As Filed with the Securities and Exchange Commission on August 1, 2003.
Registration No. 333-105128
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
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HUDSON TECHNOLOGIES, INC.
(Name of Small Business Issuer in Its Charter)
New York 5080 13-3641539
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
275 North Middletown Road
Pearl River, New York 10965
(845) 735-6000
(Address and Telephone Number of Principal Executive Offices)
(Address of Principal Place of Business or
Intended Principal Place of Business)
Kevin J. Zugibe
Chairman and Chief Executive Officer
Hudson Technologies, Inc.
275 North Middletown Road
Pearl River, New York 10965
(845) 735-6000
(Name, Address and Telephone Number of Agent for Service)
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Copies of Communications to:
Robert J. Mittman, Esq.
Ethan Seer, Esq.
Blank Rome LLP
405 Lexington Avenue
New York, New York 10174
Telephone: (212) 885-5000
Telecopier: (212) 885-5001
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Approximate Date of Commencement of Proposed Sale to the Public: As soon
as practicable after this registration statement becomes effective.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_| _______
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_| _______
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_| _______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. |_|
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Title of each class of Proposed Maximum Aggregate Amount of
Securities to be Registered Offering Price (1) Registration Fee
--------------------------- ------------------ ----------------
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common stock, par value
$.01 per share $5,682,622 $459.73
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Amount Previously Paid.................................... $404.50(2)
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Amount Due................................................ $ 55.23
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(1) Estimated and calculated pursuant to Rule 457 (o), solely for the
purpose of computing the registration fee.
(2) Previously paid with the initial filing of this Registration
Statement on May 9, 2003.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until the registration statement shall become effective on
such date as the Commission, acting pursuant to said Section 8(a), may
determine.
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
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SUBJECT TO COMPLETION, DATED AUGUST 1, 2003
PROSPECTUS
_________ Shares
HUDSON TECHNOLOGIES INC.
COMMON STOCK
We are distributing, together with this prospectus, at no charge,
non-transferable subscription rights to purchase shares of our common stock to
persons who own our common stock as of the close of business on August 1, 2003,
the record date. These are called basic subscription rights. You will not be
entitled to receive any of these rights unless you are a stockholder of Hudson
at that time. You will receive one subscription right for each whole share of
our common stock that you own on the record date. Each subscription right will
entitle you to purchase ___ share(s) of our common stock at the subscription
price of $_____ per share. Rights may not be exercised to purchase less than
1,000 shares of our common stock. The shares in the rights offering are being
offered directly by us without the services of an underwriter or selling agent.
The subscription rights are exercisable beginning on the date of this
prospectus and will expire at 5:00 P.M. Eastern Time, on ________, 2003. We, at
our sole discretion, may extend the period for exercising the rights. Rights
which are not exercised by the expiration date will expire and will have no
value. Your exercise of the rights may not be revoked unless the expiration date
is extended for more than thirty days or there is a material change in the terms
of the rights offering. You should carefully consider whether or not to exercise
your rights before the expiration date.
If you timely exercise all of your basic subscription rights, you will be
entitled to exercise over-subscription privileges to purchase additional shares
of our common stock at the same subscription price. The over-subscription
privilege will expire concurrently with the expiration of the basic subscription
rights. Shares for which subscription rights have not been exercised prior to
the expiration date of the rights offering will first be offered to members of
the public at the subscription price. Shares offered but not purchased by
holders of subscription rights or by members of the public may be used to
satisfy our obligations under our outstanding 10% subordinated convertible
notes, which we refer to throughout this prospectus as the "Convertible Notes,"
held by certain of our officers, family members of our officers and directors
and certain principal stockholders.
There is no minimum number of shares which must be sold in the offering
and we intend to close on sales of shares with respect to subscriptions we
accept on a continuous basis without holding subscriptions in escrow until the
offering is completed.
The subscription rights may not be sold, transferred or assigned, and will
not be listed for trading on any stock exchange.
Our common stock trades on the NASDAQ SmallCap Market under the symbol
HDSN. On July 31, 2003, the closing sale price of our common stock as reported
by NASDAQ was $1.61.
Investing in our common stock is speculative and involves a high degree of
risk. See "Risk Factors" beginning on page 9.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Shares of common stock available after the expiration of the period for
our stockholders to exercise their basic subscription and over-subscription
rights will not be offered by us to members of the public in the states of
California and Ohio.
The date of this prospectus is _____________, 2003
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information and financial statements, including the notes thereto,
appearing elsewhere in this prospectus. Each prospective investor is urged to
read this prospectus in its entirety. References in this prospectus, to
"Hudson", "we", "us" and "our" refer to Hudson Technologies, Inc. and its
subsidiaries.
Description of Business
Hudson Technologies, Inc., incorporated under the laws of New York on
January 11, 1991, together with its subsidiaries, is a refrigerant services
company providing innovative solutions to recurring problems within the
refrigeration industry. Hudson's products and services are primarily used in
commercial air conditioning, industrial processing and refrigeration systems,
including (i) refrigerant sales, (ii) RefrigerantSide(R) Services performed at a
customer's site, consisting of system decontamination to remove moisture, oils
and other contaminants and (iii) reclamation of refrigerants. Hudson operates
through its wholly owned subsidiary Hudson Technologies Company.
Hudson's Executive Offices are located at 275 North Middletown Road, Pearl
River, New York and its telephone number is (845) 735-6000.
Description of Offering
The shares of our common stock being offered under this prospectus are
initially being offered to our stockholders of record as of August 1, 2003, to
whom we are distributing, at no charge, subscription rights which are each
exercisable to purchase ___ share(s) of our common stock at a subscription price
of $ ____ per share. Stockholders who exercise all of their basic subscription
rights prior to ____, 2003 will have an over-subscription privilege to subscribe
for additional shares of our common stock also until ______, 2003. This is
referred to in this prospectus as the rights offering. To the extent shares
offered hereby are not subscribed for by the stockholders in the rights offering
we will offer those shares to members of the public at the subscription price
for a period ending on ___, 2003. In either case we reserve the right to extend
the rights offering and/or the offering of shares to members of the public.
Shares that remain unsold as of __________, 2003 may be acquired by the holders
of our Convertible Notes, at their election, by the reduction of the principal
amount and, if applicable, accrued and unpaid interest of their respective
Convertible Notes in an amount equal to the number of shares subscribed for
multiplied by the subscription price. This election must be made by the holders
of the Convertible Notes not later than _______, 2003. The term "offering" as
used in this prospectus includes the rights offering and the subsequent offer of
remaining shares to members of the public and holders of Convertible Notes.
Questions and Answers About the Rights Offering
What is a rights offering?
A rights offering is an opportunity for you to purchase additional shares
of our common stock at a fixed price and in an amount at least proportional to
your existing interest.
What is a subscription right?
We are distributing to you, at no charge, one subscription right for each
whole share of our common stock that you owned as a holder of record on August
1, 2003. We will not distribute any fractional subscription rights, but will
round the number of subscription rights you receive up to the next largest whole
number. Each whole subscription right entitles you to purchase ___ share(s) of
our common stock for $___ per share. When you "exercise" a subscription right
that means that you choose to purchase the number of shares of common stock that
the subscription right entitles you to purchase. You may exercise any number of
your subscription rights subject to the requirement that rights may not be
exercised for less than 1,000 shares of our common stock, or you may choose not
to exercise any subscription rights. You cannot give away, transfer or sell your
subscription rights, except by operation of law or through involuntary
transfers. Consequently, except in very limited circumstances, only you will be
able to exercise your subscription rights. See "About the Rights Offering-The
Subscription Rights."
2
What is the basic subscription privilege?
The basic subscription privilege of each whole subscription right entitles
you to purchase ___ share(s) of our common stock at a subscription price of
$___. See "About the Rights Offering-Basic Subscription Privilege."
What is the over-subscription privilege?
We do not expect that all of our stockholders will exercise all of their
basic subscription privileges. By extending over-subscription privileges to our
stockholders, we are providing for the purchase of those shares that are not
purchased through exercise of basic subscription privileges. The
over-subscription privilege of each subscription right entitles you, if and when
you fully exercise your basic subscription privilege, to subscribe for
additional shares of common stock at the subscription price. See "About the
Rights Offering-Over-Subscription Privilege."
What are the limitations on the over-subscription privilege?
If sufficient shares are available in the rights offering, we will honor
all over-subscription requests in full. If over-subscription requests exceed the
number of shares available, we will allocate the available shares among
stockholders who over-subscribed in proportion to the number of shares purchased
by those over-subscribing stockholders through the exercise of their basic
subscription privilege.
Will shares not sold as part of the rights offering be offered to other
investors?
Yes. Any shares not sold as part of the rights offering will be offered by us to
members of the public at the subscription price. If any of the shares being
offered to the public remain unsold at the end of 50 days from the date of this
prospectus, the holders of our Convertible Notes must elect, no later than such
50th day, to purchase shares in this offering at the subscription price through
a reduction of the amount of principal and, if applicable any accrued and unpaid
interest under the Convertible Notes. If such an election is not timely made or
if such election is timely made but a sufficient number of shares registered
hereby is not available, the Convertible Notes will otherwise automatically
convert into restricted shares of our common stock at prices ranging from the
lesser of the subscription price or: (i) $.79 per share with respect to up to
$665,000 principal amount of Convertible Notes, together with accrued and unpaid
interest; (ii) $1.41 per share with respect to up to $500,000 principal amount
of Convertible Notes, together with accrued and unpaid interest; and (iii) $1.13
per share, with respect to up to $495,000 principal amount of Convertible Notes,
together with accrued and unpaid interest. These Convertible Notes are held by
certain of our officers, family members of our officers and directors and two of
our principal stockholders, Fleming US Discovery Fund III, L.P. and Fleming US
Discovery Offshore Fund III, L.P., which are referred to collectively in this
prospectus as the "Flemings Funds". Moreover, the Flemings Funds have indicated
their intention that if the gross proceeds from the shares sold by us for cash
in the offering to our stockholders and other investors (other than Flemings),
together with the amount of principal and accrued interest due on the
outstanding $1,660,000 principal amount of Convertible Notes that will be
converted to common stock in connection with this offering, is less than
$2,575,000, the Flemings Funds will acquire from the shares being offered to the
public that number of shares (not to exceed $925,000) necessary for us to reach
the $2,575,000 level. Included in this amount to be acquired by the Flemings
Funds is the loan from the Flemings Funds to us in the principal amount of
$575,000 for which we may use shares available under this prospectus after the
expiration of the rights offering period to repay the principal and any accrued
and unpaid interest of this loan. See "Use of Proceeds." The Flemings Funds may
purchase additional shares offered to members of the public hereby at the
subscription price. See "About the Rights Offering - Sale of Shares for Which
Subscription Rights Have Not Been Exercised by Eligible Stockholders.
Why are we engaging in a rights offering?
Our primary purpose for authorizing the rights offering was to assist us
in raising capital in a cost-effective manner in order to satisfy our continuing
operating expenses and working capital requirements. In determining to proceed
with the rights offering our board of directors considered a number of factors
including: (i) the opportunity afforded to our stockholders to participate in
this equity offering and acquire additional shares of our common stock so that
they would have the ability to maintain their proportional interest in us, and
(ii) the limited strategic alternatives available to us for raising capital in
light of the current state of the capital markets.
3
What is the Board of Directors recommendation regarding the rights offering?
Our Board of Directors is not making any recommendation as to whether or
not you should exercise your subscription rights. You should make your decision
based on your own assessment of your best interests.
How many shares may I purchase?
You will receive one subscription right for each whole share of common
stock that you owned on August 1, 2003. We will not distribute fractional
subscription rights, but will round the number of subscription rights you are to
receive up to the next largest whole number. Each whole subscription right
entitles you to purchase ___ share(s) of common stock for $___. See "About the
Rights Offering-Basic Subscription Privilege." If you exercise all of the
subscription rights that you receive, you may have the opportunity to purchase
additional shares of common stock. In your subscription agreement, you may
request to purchase as many additional shares as you wish for $___ per share.
See "Our Subscription Privilege". Subject to compliance with applicable state
securities laws, we intend to honor all of these over-subscription requests.
However, you may not be able to purchase as many shares as you requested in your
over-subscription request if a sufficient number of shares are not available
after fulfillment of the basic subscription rights. We have the discretion to
issue less than the total number of shares that may be available for
over-subscription requests in order to comply with state securities laws. In the
event that, as a result of the exercise of basic and over-subscription rights by
our stockholders, the rights offering is over-subscribed, we will reduce the
number of shares that may be purchased by each subscribing stockholder under the
over-subscription privilege on a pro rata basis in proportion to the number of
shares purchased by each subscribing stockholder through the exercise of their
basic subscription rights. See "About the Rights Offering-Over-Subscription
Privilege."
If I owned less than 1,000 shares on the record date, can I still exercise my
subscription rights in the rights offering?
Yes, provided that you exercise all of your basic subscription rights and
exercise at least enough over-subscription rights to reach the minimum
subscription of 1,000 shares. Therefore, subscriptions of stockholders who owned
less than 1,000 shares of our common stock on the record date and only exercise
their basic subscription rights will not be accepted by Hudson in connection
with this offering.
Moreover, stockholders who owned less than 1,000 shares on the record date
should note that even if you supplement your basic subscription exercise with an
over-subscription exercise in order to meet the 1,000 share minimum threshold,
in the event that the rights offering is over subscribed we will be required to
reduce the number of shares subscribed for on a proportionate basis, thereby
potentially reducing the number of shares for which you have subscribed below
the 1,000 share minimum threshold. In this case, we would not accept your
subscription in connection with this offering.
How did we arrive at the $_____ per share subscription price?
Our board of directors established a special committee consisting of
Messrs. Vincent P. Abbatecola, Dominic J. Monetta, Otto C. Morch and Harry C.
Schell, each of whom is an independent board member, to consider certain matters
relating to the rights offering, principally the subscription price for the
purchase of shares of our common stock. In furtherance of these efforts and on
behalf of the special committee we retained Houlihan Lokey Howard & Zukin
Financial Advisors, Inc., referenced to in this prospectus as "Houlihan Lokey,"
to advise the special committee with respect to a per-share price range for the
subscription price for shares in the rights offering and to render an opinion to
our board of directors as to the fairness, from a financial point of view, of
the rights offering to our public stockholders (other than the Flemings Funds
and our officers and their family members), solely in their capacity as current
stockholders. In consideration for these services we have agreed to pay Houlihan
Lokey a fee of $150,000 and reimburse them for reasonable out-of-pocket
expenses. A discussion of the factors considered and analysis applied by
Houlihan Lokey in establishing the per-share price range for the subscription
price in this offering as well as a description of the fairness opinion and
methodologies utilized in supporting the opinion is set forth below in the
section entitled "About the Rights Offering-Determination of Subscription Price
and Fairness Opinion of Houlihan Lokey" on page 17.
How do I exercise my subscription rights?
You must properly complete the appropriate subscription agreement and it
must be received by our subscription agent, described more fully below, before
5:00 P.M. Eastern Time on ________, 2003, which is referred to throughout this
prospectus as the "Expiration Date." The address for our subscription agent is
provided in this section below. See "About the Rights Offering-Exercise of
Subscription Rights and Method of Payment."
4
How do I pay for my shares?
Your subscription agreement must be accompanied by proper payment for each
share that you wish to purchase pursuant to both your basic and
over-subscription privileges. See "About the Rights Offering-Method of Payment."
How long will the rights offering last?
You will be able to exercise your subscription rights only during a
limited period. If our subscription agent does not receive your properly
executed subscription agreement and payment for the shares being purchased
before 5:00 P.M. Eastern time on the Expiration Date the subscription rights
will expire. We may, in our discretion, decide to extend the rights offering. We
may also, in our discretion, decide to extend the time period for the offering
of shares to members of the public. See "About the Rights Offering-Expiration
Dates."
What if my shares are not held in my name?
If you hold your shares of our common stock in the name of a broker,
dealer or other nominee, then your broker, dealer or other nominee is the record
holder of the shares you own. The record holder must exercise the subscription
rights on your behalf for the shares of common stock you wish to purchase.
Therefore, you will need to have your record holder act for you.
If you are not the record holder of your shares and you wish to
participate in this rights offering and purchase shares of our common stock,
please promptly contact the record holder of your shares. We will ask your
broker, dealer or other nominee to notify you of this rights offering. You
should complete and return to your record holder the form entitled "Beneficial
Owner Election Form" or other similar election form that you should receive from
your record holder with the other rights offering materials. See "About the
Rights Offering-Shares Held for Others."
What fees or charges apply if I purchase shares of common stock?
We are not charging you any fee or sales commission to issue rights to you
or to issue shares of our common stock to you if you exercise your rights. If
you exercise your rights through the record holder of your shares, you will be
responsible for paying any fees your record holder may charge you. You will not
be responsible for any fees payable to our subscription agent.
To whom should I send my forms and payment?
If your shares are held in the name of a broker, dealer or other nominee,
then you should send your subscription documents and payment to that record
holder. If you are the record holder then you should send your subscription
documents and payment by hand delivery, first class mail or courier service to:
Continental Stock Transfer
Reorganization Department
17 Battery Place, ___ Floor
New York, New York 10004
You are solely responsible for completing delivery to the subscription
agent of your properly completed subscription agreement and your subscription
payment. We urge you to allow sufficient time for delivery of your subscription
materials to the subscription agent.
5
What should I do if I have any questions or require assistance?
If you have questions or otherwise need assistance, please contact the
subscription agent for this rights offering at the following address and
telephone number:
Continental Stock Transfer
Reorganization Department
17 Battery Place, ___ Floor
New York, New York 10004
Telephone: (212) 509-4000, ext. [535].
For additional copies of rights offering documents, please contact the
subscription agent for this rights offering at the following address and
telephone number:
Continental Stock Transfer
Mail Room
17 Battery Place, ___ Floor
New York, New York 10004
Telephone: (212) 509-4000, ext. [210].
After I exercise my subscription rights, can I change my mind and cancel my
purchase?
No. Once you send in your subscription agreement and payment you cannot
revoke the exercise of your subscription rights, even if you later learn
information about us that you consider to be unfavorable and even if the market
price of our common stock is below the $___ per share purchase price. You should
not exercise your subscription rights unless you are certain that you wish to
purchase additional shares of our common stock at a price of $___ per share. See
"About the Rights Offering-No Revocation."
Is exercising my subscription rights risky?
The exercise of your subscription rights involves significant risks.
Exercising your subscription rights means buying additional shares of our common
stock and should be considered as carefully as you would consider any other
equity investment. Among other things, you should carefully consider the risks
described under the heading "Risk Factors," beginning on page 9.
Must I exercise any subscription rights?
No. You are not required to exercise your subscription rights or take any
other action.
What happens if I choose not to exercise my subscription rights?
You will retain your current number of shares of our common stock even if
you do not exercise your subscription rights. However, if other stockholders
exercise their subscription rights and you do not, the percentage of Hudson that
you own will diminish, and your voting and other rights will be diluted in
excess of the dilution that will result from the conversion of the Convertible
Notes upon the completion of this offering. See "Risk Factors-Risk Factors
Relating to the Offering of Subscription Rights-Your Percentage Ownership of
Hudson may be Diluted."
Can I sell or give away my subscription rights?
No.
What are the Federal Income Tax consequences of exercising my subscription
rights?
The receipt and exercise of your subscription rights are intended to be
nontaxable events. You should seek specific tax advice from your personal tax
advisor. See "Federal Income Tax Considerations-Taxation of Stockholders."
6
When will I receive my new shares?
If you purchase shares of common stock through the rights offering, you
will receive certificates or your account will be credited by an amount
representing those shares as soon as practicable after the Expiration Date.
Can the Board of Directors cancel the rights offering?
Yes. The Board of Directors may decide to cancel the rights offering at
any time, on or before ________, 2003, for any reason in which case we will
return your payment to you without any interest. See "About the Rights
Offering-Cancellation Right."
How much money will Hudson receive from the rights offering?
If we sell all the shares being offered for cash, we will receive gross
proceeds of approximately $5,680,000. If shares being offered are not sold for
cash they may be issued upon conversion of all or a portion of the $1,660,000
principal amount, as well as accrued and unpaid interest, of our outstanding
Convertible Notes. Under certain circumstances, two of our principal
stockholders, the Flemings Funds, have indicated their intention to acquire up
to $925,000 of the shares that are not subscribed for in the rights offering by
other stockholders or by the public in order to enable us to achieve $2,575,000
of proceeds from shares issued in this offering. Included in this $2,575,000
aggregate proceeds amount is the $1,660,000 principal amount of Convertible
Notes that will be converted into our common stock in connection with this
offering and the principal and accrued and unpaid interest on the $575,000 loan
from the Flemings Funds for which we may use shares available under this
prospectus to repay the principal and interest of this loan. The Flemings Funds
may purchase additional shares offered to members of the public hereby at the
subscription price. See "About the Rights Offering-Sale of Shares for Which
Subscription Rights Have Not Been Exercised by Eligible Stockholders."
How will we use the proceeds from the rights offering?
We are making this offering with the intention of raising up to
approximately $5,680,000 of gross proceeds. After payment of expenses of the
offering we intend to use the net cash proceeds for (i) sales and marketing
support of our service business, (ii) infrastructure support for our refrigerant
sales business, and (iii) working capital and general corporate purposes. See
"Use of Proceeds."
How many shares will be outstanding after the rights offering?
