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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 September 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
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Hudson Technologies, Inc.
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(Exact name of small business issuer as specified in its charter)
New York 13-3641539
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification number)
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
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Class Outstanding at October 29, 1999
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<PAGE>
Hudson Technologies, Inc.
Index
Part I. Financial Information Page Number
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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 4.- Submission of Matters to a Vote of Security Holders 19
Item 6.- Exhibits and Reports on Form 8-K 19
Signatures 20
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Part 1 - Financial Information
Hudson Technologies, Inc. and subsidiaries
Consolidated Balance Sheets
(Amounts in thousands, except for share and par value amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Assets (unaudited)
Current assets:
Cash and cash equivalents $ 2,526 $ 776
Trade accounts receivable - net of allowance for doubtful
accounts of $236 and $240 2,007 1,075
Inventories 2,381 3,284
Prepaid expenses and other current assets 241 208
-------- --------
Total current assets 7,155 5,343
Property, plant and equipment, less accumulated depreciation 6,179 5,332
Other assets 126 184
-------- --------
Total Assets $ 13,460 $ 10,859
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 2,953 $ 4,250
Short-term debt 1,441 1,040
-------- --------
Total current liabilities 4,394 5,290
Deferred income 26 42
Long-term debt, less current maturities 2,010 1,885
-------- --------
Total Liabilities 6,430 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 67,314 and none 6,731 --
Additional paid-in capital 21,614 22,545
Accumulated deficit (21,366) (18,954)
-------- --------
Total Stockholders' Equity 7,030 3,642
-------- --------
Total Liabilities and Stockholders' Equity $ 13,460 $ 10,859
======== ========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
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Hudson Technologies, Inc. and subsidiaries
Consolidated Statements of Operations
(Amounts in thousands, except for share and per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three month period Nine month period
ended September 30, ended September 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 6,115 $ 5,153 $ 15,141 $ 20,678
Cost of sales 4,927 4,094 11,766 15,501
----------- ----------- ----------- -----------
Gross Profit 1,188 1,059 3,375 5,177
----------- ----------- ----------- -----------
Operating expenses:
Selling and marketing 426 551 1,278 1,327
General and administrative 1,176 1,231 3,311 3,667
Depreciation and amortization 335 303 999 850
----------- ----------- ----------- -----------
Total operating expenses 1,937 2,085 5,588 5,844
----------- ----------- ----------- -----------
Operating income (loss) (749) (1,026) (2,213) (667)
----------- ----------- ----------- -----------
Other income (expense):
Interest expense (118) (95) (326) (293)
Loss on sale of equipment -- -- (80) --
Other income 98 35 207 87
----------- ----------- ----------- -----------
Total other income (expense) (20) (60) (199) (206)
----------- ----------- ----------- -----------
Income (loss) before income taxes (769) (1,086) (2,412) (873)
Income taxes -- -- -- --
----------- ----------- ----------- -----------
Net income (loss) $ (769) $ (1,086) $ (2,412) $ (873)
=========== =========== =========== ===========
Net income (loss) per common share - basic $ (0.17) $ (0.21) $ (0.52) $ (0.17)
=========== =========== =========== ===========
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 $ (0.17) $ (0.21) $ (0.52) $ (0.17)
=========== =========== =========== ===========
Weighted average number of shares outstanding 5,085,820 5,065,820 5,085,820 5,065,820
=========== =========== =========== ===========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
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Hudson Technologies, Inc. and subsidiaries
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
(unaudited)
(Amounts in thousands)
Nine month period
ended September 30,
1999 1998
------- -------
Cash flows from operating activities:
Net loss $(2,412) $ (873)
Adjustments to reconcile net loss
to cash provided (used) by operating activities:
Depreciation and amortization 999 850
Allowance for doubtful accounts 41 80
Changes in assets and liabilities:
Trade receivables (973) 334
Inventories 904 2,399
Income taxes receivables -- 18
Prepaid and other current assets (33) (65)
Other assets 55 (23)
Accounts payable and accrued expenses (1,298) (1,018)
Deferred income (16) (13)
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Cash provided (used) by operating activities (2,733) 1,689
------- -------
Cash flows from investing activities:
Additions to property, plant, and equipment (1,844) (439)
------- -------
Cash used by investing activities (1,844) (439)
------- -------
Cash flows from financing activities:
Proceeds from issuance of Preferred Stock - net 5,800 --
Proceeds (repayments) from short-term bank borrowings - net 108 (1,368)
Proceeds from long-term debt 853 950
Repayment of long-term debt (434) (245)
------- -------
Cash provided (used) by financing activities 6,327 (663)
------- -------
Increase in cash and cash equivalents 1,750 587
Cash and equivalents at beginning of period 776 626
------- -------
Cash and equivalents at end of period $ 2,526 $ 1,213
======= =======
- -------
Supplemental disclosure of cash flow information:
Cash paid during period for interest $ 326 $ 293
See accompanying Notes to the Consolidated Financial Statement
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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 nine months ended September 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. Effective
October 11, 1999, the Company sold an additional 5% ownership interest in ESS
(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 September 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 September
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 nine months ended September 30, 1999, one customer accounted for 20%
of the Company's revenues. During the nine months ended September 30, 1998, two
customers accounted for 30% and 14%, 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, as
incurred in 1999, would have a material adverse effect on the Company's
financial position and results of operations.
