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Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT UNDER 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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(Name of small business issuer as specified in its charter)
New York 13-3641539
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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
Securities registered under Section 12(b) of the Securities Exchange Act of
1934: None
Securities registered under Section 12(g) of the Securities Exchange Act of
1934:
Common Stock, $0.01 par value
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 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
[_]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form and no disclosure will be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The Issuer's revenues for the fiscal year ended December 31, 1999 were
$17,909,000
The aggregate market value of the Issuer's Common Stock held by non-affiliates
as of March 13, 2000 was approximately $11,443,095. As of March 13, 2000, there
were 5,085,820 shares of the Issuer's Common Stock outstanding.
Documents incorporated by reference: None
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Hudson Technologies, Inc.
Index
<TABLE>
<CAPTION>
Part Item Page
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<S> <C> <C>
Part I. Item 1 - Description of Business 3
Item 2 - Description of Properties 7
Item 3 - Legal Proceedings 8
Item 4 - Submission of Matters to a Vote of Security Holders 10
Part II. Item 5 - Market for the Common Equity and Related Stockholder Matters 11
Item 6 - Management's Discussion and Analysis of Financial Condition 12
and Results of Operations
Item 7 - Financial Statements 16
Item 8 - Changes in and Disagreements with Accountants on Accounting 16
and Financial Disclosure
Part III. Item 9 - Directors, Executive Officers, Promoters and Control Persons; 17
Compliance with Section 16(a) of the Exchange Act
Item 10 - Executive Compensation 19
Item 11 - Security Ownership of Certain Beneficial Owners and Management 23
Item 12 - Certain Relationships and Related Transactions 24
Item 13 - Exhibits and Reports on Form 8-K 25
Signatures 26
Financial Statements 27
</TABLE>
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Part I
Item 1. Description of Business
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, 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.
The Company's Executive Offices are located at 275 North Middletown Road, Pearl
River, New York and its telephone number is (914) 735-6000.
Industry background
The production and use of refrigerants containing chlorofluorocarbons ("CFCs")
and hydrochlorofluorocarbons ("HCFCs"), the most commonly used refrigerants are
subject to extensive and changing regulation under the Clean Air Act (the
"Act"). The Act, which was amended during 1990 in response to evidence linking
the use of CFCs to damage to the earth's ozone layer, prohibits any person in
the course of maintaining, servicing, repairing and disposing of air
conditioning or refrigeration equipment, to knowingly vent or otherwise release
or dispose of ozone depleting substances used as refrigerants. That prohibition
also applies to substitute, non-ozone depleting refrigerants. The Act further
requires the recovery of refrigerants used in residential, commercial and
industrial air conditioning and refrigeration systems.
In addition, the Act prohibited production of CFC refrigerants effective January
1, 1996 and limits the production of refrigerants containing HCFCs, which
production is scheduled to be phased out by the year 2030.
Owners, operators and companies servicing cooling equipment are responsible for
the integrity of their systems regardless of the refrigerant being used and for
the responsible management of their refrigerant.
Products and Services
Refrigerant Sales
The Company sells reclaimed and virgin (new) refrigerants to a variety of
customers in various segments of the air conditioning and refrigeration
industry. Virgin refrigerants are primarily purchased by the Company from E.I.
DuPont de Nemours and Company ("DuPont") as part of the Company's strategic
alliance with DuPont (see "Strategic Alliance" below), and resold by the
Company, typically at wholesale. In addition, the Company regularly purchases
used or contaminated refrigerants from many different sources, which
refrigerants are then reclaimed, using the Company's high volume proprietary
reclamation equipment, and resold by the Company.
RefrigerantSide(TM) Services
The Company provides services that are performed at a customer's site through
the use of portable, high volume, high-speed proprietary reclamation equipment,
including its patented Zugibeast(R) reclamation machine. These services consist
of RefrigerantSide(TM) Services, which encompass system decontamination, and
refrigerant recovery and reclamation. The Company also provides complete
refrigerant management services, which include testing and banking services
tailored to individual customer requirements. Hudson also separates `crossed'
(i.e.; commingled) refrigerants and provides re-usable cylinder repair and
hydrostatic testing services.
Hudson's Network
Hudson operates from a network of facilities located in:
o Hillburn, New York --RefrigerantSide(TM)Service depot
o Rantoul, Illinois --Reclamation and cylinder
refurbishment center and
RefrigerantSide(TM)Service depot
o Charlotte, North Carolina --Reclamation center and
RefrigerantSide(TM)Service depot
o Houston, Texas --RefrigerantSide(TM)Service depot
o Chicago, Illinois --RefrigerantSide(TM)Service depot
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o Baltimore, Maryland --RefrigerantSide(TM)Service depot
o Seattle, Washington --RefrigerantSide(TM)Service depot
o Plainview, New York --RefrigerantSide(TM)Service depot
o Boston, Massachusetts --RefrigerantSide(TM)Service depot
o Punta Gorda, Florida --Refrigerant separation and
reclamation center and
RefrigerantSide(TM)Service depot
o Baton Rouge, Louisiana --RefrigerantSide(TM)Service depot
o Fort Myers, Florida --Engineering center
Strategic Alliance
In January 1997, the Company entered into an Industrial Property Management
Segment Marketer Appointment and Agreement and Refrigeration Reclamation
Services Agreement with E.I. DuPont de Nemours and Company ("DuPont'), pursuant
to which the Company (i) provides recovery, reclamation, separation, packaging
and testing services directly to DuPont for marketing through DuPont's
Authorized Distributor Network and (ii) markets DuPont's SUVA(TM) refrigerant
products to selected market segments together with the Company's reclamation and
refrigerant management services. Under the agreement, 100% of virgin
refrigerants provided to specified market segment customers must be purchased
from DuPont.
In addition, in January 1997, the Company entered into a Stock Purchase
Agreement with DuPont and DuPont Chemical and Energy Operations, Inc. ("DCEO")
pursuant to which the Company issued to DCEO 500,000 shares of Common Stock in
consideration of $3,500,000 in cash. Concurrently, the parties entered into a
Standstill Agreement, Shareholders' Agreement and Registration Agreement which,
among other things, provide that (i) subject to certain exceptions, neither
DuPont nor any corporation or entity controlled by DuPont will, directly or
indirectly, acquire any shares of any class of capital stock of the Company if
the effect of such acquisition would be to increase DuPont's aggregate voting
power to greater than 20% of the total combined voting power relating to any
election of directors; (ii) at DuPont's request, the Company will cause two
persons designated by DCEO and DuPont to be elected to the Company's Board of
Directors; and (iii) subject to certain exceptions, DuPont will have a five-year
right of first refusal to purchase shares of Common Stock sold by the Company's
principal shareholders. The Company also granted to DuPont certain demand and
"piggy-back" registration rights with respect to the shares.
The Company has sold certain reclaimed refrigerants to DuPont.
During the years ended December 31, 1999 and 1998, revenues from DuPont
aggregated approximately $975,000 and $6,434,000, respectively. In 1999 revenues
with DuPont decreased primarily due to the fact that the Company ceased selling
reclaimed refrigerants directly to DuPont and now sells reclaimed refrigerants
directly to DuPont's network of authorized distributors.
Suppliers
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 refrigerants at a profit, the Company's financial condition and
results of operations would be materially adversely affected.
Customers
The Company provides its services to commercial, industrial and governmental
customers, as well as to refrigerant wholesalers, distributors, contractors and
to refrigeration equipment manufacturers. Agreements with larger customers
generally provide for standardized pricing for specified services.
For the year ended December 31, 1999, one customer accounted for an aggregate of
17% of the Company's revenues. For the year ended December 31, 1998, two
customers accounted for an aggregate of 42% 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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Marketing
Marketing programs are conducted through the efforts of the Company's executive
officers, Company sales personnel, and third parties. Hudson employs various
marketing methods, including direct mailings, technical bulletins, in-person
solicitation, print advertising, response to quotation requests and
participation in trade shows.
The Company's sales personnel are compensated on a commission basis with a
guaranteed minimum draw. The Company's executive officers devote significant
time and effort to customer relationships.
Competition
The Company competes primarily on the basis of price, breadth of services
offered (including RefrigerantSide(TM) Services and other on-site services), and
performance of its high volume, high-speed equipment used in its operations.
The Company competes with numerous regional companies, which provide refrigerant
recovery and/or reclamation services, as well as companies marketing reclaimed
and new alternative refrigerants. Certain of such competitors, including
National Refrigerants, Inc., Refron, Inc., and Environmental Technologies
Company, Inc., which may possess greater financial, marketing, distribution and
other resources for the sale and distribution of refrigerants than the Company
and, in some instances, provide services or products over a more extensive
geographic area than the Company.
The refrigerant recovery and reclamation industry is relatively new and emerging
competition from existing competitors and new market entrants is expected to
increase. Demand and market acceptance for Hudson's newly introduced
RefrigerantSide(TM) services, and for the Company's refrigerant management
products and services are subject to a high degree of uncertainty. There can be
no assurance that the Company will be able to compete successfully or penetrate
this market as rapidly as it anticipates.
Insurance
The Company carries insurance coverage the Company considers sufficient to
protect the Company's assets and operations. The Company currently maintains
general commercial liability insurance and excess liability coverage for claims
up to $7,000,000 per occurrence and $7,000,000 in the aggregate. There can be no
assurance that such insurance will be sufficient to cover potential claims or
that an adequate level of coverage will be available in the future at a
reasonable cost. The Company attempts to operate in a professional and prudent
manner and to reduce its liability risks through specific risk management
efforts, including employee training. Nevertheless, a partially or completely
uninsured claim against the Company, if successful and of sufficient magnitude,
would have a material adverse effect on the Company.
The refrigerant industry involves potentially significant risks of statutory and
common law liability for environmental damage and personal injury. The Company,
and in certain instances, its officers, directors and employees, may be subject
to claims arising from the Company's on-site or off-site services, including the
improper release, spillage, misuse or mishandling of refrigerants classified as
hazardous or non-hazardous substances or materials. The Company may be strictly
liable for damages, which could be substantial, regardless of whether it
exercised due care and complied with all relevant laws and regulations.
Hudson maintains environmental impairment insurance of $1,000,000 for events
occurring subsequent to November 1996. There can be no assurance that the
Company will not face claims resulting in substantial liability for which the
Company is uninsured, that hazardous substances or materials are not or will not
be present at the Company's facilities, or that the Company will not incur
liability for environmental impairment or personal injury (see Item 3 "Legal
Proceedings").
Government Regulation
The business of refrigerant reclamation and management is subject to extensive,
stringent and frequently changing federal, state and local laws and substantial
regulation under these laws by governmental agencies, including the
Environmental Protection Agency ("EPA"), the United States Occupational Safety
and Health Administration and the United States Department of Transportation.
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Among other things, these regulatory authorities impose requirements which
regulate the handling, packaging, labeling, transportation and disposal of
hazardous and non-hazardous materials and the health and safety of workers, and
require the Company and, in certain instances, its employees, to obtain and
maintain licenses in connection with its operations. This extensive regulatory
framework imposes significant compliance burdens and risks on the Company.
Hudson and its customers are subject to the requirements of the Clean Air Act,
and the regulations promulgated thereunder by the EPA, which make it unlawful
for any person in the course of maintaining, servicing, repairing, and disposing
of air conditioning or refrigeration equipment, to knowingly vent or otherwise
release or dispose of ozone depleting substances, and non-ozone depleting
substitutes, used as refrigerants.
Pursuant to the Clean Air Act, reclaimed refrigerant must satisfy the same
purity standards as newly manufactured refrigerants in accordance with standards
established by the Air Conditioning and Refrigeration Institute ("ARI") prior to
resale to a person other than the owner of the equipment from which it was
recovered. The ARI and the EPA administer certification programs pursuant to
which applicants are certified to reclaim refrigerants in compliance with ARI
standards. Under such programs, the ARI issues a certification for each
refrigerant and conducts periodic inspections and quality testing of reclaimed
refrigerants.
The Company has obtained ARI certification for most refrigerants at each of its
reclamation facilities, and is certified by the EPA. The Company is required to
submit periodic reports to the ARI and pay annual fees based on the number of
pounds of reclaimed refrigerants. Certification by the ARI is not currently
required to engage in the refrigerant management business.
During February 1996, the EPA published proposed regulations, which, if enacted,
would require participation in third-party certification programs similar to the
ARI program. Such proposed regulations would also require laboratories designed
to test refrigerant purity to undergo a certification process. Extensive
comments to these proposed regulations were received by the EPA. The EPA is
still considering these comments and no further or additional regulations have
been proposed or published.
In addition, the EPA has established a mandatory certification program for air
conditioning and refrigeration technicians. Hudson's technicians have applied
for or obtained such certification.
The Company is subject to regulations adopted by the Department of
Transportation which classify most refrigerants handled by the Company as
hazardous materials or substances and impose requirements for handling,
packaging, labeling and transporting refrigerants.
The Resource Conservation and Recovery Act of 1976 ("RCRA") requires that
facilities that treat, store or dispose of hazardous wastes comply with certain
operating standards. Before transportation and disposal of hazardous wastes
off-site, generators of such waste must package and label their shipments
consistent with detailed regulations and prepare a manifest identifying the
material and stating its destination. The transporter must deliver the hazardous
waste in accordance with the manifest to a facility with an appropriate RCRA
permit. Under RCRA, impurities removed from refrigerants consisting of oils
mixed with water and other contaminants are not presumed to be hazardous waste.
The Emergency Planning and Community Right-to-Know Act of 1986 requires the
annual reporting of Emergency and Hazardous Chemical Inventories (Tier II
reports) to the various states in which the Company operates and to file annual
Toxic Chemical Release Inventory Forms with the EPA.
The Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), establishes liability for clean-up costs and environmental damages
to current and former facility owners and operators, as well as persons who
transport or arrange for transportation of hazardous substances. Almost all
states, including New York, have similar statutes regulating the handling and
storage of hazardous substances, hazardous wastes and non-hazardous wastes. Many
such statutes impose requirements, which are more stringent than their federal
counterparts. The Company could be subject to substantial liability under these
statutes to private parties and government entities, in some instances without
any fault, for fines, remediation costs and environmental damage, as a result of
the mishandling, release, or existence of any hazardous substances at any of its
facilities.
The Occupational Safety and Health Act of 1970 mandates requirements for safe
work place for employees and special procedures and measures for the handling of
certain hazardous and toxic substances. State laws, in certain circumstances,
mandate additional measures for facilities handling specified materials. In
February 1999, an inspection was performed,
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at one of the Company's facilities, by the Occupational Safety and Health
Administration in response to a complaint by an unnamed third party. The Company
has not received a report on the results of that inspection.
