantSide(TM) Services. Pursuant to this change in business focus, the
Company has developed a strategic business plan and as of June 30, 1999 it has
begun to implement this plan. In addition, the Company also provides refrigerant
management services, consisting principally of recovery and reclamation of
refrigerants used in commercial air conditioning, industrial processing and
refrigeration systems. While refrigerant sales continue to represent a
significant portion of the Company's revenues, the Company has diverted a
substantial portion of its sales resources towards service sales.
In March 1999, the Company completed the sale of its Series A Preferred Stock
and received net proceeds of $5,800,000. The net proceeds of the sale of the
Company's Series A Preferred Stock are being used to expand the Company's
service offering, and provide working capital, through a network of depots that
provide a full range of the Company's on site RefrigerantSide(TM) Services.
Management believes that these services represent the Company's long term growth
potential. However, in the short term, while the Company believes it will
experience an increase in revenues from its RefrigerantSide(TM) Services, such
an increase will not be sufficient to offset a substantial reduction in
refrigerant revenue. The Company expects that it will incur additional expenses
and losses during the coming quarters related to the expansion of its depot
network.
The change in business focus towards revenues generated from service may cause a
material reduction in revenues derived from the sale of refrigerants. In
addition, to the extent that the Company is unable to obtain refrigerants on
commercially reasonable terms or experiences a decline in demand for
refrigerants, the Company could realize reductions in refrigerant processing,
and possible loss of revenues which would have a material adverse affect on
operating results.
10
<PAGE>
Results of Operations
Three months ended June 30, 1999 as compared to the three months ended June 30,
1998
Revenues for the three months ended June 30, 1999 were $3,995,000, a decrease of
$4,825,000 or 55% from the $8,820,000 reported during the comparable 1998
period. The decrease was primarily attributable to lower revenues generated from
a principal customer and the lack of revenues from ESS, which was sold during
the first quarter of 1999, partially offset by an increase in
RefrigerantSide(TM) Services revenue. In addition, during the 1999 period the
Company experienced a short fall of product availability on a timely basis to
meet certain of its refrigerant sales. If the Company is unable to obtain
product in the future, the Company would experience a reduction in refrigerant
revenues which would have a material adverse affect on operating results.
Cost of sales for the three months ended June 30, 1999 were $3,002,000, a
decrease of $3,721,000 or 55% from the $6,723,000 reported during the comparable
1998 period due mainly to a lower volume of refrigerant sales. As a percentage
of sales, cost of sales were 75% of revenues for the three month period ended
June 30, 1999, a decrease from the 76% reported for the comparable 1998 period.
The decrease in cost of sales as a percentage of revenues was primarily
attributable to a decrease in lower margin refrigerant sales.
Operating expenses for the three months ended June 30, 1999 were $1,679,000, a
decrease of $173,000 or 9% from the $1,852,000 reported during the comparable
1998 period. The decrease was primarily attributable to a lack of operating
expenses attributed to ESS offset by an overall increase in selling and
depreciation and amortization expense.
Other income (expense) for the three months ended June 30, 1999 was ($101,000),
an increase of $14,000 from the ($87,000) reported during the comparable 1998
period. Other income (expense) includes interest expense of $106,000 and
$114,000 for 1999 and 1998, respectively, offset by other income of $85,000 and
$27,000 for 1999 and 1998, respectively. In addition, in 1999, the Company
recognized a loss on the sale of equipment in the amount of $80,000. Other
income primarily relates to interest and lease rental income.
No income taxes for the three months ended June 30, 1999 and 1998 were
recognized. The Company recognized a reserve allowance against the deferred tax
benefit for the 1999 and 1998 losses. The tax benefits associated with the
Company's net operating loss carry forwards would be recognized to the extent
that the Company recognizes net income in future periods.
Net loss for the three months ended June 30, 1999 was $787,000, as compared to
net income of $158,000 reported during the comparable 1998 period. The net loss
was primarily attributable to lower volume of refrigerant revenues.
Six months ended June 30, 1999 as compared to the six months ended June 30, 1998
Revenues for the six months ended June 30, 1999 were $9,027,000, a decrease of
$6,498,000 or 42% from the $15,525,000 reported during the comparable 1998
period. The decrease was primarily attributable to lower revenues generated from
a principal customer and the lack of revenues from ESS, which was sold in the
first quarter of 1999, partially offset by an increase in RefrigerantSide(TM)
Services revenue. In addition, during the 1999 period the Company experienced a
short fall of product availability on a timely basis to meet certain of its
refrigerant sales. If the Company is unable to obtain product in the future, the
Company would experience a reduction in refrigerant revenues which would have a
material adverse affect on operating results.
Cost of sales for the six months ended June 30, 1999 were $6,840,000, a decrease
of $4,567,000 or 40% from the $11,407,000 reported during the comparable 1998
period due mainly to a reduction in the volume of lower margin refrigerant and
service revenues. As a percentage of sales, cost of sales were 76% of revenues
for the six-month period ended June 30, 1999, an increase from the 74% reported
for the comparable 1998 period. The increase in cost of sales as a percentage of
revenues was primarily attributable to an increase in labor and other operating
costs.
11
<PAGE>
Operating expenses for the six months ended June 30, 1999 were $3,651,000, a
decrease of $108,000 or 3% from the $3,759,000 reported during the comparable
1998 period. The decrease was primarily attributable to a lack of operating
expenses from ESS offset by an increase in selling and depreciation and
amortization expense.
Other income (expense) for the six months ended June 30, 1999 was ($179,000), an
increase of $33,000 from the ($146,000) reported during the comparable 1998
period. Other income (expense) includes interest expense of $208,000 and
$198,000 for 1999 and 1998, respectively, offset by other income of $109,000 and
$52,000 for 1999 and 1998, respectively. In addition, in 1999, the Company
recognized a loss on the sale of equipment in the amount of $80,000. Other
income primarily relates to interest and lease rental income.
No income taxes for the six months ended June 30, 1999 and 1998 were recognized.
The Company recognized a reserve allowance against the deferred tax benefit for
the 1999 and 1998 losses. The tax benefits associated with the Company's net
operating loss carry forwards would be recognized to the extent that the Company
recognizes net income in future periods.
Net loss for the six months ended June 30, 1999 was $1,643,000, as compared to
the net income of $213,000 reported during the comparable 1998 period. The
increase in net loss was primarily attributable to lower volume on refrigerant
sales revenues.
Liquidity and Capital Resources
At June 30, 1999, the Company had working capital of approximately $3,558,000,
an increase of $3,505,000 from the $53,000 of working capital at December 31,
1998. The increase in working capital is primarily attributable to the sale of
the Company's Series A Convertible Preferred Stock pursuant to which the Company
received net proceeds of $5,800,000 offset by the net loss incurred during the
six months ended June 30, 1999. A principal component of current assets is
inventory. At June 30, 1999, the Company had inventories of $ 4,693,000, an
increase of $1,409,000 or 43% from the $3,284,000 at December 31, 1998. The
Company's ability to sell and replace its inventory on a timely basis and the
prices at which it can be sold are subject, among other things, to current
market conditions and the nature of supplier or customer arrangements (See
Seasonality and Fluctuations in Operating Results). The Company has historically
financed its working capital requirements through cash flows from operations,
the issuance of debt and equity securities, bank borrowings and loans from
officers.
Net cash used by operating activities for the six months ended June 30, 1999,
was $3,779,000 compared with net cash provided by operating activities of
$779,000 for the comparable 1998 period. Net cash used by operating activities
was attributable mainly to the increase of inventories, trade receivables, a
decrease in accounts payable and accrued expenses and by the net loss for the
1999 period.
Net cash used by investing activities for the six months ended June 30, 1999,
was $1,209,000 compared with net cash used by investing activities of $312,000
for the prior comparable 1998 period. The net cash usage consisted primarily of
equipment additions primarily associated with the expansion of the depot
network.
Net cash provided by financing activities for the six months ended June 30,
1999, was $6,701,000 compared with net cash used by financing activities of
$309,000 for the comparable 1998 period. The net cash provided by financing
activities primarily consisted of proceeds from the sale of the Company's Series
A Preferred Stock and proceeds from long and short term debt for the 1999
period.
At June 30, 1999, the Company had cash and equivalents of $2,489,000.
During 1996, the Company mortgaged its property and building located in Ft.
Lauderdale with Turnberry Savings Bank, NA. The mortgage balance of $668,000 at
June 30, 1999 bears interest rate of 9.25% and is repayable over 20 years
through January 2017. The Company has principally ceased its operations at this
facility and has entered into a three year lease of the entire facility at a
current level of $12,500 per month to an unrelated third party. The Company
expects to sell this property in the foreseeable future.
12
<PAGE>
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. In July, 1999 the Company sold the aerosol packaging equipment to an
unrelated third party and has correspondingly reduced the balance of the
remaining payments under the lease related to these assets. During the quarter
ended June 30, 1999, the Company recognized an $80,000 loss on the sale of the
equipment.
During January 1997, the Company entered into a month to month lease of, and a
contract to purchase, a 29,000 square foot facility on 5.15 acres in Congers,
New York for approximately $1.4 million; subject to approvals and ability to
obtain financing. In October 1998, the Company cancelled the contract pursuant
to its contingency provision. In June 1999, the Company entered into an
agreement with the landlord to terminate the month to month lease. Pursuant to
that agreement, the Company vacated that facility effective August 1, 1999.
The sale, by the Company, of the aerosol packaging equipment contained in the
Congers facility and the exit from the Congers facility is not expected to have
a material adverse effect on the Company's financial position or results of
operations because the Company believes that it will continue to sell certain
refrigerants without the use of the aerosol packaging equipment. However, there
can be no assurance that the Company will be able to sell certain refrigerants
and offset the loss of revenues due to the sale of the aerosol packaging
equipment and the exit of the Congers facility.
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 $6,500,000. 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 June 30, 1999, the Company has
availability under its revolving line of credit of approximately $1,495,000.
Advances, available to the Company, under the term loan (currently approximately
$779,000) 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, 1999, the Company had $2,326,000 outstanding under
this facility. The facility bears interest at the prime rate plus 1.5%, (10.25%
at June 30, 1999) and substantially all of the Company's assets are pledged as
collateral for obligations to CIT. In addition, among other things, the
agreements restrict the Company's ability to declare or pay any dividends on its
capital stock. The Company has obtained a waiver from CIT to permit the payment
of dividends on its Series A Preferred Stock.
In connection with the loan agreements, the Company issued to CIT warrants to
purchase 30,000 shares of the Company's common stock at an exercise price equal
to 110% of the then fair market value of the stock, which on the date of
issuance was $4.33 per share, and expires April 29, 2001. The value of the
warrants were not deemed to be material.
Effective March 19, 1999, the Company sold 75% of its stock ownership in
Environmental Support Solutions ("ESS") to one of ESS's founders. The
consideration for the Company's sale of its interest was $100,000 in cash and a
six year 6% interest bearing note in the amount of $380,000. It is not
anticipated that the Company will be involved in, or control, the operations of
ESS. The Company will recognize as income the portion of the proceeds associated
with the net receivables upon the receipt of cash. This sale did not have a
material effect on the Company's financial condition or results of operation.
The Company is continuing to evaluate opportunities to rationalize its other
operating facilities based on its emphasis on the expansion of its service
sales. As a result, the Company may discontinue certain operations which it
believes do not support the growth of service sales and, in doing so, may incur
future charges to exit certain operations.
13
<PAGE>
On March 16, 1999, the shareholders of the Company approved an amendment to the
Certificate of Incorporation to authorize the issuance of up to 5,000,000 shares
of Preferred Stock. This authorization allows the Board of Directors to, among
other things, set the number of shares, the dividend rate and the voting rights
on any issuance of Preferred Stock without further shareholder approval.
On March 30, 1999, the Company completed the sale of 65,000 shares of its Series
A Preferred Stock, with a liquidation value of $100 per share, to Fleming US
Discovery Fund III, L.P. and Fleming US Discovery Offshore Fund III, L.P. The
gross proceeds from the sale of the Preferred Stock were $6,500,000. The
Preferred Stock has voting rights on an as if converted basis. The number of
votes applicable to the Series A Preferred Stock is equal to the number of
shares of common stock into which the Series A Preferred Stock is then
convertible. However, the holders of the Preferred Stock will provide the CEO
and Secretary of the Company a proxy to vote all shares currently owned and
subsequently acquired above 29% of the votes entitled to be cast by all
shareholders of the Company. The Preferred Stock carries a dividend rate of 7%,
which will increase to 16% on the fifth anniversary date, and converts to Common
Stock at a rate of $2.375 per share, which was 27% above the closing market
price of Common Stock as of March 29, 1999. The conversion rate may be subject
to certain antidilution provisions. The Company engaged an advisor to facilitate
the Company's efforts in connection with this transaction. In addition to the
advisor fees of $560,000, the Company issued to the advisor, warrants to
purchase 136,842 shares of the Company's Common Stock at an exercise price per
share of $2.73. The Company is using the net proceeds from the issuance of
Preferred Stock to expand its RefrigerantSide(TM) Services and for working
capital purposes.