Although we cannot at this time determine the number of shares of common
stock that will be outstanding after the rights offering and after sales to the
public and in satisfaction of outstanding Convertible Notes, if we sell all of
the shares registered for sale hereby in the rights offering and/or in the
public offering portion then we will issue approximately ________ shares of
common stock. In that case, we will have approximately __________ shares of
common stock outstanding after the offering without giving effect to the shares
of our common stock issuable upon conversion of our outstanding Convertible
Notes or the 120,782 shares of outstanding Series A Preferred Stock. Although
the conversion price of the Series A Preferred Stock is currently $2.375, in
accordance with applicable anti-dilution provisions, the conversion price of the
Series A Preferred Stock could be adjusted downward to a conversion price equal
to $.79 upon the conversion of any of the Convertible Notes with that conversion
rate. The Flemings Funds, which are the holders of all of the outstanding shares
of our Series A Preferred Stock as well as $1,256,000 aggregate principal amount
of our Convertible Notes, have indicated their intention that, in the event that
we receive gross cash proceeds in this offering of at least $1,000,000
(exclusive of the conversion of any of the Convertible Notes and any purchases
made by the Flemings Funds in the offering), the conversion rate(s) of their
Convertible Notes that are below the $______ subscription price will be adjusted
to equal the $_______ subscription price of this offering and the conversion
price of their Series A Preferred Stock will be adjusted to equal the $_____
subscription price of this offering. In all cases the Convertible Notes held by
the Flemings Funds and third-parties with a conversion rate above the $_____
subscription price, will be adjusted, based on their existing anti-dilution
provisions, so that the conversion rate will equal the $_____ subscription price
of this offering. See the section below entitled "About the Rights Offering -
Adjustment of the Conversion Rate of the Convertible Notes and Conversion Price
of the Series A Preferred Stock," on page ___. Given the $____ subscription
price for this offering, in the event we receive at least $1,000,000 of gross
cash proceeds in the offering, we will be required to issue _____ additional
shares of our common stock as a result of the conversion of the outstanding
Convertible Notes, and the holders of the Series A Preferred Stock will be
entitled to convert the Series A Preferred Stock into an aggregate of ________
shares of our common stock.
7
In the event we do not raise $1,000,000 in gross cash proceeds in this
offering, exclusive of the conversion of Convertible Notes or purchases of
shares made by the Flemings Funds, the conversion rate of the Convertible Notes
held by the Flemings Funds will not be adjusted to equal the $____ subscription
price of the offering and we would be required to issue an additional ____
shares of our common stock upon conversion of the principal and accrued interest
of the Convertible Notes in connection with this offering. Similarly, the
conversion price of the Series A Preferred Stock would not be adjusted to equal
the $____ subscription price of this offering but would be adjusted to equal the
lowest conversion rate of our outstanding Convertible Notes upon their
conversion. The lowest conversion rate of the Convertible Notes is currently
$.79 per share in which case up to an additional _____ shares of common stock
would be issued upon conversion of all of the outstanding shares of the Series A
Preferred Stock.
In addition, pursuant to the terms of the Convertible Notes, upon the
consummation of this offering common stock purchase warrants will be issued to
the holders of Convertible Notes which warrants will be exercisable to purchase
an amount of shares of our common stock equal to 10% of the number of shares of
common stock into which the Convertible Notes were convertible at the time of
their issuance. These warrants will be exercisable for a period of five years
from the date of their issuance at exercise prices ranging from $_______ to
$_______. See the section below entitled "About the Rights Offering-Warrants to
be Issued to Holders of Convertible Notes."
What if I have more questions?
If you have more questions about the rights offering, please contact our
President, Brian F. Coleman, at 275 North Middletown Road, Pearl River, New York
10965, or by telephone at (845) 735-6000.
SUMMARY FINANCIAL DATA
The following table presents summary historical financial data. We have
derived the audited summary financial data as of and for the two-year period
ended December 31, 2002 and the unaudited summary financial data as of and for
the three months ended March 31, 2003 and 2002 from the consolidated financial
statements and notes thereto included elsewhere in this prospectus. The
following selected financial data are qualified in their entirety by reference
to, and you should read the information contained in this table in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," and our consolidated financial statements and the notes to those
consolidated financial statements contained elsewhere in this prospectus.
(In thousands except share and per share amounts)
Three Months Year Ended
Ended March 31, December 31,
--------------- ------------
2003 2002 2002 2001
----------- ----------- ----------- -----------
Revenues ........................ $ 5,677 $ 6,111 $ 19,963 $ 20,768
Operating expenses .............. 1,874 2,022 7,911 8,017
Net loss ........................ (422) (448) (2,522) (2,399)
Available for common shares ..... (640) (645) (3,318) (3,122)
Net loss per common share ....... (0.12) (0.13) (0.64) (0.61)
Weighted average number of shares
outstanding ..................... 5,165,020 5,156,895 5,162,228 5,103,733
Balance Sheet Data:
March 31, 2003 March 31, 2003 December 31, 2002
-------------- -------------- -----------------
(as adjusted for (unaudited)
offering)
Cash and cash equivalents ........... $ 5,553 $ 353 $ 545
Working capital (deficit) ........... 4,881 (319) (11)
Total assets ........................ 14,371 9,171 8,422
Total long-term obligations ......... 1,100 1,100 1,171
Total Stockholders' equity .......... 6,286 1,086 1,508
The as adjusted Balance Sheet Data as of March 31, 2003 represents the financial
results if Hudson was to receive all of the net cash proceeds contemplated in
this prospectus.
8
RISK FACTORS
The shares offered by this prospectus are speculative and involve a high
degree of risk. In addition to other information in this prospectus, you should
carefully consider the following risk factors before making an investment
decision.
Risk Factors Relating to Hudson
We have incurred significant historical losses and expect to continue to incur
losses in the future.
Since inception, we have incurred significant losses, including net losses
of $2,522,000 and $2,399,000 for the fiscal years ended December 31, 2002 and
2001, respectively, and a net loss of $422,000 for the three months ended March
31, 2003. At March 31, 2003, we had an accumulated deficit of $30,648,000.
Losses are continuing through the date of this prospectus. Inasmuch as we will
continue to have a high level of operating expenses following this offering and
anticipate that we will incur additional expenditures in connection with any
expansion of our RefrigerantSide(R) Services or other business, we anticipate
that we will continue to incur losses until we generate revenues sufficient to
offset our operating costs. We may not be able to generate significant revenues
or ever achieve profitable operations.
The proceeds from this offering may not be sufficient to meet our capital
requirements and we may need additional subsequent financing which may not be
readily available to us.
Our capital requirements have been and will continue to be significant. We
are dependent on the proceeds of this offering in order to continue our
operations as currently conducted during the near term. There is no minimum
amount of rights that must be exercised before a closing may occur and our
stockholders or other prospective investors will not know whether all or a
portion of the shares of common stock offered hereby have been sold. To the
extent that less than all of the shares offered hereby are sold, we will have
less resources available to us. See the section below entitled "Use of
Proceeds." Consequently, the amount of proceeds we will raise in this offering
may not be sufficient to satisfy our future cash requirements. Although the
reorganization of our RefrigerantSide(R) Services business, to focus on vertical
markets, is aimed at increasing our efficiencies and reducing our expenses, in
the long term we expect to incur additional expenses in the development and
implementation of this business strategy. In addition, unanticipated declines in
revenues or increases in operating costs could require resources substantially
greater than the proceeds available to us from this offering. As a result, we
may be required to seek additional equity or debt financing in order to meet
these increased operating expenses. We have no current arrangements with respect
to, or sources of, additional financing, which if available to us, may not be on
acceptable terms. Our inability to obtain additional capital financing when
needed could materially adversely affect our business and financial condition
and could require us to curtail or otherwise cease our existing operations.
The nature of our business exposes us to potential liability.
The refrigerant recovery and reclamation industry involves potentially
significant risks of statutory and common law liability for environmental damage
and personal injury. We, and in certain instances, our officers, directors and
employees, may be subject to claims arising from our on-site or off-site
services, including the improper release, spillage, misuse or mishandling of
refrigerants classified as hazardous or nonhazardous substances or materials. We
may be strictly liable for damages, which could be substantial, regardless of
whether we exercised due care and complied with all relevant laws and
regulations. Our current insurance coverage may not be sufficient to cover
potential claims and adequate levels of insurance coverage may not be available
in the future at a reasonable cost. A partially or completely uninsured claim
against us, if successful and of sufficient magnitude, would have a material
adverse effect on us.
We may not be successful in pursuing our contemplated growth strategy.
Our business objective is to seek to expand our RefrigerantSide(R)
Services business, which expansion is subject to the availability of adequate
financing and will be largely dependent upon our ability to profitably operate
our existing business and implement our vertical market penetration of certain
industries in which we intend to co-market our RefrigerantSide(R) Services. We
may not be successful in the implementation of this strategy.
9
Our business and financial condition is substantially dependent on the sale and
continued environmental regulation of chloroflurocarbons, or CFCs.
Our sales of refrigerants continue to represent a significant portion of
our revenues. Most of our refrigerant sales, however, are CFC based refrigerants
which are no longer manufactured. Our inability to source CFC based refrigerants
for resale would have a material adverse effect on our financial condition and
result of operations. Moreover, our business and prospects are largely dependent
upon continued regulation of the use and disposition of refrigerants containing
CFCs. Changes in government regulations relating to the emission of refrigerants
containing CFCs into the atmosphere could have a material adverse effect on us.
Failure by government authorities to otherwise continue to enforce existing
regulations or significant relaxation of regulatory requirements could also
adversely affect demand for our services and products.
Our business is subject to significant regulatory compliance burdens.
The refrigerant reclamation and management business is subject to
extensive, stringent and frequently changing federal, state and local laws and
substantial regulation under these laws by governmental agencies, including the
United States Environmental Protection Agency, the United States Occupational
Safety and Health Administration and the United States Department of
Transportation. Although we believe that we are in substantial compliance with
all material regulations relating to our material business operations,
amendments to existing statutes and regulations or adoption of new statutes and
regulations which affect the marketing and sale of refrigerants could require us
to continually alter our methods of operation and/or discontinue the sale of
certain of our products resulting in costs to us that could be substantial. We
may not be able, for financial or other reasons, to comply with applicable laws,
regulations and permitting requirements, particularly as we seek to enter into
new geographic markets. Our failure to comply with applicable laws, rules or
regulations or permitting requirements could subject us to civil remedies,
including substantial fines, penalties and injunctions, as well as possible
criminal sanctions, which would materially adversely impact our operations and
financial condition.
As a result of the intense competition, and the strength of some of our
competitors in the market, we may not be able to compete effectively.
The markets for our services and products are highly competitive. We
compete with numerous regional and national companies which provide refrigerant
recovery and reclamation services, as well as companies which market and deal in
reclaimed and alternative refrigerants, including certain of our suppliers, some
of which possess substantially greater financial, technical, marketing,
personnel and other resources than us. We also compete with numerous
manufacturers of refrigerant recovery and reclamation equipment. Certain of
these competitors have established reputations for success in the service of air
conditioning and refrigeration systems. We may not be able to compete
successfully, particularly as we seek to enter into new markets.
A number of factors could negatively impact the price and/or availability of
used refrigerants which would, in turn, adversely affect our business and
financial condition.
Our business is substantially dependent on the availability of used
refrigerants in large quantities and the corresponding demand for reclaimed
refrigerants which may be affected by several factors, including limitations on
commercial production and use imposed by government regulation as the
introduction and commercial use of new refrigerants and air conditioning and
refrigeration equipment, price competition resulting from additional market
entrants and changes in government regulation, particularly regulations
repealing or imposing taxes on the use of refrigerants. Although we believe that
sufficient quantities of used domestic refrigerants will continue to be
available to us at a reasonable cost for the foreseeable future, we do not
maintain agreements with any of our domestic suppliers to obtain refrigerants
from time to time in the ordinary course of business. Sufficient amounts of used
refrigerants may not be available to us in the future or may be available on
commercially unreasonable terms. Additionally, we may be subject to price
fluctuations, periodic delays or shortages of used refrigerant or current levels
of demand for reclaimed refrigerants may decrease. Our failure to recover and
reclaim refrigerants for customers or to otherwise obtain, reclaim and resell
sufficient quantities of refrigerants would have a material adverse effect on
our operating margins and results of operations.
The loss of key management personnel would adversely impact our business.
Our success is largely dependent upon the efforts of our Chief Executive
Officer and Chairman, the loss of the services of which would have a material
adverse effect on our business and prospects.
10
Proceeds from this offering applied to working capital may be allocated at the
discretion of management.
A substantial portion of the proceeds from this offering has been
allocated to working capital and general corporate purposes. Accordingly, our
management will have broad discretion as to the application of any such
proceeds.
We have the ability to designate and issue preferred stock which may have
rights, preferences and privileges greater than our common stock and which could
impede a subsequent change in control of Hudson.
Our Certificate of Incorporation authorizes our Board of Directors to
issue up to 5,000,000 shares of "blank check" preferred stock and to fix the
rights, preferences, privileges and restrictions, including voting rights, of
these shares, without further shareholder approval. A total of 150,000 of the
shares of preferred stock have been designated as Series A Convertible Preferred
Stock, 120,782 shares of which are currently outstanding. The rights of the
holders of our common stock will be subject to and may be adversely affected by
the rights of holders of any additional preferred stock that may be issued in
the future. Our ability to issue preferred stock without shareholder approval
could have the effect of making it more difficult for a third party to acquire a
majority of our voting stock, thereby delaying, deferring or preventing a change
in control of Hudson.
If our common stock were delisted from NASDAQ it would be subject to "penny
stock" rules which could negatively impact its liquidity and our stockholders'
ability to sell their shares.
Our common stock is currently listed on NASDAQ. We must comply with
numerous NASDAQ MarketPlace rules in order to continue the listing of our common
stock on NASDAQ and we are currently not in compliance with a NASDAQ MarketPlace
rule relating to our maintaining a specified level of stockholders' equity. As a
result, NASDAQ may seek to remove or "delist" our common stock. If our common
stock is no longer traded on NASDAQ the common stock would be subject to certain
rules promulgated under the Securities Exchange Act of 1934, which require
additional disclosure by broker-dealers in connection with any trades involving
a stock defined as a penny stock which, subject to certain exceptions, is any
non-NASDAQ equity security that has a market price of less than $5.00 per share.
Such rules require the delivery, prior to any penny stock transaction, of a
disclosure schedule explaining the penny stock market and the risks associated
therewith, and impose various sales practice requirements on broker-dealers who
sell penny stock to persons other than established customers and accredited
investors. For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transactions prior to sale. The additional
burdens imposed upon broker-dealers by such requirements may discourage
broker-dealers from effecting transactions in our common stock, which could
severely limit the market liquidity of our common stock.
The issuance of our common stock in this offering will trigger adjustment of the
conversion price of our Series A Preferred Stock, which, if converted, would
have a substantially dilutive effect on the ownership interests of our common
stockholders.
Our Series A Preferred Stock provides for anti-dilution adjustment of the
conversion price in the event of the issuance by Hudson of securities for
consideration per share less than the then effective conversion price of the
Series A Preferred Stock. The holders of our outstanding Series A Preferred
Stock have agreed that in the event we receive gross cash proceeds in this
offering of more than $1,000,000 (exclusive of the conversion of any Convertible
Notes and any purchases made by the Flemings Funds in the offering), the
conversion price of the Series A Preferred Stock will be adjusted to equal the
per share consideration received by Hudson in connection with this offering. In
the event we do not receive gross cash proceeds of $1,000,000 in this offering
(exclusive of the conversion of any Convertible Notes and any purchases made by
the Flemings Funds in the offering), the conversion price of the Series A
Preferred Stock will be adjusted downward to equal the per share consideration
received by us for any subsequent issuance of securities below the current
$2.375 per share conversion price or the lowest conversion rate of our
outstanding Convertible Notes upon their conversion, which lowest conversion
rate is currently $.79 per share. Any downward adjustment of the conversion
price of the Series A Preferred Stock would result in further dilution to the
interests of Hudson's common stockholders upon conversion of the Series A
Preferred Stock. Moreover, the percentage ownership of Hudson by existing common
stockholders will decrease as a result of issuance of shares upon conversion of
the Convertible Notes which will occur in connection with this offering.
11
Based on the current conversion rate of the Series A Preferred Stock, the
holders of these shares effectively control the affairs of Hudson.
The holders of our Series A Preferred Stock own approximately 49.6% of our
outstanding common stock on a fully diluted, as converted basis, based upon the
current $2.375 conversion price of the Series A Preferred Stock. Moreover, any
downward adjustment of the conversion price below the current $2.375 conversion
price of the Series A Preferred Stock will result in a substantial increase of
the ownership percentage of Hudson by the holders of the Series A Preferred
Stock. Accordingly, such persons acting together, will be in a position to
significantly effect, and potentially fully control Hudson and the election of
our directors and generally direct Hudson's affairs. There is no provision for
cumulative voting for directors.
The trading price of our common stock has been and is likely to continue to be
volatile.
The trading price of our common stock is subject to significant
volatility, which is due, in part, to the lack of liquidity from our shares.
This lack of liquidity may continue for the foreseeable future.
Disclosures of our operating results, announcements of regulatory changes
affecting our business, other factors affecting our operations and general
conditions in the securities markets unrelated to our operating performance may
cause the market price of our common stock to change significantly over short
periods of time. In addition, sales of shares under this prospectus may have a
depressive effect on the market price of our common stock.
Risk Factors Relating to the Offering of Subscription Rights
The market price of our common stock may decline after you have committed to
purchase our common stock.
The market price of our common stock may increase or decline before the
subscription rights expire. Once you exercise your subscription rights, you may
not revoke the exercise. Therefore, if you exercise your subscription rights and
the market price of the common stock goes below $___, then you will have
committed to buy shares of common stock in the rights offering at a price that
is higher than the price at which our shares could be purchased in the open
market. Moreover, you may not be able to sell the shares of common stock that
you purchase in our rights offering at a price equal to or greater than the
subscription price.
Your percentage ownership of Hudson may be diluted.
If you do not exercise all of your basic subscription rights, you may
suffer significant dilution of your percentage ownership of Hudson relative to
stockholders who fully exercise their subscription rights in addition to any
dilution that will result from any purchases of shares by the public and the
conversion of our Convertible Notes. For example, if you own ______ shares of
common stock before the rights offering, or approximately ___% of the equity of
Hudson, and you exercise none of your subscription rights while all other
subscription rights are exercised and purchased for cash through the basic
subscription privilege and/or over-subscription privilege, then the percentage
ownership represented by your _______ shares will be reduced to approximately
___%. After giving effect to the automatic conversion of our outstanding
Convertible Notes upon completion of this offering, your percentage ownership in
the above example will be further reduced by approximately __%.
You may not be able to sell your shares of common stock immediately upon
expiration of the rights offering.
Until certificates are delivered, or your account is credited for the
purchased shares after expiration of the rights offering, you may not be able to
sell the shares of our common stock that you purchase in the rights offering.
Certificates representing shares of our common stock that you purchased will be
delivered and/or your account will be credited as soon as practicable after
__________, 2003, the Expiration Date of the rights offering, which may be
extended by Hudson.
The rights offering may be canceled and funds returned without interest.
If we elect to cancel the rights offering, we will have no obligation with
respect to the subscription rights except to return, without interest, any
subscription payments.
12
You will not earn interest on any funds delivered to us to exercise your
subscription rights.
We will not pay you interest on funds delivered to us pursuant to your
exercise of rights regardless of the length of time during which we hold your
subscription payment.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this section and elsewhere in this
prospectus 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
Hudson 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 Hudson 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, the ability
to obtain financing, and other risks detailed in this prospectus. The words
"believe", "expect", "anticipate", "may", "plan", "should" 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.
13
USE OF PROCEEDS
In the event that all of the shares offered hereby are sold for cash, we
expect to use the net cash proceeds of this offering, which are estimated to be
approximately $5,200,000 assuming we do not incur any obligation for payment of
fees or commissions in connection with the offer of shares, if any, to members
of the public and after payment of the expenses of this offering, as follows:
----------------------------------------------------------
Purpose Approximate Dollar Amount
----------------------------------------------------------
Sales and marketing $ 2,400,000
----------------------------------------------------------
Capital expenditures 750,000
----------------------------------------------------------
Working capital 2,050,000
----------------------------------------------------------
Total $ 5,200,000
----------------------------------------------------------
In the event that less than all of the shares offered hereby are sold for
cash, we currently intend to allocate the net proceeds in the priority of the
following categories: (i) working capital; (ii) sales and marketing; and (iii)
capital expenditures.
Capital expenditures will generally be applied to the updating and/or
acquiring of equipment and machinery used in Hudson's refrigerant and
reclamation business, RefrigerantSide(R) Services business at its remaining
service depots, as well as pursuant to strategic alliances that Hudson is
seeking to establish in the implementation of its vertical markets strategy.
Working capital will be applied toward general and administrative
expenses, and the further exploration, testing and recovery process development
as described below under the section entitled "Our Business" beginning on page
33. We may use a portion of the proceeds allocated to working capital to pay
down a portion of our borrowings under our existing credit facility with Keltic
Financial Partners, LP, or "Keltic," and/or repay some or all of the $575,000
principal amount of our loan arrangement with the Flemings Funds which is due to
mature in May 2006. We entered into the Keltic credit facility and Flemings
Funds loan arrangement in May 2003 and each loan arrangement currently bears
interest annually at the rate of 6.5%. We have used the proceeds from these
borrowings principally for working capital and general corporate purposes. We
may seek to use shares registered hereby and available after expiration of the
rights offering period for the repayment of certain of our outstanding
obligations including the loan arrangement with the Flemings Funds.