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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 dividends on the outstanding Preferred Stock,
$231,000 as of September 30, 1999, divided by the weighted average number of
shares outstanding. If dilutive, common equivalent shares (common shares
assuming exercise of options and warrants or conversion of preferred stock)
utilizing the treasury stock method are considered in the presentation of
dilutive earnings per share.
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
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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
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 Series A Preferred Stock were $6,500,000.
The Series A Preferred Stock has voting rights on an as-if converted basis. The
number of votes applicable to the Series A Preferred Stock is equal to the
number of shares of common stock into which the Series A Preferred Stock is then
convertible. However, the holders of the Series A Preferred Stock will provide
the Chief Executive Officer and Secretary of the Company a proxy to vote all
shares currently owned and subsequently acquired above 29% of the votes entitled
to be cast by all shareholders of the Company. The Series A Preferred Stock
carries a dividend rate of 7%, which will increase to 16%, if the stock remained
outstanding, on the fifth anniversary date, and converts to Common Stock at a
rate of $2.375 per share, which was 27% above the closing market price of Common
Stock as of March 29, 1999. The conversion rate may be subject to certain
antidilution provisions. The Company is using the net proceeds from the issuance
of the Series A Preferred Stock to expand its RefrigerantSide(TM) Services and
for working capital purposes.
The Company will pay dividends, in arrears, on the Series A Preferred Stock,
semi annually, either in cash or additional shares, at the Company's option,
during the first two years after which dividends will be paid in cash. On
September 30, 1999, the Company declared and paid, in-kind, the dividends on the
outstanding Series A Preferred Stock. The Company issued a total of 2,314
additional shares of its Series A Preferred Stock in satisfaction of the
dividends due. The Company may redeem the Series A Preferred Stock on March 31,
2004 either in cash or shares of Common Stock valued at 90% of the average
trading price of the Common Stock for the 30 days preceding March 31, 2004. In
addition, after March 30, 2001, the Company may call the Series A Preferred
Stock if the market price of the Common Stock is equal 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 Series A Preferred Stock. The holders of the Series A
Preferred Stock, voting as a separate class, have the right to elect up to two
members to the Company's Board of Directors; or at their option, to designate up
to two 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
have elected two members to the Board of Directors.
The Company engaged an advisor to facilitate the Company's efforts in connection
with this transaction. In addition to the advisor fees, 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 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.
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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.
Effective October 11, 1999, the Company sold to three of ESS's employees an
additional 5% ownership in ESS. The Company received $37,940 from the sale of
this additional ESS stock.
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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 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 through a network of depots that provide a full range of the
Company's on site RefrigerantSide(TM) Services and to provide working capital.
Management believes that its RefrigerantSide(TM) Services represent the
Company's long term growth potential. However, 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.
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Results of Operations
Three months ended September 30, 1999 as compared to the three months ended
September 30, 1998
Revenues for the three months ended September 30, 1999 were $6,115,000, an
increase of $962,000 or 19% from the $5,153,000 reported during the comparable
1998 period. The increase was primarily attributable to an increase in
refrigerant and RefrigerantSide(TM) Services revenues offset by the lack of
revenues from ESS, which was sold during the first quarter of 1999.
Cost of sales for the three months ended September 30, 1999 were $4,927,000, an
increase of $833,000 or 20% from the $4,094,000 reported during the comparable
1998 period due mainly to an increase in the volume of refrigerant sales. As a
percentage of sales, cost of sales were 81% of revenues for the three month
period ended September 30, 1999, an increase from the 79% reported for the
comparable 1998 period. The increase in cost of sales as a percentage of
revenues was primarily attributable to lower margin refrigerant revenues and the
lack of revenues from ESS.