The Company will pay dividends, in arrears, on the Preferred Stock, semi
annually, either in cash or additional shares, at the Company's option, during
the first two years after which dividends will be paid in cash. The Company may
redeem the Preferred Stock on March 31, 2004 either in cash or shares of Common
Stock valued at 90% of the average trading price of the Common Stock for the 30
days preceding March 31, 2004. In addition, after March 30, 2001, the Company
may call the Preferred Stock if the market price of the Common Stock is equal to
or greater than 250% of the conversion price and the Common Stock has traded
with an average daily volume in excess of 20,000 shares for a period of thirty
consecutive days.
The Company has provided certain registration, preemptive and tag along rights
to the holders of the Preferred Stock. The holders of the Preferred Stock,
voting as a separate class, have the right to elect up to two members to the
Company's Board of Directors or at their option, to designate up to two
observers to the Company's Board of Directors who will have the right to attend
and observe meetings of the Board of Directors. Currently, the holders will
elect two members to the Board of Directors.
The Company incurred an aggregate of $700,000 in costs associated with the sale
of the Series A Preferred Stock and such costs have been charged to additional
paid-in capital.
The Company believes that its cash flow from operations, together with the
proceeds from the sale of its Series A Preferred Stock, and its credit facility,
will be sufficient to satisfy the Company's working capital requirements and
proposed expansion of its service business for the next year. Any additional
expansion or acquisition opportunities that may arise in the future may affect
the Company's future capital needs. However, there can be no assurances that the
Company's proposed or future expansion plans will be successful, and as such,
the Company may have further capital needs.
Reliance on Suppliers and Customers
The Company's financial performance is in part dependent on its ability to
obtain sufficient quantities of virgin and reclaimable refrigerants from
manufacturers, wholesalers, distributors, bulk gas brokers, and from other
sources within the air conditioning and refrigeration and automotive aftermarket
industries, and on corresponding demand for refrigerants. To the extent that the
Company is unable to obtain sufficient quantities of refrigerants in the future,
or resell reclaimed refrigerants at a profit, the Company's financial condition
and results of operations would be materially adversely affected.
14
<PAGE>
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, 1999, two customers accounted for an
aggregate of 29% of the Company's revenues. During the six months ended June 30,
1998, two customers accounted for an aggregate of 51% of the Company's revenues.
The loss of a principal customer or a decline in the economic prospects and
purchases of the Company's products or services by any such customer, as
incurred in 1999, would have a material adverse effect on the Company's
financial position and results of operations.
Seasonality and Fluctuations in Operating Results
The Company's operating results vary from period to period as a result of
weather conditions, requirements of potential customers, non-recurring
refrigerant and service sales, availability and price of refrigerant products
(virgin or reclaimable), changes in reclamation technology and regulations,
timing in introduction and/or retrofit or replacement of CFC-based refrigeration
equipment by domestic users of refrigerants, the rate of expansion of the
Company's operations, and by other factors. The Company's business has
historically been seasonal in nature with peak sales of refrigerants occurring
in the first half of each year. Accordingly, the second half of the year results
of operations have reflected additional losses due to a decrease in revenues.
Delays in securing adequate supplies of refrigerants at peak demand periods,
lack of refrigerant demand, increased expenses, declining refrigerant prices and
a loss of a principle customer 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
The Company uses various types of technology in the operations of its business.
Some of this technology incorporates date identification functions; however,
many of these date identification functions were developed to use only two
digits to identify a year. These date identifications functions, if not
corrected, could cause their related technologies to fail or create erroneous
results on or before January 1, 2000.
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 limited knowledge of the readiness and
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 their 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
before December 31, 1999. 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 and such costs have been expensed as incurred.
The Company believes that modification of existing software and conversions to
new software should result in Year 2000 compliance. However, given the
complexity and potential unknowns 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. There can be no assurance that the Company will be entirely
successful with its compliance.
The Company's intention is to address its Year 2000 issues prior to being
affected by them. The Company has attempted to identify its exposure to the Year
2000 issue but there may be other unforeseen risks that the Company may not have
identified. However, if the Company identifies significant risks associated with
Year
15
<PAGE>
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.
There can be no assurance that the Company's plans or contingency plan will be
entirely successful.
16
<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 stated 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 December 1997, United alleged that it discovered levels of
Dichlorodifluoromethane (R-12) in two of its wells within close proximity to the
Company's facility, and has alleged that the Company is the source. Sampling by
the Company of various monitoring wells installed around the Company's
facilities have been taken on a monthly basis since August 1996 and have failed
to detect any levels of R-12 in the groundwater in and around the Company's
facility.
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. From August 1997 through March 1999 the levels
of R-11 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. In
August 1998 the DEC accepted the Company's proposal and requested that the
Company proceed with the installation of the system. The cost of this
remediation system was estimated to be approximately $100,000.
In June 1998, United commenced an action against the Company in the Supreme
Court of the State of New York, Rockland County, seeking damages in the amount
of $1.2 million allegedly sustained as a result of the foregoing. In December
1998, United served an amended complaint asserting a claim pursuant to the
Resource Conservation and Recovery Act, 42 U.S.C. ss. 6901, et. seq. ("RCRA").
The Company maintains that the allegations in the complaint are without merit
and that the damages claimed by United are significantly overstated and bear
little relation to any damages that United allegedly sustained. A motion has
been filed on behalf of the Company to dismiss the RCRA cause of action, which
motion has been pending since March 1999.
On April 1, 1999, the Company reported a release at the Company's Hillburn, New
York facility of what was ultimately determined to be approximately 7,800 lbs.
of R-11, as a result of a failed hose connection to one of the Company's outdoor
storage tanks allowing liquid R-11 to discharge from the tank into the concrete
secondary containment area in which the subject tank was located. An amount of
the R-11 escaped the
17
<PAGE>
secondary containment area through an open drain for removing accumulated
rainwater and entered the ground. The Company immediately commenced excavation
operations to remove contaminated soil and has taken a number of other steps to
mitigate and minimize contamination, including acceleration of the installation
of the planned remediation system.
In April 1999, the Company was advised by United that one of its wells within
close proximity to the Company's facility showed elevated levels of R-11 in
excess of 200 ppb. and was taking certain steps and would be incurring costs in
an attempt to remediate any contamination. In response to the release, the
Company requested, and in May 1999, received permission from the DEC to operate
the system pending negotiation and finalization of a Consent Order covering the
operation of the system. The remediation system was put into operation on May 7,
1999. The level of R-11 in United's Well have steadily decreased since June 1,
1999 after rising to a level in excess of 700 ppb. The Company continues to work
with the DEC, United and with the Company's experts to determine the scope of
any contamination, and to develop and implement plans to deal with and remediate
any such contamination.
In May 1999, United submitted supplemental affidavits and exhibits to the
Rockland County Supreme Court in connection with the Company's pending motion
which relate to the April 1, 1999 release. The Company responded to that
supplemental information, and the motion remains pending. In July 1999, United
filed a motion seeking permission to amend its complaint in that action to
allege facts relating to, and to seek damages allegedly resulting from, the
April 1, 1999 release. The Company has not yet responded to that motion.
The Company carries $1,000,000 of pollution liability insurance per occurrence
and has put the insurance carrier on notice of the R-11 release and possible
claims of United. There can be no assurance that this action, or any settlement
thereof, will be resolved in a manner favorable to the Company, or that the
ultimate outcome of any legal action or settlement, or the effects of the April
1, 1999 release, will not have a material adverse effect on the Company's
financial condition and results of operations.
During March and April, 1998, six (6) complaints, each alleging violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, were filed by a
total of eight shareholders, on behalf of themselves and all others similarly
situated, against the Company and certain of its officers and directors in the
United States District Court for the Southern District of New York. Each of the
complaints 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. A motion has been made on behalf of the Company to dismiss the claims
asserted, which motion has been pending since March 1999.
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. BNY has filed a motion seeking summary
judgment against the Company, which motion is now pending.
There can be no assurance that this action, or any settlement thereof, will be
resolved in a manner favorable to the Company.
18
<PAGE>
In June 1999, an action was commenced in the 19th Judicial District Court, East
Baton Rouge Parish, State of Louisiana, on behalf of four individuals, against
the Company seeking unspecified damages for alleged personal injuries allegedly
suffered as a result of an ammonia release at the Company's Louisiana facility
in January 1999. The Company maintains that the allegations in the complaint are
without merit. The Company has retained counsel and intends to defend this
action vigorously.
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 and Use of Proceeds
During the three months ended June 30, 1999, the Company granted options to
purchase 78,500 shares of common stock to certain employees pursuant to its 1997
Stock Option Plan. 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 3.1: Certificate of Amendment of the Certificate of Incorporation
dated March 16, 1999
Exhibit 3.2: Certificate of Correction of the Certificate of Amendment
dated March 25, 1999
Exhibit 3.3: Certificate of Amendment of the Certificate of Incorporation
dated March 29, 1999
Exhibit 27: Financial Data Schedule (for SEC use only)
(b) No report on Form 8-K filed during the quarter ended June 30, 1999.
19
<PAGE>
Hudson Technologies, Inc. and subsidiaries
Form 10-QSB of June 30, 1999
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 12, 1999
--------------------------------------
Kevin J. Zugibe Date
Chairman, CEO and President
By: /s/ Brian F. Coleman August 12, 1999
--------------------------------------
Brian F. Coleman Date
Vice President and
Chief Financial Officer
20
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
HUDSON TECHNOLOGIES, INC.
Under Section 805 of the Business Corporation Law
WE, the undersigned, being the President and Secretary, respectively, of
HUDSON TECHNOLOGIES, INC., hereby certify:
The name of the corporation is HUDSON TECHNOLOGIES, INC. It was formed
under the name REFRIGERANT RECLAMATION INDUSTRIES, INC.
The Certificate of Incorporation was filed by the Department of State on
January 11, 1991.
The Certificate of Incorporation is amended as authorized by Section 801 of
the Business Corporation Law to increase the aggregate number of shares which
the corporation shall have authority to issue from 20,000,000, $.01 par value,
to 25,000,000, $.01 par value; to designate all of the additional shares as
Preferred Stock; and to state the relative voting, dividend, liquidation and
other rights, preferences and limitations relating to the shares of each class.
To effectuate the foregoing, Paragraph (5) of the Certificate of
Incorporation, which refers to the authorized shares of the corporation, is
hereby amended to read as follows:
"(5). The total number of shares of capital stock which the Company shall
have authority to issue is Twenty-Five Million (25,000,000) shares, of which
Twenty Million (20,000,000) shares shall be Common Stock, par value $.01 per
share, and Five Million (5,000,000) shares shall be Preferred Stock, par value
$.01 per share.
The Preferred Stock may be issued from time to time in one or more series.