The Company believes that it is in substantial compliance with all material
regulations relating to its material business operations. However, there can be
no assurance that Hudson will be able to continue to comply with applicable
laws, regulations and licensing requirements. Failure to comply could subject
the Company to civil remedies, substantial fines, penalties, injunction, or
criminal sanctions.
Quality Assurance & Environmental Compliance
The Company utilizes in-house quality and regulatory compliance control
procedures. Hudson maintains its own analytical testing laboratories to assure
that reclaimed refrigerants comply with ARI purity standards and employs
portable testing equipment when performing on-site services to verify certain
quality specifications. The Company employs three persons engaged full-time in
quality control and to monitor the Company's operations for regulatory
compliance.
Employees
The Company has approximately 99 full and part-time employees including air
conditioning and refrigeration technicians, chemists, engineers, and sales and
administrative personnel.
None of the Company's employees are represented by a union. The Company believes
that its employee relations are good.
Patents and Proprietary Information
The Company holds a United States patent relating to various high-speed
equipment components and a process to reclaim refrigerants, and a registered
trademark for its "Zugibeast(R)". The patent expires in January 2012. The
Company believes that patent protection is important to its business and has
received a notice of allowance for an additional United States patent relating
to a high speed refrigerant recovery process. There can be no assurance as to
the breadth or degree of protection that patents may afford the Company, that
any patent applications will result in issued patents or that patents will not
be circumvented or invalidated. Technological development in the refrigerant
industry may result in extensive patent filings and a rapid rate of issuance of
new patents. Although the Company believes that its existing patents and the
Company's equipment do not and will not infringe upon existing patents or
violate proprietary rights of others, it is possible that the Company's existing
patent rights may not be valid or that infringement of existing or future
patents or violations of proprietary rights of others may occur. In the event
the Company's equipment infringe or are alleged to infringe patents or other
proprietary rights of others, the Company may be required to modify the design
of its equipment, obtain a license or defend a possible patent infringement
action. There can be no assurance that the Company will have the financial or
other resources necessary to enforce or defend a patent infringement or
proprietary rights violation action or that the Company will not become liable
for damages.
The Company also relies on trade secrets and proprietary know-how, and employs
various methods to protect its technology. However, such methods may not afford
complete protection and there can be no assurance that others will not
independently develop such know-how or obtain access to the Company's know-how,
concepts, ideas and documentation. Failure to protect its trade secrets could
have a material adverse effect on the Company.
Item 2. Description of Properties
The Company's headquarters are located in approximately 5,400 square feet of
leased commercial space at Pearl River, New York. The building is leased from an
unaffiliated third party pursuant to a three year agreement at an annual rental
of approximately $87,500 through January 2002.
In March 1995, the Company purchased, for $950,000, a facility in Ft.
Lauderdale, Florida, consisting of a 32,000 square foot building on
approximately 1.7 acres with rail and port access. The property was mortgaged
during 1996 for $700,000. Annual real estate taxes are approximately $24,000.
The Company has principally ceased its operations at this facility and has
entered into a three year lease of the entire facility at the current level of
$13,125 per month to an unaffiliated third party. The Company intends to sell
this property in the foreseeable future.
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The Company's Hillburn facility is located in approximately 21,000 square feet
of leased industrial space at Hillburn, New York. The building is leased from an
unaffiliated third party pursuant to a five-year agreement at an annual rental
of approximately $90,000 through May 2004.
The Company's Rantoul, Illinois facility is located in a 29,000 square foot
building leased from an unaffiliated third party at an annual rental of
approximately $ 78,000 pursuant to an agreement expiring in September 2002. The
Company also leases warehouse space from an unaffiliated third party in a 7,500
square foot building on a month to month basis at a monthly rent of $1,600.
The Company's Charlotte, North Carolina facility is located in a 12,000 square
foot building leased from an unaffiliated third party at an annual rent of
approximately $42,000 pursuant to an agreement expiring in April 2000.
The Company's Houston, Texas depot facility, which consists of 1,555 square feet
located in a larger building, is leased from an unaffiliated third party at an
annual rent of $8,000 pursuant to an agreement which expires in May 2000.
The Company's Villa Park (Chicago), Illinois depot facility is located in a
3,500 square foot building leased from an unaffiliated third party at an annual
rent of approximately $23,000 pursuant to an agreement expiring in August 2002.
The Company's Baltimore, Maryland depot facility is located in a 2,700 square
foot building leased from an unaffiliated third party at an annual rent of
approximately $25,000 pursuant to an agreement expiring in August 2002.
The Company's Seattle, Washington depot facility is located in a 3,000 square
foot building leased from an unaffiliated third party at an annual rent of
approximately $16,200 pursuant to an agreement expiring in March 2001.
The Company's Plainview, New York depot facility is located in a 2,000 square
foot building leased from an unaffiliated third party at an annual rent of
approximately $16,440 pursuant to an agreement expiring in July 2000.
The Company's Haverhill (Boston), Massachusetts depot facility is located in a
3,000 square foot building leased from an unaffiliated third party at an annual
rent of $13,200 pursuant to an agreement expiring in February 2001.
The Company's Punta Gorda, Florida separation facility is located in a 15,000
square foot building leased from an unaffiliated third party at an annual rent
of $60,000 pursuant to an agreement expiring in April 2001.
The Company's Baton Rouge, Louisiana facility is located in a 3,800 square foot
building leased from an unaffiliated third party at an annual rental of
approximately $18,000 pursuant to an agreement expiring in July 2002.
The Company's Ft. Myers, Florida engineering facility is located in a 15,000
square foot building leased from an unaffiliated third party at an annual rent
of $48,600 pursuant to an agreement expiring in July 2000.
Item 3. 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
Hillburn, New York facility showed elevated levels of refrigerant contamination,
specifically Trichlorofluoromethane (R-11). 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 detected levels of R-11 in the groundwater, but have
failed to detect any levels of R-12 in the groundwater in and around the
Company's facility.
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 New York State Department
of Environmental Conservation ("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 $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 alleged
contamination. In December 1998, United served an amended complaint asserting a
claim pursuant to the Resource
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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 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 planned 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 the affected United well have
steadily decreased since June 1, after rising to a level in excess of 700 ppb.
and on March 13, 2000 was reduced to 5.5 ppb. In December 1999, a second United
well within close proximity to the Company's facility began showing elevated
levels of R-11 in excess of 5 ppb. and increased to a high of 26 ppb. in
February 2000. 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
plans for the construction of a separate remediation system to directly treat
contaminated water from United's well.
In July 1999, United filed a motion seeking permission to amend its complaint in
the action it commenced in June 1998 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 RCRA 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 alleged that the defendants, among other things, misrepresented
material information about the Company's financial results and prospects, and
its customer relationships. 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, and as a
result, in November 1999, a final judgment was entered dismissing the
consolidated complaint in its entirety.
In June 1999, an action was commenced in the Baton Rouge Supreme Court by
William Freeman and three others 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
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complaint are without merit and that no damages were suffered by the plaintiffs
in that action. There can be no assurance that this action, or any settlement
thereof, will be resolved in a manner favorable to the Company.
The Company 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 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
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Part II
Item 5. Market for the Common Equity and Related Stockholder Matters
The Company's Common Stock traded from November 1, 1994 to September 20, 1995 on
the NASDAQ Small-Cap Market under the symbol `HDSN'. Since September 20, 1995,
the Common Stock has traded on the NASDAQ National Market. The following table
sets forth, for the periods indicated the range of the high and low sale prices
for the Common Stock as reported by NASDAQ.
- -------------------------------------------------------------------------
1998 High Low
- ---- ---- ---
- -------------------------------------------------------------------------
o First Quarter $ 4 3/4 $ 3
- -------------------------------------------------------------------------
o Second Quarter $ 5 3/4 $ 3 1/2
- -------------------------------------------------------------------------
o Third Quarter $ 4 7/16 $ 2 1/2
- -------------------------------------------------------------------------
o Fourth Quarter $ 3 7/8 $ 1 1/2
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
1999
- ----
- -------------------------------------------------------------------------
o First Quarter $ 2 1/2 $ 1 1/2
- -------------------------------------------------------------------------
o Second Quarter $ 3 5/8 $ 1 3/4
- -------------------------------------------------------------------------
o Third Quarter $ 2 5/8 $ 1 1/2
- -------------------------------------------------------------------------
o Fourth Quarter $ 4 7/16 $ 1 1/4
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
The number of record holders of the Company's Common Stock was approximately 250
as of March 13, 2000. The Company believes that there are in excess of 4,000
beneficial owners of its Common Stock.
To date, the Company has not declared or paid any cash dividends on its Common
Stock. The payment of dividends, if any, in the future is within the discretion
of the Board of Directors and will depend upon the Company's earnings, its
capital requirements and financial condition, borrowing covenants, and other
relevant factors. The Company presently intends to retain all earnings, if any,
to finance the Company's operations and development of its business and does not
expect to declare or pay any cash dividends in the foreseeable future. In
addition, the Company has entered into a credit facility with CIT Group/Credit
Finance Group, Inc. ("CIT") which, among other things, restricts 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. The Series A Preferred Stock carries a dividend rate of 7%. 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 (see Item 6
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" - Liquidity).
During the three months ended December 31, 1999, the Company granted options to
purchase 70,000 and 35,000 shares of common stock to certain employees pursuant
to its 1994 and 1997 Stock Option Plans, respectively. With respect to these
grants, the Company relied on the exemption from registration provided by
Section 4(2) under the Securities Act of 1933 as transactions by an issuer not
involving a public offering.
11
<PAGE>
Item 6. 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-KSB
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 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 in the industry overall, 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 the Company's 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. These services are offered in addition to the
Company's traditional refrigerant management services, consisting principally of
recovery and reclamation of refrigerants used in commercial air conditioning,
industrial processing and refrigeration systems. Pursuant to this change in
business focus, the Company has developed, and is currently implementing, a
strategic business plan which provides for the creation of a network of service
depots and the exiting of certain operations which may not support the growth of
service sales. Consistent with its plan, the Company anticipates a reduction in
automotive refrigerant sales related to the sale of its aerosol packaging
equipment and the exit of the Congers, New York facility.
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, while the Company believes it
will experience an increase in revenues from its RefrigerantSide(TM) Services,
in the short term, 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 year related to the expansion
and development 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 effect on
operating results.
Results of Operations
Year ended December 31, 1999 as compared to year ended December 31, 1998
Revenues for 1999 were $17,909,000, a decrease of $5,402,000 or 23% from the
$23,311,000 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 the Company's former subsidiary Environmental Support
Solutions ("ESS"), which was sold in the first quarter of 1999, partially offset
by an increase in RefrigerantSide(TM) Services revenue. In addition, the Company
experienced a short fall of certain refrigerant product availability on a timely
basis to meet certain of its refrigerant sales. If the Company is unable to
obtain refrigerant product in the future, the Company would experience a
reduction in refrigerant revenues beyond the reduction that the Company
anticipates relating to its change in focus
12
<PAGE>
towards service revenues and the reduction in automotive refrigerant sales which
would have a material adverse effect on operating results.
Cost of sales for 1999 were $14,121,000, a decrease of $3,464,000 or 20% from
the $17,585,000 reported during the comparable 1998 period primarily due to a
reduction in refrigerant revenues. As a percentage of sales, cost of sales were
79% of revenues for 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.
Operating expenses for 1999 were $7,395,000, a decrease of $720,000 or 9% from
the $8,115,000 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 and selling expenses primarily
associated with the expansion of the Company's RefrigerantSide(TM) Service
offering.
Other income (expense) for 1999 was $(348,000), an increase of $81,000 or 30%
from the $(267,000) reported during the comparable 1998 period. Other income
(expense) includes interest expense of $454,000 and $399,000 for 1999 and 1998,
respectively, offset by other income of $106,000 and $132,000 for 1999 and 1998,
respectively. The increase in interest expense is primarily attributed to an
increase in borrowings during 1999 as compared to 1998. Other income primarily
relates to lease rental income.
No income taxes for the years ended December 31, 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 1999 was $3,955,000 an increase of $1,299,000 from the $2,656,000
net loss reported during the comparable 1998 period. The increase in net loss
was primarily attributable to a lower volume of refrigerant sales.
Liquidity and Capital Resources
At December 31, 1999, the Company had working capital of approximately
$1,677,000, an increase of $1,624,000 from the $53,000 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
year ended December 31, 1999. A principal component of current assets is
inventory. At December 31, 1999, the Company had inventories of $2,480,000, a
decrease of $804,000 or 24% 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 year ended December 31, 1999, was
$3,442,000 compared with net cash provided by operating activities of $574,000
for the comparable 1998 period. Net cash used by operating activities was
primarily attributable 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 year ended December 31, 1999, was
$1,822,000 compared with net cash used by investing activities of $591,000 for
the prior comparable 1998 period. The net cash usage primarily consisted of
equipment additions primarily associated with the expansion of the Company's
depot network.
Net cash provided by financing activities for the year ended December 31, 1999,
was $6,971,000 compared with net cash used by financing activities of $167,000
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 December 31, 1999, the Company had cash and equivalents of $2,483,000.
During 1996, the Company mortgaged its property and building located in Ft.
Lauderdale with Turnberry Savings Bank, NA. The mortgage of $660,000, at
December 31, 1999, bears interest rate of 9.5% and is repayable over 20 years
13
<PAGE>
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 the
current level of $13,125 per month to an unaffiliated third party. The Company
intends to sell this property in the foreseeable future.
During January 1997, in connection with the execution of various agreements with
E.I. DuPont de Nemours ("DuPont'), the Company obtained additional equity funds
of $3,500,000 from an affiliate of DuPont. The proceeds were primarily utilized
to retire debt.
On April 28, 1998, the Company entered into a credit facility with CIT which
made available borrowings to the Company of up to $5,000,000. The credit
facility was increased to $6,500,000 in 1999. The facility requires minimum
borrowings of $1,250,000. The facility provides for a revolving line of credit
and a six-year term loan and expires in April 2001. Advances under the revolving
line of credit are limited to (i) 80% of eligible trade accounts receivable and
(ii) 50% of eligible inventory (which inventory amount shall not exceed 200% of
eligible trade accounts receivable or $3,250,000). As of December 31, 1999, the
Company had availability under its revolving line of credit of approximately
$700,000. Advances available to the Company under the term loan 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. During 1999, the
Company received advances of $166,000 based on capital expenditures. As of
December 31, 1999, the Company has approximately $861,000 outstanding under its
term loans. As of December 31, 1999, the Company had $1,500,000 outstanding
under its revolving line of credit. The facility bears interest at the prime
rate plus 1.5%, 10% at December 31, 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 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. 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. It is not anticipated that the Company will be involved in, or
control, the operations of ESS. Effective October 11, 1999, the Company sold to
three of ESS's employees an additional 5.4% ownership in ESS. The Company
received $37,940 from the sale of this additional ESS stock.