Our indicated allocation of the net cash proceeds of this offering
represents our best estimates based upon our currently proposed plans and
assumptions relating to our operations and certain assumptions regarding general
economic conditions. If any of these factors change, we may find it necessary or
advisable to reallocate some of the cash proceeds within the categories set
forth above or use portions of those proceeds for other purposes.
In addition to shares which may be sold for cash, certain of the shares
offered for sale by us under this prospectus may be acquired by the holders of
our Convertible Notes, at their election, through the reduction of the principal
and, if applicable accrued and unpaid interest in an amount equal to the number
of shares subscribed for, multiplied by the subscription price. There are
currently $1,660,000 principal amount of Convertible Notes outstanding which
were issued by us between December 2002 and April 2003. These Convertible Notes
bear interest at 10% per annum and will otherwise automatically convert into our
common stock upon the consummation of this offering. The proceeds from the
Convertible Notes were used for working capital and general corporate purposes.
14
MARKET PRICE FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Hudson's common stock traded from November 1, 1994 to September 20, 1995
on the NASDAQ SmallCap Market under the symbol `HDSN'. From September 20, 1995
through May 12, 2002, the common stock traded on the NASDAQ National Market.
Since May 13, 2002, the common stock has traded on the NASDAQ SmallCap Market.
There can be no assurance that, in the future, Hudson will be able to meet the
requirements necessary for continued listing of its common stock on the NASDAQ
SmallCap 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.
-----------------------------------------------------------------------------
High Low
---- ---
-----------------------------------------------------------------------------
2001
-----------------------------------------------------------------------------
o First Quarter $ 2.53 $ 1.50
-----------------------------------------------------------------------------
o Second Quarter $ 3.50 $ 1.80
-----------------------------------------------------------------------------
o Third Quarter $ 3.25 $ 1.90
-----------------------------------------------------------------------------
o Fourth Quarter $ 4.13 $ 2.01
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
2002
-----------------------------------------------------------------------------
o First Quarter $ 3.95 $ 2.60
-----------------------------------------------------------------------------
o Second Quarter $ 3.10 $ 1.60
-----------------------------------------------------------------------------
o Third Quarter $ 2.09 $ 0.85
-----------------------------------------------------------------------------
o Fourth Quarter $ 1.70 $ 0.56
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
2003
-----------------------------------------------------------------------------
o First Quarter $ 1.75 $ 1.20
-----------------------------------------------------------------------------
o Second Quarter $ 2.72 $ .97
-----------------------------------------------------------------------------
The number of record holders of Hudson's common stock was approximately
250 as of July 30, 2003. Hudson believes that there are in excess of 4,000
beneficial owners of its common stock.
To date, Hudson 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 Hudson's Board of Directors and will depend upon Hudson's earnings, its
capital requirements and financial condition, borrowing covenants, and other
relevant factors. Hudson presently intends to retain all earnings, if any, to
finance Hudson's operations and development of its business and does not expect
to declare or pay any cash dividends in the foreseeable future. In addition,
Hudson has a credit facility with Keltic which, among other things, restricts
Hudson's ability to declare or pay any cash dividends on its capital stock. The
Series A Preferred Stock carries a dividend rate of 7% and as such has a
dividend preference over the common stock. Hudson pays dividends, in arrears, on
the Series A Preferred Stock, semi annually, either in cash or additional
shares, at Hudson's option. To date Hudson has, and expects that it will
continue to pay dividends on the Series A Preferred Stock in additional shares.
ABOUT THE RIGHTS OFFERING
The Reason for the Rights Offering
We are offering the subscription rights to our current stockholders with
the intention of raising up to approximately $5,680,000 of gross proceeds. After
payment of expenses and any fees or commissions of this offering, we intend to
use the net cash proceeds of this offering for (i) sales and marketing support
of our service business (ii) infrastructure support for our refrigerant sales
business and (iii) working capital and general corporate purposes. Our Board of
Directors has chosen to give you the opportunity to buy more shares and provide
us with additional capital. This right provides each stockholder the opportunity
to avoid additional dilution of their ownership interest, at least insofar as
this current financing is concerned. However, our stockholders will experience
dilution of their ownership interest as a result of the conversion of our
Convertible Notes upon completion of this offering. Of course, we cannot assure
you that we will not need to seek additional financing in
15
the future that could result in dilution of your ownership and your ownership
interest will be diluted as a result of the conversion of our outstanding
Convertible Notes in connection with this offering.
The Subscription Rights
Without cost to you, we are distributing to you an instrument known as a
"subscription right." You will receive one non-transferable subscription
right(s) for each whole share of our common stock you owned as of August 1,
2003, which we arbitrarily established as the "record date" for the rights
offering. Each subscription right will entitle you, at your option, to purchase
___ share(s) of our common stock at the "subscription price," which we have
established as $____ per share. Should you elect to exercise your rights to
subscribe, meaning that you choose to purchase the common stock offered to you,
you may do so only on the terms and conditions of the offering.
You may exercise any number of your subscription rights subject to your
subscribing to purchase a minimum of 1,000 shares, or you may choose not to
exercise any subscription rights. You cannot give or sell your subscription
rights to anyone; only you can exercise them. If not exercised, your right will
expire at 5:00 P.M. Eastern Time on ___________, 2003, the Expiration Date.
Prior to that date and time, the Board of Directors may cancel the rights
offering for any reason. After that date, the subscription rights will expire
and will no longer be exercisable. There is no minimum that we must sell to
complete the offering. The rights offering and any other sales of shares under
this prospectus is being made on an "any or all basis," which means that we may
accept payment for shares sold pursuant to any subscription received even if all
of the shares of common stock offered are not subscribed for in the offering.
Once you submit your subscription agreement to our subscription agent
together with your payment, you may not revoke your subscription, even if you
subsequently learn unfavorable information about Hudson or if the market price
of our common stock declines to below the subscription price of the shares.
Basic Subscription Privilege
Each whole subscription right will entitle you to receive, upon payment of
$______ per subscription right, ____ share(s) of our common stock. You will
receive certificates, or your account will be credited by an amount representing
shares that you purchase pursuant to your basic subscription privilege, as soon
as practicable after the Expiration Date, whether you exercise your subscription
rights immediately prior to that date or earlier.
Over-Subscription Privilege
Subject to the allocation described below, each subscription right also
grants you an over-subscription privilege to purchase additional shares of
common stock that are subject to basic subscription rights not exercised by
other stockholders. You are entitled to exercise your over-subscription
privilege only if you exercise your basic subscription privilege in full.
If you wish to exercise your over-subscription privilege, you should
indicate the number of additional shares that you would like to purchase in the
space provided on your subscription agreement or Beneficial Owner Election Form,
as the case may be. When you send in your subscription documents, you must also
send the full purchase price for the number of additional shares that you have
requested to purchase, which payment is in addition to the payment due for
shares purchased through your basic subscription privilege. If we receive
over-subscription requests for a number of shares greater than the number of
shares available, we will allocate the available over-subscription shares to the
over-subscribers in the same proportion that their basic subscription shares
bears to the total of basic subscriptions. Regardless of the proportion,
however, you will not receive more over-subscription shares than you actually
apply for, although you may receive fewer. We have the discretion to issue less
than the total number of shares that may be available for over-subscription
requests in order to comply with state securities laws.
As soon as practicable after the Expiration Date, we will determine the
number of shares of common stock that you may purchase pursuant to the
over-subscription privilege. You will receive certificates, or your account will
be credited by an amount, representing these shares as soon as practicable after
the Expiration Date. We have the discretion to delay allocation and distribution
of any and all shares to stockholders who elect to participate in the rights
offering and are affected by state securities laws, if any, including shares
that we issue with respect to basic or over-subscription privileges, in order to
comply with such regulations. If you request and pay for more shares than are
allocated to you, we will refund that overpayment, without interest. In
connection with the exercise of the over-subscription privilege, banks, brokers
and other nominee holders
16
of subscription rights who act on behalf of beneficial owners will be required
to certify to us as to the aggregate number of subscription rights that have
been exercised, and the number of shares of common stock that are being
requested through the over-subscription privilege, by each beneficial owner on
whose behalf the nominee holder is acting.
No Recommendation
We are not making any recommendations as to whether or not you should
exercise your subscription rights. You should make your decision based on your
own assessment of your best interests.
Expiration Dates
The rights will expire at 5:00 P.M. Eastern Time, on __________, 2003,
unless we decide to extend the rights offering. If you do not exercise your
subscription rights prior to that time, your subscription rights will be null
and void. We will not be required to issue shares of common stock to you if our
subscription agent receives your subscription agreement or your payment after
that time, regardless of when you sent the subscription agreement and payment.
In addition we may, in our discretion, determine to extend the time period
during which we may offer shares to members of the public.
Board of Directors' Withdrawal Right
Our Board of Directors may withdraw or cancel the rights offering in its
sole discretion at any time prior to or on the Expiration Date for any reason
including, without limitation, a change in the market price of our common stock.
If we withdraw the rights offering, any funds you paid will be refunded, without
interest or penalty.
Determination of Subscription Price and Fairness Opinion of Houlihan Lokey
Pursuant to an engagement letter dated July 9, 2003, we retained Houlihan
Lokey on behalf of, and to advise, the special committee of our board of
directors initially with respect to the possible range of per share subscription
prices in the rights offering and, upon the special committee's request, to
render an opinion as to the fairness, from a financial point of view, of the
rights offering to our public common stockholders (other than the Flemings Funds
and our officers and their family members). Houlihan Lokey had multiple meetings
and conference calls with members of the special committee, including on July 2,
2003 for preliminary discussions and due diligence purposes and July 10, 2003.
At the July 24, 2003 meeting of the special committee of our board of directors,
Houlihan Lokey presented its analysis and subsequently, on __________, 2003
delivered its written opinion that, as of such date and based on the matters
described in the opinion, the rights offering was fair, from a financial point
of view, to our public stockholders (other than the Flemings Funds and our
officers and their family members), solely in their capacity as current
stockholders. Houlihan Lokey's opinion, dated ___________, 2003, speaks only as
of that date, and Houlihan Lokey does not have any obligation to update, revise
or reaffirm its opinion.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The
following is a brief summary and general description of the valuation
methodologies utilized by Houlihan Lokey. The summary does not purport to be a
complete statement of the analyses and procedures applied, the judgments made or
the conclusion reached by Houlihan Lokey, or a complete description of its
presentation to the special committee on July 24, 2003. Houlihan Lokey advised
the special committee on that date that Houlihan Lokey's analyses must be
considered as a whole, and that selecting portions of its analyses and of the
factors considered by it, without considering all factors and analyses, could
create an incomplete view of the process underlying its analyses and opinions.
Houlihan Lokey's opinion and financial analyses were only one of a number
of factors considered by our board of directors in their evaluation of the
transaction, and was not the sole determinative factor it the board's decision
with respect to proceeding with the rights offering.
THE COMPLETE TEXT OF HOULIHAN LOKEY'S OPINION IS ATTACHED TO THIS
PROSPECTUS AS ANNEX __. THE BRIEF SUMMARY AND GENERAL DESCRIPTION OF THE
VALUATION METHODOLOGIES SET FORTH BELOW IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE OPINION. YOU ARE URGED TO READ THE OPINION CAREFULLY IN ITS
ENTIRETY FOR A DESCRIPTION OF THE PROCEDURES FOLLOWED, THE FACTORS CONSIDERED
AND THE ASSUMPTIONS MADE BY HOULIHAN LOKEY.
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Houlihan Lokey's opinion to the special committee addresses only the
fairness of the rights offering, from a financial point of view, to our public
stockholders (other than the Flemings Funds and our officers and their family
members), solely in their capacity as current stockholders, and does not
constitute a recommendation to the stockholders as to whether or not they should
participate in the rights offering. Houlihan Lokey's opinion does not address
our underlying business decision to effect the rights offering.
In connection with the preparation of its opinion, Houlihan Lokey made
certain reviews, analyses and inquiries as it deemed necessary and appropriate
under the circumstances. Among other things, Houlihan Lokey:
1. reviewed our Form 10-K's for each of the fiscal years ended 1999
through 2002;
2. reviewed our Form 10-Q's for the quarters ended March 31, 2002
through 2003;
3. reviewed our registration statement, of which this prospectus formed
a part, in its amended form as filed with the Securities and
Exchange Commission on June 13, 2003 and July 31, 2003;
4. met with certain members of our senior management to discuss our
operations, financial condition, future prospects and projected
operations and performance;
5. reviewed forecasts and projections prepared by our management with
respect to Hudson for the years ended December 31, 2003 through
2007;
6. reviewed other publicly available financial data for certain
companies that we deemed comparable to Hudson;
7. reviewed the historical market trading prices and trading volume for
our common stock;
8. reviewed agreements between us and The BOC Group PLC;
9. reviewed certain other public rights offering;
10. reviewed certain management presentations regarding our business
plan; and
11. conducted such other studies, analyses and investigations as
Houlihan Lokey deemed appropriate.
In connection with its engagement on behalf of the special committee,
Houlihan Lokey relied upon and assumed, without independent verification, that
the forecasts and projections provided to it had been reasonably prepared and
represented our currently available estimates of our future financial results
and condition for the periods covered by the forecasts and projections, and that
there has been no material change in our assets, financial condition, business
or prospects since the date of the most recent financial statements made
available to Houlihan Lokey. In addition, Houlihan Lokey assumed that the rights
offering and related transactions would be effectuated on substantially the same
terms as described in the form of this prospectus included in our draft of
Amendment No. 2 to the registration statement, provided to Houlihan Lokey on
July 31, 2003.
As part of its analysis, Houlihan Lokey, among other things, (i) reviewed
the current and recent historical trading prices and volume of our common stock,
(ii) examined our existing capital structure, (iii) performed an independent
analysis of our intrinsic common stock value both under our existing capital
structure and on a pro forma basis under various potential outcomes of the
rights offering, (iv) reviewed other publicly announced rights offerings between
May 1999 to June 2003, (v) considered the current status of our NASDAQ small-cap
listing requirements, and (v) considered certain financing alternatives to the
proposed rights offering.
The following is a brief summary and general description of the material
financial analyses performed by Houlihan Lokey in connection with rendering its
opinion.
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Analysis and Valuation of the Company's Common Stock
As part of its analysis, Houlihan Lokey performed an independent valuation
of our stock, both under our existing capital structure and on a pro forma basis
assuming completion of the rights offering, in each case by using two widely
accepted valuation methodologies. The first valuation methodology is the market
multiple method, which involves the multiplication of various earnings and cash
flow measures by appropriate risk-adjusted multiples determined by analyzing the
comparable multiples for other public companies in the same or similar
businesses. The second method is the discounted cash flow valuation analysis in
which management's financial projections are used to estimate the future cash
flows of a company as well as an estimate of a terminal value for such company
at the end of the projection period. The cash flows and the terminal value of
the company are discounted at an appropriate risk-adjusted rate of return to
determine their present value. Another approach, the comparable transaction
method, which involves multiples of earnings and cash flow, may also be employed
in certain cases as a third valuation methodology. Multiples used in this
approach are determined through an analysis of completed transactions involving
controlling interests in companies with operations similar to the subject
company's business operations. Houlihan Lokey did not use the comparable
transaction method due to the lack of a sufficient number of transactions that
it considered comparable.
Market Multiple Valuation Analysis
We are primarily engaged in providing solutions and services regarding the
refrigeration systems of commercial, industrial and governmental customers. Due
to the lack of a sufficient number of publicly traded companies in the
refrigeration services industry, Houlihan Lokey considered public companies
whose primary lines of business involve providing facilities services, waste
remediation, and environmental services to commercial, industrial and
governmental customers. The publicly traded companies that Houlihan Lokey
considered included: ABM Industries, Inc.; Clean Harbors, Inc.; Duratek, Inc.;
Perma-Fix Environmental Services, Inc.; Synagro Technologies, Inc.; Team, Inc.
and TRC Companies, Inc.
Houlihan Lokey analyzed multiples of revenues, earnings before interest
and taxes, or "EBIT" and earnings before interest, taxes, depreciation and
amortization, or "EBITDA" for these companies. To derive the relevant multiples,
revenue, EBIT and EBITDA earnings levels of the public companies were compared
to their enterprise value (equal to the trading value of equity plus the book
value of debt, less cash on the balance sheet).
The multiples of latest twelve month revenue for these companies ranged
from ____ to ____ times revenue, with a median of ____ times. Multiples for
these companies of projected fiscal 2003 revenue ranged from ____ to ____ times,
with a median of ____ times.
The multiples of latest twelve month EBITDA for these companies ranged
from ____ to ____ times, with a median of ____ times. Multiples for these
companies of projected fiscal 2003 EBITDA ranged from ____ to ____ times, with a
median of ____ times.
The multiples of latest twelve month EBIT for these companies ranged from
____ to ____ times, with a median of ____ times. Multiples for these companies
based on projected fiscal 2003 ranged from ____ to ____ times, with a median of
____ times.
As part of its analysis, Houlihan Lokey analyzed the float and trading
volume for our common stock. Houlihan Lokey calculated the public float as a
percent of total shares outstanding, as well as the ratio of average daily
trading volume (over the most recent 90 days) to float and total shares
outstanding. Houlihan Lokey then compared our ratios to the same ratios for the
selected public companies. This analysis showed that we have a lower percentage
of public float to shares outstanding relative to these companies, and our
average daily trading volume as a percentage of public float was at or below the
low end of the range of the selected public companies Houlihan Lokey considered.
Discounted Cash Flow Valuation Analysis
Houlihan Lokey relied on management's long term financial projections
through December 31, 2007. The financial projections contemplated (i) the
successful implementation of management's new business strategy of targeting
higher margin commercial and industrial customers in specific industries, (ii) a
reduced cost structure resulting from the closure of many of our nationwide
depots and focusing our sales and marketing efforts, and (iii) the successful
implementation of our recent agreement with The BOC Group PLC.
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Houlihan Lokey assessed the risk associated with the successful execution
of our long term financial projections and applied a discount rate developed
through an analysis of rates of return on alternative investment opportunities
on investments in companies with similar risk characteristics.
Our terminal value at the end of the projection period was determined by
applying a risk adjusted multiple to the projected EBITDA in the terminal year
(2007) of the projections. The terminal EBITDA multiple was selected in line
with the multiples observed in the comparable public companies.
Intrinsic Valuation Conclusions
Houlihan Lokey considered both the Market Multiple Valuation Analysis and
the Discounted Cash Flow Valuation Analysis to assess the intrinsic value of our
common stock under our current capital structure, before the rights offering.
Based on approximately 22.1 million common shares outstanding on a fully diluted
basis (i.e. assuming the conversion of our Series A Preferred Stock into common
stock at a conversion rate of $0.79 per share in accordance with its existing
rights, and the conversion of the Convertible Notes at their various current
conversion rates of between $0.79 and $1.41 per share of common stock) Houlihan
Lokey determined that the current intrinsic value of our common stock is
reasonably stated in the range of $____ to $____ per share.
On a pro forma basis, assuming completion of the rights offering,
depending upon the amount of funds raised in the rights offering from sources
other than the Flemings Funds, and depending upon the resulting adjustment to
the conversion rate of our Series A Preferred Stock and of our Convertible
Notes, based upon a range of approximately 18.6 million to 23.0 million shares
of common stock outstanding on a fully diluted basis, the intrinsic value of our
common stock could be reasonably stated in the range of $____ to $____ per
share.
Analysis of Other Rights Offerings
Houlihan Lokey reviewed 55 other publicly announced rights offerings
between May 1999 and June 2003. With respect to the discount to the market price
for shares of the securities offered in these rights offerings, Houlihan Lokey
observed a median discount of ____% and a mean discount of ____% and an overall
range among the 55 rights offerings from a discount of ____% to a premium of
____% to the market price of the securities offered.
Among the 55 rights offerings reviewed, Houlihan Lokey identified 23
rights offerings in which the rights offered were not transferable. For these
offerings, Houlihan Lokey observed a median discount of ____% and a mean
discount of ____% with an overall range from a discount of ____% to a premium of
____% to the market price of the securities offered.
Houlihan Lokey compared our rights offering's ____% discount to the July
28, 2003 closing price of our common stock of $1.60 per share with the mean and
median discounts observed in the rights offerings reviewed. The ____% discount
to market exceeds the mean and median discounts observed in both the rights
offerings generally and the rights offerings with non-transferable rights, but
the ____% discount to market falls within the overall ranges observed.
Additional Analysis
Houlihan Lokey also considered, among other things, (i) the range of the
intrinsic value per share of our common stock under our existing capital
structure, compared to such pro forma range of value after the rights offering,
(ii) the potential dilution or accretion of the existing public common
stockholders' percentage of equity ownership, on a fully diluted basis, as a
result of the rights offering, and (iii) our viable financing alternatives to
the rights offering.
Houlihan Lokey also compared the potential effect of the rights offering
on the value of our common stock to the potential effect on the value of our
stock of the most likely financing alternatives to the rights offering. The
alternatives considered included (i) a status quo scenario in which we continued
to operate in the absence of the rights offering or any similar transaction, and
(ii) raising capital from a third party investor.
In considering these alternatives, Houlihan Lokey considered, among other
things, ownership dilution to public common stockholders, our ability to fund
our current business plan, our current capital structure and our future ability
to maintain our NASDAQ Small Cap listing.