Operating expenses for the three months ended September 30, 1999 were
$1,937,000, a decrease of $148,000 or 7% from the $2,085,000 reported during the
comparable 1998 period. The decrease was primarily attributable to a lack of
operating expenses attributed to ESS.
Other income (expense) for the three months ended September 30, 1999 was
$(20,000), a decrease of $40,000 from the $(60,000) reported during the
comparable 1998 period. Other income (expense) includes interest expense of
$118,000 and $95,000 for the 1999 and 1998 periods, respectively, offset by
other income of $98,000 and $35,000 for 1999 and 1998, respectively. Other
income primarily relates to interest and lease rental income.
No income taxes for the three months ended September 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 September 30, 1999 was $769,000, as compared
to a net loss of $1,086,000 reported during the comparable 1998 period. The
reduction in net loss was primarily attributable to a higher volume of
refrigerant revenues and a reduction in certain operating expenses.
Nine months ended September 30, 1999 as compared to the nine months ended
September 30, 1998
Revenues for the nine months ended September 30, 1999 were $15,141,000, a
decrease of $5,537,000 or 27% from the $20,678,000 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, all
of which occurred during the first six months of 1999, 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 nine months ended September 30, 1999 were $11,766,000 a
decrease of $3,735,000 or 24% from the $15,501,000 reported during the
comparable 1998 period due mainly to a reduction in the volume of lower margin
refrigerant revenues. As a percentage of sales, cost of sales were 78% of
revenues for the nine month period ended September 30, 1999, an increase from
the 75% reported for the comparable 1998 period. The increase in cost of sales
as a percentage of revenues was primarily attributable to an increase in labor
and other operating costs and the lack of revenues from ESS.
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Operating expenses for the nine months ended September 30, 1999 were $5,588,000,
a decrease of $256,000 or 4% from the $5,844,000 reported during the comparable
1998 period. The decrease was primarily attributable to a lack of operating
expenses from ESS offset by an increase in depreciation and amortization
expense.
Other income (expense) for the nine months ended September 30, 1999 was
$(199,000), a decrease of $7,000 from the $(206,000) reported during the
comparable 1998 period. Other income (expense) includes interest expense of
$326,000 and $293,000 for the 1999 and 1998 periods, respectively, offset by
other income of $207,000 and $87,000 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 nine months ended September 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 nine months ended September 30, 1999 was $2,412,000, as
compared to the net loss of $873,000 reported during the comparable 1998 period.
The increase in net loss was primarily attributable to lower volume of
refrigerant revenues.
Liquidity and Capital Resources
At September 30, 1999, the Company had working capital of approximately
$2,761,000, an increase of $2,708,000 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 losses
incurred during the nine months ended September 30, 1999. A principal component
of current assets is inventory. At September 30, 1999, the Company had
inventories of $2,381,000, a decrease of $903,000 or 27% 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 nine months ended September 30,
1999, was $2,733,000 compared with net cash provided by operating activities of
$1,689,000 for the comparable 1998 period. Net cash used by operating activities
was attributable mainly to the increase in trade receivables, a decrease in
accounts payable and accrued expenses and by the net loss for the 1999 period
offset by a decrease in inventories.
Net cash used by investing activities for the nine months ended September 30,
1999, was $1,844,000 compared with net cash used by investing activities of
$439,000 for the prior comparable 1998 period. The net cash usage consisted
primarily of equipment additions primarily associated with the expansion of the
Company's depot network.
Net cash provided by financing activities for the nine months ended September
30, 1999, was $6,327,000 compared with net cash used by financing activities of
$663,000 for the comparable 1998 period. The net cash provided by financing
activities primarily consisted of proceeds from the sale of the Company's Series
A Preferred Stock and net proceeds from long and short term debt for the 1999
period.
At September 30, 1999, the Company had cash and equivalents of $2,526,000.
During 1996, the Company mortgaged its property and building located in Ft.
Lauderdale with Turnberry Savings Bank, NA. The mortgage balance of $664,000 at
September 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
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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
intends to sell this property in the foreseeable future.
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 purchased the aerosol packaging equipment
and 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 aerosol packaging 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 September 30, 1999, the Company
has availability under its revolving line of credit of approximately $1,064,000.