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 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 is $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 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 on 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 the dividends will be paid in cash. On
September 30, 1999, the Company declared and paid, in-kind, the dividends of
outstanding on the 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 its Common Stock is
14
<PAGE>
equal 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 advisors 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 the sale of its Series A Preferred Stock. In addition to the advisor fees,
the Company issued to the advisor, warrants to purchase 136,482 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 anticipated cash flow from operations, together
with the proceeds from the sale of its 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 future capital needs.
Acquisitions
In April 1996, the Company acquired all the outstanding capital stock of ESS, a
developer and provider of environmental software, training, and management
services in consideration of $2,375,000, consisting of cash of $700,000 and
promissory notes in the principal amount of $1,675,000 which were repaid during
October 1996. The acquisition was accounted for as a purchase from the date of
acquisition with the assets acquired and liabilities assumed recorded at fair
values, resulting in an excess of cost over assets acquired of approximately
$800,000.
In June 1996, ESS acquired all the net assets, subject to liabilities, of
E-Soft, Inc. ("E-Soft"), a developer and marketer of software programs related
to hazardous material management, in consideration of a cash payment of $50,000
and 41,560 shares of common stock with the acquired assets and liabilities
assumed recorded at fair values, resulting in an excess of cost over assets
acquired of approximately $500,000.
Effective March 19, 1999, the Company sold 75% of its stock ownership in ESS to
one of its founders. The consideration for the Company's sale of its interest
was $100,000 in cash and a six year note in the amount of $380,000. The Company
will recognize, as income, the portion of the proceeds associated with the note
receivable upon the receipt of cash. This sale did not have a material adverse
effect on the Company's financial position or results of operations. It is not
anticipated that the Company will be involved in or control the operations of
ESS. Effective October 11, 1999, the Company sold to three of ESS' employees an
additional 5.4% ownership in ESS. The Company received $37,940 from the sale of
the additional ESS stock.
Inflation
Inflation has not historically had a material impact on the Company's
operations.
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. The loss of a
principal customer would have a material adverse effect on the Company.
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
(see "Description of Business - Strategic Alliance").
15
<PAGE>
During the year ended December 31, 1999, one customer accounted for an aggregate
of 17% of the Company's revenues. During the year ended December 31, 1998, two
customers accounted for an aggregate of 42% 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 principal customer could result in significant losses. There can be
no assurance that the foregoing factors will not occur and result in a material
adverse effect on the Company's financial position and significant losses.
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.
Item 7. Financial Statements.
The financial statements appear in a separate section of this report following
Part III.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
16
<PAGE>
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
The following table sets forth information with respect to the directors and
officers of the Company:
<TABLE>
<CAPTION>
- --------------------------------------------------- ------------------------------------------------------------
Name Age Position
---- --- --------
- --------------------------------------------------- ------------------------------------------------------------
<S> <C> <C>
Kevin J. Zugibe 36 Chairman of the Board; President and Chief Executive Officer
- --------------------------------------------------- ------------------------------------------------------------
Thomas P. Zugibe 47 Executive Vice President and Director
- --------------------------------------------------- ------------------------------------------------------------
Stephen P. Mandracchia 40 Executive Vice President and Secretary
- --------------------------------------------------- ------------------------------------------------------------
Brian F. Coleman 38 Vice President and Chief Financial Officer
- --------------------------------------------------- ------------------------------------------------------------
Walter A. Phillips 47 Vice President Marketing and Strategic Planning
- --------------------------------------------------- ------------------------------------------------------------
Harry C. Schell 65 Director
- --------------------------------------------------- ------------------------------------------------------------
Vincent Abbatecola 53 Director
- --------------------------------------------------- ------------------------------------------------------------
Otto C. Morch 66 Director
- --------------------------------------------------- ------------------------------------------------------------
Dominic J. Monetta 58 Director
- --------------------------------------------------- ------------------------------------------------------------
Robert L. Burr 48 Director
- --------------------------------------------------- ------------------------------------------------------------
Robert M. Zech 34 Director
- --------------------------------------------------- ------------------------------------------------------------
</TABLE>
Kevin T. Zugibe, P.E. is a founder of the Company and has been a director,
President and Chief Executive Officer of the Company since its inception in
1991. Since May 1994, Mr. Zugibe has devoted his full business time to the
Company's affairs. From May 1987 to May 1994, Mr. Zugibe was employed as a power
engineer with Orange and Rockland Utilities, Inc. Mr. Zugibe is a licensed
professional engineer, and from December 1990 to May 1994, he was a member of
Kevin J. Zugibe & Associates, a professional engineering firm. Kevin J. Zugibe
and Thomas P. Zugibe are brothers.
Thomas P. Zugibe has been a Vice President of the Company since its inception in
1991 and a director since April 1995. Mr. Zugibe is responsible for overseeing
the day to day operations of the Company. He has been engaged in the practice of
law in the State of New York since 1980 and is on extended leave from the law
firm of Ferraro, Zugibe, and Albrecht, Garnerville, New York.
Stephen P. Mandracchia has been a Vice President of the Company since January
1993 and Secretary of the Company since April 1995. Mr. Mandracchia served as a
director from June 1994 until August 1996 and was reelected to the Board of
Directors in August 1999 . Mr. Mandracchia is responsible for corporate,
administrative and regulatory legal affairs of the Company. Mr. Mandracchia was
a member of the law firm of Martin, Vandewalle, Donohue, Mandracchia & McGahan,
Great Neck, New York until December 31, 1995 (having been affiliated with such
firm since August 1983).
Brian F. Coleman has been Vice President and Chief Financial Officer of the
Company since May 1997. Prior to joining the Company, Mr. Coleman was employed
by and since July 1995, was a partner with BDO Seidman, LLP, the Company's
independent auditors.
Walter A. Phillips has been Vice President of Marketing and Strategic Planning
of the Company since October 1996. Prior to joining the Company, Mr. Phillips
was employed in various sales and marketing roles with York International.
Vincent P. Abbatecola has been a director of the Company since June 1994. Mr.
Abbatecola is the owner of Abbey Ice & Spring Water Company, Spring Valley, New
York, where he has been employed since May 1971.
Otto C. Morch has been a director of the Company since March 1996. Mr. Morch was
a Senior Vice President, of Commercial Banking at Provident Bank and retired
from that position in December 1997.
Dominic J. Monetta has been a director of the Company since April 1996. Since
August 1993, Mr. Monetta has been the President of Resource Alternatives, Inc.,
a corporate development firm concentrating on solving management and
technological problems facing chief executive officers and their senior
executives. From December 1991 to May 1993, Mr. Monetta served as the Director
of Defense Research and Engineering for Research and Advanced Technology for the
United States Department of Defense. From June 1989 to December 1991, Mr.
Monetta served as the Director of the Office of New Production Reactors of the
United States Department of Energy.
17
<PAGE>
Harry C. Schell has been a director of the Company since August 1998. Mr. Schell
is the former chairman and chief executive officer of BICC Cables Corporation,
and has served on the board of directors of the BICC Group (London), Phelps
Dodge Industries, the National Electrical Manufacturers Association and the
United Way of Rockland (New York).
Robert L. Burr has been a Director of the Company since August 1999. Mr. Burr
has been a Director of Fleming Asset Management, a subsidiary of Robert Fleming,
Inc., a global merchant bank, since 1995. From 1992 to 1995, Mr. Burr was head
of Private Equity at Kidder, Peabody & Co., Inc. Prior to that time, Mr. Burr
served as the Managing General Partner of Morgan Stanley Ventures and General
Partner of Morgan Stanley Venture Capital Fund I, L.P. and was a corporate
lending officer with Citibank, N.A. Mr. Burr serves on the Board of Directors of
Global Pharmaceutical Corporation.
Robert M. Zech has been a Director of the Company since June 1999. Mr. Zech has
been a Vice President of Fleming Asset Management, a subsidiary of Robert
Fleming Inc., a global merchant bank, since 1996. From 1994 to 1996, Mr. Zech
was an Investment Analyst with Cramer Rosenthal McGlynn Inc., an investment
management firm. Prior to that time, Mr. Zech served as an Associate with
Wolfensohn & Co., a mergers & acquisitions advisory firm, and was a Financial
Analyst at leveraged buyout sponsor Merrill Lynch Capital Partners, Inc. and in
the investment banking division of Merrill Lynch & Co.
The Company has established a Compensation /Stock Option Committee of the Board
of Directors, which is responsible for recommending the compensation of the
Company's executive officers and for the administration of the Company's Stock
Option Plans. The members of the such Committee are Messrs. Abbatecola, Morch,
Burr and Schell. The Company also has an Audit Committee of the Board of
Directors, which supervises the audit and financial procedures of the Company.
The members of the Audit Committee are Messrs. Abbatecola, Morch and Zech. The
Company also has an Executive Committee of the Board of Directors, which is
authorized to exercise the powers of the board of directors in the general
supervision and control of the business affairs of the Company during the
intervals between meetings of the board. The members of the Executive Committee
are Messrs. Schell, Zech and Kevin J. Zugibe. In 1999, the Company established
an Occupational, Safety And Environmental Protection Committee, which is
responsible for satisfying the Board that the Company's Environmental, Health
and Safety policies, plans and procedures are adequate. The members of the
Occupational, Safety and Environmental Protection Committee are Messrs.
Mandracchia, Monetta and Thomas P. Zugibe.
The By-laws of the Company provide that the Board of Directors is divided into
two classes. Each class is to have a term of two years, with the term of each
class expiring in successive years, and is to consist, as nearly as possible, of
one-half of the number of directors constituting the entire Board. The By-laws
provide that the number of directors shall be fixed by the Board of Directors
but in any event, shall be no less than seven (7) (subject to decrease by a
resolution adopted by the shareholders). In 1999, the Board of Directors was
increased to nine members. Two members of the board, Messrs. Burr and Zech, were
elected by vote of the Holders of the Company's Series A Preferred Stock at the
Company's August 19, 1999 Annual Meeting of the Shareholders.
The Company currently maintains directors and officers liability insurance for
covered claims up to $2,000,000 in the aggregate.
Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10 percent of a registered
class of the Company's equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission ("SEC").
Officers, directors, and greater than 10 percent stockholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
Based solely on the Company's review of the copies of such forms received
by the Company, the Company believes that during the year ended December 31,
1999 all filing requirements applicable to its officers, directors, and greater
than 10 percent beneficial stockholders were complied with except that (i)
Messrs Burr and Zech failed to timely file a Form 3 upon becoming directors of
the Company, (ii) Messrs. Kevin Zugibe, Thomas P. Zugibe, Stephen Mandracchia,
Brian Coleman and Walter Philips failed to timely file a Form 4 with respect to
options to purchase 1,000 shares of the Company's common stock granted to each
of them in March 1999, (iii) Messrs. Abbatecola, Morch and Monetta failed to
timely file a Form 4 with respect to options to purchase 5,000 shares of the
Company's common stock granted to each of them in August 1999, (iv) Mr. Schell
failed to timely file a Form 4 with respect to options to purchase 10,000 shares
of the Company's common stock granted to him in August 1999; and (v) Mr.
Abbatecola failed to timely file a Form 4 with respect to the 1,500 shares of
the company's common stock purchased by him in 1999.
18
<PAGE>
Item 10. Executive Compensation
The following table discloses, for the years indicated, the compensation for the
Company's Chief Executive Officer and each executive officer that earned over
$100,000 during the year ended December 31, 1999 (the "Named Executives").
<TABLE>
<CAPTION>
Summary Compensation Long Term Compensation
Table Awards
----------------------
Annual Compensation(1) Securities Underlying
--------------------
Name Position Year Salary Bonus Options
---- -------- ---- ------ ----- -------
<S> <C> <C> <C> <C> <C>
Kevin J. Zugibe Chairman of the Board, 1999 $136,279 -- 1,000 shares
President and Chief Executive 1998 $134,800 -- 40,000 shares
Officer 1997 $158,631 -- 58,000 shares
Eugene J. Tonkovich(2) President and Chief Operating 1999 $128,124 -- 1,000 shares
Officer 1998 $ 91,238 -- 250,000 shares(3)
1997 -- -- --
Stephen P. Mandracchia Executive Vice President and 1999 $108,124 -- 1,000 shares
Secretary 1998 $104,800 -- 25,000 shares
1997 $120,554 -- 40,000 shares
Thomas P. Zugibe Executive Vice President 1999 $104,800 -- 1,000 shares
1998 $104,800 -- 25,000 shares
1997 $120,169 -- 40,000 shares
Walter A. Phillips Vice President Marketing and 1999 $160,781 -- 1,000 shares
Strategic Planning 1998 $148,312 -- 10,000 shares
1997 $213,145 -- 22,000 shares
Brian F. Coleman Vice President and Chief 1999 $138,124 -- 1,000 shares
Financial Officer 1998 $124,900 -- 25,000 shares
1997 $79,950 -- 42,000 shares
</TABLE>
- ----------
(1) The value of personal benefits furnished to the Named Executives during
1997, 1998, and 1999 did not exceed 10% of their respective annual compensation.
(2) Effective July 1999, Eugene J. Tonkovich resigned as President and Chief
Operating Officer but continues to be compensated as an employee of the Company.
(3) In 1999 options to purchase 100,000 of the 250,000 shares of Common Stock
have been cancelled.
19
<PAGE>
The Company granted options, vesting immediately on the date of grant, to the
Named Executives during the fiscal year ended December 31, 1999, as shown in the
following table:
Summary of Stock Options
Granted to Named Executives
<TABLE>
<CAPTION>
Number of % of Total
Securities Options
Underlying Granted to
Options Employees in
Granted Fiscal year
---------- ----------- Exercise or Expiration
Name Position Shares Percent Base price ($/sh) Date
---- -------- ------ ------- ----------------- ----------
<S> <C> <C> <C> <C> <C>
Kevin J. Zugibe Chairman, President and 1,000 .4% $2.00 03/24/2004
Chief Executive Officer
Thomas P. Zugibe Executive Vice President 1,000 .4% $2.00 03/24/2004
Stephen P. Executive Vice President 1,000 .4% $2.00 03/24/2004
Mandracchia
Walter A. Phillips Vice President of Marketing and 1,000 .4% $1.78 03/24/2004
Strategic Operations
Brian F. Coleman Vice President and Chief 1,000 .4% $1.78 03/24/2004
Financial Officer
</TABLE>
Aggregated Fiscal Year End Option Values Table
The following table sets forth information concerning the value of unexercised
stock options held by the Named Executives at December 31, 1999. No options were
exercised by the Named Executives during the fiscal year ended December 31,
1999.