20
In comparing the rights offering to these alternatives, Houlihan Lokey
considered, among other things, the following:
o under the rights offering, we may raise additional capital to fund
our business plan;
o our current deficiency in our NASDAQ listing requirements;
o the rights offering may be less dilutive to existing public
shareholders than the status quo alternative or other financing
options; and
o the rights offering may help simplify our existing complex capital
structure
Based on its analysis, Houlihan Lokey concluded that the rights offering
is fair, from a financial point of view, to our public common stockholders
(other than the Flemings Funds and our officers and their family members) in
their capacity as current stockholders, [but not in their capacity as purchasers
in the rights offering].
Houlihan Lokey was not requested to, and did not, solicit third party
indications of interest in financing, or acquiring all or any part of Hudson.
Houlihan Lokey did not independently verify the accuracy and completeness of the
information supplied to it with respect to Hudson, and does not assume any
responsibility with respect to such information. Houlihan Lokey was not
requested to, and did not, make an independent evaluation or appraisal of our
properties or assets. Houlihan Lokey's analysis was based on business, economic,
market and other conditions as they existed and could be evaluated by Houlihan
Lokey at the date of its opinion.
Houlihan Lokey is a nationally recognized investment banking firm with
expertise in, among other things, valuing businesses and securities and
rendering fairness opinions. Houlihan Lokey has extensive experience in valuing
businesses and securities in connection with mergers and acquisitions, leveraged
buyouts, private placements of debt and equity, corporate reorganizations,
employee stock ownership plans, and other transactions or purposes. The special
committee selected Houlihan Lokey because of its experience and expertise in
performing valuations and fairness analysis. Houlihan Lokey does not
beneficially own any interest in Hudson. Furthermore, Houlihan Lokey has no
agreement or understanding to provide additional services to us beyond the scope
of this fairness opinion.
Houlihan Lokey does not make a market in our publicly traded securities.
Houlihan Lokey is engaged, from time to time, to provide financial advice to a
variety of public and private entities and persons. Although not in the present
transaction, Houlihan Lokey has previously rendered, may be currently rendering,
and may in the future render, certain services to JP Morgan Partners, and its
affiliates.
Fees and Expenses.
We have agreed to pay Houlihan Lokey a fee of $150,000 plus reasonable
out-of-pocket expenses (including the reasonable expenses of its legal counsel)
incurred in connection with its services to us in connection with the rights
offering (including the rendering of its fairness opinion). No portion of the
fee was contingent upon approval or completion of the rights offering or the
conclusions set forth in Houlihan Lokey's opinion. We have further agreed to
indemnify Houlihan Lokey and certain other parties affiliated or associated with
Houlihan Lokey against certain claims, liabilities and expenses related to or
arising in connection with the rendering by Houlihan Lokey of its services as
described above.
Non-Transferability of Subscription Rights
Except in the limited circumstances described below, both the basic
subscription rights and over-subscription rights are non-transferable and
non-assignable. Only you may exercise these rights.
Notwithstanding the foregoing, your rights may be transferred by operation
of law or through involuntary transfers. For example, a transfer of rights to
the estate of the recipient upon the death of the recipient would be permitted.
If the rights are transferred as permitted, evidence satisfactory to us that the
transfer was proper must be received by us prior to the Expiration Date of the
rights offering.
Subscription Agent
The subscription agent for this offering is Continental Stock Transfer &
Trust Company. The address to which subscription agreements and payments, other
than wire transfers, should be mailed or delivered is Continental Stock
Transfer,
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Reorganization Department, 17 Battery Place, ___ Floor, New York, New York
10004. If you deliver subscription agreements in a manner different than that
described in this prospectus, we may not honor the exercise of your subscription
privileges.
You should direct any questions or requests for assistance concerning the
method of subscribing for the shares of common stock to the subscription agent,
at Continental Stock Transfer, Reorganization Department, 17 Battery Place, ___
Floor, New York, New York 10004 or by telephone at (212) 509-4000, ext. [535].
For additional copies of this prospectus you may direct your requests to the
subscription agent, attention "Mail Room" or contact the subscription agent by
telephone at (212) 509-4000 ext. [210].
Fractional Shares of Common Stock and Fractional Rights
We will not issue any fractional shares of common stock in this offering.
Rights certificates may not be divided in any manner that would create
fractional rights. Banks, trust companies, securities dealers and brokers that
hold shares of our common stock as nominees for more than one beneficial owner
may have the applicable subscription rights divided by the subscription agent or
may, upon proper showing to the subscription agent, exercise their rights on the
same basis as if the beneficial owners were record holders on the record date.
We reserve the right to deny any division of subscription rights if, in our
opinion, the result would be inconsistent with the intent of this privilege.
Exercise of Subscription Rights and Method of Payment
Our stockholders may exercise their subscription rights by delivering to
our subscription agent the following, all of which must be received by our
subscription agent on or prior to the Expiration Date:
o a properly completed and duly executed subscription agreement;
o any required signature guarantees; and
o payment in full of $_____ per share for the shares of common
stock subscribed for by exercising basic subscription rights
and, if desired, over-subscription rights.
You should deliver your subscription agreement and payment to our
subscription agent at the address set forth under the subsection "Subscription
Agent" above on or prior to the Expiration Date of the subscription period. We
will not pay you interest on funds delivered to us pursuant to the exercise of
rights. If you hold shares of our common stock in street name and receive rights
through a broker, dealer, commercial bank, trust company or other nominee, or if
you hold common stock certificates and would prefer to have an institution
conduct the transaction relating to the rights on your behalf, you should
contact the appropriate nominee or institution and request that it conduct the
subscription transaction for you. In most cases you will receive a "Beneficial
Owner Election Form" or other form of election to subscribe for shares of common
stock which you will be required to complete and return to your holder or other
nominee in accordance with their instructions, together with any applicable
payment of the subscription price as such holder or nominee may require.
Payment for the shares must be made by check or bank draft (cashier's
check) drawn upon a United States bank or a postal, telegraphic or express money
order payable to the order of "Continental Stock Transfer, Subscription Agent."
Payment for basic subscription rights and over-subscription rights may also be
effected through wire transfer as described below.
Payment will be deemed to have been received by us only upon:
o clearance of any uncertified check;
o receipt by our subscription agent of any certified check or
bank draft drawn upon a U.S. bank or of any postal,
telegraphic or express money order;
o receipt by our subscription agent of any funds transferred by
wire transfer; or
o receipt of funds by our subscription agent through an
alternative payment method approved by our subscription agent.
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Please note that funds paid by uncertified personal check may take at
least ten business days to clear. Accordingly, if you wish to pay by means of an
uncertified personal check, we urge you to make payment sufficiently in advance
of the Expiration Date to ensure that the payment is received and clears before
that date. We are not responsible for any delay in payment and urge you to
consider payment by means of a certified or cashier's check, money order or wire
transfer.
If you choose to wire transfer funds for payment you are urged to send
your subscription agreement by overnight delivery no later than the date of your
wire transfer to assure proper matching with your payment and in any event, in
time for delivery on or prior to __________, 2003. A wire transfer of funds is
to be made to the account maintained by the subscription agent for that purpose
at J.P. Morgan Chase, Account No. ___________, ABA No. _____________ at
___________, New York, New York _____.
Any wire transfer of funds should clearly indicate the identity of the
subscriber who is paying the subscription price by the wire transfer and should
be confirmed by a telephone call to the subscription agent. You should contact
the subscription agent at Continental Stock Transfer, Reorganization Department,
17 Battery Place, ___ Floor, New York, New York 10004, (212) 509-4000, ext.
[535] for further specific payment instructions. In addition, we request that
you provide the name and ABA routing number of the originating bank and the date
of your wire transfer on your subscription agreement.
You should read the instructions accompanying the rights agreement
carefully and strictly follow it. DO NOT SEND RIGHTS AGREEMENTS OR PAYMENTS TO
US. We will not consider your subscription received until the subscription agent
has received delivery of a properly completed and duly executed rights agreement
and payment of the full subscription amount. The risk of delivery of all
documents and payments is yours or your nominee's, not ours or the subscription
agent's.
The method of delivery of rights agreements and payments of the
subscription amount to the subscription agent will be at the right of the rights
holders, but, if sent by mail, we recommend that you send the subscription
agreement and payment by FedEx, other overnight courier or by registered mail,
properly insured, with return receipt requested, and that a sufficient number of
days be allowed to ensure delivery to the subscription agent and clearance of
payment before the expiration of the subscription period.
Signature Guarantee
Signatures on the subscription agreement do not need to be guaranteed if
either the subscription agreement provides that the shares of common stock to be
purchased are to be delivered directly to the record owner of such subscription
rights, or the subscription agreement is submitted for the account of a member
firm of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc., or a commercial bank or trust company
having an office or correspondent in the Untied States. If a signature guarantee
is required, signatures on the subscription agreement must be guaranteed by an
Eligible Guarantor Institution, as defined in Rule 17Ad-15 of the Securities
Exchange Act of 1934, as amended. Eligible Guarantor Institutions include banks,
brokers, dealers, credit unions, national securities exchanges and savings
associations.
Shares Held for Others
If you are a broker, a trustee or a depository for securities, or you
otherwise hold shares of our common stock for the account of a beneficial owner
of our common stock, you should notify the beneficial owner of such shares as
soon as possible to obtain instructions with respect to their subscription
rights. If you are a beneficial owner of our common stock held by a holder of
record, such as a broker, trustee or a depository for securities and you wish to
participate in this rights offering, you should contact the record holder and
ask him or her to effect transactions in accordance with your instructions.
Ambiguities in Exercise of Subscription Rights
If you do not specify the number of subscription rights being exercised on
your subscription agreement, or if your payment is not sufficient to pay the
total purchase price for all of the shares that you indicated you wish to
purchase, you will be deemed to have exercised the maximum number of
subscription rights that could be exercised for the amount of the payment that
we receive from you. If your payment exceeds the total purchase price for all of
the subscription rights shown on your subscription agreement, your payment will
be applied, until depleted, to subscribe for shares of common stock in the
following order:
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1. to subscribe for the number of shares, if any, that you
indicated on your subscription agreement that you wished to
purchase through your basic subscription privilege;
2. to subscribe for shares of common stock until your basic
subscription privilege has been fully exercised;
3. to subscribe for additional shares of common stock pursuant to
the over-subscription privilege, subject to any application
proration.
In any case, the allocation of your payment remains subject to the minimum
share purchase requirements set forth below, such that if your payment would not
cover the purchase of at least 1,000 shares in this offering, your subscription
and payment would not be accepted and would be returned to you without interest
or deduction. In the event such payment is sufficient to meet the minimum share
purchase requirement any excess payment remaining after the foregoing allocation
will be returned to you as soon as practicable by mail, without interest or
deduction.
Regulatory Limitation
We will not be required to issue you shares of common stock pursuant to
the rights offering if, in our opinion, you would be required to obtain prior
clearance or approval from any state or federal regulatory authorities to own or
control such shares if, at the time the subscription rights expire, you have not
obtained such clearance or approval.
State and Foreign Securities Law
The rights offering is not being made in any state or other jurisdiction
in which it is unlawful to do so, nor are we selling to you or accepting any
offers to purchase any shares of common stock from you if you are a resident of
any such state or other jurisdiction. We may delay the commencement of the
rights offering in certain states or other jurisdictions in order to comply with
the securities law requirements of such states and other jurisdictions. It is
not anticipated that there will be any changes in the terms of the rights
offering. In our sole discretion, we may decline to make modifications to the
terms of the rights offering requested by certain states or other jurisdictions,
in which case shareholders who live in those states or jurisdictions will not be
eligible to participate in the rights offering.
Minimum Share Purchase Requirement
We will only accept subscriptions in this rights offering for the purchase
of a minimum of 1,000 shares of our common stock. Stockholders who exercise all
of their basic subscription rights may subscribe for an unlimited number of
additional shares under their over-subscription privilege subject to state
regulatory approval and our proportionate reduction of subscriptions in the
event of over-subscription of the offering. Therefore, stockholders who, as a
result of their share ownership on the record date, receive basic subscription
rights for less than 1,000 shares of our common stock may still participate in
the rights offering by exercising all of their basic subscription rights and a
sufficient amount of over-subscription rights which, in the aggregate, exceeds
the minimum 1,000 purchase requirement. Nevertheless, in the event this rights
offering is over-subscribed we will be required to reduce, on a proportionate
basis, the number of shares that may be purchased by each subscribing
stockholder as part of the over-subscription privilege. Consequently,
stockholders with basic subscription rights for less than 1,000 shares who have
exercised over-subscription rights necessary to exceed the 1,000 share purchase
requirement may be subsequently reduced below the 1,000 share purchase
requirement, in which case we would not accept that stockholder's subscription.
Our Decision Regarding Certain Matters Binding on You
All questions concerning the timeliness, validity, form and eligibility of
any exercise of subscription rights will be determined by us, and our
determinations will be final and binding. In our sole discretion, we may waive
any defect or irregularity, or permit a defect or irregularity to be corrected
within such time as we may determine, or reject the purported exercise of any
subscription right by reason of any defect or irregularity in such exercise.
Subscriptions will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time as we determine in our
sole discretion. We will not be under any duty to notify you of any defect or
irregularity in connection with the submission of a subscription agreement or
incur any liability for failure to give such notification.
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It is not anticipated that we will give notice to you of any defects in
your subscription, if any, but we reserve the right to do so, and to condition
the re-submission of your subscription upon such conditions as we deem necessary
or appropriate under the circumstances. Under no circumstance, however, will we
be obligated to give you notification of defects in your subscription. No
exercise of rights will be accepted until all defects have been cured or waived.
If your exercise is rejected, any payments made on account of this offering will
be promptly returned.
No Revocation
After you have exercised your basic subscription privilege and, if
applicable, your over-subscription privilege and delivered the appropriate
payment, YOU MAY NOT REVOKE THAT EXERCISE EVEN IF THE SUBSCRIPTION PERIOD HAS
NOT YET ENDED. You should not exercise your subscription rights unless you are
certain that you wish to purchase additional shares of our common stock.
Delivery of Subscribed Shares
If you purchase shares of common stock through the rights offering, you
will receive certificates or your account will be credited by an amount
representing those shares as soon as practicable after the Expiration Date.
Fees and Expenses
We are offering shares of our common stock through the issuance of rights
directly to our stockholders as of the record date. Upon the expiration of the
rights offering period we intend to solicit offers and sales of shares
registered hereby and available to members of the public, subject to applicable
state securities regulations. Certain of our officers, directors and employees
may participate in the offer and sale of shares to the public but will receive
no compensation or remuneration for those efforts. We will not engage any NASD
member firm to participate in the offer and sale of shares in the rights
offering or in the public portion of this offering. You will be responsible for
paying any commissions, fees, taxes or other expenses incurred in connection
with your exercise of the subscription rights. Hudson will not pay such
expenses.
Sales of Shares for Which Subscription Rights Have Not Been Exercised by
Eligible Stockholders
Any shares not sold as part of the rights offering will be offered by us
to members of the public at the subscription price. If any of the shares being
offered to the public remain unsold at the end of 50 days from the date of this
prospectus the holders of our Convertible Notes must elect no later than such
50th date to purchase shares in this offering at the subscription price through
a reduction of the amount of principal and, if applicable, any accrued and
unpaid interest under the Convertible Notes. If such an election is not timely
made or if an election is timely made but a sufficient number of shares
registered hereby is not available, the Convertible Notes will otherwise
automatically convert into restricted shares of our common stock at prices
ranging from the lesser of the subscription price or: (i) $.79 per share with
respect to up to $665,000 principal amount of Convertible Notes, together with
accrued and unpaid interest; (ii) $1.41 per share with respect to up to $500,000
principal amount of Convertible Notes, together with accrued and unpaid
interest; and (iii) $1.13 per share, with respect to up to $495,000 principal
amount of Convertible Notes, together with accrued and unpaid interest. These
Convertible Notes are held by certain of our officers and their family members
and two of our principal stockholders, the Flemings Funds. Moreover, the
Flemings Funds have indicated their intention that if gross proceeds from the
shares sold by us for cash in the offering to our stockholders and other
investors (other than Flemings),together with the amount of principal and
accrued interest due on the outstanding $1,660,000 principal amount of
Convertible Notes that will be converted to common stock in connection with this
offering, is less than $2,575,000, the Flemings Funds will acquire from the
shares being offered to the public that number of shares (not to exceed
$925,000) necessary for us to reach the $2,575,000 level. Included in this
amount to be acquired by the Flemings Funds is the loan from the Flemings Funds
to us in the principal amount of $575,000 for which we may use shares available
under this prospectus to repay the principal and accrued and unpaid interest of
this loan. The Flemings Funds may also purchase additional shares offered to
members of the public at the subscription price.
Adjustment of the Conversion Rate of the Convertible Notes and Conversion Price
of the Series A Preferred Stock
The Flemings Funds have indicated their intention to modify the terms of
the Convertible Notes that they hold, such that if (A) the gross proceeds from
the shares sold by us for cash in the offering to our stockholders and other
investors (other than the Flemings Funds, and not including the amount of
principal and accrued interest due on the approximately $1,660,000 outstanding
principal amount of Convertible Notes that may be converted to common stock in
connection with this offering), is
25
at least $1,000,000 and (B) the then effective conversion rate of the
Convertible Notes held by the Flemings Funds is less than the $____ subscription
price, then the conversion rate of the Convertible Notes held by the Flemings
Funds shall be equal to the $____ subscription price. As described above, in
accordance with the existing terms of the Convertible Notes, in the event that
the then-effective conversion rate of the Convertible Notes is greater than the
$____ subscription price, the conversion rate of the Convertible Notes held by
the Flemings Funds and all other holders shall be equal to the $_____
subscription price (and such terms shall remain in place).
In December 2002, the Flemings Funds agreed to waive their rights to an
immediate downward adjustment of the then effective $2.375 conversion price of
the Series A Preferred Stock in connection with the issuance of the Convertible
Notes; however, any subsequent conversion of the Convertible Notes will result
in a downward adjustment of the conversion price of the Series A Preferred Stock
to equal the then effective conversion rate at which the Convertible Notes
convert. Consequently, upon conversion of certain of the Convertible Notes at
the $.79 per share conversion rate, the anti-dilution provisions of the Series A
Preferred Stock will cause the conversion price of the Series A Preferred Stock
to adjust downward to a conversion price of $.79 per share. See "Certain
Transactions". In accordance with the terms of the Series A Preferred Stock, the
Flemings Funds have the right (but not the obligation) to convert any or all
shares of Series A Preferred Stock into our common stock.
The Flemings Funds have indicated their intention to modify the terms of
the Series A Preferred Stock held by the Flemings Funds, such that:
(1) If (A) the gross proceeds from the shares sold by us for cash in
the offering to our stockholders and other investors (other than the Flemings
Funds, and not including the amount of principal and accrued interest due on the
approximately $1,660,000 outstanding principal amount of Convertible Notes that
may be converted to common stock in connection with this offering), is at least
$1,000,000 and (B) the then effective conversion price of the Series A Preferred
Stock is less than the $____ subscription price, then the conversion price of
the Series A Preferred Stock shall be equal to the $_____ subscription price. As
described above, in accordance with the existing terms of the Series A Preferred
Stock, in the event that the conversion price of the Series A Preferred Stock is
greater than the $____ subscription price, then the conversion price of the
Series A Preferred Stock shall be equal to the $____ subscription price, and
(2) If the gross proceeds from the shares sold by us for cash in the
offering to our stockholders and other investors (other than the Flemings Funds,
and not including the amount of principal and accrued interest due on the
approximately $1,660,000 outstanding principal amount of Convertible Notes that
may be converted to common stock in connection with this offering), is more than
$4,000,000, then the Flemings Funds will convert all of the outstanding shares
of Series A Preferred Stock into restricted common stock, at the conversion
price described in the foregoing paragraph (1).
In addition, the Flemings Funds have agreed to waive their "piggyback"
registration rights with respect to the registration of the shares of common
stock underlying the Series A Preferred Stock in this offering, which waiver
does not in any way limit the registration rights of the Flemings Funds in any
other offering or as otherwise permitted under the registration rights agreement
we entered into with the Flemings Funds at the time of their purchase of the
Series A Preferred Stock. As part of this rights offering process we requested
the Flemings Funds affirm that for a period of six months from the date of this
prospectus they will not take any action that would cause Hudson to engage in a
going private transaction, which affirmation has been received from the Flemings
Funds.
Warrants to be Issued to Holders of Convertible Notes
In accordance with the terms of the Convertible Notes we will issue common
stock purchase warrants to the holders of Convertible Notes upon the earlier of
the first anniversary of the respective date of issuance of the Convertible
Notes or the consummation of a public equity offering which, when aggregating
the outstanding principal and accrued interest of the Convertible Notes and all
additional proceeds from new investors, equals gross proceeds of not less than
$2,000,000. See the section below entitled "Description of Securities."
Consequently upon the consummation of the rights offering for such gross
proceeds we will be required to issue common stock purchase warrants to the
holders of the Convertible Notes which warrants will be exercisable to purchase
an amount of shares of our common stock equal to 10% of the number of shares of
common stock into which the Convertible Notes were convertible at the time of
their issuance. Pursuant to the terms of the Convertible Notes, the warrants
will have an exercise price equal to 110% of the lesser of (i) the conversion
rate of the Convertible Notes on the date of their issuance or (ii) the
conversion rate of the Convertible Notes on the date of the issuance of the
warrants.