The Board of Directors of the Company is hereby expressly authorized to provide,
by resolution or resolutions duly adopted by it prior to issuance, for the
creation of each such series and to fix the designation and the powers,
preferences, rights, qualifications, limitations and restrictions relating to
the shares of each such series. The authority of the Board of Directors with
respect to each series of Preferred Stock shall include, but not be limited to,
determining the following:
(a) the designation of the series and the number of shares to constitute
such series (which number may be increased or decreased from time to time unless
otherwise provided by the Board of Directors);
21
<PAGE>
(b) the dividend rate (or method of determining such rate), any conditions
on which and times at which dividends are payable, the preference or relation
which such dividends shall bear to the dividends payable on any other class or
classes or of any other series of capital stock including the Preferred Stock,
and whether such dividends shall be cumulative or non-cumulative;
(c) whether the series will be redeemable (at the option of the Company or
the holders of such shares or both, or upon the happening of a specified event)
and, if so, the redemption prices and the conditions and times upon which
redemption may take place and whether for cash, property or rights, including
securities of the company or another corporation;
(d) whether the shares of such series shall be subject to the operation of
a retirement or sinking fund and, if so, the extent to and manner in which any
such retirement or sinking fund shall be applied to the purchase or redemption
of the shares of such series for retirement or other corporate purposes and the
terms and provisions relating to the operation thereof;
(e) the conversion or exchange rights (at the option of the Company or the
holders of such shares or both, or upon the happening of a specified event), if
any, including the conversion or exchange times, prices, rates, adjustments and
other terms of conversion or exchange;
(f) whether the shares of such series shall have voting rights in addition
to any voting rights provided as a matter of law and, if so, the terms of such
voting rights, which may be general or limited;
(g) the conditions or restrictions, if any, upon the creation of
indebtedness of the Company or upon the issue or reissue or sale of any
additional stock, including additional shares of such series or of any other
series of Preferred Stock or of any other class;
(h) the rights of the holders upon voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company or upon any dissolution
of the assets of the Company (including preferences over the Common Stock or
other class or classes or series of capital stock including the Preferred
Stock);
(i) the preemptive rights, if any, to subscribe to additional issues of
stock or securities of the Company;
(j) the limitations and restrictions, if any, to be effective while any
shares of such series are outstanding upon the payment of dividends or the
making of other distributions on, and upon the purchase, redemption or other
acquisition by the Company of, the Common Stock or shares of stock of any other
class or any other series of Preferred Stock; and
(k) such other special rights and privileges, if any, for the benefit of
the holders of the Preferred Stock, as shall not be inconsistent with the
provisions of the Certificate of Incorporation, as amended, or applicable law.
All shares of Preferred Stock of the same series shall be identical in
all
22
<PAGE>
respects, except that shares of any one series issued at different times may
differ as to dates, if any, from which dividends thereon may accumulate. All
shares of Preferred Stock redeemed, purchased or otherwise acquired by the
Company (including shares surrendered for conversion) shall be cancelled and
thereupon restored to the status of authorized but unissued shares of Preferred
Stock undesignated as to series.
Except as otherwise may be required by law, and except as otherwise may
be provided in the Certificate of Incorporation, as amended, or in the
resolution of the Board of Directors of the Company creating any series of
Preferred Stock, the Common Stock shall have the exclusive right to vote for the
election of directors and for all other purposes, each holder of the Common
Stock being entitled to one vote for each share thereof held.
Except as may be stated and expressed in any resolution or resolutions
of the Board of Directors providing for the issue of any series of Preferred
Stock, (i) any amendment to the Certificate of Incorporation which shall
increase or decrease the number of shares of any class or classes of authorized
capital stock of the Company (but not below the number of shares thereof then
outstanding) may be adopted by the affirmative vote of the holders of a majority
of the outstanding shares of the voting stock of the Company, and (ii) no holder
of capital stock shall be entitled as a matter of right to subscribe for or
purchase, or have any preemptive right with respect to, any apart of any new or
additional issue of stock of any class whatsoever, or of securities convertible
into any stock of any class whatsoever, whether now or hereafter authorized and
whether issued for cash or other consideration or by way of dividend."
The amendment of the Certificate of Incorporation was authorized by
unanimous written consent, setting forth the action taken, signed by all of the
members of the Board of Directors, followed by the vote of the holders of a
majority of the outstanding shares entitled to vote thereon at a meeting of the
shareholders.
IN WITNESS WHEREOF, we have hereunto executed this Certificate of
Amendment and do affirm the foregoing as true under the penalties of perjury
this 16th day of March, 1999.
/s/ Kevin J. Zugibe
-----------------------------
Kevin J. Zugibe,
Chairman of the Board
/s/ Stephen P. Mandracchia
-----------------------------
Stephen P. Mandracchia,
Secretary
23
CERTIFICATE OF CORRECTION
OF THE
CERTIFICATE OF AMENDMENT
OF
HUDSON TECHNOLOGIES, INC.
Under Section 105 of the Business Corporation Law
THE UNDERSIGNED, being the President and Secretary, respectively, of HUDSON
TECHNOLOGIES, INC., do hereby certify:
The name of the corporation is Hudson Technologies, Inc. It was formed
under the name Refrigerant Reclamation Industries, Inc.
The Certificate of Incorporation was filed by the Department of State on
January 11, 1991.
The Certificate of Amendment to be corrected was filed by the Department of
State on March 17, 1999.
In order to correct an inadvertent omission in Article 4 of the Certificate
of Amendment, Article 4 of the Certificate of Amendment is hereby corrected to
read as follows:
"4. A. To effectuate the foregoing, Paragraph (5) of the Certificate of
Incorporation, which refers to the authorized shares of the corporation, is
hereby amended to read as follows:
"(5). The total number of shares of capital stock which the Company shall
have authority to issue is Twenty-Five Million (25,000,000) shares, of which
Twenty Million (20,000,000) shares shall be Common Stock, par value $.01 per
share, and Five Million (5,000,000) shares shall be Preferred Stock, par value
$.01 per share.
The Preferred Stock may be issued from time to time in one or more series.
The Board of Directors of the Company is hereby expressly authorized to provide,
by resolution or resolutions duly adopted by it prior to issuance, for the
creation of each such series and to fix the designation and the powers,
preferences, rights, qualifications, limitations and restrictions relating to
the shares of each such series. The authority of the Board of Directors with
respect to each series of Preferred Stock shall include, but not be limited to,
determining the following:
(a) the designation of the series and the number of shares to constitute
such series (which number may be increased or decreased from time to time unless
otherwise provided by the Board of Directors);
24
<PAGE>
(b) the dividend rate (or method of determining such rate), any conditions
on which and times at which dividends are payable, the preference or relation
which such dividends shall bear to the dividends payable on any other class or
classes or of any other series of capital stock including the Preferred Stock,
and whether such dividends shall be cumulative or non-cumulative;
(c) whether the series will be redeemable (at the option of the Company or
the holders of such shares or both, or upon the happening of a specified event)
and, if so, the redemption prices and the conditions and times upon which
redemption may take place and whether for cash, property or rights, including
securities of the company or another corporation;
(d) whether the shares of such series shall be subject to the operation of
a retirement or sinking fund and, if so, the extent to and manner in which any
such retirement or sinking fund shall be applied to the purchase or redemption
of the shares of such series for retirement or other corporate purposes and the
terms and provisions relating to the operation thereof;
(e) the conversion or exchange rights (at the option of the Company or the
holders of such shares or both, or upon the happening of a specified event), if
any, including the conversion or exchange times, prices, rates, adjustments and
other terms of conversion or exchange;
(f) whether the shares of such series shall have voting rights in addition
to any voting rights provided as a matter of law and, if so, the terms of such
voting rights, which may be general or limited;
(g) the conditions or restrictions, if any, upon the creation of
indebtedness of the Company or upon the issue or reissue or sale of any
additional stock, including additional shares of such series or of any other
series of Preferred Stock or of any other class;
(h) the rights of the holders upon voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company or upon any dissolution
of the assets of the Company (including preferences over the Common Stock or
other class or classes or series of capital stock including the Preferred
Stock);
(i) the preemptive rights, if any, to subscribe to additional issues of
stock or securities of the Company;
(j) the limitations and restrictions, if any, to be effective while any
shares of such series are outstanding upon the payment of dividends or the
making of other distributions on, and upon the purchase, redemption or other
acquisition by the Company of, the Common Stock or shares of stock of any other
class or any other series of Preferred Stock; and
(k) such other special rights and privileges, if any, for the benefit of
the holders of the Preferred Stock, as shall not be inconsistent with the
provisions of the Certificate of Incorporation, as amended, or applicable law.
All shares of Preferred Stock of the same series shall be identical in all
respects, except that shares of any one series issued at different times may
differ as to dates, if any, from which dividends thereon may accumulate. All
shares of Preferred Stock redeemed, purchased or otherwise acquired by the
Company (including shares surrendered for conversion) shall be cancelled
25
<PAGE>
and thereupon restored to the status of authorized but unissued shares of
Preferred Stock undesignated as to series.
Except as otherwise may be required by law, and except as otherwise may be
provided in the Certificate of Incorporation, as amended, or in the resolution
of the Board of Directors of the Company creating any series of Preferred Stock,
the Common Stock shall have the exclusive right to vote for the election of
directors and for all other purposes, each holder of the Common Stock being
entitled to one vote for each share thereof held.
Except as may be stated and expressed in any resolution or resolutions of
the Board of Directors providing for the issue of any series of Preferred Stock,
(i) any amendment to the Certificate of Incorporation which shall increase or
decrease the number of shares of any class or classes of authorized capital
stock of the Company (but not below the number of shares thereof then
outstanding) may be adopted by the affirmative vote of the holders of a majority
of the outstanding shares of the voting stock of the Company, and (ii) no holder
of capital stock shall be entitled as a matter of right to subscribe for or
purchase, or have any preemptive right with respect to, any part of any new or
additional issue of stock of any class whatsoever, or of securities convertible
into any stock of any class whatsoever, whether now or hereafter authorized and
whether issued for cash or other consideration or by way of dividend."
B. To effectuate the foregoing, Paragraph (7) of the Certificate of
Incorporation, which refers to preemptive rights, is hereby amended to read as
follows:
"(7). Except as may be stated and expressed in any resolution or
resolutions of the Board of Directors providing for the issue of any series of
Preferred Stock, Shareholders shall not be entitled to any Preemptive rights,
directly or indirectly, with respect to any shares of the Corporation of any
class, now or hereafter authorized, or any other securities of the company.""
The correction of the Certificate of Amendment was authorized by written
consent, setting forth the action taken, signed by all of the members of the
Board of Directors.
26
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Certificate of
Correction and do affirm the foregoing as true under the penalties of perjury
this 25th day of March, 1999.
/s/ Kevin J. Zugibe
-----------------------------
Kevin J. Zugibe,
Chairman of the Board
/s/ Stephen P. Mandracchia
-----------------------------
Stephen P. Mandracchia,
Secretary
27
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
HUDSON TECHNOLOGIES, INC.
under Section 805 of the Business Corporation Law
-----------------------
The undersigned, being the Chairman and Chief Executive Officer and
Secretary, respectively, of Hudson Technologies, Inc. (the "Corporation") hereby
certify that:
A. The name of the Corporation is HUDSON TECHNOLOGIES, INC. The Corporation
was formed under the name REFRIGERANT RECLAMATION INDUSTRIES, INC.
B. The Certificate of Incorporation was filed with the Department of State
on January 10, 1991.
C. On March 26, 1999, the Board of Directors of the Corporation duly
adopted resolutions in order to designate the Series A Preferred Stock (as set
forth in the resolution below).
D. The resolution contained herein has not been modified, altered or
amended and is presently in full force and effect.
E. To effectuate the foregoing, Paragraph (5) of the Certificate of
Incorporation, which refers to the authorized shares of the Corporation, is
hereby amended by adding the following to the end of said Paragraph (5):
RESOLVED, that pursuant to the authority expressly vested in the Board of
Directors of the Corporation by Paragraph 5 of the Certificate of Incorporation
of the Corporation, the Board of Directors hereby fixes and determines the
voting rights, designations, preferences, qualifications, privileges,
limitations, restrictions, options, conversion rights and other special or
relative rights of the foregoing series of the preferred stock, par value $.01
per share, which shall be designated as Series A Convertible Preferred Stock
(the "Series A Preferred Stock").
1. Designation. Seventy-five thousand (75,000) shares of preferred stock,
par value $.01 per share, of the Corporation are hereby constituted as a series
of the preferred stock designated as "Series A Convertible Preferred Stock";
provided, however, that the Corporation shall issue any such shares in excess of
sixty-five thousand (65,000) only to pay dividends on the Series A Preferred
Stock as provided in Section 2(a)(i).
28
<PAGE>
2. Dividends.
a) Dividends on Series A Preferred Stock. The Corporation shall pay, when
and as declared by the Corporation's Board of Directors, to the holders of the
Series A Preferred Stock, out of the assets of the Corporation legally available
therefor, dividends at the times, in the amounts and with such priorities as
follows:
(i) Dividend Rate. Dividends on shares of Series A Preferred Stock will be
payable in arrears in cash or, for the first eight fiscal quarters after the
Issue Date, at the option of the Corporation, in additional shares of Series A
Preferred Stock, at a rate per annum equal to (x) until the fifth anniversary of
the Issue Date, 7.00% of the Preferred Liquidation Value thereof on the Dividend
Payment Date and (y) on and after the fifth anniversary of the Issue Date,
16.00% of the Preferred Liquidation Value thereof on the Dividend Payment Date.
Dividends will be calculated on the basis of a 360-day year.
(ii) Accrual of Dividends.