<TABLE>
<CAPTION>
Number of Securities
Underlying (1) Value of
Unexercised Options In-the-money Options
Shares At December 31, 1999 At December 31, 1999
------ --------------------- --------------------
Name Acquired on Value Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------------- ----------- ------------- ----------- -------------
Exercise
--------
<S> <C> <C> <C> <C> <C> <C>
Kevin J. Zugibe -- -- 81,000 18,000 0 0
Chairman; President and
Chief Executive Officer
Thomas P. Zugibe -- -- 66,000 0 0 0
Executive Vice President
Stephen P. Mandracchia -- -- 66,000 0 0 0
Executive Vice President
and Secretary
Walter A. Phillips -- -- 48,000 0 0 0
Vice President of Marketing
& Strategic Planning
Brian F. Coleman -- -- 68,000 0 0 0
Vice President and Chief
Financial Officer
</TABLE>
- ----------
(1)Year-end values of unexercised in-the-money options represent the positive
spread between the exercise price of such options and the year-end market value
of the Common Stock of $1.50.
20
<PAGE>
Compensation of Directors
Non-employee directors receive an annual fee of $3,000 and receive reimbursement
for out-of-pocket expenses incurred, and an attendance fee of $500 and $250,
respectively, for attendance at meetings of the Board of Directors and Board
committee meetings. In addition, commencing in August 1998, non-employee
directors receive 5,000 nonqualified stock options per year of service under the
Company's Stock Option Plans.
To date, the Company has granted to Harry C. Schell nonqualified options to
purchase 20,000 shares of Common Stock at exercise prices ranging from $2.38 to
$3.00 per share. Such options vested and are fully exercisable as of December
31, 1999. The Company has also granted to each of Dominic J. Monetta, Otto Morch
and Vincent Abbatecola, nonqualified options to purchase 10,000 shares of Common
Stock at exercise prices ranging from $2.38 to $3.00 per share. Such options
vested and are fully exercisable as of December 31, 1999. In addition, as
members of the Board of Directors, the Company has granted to Fleming US
Discovery Fund III, L.P. and Fleming US Discovery Offshore Fund III, L.P.
nonqualified options to purchase 8,618 and 1,382 shares of common stock at an
exercise price of $2.38 per share. All such options issued to the directors are
vested and fully exercisable at December 31, 1999.
Employment Agreements
The Company has entered into a two-year employment agreement with Kevin J.
Zugibe, which expires in May 2001 and is automatically renewable for two
successive terms. Pursuant to the agreement, effective February 1, 2000, Mr.
Zugibe is receiving an annual base salary of $70,000 with such increases and
bonuses as the Board may determine. The Company is the beneficiary of a
"key-man" insurance policy on the life of Mr. Zugibe in the amount of
$1,000,000.
The Company has entered into a three-year employment contract with Mr. Coleman
which provides for an annual base salary of $130,000, which expires in May 2000.
Stock Option Plan
1994 Stock Option Plan
The Company has adopted an Employee Stock Option Plan (the "Plan") effective
October 31, 1994 pursuant to which 725,000 shares of Common Stock are currently
reserved for issuance upon the exercise of options designated as either (i)
options intended to constitute incentive stock options ("ISOs") under the
Internal Revenue Code of 1986, as amended (the "Code"), or (ii) nonqualified
options. ISOs may be granted under the Plan to employees and officers of the
Company. Non-qualified options may be granted to consultants, directors (whether
or not they are employees), employees or officers of the Company. Stock
appreciation rights may also be issued in tandem with stock options.
The Plan is intended to qualify under Rule 16b-3 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and is administered by a committee
of the Board of Directors, which currently consists of Messrs. Abbatecola,
Morch, Burr and Schell. The committee, within the limitations of the Plan,
determines the persons to whom options will be granted, the number of shares to
be covered by each option, whether the options granted are intended to be ISOs,
the duration and rate of exercise of each option, the exercise price per share
and the manner of exercise and the time, manner and form of payment upon
exercise of an option. Unless sooner terminated, the Plan will expire on
December 31, 2004.
ISOs granted under the Plan may not be granted at a price less than the fair
market value of the Common Stock on the date of grant (or 110% of fair market
value in the case of persons holding 10% or more of the voting stock of the
Company). The aggregate fair market value of shares for which ISOs granted to
any employee are exercisable for the first time by such employee during any
calendar year (under all stock option plans of the Company) may not exceed
$100,000. Non-qualified options granted under the Plan may not be granted at a
price less than 85% of the market value of the Common Stock on the date of
grant. Options granted under the Plan will expire not more than ten years from
the date of grant (five years in the case of ISOs granted to persons holding 10%
or more of the voting stock of the Company). All options granted under the Plan
are not transferable during an optionee's lifetime but are transferable at death
by will or by the laws of descent and distribution. In general, upon termination
of employment of an optionee, all options granted to such person which are not
exercisable on the date of such termination immediately terminate, and any
options that are exercisable terminate 90 days following termination of
employment.
21
<PAGE>
As of December 31, 1999, options to purchase 248,266 shares of Common Stock were
issued under the Plan. During 1999, the Company granted options to purchase
70,000 shares to employees, exercisable at prices ranging from $1.94 to $2.50
per share (see Note 11 to the Notes to the Consolidated Financial Statements).
1997 Stock Option Plan
The Company has adopted the 1997 Stock Option Plan (the "1997 Plan"), pursuant
to which 2,000,000 shares of Common Stock are currently reserved for issuance
upon the exercise of options designated as either (i) options intended to
constitute incentive stock options ("ISOs") under the Internal Revenue Code of
1986, as amended (the "Code"), or (ii) nonqualified options. ISOs may be granted
under the 1997 Plan to employees and officers of the Company. Non-qualified
options may be granted to consultants, directors (whether or not they are
employees), employees or officers of the Company. Stock appreciation rights may
also be issued in tandem with stock options.
The 1997 Plan is intended to qualify under Rule 16b-3 under the Exchange Act and
is administered by a committee of the Board of Directors, which currently
consists of Messrs. Abbatecola and Morch. The committee, within the limitations
of the 1997 Plan, determines the persons to whom options will be granted, the
number of shares to be covered by each option, whether the options granted are
intended to be ISOs, the duration and rate of exercise of each option, the
exercise price per share and the manner of exercise and the time, manner and
form of payment upon exercise of an option. Unless sooner terminated, the 1997
Plan will expire on June 11, 2007.
ISOs granted under the 1997 Plan may not be granted at a price less than the
fair market value of the Common Stock on the date of grant (or 110% of fair
market value in the case of persons holding 10% or more of the voting stock of
the Company). The aggregate fair market value of shares for which ISOs granted
to any employee are exercisable for the first time by such employee during any
calendar year (under all stock option plans of the Company) may not exceed
$100,000. Non-qualified options granted under the 1997 Plan may not be granted
at a price less than 85% of the market value of the Common Stock on the date of
grant. Options granted under the 1997 Plan will expire not more than ten years
from the date of grant (five years in the case of ISOs granted to persons
holding 10% or more of the voting stock of the Company). All options granted
under the 1997 Plan are not transferable during an optionee's lifetime but are
transferable at death by will or by the laws of descent and distribution. In
general, upon termination of employment of an optionee, all options granted to
such person which are not exercisable on the date of such termination
immediately terminate, and any options that are exercisable terminate 90 days
following termination of employment.
As of December 31, 1999, the Company granted options to purchase 786,266 shares
of Common Stock under the 1997 Plan. During 1997, options to purchase 40,000,
25,000 and 25,000 shares at an exercise price of $4.47 per share were granted to
Kevin J. Zugibe, Stephen P. Mandracchia and Thomas P. Zugibe, respectively. Such
options vested and are fully exercisable. Additionally, during 1997, options to
purchase 18,000, 15,000 and 15,000 shares at an exercise price of $3.85 were
granted to, respectively, Kevin J. Zugibe, Stephen P. Mandracchia and Thomas P.
Zugibe. Such options vested and are fully exercisable except for options to
purchase 17,000 shares of Common Stock issued to Kevin J. Zugibe which become
exercisable November 3, 2000. During 1997, the Company also granted options to
purchase 99,100 shares to certain officers and employees, exercisable at prices
ranging from $3.50 to $4.06 per share. During 1998, the Company granted
non-qualified options to purchase 40,000, 25,000, and 25,000 shares at an
exercise price of $3.00 per share to Kevin J. Zugibe, Stephen P. Mandracchia and
Thomas P. Zugibe, respectively. Such options vested on August 31, 1998. In
addition during 1998, the Company also granted options to purchase 420,666
shares to certain officers, directors and employees, exercisable at prices
ranging from $2.50 to $4.375 per share. During 1999, the Company granted options
to purchase 1,000, 1,000 and 1,000 shares at an exercise price of $2.00 per
share to Kevin J. Zugibe, Stephen P. Mandracchia and Thomas P. Zugibe,
respectively. Such options vested and are fully exercisable as of November 3,
2000; November 3, 1999 and November 3, 1999, respectively. In addition, during
1999, the Company also granted options to purchase 153,500 shares to certain
officers, directors and employees, exercisable at prices ranging from $1.781 to
$2.63 per share (see Note 11 to the Notes to the Consolidated Financial
Statements).
22
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information as of March 13, 2000 based on
information obtained from the persons named below, with respect to the
beneficial ownership of the Company's Common Stock by (i) each person known by
the Company to be the beneficial owner of more than 5% of the Company's
outstanding Common Stock, (ii) the Named Executives, (iii) each director of the
Company, and (iv) all directors and executive officers of the Company as a
group:
Amount and
Nature of Percentage of
Beneficial Common
Name and Address of Beneficial Owner (1) Ownership (2) Shares Owned
- ---------------------------------------- ------------ -------------
Kevin J. Zugibe 318,728 (3) 6.15%
Thomas P. Zugibe 305,668 (4) 5.93%
Stephen P. Mandracchia 300,128 (5) 5.83%
Walter A. Phillips 48,000 (6) *
Brian F. Coleman 68,000 (7) *
Vincent P. Abbatecola 15,000 (8) *
Robert L. Burr 0 (12) *
Dominic J. Monetta 20,000 (8) *
Otto C. Morch 10,600 (8) *
Harry C. Schell 49,000 (9) *
Robert M. Zech 0 (12) *
DuPont Chemical and Energy
Operations, Inc. 500,000 (10) 9.83%
Fleming Funds 2,844,273 (11) 35.87%
All directors and executive officers
as a group
(11 persons) 1,135,124 (13) 20.77%
* = Less than 1%
- ----------
(1) Unless otherwise indicated, the address of each of the persons listed above
is the address of the Company, 275 North Middletown Road, Pearl River, New York
10965.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this report. Each
beneficial owner's percentage ownership is determined by assuming that options
and warrants that are held by such person (but not held by any other person) and
which are exercisable within 60 days from the date hereof have been exercised.
Unless otherwise noted, the Company believes that all persons named in the table
have sole voting and investment power with respect to all shares of Common stock
beneficially owned by them.
(3) Includes (i) 40,000 shares which may be purchased at $4.47 per share; (ii)
40,000 shares which may be purchased at $3.00 per share; (iii) 18,000 shares
which may be purchased at $3.85 per share and (iv) 1,000 shares which may be
purchased at $2.00 per share under immediately exercisable options. Does not
give effect to any voting rights held by Mr. Zugibe as a result of the Company's
agreement with the holders of the Series A Preferred Stock as discussed in (11)
below.
(4) Includes (i) 25,000 shares which may be purchased at $4.47 per share; (ii)
15,000 shares which may be purchased at $3.85 per share (iii) 25,000 shares
which may be purchased at $3.00 per share and (iv) 1,000 shares which may be
purchased at $2.00 per share under immediately exercisable options.
(5) Includes (i) 25,000 shares which may be purchased at $4.47 per share; (ii)
15,000 shares which may be purchased at $3.85 per share (iii) 25,000 shares
which may be purchased at $3.00 per share and (iv) 1,000 shares which may be
purchased at $2.00 per share under immediately exercisable options. Does not
give effect to any voting rights held by Mr. Mandracchia as a result of the
Company's agreement with the holders of the Series A Preferred Stock as
discussed in (11) below.
23
<PAGE>
(6) Represents (i) 15,000 shares which may be purchased at $5.625 per share;
(ii) 10,000 shares which may be purchased at $4.06 per share; (iii) 12,000
shares which may be purchased at $3.50 per share; (iv) 10,000 shares which may
be purchased at $3.06 per share and (v) 1,000 shares which may be purchased at
$1.78 per share under immediately exercisable options.
(7) Represents (i) 30,000 shares which may be purchased at $4.06 per share; (ii)
12,000 shares which may be purchased at $3.50 per share; (iii) 25,000 shares
which may be purchased at $2.50 per share and (iv) 1,000 shares which may be
purchased at $1.78 per share under immediately exercisable options.
(8) Includes 5,000 shares which may be purchased at $3.00 per share and 5,000
shares which may be purchased at $2.375 under immediately exercisable options.
(9) Includes 10,000 shares which may be purchased at $3.00 per share and 10,000
shares which may be purchased at $2.375 per share under immediately exercisable
options.
(10) According to a Schedule 13D filed with the Securities and Exchange
Commission, DuPont Chemical and Energy Operations, Inc. ("DCEO") and E.I. DuPont
de Nemours and Company claim shared voting and dispositive power over the
shares. DCEO's address is DuPont Building, Room 8045, 1007 Market Street,
Wilmington, DE 19898.
(11) Fleming US Discovery Fund III, L.P. and Fleming US Discovery Offshore Fund
III, L.P., and their general partner, Fleming U.S. Discovery Partners, L.P. and
its general partner, Fleming U.S. Discovery Partners LCC, collectively referred
to as ("Flemings Funds") are affiliates. The beneficial ownership of Flemings
assumes the conversion of Series A Preferred Stock owned by Flemings to Common
Stock at a conversion rate of $2.375 per share. The holders of shares of Series
A Preferred Stock vote together with the holders of the Common Stock based upon
the number of shares of Common Stock into which the Series A Preferred Stock is
then convertible. Flemings Funds has provided to the Chief Executive Officer and
Secretary of the Company a Proxy to vote that number of voting shares held by
Flemings which exceed 29% of the then voting shares. Also includes 10,000 shares
which may be purchased at $2.375 per share under immediately exercisable
options. The address of all of the Fleming Funds is 320 Park Avenue, 11th Floor,
New York, New York 10022, except for the Fleming U.S. Discovery Offshore Fund
III, L.P. whose address is c/o Bank of Bermuda Ltd., 6 Front Street, Hamilton
HM11 Bermuda.
(12) Messers. Burr and Zech have been appointed directors by the Flemings Funds.
Their share ownership excludes all shares of common stock beneficially owned by
Flemings Funds.