The Flemings Funds have agreed that if the conversion price of their
Convertible Notes is increased to equal the $______ subscription price as a
result of our receipt of at least $1,000,000 of gross cash proceeds from the
sale of shares to our stockholders and other investors in this offering (other
than the Flemings Funds, and not including the amount of principal and accrued
interest due on the approximately $1,660,000 outstanding principal amount of
Convertible Notes that may be converted into common stock in connection with the
offering), then the exercise price on any warrants they receive, to the extent
such exercise price is lower than the $_____ subscription price, will be raised
to equal the $_____ subscription price. Furthermore, in the event that the
exercise price of the Convertible Notes held by the Flemings Funds is increased
to equal the $______ subscription price, but the exercise price of warrants
issued to any other holder(s) of Convertible Notes is lower than the $_____
subscription price, the Flemings Funds have agreed to waive their right in this
instance to decrease the conversion rate of their Convertible Notes and the
conversion price of their Series A Preferred Stock to such lower price.
Shares of Our Common Stock Outstanding After the Rights Offering
Assuming we issue all of the shares of common stock offered in the rights
offering, approximately _______ shares of our common stock will be issued and
outstanding. This would represent a __% increase in the number of outstanding
shares of our common stock.
THE PERCENTAGE OF OUR COMMON STOCK THAT YOU HOLD WILL DECREASE AS A RESULT
OF THE CONVERSION OF OUR OUTSTANDING CONVERTIBLE NOTES UPON THE COMPLETION OF
THIS OFFERING AND MAY BE DECREASED FURTHER IF YOU DO NOT EXERCISE YOUR BASIC
SUBSCRIPTION RIGHTS AND SHARES ARE PURCHASED IN THE OFFERING BY OTHER
STOCKHOLDERS AND/OR MEMBERS OF THE PUBLIC.
IN ADDITION, IN ACCORDANCE WITH ANTI-DILUTION PROVISIONS, THE SERIES A
PREFERRED STOCK CONVERSION PRICE WILL BE ADJUSTED DOWNWARD FROM THE CURRENT
CONVERSION PRICE OF
26
$2.375 TO A CONVERSION PRICE AT LEAST EQUAL TO THE SUBSCRIPTION PRICE OF THE
OFFERING AND UPON THE OCCURRENCE OF CERTAIN EVENTS COULD BE FURTHER ADJUSTED TO
A CONVERSION PRICE OF $.79 WHICH IS THE LOWEST CURRENT CONVERSION RATE OF OUR
CONVERTIBLE NOTES. TO THE EXTENT THAT ALL OR A PORTION OF THE SERIES A PREFERRED
STOCK WERE CONVERTED INTO OUR COMMON STOCK AT THE ADJUSTED CONVERSION PRICE, OUR
COMMON STOCKHOLDERS WOULD BE SUBJECT TO SIGNIFICANT DILUTION OF THEIR PERCENTAGE
OWNERSHIP INTEREST IN HUDSON.
IMPORTANT
We may offer to members of the public shares of our common stock, if any,
that remain after the expiration date of the rights offering. As with the rights
offering, members of the public interested in subscribing for shares must submit
subscriptions for the purchase of a minimum of 1,000 shares. Subscriptions for
shares offered to members of the public will be accepted and filled on a "first
come first served" basis. The offering of shares to members of the public will
expire on the later of (i) a date determined by our board of directors and (ii)
____, 2003, unless extended by us but not later than _____, 2003.
PLEASE CAREFULLY READ THE INSTRUCTIONS ACCOMPANYING THE SUBSCRIPTION
AGREEMENT AND FOLLOW THOSE INSTRUCTIONS IN DETAIL. IF YOU ARE THE RECORD HOLDER
OF YOUR SHARES OF OUR COMMON STOCK, SEND SUBSCRIPTION AGREEMENT DIRECTLY TO OUR
SUBSCRIPTION AGENT. IF A BANK, BROKER OR OTHER NOMINEE IS THE RECORD HOLDER OF
THE SHARES OF OUR COMMON STOCK BENEFICIALLY OWNED BY YOU, PLEASE CONTACT THAT
RECORD HOLDER TO DETERMINE THE PROCEDURE REQUIRED FO SUBMITTING YOUR
SUBSCRIPTION DOCUMENTS AND PAYMENT. YOU ARE RESPONSIBLE FOR CHOOSING THE PAYMENT
AND DELIVERY METHOD FOR YOUR SUBSCRIPTION AGREEMENT, AND YOU BEAR THE RISKS
ASSOCIATED WITH SUCH DELIVERY. IF YOU CHOOSE TO DELIVER YOUR SUBSCRIPTION
AGREEMENT AND PAYMENT BY MAIL, WE RECOMMEND THAT YOU USE REGISTERED MAIL,
PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED. WE ALSO RECOMMEND THAT YOU
ALLOW A SUFFICIENT NUMBER OF DAYS TO ENSURE TIMELY DELIVERY AND CLEARANCE OF
PAYMENT PRIOR TO __________, 2003 FOR STOCKHOLDERS SUBSCRIBING IN THE RIGHTS
OFFERING, AND ___, 2003, FOR MEMBERS OF THE PUBLIC SUBSCRIBING AFTER THE RIGHTS
OFFERING FOR REMAINING SHARES, IF ANY. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY
TAKE AT LEAST TEN BUSINESS DAYS TO CLEAR, WE STRONGLY URGE YOU TO PAY, OR
ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK, MONEY ORDER OR
WIRE TRANSFER.
IF YOU HAVE QUESTIONS
If you have questions or need assistance concerning the procedure for
exercising subscription rights or if you would like additional copies of this
prospectus or the subscription agreement you should contact our President, Brian
F. Coleman, at (845) 735-6000.
Income Tax Effect of Exercising Subscription Rights
The following summarizes the material federal income tax consequences to
you as a United States stockholder of Hudson as a result of the receipt, lapse,
or exercise of the subscription rights distributed to you pursuant to the rights
offering. This discussion does not address the tax consequences of the rights
offering under applicable state, local or foreign tax laws. Moreover, this
discussion does not address every aspect of taxation that may be relevant to a
particular taxpayer under special circumstances or who is subject to special
treatment under applicable law and is not intended to be applicable in all
respects to all categories of investors. Other tax considerations may apply to
investors who are, for example, insurance companies, tax-exempt persons,
financial institutions, regulated investment companies, dealers in securities,
persons who hold their shares of common stock as part of a hedging, straddle,
constructive sale or conversion transaction, persons whose functional currency
is not the U.S. dollar and persons who are not treated as a U.S. stockholder.
This summary is based on the Internal Revenue Code of 1986, as amended
which we refer to in this prospectus as the "Code", the Treasury regulations
promulgated thereunder, judicial authority and current administrative rules and
practice, all of which are subject to change on a prospective or retroactive
basis.
This discussion assumes that your shares of common stock and the
subscription rights and shares issued to you during the rights offering
constitute capital assets within the meaning of Code Section 1221.
27
Receipt and exercise of the subscription rights distributed pursuant to
the rights offering is intended to be nontaxable to stockholders, and the
following summary assumes you will qualify for such nontaxable treatment. If
however, the rights offering does not qualify as nontaxable, you would be
treated as receiving a taxable distribution equal to the fair market value of
the subscription rights on the distribution date. The distribution would be
taxed as a dividend to the extent made out of Hudson's current or accumulated
earnings and profits; any excess would be treated first as a return of your
basis, or investment in your common stock and then as a capital gain. Expiration
of the subscription rights in that situation would result in a capital loss.
Taxation of Stockholders
Receipt of a Subscription Right. You will not recognize any gain or other
income upon receipt of a subscription right in respect of your common stock.
Your tax basis in each subscription right will effectively depend on whether you
exercise the subscription right or allow the subscription right to expire.
Except as provided in the following sentence, the basis of subscription rights
you receive as a distribution with respect to your common stock will be zero.
If, however, either (i) the fair market value of the subscription rights on the
date of issuance is 15% or more of the fair market value on that same date of
the common stock with respect to which they are received or (ii) you properly
elect, in your federal income tax return for the taxable year in which the
subscription rights are received, to allocate part of your basis in your common
stock to the subscription rights, then upon exercise of the rights, your basis
in the common stock will be allocated between the common stock and the rights in
proportion to the fair market value of each on the date the rights are issued.
Your holding period for a subscription right will include your holding period
for the shares of common stock upon which the subscription right is issued.
Expiration of Subscription Rights. You will not recognize any loss upon
the expiration of a subscription right.
Exercise of Subscription Rights. You generally will not recognize a gain
or loss on the exercise of a subscription right. The tax basis of any share of
common stock that you purchase through the rights offering will be equal to the
sum of your tax basis, if any, in the subscription right exercised and the price
paid for the shares. The holding period of the shares of common stock purchased
through the rights offering will begin on the date that you exercise your
subscription rights.
THIS DISCUSSION IS INCLUDED FOR YOUR GENERAL INFORMATION ONLY. YOU SHOULD
CONSULT YOUR TAX ADVISOR TO DETERMINE THE TAX CONSEQUENCES TO YOU OF THE RIGHTS
OFFERING IN LIGHT OF YOUR PARTICULAR CIRCUMSTANCES, INCLUDING ANY STATE, LOCAL
AND FOREIGN TAX CONSEQUENCES.
PLAN OF DISTRIBUTION
The common stock offered hereby is being offered by Hudson through the
issuance of subscription rights directly to its stockholders of record as of
August 1, 2003. Shares for which subscription rights have not been exercised by
eligible stockholders will first be offered to members of the public and, to the
extent thereafter available, may be acquired by the holders of our existing
Convertible Notes through the reduction of the principal amount and, if
applicable, accrued and unpaid interest on the Convertible Notes in an amount
equal to the shares subscribed for multiplied by the subscription price. We may
seek to use shares registered hereby and available after the expiration of this
offering for the repayment of certain of our outstanding loan obligations.
We intend to distribute subscription rights and copies of this prospectus
to shareholders of record on August 1, 2003, as well as to certain members of
the public whom we believe may have an interest in purchasing shares as soon as
the Registration Statement, of which this prospectus is a part, becomes
effective with the Securities and Exchange Commission.
We will not engage any NASD member firms in connection with the offer and
sale of securities under this prospectus. However, certain of our employees,
officers or directors who are not affiliated or associated with any NASD member
firm may solicit responses from holders of subscription rights or members of the
public who are sent copies of the prospectus, but such individuals will not
receive any commissions or compensation for such services other than their
normal employment compensation.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies
Hudson's discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires Hudson to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. Several of Hudson's accounting policies involve significant
judgements, uncertainties and estimations. Hudson bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities. Actual
results may differ from these estimates under different assumptions or
conditions. To the extent that actual results differ from management's
judgements and estimations, there could be a material adverse effect on Hudson.
On an on-going basis, Hudson evaluates its estimates, including, but not limited
to, those estimates related to its allowance for doubtful accounts, inventories
and commitments and contingencies. With respect to accounts receivable, Hudson
estimates the necessary allowance for doubtful accounts based on both historical
and anticipated trends of payment history and the ability of the customer to
fulfill its obligations. For inventory, Hudson evaluates both current and
anticipated sales prices of its products to determine if a write down of
inventory to net realizable value is necessary. Hudson utilizes both internal
and external sources to evaluate potential current and future liabilities for
various commitments and contingencies. In the event that the assumptions or
conditions change in the future, the estimated liabilities could differ from the
original estimates.
Overview
Over the past few years, Hudson has been attempting to grow its service
revenues through the development of a service offering known as
RefrigerantSide(R) Services. RefrigerantSide(R) Services are sold to contractors
and end-users associated with refrigeration systems in commercial air
conditioning and industrial processing industries. These services are offered in
addition to refrigerant sales and Hudson's traditional refrigerant management
services, which consist primarily of reclamation of refrigerants. Hudson has
created a network of service depots that provide a full range of Hudson's
RefrigerantSide(R) Services to facilitate the growth and development of its
service offerings.
During 1999 and 2001 Hudson completed sales of its Series A Preferred
Stock. The net proceeds of these sales were used to expand Hudson's service
offering through a network of service depots and to provide working capital.
Management believes that its RefrigerantSide(R) Services represent Hudson's long
term growth potential. However, in recent periods Hudson has not been successful
in growing its RefrigerantSide(R) Services revenue. As part of Hudson's goal to
grow its RefrigerantSide(R) Services business, in 2002, Hudson commenced a
restructuring of its sales and marketing efforts including hiring a new Vice
President of Sales and Marketing. In addition, Hudson has evaluated its sales
and marketing strategy and has determined to focus its efforts on vertical
markets; rather than geographic markets that had been the focus associated with
its network of service depots. In pursuing its vertical markets strategy, Hudson
expects to focus its RefrigerantSide(R) Services on specific industries,
including petrochemical, pharmaceutical, industrial power, manufacturing,
commercial facility and property management, and maritime. Moreover, to maintain
its current ability to quickly respond to customer service requests throughout
the United States, Hudson intends to create strategic alliances with companies
that will allow it to co-locate its equipment and to utilize these partners'
sales and marketing resources to offer their customers Hudson's
RefrigerantSide(R) Services. In addition, as a result of Hudson's new market
strategy management has closed six of Hudson's service depots. The territories
served by the depots to be closed will continue to be served by Hudson's
remaining service depots. In the near term, Hudson expects that it will incur
additional expenses and losses related to the development of its
RefrigerantSide(R) Services.
Sales of refrigerants continue to represent a majority of Hudson's
revenues. Most of Hudson's refrigerant sales are chlorofluorocarbon, or CFC
based refrigerants, which are no longer manufactured. In addition, Hudson
expects that, over time, the demand for CFC based refrigerants will decrease as
equipment that utilizes other chemical based refrigerants replaces those units
that utilize CFC based refrigerants. To the extent that Hudson is unable to
source CFC based refrigerants on commercially reasonable terms or at all, or the
demand for CFC based refrigerants decreases, Hudson's financial condition and
results of operations would be materially adversely affected. In addition,
Hudson's long-term strategy of growth in revenues generated from
RefrigerantSide(R) Services may cause reductions in revenues derived from the
sale of refrigerants.
29
Hudson believes that, for the foreseeable future in the refrigeration
industry overall, there will be a trend towards lower sales prices, volumes and
gross profit margins on refrigerant sales, which may result in an adverse effect
on Hudson's operating results. In addition, to the extent that Hudson is unable
to obtain refrigerants on commercially reasonable terms or experiences a decline
in demand for refrigerants, Hudson could realize reductions in refrigerant
processing, and possible loss of revenues which would have a material adverse
effect on its operating results.
Results of Operations
Three months ended March 31, 2003 as compared to the three months ended March
31, 2002
Revenues for the three months ended March 31, 2003 were $5,677,000, a
decrease of $434,000 or 7% from the $6,111,000 reported during the comparable
2002 period. The decrease in revenues was primarily attributable to a decrease
in refrigerant revenues and a decrease in RefrigerantSide(R) Services revenues.
The decrease in refrigerant revenues is related to a reduction in the sales
prices per pound for certain refrigerants. The decrease in RefrigerantSide(R)
Services was primarily a reduction in the number of jobs sold.
Cost of sales for the three months ended March 31, 2003 was $4,037,000, a
decrease of $644,000 or 14% from the $4,681,000 reported during the comparable
2002 period. The decrease in cost of sales was primarily due to a reduction in
materials cost of refrigerants sold and payroll associated with Hudson's
RefrigerantSide(R) Services. As a percentage of sales, cost of sales were 71% of
revenues for 2003, a decrease from the 77% reported for the comparable 2002
period. The decrease in cost of sales as a percentage of revenues was primarily
attributable to a reduction in material costs of refrigerants sold.
Operating expenses for the three months ended March 31, 2003 were
$1,874,000 a decrease of $148,000 or 7% from the $2,022,000 reported during the
comparable 2002 period. The decrease was primarily attributable to a reduction
in sales payroll costs associated with the Hudson's RefrigerantSide(R) Service
offering.
Other income (expense) for the three months ended March 31, 2003 was
$(188,000), compared to the $144,000 reported during the comparable 2002 period.
Other income (expense) includes interest expense of $188,000 and $97,000 for the
comparable three month periods ended March 31, 2003 and 2002, respectively,
offset by other income of $241,000 for 2002. The increase in interest expense is
primarily attributed to additional CIT charges in connection with the Company's
credit facility, interest on the Notes and amortization of the original issue
discount associated with the Company's convertible notes. Other income during
the 2002 quarterly period primarily relates to interest income and proceeds from
the prepayment of the note receivable from ESS.
No income taxes for the three months ended March 31, 2003 and 2002 were
recognized. The Company recognized a reserve allowance against the deferred tax
benefit for the 2003 and 2002 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. A portion of the
Company's net operating loss carry forwards are subject to annual limitations.
Net loss for the three months ended March 31, 2003 was $422,000 a decrease
of $26,000 or 6% from the $448,000 net loss reported during the comparable 2002
period. The decrease in net loss was primarily attributable to an increase in
gross profit, attributable to a reduction in materials cost of refrigerant
sales; and a decrease in sales payroll costs, offset by the non-recurring gain
of $232,000 from the prepayment of the note receivable from ESS in 2002.
Year ended December 31, 2002 as compared to year ended December 31, 2001
Revenues for 2002 were $19,963,000, a decrease of $805,000 or 4% from the
$20,768,000 reported during the comparable 2001 period. The decrease in revenues
was primarily attributable to a decrease in refrigerant revenues and a decrease
in RefrigerantSide(R) Services revenues. The decrease in refrigerant revenues is
related to a reduction in the sales prices per pound for certain refrigerants.
The decrease in RefrigerantSide(R) Services was primarily a reduction in the
number of jobs sold.
Cost of sales for 2002 was $14,505,000, a decrease of $466,000 or 3% from
the $14,971,000 reported during the comparable 2001 period. The decrease in cost
of sales was primarily due to a reduction in payroll and supply costs associated
with Hudson's RefrigerantSide(R) Services offset by an increase in cost of
refrigerant. As a percentage of sales, cost of sales
30
were 73% of revenues for 2002, an increase from the 72% reported for the
comparable 2001 period. The increase in cost of sales as a percentage of
revenues was primarily attributable to an increase in the cost of refrigerant
sold.
Operating expenses for 2002 were $7,911,000 a decrease of $106,000 or 1%
from the $8,017,000 reported during the comparable 2001 period. The decrease was
primarily attributable to a reduction in administrative payroll costs and a
reduction in depreciation and amortization offset by an increase in marketing
and sales payroll costs of $233,000 associated with Hudson's RefrigerantSide(R)
Service offering.
Other income (expense) for 2002 was $(69,000), compared to the $(179,000)
reported during the comparable 2001 period. Other income (expense) includes
interest expense of $347,000 and $423,000 for 2002 and 2001, respectively,
offset by other income of $278,000 and $244,000 for 2002 and 2001, respectively.
The decrease in interest expense is primarily attributed to a decrease in
outstanding indebtedness and interest rates during 2002 as compared to 2001.
Other income primarily relates to interest income and proceeds from the
prepayment of the note receivable from Environmental Support Solutions, Inc. or
ESS.
No income taxes for the years ended December 31, 2002 and 2001 were
recognized. Hudson recognized a reserve allowance against the deferred tax
benefit for the 2002 and 2001 losses. The tax benefits associated with Hudson's
net operating loss carry forwards would be recognized to the extent that Hudson
recognizes net income in future periods. A portion of Hudson's net operating
loss carry forwards are subject to annual limitations. See Note 4 to the Notes
to the Consolidated Financial Statements contained elsewhere in this prospectus.
Net loss for 2002 was $2,522,000 an increase of $123,000 or 5% from the
$2,399,000 net loss reported during the comparable 2001 period. The increase in
net loss was primarily attributable to a decrease in revenues resulting from
lower sales prices of certain refrigerants sold as well as an increase in the
cost of the refrigerant that was sold, offset by the non-recurring gain of
$232,000 from the prepayment of the note receivable from ESS.
Liquidity and Capital Resources
At March 31, 2003, Hudson had a working capital deficit, which represents
current assets less current liabilities, of approximately $319,000, an increase
of $308,000 from working capital deficit of $11,000 at December 31, 2002. The
increase in working capital deficit is primarily attributable to the net loss
incurred during the three months ended March 31, 2003.
Principal components of current assets are inventory and trade
receivables. At March 31, 2003, Hudson had inventories of $2,985,000, an
increase of $18,000 or 1% from the $2,967,000 at December 31, 2002. The increase
in the inventory balance is due to the timing and availability of inventory
purchases and the sale of refrigerants. Hudson'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 the subsection below entitled "Seasonality and
Fluctuations in Operating Results". At March 31, 2003, Hudson had trade
receivables of $3,082,000, an increase of $1,111,000 or 56% from the $1,971,000
at December 31, 2002. The increase in the accounts receivable balance related to
seasonal revenue fluctuations. Hudson's trade receivables are concentrated with
various wholesalers, brokers, contractors and end-users within the refrigeration
industry that are primarily located in the continental United States.
Hudson has historically financed its working capital requirements through
cash flows from operations, the issuance of debt and equity securities and bank
and related party borrowings. In recent years, Hudson has not financed its
working capital requirements through cash flows from operations but rather from
issuances of equity securities and bank borrowings. In order for Hudson to
finance its working capital requirements through cash flows from operations,
Hudson must reduce its operating losses. There can be no assurances that Hudson
will be successful in lowering its operating losses, in which case Hudson will
be required to fund its working capital requirements from additional issuances
of equity securities and/or additional bank borrowings. Based on the current
investment environment there can be no assurances that Hudson would be
successful in raising additional capital. The inability to raise additional
capital could have a material adverse effect on Hudson.