(A) Dividends on each share of Series A Preferred Stock shall accrue
cumulatively on a daily basis from the Issue Date to the date on which the
redemption or conversion of such share of Series A Preferred Stock shall
have been effected, whether or not such dividends have been declared and
whether or not there shall be (at the time such dividends became or become
payable or any other time) profits, surpluses or other funds of the
Corporation legally available for the payment of dividends.
(B) To the extent not paid on any Dividend Payment Date for any reason
other than the Corporation's compliance with Section 2(b) hereof, all
dividends which have accrued on any share of Series A Preferred Stock then
outstanding during the period from and including the preceding Dividend
Payment Date (or from and including the Issue Date in the case of the
initial Dividend Payment Date) to (but excluding) such Dividend Payment
Date shall be added on such Dividend Payment Date to the Preferred
Liquidation Value of such share of Series A Preferred Stock (so that,
without limitation, dividends shall thereafter accrue in respect of the
amount of such accrued but unpaid dividends) and shall remain a part
thereof until (but only until) such dividends are paid.
(iii) Payment Dates. Full cumulative dividends on the Series A Preferred
Stock shall be payable semi-annually, on the last day of March and September in
each year (each, a "Dividend Payment Date"). The first Dividend Payment Date
shall be September 30, 1999. If any Dividend Payment Date shall be on a day
other than a Business Day, then the Dividend Payment Date shall be on the next
succeeding Business Day. An amount equal to the full cumulative dividends shall
also be payable, in satisfaction of such dividend obligation, upon liquidation
as provided under Section 3 hereof, and upon redemption as provided under
Section 6 hereof. The Board of Directors may fix a record date for the
determination of holders of shares of Series A Preferred Stock entitled to
receive payment of the dividends payable pursuant to this Section 2, which
record date shall not be more than 60 days prior to the Dividend Payment Date.
29
<PAGE>
(iv) Amounts Payable. The amount of dividends payable on Series A Preferred
Stock on each Dividend Payment Date shall be the full cumulative dividends which
are unpaid through and including such Dividend Payment Date. Dividends which are
not paid for any reason whatsoever on a Dividend Payment Date shall cumulate
until paid and shall be payable on the next Dividend Payment Date on which
payment can lawfully be made (or upon liquidation or redemption as provided
herein). Holders of shares of Series A Preferred Stock called for redemption on
a redemption date falling between the close of business on a dividend payment
record date and the opening of business on the corresponding Dividend Payment
Date shall, in lieu of receiving such dividend payment on the Dividend Payment
Date fixed therefor, receive an amount equal to such dividend payment
(consisting of all accumulated and unpaid dividends through the redemption date)
on the date fixed for redemption. If for whatever reason all payments have not
been made with respect to any share of Series A Preferred Stock as required by
Section 3 on a distribution date or all payments have not been made with respect
to any share of Series A Preferred Stock as required by Section 6 on a
redemption date (other than because of a failure by the holder thereof to tender
such shares for payment on such date), then, notwithstanding any other provision
hereof, dividends shall continue to accumulate on such outstanding shares until
paid.
(v) Compliance with Section 2(b). Notwithstanding any other provision
hereof, any dividend not paid by the Corporation under this Section 2(a) because
of the Corporation's compliance with Section 2(b) will be deemed paid under the
provision of this Certificate of Amendment.
b) Dividends on Common Stock. In the event that (i) the Corporation shall
at any time or from time to time declare, order, pay or make a dividend or other
distribution (whether in cash, securities, rights to purchase securities or
other property) on its Common Stock and (ii) such dividend or other distribution
exceeds on a per share of Common Stock equivalent basis the amount payable on a
share of Series A Preferred Stock on the Dividend Payment Date immediately
following the declaration of such dividend or other distribution on the Common
Stock, the holders of the Series A Preferred Stock shall receive, in lieu of the
dividend payable under Section 2(a) on such Dividend Payment Date, from the
Corporation, with respect to each share of Series A Preferred Stock held, a
dividend or distribution that is the same dividend or distribution that would be
received by a holder of the number of shares of Common Stock into which such
share of Series A Preferred Stock is convertible pursuant to the provisions of
Section 5 hereof on the record date for such dividend or distribution. Any such
dividend or distribution shall be declared, ordered, paid or made on the Series
A Preferred Stock at the same time such dividend or distribution is declared,
ordered, paid or made on the Common Stock.
c) Limitation on Dividends, Repurchases and Redemptions. So long as any
shares of Series A Preferred Stock shall be outstanding, the Corporation shall
not declare or pay or set apart for payment any dividends or make any other
distributions on any Junior Securities, whether in cash, securities, rights to
purchase securities or other property (other than dividends or distributions
payable in shares of the class or series upon which such dividends or
distributions are declared or paid), nor shall the Corporation or any of its
Subsidiaries purchase, redeem or otherwise acquire for any consideration or make
payment on account of the purchase, redemption or other retirement of any Parity
Securities or Junior Securities, nor shall any monies be paid or made available
for a sinking fund for the purchase or redemption of any Parity Securities or
Junior Securities, unless with respect to all of the foregoing all dividends or
other distributions to which the
30
<PAGE>
holders of Series A Preferred Stock shall have been entitled, pursuant to
Sections 2(a) and 2(b) hereof, shall have been paid or declared and a sum of
money has been set apart for the full payment thereof.
d) Pro Rata Payments. In the event that full dividends are not paid or made
available to the holders of all outstanding shares of Series A Preferred Stock
and of any Parity Securities and funds available for payment of dividends shall
be insufficient to permit payment in full to holders of all such stock of the
full preferential amounts to which they are then entitled, then the entire
amount available for payment of dividends shall be distributed ratably among all
such holders of Series A Preferred Stock and of any Parity Securities in
proportion to the full amount to which they would otherwise be respectively
entitled.
3. Preference on Liquidation.
a) Liquidation Preference for Series A Preferred Stock. In the event that
the Corporation shall liquidate, dissolve or wind up, whether voluntarily or
involuntarily, no distribution shall be made to the holders of shares of Common
Stock or other Junior Securities (and no monies shall be set apart for such
purpose) unless prior thereto, the holders of shares of Series A Preferred Stock
shall have received an amount per share equal to the greater of (i) the sum of
(x) the Liquidation Value, plus (y) all declared but unpaid dividends thereon
through the date of distribution, (ii) ratable distributions determined with
respect to the holders of Series A Preferred Stock and Common Stock on the basis
of the number of shares of Common Stock into which such Series A Preferred Stock
could be converted pursuant to the provisions of Section 5 hereof immediately
prior to such distribution and (iii) the Payment Amount, on a per share basis
(the greater of (i), (ii) and (iii) above is herein referred to as the "Series A
Liquidation Preference").
b) Pro Rata Payments. If, upon any such liquidation, dissolution or other
winding up of the affairs of the Corporation, the assets of the Corporation
shall be insufficient to permit the payment in full of the Series A Liquidation
Preference for each share of Series A Preferred Stock then outstanding and the
full liquidating payments on all Parity Securities, then the assets of the
Corporation remaining shall be ratably distributed among the holders of Series A
Preferred Stock and of any Parity Securities in proportion to the full amounts
to which they would otherwise be respectively entitled if all amounts thereon
were paid in full.
c) Sale Not a Liquidation. Neither the voluntary sale, conveyance, exchange
or transfer (for cash, shares of stock, securities or other consideration) of
all or substantially all the property or assets of the Corporation nor the
consolidation, merger or other business combination of the Corporation with or
into one or more corporations shall be deemed to be a liquidation, dissolution
or winding-up, voluntary or involuntary, of the Corporation.
d) Notice of Liquidation. Written notice of any liquidation, dissolution or
winding up of the Corporation, stating the payment date or dates when and the
place or places where amounts distributable in such circumstances shall be
payable, shall be given by first class mail, postage prepaid, not less than
thirty (30) days prior to any payment date specified therein, to the holders of
record of the SeriesED Preferred Stock at their respective addresses as shall
appear on the records of the Corporation.
31
<PAGE>
4. Voting.
a) General. In addition to any voting rights provided in the Corporation's
Certificate of Incorporation or by law, the Series A Preferred Stock shall vote
together with the Common Stock as a single class on all actions to be voted on
by the stockholders of the Corporation. Each share of Series A Preferred Stock
shall entitle the holder thereof to such number of votes per share on each such
action as shall equal the number of shares of Common Stock (including fractions
of a share) into which each share of Series A Preferred Stock is then
convertible; provided, however, that each holder of Series A Preferred Stock and
Conversion Shares (as defined below in the definition of "Fleming Holders")
hereby irrevocably constitutes Kevin J. Zugibe and Stephen P. Mandracchia, and
each of them, as such holder's proxy, with full power of substitution in each of
them, in the name, place and stead of such holder, to vote at all meetings of
the stockholders of the Corporation (other than with respect to matters
requiring a separate class vote of holders of the Series A Preferred Stock) that
number of voting shares of the Corporation of all classes, including any now
owned or hereafter acquired shares held by such holder and its Affiliates, in
the aggregate, as shall exceed twenty-nine percent (29%) of the votes entitled
to be cast by all stockholders of the Corporation (as contemplated in the first
sentence of this Section 4(a)). Each such proxy is coupled with an interest. The
holders of Series A Preferred Stock shall be entitled to notice of any
stockholder's meeting in accordance with the By-Laws of the Corporation.
b) Board of Directors. The Corporation shall not, without the written
consent or affirmative vote of the holders representing at least a majority of
the shares of Series A Preferred Stock then outstanding, given in writing or by
vote at a meeting, consenting or voting (as the case may be) separately as a
class, increase the maximum number of directors constituting the Board of
Directors to a number in excess of nine (9).
c) Election of Directors. So long as the Fleming Holders hold at least
thirty-five percent (35%) of the originally issued shares of Series A Preferred
Stock, the Fleming Holders (or if no such shares are held by a Fleming Holder,
any transferee of shares of Series A Preferred Stock consented to by the
Corporation (which consent shall not be unreasonably withheld) (the "Permitted
Preferred Transferee)), shall be entitled, but not required, to elect up to two
(2) directors of the Corporation. So long as the Fleming Holders hold at least
twenty percent (20%), but less than thirty-five (35%) percent, of the originally
issued shares of Series A Preferred Stock, the Fleming Holders (or if no such
shares are held by a Fleming Holder, any Permitted Preferred Transferee), shall
be entitled, but not required, to elect one (1) director of the Corporation. A
director elected in accordance with this Section 4 is referred to as a
"Preferred Director".
Holders of at least a majority of the outstanding shares of Series A
Preferred Stock shall exercise their right, as described above, to elect each
Preferred Director by written notice to the Corporation of the identity of the
person nominated to serve as Preferred Director, and requesting the Corporation
to call a meeting of the holders of Series A Preferred Stock to act upon such
nomination. Each such nomination shall be subject to approval by the
Corporation, such approval not to be unreasonably withheld. Promptly upon such
request, the holders of Series A Preferred Stock, consenting or voting as a
class (as the case may be), shall be entitled to elect a Preferred Director at
any meeting (or in a written consent in lieu thereof) held for the purpose of
electing directors until such time as holders of at least a majority of the
outstanding shares of Series
32
<PAGE>
A Preferred Stock shall notify the Corporation in writing that they no longer
wish to exercise their right to elect a Preferred Director.
At any meeting (or in a written consent in lieu thereof) held for the
purpose of electing directors, (x) the presence in person or by proxy (or the
written consent) of the holders representing a majority of the shares of Series
A Preferred Stock then outstanding shall constitute a quorum of such class for
the election of a Preferred Director; and (y) the absence of the presence in
person or by proxy (or written consent) of the holders representing less than a
majority of the shares of Common Stock then outstanding shall not affect the
right of a quorum of holders of Series A Preferred Stock to elect a Preferred
Director. Any Preferred Director may be removed with or without cause by, and
shall not be removed except by, the holders representing a majority of the
shares of Series A Preferred Stock then outstanding, present in person or by
proxy and voting at a meeting of stockholders, or of the holders of Series A
Preferred Stock called for that purpose, or by written consent signed by the
holders representing a majority of the shares of Series A Preferred Stock then
outstanding.
A vacancy in the directorship to be held by a Preferred Director shall be
filled only by vote or written consent of the holders of the Series A Preferred
Stock as provided above. Unless otherwise required by the laws of the State of
New York, any holder or holders of at least a majority of the outstanding shares
of Series A Preferred Stock shall have the right to call a meeting of the
holders of Series A Preferred Stock of the Corporation for the purpose of
electing a Preferred Director and filling vacancies of Preferred Directors.