(13) Includes exercisable options to purchase 379,000 shares of Common Stock
owned by the directors and officers as a group. Excludes 2,834,273 shares
beneficially owned by the Flemings Funds.
Kevin J. Zugibe, Thomas P. Zugibe and Stephen P. Mandracchia may be deemed to be
"parents" of the Company as such term is used under the Securities Act of 1933.
Item 12. Certain Relationships and Related Transactions
In May 1998, an officer and a former director of the Company made unsecured
loans of $300,000 to the Company which were payable on demand and bore interest
at 10%. The note was repaid on June 30, 1998.
In February 1999, a former director of the Company made an unsecured loan of
$365,000 to the Company which was payable on demand and bore interest at 12%.
The note was repaid on April 16, 1999.
In the regular course of its business, the Company purchases refrigerants from
and sells refrigerants to DuPont and performs recovery, reclamation,
RefrigerantSide(TM) Services and other services (see "Description of Business -
Strategic Alliance).
24
<PAGE>
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Certificate of Incorporation and Amendment. (1)
3.2 Amendment to Certificate of Incorporation, dated July 20,1994. (1)
3.3 Amendment to Certificate of Incorporation, dated October 26, 1994. (1)
3.4 By-Laws. (1)
3.5 Certificate of Amendment of the Certificate of Incorporation dated
March 16, 1999. (12)
3.6 Certificate of Correction of the Certificate of Amendment dated March
25, 1999. (12)
3.7 Certificate of Amendment of the Certificate of Incorporation dated
March 29, 1999. (12)
10.1 Lease Agreement between the Company and Ramapo Land Co., Inc. (1)
10.2 Consulting Agreement with J.W. Barclay & Co., Inc. (1)
10.3 1994 Stock Option Plan of the Company. (1) (*)
10.4 Employment Agreement with Kevin J. Zugibe. (1) (*)
10.5 Assignment of patent rights from Kevin J. Zugibe to Registrant. (1)
10.6 Agreement dated August 12, 1994 between the Company and PAACO
International, Inc. (1)
10.7 Agreement between the Company and James T. and Joan Cook for the
purchase of premises 3200 S.E. 14th Avenue, Ft. Lauderdale, Florida.
(1)
10.8 Agreement dated as of December 12, 1994, by and between the Company
and James Spencer d/b/a CFC Reclamation. (2)
10.9 Employment agreement, dated December 12, 1994, between the Company and
James Spencer. (2)
10.10 Agreement, dated July 25, 1995, between the Company and Refrigerant
Reclamation Corporation of America. (3)
10.11 Employment Agreements with Thomas P. Zugibe, Stephen P. Mandracchia
and Stephen J. Cole-Hatchard. (4) (*)
10.12 Contract of Sale with ESS, Stephen Spain, Robert Johnson and the
Company dated April 23, 1996. (5)
10.13 Agreement dated June 14, 1996 between Environmental Support,
Solutions, Inc. and E-Soft, Inc. (7)
10.14 Agreement dated July 24, 1996 between the Company and GRR Co., Inc.
(7)
10.15 Agreements dated June 18, 1996 and September 30, 1996 between Cameron
Capital and the Company. (7)
10.16 Employment agreement, dated October 1, 1996, between the Company and
Walter Phillips. (7) (*)
10.17 Agreement dated February 4, 1997 between Wilson Art, Inc. and the
Company for the purchase of 100 Brenner Drive, Congers, New York. (7)
10.18 Employment agreement, dated April 16, 1997, between the Company and
Brian Coleman. (8) (*)
10.19 Agreements dated January 29, 1997 between E.I. DuPont de Nemours,
DCEO, and the Company. (6)
10.20 Loan and security agreements and warrant agreements dated April 29,
1998 between the Company and CIT Group/Credit Financing Group, Inc.
(9)
10.21 Stock Purchase Agreement, Registration Rights Agreement and
Stockholders Agreement dated March 30, 1999 between the Company and
Flemings US Discovery Partners, L.P. (10)
10.22 Contract of Sale, dated March 19, 1999, for 75% interest in
Environmental Support Solutions, Inc. (11)
10.23 1997 Stock Option Plan of the Company, as amended. (*)
23.1 Consent of BDO Seidman, LLP.
27 Financial Data Schedule.
- ----------
(1) Incorporated by reference to the comparable exhibit filed with the
Company's Registration Statement on Form SB-2 (No. 33-80279-NY).
(2) Incorporated by reference to the comparable exhibit filed with the
Company's Report on Form 8-K dated December 12, 1994.
(3) Incorporated by reference to the comparable exhibit filed with the
Company's Report on Form 10-QSB for the quarter ended June 30, 1995.
(4) Incorporated by reference to the comparable exhibit filed with the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1995.
(5) Incorporated by reference to the comparable exhibit filed with the
Company's Report on Form 8-K dated April 29, 1996.
(6) Incorporated by reference to the comparable exhibit filed with the
Company Report in Form 8-K dated January 29, 1997.
(7) Incorporated by reference to the comparable exhibit filed with the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996.
(8) Incorporated by reference to the comparable exhibit filed with the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1997.
(9) Incorporated by reference to the comparable exhibit filed with the
Company's Report on Form 10-QSB for the quarter ended March 31, 1998.
(10) Incorporated by reference to the comparable exhibit filed with the
Company's Report on Form 10-KSB for the year ended December 31, 1998.
(11) Incorporated by reference to the comparable exhibit filed with the
Company's Report on Form 10-QSB for the quarter ended March 31, 1999.
(12) Incorporated by reference to the comparable exhibit filed with the
Company's Report on Form 10-QSB for the quarter ended June 30, 1999.
(*) Denotes Management Compensation Plan, agreement or arrangement.
(b) Reports on Form 8-K:
During the quarter ended December 31, 1999, no report on Form 8-K was
filed.
25
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HUDSON TECHNOLOGIES, INC.
By: /s/ Kevin J. Zugibe
--------------------------
Kevin J. Zugibe, President
Date: March 28, 2000
In accordance with the Exchange Act, this report has been signed below by the
following persons, on behalf of the Registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Kevin J. Zugibe Chairman of the Board; President and Chief Executive March 28, 2000
- -------------------------- Officer (Principal Executive Officer)
Kevin J. Zugibe
/s/ Thomas P. Zugibe Executive Vice President and Director March 28, 2000
- --------------------------
Thomas P. Zugibe
/s/ Stephen P. Mandracchia Executive Vice President; Secretary and Director March 28, 2000
- --------------------------
Stephen P. Mandracchia
/s/ Brian F. Coleman Vice President and Chief Financial Officer (Principal March 28, 2000
- -------------------------- Financial and Accounting Officer)
Brian F. Coleman
/s/ Harry C. Schell Director March 28, 2000
- --------------------------
Harry C. Schell
/s/ Vincent Abbatecola Director March 28, 2000
- --------------------------
Vincent Abbatecola
/s/ Otto C. Morch Director March 28, 2000
- --------------------------
Otto C. Morch
/s/ Dominic J. Monetta Director March 28, 2000
- --------------------------
Dominic J. Monetta
/s/ Robert L. Burr Director March 28, 2000
- --------------------------
Robert L. Burr
/s/ Robert M. Zech Director March 28, 2000
- --------------------------
Robert M. Zech
</TABLE>
26
<PAGE>
Hudson Technologies, Inc.
Consolidated Financial Statements
Contents
- --------------------------------------------------------------------------------
Report of Independent Certified Accountants 28
Audited Consolidated Financial Statements:
o Consolidated Balance Sheet 29
o Consolidated Statements of Operations 30
o Consolidated Statements of Stockholders' Equity 31
o Consolidated Statements of Cash Flows 32
o Notes to the Consolidated Financial Statements 33
27
<PAGE>
Report of Independent Certified Accountants
To Stockholders and Board of Directors
Hudson Technologies, Inc.
Pearl River, New York
We have audited the accompanying consolidated balance sheet of Hudson
Technologies, Inc. and subsidiaries as of December 31, 1999 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hudson
Technologies, Inc. and subsidiaries as of December 31, 1999, and the results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/ BDO Seidman, LLP
Valhalla, New York
February 29, 2000
28
<PAGE>
Hudson Technologies, Inc. and subsidiaries
Consolidated Balance Sheet
(Amounts in thousands, except for share and par value amounts)
December 31,
------------
1999
----
Assets (Note 8)
- ------
Current assets:
Cash and cash equivalents $ 2,483
Trade accounts receivable - net (Note 5) 1,916
Inventories (Note 6) 2,480
Prepaid expenses and other current assets 203
--------
Total current assets 7,082
Property, plant and equipment, less accumulated depreciation (Note 7) 5,785
Other assets 112
--------
Total Assets $ 12,979
========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 3,375
Short-term debt (Note 8) 2,030
--------
Total current liabilities 5,405
Deferred income 22
Long-term debt, less current maturities (Note 8) 2,065
--------
Total Liabilities 7,492
--------
Commitments and contingencies (Note 10)
Stockholders' equity (Notes 9 and 11):
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 6,731
Common stock, $0.01 par value; shares authorized 20,000,000;
issued outstanding 5,085,820 51
Additional paid-in capital 21,614
Accumulated deficit (22,909)
--------
Total Stockholders' Equity 5,487
--------
Total Liabilities and Stockholders' Equity $ 12,979
========
See accompanying Notes to the Consolidated Financial Statements.
29
<PAGE>
Hudson Technologies, Inc. and subsidiaries
Consolidated Statements of Operations
(Amounts in thousands, except for share and per share amounts)
For the year ended December 31,
-------------------------------
1999 1998
----------- ----------
Revenues $ 17,909 $ 23,311
Cost of sales 14,121 17,585
----------- ----------
Gross Profit 3,788 5,726
----------- ----------
Operating expenses:
Selling and marketing 1,823 1,744
General and administrative 4,223 5,176
Depreciation and amortization 1,349 1,195
----------- ----------
Total operating expenses 7,395 8,115
----------- ----------
Operating loss (3,607) (2,389)
----------- -----------
Other income (expense):
Interest expense (454) (399)
Other income (Note 3) 106 132
----------- -----------
Total other (expense) (348) (267)
----------- -----------
Loss before income taxes (3,955) (2,656)
Income taxes (Note 4) -- --
----------- -----------
Net loss $ (3,955) $ (2,656)
=========== ===========
Net loss per common share - basic and diluted $ (.85) $ (.52)
=========== ===========
Weighted average number of shares
outstanding (Note 1) 5,085,820 5,068,320
=========== ===========
See accompanying Notes to the Consolidated Financial Statements.
30
<PAGE>
Hudson Technologies, Inc. and subsidiaries
Consolidated Statements of Stockholders' Equity
(Amounts in thousands, except for share amounts)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
--------------- ------------ Treasury Paid-in Accumulated
Shares Amount Shares Amount Stock Capital Deficit Total
-------- -------- ----------- ----------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1997 -- $ -- 5,086,820 $51 $(173) $22,683 $(16,298) $6,263
Retired
treasury stock -- -- (21,000) -- 173 (173) -- --
Issuance of common
stock for services -- -- 20,000 -- -- 35 -- 35
Net loss -- -- -- -- -- -- (2,656) (2,656)
-------- -------- ----------- ----------- ------- ---------- ---------- ----------
Balance at
December 31, 1998 -- -- 5,085,820 51 -- 22,545 (18,954) 3,642
Issuance of Series A
Preferred Stock - Net 65,000 6,500 -- -- -- (700) -- 5,800
Dividends paid in-kind on
Series A Preferred Stock 2,314 231 -- -- -- (231) -- --
Net Loss -- -- -- -- -- -- (3,955) (3,955)
-------- -------- ----------- ----------- ------- ---------- ---------- ----------
Balance at
December 31, 1999 67,314 $ 6,731 5,085,820 $51 $ -- $21,614 $(22,909) $5,487
======== ======== =========== =========== ======= ========== ========== ==========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
31
<PAGE>
Hudson Technologies, Inc. and subsidiaries
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
(Amounts in thousands)
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net Loss $(3,955) $(2,656)
Adjustments to reconcile net loss
to cash provided (used) by operating activities:
Depreciation and amortization 1,349 1,195
Allowance for doubtful accounts 41 80
Common stock issued for services -- 35
Changes in assets and liabilities:
Trade accounts receivable (883) 581
Inventories 804 471
Income taxes receivable -- 167
Prepaid expenses and other current assets 6 (23)
Other assets 91 (85)
Accounts payable and accrued expenses (876) 822
Deferred income (19) (13)
------- -------
Cash provided (used) by operating activities (3,442) 574
------- -------
Cash flows from investing activities:
Additions to property, plant, and equipment (1,822) (591)
------- -------
Cash used by investing activities (1,822) (591)
------- -------
Cash flows from financing activities:
Proceeds from issuance of preferred stock - net 5,800 --
Proceeds (repayment) of short-term debt - net 737 (480)
Proceeds from long-term debt 1,064 1,102
Repayment of long-term debt (630) (455)
------- -------
Cash provided by financing activities 6,971 167
------- -------
Increase in cash and cash equivalents 1,707 150
Cash and equivalents at beginning of period 776 626
------- -------
Cash and equivalents at end of period $ 2,483 $ 776
======= =======
- ------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during period for interest $ 454 $ 399
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
32
<PAGE>
Hudson Technologies, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
Note 1- Summary of Significant Accounting Policies
Business
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 and oils and other contaminants and recovery and reclamation of
the refrigerants used in commercial air conditioning and refrigeration systems.
The Company operates as a single segment through its wholly owned subsidiary
Hudson Technologies Company.
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 5.4% ownership interest in ESS.
Fair value of financial instruments
The carrying values of financial instruments including trade accounts
receivable, and accounts payable approximate fair value at December 31, 1999,
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 December 31, 1999.
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 year ended December 31, 1999, one customer accounted for 17% of
revenues. During the year ended December 31, 1998, one customer, an affiliate,
accounted for 28% and another customer accounted for 14%. 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 an adverse effect on the Company's financial position and results of
operations.
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.
33
<PAGE>
Property, plant, and equipment
Property, plant, and equipment are stated at cost; including internally
manufactured equipment. The cost to complete equipment that is under
construction is not considered to be material to the Company's financial
position. 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
The Company 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 recognized net income in future periods.
Loss per common and equivalent shares
Loss per common share (Basic) is calculated based on the net loss for the period
less dividends on the outstanding Series A Preferred Stock, $349,000 for 1999 of
which $231,000 was paid in kind on 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. Diluted loss per share was not
presented since the effect was not dilutive.
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.
The Company is subject to various legal proceedings. The Company assesses the
merits and potential liability associated with each of these proceedings. The
Company estimates potential liability, if any, related to these matters. To the
extent that these estimates are not accurate, or circumstances change in the
future, the Company could realize liabilities which would have a material
adverse affect on operating results and its financial position.