Net cash used by operating activities for the quarter ended March 31,
2003, was $772,000 compared with net cash provided by operating activities of
$144,000 for the comparable 2002 period. Net cash used by operating activities
was primarily attributable to the net loss for the 2003 period and an increase
in trade receivables offset by an increase in trade payables. Net cash used by
operating activities for the year ended December 31, 2002, was $1,342,000
compared with net cash
31
used by operating activities of $2,361,000 for the comparable 2001 period. Net
cash used by operating activities was primarily attributable to the net loss for
the 2002 period and an increase in inventories offset by a reduction in trade
receivables.
Net cash used by investing activities for the quarter ended March 31,
2003, was $63,000 compared with net cash used by investing activities of $22,000
for the prior comparable 2002 period. The net cash used by investing activities
was due to equipment additions primarily associated with the Company's depot
network, as well as additions to patents. Net cash used by investing activities
for the year ended December 31, 2002, was $80,000 compared with net cash
provided by investing activities of $554,000 for the prior comparable 2001
period. The net cash used by investing activities was due to equipment additions
primarily associated with Hudson's depot network.
Net cash provided by financing activities for the quarter ended March 31,
2003, was $643,000 compared with net cash used by financing activities of
$423,000 for the comparable 2002 period. The net cash provided by financing
activities for the 2003 period primarily consisted of $754,000 of advances with
the Company's credit facility with CIT, offset by the repayment of long term
debt of $111,000. Net cash provided by financing activities for the year ended
December 31, 2002, was $585,000 compared with net cash provided by financing
activities of $2,326,000 for the comparable 2001 period. The net cash provided
by financing activities for the 2002 period primarily consisted of $1,150,000
aggregate proceeds received by Hudson from the sale of Bridge Notes, described
below, and the Convertible Notes to purchasers including the holders of Hudson's
Series A Preferred Stock and certain officers and certain members of their
family, offset by the repayment of long term debt of $788,000.
At March 31, 2003, Hudson had cash and cash equivalents of $353,000.
Hudson continues to assess its capital expenditure needs. Hudson may, to the
extent necessary, continue to utilize its cash balances to purchase equipment
primarily associated with its RefrigerantSide(R)Services offering and for
consolidation of its reclamation facilities. Hudson estimates that capital
expenditures during 2003 may range from approximately $400,000 to $500,000.
The following is a summary of Hudson's significant contractual cash
obligations for the periods indicated that existed as of December 31, 2002 and
is more fully disclosed in Notes 8 and 10 of the Notes to the Consolidated
Financial Statements included elsewhere in this prospectus. The amounts
presented below are in thousands of dollars.
Year ended December 31,
----------------------------------------------------------
2003 2004 2005 2006 2007 Total
------ ------ ------ ------ ------ ------
Long term debt and capital lease obligations $ 245 $1,045 $ 3 $ 3 $ 3 $1,299
Operating leases 664 324 120 70 72 1,250
------ ------ ------ ------ ------ ------
Total contractual cash obligations $ 909 $1,369 $ 123 $ 73 $ 75 $2,549
====== ====== ====== ====== ====== ======
Hudson entered into a credit facility with CIT, which provided for
borrowings to Hudson of up to $6,500,000. As of March 31, 2003, Hudson had
availability under its revolving line of credit of approximately $265,000. As of
March 31, 2003, Hudson had approximately $256,000 outstanding under its term
loans and $2,788,000 outstanding under its revolving line of credit. The
facility bore interest at the prime rate plus 1.5%, 5.75% at March 31, 2003, and
substantially all of Hudson's assets were pledged as collateral for obligations
to CIT. On May 30, 2003, all of Hudson's obligations to CIT were satisfied.
On May 30, 2003 Hudson entered into a credit facility with Keltic which
provides for borrowings of up to $5,000,000. The facility consists of a
revolving line of credit and a term loan. Advances under the revolving line of
credit may not exceed $4,600,000 and are limited to (i) 85% of eligible trade
accounts receivable and (ii) 50% of eligible inventory. Advances available to
Hudson under the term loan may not exceed $400,000. The facility bears interest
at a rate equal to the greater of the prime rate plus 2.0%, or 6.5%.
Substantially all of Hudson's assets are pledged as collateral for its
obligations to Keltic under the credit facility. In addition, among other
things, the agreements restrict Hudson's ability to declare or pay any cash
dividends on its capital stock. As of May 30, 2003, Hudson had in the aggregate
$1,932,000 outstanding under the Keltic credit facility and $1,140,000 available
for borrowing under the credit facility.
In connection with the Keltic credit facility, Hudson also entered into a
loan arrangement with the Flemings Funds for the principal amount of $575,000.
The loan is unsecured, is for a term of three years, and accrues interest at an
annual rate equal to the greater of the prime rate plus 2.0%, or 6.5%. In
accordance with the terms of the Keltic credit facility, the amount of principal
and interest outstanding under this loan arrangement reduces Hudson's aggregate
borrowing availability by a like
32
amount under its credit facility with Keltic. This loan is expected to be
retired in connection with completion of this Rights Offering.
Effective March 19, 1999, Hudson sold 75% of its stock ownership in ESS to
one of ESS's founders. The consideration for Hudson's sale of its interest was
$100,000 in cash and a six-year 6% interest bearing note in the amount of
$380,000. Hudson has recognized 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 Hudson's financial condition or results of operations.
Effective October 11, 1999, Hudson sold to three of ESS's employees an
additional 5.4% ownership in ESS. Hudson received $37,940 from the sale of this
additional ESS stock. Effective April 18, 2000, ESS redeemed the balance of
Hudson's stock ownership in ESS. Hudson received cash in the amount of $188,000
from the redemption. Pursuant to an agreement dated January 22, 2002, ESS and
Hudson agreed to a 16% discount of the outstanding balance on the note
receivable. On January 25, 2002, as part of a capital financing completed by
ESS, ESS paid Hudson $231,951, representing the discounted balance as of that
date, as full satisfaction of the note receivable and as of that date Hudson
recognized the proceeds as other income.
In November 2002, Hudson consummated the private sale of 12% unsecured
promissory notes referred to in this prospectus as the "Bridge Notes" to a
limited number of purchasers, for which it received gross proceeds of $655,000.
The Bridge Notes were for a term of one year and were subordinate in payment to
Hudson's obligations under its credit facility with CIT. In accordance with the
terms of the Bridge Notes, each of the purchasers, at their option, elected to
defer quarterly interest payments which were to be added to the principal amount
of the Bridge Notes as of each interest payment date and which accrued interest
would, in turn, accrue interest at 12% per annum. The Bridge Notes automatically
exchanged for convertible notes identical in terms to the Convertible Notes,
upon approval of such exchange by Hudson's shareholders, which approval was
obtained at the annual meeting on December 20, 2002.
Effective December 2002, Hudson consummated the private sale of
Convertible Notes to a limited number of purchasers, for which it received gross
proceeds of $495,000. At or about the same time, the Bridge Notes were cancelled
and exchanged for the convertible notes identical in terms to the Convertible
Notes in a principal amount equal to the outstanding principal amount of the
Bridge Notes immediately prior to the exchange together with accrued and unpaid
interest thereon. For purposes of this prospectus, the convertible notes issued
in exchange for the Bridge Notes are included in the term "Convertible Notes."
The Convertible Notes have a term of two years and earn interest at an annual
rate of 10% payable quarterly in arrears. Holders of the Convertible Notes had
the one time option to elect to either receive payments of interest on a
quarterly basis, subject to limitations described below, or defer quarterly
interest payments, in which case, interest would be added to the outstanding
amount of the Convertible Notes on each quarterly payment date and accrue
interest at the then effective interest rate of the Convertible Notes. The
Convertible Notes are unsecured and subordinate in payment to Hudson's
obligations under its credit facility with Keltic. The Convertible Notes may not
be prepaid in cash by Hudson without the prior consent of Keltic and payment of
interest, if any, in cash on any scheduled quarterly interest payment date is
limited to an aggregate of $20,000 per calendar year. Holders of the Convertible
Notes have the right to convert all or a portion of the outstanding principal
balance, and any accrued interest thereon, to common stock of Hudson, upon, but
not prior to, the first anniversary of the issuance of the Convertible Notes.
The initial conversion rate of these Convertible Notes was $.79 per share.
On April 15, 2003 Hudson issued an additional $500,000 principal amount of
Convertible Notes to the holders of the Series A Preferred Stock. The April 15,
2003 note issuance is identical to the December 2002 issuance, except that the
conversion rate of these Convertible Notes is $1.41 per share.
The conversion rate of the Convertible Notes is subject to adjustment on a
full ratchet basis; this means that if Hudson issues any stock at a price less
than the conversion rate, the conversion rate for all shares issuable upon
conversion of the Convertible Notes will be adjusted downward to such price.
This adjustment is applicable in certain events including Hudson's issuance of
common stock, warrants or rights to purchase common stock or securities
convertible into common stock in each case for a consideration per share which
is less than the then-effective conversion rate of the Convertible Notes. The
anti-dilution adjustment would not apply, however where Hudson issues shares
subject to stock options under or reserved for option grants under any
shareholder approved stock option plan or upon exercise or conversion of
options, warrants or other exercisable or exchangeable equity or debt securities
that were outstanding immediately prior to the issuance of the Convertible
Notes. In addition, the conversion rate is subject to an appropriate adjustment
in the event of: (i) any subdivisions, combinations and reclassifications of
Hudson's common stock; (ii) any payment, issuance or distribution by Hudson to
its stockholders of a stock dividend; (iii) the consolidation or merger of
Hudson with or into another corporation whereby Hudson is not the surviving
entity; or (iv) the sale by Hudson of substantially all of its assets.
33
The Convertible Notes provide that in the event of an equity offering by
Hudson at any time prior to the first anniversary of the issuance of the
Convertible Notes, for gross proceeds of not less than $2 million, inclusive of
the application of all outstanding principal and interest of the Convertible
Notes, which is referred to in this prospectus as the "Equity Offering", all
outstanding principal and interest, if any, on the Convertible Notes shall be
either (i) applied to the purchase of equity securities in the Equity Offering
at the public offering purchase price, or (ii) converted into restricted shares
of common stock at the then effective conversion rate. Holders of the
Convertible Notes have the right to determine, to the extent that securities are
available for purchase in the Equity Offering, whether to apply the Convertible
Notes to acquire such equity securities sold in the Equity Offering or convert
the Convertible Notes into common stock; provided, however, that in the event
that all or a portion of outstanding principal and interest, if any, of the
Convertible Notes exceeds the number of equity securities available in the
Equity Offering, the balance of the Convertible Notes not applied to the
purchase of equity securities will be converted into restricted shares of common
stock at the then-effective conversion rate.
In April 2003, the holders of $495,000 principal amount of Convertible
Notes acquired as of December 2002 entered into agreements with Hudson whereby
the holders agreed to modify the conversion rate of their Convertible Notes to
the modified conversion rate of $1.13, which was the average closing sale price
of Hudson's common stock as reported on the NASDAQ SmallCap Market for the five
business days immediately preceding the execution of the modification
agreements; provided further, that, in the event of an Equity Offering by Hudson
prior to the first anniversary of the issuance of the Convertible Notes, at a
public offering price, which includes the exercise price of stock purchase
rights offered in the Equity Offering below the modified conversion rate but in
excess of $.79, the conversion rate of the Convertible Notes will be adjusted to
not less than the public offering price.
Hudson is obligated to issue to the holders of the Convertible Notes, on
the earlier of (a) the first anniversary of their respective date of issuance,
or (b) the consummation by Hudson of an Equity Offering, warrants to purchase an
aggregate number of shares of common stock equal to 10% of the number of shares
of common stock into which the Convertible Notes were convertible at their date
of issuance. Each warrant will be exercisable to purchase one share of common
stock for a period of five years from issuance at an exercise price equal to
110% of the lesser of (i) the conversion rate of the Convertible Notes as of
their date of issuance, or (ii) the conversion rate of the Convertible Notes on
the date of issuance of the warrants. The exercise price of the warrants will be
subject to anti-dilution adjustment on terms substantially similar to
anti-dilution adjustment of the conversion rate of the Convertible Notes. As of
December 20, 2002, Hudson has recognized an original issue discount of $220,000
in connection with the obligation to issue the warrants.
On March 30, 1999, Hudson completed the sale of 65,000 shares of its
Series A Preferred Stock, with a liquidation value of $100 per share, to Fleming
US Discovery Fund III, L.P. and Fleming US Discovery Offshore Fund III, L.P. The
gross proceeds from the sale of the Series A Preferred Stock were $6,500,000.
These shares of Series A Preferred Stock currently convert to common stock at a
conversion price of $2.375 per share, which was 27% above the closing market
price of common stock on March 29, 1999.
On February 16, 2001, Hudson completed the sale of 30,000 shares of its
Series A Preferred Stock, with a liquidation value of $100 per share, to Fleming
US Discovery Fund III, L.P. and Fleming US Discovery Offshore Fund III, L.P. The
gross proceeds from the sale of the Series A Preferred Stock were $3,000,000.
These shares of Series A Preferred Stock currently convert to common stock at a
conversion price of $2.375 per share, which was 23% above the closing market
price of common stock on February 15, 2001.
The Series A Preferred Stock provides for anti-dilution adjustment of the
conversion price in the event of the subsequent offering by Hudson of securities
for consideration per share less than the then-effective conversion price of the
Series A Preferred Stock. At the direction of the NASDAQ Stock Market, Inc., a
minimum conversion price floor of $1.78 per share, below which the conversion
price of the Series A Preferred Stock could not be adjusted, had been instituted
by Hudson and the holders of the Series A Preferred Stock by amendment to the
designation of the Series A Preferred Stock, and at the same time Hudson agreed
not to offer securities for consideration per share less than the $1.78
conversion price floor without the consent of the holders of the Series A
Preferred Stock. Subsequently, in consideration for the consent of the holders
of the Series A Preferred Stock to Hudson's engagement in the private offering
of the Convertible Notes at a conversion price below the $1.78 conversion price
floor, the stockholders of Hudson, at the annual meeting on December 20, 2002,
voted in favor of a proposal to remove the $1.78 conversion price floor and the
designation of the Series A Preferred Stock was amended accordingly. Although
the holders of the Series A Preferred Stock agreed to waive their rights to an
immediate downward adjustment of the current $2.375 conversion price of the
Series A Preferred Stock in connection with the issuance of the Convertible
Notes, any subsequent conversion of the Convertible Notes will result in a
downward adjustment of the conversion
34
price of the Series A Preferred Stock to equal the then effective conversion
rate of the Convertible Notes. Consequently, upon conversion of the Convertible
Notes at the $.79 per share conversion rate, the anti-dilution provisions of the
Series A Preferred Stock will cause the conversion rate of the Series A
Preferred Stock to adjust downward to the $.79 per share. Assuming that the
Series A Preferred Stock converts to common stock at a conversion price of $.79
per share and based upon 120,782 shares of Series A Preferred Stock issued as of
March 30, 2003, the holders of the Series A Preferred Stock would receive
15,288,860 shares of common stock. Similarly, the conversion price of such
Series A Preferred Stock may be adjusted to equal the consideration received by
Hudson in connection with any issuance of securities, such as that contemplated
in this offering, below the current $2.375 conversion price.
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. The designation of the Series A Preferred Stock provided
for a proxy granted by the holders of the Series A Preferred Stock in favor of
certain of Hudson's officers to vote all shares of common stock into which the
Series A Preferred Stock converts including any additional shares subsequently
acquired by such holders in excess of 29% of the votes entitled to be cast by
the Series A Preferred Stock holders. As noted above, in consideration for
consent of the holders of the Series A Preferred Stock to Hudson's engagement in
the private offering of the Convertible Notes at a conversion rate below the
$1.78 conversion price floor, the stockholders of Hudson, at the annual meeting
on December 20, 2002, voted in favor of a proposal to remove the proxy from the
designation of the Series A Preferred Stock and the designation of the Series A
Preferred Stock was amended accordingly. The Series A Preferred Stock carries a
dividend rate of 7%, which will increase to 16%, if the stock remains
outstanding on or after March 31, 2004. Hudson used the net proceeds from the
issuance of the Series A Preferred Stock to expand its RefrigerantSide(R)
Services business and for working capital purposes.
Hudson pays dividends, in arrears, on the Series A Preferred Stock,
semi-annually, either in cash or additional shares, at Hudson's option. On March
30 and September 30, 2002, and March 30, 2003 Hudson declared and paid, in-kind,
the dividends on the outstanding Series A Preferred Stock and issued 3,873 and
4,011 and 4,153, respectively, additional shares of its Series A Preferred Stock
in satisfaction of the dividends due. Hudson 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, Hudson may call the Series A Preferred Stock if the
market price of its common stock is equal to or greater than 250% of the
conversion price and the common stock has traded with an average daily volume in
excess of 20,000 shares for a period of thirty consecutive days.
Hudson 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 have agreed to waive their registration rights with respect to
the registration of the securities in this offering. In addition, the holders of
the Series A Preferred Stock, voting as a separate class, have the right to
elect up to two members to Hudson's Board of Directors, or at their option to
designate up to two advisors to Hudson's Board of Directors who will have the
right to attend and observe meetings of the Board of Directors. Currently, the
holders of the Series A Preferred Stock have elected two members to the Board of
Directors.
Hudson is continuing to evaluate opportunities to rationalize its
operating facilities and its depot network based on ways to reduce costs or to
increase revenues. Recently, based on evaluations by management, Hudson has
consolidated certain of its facilities. Hudson is also considering whether to
reduce or eliminate certain of its operations that have not performed to its
expectations. Moreover, as we begin to implement our sales and marketing
strategy to focus on industry rather than geographic markets we may discontinue
certain operations, eliminate additional depots and related overhead costs and,
in doing so, may incur future charges to exit certain operations.
Hudson believes that it will be able to satisfy its working capital
requirements for the immediate future from anticipated cash flow from operations
and available funds under its credit facility with Keltic. However, Hudson
believes that it will need additional financing during 2003 to support its
continuing operations. In addition, any unanticipated expenses, including, but
not limited to, an increase in the cost of refrigerants purchased by Hudson, an
increase in operating expenses or failure to achieve expected revenues from
Hudson's depots and/or refrigerant sales or additional expansion or acquisition
costs that may arise in the future would adversely affect Hudson's future
capital needs. There can be no assurances that Hudson's proposed or future plans
will be successful, and as such, Hudson may need to significantly modify its
plans or it may require additional capital sooner than anticipated. Hudson is
currently seeking to obtain additional financing through the issuance of debt
and/or equity securities, which includes the offering contemplated by this
prospectus. There can be no assurance that Hudson will be able to obtain any
additional capital on commercially reasonable terms or at all, and its inability
to do so would have a material adverse affect on Hudson.
35
Inflation
Inflation has not historically had a material impact on Hudson's
operations.
Reliance on Suppliers and Customers
Hudson'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
Hudson is unable to obtain sufficient quantities of virgin or reclaimable
refrigerants in the future, or resell reclaimed refrigerants at a profit,
Hudson's financial condition and results of operations would be materially
adversely affected.
During the quarter ended March 31, 2003, two customers accounted for 17%
and 11% of the Company's revenues. During the quarter ended March 31, 2002, one
customer accounted for 14% of the Company's revenues.
During the year ended December 31, 2002, one customer accounted for 11% of
Hudson's revenues. During the year ended December 31, 2001, one customer
accounted for 15% of Hudson's revenues.
The loss of a principal customer, or a decline in the economic prospects
and purchases of Hudson's products or services by any such customer, could have
a material adverse effect on Hudson's financial position and results of
operations.
Seasonality and Fluctuations in Operating Results
Hudson'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 the introduction and/or retrofit or replacement of CFC-based
refrigeration equipment by domestic users of refrigerants, the rate of expansion
of Hudson's operations, and by other factors. Hudson's business is seasonal in
nature with peak sales of refrigerants occurring in the first half of each year.
During past years, the seasonal decrease in sales of refrigerants have resulted
in additional losses during the second half of the year. 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 Hudson's financial position. With respect to Hudson's
RefrigerantSide(R) Services, to date, Hudson has not identified any seasonal
pattern. However, Hudson could experience a similar seasonal element to this
portion of its business in the future.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
FASB statement No. 143, Accounting for Asset Retirement Obligations ("SFAS
143"). SFAS 143 addresses financial reporting for obligations associated with
retirement of tangible long-lived assets and the associated retirement costs.
SFAS 143 is effective for fiscal years beginning after June 15, 2002.
In April 2002, the FASB issued FASB statement No. 145 ("SFAS 145"), which
rescinds FASB statements No. 4, 44 and 64 and amends FASB statement No. 13. SFAS
145 is effective for fiscal years beginning after May 15, 2002.
In June 2002, the FASB issued FASB statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities ("SFAS 146"). SFAS 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities. SFAS 146 is effective for fiscal years beginning after December 31,
2002.
In December 2002, the FASB issued FASB statement No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure ("SFAS 148"), an amendment
of SFAS No. 123. SFAS 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. Hudson plans to continue to use the intrinsic value
method for stock-based compensation. SFAS No. 148 is effective for fiscal years
beginning after December 15, 2002.
36
Hudson adopted each of the above pronouncements effective January 1, 2003,
except that SFAS 148 was adopted as of December 31, 2002 and these adoptions did
not have a material impact on its financial position and results of operations.