5. Conversion. The holders of shares of Series A Preferred Stock shall have
the right to convert all or a portion of such shares into fully paid and
nonassessable shares of Common Stock or any capital stock or other securities
into which such Common Stock shall have been changed or any capital stock or
other securities resulting from a reclassification thereof as follows:
a) Right to Convert. Subject to and upon compliance with the provisions of
this Section 5, a holder of shares of Series A Preferred Stock shall have the
right, at the option of such holder, at any time, to convert any or all of such
shares into the number of fully paid and nonassessable shares of Common Stock
(calculated as to each conversion rounded down to the nearest 1/100th of a
share) obtained by dividing (i) the aggregate Liquidation Value of the shares to
be converted, plus all declared but unpaid dividends thereon through the date of
conversion (unless the holder of shares of Series A Preferred Stock being so
converted shall have elected to receive any such dividends in respect of the
shares being converted subsequent to conversion), by (ii) the Conversion Price,
and by surrender of such shares, such surrender to be made in the manner
provided in paragraph (b) of this Section 5. The Common Stock issuable upon
conversion of the shares of Series A Preferred Stock, when such Common Stock
shall be issued in accordance with the terms hereof, is hereby declared to be
and shall be duly authorized, validly issued, fully paid and nonassessable
Common Stock held by the holders thereof.
b) Mechanics of Conversion. Each holder of Series A Preferred Stock that
desires to convert the same into shares of Common Stock shall surrender the
certificate or certificates therefor, duly endorsed, at the principal office of
the Corporation or of any transfer agent for the Series A Preferred Stock or
Common Stock, accompanied by written notice to the Corporation that such holder
elects to convert the same and stating therein the number of shares of
33
<PAGE>
Series A Preferred Stock being converted and whether all declared and unpaid
dividends in respect of such shares shall be included in the calculation set
forth in Section 5(a) hereof, and setting forth the name or names in which such
holder wishes the certificate or certificates for shares of Common Stock to be
issued if such name or names shall be different from that of such holder.
Thereupon, the Corporation shall issue and deliver at such office on the fifth
succeeding Business Day after receipt of such certificate and notice (unless
such conversion is in connection with an underwritten public offering of Common
Stock, in which event concurrently with such conversion) to such holder or on
such holder's written order, (i) a certificate or certificates for the number of
validly issued, fully paid and nonassessable full shares of Common Stock to
which such holder is entitled and (ii) if less than the full number of shares of
Series A Preferred Stock evidenced by the surrendered certificate or
certificates being converted, a new certificate or certificates, of like tenor,
for the number of shares evidenced by such surrendered certificate or
certificates less the number of shares converted.
Each conversion shall be deemed to have been effected immediately prior to
the close of business on the date of such surrender of the shares to be
converted (except that if such conversion is in connection with an underwritten
public offering of Common Stock, then such conversion shall be deemed to have
been effected upon such surrender) so that the rights of the holder thereof as
to the shares being converted shall cease at such time except for (x) the right
to receive shares of Common Stock and (y) if the holder of the shares being so
converted shall have elected to receive dividends subsequent to such conversion,
all accrued and unpaid dividends in accordance herewith, and the person entitled
to receive the shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder of such shares of Common Stock at
such time.
c) Conditional Conversion. Notwithstanding any other provision hereof, if
conversion of any shares of Series A Preferred Stock is to be made in connection
with a public offering of Common Stock or any transaction described in Section
5(d)(vii) hereof, the conversion of any shares of Series A Preferred Stock may,
at the election of the holder thereof, be conditioned upon the consummation of
the public offering or such transaction, in which case such conversion shall not
be deemed to be effective until the consummation of such public offering or
transaction.
d) Adjustment of the Conversion Price. The Conversion Price shall be
adjusted from time to time as follows:
(i) Adjustment for Stock Splits and Combinations. If the Corporation
at any time or from time to time after the Issue Date, pays a stock
dividend in shares of its Common Stock, issues any convertible debt
securities, effects a subdivision of the outstanding Common Stock, combines
the outstanding shares of Common Stock, issues by reclassification of
shares of its Common Stock any shares of capital stock of the Corporation,
makes a distribution of any of its assets (other than cash dividends
payable out of earnings or retained earnings in the ordinary course of
business) then, in each such case, the Conversion Price in effect
immediately prior to such event shall be adjusted so that each holder of
shares of Series A Preferred Stock shall have the right to convert its
shares of Series A Preferred Stock into the number of shares of Common
Stock which it would have owned after the event had such shares of Series A
Preferred Stock been converted immediately before the happening of such
event. Any adjustment under this Section 5(d)(i) shall become effective
34
<PAGE>
retroactively immediately after the record date in the case of a dividend
and distribution and shall become effective immediately after the effective
date in the case of a issuance, subdivision, combination or
reclassification. If the Corporation pays a stock dividend in shares of its
Common Stock and the holders of the Series A Preferred Stock received such
stock dividend pursuant to Section 2(b) hereof, the Conversion Price shall
not be adjusted for such stock dividend under this Section 5(d)(i).
(ii) Issuance of Additional Shares of Stock. If the Corporation shall
(except as hereinafter provided) issue or sell Additional Shares of Stock
in exchange for consideration in an amount per Additional Share of Stock
less than the Conversion Price in effect immediately prior to such issuance
or sale of Additional Shares of Stock, then the Conversion Price as to the
Common Stock into which the Series A Preferred Stock is convertible
immediately prior to such adjustment shall be adjusted to equal the
consideration paid per Additional Share of Stock. The provisions of this
Section 5(d)(ii) shall not apply to any issuance of Additional Shares of
Common Stock for which an adjustment is provided under Section 5(d)(i) or
which are dividends or distributions received by the holders of the Series
A Preferred Stock pursuant to Section 2(b) hereof.
(iii) (A) Issuance of Warrants or Other Rights. If at any time (i) the
Corporation shall in any manner (whether directly or by assumption in a
merger in which the Corporation is the surviving corporation) issue or sell
any warrants or other rights to subscribe for or purchase any Additional
Shares of Stock or any Convertible Securities, whether or not the rights to
exchange or convert thereunder are immediately exercisable, and the
consideration received for such warrants or other rights or such
Convertible Securities shall be less than the Conversion Price in effect
immediately prior to the time of such issue or sale, then the Conversion
Price shall be adjusted as provided in Section 5(d)(ii). No further
adjustments of the Conversion Price shall be made upon the actual issue of
such Common Stock or of such Convertible Securities, upon exercise of such
warrants or other rights or upon the actual issue of such Common Stock upon
such conversion or exchange of such Convertible Securities.
(B) Issuance of Convertible Securities. If at any time the Corporation
shall in any manner (whether directly or by assumption in a merger in which
the Corporation is the surviving corporation) issue or sell, any
Convertible Securities, whether or not the rights to convert thereunder are
immediately exercisable, and the consideration received for such
Convertible Securities shall be less than the Conversion Price in effect
immediately prior to the time of such issue or sale, then the Conversion
Price shall be adjusted as provided in Section 5(d)(ii). No adjustment of
the Conversion Price shall be made under this Section 5(d)(iii)(B) upon the
issuance of any Convertible Securities which are issued pursuant to the
exercise of any warrants or other subscription or purchase rights therefor,
if any such adjustment shall previously have been made upon the issuance of
such warrants or other rights pursuant to Section 5(d)(iii)(A). No further
adjustments of the Conversion Price shall be made upon the actual issue of
such Common Stock upon conversion of such Convertible Securities and, if
any issue or sale of such Convertible Securities is made upon exercise of
any warrant or other right to subscribe for or to purchase any such
Convertible Securities for which adjustments of the Conversion Price have
been or are to be made pursuant to other
35
<PAGE>
provisions of this Section 5(d), no further adjustments of the Conversion
Price shall be made by reason of such issue or sale.
(iv) Superseding Adjustments. If, at any time after any adjustment of
the Conversion Price at which the Series A Preferred Stock is convertible
shall have been made pursuant to Section 5(d)(iii) as a result of any
issuance of warrants, rights or Convertible Securities,
(A) such warrants or rights, or the right of conversion or
exchange in such other Convertible Securities, shall expire, and all
or a portion of such warrants or rights, or the right of conversion or
exchange with respect to all or a portion of such other Convertible
Securities, as the case may be, shall not have been exercised, or
(B) the consideration per share for which Additional Shares of
Stock are issuable pursuant to such warrants or rights, or the terms
of such other Convertible Securities, shall be increased (to an amount
greater than that which triggered the adjustment of the Conversion
Price pursuant to Section 5(d)(iii)) solely by virtue of provisions
therein contained for an automatic increase in such consideration per
share upon the occurrence of a specified date or event,
then such previous adjustment shall be rescinded and annulled and the
Additional Shares of Stock which were deemed to have been issued by virtue
of the computation made in connection with the adjustment so rescinded and
annulled shall no longer be deemed to have been issued by virtue of such
computation. Thereupon, a recomputation shall be made of the effect of such
warrants or rights or other Convertible Securities on the basis of
(C) treating the number of Additional Shares of Stock or other
property, if any, theretofore actually issued or issuable pursuant to
the previous exercise of any such warrants or rights or any such right
of conversion or exchange, as having been issued on the date or dates
of any such exercise and for the consideration actually received and
receivable therefor, and
(D) treating any such warrants or rights or any such other
Convertible Securities which then remain outstanding as having been
granted or issued immediately after the time of such increase of the
consideration per share for which Additional Shares of Stock or other
property are issuable under such warrants or rights or other
Convertible Securities;
whereupon a new adjustment of the Conversion Price at which the Series A
Preferred Stock is convertible shall be made, which new adjustment shall
supersede the previous adjustment so rescinded and annulled.
(v) Antidilution Adjustments Under Other Securities. Without limiting
any other rights available hereunder to the holders of the Series A
Preferred Stock, if there is an antidilution adjustment (i)Eunder any
Convertible Securities, whether issued prior to or after the Issue Date, or
(ii)Eunder any rights, options or warrants to purchase Additional Shares of
Stock, whether issued prior to or after the Issue Date which, in either
case, results in a reduction in the exercise or purchase price with respect
to such security or rights or results in
36
<PAGE>
an increase in the number of Additional Shares of Stock obtainable under
such Convertible Security, right, option or warrant, then an adjustment
shall be made to the Conversion Price hereunder. Any such adjustment
pursuant to this Section 5(d)(v) shall be by whichever of the following
methods results in a lower Conversion Price: (A)Ea reduction in the
Conversion Price equal to the percentage reduction in such exercise or
purchase price with respect to such Convertible Security, right, option or
warrant or (B)Ea reduction in the Conversion Price which will result in the
same percentage increase in the number of shares of Common Stock available
hereunder as the percentage increase in the number of Additional Shares of
Stock available under such Convertible Security, right, option or warrant.
Any such adjustment under this Section 5(d)(v) shall only be made if it
would result in a lower Conversion Price than that which would be
determined pursuant to any other antidilution adjustment otherwise required
hereunder as a result of the event or circumstance which triggered the
adjustment to such Convertible Security, right, option or warrant, and if
an adjustment is made pursuant to this Section 5(d)(v), such other
antidilution adjustment otherwise required hereunder shall not be made as a
result of such event or circumstance.
(vi) Other Provisions Applicable to Adjustments under this Section.