Impairment of long-lived assets and long-lived assets to be disposed of
The Company reviews for impairment of 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 measured by the amount by which the
34
<PAGE>
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. SFAS No. 133 requires
that an entity recognize derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
adoption did not have a material effect on the Company's financial position or
results of operations.
Note 2 - Acquisitions
On April 23, 1996, the Company acquired all the outstanding capital stock of
ESS, a developer and provider of environmental software, training, and
management services in consideration of $2,375,000, consisting of cash of
$700,000 and promissory notes of $1,675,000 which were repaid during October
1996. The acquisition was accounted for as a purchase from the date of
acquisition with the assets acquired and liabilities assumed recorded at fair
values, resulting in an excess of cost over assets acquired of approximately
$800,000. Results of ESS's operations were included in the Company's
consolidated financial statements from the date of acquisition.
On June 14, 1996, ESS acquired all the net assets, subject to liabilities, of
E-Soft, Inc. ("E-Soft"), a developer and marketer of software programs related
to hazardous material management, in consideration of a cash payment of $50,000
and 41,560 unregistered shares of the Company's stock. E-Soft acquired assets
and liabilities were recorded at fair values, resulting in an excess of cost
over assets acquired of approximately $500,000. Subsequent to the acquisition,
all E-Soft assets and activities were relocated to ESS headquarters in Arizona.
Effective March 19, 1999, the Company sold 75% of its stock ownership in ESS to
one of its founders. The consideration for the Company's sale of its interest
was $100,000 in cash and a six year note in the amount of $380,000. The Company
recognized a valuation allowance for 100% of the note receivable. The Company
will recognize as income the portion of the proceeds associated with the note
receivable upon the receipt of cash. This sale did not have a material effect on
the Company's financial condition or results of operations. It is not
anticipated that the Company will be involved in or control the operations of
ESS. Effective October 11, 1999, the Company sold to three of ESS' employees an
additional 5.4% ownership in ESS. The Company received $37,940 from the sale of
the additional ESS stock.
Note 3 - Other income
For the year ended December 31, 1999, and 1998, other income of $106,000 and
$132,000, respectively, consisted mainly of lease rental income from the
Company's Ft. Lauderdale facility.
Note 4 - Income taxes
During the years ended December 31, 1999 and 1998, there were no income tax
expense recognized due to the Company's net losses.
Reconciliation of the Company's actual tax rate to the U.S. Federal statutory
rate is as follows:
Year ended December 31, 1999 1998
(in percents) ---- ----
Income tax rates
----------------
- Statutory U.S. Federal rate (34%) (34%)
- States, net U.S. benefits (4%) (4%)
- Valuation allowance 38% 38%
----- -----
Total --% --%
===== =====
As of December 31, 1999, the Company has net operating loss carryforwards,
("NOL's") of approximately $20,000,000 expiring 2007 through 2014 for which a
100% valuation allowance has been recognized. Refrigerant Reclamation
Corporation of America ("RRCA"), acquired during 1995 as a subsidiary of the
Company, has available NOL's expiring 2007 through 2010 of approximately
$4,660,000 subject to annual limitations of approximately $367,000.
35
<PAGE>
Elements of deferred income tax assets (liabilities) are as follows:
December 31, 1999
(in thousands) --------
Deferred tax assets (liabilities)
---------------------------------
- Depreciation & amortization $ (55)
- Reserves for doubtful accounts 63
- NOL 8,000
- Other (8)
-------
Subtotal 8,000
- NOL valuation allowance (8,000)
-------
Total $ --
=======
Note 5- Trade accounts receivable - net
At December 31, 1999, trade accounts receivable are net of reserves for doubtful
accounts of $158,000.
Note 6 - Inventories
Inventories consisted of the following:
December 31, 1999
-------
(in thousands)
Refrigerant and cylinders $ 2,142
Packaged refrigerants 338
-------
Total $ 2,480
=======
During January 1998, the Company entered into several agreements, with E.I.
DuPont de Nemours and Company ("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 (see Note 9 to
the Notes to Consolidated Financial Statements).
Note 7 - Property, plant, and equipment
Elements of property, plant, and equipment are as follows:
December 31,
(in thousands) 1999
--------
Property, plant, & equipment
----------------------------
- Land $ 335
- Buildings & improvements 754
- Equipment 7,055
- Equipment under capital lease 1,159
- Furniture & fixtures 175
- Leasehold improvements 853
- Equipment under construction 246
--------
Subtotal 10,577
Accumulated depreciation & amortization (4,792)
--------
Total $ 5,785
========
The Company's land, building, and improvements, with a net book value of
approximately $953,000, are currently being leased to a third party. The Company
intends to sell this property in the foreseeable future.
36
<PAGE>
Note 8 - Short-term and long-term debt
Elements of short-term and long-term debt are as follows:
December 31, 1999
(in thousands) -------
Short-term & long-term debt
---------------------------
Short-term debt:
- Bank credit line $ 1,500
- Long-term debt: current 530
-------
Subtotal 2,030
-------
Long-term debt:
- Bank credit line 861
- Mortgage payable 660
- Capital lease obligations 289
- Vehicle loans 781
- RRCA priority claims 4
- Less: current maturities (530)
-------
Subtotal 2,065
-------
Total $ 4,095
=======
Bank credit line
On April 28, 1998, the Company entered into a credit facility with CIT
Group/Credit Finance Group, Inc. ("CIT") which makes available borrowings to the
Company of up to $5,000,000 and increased to $6,500,000 in 1999. The facility
requires minimum borrowings of $1,250,000. The facility provides for a revolving
line of credit and a six-year term loan and expires in April 2001. Advances
under the revolving line of credit are limited to (i) 80% of eligible trade
accounts receivable and (ii) 50% of eligible inventory (which inventory amount
shall not exceed 200% of eligible trade accounts receivable or $3,250,000). As
of December 31, 1999, the Company has availability under its revolving line of
credit of approximately $700,000. Advances, available to the Company, under the
term loan 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. During 1999, the Company received advances of $166,000 based on
capital expenditures. As of December 31, 1999, the Company has approximately
$861,000 outstanding under its term loans. As of December 31, 1999, the Company
had $1,500,000 outstanding under its revolving line of credit. The facility
bears interest at the prime rate plus 1.5%, 10% at December 31, 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.
Mortgage payable
During 1996, the Company mortgaged its property and building located in Ft.
Lauderdale with Turnberry Savings Bank, NA. The mortgage of $660,000, at
December 31, 1999 bears interest at a rate of 9.5% and repayable over 20 years
through January 2017.
Vehicle Loans
During 1999, the Company entered into various vehicle loans. The vehicles are
primarily used in connection with the Company's on-site services. The loans are
payable in 60 monthly payments through October 2004 and bear interest at 9.0%
through 9.98%.
RRCA Priority Claims
In connection with its bankruptcy reorganization in June 1994, prior to its
acquisition by Hudson, RRCA had unsecured obligations, as modified by a
settlement during April 1996, payable in periodic payments to bankruptcy
creditors through January 2000.
37
<PAGE>
Related Party Loan
In February 1999, a former director made an unsecured loan in the aggregate
principal amount of $365,000 to the Company. The loan was repaid on April 16,
1999 and bore interest at 12% per annum.
Scheduled maturities of the Company's debts and capital lease obligations are as
follows:
Debts and capital lease obligations
-----------------------------------
Years ended December 31, Amount
------------------------ ------
(in thousands)
-2000 $2,030
-2001 414
-2002 428
-2003 429
-2004 211
-Thereafter 583
------
Total $4,095
======
The Company rents certain equipment with a net book value of about $410,000 for
leases which have been classified as capital leases. Scheduled future minimum
lease payments under capital leases net of interest are as follows:
Scheduled capital lease obligation payments
-------------------------------------------
Years ended December 31, Amount
------------------------ ------
(in thousands)
-2000 $ 175
-2001 47
-2002 43
-2003 24
------
Total $ 289
======
Average short-term debt for the year ended December 31, 1999 totaled $964,000
with a weighted average interest rate of approximately 9.6%.
Note 9 - Stockholders' equity
On May 10, 1996, the Board of Directors authorized the Company to acquire, from
publicly traded markets, a maximum of 25,000 issued and outstanding shares of
its own Common Stock. In 1996, the Company had repurchased 21,000 shares at an
average price of $8.25 per share. No shares were subsequently purchased. During
1998, the Company retired the 21,000 shares of stock held in treasury.
In September 1996 and October 1997, in connection with the then outstanding
convertible debentures, the Company issued warrants to purchase an aggregate of
16,071 and 66,000 shares of the Company's Common Stock at an exercise price of
$18.00 and $10.00, respectively, per share. These warrants expire through August
6, 2002.
On January 29, 1997, the Company entered into a Stock Purchase Agreement with
DuPont and DuPont Chemical and Energy Operations, Inc. ("DCEO") pursuant to
which the Company issued to DCEO 500,000 shares of Common Stock in consideration
of $3,500,000 in cash. Simultaneous with the execution of the Stock Purchase
Agreement, the parties entered into a Standstill Agreement, Shareholders'
Agreement and Registration Agreement.
The Standstill Agreement provides, subject to certain exceptions, that neither
DuPont nor any corporation or entity controlled by DuPont will, directly or
indirectly, acquire any shares of any class of capital stock of the Company if
the effect of such acquisition would be to increase DuPont's aggregate voting
power to greater than 20% of the total combined voting power relating to any
election of directors. The Standstill Agreement also provides that the Company
will cause two persons designated by DCEO and DuPont to be elected to the
Company's Board of Directors.
The Shareholders' Agreement provides that, subject to certain exceptions, DuPont
shall have a right of first refusal to purchase any shares of Common Stock
intended to be sold by the Company's principal shareholders.
38
<PAGE>
Pursuant to the Registration Agreement, the Company granted to DuPont certain
demand and "piggy-back" registration rights.
During 1998, the Company issued, to a vendor, 20,000 shares of common stock for
services rendered during the year. The value of the services was recognized
based on the fair value of the stock at the time of issuance.
On April 28, 1998, in connection with the loan agreements with CIT, 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 and expire on April 29,
2001. 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.
On March 16, 1999, the shareholders of the Company approved an amendment to the
Certificate of Incorporation to authorize the issuance of 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.
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 is $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 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 on 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 the dividends will be paid in cash. On
September 30, 1999, the Company declared and paid, in-kind, the dividends of
outstanding on the 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 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 advisors 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 the sale of the Series A Preferred Stock. In addition to the advisor fees,
the Company issued to the advisor, warrants to purchase 136,482 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.
39
<PAGE>
Note 10 - Commitments and contingencies
Rents, operating leases and contingent income
Hudson utilizes leased facilities and operates equipment under non-cancelable
operating leases through December 31, 2001. In addition, the Company leases its
owned Ft. Lauderdale facility to a third party.
Properties
The Company's headquarters are located in approximately 5,400 square feet of
leased commercial space at Pearl River, New York. The building is leased from an
unaffiliated third party pursuant to a three year agreement at an annual rental
of approximately $87,500 through January 2002.
In March 1995, the Company purchased, for $950,000, a facility in Ft.
Lauderdale, Florida, consisting of a 32,000 square foot building on
approximately 1.7 acres with rail and port access. The property was mortgaged
during 1996 for $700,000. Annual real estate taxes are approximately $24,000.
The Company has principally ceased its operations at this facility and has
entered into a three year lease of the entire facility at the current level of
$13,125 per month to an unaffiliated third party. The Company intends to sell
this property in the foreseeable future.
The Company's Hillburn facility is located in approximately 21,000 square feet
of leased industrial space at Hillburn, New York. The building is leased from an
unaffiliated third party pursuant to a five-year agreement at an annual rental
of approximately $90,000 through May 2004.
The Company's Rantoul, Illinois facility is located in a 29,000 square foot
building leased from an unaffiliated third party at an annual rental of
approximately $ 78,000 pursuant to an agreement expiring in September 2002. The
Company also leases warehouse space from an unaffiliated third party in a 7,500
square foot building on a month to month basis at a monthly rent of $1,600.
The Company's Charlotte, North Carolina facility is located in a 12,000 square
foot building leased from an unaffiliated third party at an annual rent of
approximately $42,000 pursuant to an agreement expiring in April 2000.
The Company's Houston, Texas depot facility, which consists of 1,555 square feet
located in a larger building, is leased from an unaffiliated third party at an
annual rent of $8,000 pursuant to an agreement which expires in May 2000.
The Company's Villa Park (Chicago), Illinois depot facility is located in a
3,500 square foot building leased from an unaffiliated third party at an annual
rent of approximately $23,000 pursuant to an agreement expiring in August 2002.
The Company's Baltimore, Maryland depot facility is located in a 2,700 square
foot building leased from an unaffiliated third party at an annual rent of
approximately $25,000 pursuant to an agreement expiring in August 2002.
The Company's Seattle, Washington depot facility is located in a 3,000 square
foot building leased from an unaffiliated third party at an annual rent of
approximately $16,200 pursuant to an agreement expiring in March 2001.
The Company's Plainview, New York depot facility is located in a 2,000 square
foot building leased from an unaffiliated third party at an annual rent of
approximately $16,440 pursuant to an agreement expiring in July 2000.
The Company's Haverhill (Boston), Massachusetts depot facility is located in a
3,000 square foot building leased from an unaffiliated third party at an annual
rent of $13,200 pursuant to an agreement expiring in February 2001.
The Company's Punta Gorda, Florida separation facility is located in a 15,000
square foot building leased from an unaffiliated third party at an annual rent
of $60,000 pursuant to an agreement expiring in April 2001.
The Company's Baton Rouge, Louisiana facility is located in a 3,800 square foot
building leased from an unaffiliated third party at an annual rental of
approximately $18,000 pursuant to an agreement expiring in July 2002.
The Company's Ft. Myers, Florida engineering facility is located in a 15,000
square foot building leased from an unaffiliated third party at an annual rent
of $48,600 pursuant to an agreement expiring in July 2000.
40
<PAGE>
The Company rents properties and various equipment under operating leases. Rent
expense, net of sublease rental income, for the years ended December 31, 1999
and 1998 totaled approximately $925,000 and $928,000, respectively.
Future commitments under operating leases, are summarized as follows:
Rent expense
------------
Years ended December 31, Amount
------------------------ ------
(in thousands)
-2000 $ 641
-2001 513
-2002 230
-2003 105
-2004 46
------
Total $1,535
======
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
Hillburn, New York facility showed elevated levels of refrigerant contamination,
specifically Trichlorofluoromethane (R-11). 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 detected levels of R-11 in the groundwater, but have
failed to detect any levels of R-12 in the groundwater in and around the
Company's facility.