Advances, available to the Company, under the term loan (currently approximately
$739,000) are based on existing fixed asset valuations and future advances under
the term loan of up to an additional $1,000,000 are based on future capital
expenditures. During the quarter ended September 30, 1999, the Company received
advances of $166,000 based on capital expenditures. As of September 30, 1999,
the Company had $1,777,000 outstanding under this facility. The facility bears
interest at the prime rate plus 1.5%, (9.75% at September 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.
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.
Effective October 11, 1999, the Company sold to three of ESS's employees an
additional 5% ownership in ESS. The Company received $37,940 from the sale of
this additional ESS stock.
13
<PAGE>
The Company is continuing to evaluate opportunities to rationalize its other
operating facilities based on its emphasis on the expansion of its service
sales. As a result, the Company may discontinue certain operations which it
believes do not support the growth of service sales and, in doing so, may incur
future charges to exit certain operations.
On March 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 Series A Preferred Stock were $6,500,000.
The Series A Preferred Stock has voting rights on an as-if converted basis. The
number of votes applicable to the Series A Preferred Stock is equal to the
number of shares of common stock into which the Series A Preferred Stock is then
convertible. However, the holders of the Series A Preferred Stock will provide
the Chief Executive Officer and Secretary of the Company a proxy to vote all
shares currently owned and subsequently acquired above 29% of the votes entitled
to be cast by all shareholders of the Company. The Series A Preferred Stock
carries a dividend rate of 7%, which will increase to 16%, if the stock remained
outstanding, on the fifth anniversary date, and converts to Common Stock at a
rate of $2.375 per share, which was 27% above the closing market price of Common
Stock as of March 29, 1999. The conversion rate may be subject to certain
antidilution provisions. The Company is using the net proceeds from the issuance
of the Series A Preferred Stock to expand its RefrigerantSide(TM) Services and
for working capital purposes.
The Company will pay dividends, in arrears, on the Series A Preferred Stock,
semi annually, either in cash or additional shares, at the Company's option,
during the first two years after which dividends will be paid in cash. On
September 30, 1999, the Company declared and paid, in-kind, the dividends on the
outstanding Series A Preferred Stock. The Company issued a total of 2,314
additional shares of its Series A Preferred Stock in satisfaction of the
dividends due. The Company may redeem the Series A Preferred Stock on March 31,
2004 either in cash or shares of Common Stock valued at 90% of the average
trading price of the Common Stock for the 30 days preceding March 31, 2004. In
addition, after March 30, 2001, the Company may call the Series A Preferred
Stock if the market price of the Common Stock is equal 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 Series A Preferred Stock. The holders of the Series A
Preferred Stock, voting as a separate class, have the right to elect up to two
members to the Company's Board of Directors or at their option, to designate up
to two 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
have elected two members to the Board of Directors.
The Company engaged an advisor to facilitate the Company's efforts in connection
with this transaction. In addition to the advisor fees, 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 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 twelve months. Any
additional expansion or acquisition opportunities that may arise in the future
may affect the Company's future capital needs. However, there can be no
assurances that the Company's proposed or future expansion plans will be
successful, and as such, the Company may have further capital needs.
14
<PAGE>
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.
During January 1997, the Company entered into agreements with DuPont to market
DuPont's SUVA(TM) refrigerants. Under the agreement, 100% of virgin refrigerants
provided to specified market segment customers must be purchased from DuPont.
During the nine months ended September 30, 1999, one customer accounted for an
aggregate of 20% of the Company's revenues. During the nine months ended
September 30, 1998, two customers accounted for an aggregate of 44% 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.
15
<PAGE>
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 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 any contingency plan
it may develop will be adequate to address any year 2000 problems that the
Company may experience.
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 $1,200,000 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") In
January 1999 the Company filed a motion to dismiss the RCRA cause of action.
On April 1, 1999, the Company reported a release at the Company's Hillburn, New
York facility of what was ultimately determined to be approximately 7,800 lbs.
of R-11, as a result of a failed hose connection to one of the Company's outdoor
storage tanks allowing liquid R-11 to discharge from the tank into the concrete
secondary containment area in which the subject tank was located. An amount of
the R-11 escaped the secondary containment area through an open drain from the
secondary containment area for removing accumulated rainwater and entered the
ground. The Company immediately commenced excavation operations
17
<PAGE>
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 remediation system pending negotiation and finalization of a Consent Order
covering the operation of the system. The remediation system was put into
operation on May 7, 1999. The level of R-11 in United's Well have steadily
decreased since June 1, after rising to a level in excess of 700 ppb. The
Company continues to work with the NYSDEC, United and with the Company's experts
to determine the scope of any contamination, and to develop plans for the
construction of a separate remediation system to directly treat contaminated
water from United's well.