37
OUR BUSINESS
Industry background
The production and use of refrigerants containing CFCs and
hydrochlorofluorocarbons or HCFCs, the most commonly used refrigerants, are
subject to extensive and changing regulation under the Clean Air Act. The Clean
Air Act, which was amended during 1990 in response to evidence linking the use
of CFCs and 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 Clean Air Act further
requires the recovery of refrigerants used in residential, commercial and
industrial air conditioning and refrigeration systems. In addition, the Clean
Air Act prohibited production of CFC refrigerants effective January 1, 1996 and
limits the production of HCFC refrigerants, 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
RefrigerantSide(R) Services
Hudson provides services that are performed at a customer's site through
the use of portable, high volume, high-speed proprietary equipment, including
the patented ZugiBeast(R) system. Certain of these RefrigerantSide(R) Services,
which encompass system decontamination, and refrigerant recovery and
reclamation, are also proprietary and are covered by certain process patents.
Refrigerant Sales
Hudson sells reclaimed and virgin or new refrigerants to a variety of
customers in various segments of the air conditioning and refrigeration
industry. Virgin refrigerants are purchased by Hudson from several suppliers,
including E.I. DuPont de Nemours and Company, or DuPont as part of Hudson's
strategic alliance with DuPont discussed in greater detail below under the
subsection "Strategic Alliance", and resold by Hudson, typically at wholesale.
In addition, Hudson regularly purchases used or contaminated refrigerants from
many different sources; which refrigerants are then reclaimed using Hudson's
high volume proprietary reclamation equipment, and resold by Hudson.
Refrigerant Management Services
Hudson provides a complete offering of refrigerant management services,
which primarily include reclamation of refrigerants, testing and banking
(storage) 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:
Charlotte, North Carolina --RefrigerantSide(R) Service depot
Fremont, New Hampshire --Telemarketing office
Hillburn, New York --RefrigerantSide(R) Service depot
Pearl River, New York --Company headquarters and administration
offices
Punta Gorda, Florida --Refrigerant separation and reclamation
center
Champaign, Illinois --Reclamation and cylinder refurbishment
center and RefrigerantSide(R)Service depot
Seattle, Washington --RefrigerantSide(R) Service depot
Strategic Alliance
In January 1997, Hudson entered into agreements with DuPont, pursuant to
which Hudson (i) provides recovery, reclamation, separation, packaging and
testing services directly to DuPont for marketing through DuPont's Authorized
38
Distributor Network and (ii) markets DuPont's SUVA(TM) refrigerant products
together with Hudson's reclamation and refrigerant management services. These
agreements provide for automatic annual renewal subject to termination by either
party.
Hudson has recently evaluated its sales and marketing strategy and has
determined to reorganize its RefrigerantSide(R) Services business to focus its
efforts on vertical markets; rather than the geographic markets that had been
the focus associated with its network of service depots. In order to maintain
its current ability to quickly respond to customer service requests throughout
the United States as well as to expand its presence outside the United States,
Hudson intends to create strategic alliances with companies that service larger
customers in targeted industries which would enable Hudson to co-locate its
equipment with these strategic partners and utilize these partners' sales and
marketing resources to offer their customers Hudson's RefrigerantSide(R)
Services.
We believe that the international market for refrigerant reclamation
processes, sales and services is equal in size to the United States market for
those sales and services. In furtherance of our efforts to expand the our
presence outside of the United States, in June 2003, we entered into an
exclusive global technology and marketing agreement with The BOC Group PLC, or
"BOC Group," a worldwide industrial gases, vacuum technologies and distribution
services company that serves two million customers in more than 50 countries.
Under the agreement we have agreed to license our RefrigerantSide(R)Services
technology to BOC Group, and we have agreed to enter into separate supplemental
agreements with certain BOC Group affiliate companies, pursuant to which we will
license our RefrigerantSide(R)Services technology and the use of our related
proprietary equipment to each BOC Group affiliate in return for a license fee
payable to us by the BOC Group affiliate in annual installments during the
course of that supplemental agreement and the payment of royalty payments to us
based on revenues derived by the BOC Group affiliate from the performance of
RefrigerantSide(R) Services licensed from us. The arrangement is specifically
aimed at marketing and developing our RefrigerantSide(R) and other performance
optimization services in over 20 countries outside the United States. The
agreement with the BOC Group is, and each supplemental agreement with a BOC
Group affiliate will be, for an initial term of seven years and may be further
extended for an initial period of three years and thereafter on an open-ended
basis unless terminated by either party upon six months' prior written notice.
Suppliers
Hudson'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. Most of Hudson's
refrigerant sales are CFC based refrigerants, which are no longer manufactured.
To the extent that Hudson is unable to source CFC based refrigerants or virgin
refrigerants, or resell refrigerants at a profit, Hudson's financial condition
and results of operations would be materially adversely affected.
Customers
Hudson 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.
During the quarter ended March 31, 2003, two customers accounted for 17%
and 11% of the Company's revenues. During the quarter ended March 31, 2002, one
customer accounted for 14% of the Company's revenues.
During the year ended December 31, 2002, one customer accounted for 11% of
Hudson's revenues. During the year ended December 31, 2001, one customer
accounted for 15% of Hudson's revenues.
The loss of a principal customer or a decline in the economic prospects of
and/or a reduction in purchases of Hudson's products or services by any such
customer could have a material adverse effect on Hudson's financial position and
results of operations.
39
Marketing
Marketing programs are conducted through the efforts of Hudson's executive
officers, 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 the internet
(www.hudsontech.com).
Hudson's sales personnel are compensated on a combination of a base salary
and commission. Hudson's executive officers devote significant time and effort
to customer relationships.
Competition
Hudson competes primarily on the basis of the performance of its
proprietary high volume, high-speed equipment used in its operations, the
breadth of services offered by Hudson (including proprietary RefrigerantSide(R)
Services and other on-site services) and price (particularly with respect to
refrigerant sales).
Hudson competes with numerous regional and national companies, which
provide refrigerant reclamation services, as well as market reclaimed and virgin
refrigerants. Certain of these competitors may possess greater financial,
marketing, distribution and other resources for the sale and distribution of
refrigerants than Hudson and, in some instances, provide services or products
over a more extensive geographic area than Hudson.
Hudson's RefrigerantSide(R) Services provide new and innovative solutions
to certain problems within the refrigeration industry and as such the demand and
market acceptance for these services are subject to uncertainty. Competition for
these services primarily consists of traditional methods of solving the
industry's problems and as a result there can be no assurance that Hudson will
be able to compete successfully or penetrate this service market as rapidly as
it anticipates.
Insurance
Hudson carries insurance coverage that it considers sufficient to protect
Hudson's assets and operations. Hudson currently maintains general commercial
liability insurance and excess liability coverage for claims up to $7,000,000
per occurrence and $8,000,000 in the aggregate. Hudson attempts to operate in a
professional and prudent manner and to reduce potential liability risks through
specific risk management efforts, including employee training. Nevertheless, a
partially or completely uninsured claim against Hudson, if successful and of
sufficient magnitude, would have a material adverse effect on Hudson.
The refrigerant industry involves potentially significant risks of
statutory and common law liability for environmental damage and personal injury.
Hudson, and in certain instances its officers, directors and employees, may be
subject to claims arising from Hudson'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. Hudson may be held
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 and pollution
liability insurance, each in amounts of $1,000,000 per occurrence, and
$2,000,000 annual aggregate for events occurring subsequent to November 1996. As
a result of Hudson's settlement in June 2000 of a claim brought by United Water
of New York, Inc., Hudson has exhausted all if its environmental impairment
insurance coverage related to this matter. See the subsection entitled "Legal
Proceedings" described below in this prospectus.
Government Regulation
The business of refrigerant sales, 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 or EPA, the United States Occupational
Safety and Health Administration and the United States Department of
Transportation.
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
40
require Hudson, 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 Hudson.
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 or 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.
Hudson has obtained ARI certification for most refrigerants at each of its
reclamation facilities, and is certified by the EPA. In order to maintain ARI
certification, Hudson is required, among other things, to submit periodic
reports to the ARI and pay annual fees based on the number of pounds of
refrigerants reclaimed by Hudson. However, certification by the ARI is not
required.
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.
Hudson is also subject to regulations adopted by the Department of
Transportation which classify most refrigerants handled by Hudson as hazardous
materials or substances and impose requirements for handling, packaging,
labeling and transporting refrigerants.
The Resource Conservation and Recovery Act of 1976 or 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 also known
as Tier II reports to the various states in which Hudson operates and to file
annual Toxic Chemical Release Inventory Forms with the EPA. Hudson believes that
it has been and remains in full compliance with these requirements.
The Comprehensive Environmental Response, Compensation and Liability Act
of 1980, or 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 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. Hudson
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.
41
Hudson believes that it is in compliance with all material regulations
relating to its material business operations.
Quality Assurance & Environmental Compliance
Hudson 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. Hudson employs three persons engaged full-time in
quality control and to monitor Hudson's operations for regulatory compliance.
Employees
Hudson has 69 full and 5 part time employees including air conditioning
and refrigeration technicians, chemists, engineers, sales and administrative
personnel.
None of Hudson's employees is represented by a union. Hudson believes that
its employee relations are good.
Patents and Proprietary Information
Hudson holds a United States patent relating to the high-speed equipment,
components and process to reclaim refrigerants, and a registered trademark for
its "ZugiBeast(R)". The patent expires in January 2012. Hudson believes that
patent protection is important to its business and has received additional
United States patents relating to high-speed refrigerant recovery and to various
RefrigerantSide(R) Services. There can be no assurance as to the breadth or
degree of protection that patents may afford Hudson, 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 Hudson believes that its existing patents and Hudson's
equipment do not and will not infringe upon existing patents or violate
proprietary rights of others, it is possible that Hudson'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 Hudson's
equipment or processes infringe or are alleged to infringe patents or other
proprietary rights of others, Hudson 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 Hudson will have the financial or other resources
necessary to enforce or defend a patent infringement or proprietary rights
violation action or that Hudson will not become liable for damages.
Hudson 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 Hudson's know-how,
concepts, ideas and documentation. Failure to protect its trade secrets could
have a material adverse effect on Hudson.
Description of Properties
Hudson'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
$27,000 pursuant to an agreement expiring in August 2005.
Hudson's Baton Rouge, Louisiana depot facility is located in a 3,800
square foot building leased from an unaffiliated third party at an annual rental
of $21,000 pursuant to an agreement expiring in July 2005.
Hudson's Champaign, Illinois facility is located in a 48,000 square foot
building leased from an unaffiliated third party at an annual rental of $132,000
pursuant to an agreement expiring in November 2004. Hudson sublets a portion of
the facility to an unaffiliated third party at an annual rental of $48,000
pursuant to a rental agreement expiring in November 2004. In 2003, this facility
will consolidate the operations that are currently located in Hudson's Rantoul,
Illinois facility.
Hudson's Charlotte, North Carolina facility is located in a 12,000 square
foot building leased from an unaffiliated third party pursuant to a month to
month rental agreement at a monthly rental of $3,500.
Hudson's Villa Park, Illinois depot facility is located in a 3,500 square
foot building leased from an unaffiliated third party at an annual rent of
$25,000 pursuant to an agreement expiring in August 2005.
42
Hudson's Fremont, New Hampshire telemarketing facility is located in a
2,100 square foot building leased from an unaffiliated third party at an annual
rent of $8,000 pursuant to an agreement expiring in June 2004.
Hudson's Hillburn, New York facility is located in a 21,000 square foot
building leased from an unaffiliated third party at an annual rent of $103,000
pursuant to an agreement expiring in May 2004.
Hudson's headquarters are located in a 3,625 square foot building in Pearl
River, New York. The building is leased from an unaffiliated third party
pursuant to a five year agreement at an annual rental of approximately $64,000
through December 2007.
Hudson'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 $76,000 pursuant to an agreement expiring in December 2003.
Hudson's Rantoul, Illinois facility is located in a 29,000 square foot
building leased from an unaffiliated third party at an annual rent of $78,000
pursuant to an agreement that expired in September 2002. Hudson currently
occupies the facility pursuant to a month to month rental agreement at a monthly
rate of $6,500 which expires on August 31, 2003. Hudson is in the process of
relocating all of its operations at this facility to its Champaign, Illinois
facility.
Hudson'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
$20,000 pursuant to an agreement expiring in March 2004.
Hudson typically enters into short-term leases for its facilities and
whenever possible extends the expiration date of such leases. Hudson is
beginning to implement a change in its sales and marketing strategy toward
vertical rather than geographic markets, and as a result, Hudson is in the
process of terminating the operations at its Baltimore, Baton Rouge and Villa
Park service depots.
Legal Proceedings
In June 1998, United Water of New York Inc., or United commenced an action
against Hudson 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
alleged contamination of certain of United's wells which are in close proximity
to Hudson's Hillburn, New York facility.
On April 1, 1999, Hudson reported a release at Hudson's Hillburn, New York
facility of approximately 7,800 lbs. of R-11, as a result of a failed hose
connection to one of Hudson'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.
Between April 1999 and May 1999, with the approval of the New York State
Department of Environmental Conservation, or DEC, Hudson constructed and put
into operation a remediation system at Hudson's Hillburn facility to remove R-11
levels in the groundwater under and around Hudson's facility. The cost of this
remediation system was $100,000.
In July 1999, United amended its complaint in the Rockland County action
to allege facts relating to, and to seek damages allegedly resulting from the
April 1, 1999 R-11 release.
In June 2000, the Rockland County Supreme Court approved a settlement of
the Rockland County action commenced by United. Under the settlement, Hudson
paid to United the sum of $1,000,000 and has been making additional monthly
payments in the amount of $5,000, which payments will continue through December
2003. The proceeds of the settlement were required to be used to fund the
construction and operation by United of a new remediation tower, as well as for
the continuation of temporary remedial measures implemented by United that have
successfully contained the spread of R-11. The remediation tower was completed
in March 2001, and is designed to treat all of United's impacted wells and
restore the water to New York State drinking water standards for supply to the
public. Hudson carries $1,000,000 of environmental impairment insurance per
occurrence and in connection with the settlement, exhausted all insurance
proceeds available for that occurrence under all applicable policies.
In June 2000, Hudson signed an Order on Consent with the DEC regarding all
past contamination of the United well field, whereby, Hudson agreed to continue
operating the remediation system it installed at its Hillburn facility in May
1999, until remaining groundwater contamination has been effectively abated. In
May 2001, Hudson signed an amendment to the
43
Order on Consent with the DEC, pursuant to which Hudson installed one additional
monitoring well and modified Hudson's existing remediation system to incorporate
a second recovery well. Hudson is continuing to operate the remediation system.
In May 2000, Hudson's Hillburn facility was nominated by the EPA for
listing on the National Priorities List, pursuant to CERCLA. Hudson believes
that the agreements reached with the DEC and United, together with the reduced
levels of contamination present in the United wells, make such listing
unnecessary and counterproductive. Hudson submitted opposition to the listing
within the sixty-day comment period. The EPA has advised that it has no current
plans to finalize the process for listing the Hillburn facility on the NPL. The
EPA has also advised that it will not at this time withdraw the proposal of the
facility or the NPL.
In October 2001, Hudson learned that trace levels of R-11 were detected in
one of United's wells that is closest to the village of Suffern's well system.
During February 2002, Suffern expressed concern over the possibility of R-11
reaching its well system and has advised Hudson that it was investigating
available options to protect its well system. No contamination of R-11 has ever
been detected in any of the Suffern's wells and, as of October 2002, the level
of R-11 in the United well closest to Suffern was below 1 parts per billion. In
October, 2002 Suffern advised Hudson it intends to proceed with plans to protect
its wells and could look to Hudson to reimburse Suffern for any costs it may
incur. To date, no detailed cost estimate, formal demand or claim has been
presented by Suffern, however, to the extent Suffern proceeds with its plans,
Hudson may incur additional costs. Hudson has reimbursed Suffern for
approximately $10,000 of costs incurred to date for additional sampling by
Suffern of its wells and for minor preparatory work in connection with Suffern's
plan for protecting its wells. Hudson continues cooperate with all applicable
governmental agencies to prevent contamination of Suffern's wells and its water
supply.
In February 2003, Hudson agreed to extend the statute of limitations
applicable to any claims that may be available to Ramapo Land Company, the
lessor of the Hillburn facility, arising out of the April 1, 1999 incident for
an additional two years. To date, no claims against Hudson have been asserted or
threatened by Ramapo Land Company.
During the year ended December 31, 2002, Hudson recognized $115,000 in
additional remediation costs in connection with these matters. There can be no
assurance that the R-11 will not spread beyond the United well system and impact
the village of Suffern's wells, or that the ultimate outcome of such a spread of
contamination will not have a material adverse effect on Hudson's financial
condition and results of operations. There can be no assurance that the EPA will
withdraw the proposal for listing of Hudson's Hillburn facility on the NPL, or
that the ultimate outcome of such a listing will not have a material adverse
effect on Hudson's financial condition and results of operations. Furthermore,
there can be no assurance that Ramapo Land Company will not assert any claim
against Hudson, or that any such claim will not have a material adverse effect
on Hudson's financial condition and results of operations.
44
Management
The following table sets forth information with respect to the directors
and executive officers of Hudson:
---------------------------------------------------------------------------------------------------
Name Age Position
---- --- --------
---------------------------------------------------------------------------------------------------
Kevin J. Zugibe 39 Chairman of the Board and Chief Executive Officer
---------------------------------------------------------------------------------------------------
Brian F. Coleman 41 President and Chief Operating Officer
---------------------------------------------------------------------------------------------------
James R. Buscemi 50 Chief Financial Officer
---------------------------------------------------------------------------------------------------
Neil B. Gafarian 55 Vice President Sales and Marketing
---------------------------------------------------------------------------------------------------
Charles F. Harkins, Jr. 41 Vice President Refrigerant Product Services
---------------------------------------------------------------------------------------------------
Stephen P. Mandracchia 43 Vice President Operations and Secretary
---------------------------------------------------------------------------------------------------
Vincent P. Abbatecola 56 Director
---------------------------------------------------------------------------------------------------
Robert L. Burr 52 Director
---------------------------------------------------------------------------------------------------
Dominic J. Monetta 61 Director
---------------------------------------------------------------------------------------------------
Otto C. Morch 69 Director
---------------------------------------------------------------------------------------------------
Harry C. Schell 68 Director
---------------------------------------------------------------------------------------------------
Robert M. Zech 37 Director
---------------------------------------------------------------------------------------------------
Kevin J. Zugibe, P.E. is a founder of Hudson and has been a director and
Chief Executive Officer of Hudson since its inception in 1991. From May 1987 to
May 1994, Mr. Zugibe was employed as a power engineer with Orange and Rockland
Utilities, Inc., a major public utility, where he was responsible for all HVAC
applications. 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. Mr. Zugibe is the brother-in-law of Stephen P.
Mandracchia.
Brian F. Coleman has been President and Chief Operating Officer since his
appointment on August 21, 2001 and served as Chief Financial Officer of Hudson
from May 1997 until December 31, 2002. From June of 1987 to May of 1997, Mr.
Coleman was employed by and since July 1995, was a partner with BDO Seidman,
LLP, Hudson's independent auditors.
James R. Buscemi joined Hudson as Corporate Controller in June 1998 and
has served as its Chief Financial Officer since December 31, 2002. Prior to
joining Hudson, Mr. Buscemi held various financial positions within Avnet, Inc,
including Chief Financial Officer of Avnet's electric motors and component part
subsidiary, Brownell Electro, Inc.
Neil B. Gafarian joined Hudson in February 2002 as Vice President of Sales
and Marketing. Prior to joining Hudson, Mr. Gafarian spent more than 20 years in
the building automation and energy field, the last nine with Invensys, Plc.
Also, Mr. Gafarian owned and operated his own telemarketing and consulting
business.
Charles F. Harkins, Jr. has been with Hudson since 1992 and has served in
a variety of capacities and currently is Vice President of Refrigerant Product
Services ("RPS") a position he has held since October 2000. Prior to joining
Hudson, Mr. Harkins served in the U.S. Army for 13 years attaining the rank of
Staff Sergeant; he is a graduate of the U.S. Army Engineer School and the U.S.
Army Chemical School.
Stephen P. Mandracchia has been an officer of Hudson since 1993 and is
currently the Vice President Operations and Secretary a position he has held
since October 2000. Mr. Mandracchia is responsible for operations and regulatory
legal affairs of Hudson. 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). Mr.
Mandracchia is the brother in-law of Mr. Zugibe.
Vincent P. Abbatecola has been a director of Hudson since June 1994. Mr.
Abbatecola is the owner and General Manager of Abbey Ice & Spring Water Company,
a leading ice and bottled water company in the New York metropolitan area since
May 1971. He serves as a Board Member and past Chairman of the Mid Atlantic Ice
Association, Board Member and past Chairman of the National Packaged Ice
Association and Past Chairman of the Food Safety Committee of the National
Packaged Ice Association. Mr. Abbatecola also serves as Vice Chairman, Board of
Governors of the Rockland County Health
45
Center; Member, St. Thomas Aquinas College President's Council; Member, Rockland
Business Association Board of Directors; Member, Nyack Hospital Corporation and
Member, Union State Bank Chairman's Council.