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 New York State Department
of Environmental Conservation ("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 $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 alleged
contamination. 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 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 planned 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 the affected United well have
steadily decreased since June 1, after rising to a level in excess of 700 ppb.
and on March 13, 2000 was reduced to 5.5 ppb. In December 1999, a second United
well within close proximity to the Company's facility began showing elevated
levels of R-11 in excess of 5 ppb. and increased to a high of 26 ppb. in
February 2000. 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
plans for the construction of a separate remediation system to directly treat
contaminated water from United's well.
In July 1999, United filed a motion seeking permission to amend its complaint in
the action it commenced in June 1998 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
41
<PAGE>
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 RCRA 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 alleged that the defendants, among other things, misrepresented
material information about the Company's financial results and prospects, and
its customer relationships. 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, and as a
result, in November 1999, a final judgment was entered dismissing the
consolidated complaint in its entirety.
In June 1999, an action was commenced in the Baton Rouge Supreme Court by
William Freeman and three others 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 and that no
damages were suffered by the plaintiffs in that action. There can be no
assurance that this action, or any settlement thereof, will be resolved in a
manner favorable to the Company.
The Company 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.
Employment agreements
The Company has entered into a two-year employment agreement with Kevin J.
Zugibe, which expires in May 2001 and is automatically renewable for two
successive terms. Pursuant to the agreement, effective February 1, 2000, Mr.
Zugibe is receiving an annual base salary of $70,000 with such increases and
bonuses as the Board may determine.
The Company has entered into a five year employment agreement with an employee
which expires in July 2001 and is renewable for successive two year terms. The
agreement provided for a minimum annual salary of $85,000 per year and bonuses
up to $115,000 per year based on certain production volumes.
42
<PAGE>
Note 11 - Stock Option Plan
Effective October 31, 1994, the Company adopted an Employee Stock Option Plan
("Plan") pursuant to which 725,000 shares of common stock are reserved for
issuance upon the exercise of options designated as either (i) options intended
to constitute incentive stock options ("ISOs") under the Internal Revenue Code
of 1986, as amended, or (ii) nonqualified options. ISOs may be granted under the
Plan to employees and officers of the Company. Non-qualified options may be
granted to consultants, directors (whether or not they are employees), employees
or officers of the Company. Stock appreciation rights may also be issued in
tandem with stock options. Unless sooner terminated, the Plan will expire on
December 31, 2004.
ISOs granted under the Plan may not be granted at a price less than the fair
market value of the Common Stock on the date of grant (or 110% of fair market
value in the case of persons holding 10% or more of the voting stock of the
Company). Non-qualified options granted under the Plan may not be granted at a
price less than 85% of the market value of the Common Stock on the date of
grant. Options granted under the Plan expire not more than ten years from the
date of grant (five years in the case of ISOs granted to persons holding 10% or
more of the voting stock of the Company).
Effective July 25, 1997, and as amended on August 19, 1999, the Company adopted
its 1997 Employee Stock Option Plan ("1997 Plan") pursuant to which 2,000,000
shares of common stock are reserved for issuance upon the exercise of options
designated as either (i) options intended to constitute incentive stock options
("ISOs") under the Internal Revenue Code of 1986, as amended, or (ii)
nonqualified options. ISOs may be granted under the 1997 Plan to employees and
officers of the Company. Non-qualified options may be granted to consultants,
directors (whether or not they are employees), employees or officers of the
Company. Stock appreciation rights may also be issued in tandem with stock
options. Unless sooner terminated, the 1997 Plan will expire on June 11, 2007.
ISOs granted under the 1997 Plan may not be granted at a price less than the
fair market value of the Common Stock on the date of grant (or 110% of fair
market value in the case of persons holding 10% or more of the voting stock of
the Company). Non-qualified options granted under the 1997 Plan may not be
granted at a price less than 85% of the market value of the Common Stock on the
date of grant. Options granted under the 1997 Plan expire not more than ten
years from the date of grant (five years in the case of ISOs granted to persons
holding 10% or more of the voting stock of the Company).
All stock options have been granted to employees and non-employees at exercise
prices equal to or in excess of the market value on the date of the grant.
The Company applies APB Opinion 25, `Accounting for Stock Issued to Employees',
and related Interpretations in accounting for its stock option plan by recording
as compensation expense the excess of the fair market value over the exercise
price per share as of the date of grant. Under APB Opinion 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of the grant, no compensation cost is
recognized.
SFAS No. 123 requires the Company to provide pro forma information regarding net
loss and net loss per share as if compensation cost for the Company's stock
option plan had been determined in accordance with the fair value based method
prescribed in SFAS No. 123. The Company estimates the fair value of each stock
option at the grant date by using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants since 1995.
Years ended December 31, 1999 1998
Assumptions ---- -----
-----------
Dividend Yield 0% 0%
Risk free interest rate 5.3% 5.5%
Expected volatility 46.5% 46.1%
Expected lives 5 5
43
<PAGE>
Under the accounting provisions of FASB Statement 123, the Company's net loss
and net loss per share would have been adjusted to the pro forma amounts
indicated below:
Years ended December 31, 1999 1998
--------- -------
Pro forma results
-----------------
(In thousands, except per share amounts)
Net loss:
As reported $ (3,955) $(2,656)
Pro forma $ (4,723) $(3,438)
Loss per common share-basic and
diluted
As reported $ (.85) $ (.52)
Pro forma $ (1.00) $ (.68)
A summary of the status of the Company's stock option plan as of December 31,
1999 and 1998 and changes for the years ending on those dates is presented
below:
Weighted
Average
Stock Option Plan Grants Shares Exercise Price
------------------------
Outstanding at December 31, 1997 880,526 $6.03
o Granted 520,666 $3.50
o Forfeited (26,550) $5.74
---------
Outstanding at December 31, 1998 1,374,642 $5.08
o Granted 226,500 $2.24
o Forfeited (566,610) $5.23
---------
Outstanding at December 31, 1999 1,034,532 $4.37
========= =====
Data summarizing year-end options exercisable and weighted average fair-value of
options granted during the years ended December 31, 1999 and 1998 is shown
below:
Options Exercisable
Year ended Year ended
December 31, December 31,
1999 1998
Options exercisable at year-end 925,532 1,052,525
----------- ---------
Weighted average exercise price
$ 4.07 $ 5.15
----------- ---------
Weighted average fair value of options
granted during the
year
$ .83 $ 1.21
----------- ---------
Options Exercisable at December 31, 1999
Weighted-average
Exercise
Range of Prices Number Outstanding Price
--------------- ------------------ ------
$1 to $4 636,000 $ 2.86
$4 to $10 190,532 $ 4.55
$10 to $16 99,000 $10.91
-------
$1 to $16 925,532 $ 4.07
=======
44
<PAGE>
The following table summarizes information about stock options outstanding at
December 31, 1999:
Options Outstanding At December 31, 1999
Weighted-average Weighted-
Range of Remaining average
-------- Number Contractual Exercise
Prices Outstanding Life Price
------ ----------- ---- -----
$1 to $4 701,000 4.2 years $ 3.01
$4 to $10 190,532 3.0 years $ 4.55
$10 to $16 143,000 2.0 years $ 10.79
---------
$1 to $16 1,034,532 3.7 years $ 4.37
=========
During the initial phase-in period of SFAS 123, the effects on the pro-forma
results are not likely to be representative of the effects on pro-forma results
in future years since options vest over several years and additional awards
could be made each year.
45
Exhibit 10.23:
1997 STOCK OPTION PLAN
OF
HUDSON TECHNOLOGIES, INC.
1. Purpose
Hudson Technologies, Inc. (the "Company") desires to attract and retain the
best available talent and encourage the highest level of performance in order to
continue to serve the best interests of the Company, and its shareholder(s). By
affording key personnel the opportunity to acquire proprietary interests in the
Company and by providing them incentives to put forth maximum efforts for the
success of the business, the 1997 Stock Option Plan of Hudson Technologies, Inc.
(the "1997 Plan") is expected to contribute to the attainment of those
objectives.
The word "Parent" as used herein, shall mean any corporation that owns
fifty percent or more of the voting stock of the Company.
The word "Subsidiary" or "Subsidiaries" as used herein, shall mean any
corporation, fifty percent or more of the voting stock of which is owned by the
Company.
2. Scope and Duration
Options under the 1997 Plan may be granted in the form of incentive stock
options ("Incentive Options") as provided in Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), or in the form of nonqualified stock
options ("Non-Qualified Options"). (Unless otherwise indicated, references in
the 1997 Plan to "options" include Incentive Options and Non-Qualified Options.)
The maximum aggregate number of shares as to which options may be granted from
time to time under the 1997 Plan is 2,000,000* shares of the Common Stock of the
Company ("Common Stock"), which shares may be, in whole or in part, authorized
but unissued shares or shares reacquired by the Company. The maximum number of
shares with respect to which options may be granted to any employee during the
term of the 1997 Plan is 500,000. Except as otherwise provided in Paragraph 7(b)
hereof, if an option shall expire, terminate or be surrendered for cancellation
for any reason without having been exercised in full, the shares represented by
the option or portion thereof not so exercised shall (unless the 1997 Plan shall
have been terminated) become available for subsequent option grants under the
1997 Plan. As provided in Paragraph 13, the 1997 Plan shall become effective on
June 12, 1997, and unless terminated sooner pursuant to Paragraph 14, the 1997
Plan shall terminate on June 11, 2007, and no option shall be granted hereunder
after that date.
*Increased to 2,000,000 shares by shareholder resolution made August 19,1999
3. Administration
The 1997 Plan shall be administered by the Board of Directors of the
Company, or, at their discretion, by a committee which is appointed by the Board
of Directors to perform such function (the "Committee"). The Committee shall
consist of not less than two members of the Board of Directors, each of whom
shall serve at the pleasure of the Board of Directors and shall be a
"Non-Employee Director" as defined in Rule l6b-3 under the Securities Exchange
Act of 1934 (the "Act"). Vacancies occurring in the membership of the Committee
shall be filled by appointment by the Board of Directors.
The Board of Directors or the Committee, as the case may be, shall have
plenary authority in its discretion, subject to and not inconsistent with the
express provisions of the 1997 Plan, to grant options, to determine the purchase
price of the Common Stock covered by each option, the term of each option, the
persons to whom, and the time or times at which, options shall be granted and
the number of shares to be covered by each option; to designate options as
Incentive Options or Non-Qualified Options; to interpret the 1997 Plan; to
prescribe, amend and rescind rules and regulations relating to the 1997 Plan; to
determine the terms and provisions of the option agreements (which need not be
identical) entered into in connection with options under the 1997 Plan; and to
make all other determinations deemed necessary or advisable for the
administration of the 1997 Plan. The Board of Directors or the Committee, as the
case may be, may delegate to one or more of its members or to one or more agents
such administrative duties as it may deem advisable, and the Board of Directors
or the Committee, as the case may be, or any person to whom it has delegated
duties as aforesaid may employ one or more persons to render advice with respect
to any responsibility the Board of Directors or the Committee, as the case may
be, or such person may have under the 1997 Plan.
46
<PAGE>
4. Eligibility; Factors to be Considered in Granting Options
Incentive Options shall be limited to persons who are employees of the
Company or, if applicable, its Parent, or the Company's present and future
Subsidiaries and at the date of grant of any option are in the employ of the
Company or its Parent or the Company's present and future Subsidiaries. In
determining the employees to whom Incentive Options shall be granted and the
number of shares to be covered by each Incentive Option, the Board of Directors
or the Committee, as the case may be, shall take into account the nature of
employees' duties, their present and potential contributions to the success of
the Company and such other factors as it shall deem relevant in connection with
accomplishing the purposes of the 1997 Plan. An employee who has been granted an
option or options under the 1997 Plan may be granted an additional option or
options, subject, in the case of Incentive Options, to such limitations as may
be imposed by the Code on such options. Except as provided below, a
Non-Qualified Option may be granted to any person, including, but not limited
to, employees, independent agents, consultants and attorneys, who the Board of
Directors or the Committee, as the case may be, believes has contributed, or
will contribute, to the success of the Company.
5. Option Price
The purchase price of the Common Stock covered by each option shall be
determined by the Board of Directors or the Committee, as the case may be. In
the case of Incentive Options, the purchase price shall not be less than 100%
(110% if granted to an employee referred to in Paragraph 8(b) hereof) of the
Fair Market Value (as defined in Paragraph 15 below) of a share of the Common
Stock on the date on which the option is granted. In the case of Non-Qualified
Options the purchase price per share of Common Stock covered by each option
shall be such price, not less than the par value a share of Common Stock, as
shall be determined by the Board of Directors or the Committee, as the case may
be. Such purchase prices shall be subject to adjustment as provided in Paragraph
12 below. The Board of Directors or the Committee, as the case may be, shall
determine the date on which an option is granted; in the absence of such a
determination, the date on which the Board of Directors or the Committee, as the
case may be, adopts a resolution granting an option shall be considered the date
on which such option is granted.
6. Term of Options
The term of each option shall be determined by the Board of Directors or
the Committee, as the case may be, provided, however, that the term of any
option cannot be more than 10 years from the date of grant (five years in the
case of an Incentive Option granted to an employee referred to in Paragraph 8(b)
hereof). All options granted pursuant to the 1997 Plan are subject to earlier
termination as provided in Paragraphs 10 and 11 below.
7. Exercise of Options
(a) Subject to the provisions of the 1997 Plan and unless otherwise
provided in the option agreement, options granted under the 1997 Plan shall
become exercisable as determined by the Board of Directors or Committee. In its
discretion, the Board of Directors or the Committee, as the case may be, may, in
any case or cases, prescribe that options granted under the 1997 Plan become
exercisable in installments or provide that an option may be exercisable in full
immediately upon the date of its grant. The Board of Directors or the Committee,
as the case may be, may, in its sole discretion, also provide that an option
granted pursuant to the 1997 Plan shall immediately become exercisable in full
upon the happening of any of the following events; (i) the first purchase of
shares of Common Stock pursuant to a tender offer or exchange offer (other than
an offer by the Company) for all, or any part of, the Common Stock, (ii) the
approval by the shareholder(s) of the Company of an agreement for a merger in
which the Company will not survive as an independent, publicly owned
corporation, a consolidation, or a sale, exchange or other disposition of all or
substantially all of the Company's assets, (iii) with respect to an employee, on
his 65th birthday, or (iv) with respect to an employee, on the employee's
involuntary termination from employment, except as provided in Section 10
herein. In the event of a question or controversy as to whether or not any of
the events hereinabove described has taken place, a determination by the Board
of Directors or the Committee, as the case may be, that such event has or has
not occurred shall be conclusive and binding upon the Company and participants
in the 1997 Plan.