The following provisions shall be applicable to making adjustments to the
shares of Common Stock into which the Series A Preferred Stock is
convertible and the Conversion Price at which the Series A Preferred Stock
is convertible provided for in this Section 5(d):
(A) Computation of Consideration. To the extent that any
Additional Shares of Stock or any Convertible Securities or any
warrants or other rights to subscribe for or purchase any Additional
Shares of Stock or any Convertible Securities shall be issued for cash
consideration, the consideration received by the Corporation therefor
shall be the amount of the cash received by the Corporation therefor,
or, if such Additional Shares of Stock or Convertible Securities are
offered by the Corporation for subscription, the subscription price,
or, if such Additional Shares of Stock or Convertible Securities are
sold to underwriters or dealers for public offering without a
subscription offering, the public offering price (in any such case
subtracting any amounts paid or receivable for accrued interest or
accrued dividends and any compensation, discounts or expenses paid or
incurred by the Corporation for and in the underwriting of, or
otherwise in connection with, the issuance thereof, to the extent such
amounts shall exceed in any such case five percent (5%) of the amount
of cash received, subscription price or public offering price). To the
extent that such issuance shall be for a consideration other than
cash, then except as herein otherwise expressly provided, the amount
of such consideration shall be deemed to be the fair value of such
consideration at the time of such issuance as determined in good faith
by the Board of Directors of the Corporation. In case any Additional
Shares of Stock or any Convertible Securities or any warrants or other
rights to subscribe for or purchase such Additional Shares of Stock or
Convertible Securities shall be issued in connection with any merger
in which the Corporation issues any securities, the amount of
consideration therefor shall be deemed to be the fair value, as
determined in good faith by the Board of Directors of the Corporation,
of such portion of the assets and business of the nonsurviving
corporation as such Board in good faith shall determine to be
attributable to such Additional Shares of Stock, Convertible
Securities, warrants or other rights, as the case may be. The
37
<PAGE>
consideration for any Additional Shares of Stock issuable pursuant to
any warrants or other rights to subscribe for or purchase the same
shall be the consideration received by the Corporation for issuing
such warrants or other rights plus the additional consideration
payable to the Corporation upon exercise of such warrants or other
rights. The consideration for any Additional Shares of Stock issuable
pursuant to the terms of any Convertible Securities shall be the
consideration received by the Corporation for issuing warrants or
other rights to subscribe for or purchase such Convertible Securities,
plus the consideration paid or payable to the Corporation in respect
of the subscription for or purchase of such Convertible Securities,
plus the additional consideration, if any, payable to the Corporation
upon the exercise of the right of conversion or exchange in such
Convertible Securities. In case of the issuance at any time of any
Additional Shares of Stock or Convertible Securities in payment or
satisfaction of any dividends upon any class of stock other than
Common Stock, the Corporation shall be deemed to have received for
such Additional Shares of Stock or Convertible Securities a
consideration equal to the amount of such dividend so paid or
satisfied.
(B) When Adjustments to Be Made. The adjustments required by this
Section 5(d) shall be made whenever and as often as any event
requiring an adjustment shall occur, except that any adjustment of the
Conversion Price that would otherwise be required may be postponed
(except in the case of a subdivision or combination of shares of the
Common Stock, as provided for in Section 5(d)(i)) up to, but not
beyond, the date of exercise if such adjustment either by itself or
with other adjustments not previously made amount to a change in the
Conversion Price of less than $.05. Any adjustment representing a
change of less than such minimum amount (except as aforesaid) which is
postponed shall be carried forward and made as soon as such
adjustment, together with other adjustments required by this Section
5(d) and not previously made, would result in a minimum adjustment or
on the date of conversion. For the purpose of any adjustment, any
event shall be deemed to have occurred at the close of business on the
date of its occurrence.
(C) Fractional Interests. In computing adjustments under this
Section 5(d), fractional interests in the Common Stock shall be taken
into account to the nearest 1/100th of a share.
(D) Challenge to Good Faith Determination. Whenever the Board of
Directors of the Corporation shall be required to make a determination
in good faith of the fair value of any item under this Section 5(d),
such determination may be challenged in good faith by (1) any holder
of thirty percent (30%) or more of Series A Preferred Stock or (2) a
Designated Entity, and any dispute shall be resolved by an investment
banking firm of recognized national standing jointly selected by the
Corporation and such holder or Designated Entity. The fees of such
investment banker shall be borne by such holder or Designated Entity
unless the Corporation's calculation is determined to be understated
by five percent (5%) or more.
38
<PAGE>
(vii) Reorganization, Reclassification, Merger or Consolidation. If
the Corporation shall at any time reorganize or reclassify the outstanding
shares of Common Stock (other than a change in par value, or from no par
value to par value, or from par value to no par value, or as a result of a
subdivision or combination) or consolidate with or merge into another
corporation (where the Corporation is not the continuing corporation after
such merger or consolidation), the holders of Series A Preferred Stock
shall thereafter be entitled to receive upon conversion of the Series A
Preferred Stock in whole or in part, the same kind and number of shares of
stock and other securities, cash or other property (and upon the same terms
and with the same rights) as would have been distributed to a holder upon
such reorganization, reclassification, consolidation or merger had such
holder converted its Series A Preferred Stock immediately prior to such
reorganization, reclassification, consolidation or merger (subject to
subsequent adjustments under Section 5(d) hereof). The Conversion Price
upon such conversion shall be the Conversion Price that would otherwise be
in effect pursuant to the terms hereof. Notwithstanding anything herein to
the contrary, the Corporation will not effect any such reorganization,
reclassification, merger or consolidation unless prior to the consummation
thereof, the corporation which may be required to deliver any stock,
securities or other assets upon the conversion of the Series A Preferred
Stock shall agree by an instrument in writing to deliver such stock, cash,
securities or other assets to the holders of the Series A Preferred Stock.
A sale, transfer or lease of all or substantially all of the assets of the
Corporation to another person shall be deemed a reorganization,
reclassification, consolidation or merger for the foregoing purposes.
(viii) Exceptions to Adjustment of Conversion Price. Anything herein
to the contrary notwithstanding, the Corporation shall not make any
adjustment of the Conversion Price in the case of Additional Shares of
Stock.
(ix) Chief Financial Officer's Opinion. Upon each adjustment of the
Conversion Price, and in the event of any change in the rights of a holder
of Series A Preferred Stock by reason of other events herein set forth,
then and in each such case, the Corporation will promptly obtain an opinion
of the chief financial officer of the Corporation, stating the adjusted
Conversion Price, or specifying the other shares of the Common Stock,
securities or assets and the amount thereof receivable as a result of such
change in rights, and setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based. The
Corporation will promptly mail a copy of such opinion to the holders of
Series A Preferred Stock. If a holder of thirty percent (30%) or more of
Series A Preferred Stock or a Designated Entity disagrees with such
calculation, the Corporation agrees to obtain within forty-five (45)
Business Days an opinion of a firm of independent certified public
accountants selected by the Corporation's Board of Directors and acceptable
to such holder to review such calculation and the opinion of such firm of
independent certified public accountants shall be final and binding on the
parties and shall be conclusive evidence of the correctness of the
computation with respect to any such adjustment of the Conversion Price.
The fees of such accountants shall be borne by such holder or Designated
Entity unless the calculation of the chief financial officer of the
Corporation is determined to be understated by five percent (5%) or more.
(x) Corporation to Prevent Dilution. In case at any time or from time
to time conditions arise by reason of action taken by the Corporation,
which in the good faith
39
<PAGE>
opinion of its Board of Directors or a majority of the holders of the
Series A Preferred Stock are not adequately covered by the provisions of
this Section 5(d), and which might materially and adversely affect the
exercise rights of the holders of the Series A Preferred Stock, the Board
of Directors of the Corporation shall appoint such firm of independent
certified public accountants acceptable to a majority of the holders of the
Series A Preferred Stock, which shall give their opinion upon the
adjustment, if any, on a basis consistent with the standards established in
the other provisions of this Section 5(d), necessary with respect to the
Conversion Price, so as to preserve, without dilution (other than as
specifically contemplated by the Certificate of Incorporation), the
exercise rights of the holders of the Series A Preferred Stock. Upon
receipt of such opinion, the Board of Directors of the Corporation shall
forthwith make the adjustments described therein.
e) No Impairment. The Corporation will not, by amendment of its Certificate
of Incorporation or through any reorganization, recapitalization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Corporation, but
will at all times in good faith assist in the carrying out of all the provisions
of Section 5 hereof and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the holders of the
Series A Preferred Stock against impairment.
f) No Fractional Share Adjustments. No fractional shares shall be issued
upon conversion of the Series A Preferred Stock. If more than one share of the
Series A Preferred Stock is to be converted at one time by the same stockholder,
the number of full shares issuable upon such conversion shall be computed on the
basis of the aggregate amount of the shares to be converted. Instead of any
fractional shares of Common Stock which would otherwise be issuable upon
conversion of any shares of Series A Preferred Stock, the Corporation will pay a
cash adjustment in respect of such fractional interest in an amount equal to the
same fraction of the Market Price per share of Common Stock at the close of
business on the day of conversion which such shares of Series A Preferred Stock
would be convertible into on such date.
g) Shares to be Reserved. The Corporation shall at all times reserve and
keep available, out of its authorized and unissued stock, solely for the purpose
of effecting the conversion of the Series A Preferred Stock, such number of
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all of the Series A Preferred Stock from time to time outstanding.
The Corporation shall from time to time, in accordance with the laws of the
State of New York, increase the authorized number of shares of Common Stock if
at any time the number of shares of authorized but unissued Common Stock shall
be insufficient to permit the conversion in full of the Series A Preferred
Stock.
h) Taxes and Charges. The Corporation will pay any and all issue or other
taxes that may be payable in respect of any issuance or delivery of shares of
Common Stock on conversion of the Series A Preferred Stock. The Corporation
shall not, however, be required to pay any tax which may be payable in respect
of any transfer involved in the issuance or delivery of Common Stock in a name
other than that of the Series A Preferred Stock, and no such issuance or
delivery shall be made unless and until the Person requesting such issuance has
paid to the Corporation the amount of such tax or has established, to the
satisfaction of the Corporation, that such tax has been paid.
40
<PAGE>
i) Accrued Dividends. Upon conversion of any shares of Series A Preferred
Stock, the holder thereof shall be entitled to receive any accrued but unpaid
dividends in respect of the shares of Series A Preferred Stock so converted to
the date of such conversion.
j) Closing of Books. The Corporation will at no time close its transfer
books against the transfer of any shares of Series A Preferred Stock or of any
shares of Common Stock issued or issuable upon the conversion of any shares of
Series A Preferred Stock in any manner which interferes with the timely
conversion of such shares of Series A Preferred Stock.
6. Redemption
a) Redemption Price. Any redemption of the Series A Preferred Stock
pursuant to Section 6(b) shall be at a price per share equal to the Liquidation
Value plus all declared but unpaid dividends thereon through the redemption date
(the "Mandatory Redemption Price"). Any redemption of the Series A Preferred
Stock pursuant to Section 6(d) shall be at a price per share equal to the Series
A Liquidation Preference, except that, for purposes of calculation of the
redemption price under this Section 6(a), clause (ii) of the definition of
Series A Liquidation Preference in Section 3(a) hereof shall provide for the
amount per share such holders would have received if such holders had converted
their shares of Series A Preferred Stock into shares of Common Stock immediately
prior to the Fundamental Change (the "Optional Redemption Price"). The Mandatory
Redemption Price shall be paid, at the election of the Corporation, in cash or
shares of Common Stock which have been registered under a registration statement
under the Securities Act of 1933, as amended, which registration statement is
effective, provided, that, for purposes of calculating the number of shares of
Common Stock to be received by each holder of Series A Preferred Stock, each
such share of Common Stock shall be valued at 90% of the Market Price.
b) Redemption at the Corporation's Option. Subject to Section 6(a) hereof,
the Corporation may, it its option, redeem all, but not less than all, of the
then outstanding shares of Series A Preferred Stock at the Mandatory Redemption
Price on MarchE31,E2004.
c) Procedures for Redemption at the Corporation's Option. In the event the
Corporation shall redeem shares of Series A Preferred Stock pursuant to Section
6(b), the Corporation shall give written notice of such redemption by first
class mail, postage prepaid, mailed not less than thirty (30) nor more than
ninety (90) days prior to the redemption date, to each holder of record of the
shares to be redeemed, at such holder's address as the same appears on the stock
records of the Corporation. Each such notice shall state: (i) the redemption
date; (ii) the number of shares of Series A Preferred Stock to be redeemed;
(iii) the Mandatory Redemption Price or Optional Redemption Price, as the case
may be; (iv) the place or places where certificates for such shares are to be
surrendered for payment of the Mandatory Redemption Price or Optional Redemption
Price, as the case may be; (v) that payment will be made upon presentation and
surrender of such Series A Preferred Stock; (vi) the then current Conversion
Price; (vii) that dividends on the shares to be redeemed shall cease to accrue
following such redemption date; (viii) that such redemption is mandatory, if
pursuant to Section 6(b); and (ix) that dividends, if any, accrued to and
including the date fixed for redemption will be paid as specified in such
notice.
41
<PAGE>
Notice having been mailed as aforesaid, from and after the redemption date,
unless the Corporation shall be in default in the payment of the Mandatory
Redemption Price or Optional Redemption Price, as the case may be (including any
accrued and unpaid dividends to (and including) the date fixed for redemption),
(A) dividends on the shares of the Series A Preferred Stock so called for
redemption shall cease to accrue, (B) such shares shall be deemed no longer
outstanding and (C) all rights of the holders thereof as stockholders of the
Corporation (except the right to receive from the Corporation (i)Eany moneys
payable upon redemption without interest thereon and (ii)Eany shares of Series A
Preferred Stock and Common Stock pursuant to Section 6(a) hereof) shall cease.