In 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. 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. In August 1999, the Company entered into a stipulation accepting
service of the amended complaint subject to the Company's pending motion to
dismiss. On August 26, 1999, the Court issued a decision which granted the
Company's motion to dismiss that portion of United's claims which seek past
cleanup costs, and held in abeyance a ruling whether United can assert a claim
for present/future cleanup under RCRA until the date of trial. The Company
continues to defend the claims asserted by United.
The Company carries $1,000,000 of pollution liability insurance per occurrence
and has put the insurance carrier on notice of the release and possible claims
of United. There can be no assurance that this action, or any settlement
thereof, will be resolved in a manner favorable to the Company, or that the
ultimate outcome of any legal action or settlement, or the effects of the April
1, 1999 release, will not have a material adverse effect on the Company's
financial condition and results of operations.
During March and April, 1998, six (6) complaints, each alleging violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, were filed by a
total of eight shareholders, on behalf of themselves and all others similarly
situated, against the Company and certain of its officers and directors in the
United States District Court for the Southern District of New York. Each of the
complaints 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. In October 1998, a consolidated complaint on behalf of the plaintiffs
was served upon the Company. In December 1998, a motion was made on behalf of
the Company to dismiss each of the claims asserted against the Company in the
consolidated complaint. On September 26, 1999 the Court issued an opinion and
order dismissing with prejudice three of the five claims asserted by the
plaintiffs and further dismissing the remaining two claims without prejudice to
the plaintiffs filing a second amended consolidated complaint within thirty (30)
days of the date of the Court's opinion and order. The plaintiffs failed to
serve a second amended consolidated complaint, within the thirty-day period
permitted by the court and, as a result, the action has been dismissed in its
entirety.
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, 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
18
<PAGE>
the Company. The Company has opposed that motion and submitted a cross motion
seeking summary judgment dismissing the complaint in its entirety. Those motions
are currently pending.
There can be no assurance that this action, or any settlement thereof, will be
resolved in a manner favorable to the Company.
In June 1999, an action entitled "Willie Freeman, et al v. Hudson Technologies
Company," was commenced in the Baton Rouge Supreme Court on behalf of three
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.
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 September 30, 1999, the Company granted options to
purchase 20,000 shares of common stock to certain employees pursuant to its 1997
Stock Option Plan. On September 30, 1999, the Company issued a total of 2,314
additional shares of its Series A Preferred Stock to the holders thereof in
satisfaction of the dividends due. The Company relied on Section 4(2) under the
Securities Act of 1933 as transactions by an issuer not involving a public
offering.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of the Shareholders was completed on August 16, 1999. At that
meeting, the shareholders of the Company (i) elected each of Stephen P.
Mandracchia, Thomas P. Zugibe, Vincent P. Abbatecola and Otto C. Morch as
directors of the Company for two year terms and (ii) approved an amendment to
the Company's 1997 stock option plan to reserve an additional 1,000,000 shares
of the Company's stock pursuant to the plan. The voting results were as follows:
(i) Election of Directors:
Votes For Votes Withheld
--------- --------------
Stephen P. Mandracchia 7,143,656 309,739
Thomas P. Zugibe 7,143,556 309,839
Vincent P. Abbatecola 7,146,256 307,139
Otto C. Morch 7,145,556 307,839
(ii) Amendment to 1997 Stock Option Plan
Votes For Votes Against Abstain Broker Non-Votes
--------- ------------- ------- ----------------
5,109,862 441,045 20,992 1,971,496
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are attached to this report:
Exhibit 27: Financial Data Schedule (for SEC use only)
(b) No report on Form 8-K was filed during the quarter ended September 30,
1999.
19
<PAGE>
Hudson Technologies, Inc. and subsidiaries
Form 10-QSB of September 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 November 12, 1999
------------------------------------------
Kevin J. Zugibe Date
Chairman, CEO and President
By: /s/ Brian F. Coleman November 12, 1999
------------------------------------------
Brian F. Coleman Date
Vice President and
Chief Financial Officer
20
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
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SUCH FINANCIAL STATEMENTS.
</LEGEND>
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