(b) Any option at any time granted under the 1997 Plan may contain a
provision to the effect that the optionee (or any persons entitled to act under
Paragraph 11 hereof) may, at any time at which Fair Market Value is in excess of
the exercise price and prior to exercising the option, in whole or in part,
request that the Company purchase all or any portion of the option as shall then
be exercisable at a price (the "Purchase Price") equal to the difference between
47
<PAGE>
(i) an amount equal to the option price multiplied by the number of shares
subject to that portion of the option in respect of which such request shall be
made and (ii) an amount equal to such number of shares multiplied by the fair
market value of the Company's Common Stock (within the meaning of Section 422 of
the Code and the treasury regulations promulgated thereunder) on the date of
purchase. The Company shall have no obligation to make any purchase pursuant to
such request, but if it elects to do so, such portion of the option as to which
the request is made shall be surrendered to the Company. The Purchase Price for
the portion of the option to be so surrendered shall be paid by the Company,
less any applicable withholding tax obligations imposed upon the Company by
reason of the purchase, at the election of the Board of Directors or the
Committee, as the case may be, either in cash or in shares of Common Stock
(valued as of the date and in the manner provided in clause (ii) above), or in
any combination of cash and Common Stock, which may consist, in whole or in
part, of shares of authorized but unissued Common Stock or shares of Common
Stock held in the Company's treasury. No fractional share of Common Stock shall
be issued or transferred and any fractional share shall be disregarded. Shares
covered by that portion of any option purchased by the Company pursuant hereto
and surrendered to the Company shall not be available for the granting of
further options under the 1997 Plan. All determinations to be made by the
Company hereunder shall be made by the Board of Directors or the Committee, as
the case may be.
(c) An option may be exercised, at any time or from time to time (subject,
in the case of Incentive Options, to such restrictions as may be imposed by the
Code), as to any or all full shares as to which the option has become
exercisable until the expiration of the period set forth in Paragraph 6 hereof,
by the delivery to the Company, at its principal place of business, of (i)
written notice of exercise in the form specified by the Board of Directors or
the Committee, as the case may be, specifying the number of shares of Common
Stock with respect to which the option is being exercised and signed by the
person exercising the option as provided herein, (ii) payment of the purchase
price; and (iii) in the case of Non-Qualified Options, payment in cash of all
withholding tax obligations imposed on the Company by reason of the exercise of
the option. Upon acceptance of such notice, receipt of payment in full, and
receipt of payment of all withholding tax obligations, the Company shall cause
to be issued a certificate representing the shares of Common Stock purchased. In
the event the person exercising the option delivers the items specified in (i)
and (ii) of this Subsection (c), but not the item specified in (iii) hereof, if
applicable, the option shall still be considered exercised upon acceptance by
the Company for the full number of shares of Common Stock specified in the
notice of exercise but the actual number of shares issued shall be reduced by
the smallest number of whole shares of Common Stock which, when multiplied by
the Fair Market Value of the Common Stock as of the date the option is
exercised, is sufficient to satisfy the required amount of withholding tax.
(d) Except as otherwise provided in subsection (b) of this Paragraph 7, the
purchase price of the shares as to which an option is exercised shall be paid in
full at the time of exercise. Payment shall be made in cash, which may be paid
by check or other instrument acceptable to the Company; in addition, subject to
compliance with applicable laws and regulations and such conditions as the Board
of Directors or the Committee, as the case may be, may impose, the Board of
Directors or the Committee, as the case may be, in its sole discretion, may on a
case-by-case basis elect to accept payment in shares of Common Stock of the
Company which are already owned by the option holder, valued at the Fair Market
Value thereof (as defined in Paragraph 15 below) on the date of exercise;
provided, however, that with respect to Incentive Options, no such discretion
may be exercised unless the option agreement permits the payment of the purchase
price in that manner.
(e) Except as provided in Paragraphs 10 and 11 below, no option granted to
an employee may be exercised at any time by such employee unless such employee
is then an employee of the Company or a Subsidiary or Parent.
8. Incentive Options
(a) With respect to Incentive Options granted, the aggregate Fair Market
Value (determined in accordance with the provisions of Paragraph 15 at the time
the Incentive Option is granted) of the Common Stock or any other stock of the
Company or its current or future Subsidiaries with respect to which incentive
stock options, as defined in Section 422 of the Code, are exercisable for the
first time by any employee during any calendar year (under all incentive stock
option plans of the Company and its parent and subsidiary corporation's, as
those terms are defined in Section 424 of the Code) shall not exceed $100,000.
(b) No Incentive Option may be awarded to any employee who immediately
prior to the date of the granting of such Incentive Option owns more than 10% of
the combined voting power of all classes of stock of the Company or any of its
Subsidiaries unless the exercise price under the Incentive Option is at least
110% of the Fair Market Value and the option expires within 5 years from the
date of grant.
48
<PAGE>
(c) In the event of amendments to the Code or applicable regulations
relating to Incentive Options subsequent to the date hereof, the provisions of
the 1997 Plan and the provisions of outstanding option agreements between the
Company and any optionee with respect to options issued pursuant to the 1997
Plan shall automatically, and without any action on the part of any person, be
modified to conform to such amendments, provided, however, that no such
amendment shall occur without the express approval of the Company and the
optionee if the effect of such amendment were to result in the granting of a new
option pursuant to Section 424(h) of the Code or any successor provision.
9. Transferability of Options
Incentive Options granted under the 1997 Plan shall not be transferable
otherwise than by will or the laws of descent and distribution, and Incentive
Options may be exercised during the lifetime of the optionee only by the
optionee. Non-Qualified Options are only transferable if such right is granted
by the Board of Directors, or the Committee, as the case may be, and such
provision is contained in the option agreement with respect to the Non-Qualified
Options. No transfer of an option by the optionee by will or by the laws of
descent and distribution or otherwise shall be effective to bind the Company
unless the Company shall have been furnished with written notice thereof and a
copy of the will and/or such other evidence as the Company may deem necessary to
establish the validity of the transfer and the acceptance by the transferor or
transferees of the terms and conditions of such option.
10. Termination of Employment
In the event that the employment of an employee to whom an option has been
granted under the 1997 Plan shall be terminated (except as set forth in
Paragraph 11 below), such option may be, subject to the provisions of the 1997
Plan, exercised (to the extent that the employee was entitled to do so at the
termination of his employment) at any time within three (3) months after such
termination, but not later than the date on which the option terminates;
provided, however, that any option which is held by an employee whose employment
is terminated for cause or voluntarily without the consent of the Company shall,
to the extent not theretofore exercised, automatically terminate as of the date
of termination of employment. As used herein, "cause" shall mean conduct
amounting to fraud, dishonesty, or engaging in competition or solicitations in
competition with the Company and breaches of any applicable employment agreement
between the Company and the optionee. Options granted to employees under the
1997 Plan shall not be affected by any change of duties or position so long as
the holder continues to be a regular employee of the Company or any of its
current or future Subsidiaries or Parent. Any option agreement or any rules and
regulations relating to the 1997 Plan may contain such provisions as the Board
of Directors or the Committee, as the case may be, shall approve with reference
to the determination of the date employment terminates and the effect of leaves
of absence. Nothing in the 1997 Plan or in any option granted pursuant to the
1997 Plan shall confer upon any employee any right to continue in the employ of
the Company or any of the Subsidiaries or Parent or affiliated companies or
interfere in any way with the right of the Company or any such Subsidiary or
Parent or affiliated companies to terminate such employment at any time.
11. Death or Disability of Employee
If an employee to whom an option has been granted under the 1997 Plan shall
die while employed by the Company or a Parent or a Subsidiary or within three
(3) months after the termination of such employment (other than termination for
cause or voluntary termination without the consent of the Company or the consent
of the Parent for an employee of the Parent, as the case may be), such option
may be exercised, to the extent exercisable by the employee on the date of
death, by a legatee or legatees of the employee under the employee's last will,
or by the employee's personal representative or distributees, at any time within
one year after the date of the employee's death, but not later than the date on
which the option terminates. In the event that the employment of an employee to
whom an option has been granted under the 1997 Plan shall be terminated as the
result of a disability, such option may be exercised, to the extent exercisable
by the employee on the date of such termination, at any time within one year
after the date of such termination, but not later than the date on which the
option terminates.
12. Adjustments Upon Changes in Capitalization, Etc.
Notwithstanding any other provision of the 1997 Plan, the Board of
Directors or the Committee, as the case may be, may, at any time, make or
provide for such adjustments to the 1997 Plan, to the number and class of shares
issuable thereunder or to any outstanding options as it shall deem appropriate
to prevent dilution or enlargement of rights, including adjustments in the event
of changes in the outstanding Common Stock by reason of stock dividends,
split-ups, recapitalizations, mergers, consolidations, combinations or exchanges
of shares, separations, reorganizations, liquidations and the like. In the event
of any offer to holders of Common Stock generally relating to the acquisition of
their shares,
49
<PAGE>
the Board of Directors or the Committee, as the case may be, may make such
adjustment as it deems equitable in respect of outstanding options and rights,
including in its discretion revision of outstanding options and rights so that
they may be exercisable for the consideration payable in the acquisition
transaction. Any such determination by the Board of Directors or the Committee,
as the case may be, shall be conclusive. Any fractional shares resulting from
such adjustments shall be eliminated.
13. Effective Date
The 1997 Plan shall become effective on June 12, 1997, the date of adoption
by the Board of Directors, subject to approval of the 1997 Plan by the
shareholders of the Company on or before June 11, 1998.
14. Termination and Amendment
The Board of Directors of the Company may, without the approval of its
shareholders, suspend, terminate, modify or amend the 1997 Plan, provided,
however, that any amendment that would increase the aggregate number of shares
which may be issued under the 1997 Plan, materially increase the benefits
accruing to participants under the 1997 Plan, or materially modify the
requirements as to eligibility for participation in the 1997 Plan, shall be
subject to the approval of the Company's shareholder(s), except that any such
increase or modification that may result from adjustments authorized by
Paragraph 12 does not require such approval. Except as provided below and in
Paragraph 8(c) hereof, no suspension, termination, modification or amendment of
the 1997 Plan shall require the approval of any optionee. Notwithstanding the
foregoing, no suspension, termination, modification or amendment of the 1997
Plan shall be made without the consent of the person to whom an option shall
theretofore have been granted if it adversely effects the rights of such
optionee under such option.
15. Miscellaneous
As said term is used in the 1997 Plan, the "Fair Market Value" of a share
of Common Stock on any day means: (a) if the principal market for the Common
Stock is a national securities exchange or the National Association of
Securities Dealers Automated Quotations System ("NASDAQ), the closing sales
price of the Common Stock on such day as reported by such exchange or market
system, or on a consolidated tape reflecting transactions on such exchange or
market system, or (b) if the principal market for the Common Stock is not a
national securities exchange and the Common Stock is not quoted on NASDAQ, the
mean between the highest bid and lowest asked prices for the Common Stock on
such day as reported by the National Quotation Bureau, Inc.; provided that if
clauses (a) and (b) of this paragraph are both inapplicable, or if no trades
have been made or no quotes are available for such day, the Fair Market Value of
the Common Stock shall be determined by the Board of Directors or the Committee,
as the case may be, shall be conclusive as to the Fair Market Value of the
Common Stock.
No shares of Common Stock shall be issued and delivered upon exercise of an
option granted under the 1997 Plan unless and until (i) such shares of Common
Stock have been duly listed, upon official notice of issuance, upon any stock
exchange(s) on which the Common Stock is listed, (ii) a Registration Statement
under the Securities Act of 1933, as amended, with respect to such shares shall
be effective and any applicable state registration or qualification has been
complied with, or, in the opinion of either counsel to the Company or counsel to
the option holder reasonably acceptable to the Company, exemptions from such
federal and state registration requirements are available and/or (iii) the
person exercising such option delivers to the Company such documents, agreements
and investment and other representations as the Board of Directors or the
Committee, as the case may be, shall determine to be in the best interests of
the Company.
During the term of the 1997 Plan, the Board of Directors or the Committee,
as the case may be, in its discretion, may offer one or more option holders the
opportunity to surrender any or all unexpired options for cancellation or
replacement. If any options are so surrendered, the Board of Directors or the
Committee, as the case may be, may then grant new Non-Qualified or Incentive
Options to such holders for the same or different numbers of shares at higher or
lower exercise prices than the surrendered options. Such new options may have a
different term and shall be subject to the provisions of the 1997 Plan the same
as any other option.
Anything herein to the contrary notwithstanding, the Board of Directors or
the Committee, as the case may be, may, in their sole discretion, impose more
restrictive conditions on the exercise of an option granted pursuant to the 1997
Plan; however, any and all such conditions shall be specified in the option
agreement limiting and defining such option.
50
<PAGE>
16. Privileges of Stock Ownership
No person entitled to exercise any option granted under the 1997 Plan shall
have any of the rights or privileges of a shareholder of the Company in respect
of any shares of stock issuable upon exercise of such option until certificates
representing such shares shall have been issued.
17. Compliance with SEC Regulations.
It is the Company's intent that the 1997 Plan comply in all respects with
Rule 16b-3 of the Act and any regulations promulgated thereunder. If any
provision of the 1997 Plan is later found not to be in compliance with said
Rule, the provisions shall be deemed null and void.
51
Exhibit 23.1:
Consent of Independent Certified Public Accountants
Hudson Technologies, Inc.
Pearl River, New York
We hereby consent to the incorporation by reference in the Registration
Statement (No. 333-17133) on Form S-8 of our report dated February 29, 2000,
relating to the consolidated financial statements of Hudson Technologies, Inc.
for the year ended December 31, 1999 appearing in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1999.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO SEIDMAN, LLP
Valhalla, New York
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-KSB AT DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,483,000
<SECURITIES> 0
<RECEIVABLES> 2,074,000
<ALLOWANCES> 158,000
<INVENTORY> 2,480,000
<CURRENT-ASSETS> 7,082,000
<PP&E> 10,577,000
<DEPRECIATION> 4,792,000
<TOTAL-ASSETS> 12,979,000
<CURRENT-LIABILITIES> 5,405,000
<BONDS> 0
0
6,731,000
<COMMON> 51,000
<OTHER-SE> (1,295,000)
<TOTAL-LIABILITY-AND-EQUITY> 12,979,000
<SALES> 17,909,000
<TOTAL-REVENUES> 17,909,000
<CGS> 14,121,000
<TOTAL-COSTS> 14,121,000
<OTHER-EXPENSES> 1,349,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 454,000
<INCOME-PRETAX> (3,955,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,955,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,955,000)
<EPS-BASIC> (0.85)
<EPS-DILUTED> (0.85)
</TABLE>