Upon surrender in accordance with such notice of the certificates for any
such shares so redeemed (properly endorsed or assigned for transfer, if the
Board of Directors shall so require and the notice shall so state), such shares
shall be redeemed by the Corporation at the applicable Mandatory Redemption
Price.
Notwithstanding the foregoing, if notice of redemption has been given
pursuant to this Section 6 and any holder of shares of Series A Preferred Stock
shall, prior to the close of business on the third (3rd) Business Day preceding
the redemption date, give written notice to the Corporation pursuant to Section
5(b) hereof of the conversion of any or all of the shares to be redeemed held by
such holder (accompanied by a certificate or certificates for such shares, duly
endorsed or assigned to the Corporation), then the conversion of such shares to
be redeemed shall become effective as provided in Section 5 hereof.
d) Redemption at Option of Holder Upon a Fundamental Change. Subject to
Section 6(a) hereof, if a Fundamental Change occurs, each holder of Series A
Preferred Stock shall have the right, at the holder's option, to require the
Corporation to repurchase all of such holder's Series A Preferred Stock, or any
portion thereof, on the date (the "Repurchase Date") selected by the Corporation
that is not less than ten (10) nor more than twenty (20) days after the Final
Surrender Date, at a price per share equal to the Optional Redemption Price. The
Corporation agrees that it will not complete any Fundamental Change unless
proper provision has been made to satisfy its obligations under this Section
6(d).
e) Notice of Fundamental Change. Within thirty (30) days after the
occurrence of a Fundamental Change, the Corporation shall mail to all holders of
record of the Series A Preferred Stock a notice in the manner and containing the
information set out in Section 6(c), except that, for purposes of this Section
6(e), such notice shall also describe the occurrence of such Fundamental Change
and the repurchase right arising as a result thereof. To exercise the repurchase
right, a holder of Series A Preferred Stock must surrender, on or before the
date which is, subject to any contrary requirements of applicable law, thirty
(30) days after the date of mailing of the notice from the Corporation (the
"Final Surrender Date"), the certificates representing the Series A Preferred
Stock with respect to which the right is being exercised, duly endorsed for
transfer to the Corporation, together with a written notice of election.
f) Election Irrevocable. An election by a holder of Series A Preferred
Stock to have the Corporation repurchase shares of Series A Preferred Stock
pursuant to Section 6(d) shall become irrevocable at the close of business on
the relevant Repurchase Date.
42
<PAGE>
7. Shares to be Retired. Any share of Series A Preferred Stock converted,
redeemed, repurchased or otherwise acquired by the Corporation shall be retired
and cancelled and shall upon cancellation be restored to the status of
authorized but unissued shares of preferred stock, subject to reissuance by the
Board of Directors as shares of preferred stock of one or more other series but
not as shares of Series A Preferred Stock.
8. Preemptive Rights.
a) Except (i) for issuances of pro rata dividends to all holders of Common
Stock, (ii) stock issued to employees, officers or directors in connection with
management options or incentive plans approved by the Board of Directors, (iii)
stock issued in connection with any merger, acquisition or business combination
or (iv) stock issued for consideration amounting to less than $500,000 in any
single transaction where the purchase price is not less than the then applicable
Conversion Price, provided that the aggregate amount of all such transactions
shall not exceed $1,000,000, the holders of the Series A Preferred Stock, in
order to enable such holders to maintain their fully diluted percentage
ownership of the Corporation, shall have preemptive rights, as hereinafter set
forth, to purchase any capital stock, including any warrants or securities
convertible into capital stock, of the Corporation hereafter issued by the
Corporation so that a holder of the Series A Preferred Stock shall hereafter be
entitled to acquire a percentage of capital stock which is hereafter issued
equal to the same percentage of the issued and outstanding Common Stock of the
Corporation as is held (directly or obtainable upon conversion of the Series A
Preferred Stock) by such holder of Series A Preferred Stock immediately prior to
the date on which the capital stock is to be issued. As used herein, "issue"
(and variations thereof) includes sales and transfers by the Corporation of
treasury shares.
b) The Corporation shall, before issuing any additional capital stock
(other than the exceptions referred to in Section 8(a) hereof), give written
notice thereof to the holders of the Series A Preferred Stock. Such notice shall
specify what type of instrument the Corporation intends to issue and the
consideration which the Corporation intends to receive therefor. For a period of
twenty (20) days following receipt by the holders of the Series A Preferred
Stock of such notice, the Corporation shall be deemed to have irrevocably
offered to sell to the holders of the Series A Preferred Stock a sufficient
number of shares of such capital stock so that the holders of the Series A
Preferred Stock, if such holders elect to acquire such shares as hereinafter set
forth, shall be capable of acquiring the same percentage of such shares as the
percentage of Common Stock beneficially owned (directly or obtainable upon
conversion of the Series A Preferred Stock) by such holders immediately prior to
the proposed issuance. In the event any such offer is accepted, in whole or in
part, by the holders of the Series A Preferred Stock, the Corporation shall sell
such shares to holders of the Series A Preferred Stock for the consideration and
on the precise terms set forth in the Corporation's notice (given under the
first two sentences of this paragraph). In the event that one or more holders of
the Series A Preferred Stock elects not to, or fails to, exercise its rights
under this Section 8(b) within the twenty (20) day period, then the Corporation
may issue the remaining shares of capital stock to third persons but only for
the same consideration set forth in the Corporation's notice (given under the
first two sentences of this paragraph) and no later than sixty (60) days after
the expiration of such twenty (20) day period. The closing for such transaction
shall take place as proposed by the Corporation with respect to the shares of
capital stock proposed to be issued, at which closing the Corporation shall
deliver certificates for the shares of capital stock in the
43
<PAGE>
respective names of the holders of the Series A Preferred Stock against receipt
of the consideration therefor.
c) Notwithstanding any other provision hereof, (i) the preemptive rights
granted to holders of Series A Preferred Stock by this Section 8 shall terminate
with respect to a share of Series A Preferred Stock upon the conversion or
redemption of such share of Series A Preferred Stock in accordance with the
provisions hereof and (ii) the holders of Series A Preferred Stock and
Conversion Shares shall not increase the fully diluted percentage ownership of
the Corporation beyond such level as exists immediately following the Issue
Date, whether by operation of the provisions of Section 2 or 5 hereof, through
an open market purchase or otherwise, except where the Corporation (a)
determines to pay dividends in additional shares of Series A Preferred Stock as
permitted by Section 2(a)(i), (b) is in financial distress and chooses to issue
securities to such holders, (c) repurchases outstanding shares of its capital
stock or takes other corporate action having a similar effect or (d) pursuant to
Section 5(d), has issued or sold Additional Shares of Stock in exchange for
consideration in an amount per Additional Share of Stock less than the
Conversion Price in effect immediately prior to such issuance or sale.
9. Call
a) Call at the Corporation's Option. Subject to the other provisions of
this Section 9, on any date beginning two years after the Issue Date, the
Corporation shall have the right to purchase all (but not less than all)
outstanding shares of Series A Preferred Stock (the "Call"), provided, however,
that (i) the Market Price of a share of Common Stock is equal to, or greater
than, an amount equal to 250% of the then applicable Conversion Price and (ii)
the Common Stock has traded, on the principal market for the Common Stock, with
an average daily volume in excess of 20,000 shares for a period of 30
consecutive days ending on the day immediately prior to such date. Any purchase
of the Series A Preferred Stock pursuant to this Section 9(a) shall be at a
price per share of Series A Preferred Stock equal to the Mandatory Redemption
Price.
b) Procedures for Call at the Corporation's Option. The Corporation's right
to Call the Series A Preferred Stock pursuant to Section 9(a) shall be
conditioned upon the Corporation giving notice (the "Call Notice"), by first
class mail, postage prepaid, of the exercise of the Call to the holders of the
Series A Preferred Stock not less than twenty five (25) days prior to the date
of the exercise of the Call (the "Call Date"). Each Call Notice shall state: (i)
the Call Date; (ii) the Mandatory Redemption Price; (iii) the place or places
where certificates for such shares are to be surrendered for payment of the
Mandatory Redemption Price; (iv) that payment will be made upon presentation and
surrender of such Series A Preferred Stock; (v) the then current Conversion
Price and the date on which the right to convert such shares of Series A
Preferred Stock will expire; (vi) that dividends on the shares to be purchased
shall cease to accrue following such Call Date; (vii) that such Call is
mandatory; and (viii) that dividends, if any, accrued to and including the Call
Date will be paid as specified in such notice. Notice having been mailed as
aforesaid, from and after the Call Date, unless the Corporation shall be in
default in the payment of the Mandatory Redemption Price (including any accrued
and unpaid dividends to (and including) the Call Date), (A) dividends on the
shares of the Series A Preferred Stock shall cease to accrue, (B) such shares
shall be deemed no longer outstanding and (C) all rights of the holders thereof
as stockholders of the Corporation (except the right to receive from the
Corporation (i)Eany moneys payable upon exercise of the Call
44
<PAGE>
without interest thereon and (ii)Eany shares of Common Stock pursuant to Section
5 hereof) shall cease.
Upon surrender in accordance with the Call Notice of the certificates for
any such shares so purchased (properly endorsed or assigned for transfer, if the
Board of Directors shall so require and the Call Notice shall so state), such
shares shall be purchased by the Corporation at the applicable Mandatory
Redemption Price.
Notwithstanding the foregoing, if the Call Notice has been given pursuant
to this Section 9 and any holder of shares of Series A Preferred Stock shall,
prior to the close of business on the twentieth (20th) day after receipt of such
Call Notice, give written notice to the Corporation pursuant to Section 5(b)
hereof of the conversion of any or all of the shares to be purchased held by
such holder (accompanied by a certificate or certificates for such shares, duly
endorsed or assigned to the Corporation), then (i) the conversion of such shares
to be purchased shall become effective as provided in Section 5 hereof and (ii)
the Corporation's right to Call such shares to be purchased shall terminate.
10. Definitions. As used herein, the following terms shall have the
respective meanings set forth below:
"Additional Shares of Stock" means all shares of Common Stock issued
by the Corporation after the Issue Date, other than (i)ECommon Stock to be
issued upon conversion of the Series A Preferred Stock, (ii) 500,000 shares
of Common Stock reserved for issuance under future stock option plans that
may be approved and (iii) 2,044,529 shares of Common Stock reserved or to
be reserved for issuance under stock options, stock option plans or
warrants in effect as of the date of the resolution pursuant to which this
Certificate of Amendment has been adopted.
"Affiliate", when used with respect to any Person, means (i)Eif such
Person is a corporation, any officer or director thereof (other than a
director elected pursuant to Section 4 hereof) and any Person which is,
directly or indirectly, the beneficial owner (by itself or as part of any
group) of more than five percent (5%) of any class of any equity security
(within the meaning of the Securities Exchange Act of 1934, as amended)
thereof, and, if such beneficial owner is a partnership, any general
partner thereof, or if such beneficial owner is a corporation, any Person
controlling, controlled by or under common control with such beneficial
owner, or any officer or director of such beneficial owner or of any
corporation occupying any such control relationship, (ii)Eif such Person is
a partnership, any general or limited partner thereof, and (iii)Eany other
Person which, directly or indirectly, controls or is controlled by or is
under common control with such Person. For purposes of this definition,
"control" (including the correlative terms "controlling", "controlled by"
and "under common control with"), with respect to any Person, shall mean
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through
the ownership of voting securities or by contract or otherwise.
45
<PAGE>
"Business Day" means any day other than a Saturday, Sunday or any day
on which banks in the State of New York are authorized or obligated to
close.
"Call" shall have the meaning set forth in Section 9(a).
"Call Date" shall have the meaning set forth in Section 9(b).
"Call Notice" shall have the meaning set forth in Section 9(b).
"Common Stock" means the Corporation's Common Stock, par value $.01
per share, and shall also include any common stock of the Corporation
hereafter authorized and any capital stock of the Corporation of any other
class hereafter authorized which is not preferred as to dividends or assets
over any other class of capital stock of the Corporation or which has
ordinary voting power for the election of directors of the Corporation.
"Conversion Price" means the Conversion Price per share of Common
Stock into which the Series A Preferred Stock is convertible, as such
Conversion Price may be adjusted pursuant to Section 5 hereof. The initial
Conversion Price will be $2.375.
"Convertible Securities" means evidences of indebtedness, shares of
preferred stock or other securities which are convertible into or
exchangeable, with or without payment of additional consideration in cash
or property, for Additional Shares of Stock, either immediately or upon the
occurrence of a specified date or a specified event, other than the Series
A Preferred Stock.
"Designated Entity" means, in connection with the rights of any Person
holding less than thirty percent (30%), in the aggregate, of the originally
issued Shares and Conversion Shares (as such terms are defined below in the
definition of "Fleming Holders"), (i) as long as any Shares or Conversion
Shares are held by any Person identified in clause (i) or (ii) of the
definition of "Fleming Holders", Fleming Capital Management, 320 Park
Avenue, New York, NY 10022, Attention: Robert L. Burr and (ii) if no Shares
or Conversion Shares are held by a Person identified in clause (i) or (ii)
of the definition of "Fleming Holders", the entity designated by the
Transferee holding the largest number of such shares, provided, that such
Transferee owns thirty percent (30%) or more, in the aggregate, of the
originally issued Shares and Conversion Shares (in which case such
Transferee shall provide notice to the Corporation of such entity). For so
long as no Shares or Conversion Shares are held by any Person identified in
clause (i) or (ii) of the definition of "Fleming Holders" and no Person
holds thirty percent (30%) or more, in the aggregate, of the originally
issued Shares and Conversion Shares, there shall be no Designated Entity.
For purposes of this definition of "Designated Entity," the calculation of
a Person's percentage holdings of Conversion Shares shall be determined
based upon the number of Shares from which such Conversion Shares derived.
46
<PAGE>
"Final Surrender Date" shall have the meaning set forth in Section
6(e).
"Fleming Funds" means Fleming US Discovery Fund III, L.P. and Fleming
US Discovery Offshore Fund III, L.P.
"Fleming Holders" means (i) the Fleming Funds, (ii) any Affiliate,
officer or employee of an Affiliate or investment fund managed by an
Affiliate of the Fleming Funds to which the Fleming Funds may transfer
record and/or beneficial ownership of any shares of Series A Preferred
Stock (the "Shares") or any shares of Common Stock obtained or obtainable
upon conversion of the Shares (the "Conversion Shares") and (iii) any
transferee of Shares or Conversion Shares from a Person named in clause (i)
or (ii) hereof (provided that such transferee is consented to by the
Corporation, such consent not to be unreasonably withheld), other than a
transferee of Shares or Conversion Shares sold in either a public offering
pursuant to a registration statement under the Securities Act or pursuant
to Rule 144 under the Securities Act. The "Conversion Shares" shall include
any capital stock or other securities into which Conversion Shares are
changed and any capital stock or other securities resulting from or
comprising a reclassification, combination or subdivision of, or a stock
dividend on, any Conversion Shares.
"Fundamental Change" means any of the following events:
i) the sale (or functional equivalent of a sale) of all or
substantially all of the assets of the Corporation;
ii) any event (A) which results in the registration of the
Corporation's Common Stock under the Securities Exchange Act of 1934,
as amended, to be no longer required; (B) requiring the Corporation to
make a filing under Section 13(e) of the Securities Exchange Act of
1934, as amended; (C) reducing substantially or eliminating the public
market for shares of Common Stock of the Corporation; or (D) causing a
delisting of the Corporation's Common Stock from the Nasdaq Stock
Market;
iii)any consolidation of the Corporation with, or merger of the
Corporation into, any other person, any merger of another person into
the Corporation or any other business combination involving the
Corporation which results in the holders of the Corporation's stock
immediately prior to giving effect to such transaction owning shares
of capital stock of the surviving corporation in such transaction
representing (x) fifty percent (50%) or less of the total voting power
of all shares of capital stock of such surviving corporation entitled
to vote generally in the election of directors or (y) fifty percent
(50%) or less of the total value of all capital stock of such
surviving corporation; or
iv) the commencement by the Corporation of a voluntary case under
the Federal bankruptcy laws or any other applicable Federal or state
47
<PAGE>
bankruptcy, insolvency or similar law; the consent by the Corporation
to the entry of an order for relief in an involuntary case under such
law or to the appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or other similar official) of the
Corporation or of any substantial part of its property; any assignment
by the Corporation for the benefit of its creditors; any admission by
the Corporation in writing of its inability to pay its debts generally
as they become due; the entry of a decree or order for relief in
respect of the Corporation by a court having jurisdiction in the
premises in an involuntary case under Federal bankruptcy laws or any
other applicable Federal or state bankruptcy, insolvency or similar
law appointing a receiver, liquidator, assignee, custodian, trustee,
sequestrator (or other similar official) of the Corporation or of any
substantial part of its property, or ordering the winding up or
liquidation of its affairs, and on account of any such event the
Corporation shall liquidate, dissolve or wind up; or the liquidation,
dissolution or winding up of the Corporation under any other
circumstances.
"Issue Date" means, as to any share of Series A Preferred Stock, the
date of original issuance thereof by the Corporation.
"Junior Securities" mean the Common Stock and any other class of
capital stock or series of preferred stock existing on the date hereof or
hereafter created by the Corporation which does not expressly provide that
it ranks senior to or pari passu with the Series A Preferred Stock as to
dividends, other distributions, liquidation preference or otherwise.
"Liquidation Value" means $100 per share with respect to the Series A
Preferred Stock.
"Mandatory Redemption Price" shall have the meaning set forth in
Section 6(a).
"Market Price" means, as to any security on the date of determination
thereof, the average of the closing prices of such security's sales on all
principal United States securities exchanges on which such security may at
the time be listed, or, if there shall have been no sales on any such
exchange on any day, the last trading price of such security on such day,
or if such there is no such price, the average of the bid and asked prices
at the end of such day, on the Nasdaq Stock Market, in each such case
averaged for a period of thirty (30) consecutive calendar days prior to the
day when the Market Price is being determined. Notwithstanding the
foregoing, with respect to the issuance of any security by the Corporation
in an underwritten public offering, the Market Price shall be the per share
purchase price paid by the underwriters. If at any time such security is
not listed on any exchange or the Nasdaq Stock Market, the Market Price
shall be deemed to be the fair value thereof determined by an investment
banking firm of nationally recognized standing selected by the Board of
Directors of the Corporation and acceptable to holders of a majority of the
Series A Preferred Stock, as of the most recent practicable date when the
determination is to be made, taking into account the value of the
Corporation as a going concern, and
48
<PAGE>
without taking into account any lack of liquidity of such security or any
discount for a minority interest.
"Optional Redemption Price" shall have the meaning set forth in
Section 6(a).
"Parity Securities" mean any class of capital stock or series of
preferred stock existing on the date hereof or hereafter created by the
Corporation, with the prior written consent of the Fleming Holders, which
expressly provides that it ranks pari passu with the Series A Preferred
Stock as to dividends, other distributions, liquidation preference or
otherwise.
"Payment Amount" means such amount as is necessary to cause the net
present value to equal zero as of any date of all Cash Inflows and all Cash
Outflows (each as defined below) with respect to the Series A Preferred
Stock being repurchased pursuant to Section 6 or held on the date of the
distribution pursuant to Section 3, as the case may be, when calculated
with an annual interest rate (compounded annually) equal to twelve percent
(12%). "Cash Inflows" as used herein means all cash payments, including the
Payment Amount, received by the holders of the Series A Preferred Stock as
a dividend or distribution with respect to, or as consideration for the
sale of, such Series A Preferred Stock (whether such payments are received
from the Corporation or any other Person). "Cash Outflows" as used herein
means the sum of all cash payments made by the holders of the Series A
Preferred Stock to the Corporation to acquire such Series A Preferred
Stock. (For the avoidance of doubt, Cash Inflows and Cash Outflows with
respect to any Series A Preferred Stock not included in the Series A
Preferred Stock being repurchased pursuant to Section 6 hereof as part of
the transaction for which the Payment Amount is then being calculated shall
not be included in the Cash Inflows and Cash Outflows used to make such
calculation (for purposes of Section 6 only), and only the Cash Inflows and
Cash Outflows with respect to the Series A Preferred Stock which are then
being repurchased pursuant to Section 6 hereof in the transaction for which
the Payment Amount is then being calculated shall be used in the Cash
Inflows and Cash Outflows used to make such calculation (for purposes of
Section 6 only).)
"Permitted Preferred Transferee" shall have the meaning set forth in
Section 4(c).
"Person or "person" shall mean an individual, partnership,
corporation, trust, unincorporated organization, joint venture, government
or agency, political subdivision thereof, or any other entity of any kind.
"Preferred Director" or "Preferred Directors" shall have the meaning
set forth in Section 4(c).
"Preferred Liquidation Value", with respect to any share of Series A
Preferred Stock as of a particular date, means the sum of $100 plus an
amount equal to any accrued and unpaid dividends on such share of Series A
Preferred Stock added
49
<PAGE>
to the Preferred Liquidation Value of such share of Series A Preferred
Stock on any Dividend Payment Date pursuant to Section 2(a)(ii)(B) and not
thereafter paid.
"Repurchase Date" shall have the meaning set forth in Section 6(d).
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Series A Liquidation Preference" shall have the meaning set forth in
Section 3(a).
"Series A Preferred Stock" shall have the meaning set forth in the
resolution paragraph in the preamble.
"Stock Purchase Agreements" mean each of the two Stock Purchase
Agreements dated as of the date hereof between the Corporation and the
purchaser listed on the signature page of each such Agreement.
"Subsidiary", with respect to any Person, means any corporation,
association or other entity of which more than 50% of the total voting
power of shares of stock or other equity interests (without regard to the
occurrence of any contingency) to vote in the election of directors,
managers or trustees thereof is, at the time as of which any determination
is being made, owned or controlled, directly or indirectly, by such Person
or one or more of its Subsidiaries, or both. The term "Subsidiary" or
"Subsidiaries" when used herein without reference to any particular Person,
means a Subsidiary or Subsidiaries of the Corporation.
"Transferees" shall mean any transferee (except for a Fleming Holder)
of Shares or Conversion Shares (as such terms are defined within the
definition of "Fleming Holders") from a Fleming Holder. Transferees shall
not include a transferee of Shares or Conversion Shares sold in either a
public offering pursuant to a registration statement under the Securities
Act or pursuant to Rule 144 under the Securities Act.
11. Notices. Except as may otherwise be provided for herein, all notices
referred to herein shall be in writing, and all notices hereunder shall be
deemed to have been given and received (i) upon receipt, in the case of a notice
of conversion given to the Corporation as contemplated in Section 5(b) hereof or
in the case of a notice of redemption at the holder's option given to the
Corporation as contemplated in Section 6(d) hereof, or (ii) in all other cases,
upon the earlier of (x)Ereceipt of such notice, (y) three Business Days after
the mailing of such notice if sent by registered mail (unless first-class mail
shall be specifically permitted for such notice under the terms hereof) or (z)
the Business Day following sending such notice by overnight courier, in any case
with postage or delivery charges prepaid, addressed: if to the Corporation, to
its offices at 275 North Middletown Road, Pearl River, NY 10965, Attention:
Stephen P. Mandracchia, or to an agent of the Corporation designated as
permitted by the Certificate of Incorporation, or, if to any holder of the
Series A Preferred Stock, to such holder at the address of such holder of the
Series A Preferred Stock as listed in the stock record books of the Corporation,
or to such other address as the Corporation or holder, as the case may be, shall
have designated by notice similarly given.
50
<PAGE>
[remainder of page intentionally left blank]
51
<PAGE>
IN WITNESS WHEREOF, we have hereunto executed this Certificate of Amendment
and do affirm the foregoing as true under the penalties of perjury this 29th day
of March, 1999.
HUDSON TECHNOLOGIES, INC.
By: /s/ Kevin J Zugibe
----------------------------------
Name: Kevin J. Zugibe
Title: Chairman and Chief
Executive Officer
By: /s/Stephen P. Mandracchia
----------------------------------
Name: Stephen P. Mandracchia
Title: Secretary
52
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB
AT JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,489,000
<SECURITIES> 0
<RECEIVABLES> 2,262,000
<ALLOWANCES> 236,000
<INVENTORY> 4,693,000
<CURRENT-ASSETS> 9,493,000
<PP&E> 5,879,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,496,000
<CURRENT-LIABILITIES> 5,935,000
<BONDS> 0
51,000
0
<COMMON> 6,500,000
<OTHER-SE> 1,248,000
<TOTAL-LIABILITY-AND-EQUITY> 15,496,000
<SALES> 9,027,000
<TOTAL-REVENUES> 9,027,000
<CGS> 6,840,000
<TOTAL-COSTS> 6,840,000
<OTHER-EXPENSES> 664,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 208,000
<INCOME-PRETAX> (1,643,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,643,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,643,000)
<EPS-BASIC> (0.32)
<EPS-DILUTED> (0.32)
</TABLE>