Robert L. Burr has been a Director of Hudson since August 1999. Mr. Burr
has been a partner of Windcrest Discovery Capital Partners, LLC since October
2001 and has a consulting agreement with J.P. Morgan Partners under which he is
the lead partner of Fleming US Discovery Partners, L.P., a private equity
sponsor affiliated with J.P. Morgan Chase & Co. Fleming US Discovery Partners,
L.P. is the general partner of Fleming US Discovery Fund III, L.P. and Fleming
US Discovery Offshore Fund III, L.P. Mr. Burr was employed by J. P. Morgan Chase
& Co. from July 1995 to October 2001. From 1992 to 1995, Mr. Burr was head of
Private Equity at Kidder, Peabody & Co., Inc. Previously, 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 Displaytech,
Inc. and Impax Laboratories, Inc.
Dominic J. Monetta has been a director of Hudson 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.
Otto C. Morch has been a director of Hudson since March 1996. Mr. Morch
was a Senior Vice President of Commercial Banking at Provident Bank and retired
from that position in December 1997.
Harry C. Schell has been a director of Hudson since August 1998. Mr.
Schell is the former chairman and chief executive officer of BICC Cables
Corporation, from where he retired, 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 M. Zech has been a Director of Hudson since June 1999. Mr. Zech has
been a Partner of Windcrest Discovery Investments LLC, an investment management
firm, from its inception in February 2002 and since July 2003 has a consulting
agreement with J.P. Morgan Partners with respect to Fleming US Discovery
Partners, L.P. From April 1996 to October 2001, Mr. Zech was employed by J.P.
Morgan Chase & Co., where he was a Partner of Fleming US Discovery Partners,
L.P., the general partner of Fleming US Discovery Fund III, L.P. and Fleming US
Discovery Offshore Fund III, L.P. From 1994 to 1996, Mr. Zech was an Associate
with Cramer Rosenthal McGlynn, Inc., an investment management firm. Previously
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.
Hudson has established a Compensation/Stock Option Committee of the Board
of Directors, which is responsible for recommending the compensation of Hudson's
executive officers and for the administration of Hudson's Stock Option Plans.
The members of the Committee are Messrs. Abbatecola, Burr, Morch and Zech.
Hudson also has an Audit Committee of the Board of Directors, which supervises
the audit and financial procedures of Hudson. The members of the Audit Committee
are Messrs. Abbatecola, Morch and Monetta. Hudson 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 Hudson during the intervals between meetings of the board. The
members of the Executive Committee are Messrs. Burr, Schell and Zugibe. Hudson's
Occupational, Safety And Environmental Protection Committee is responsible for
satisfying the Board that Hudson's Environmental, Health and Safety policies,
plans and procedures are adequate. The members of the Occupational, Safety and
Environmental Protection Committee are Messrs. Monetta and Zugibe.
The By-laws of Hudson 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). The holders of the Series A Preferred
Stock, voting as a separate class, have the right to elect up to two members to
Hudson's Board of Directors. Currently, the holders have elected two members to
the Board of Directors, Messrs. Burr and Zech. At Hudson's December 20, 2002
Annual Meeting of the Shareholders, Messrs. Monetta, Schell, Zech and Zugibe
were elected as directors to terms of office that will expire at the Annual
Meeting of Shareholders to be held in the year 2004. Messrs.
46
Abbatecola, Burr and Morch are currently serving as directors and whose terms of
office expire at the Annual Meeting of the Shareholders to be held in the year
2003.
47
EXECUTIVE COMPENSATION
The following table discloses, for the years indicated, the compensation
for Hudson's Chief Executive Officer and each executive officer that earned over
$100,000 during the year ended December 31, 2002 (the "Named Executives").
Summary Compensation Table
Long Term Compensation
Annual Compensation(1) Awards
---------------------- Securities Underlying
Name Position Year Salary Bonus Options
---- -------- ---- ------ ----- ----------------------
Kevin J. Zugibe (2) Chairman of the Board 2002 $ 97,471 -- 45,000 shares
and Chief Executive 2001 $ 76,366 -- 170,000 shares
Officer 2000 $ 80,981 -- 140,000 shares
Brian F. Coleman President and Chief 2002 $138,799 -- --
Operating Officer 2001 $138,799 -- 100,000 shares
2000 $138,799 $12,248 37,500 shares
Neil B. Gafarian Vice President Sales and 2002 $120,000 $37,917 40,000 shares
Marketing
Charles F. Harkins, Jr. Vice President RPS 2002 $110,079 $29,976 --
2001 $108,852 $68,492 27,500 shares
2000 $103,289 $10,126 42,500 shares
Stephen P. Mandracchia Vice President Operations 2002 $123,800 -- --
and Secretary 2001 $123,800 -- 15,000 shares
2000 $113,415 -- 77,500 shares
-----------------
(1) The value of personal benefits furnished to the Named Executives during
2000, 2001 and 2002 did not exceed 10% of their respective annual
compensation.
(2) A certain portion of Mr. Zugibe's compensation has been paid in stock
option awards rather than cash. As a result, options to purchase shares of
common stock of 45,000 and 120,000 for the years ended December 31, 2002
and 2001, respectively, were issued in lieu of cash compensation.
48
Hudson granted options, which vested upon the date of grant, to the Named
Executives during the fiscal year ended December 31, 2002, as shown in the
following table:
Summary of Option Grants in the 2002 Fiscal Year
Number of
Securities % of Total
Underlying Options Granted
Options to Employees in Exercise or Expiration
Name Position Granted Fiscal year Base price($/sh) Date
---- -------- ------- ----------- ---------------- ----
Kevin J. Zugibe Chairman and Chief 15,000 9.2% $2.50 04/18/2007
Executive Officer 15,000 9.2% $1.90 07/01/2007
15,000 9.2% $1.40 10/01/2007
Brian F. Coleman President and Chief -- -- -- --
Operating Officer
Neil B. Gafarian Vice President Sales and 40,000 24.5% $2.65 02/13/2007
Marketing
Charles F. Harkins, Jr. Vice President RPS -- -- -- --
Stephen P. Mandracchia Vice President Operations -- -- -- --
and Secretary
The following table sets forth information concerning the value of
unexercised stock options held by the Named Executives at December 31, 2002. No
options were exercised by the Named Executives during the fiscal year ended
December 31, 2002.
Aggregated Fiscal Year End Option Values
Number of Securities
Underlying Value of
Unexercised Options In-the-money Options
At December 31, 2002 At December 31, 2002(1)
-------------------- -----------------------
Shares
Acquired on
Name Exercise Value Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------------- ----------- ------------- ----------- -------------
Kevin J. Zugibe
Chairman and
Chief Executive Officer -- -- 362,668 33,332 -- --
Brian F. Coleman
President and Chief
Operating Officer -- -- 150,168 13,332 -- --
Neil B. Gafarian
Vice President Sales and
Marketing -- -- 40,000 -- -- --
Charles F. Harkins, Jr. -- -- 94,332 6,668 -- --
Vice President RPS
Stephen P. Mandracchia
Vice President Operations
And Secretary -- -- 108,500 10,000 -- --
-----------------------
(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 $.85.
49
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
Hudson's Stock Option Plans.
In addition to the standard annual director's remuneration, Mr. Schell
receives $20,000 and 5,000 stock options for serving as a director and a
consultant to Hudson. The additional stock options are issued with an exercise
price equal to that of the other directors' option grants.
As of December 31, 2002, Hudson has granted to Harry C. Schell
nonqualified options to purchase 40,000 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, 2002. Hudson has also granted to each of Dominic
J. Monetta, Otto Morch and Vincent Abbatecola, 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, 2002. In
addition, in connection with the appointment of two of their nominees as members
of the Board of Directors, Hudson has granted to Fleming US Discovery Fund III,
L.P. and Fleming US Discovery Offshore Fund III, L.P. nonqualified options to
purchase 25,854 and 4,146 shares of common stock, respectively, at an exercise
price of $2.38 per share. All such options issued to the directors are vested
and fully exercisable at December 31, 2002.
Employment Agreements
Hudson has entered into a two-year employment agreement with Kevin J.
Zugibe, which expires in May 2005 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 $141,000 with such increases and
bonuses as the Board may determine. During 2002, the Board of Directors and Mr.
Zugibe agreed, at Mr. Zugibe's option, to reduce the cash compensation and
issued 45,000 additional stock options to Mr. Zugibe in satisfaction of his
annual base salary. Hudson is the beneficiary of a "key-man" insurance policy on
the life of Mr. Zugibe in the amount of $1,000,000.
Stock Option Plans
Hudson has adopted each of an Employee Stock Option Plan (the "1994 Plan")
and the 1997 Stock Option Plan (the "1997 Plan") pursuant to which an aggregate
of 2,750,000 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
either of the 1994 Plan or 1997 Plan to employees and officers of Hudson.
Non-qualified options may be granted to consultants, directors (whether or not
they are employees), employees or officers of Hudson. Stock appreciation rights
may also be issued in tandem with stock options.
Each of the 1994 Plan and 1997 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 the Compensation/Stock Option Committee of the Board of
Directors. The Committee, within the limitations of each of the 1994 Plan and
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 1994 Plan will expire
on December 31, 2004 and the 1997 Plan will expire on June 11, 2007.
ISOs granted under either of the 1994 Plan or 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 Hudson). 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 Hudson) may
not exceed $100,000. Non-qualified options granted under the 1994 Plan may not
be granted at a price less than 85% of the market value of the common stock on
the date of grant and new qualified options granted under the 1997 Plan may not
be granted at a price less than the par value of our common stock. Options
granted under the 1994 Plan and 1997 Plan will expire not more than ten
50
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 Hudson). Except as otherwise provided
by the committee with respect to non-qualified options, all options granted
under the 1994 Plan and 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, 2002, Hudson had options outstanding to purchase
610,000 shares of common stock under the 1994 Plan. During 2000, Hudson granted
options to purchase 40,000 shares each to Kevin J. Zugibe, Stephen P.
Mandracchia and Thomas P. Zugibe exercisable at $2.375 per share. Such options
vest and are fully exercisable as of August 3, 2000. During 2001, Hudson granted
options to purchase shares to Kevin J. Zugibe, 50,000 shares; Brian F. Coleman,
20,000 shares; Stephen P. Mandracchia, 15,000 shares; and Thomas P. Zugibe,
20,000 shares, all of which are exercisable at $2.55 per share. Such options
vest quarterly in equal amounts over three years, commencing with the first
quarter of 2002. In addition, during 2001, in lieu of salary, Hudson also
granted options to purchase 15,000 shares to Kevin J. Zugibe exercisable at
$2.55 per share, all of which vested and are fully exercisable as of December
13, 2001. During 2001, Hudson also granted options to purchase 80,000 shares to
Brian F. Coleman exercisable at $2.55 per share, all of which vested as of
December 13, 2001, and which became exercisable as follows: 39,215 on 12/13/01,
39,215 on 12/13/02 and 1,570 on 12/13/03. In addition, during 2001, Hudson also
granted options to certain employees to purchase 20,000 shares exercisable at
$2.55 per share. Such options vest quarterly in equal amounts over three years,
commencing with the first quarter of 2002. During 2002, Hudson granted options
to purchase 40,000 shares to Neil B. Gafarian exercisable at $2.65 per share. In
addition, during 2002, in lieu of salary, Hudson granted options to purchase
45,000 shares to Kevin J. Zugibe exercisable at prices ranging from $1.40 to
$2.50 per share. All such options vest immediately and become exercisable at
various dates through June 2003. See Note 11 to the Notes of the Consolidated
Financial Statements included elsewhere in this prospectus.
As of December 31, 2002, Hudson had options outstanding to purchase
1,152,716 shares of common stock under the 1997 Plan. During 1998, Hudson
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, Hudson also granted options to purchase 430,666 shares to
certain officers, directors and employees, exercisable at prices ranging from
$2.50 to $4.375 per share. During 1999, Hudson granted options to purchase 1,000
shares each 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, Hudson also granted options to purchase
156,000 shares to certain officers, directors and employees, exercisable at
prices ranging from $1.781 to $2.63 per share. During 2000, Hudson granted
options to purchase 100,000 shares at an exercise price of $2.375 per share to
Kevin J. Zugibe, which options vest at a rate of 50% upon issuance and 50% on
the first anniversary date, and which become exercisable as follows: 14,500 on
8/4/00, 27,500 on 11/3/00, 14,500 on 8/4/01, 27,000 on 11/3/01, 14,500 on 8/4/02
and 2,000 on 11/2/02. During 2000, Hudson granted options to purchase 37,500 and
62,500 shares at an exercise price of $2.375 per share to Stephen P. Mandracchia
and Thomas P. Zugibe, respectively. Such options vest at a rate of 50% upon
issuance and 50% on the first anniversary date. In addition, during 2000, Hudson
also granted options to purchase 274,500 shares to certain officers, directors
and employees, exercisable at prices ranging from $2.375 to $2.78 per share.
During 2001, Hudson granted options to purchase 105,000 shares at an exercise
price of $2.375 per share to Kevin J. Zugibe, which options vested and were
fully exercisable as of February 7, 2001, as to 60,000 shares, and as of October
23, 2001 as to 45,000 shares. In addition, during 2001, Hudson granted options
to purchase 131,000 shares to certain directors and employees ranging from
$2.375 to $3.08 per share. Such options vested and were fully exercisable as of
the date of issuance. During 2002, Hudson granted options to purchase 10,000
shares to James R. Buscemi exercisable at $1.30 per share. In addition, during
2002, Hudson granted options to purchase 68,400 shares to certain employees at
prices ranging from $1.30 to $1.60 per share. All such 2002 option issuances
vested and were fully exercisable as of the date of issuance. See Note 11 to the
Notes to the Consolidated Financial Statements included elsewhere in this
prospectus.
51
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of May 30, 2003 based on
information obtained from the persons named below, with respect to the
beneficial ownership of Hudson's common stock by (i) each person known by Hudson
to be the beneficial owner of more than 5% of Hudson's outstanding common stock,
(ii) the Named Executives, (iii) each director of Hudson, and (iv) all directors
and executive officers of Hudson as a group:
Amount and Nature of Percentage of Common
Name and Address of Beneficial Owner (1) Beneficial Ownership (2) Shares Owned
---------------------------------------- ------------------------ ------------
Kevin J. Zugibe 687,980 (3) 12.3%
Brian F. Coleman 203,190 (4) 3.8%
Neil B. Gafarian 41,875 (5) *
Charles F. Harkins 107,498 (6) 2.1%
Stephen P. Mandracchia 390,128 (7) 7.3%
Vincent P. Abbatecola 30,000 (8) *
Robert L. Burr -- (9) *
Dominic J. Monetta 35,000 (8) *
Otto C. Morch 25,600 (8) *
Harry C. Schell 79,000 (10) 1.5%
Robert M. Zech 5,000 (11) *
DuPont Chemical and Energy 500,000 (12) 9.7%
Operations, Inc.
Flemings Funds 5,120,558 (13) 49.8%
All directors and executive officers as a group 1,635,271 (14) 26.3%
(12 persons)
* = Less than 1%
----------
(1) Unless otherwise indicated, the address of each of the persons listed
above is the address of Hudson, 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 May 30, 2003. 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 May 30, 2003 have been
exercised. Unless otherwise noted, Hudson 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 $3.00 per share; (ii)
1,000 shares which may be purchased at $2.00 per share; (iii) 245,000
shares which may be purchased at $2.375 per share; (iv) 40,002 shares
which may be purchased at $2.551 per share; (v) 15,000 shares which may be
purchased at $2.50 per share; (vi) 15,000 shares which may be purchased at
$1.90 per share; (vii) 15,000 shares which may be purchased at $1.40 per
share; (viii) 15,000 shares which may be purchased at $.77 per share; and
(ix) 64,250 shares which may be purchased at $1.14 per share under
immediately exercisable options.
(4) Includes (i) 25,000 shares which may be purchased at $2.50 per share; (ii)
1,000 shares which may be purchased at $1.78 per share; (iii) 37,500
shares which may be purchased at $2.375 per share; (iv) 90,002 shares
which may be purchased at $2.551 per share; and (v) 46,688 shares which
may be purchased at $1.14 per share under immediately exercisable options.
(5) Represents (i) 40,000 shares which may be purchased at $2.65 per share;
and (ii) 1,875 shares which may be purchased at $1.14 per share under
immediately exercisable options.
(6) Represents (i) 25,000 shares which may be purchased at $2.50 per share;
(ii) 55,000 shares which may be purchased at $2.375 per share; (iii) 5,000
shares which may be purchased at $2.53 per share; (iv) 4,998 shares which
may be
52
purchased at $2.55 per share; and (v) 17,500 shares which may be purchased
at $1.14 per share under immediately exercisable options.
(7) Includes (i) 25,000 shares which may be purchased at $3.00 per share; (ii)
76,300 shares which may be purchased at $2.375 per share; (iii) 7,500
shares which may be purchased at $2.551 per share; and (iv) 42,500 shares
which may be purchased at $1.14 per share under immediately exercisable
options.
(8) Includes (i) 5,000 shares which may be purchased at $3.00 per share; (ii)
10,000 shares which may be purchased at $2.375 per share; (iii) 5,000
shares which may be purchased at $3.08 per share; and (iv) 5,000 shares
which may be purchased at $.85 per share under immediately exercisable
options.
(9) Mr. Burr has been elected a director of Hudson by the Flemings Funds. Mr.
Burr's share ownership excludes all shares of common stock beneficially
owned by the Flemings Funds.
(10) Includes (i) 10,000 shares which may be purchased at $3.00 per share; (ii)
10,000 shares which may be purchased at $2.375 per share; (iii) 10,000
shares which may be purchased at $2.785 per share; (iv) 10,000 shares
which may be purchased at $3.08 per share; and (v) 10,000 shares which may
be purchased at $.85 per share under immediately exercisable options.
(11) Represents 5,000 shares which may be purchased at $.85 per share under
immediately exercisable options. As of July 2003, the Flemings Funds have
agreed that Mr. Zech be deemed to have been elected a director of Hudson
by the Flemings Funds. Mr. Zech's share ownership excludes all shares of
common stock beneficially owned by the Flemings Funds.
(12) 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.
(13) Fleming US Discovery Fund III, L.P. and Fleming US Discovery Offshore Fund
III, L.P., and their general partner, Fleming US Discovery Partners, L.P.
and its general partner, Fleming US Discovery Partners LLC, collectively
referred to as ("Flemings Funds") are affiliates. The beneficial ownership
of the Flemings Funds assumes the conversion of Series A Preferred Stock
owned by the Flemings Funds (which constitutes all of the outstanding
Series A Preferred Stock) 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.
Also includes (i) 10,000 shares which may be purchased at $2.375 per
share; (ii) 10,000 shares which may be purchased at $2.785 per share;
(iii) 10,000 shares which may be purchased at $3.08 per share; and (iv)
5,000 shares which may be purchased at $.85 per share under immediately
exercisable options. Flemings Funds address is c/o JP Morgan Chase & Co.,
1221 Avenue of the Americas, 40th Floor, New York, New York 10020, except
for Fleming US Discovery Offshore Fund III, L.P. whose address is c/o Bank
of Bermuda LTD., 6 Front Street, Hamilton HM11 Bermuda.
(14) Includes exercisable options to purchase 1,047,115 shares of common stock
owned by the directors and officers as a group. Excludes 5,120,558 shares
beneficially owned by the Flemings Funds.
53
Equity Compensation Plan
The following table provides certain information with respect to all of
Hudson's equity compensation plans in effect as of December 31, 2002.
Number of securities remaining
Number of securities to be Weighted-average exercise available for issuance under
issued upon exercise of price of outstanding equity compensation plans
outstanding options, options, warrants and (excluding securities reflected
warrants and rights rights in column a)
Plan Category (a) (b) (c)
Equity compensation plans approved
by security holders: 1,762,716 $3.14 802,844
Equity compensation plans not
approved by security holders (1): 166,842 $3.02 --
--------- -------
Total 1,929,558 $3.13 802,844
----------------------
(1) Represents the aggregate number of shares of common stock issuable upon
exercise of individual arrangements with option and warrant holders. These
options and warrants are five years in duration, expire at various dates
between March 2003 and March 2004, contain anti-dilution provisions
providing for adjustments of the exercise price under certain
circumstances and have termination provisions similar to options granted
under stockholder approved plans. See Note 11 of Notes to the Consolidated
Financial Statements for a description of Hudson's Stock Option Plans
included elsewhere in this prospectus.
DESCRIPTION OF SECURITIES
General
Hudson is authorized to issue 50,000,000 shares of common stock, and
5,000,000 shares of preferred stock. As of July 30, 2003, there were 5,166,020
shares of common stock outstanding and 120,782 shares of preferred stock
outstanding, which has been designated as Series A Convertible Preferred Stock.
Common Stock
The holders of common stock are entitled to one vote for each share held
of record on all matters to be voted on by stockholders. There is no cumulative
voting with respect to the election of directors, with the result that the
holders of more than 50% of the shares voting for the election of directors can
elect all of the directors then up for election. The holders of common stock are
entitled to receive dividends when, as and if declared by the Board of Directors
out of funds legally available therefor. In the event of liquidation,
dissolution or winding up of Hudson, the holders of common stock are entitled to
share in all assets remaining which are available for distribution to them after
payment of liabilities and after provision has been made for each class of
stock, if any, having preference over the common stock. Holders of shares of
common stock have no conversion, preemptive or other subscription rights, and
there are no redemption provisions applicable to the common stock. All of the
outstanding shares of common stock are fully paid and nonassessable.
Preferred Stock
The authorized preferred stock can be issued from time to time in one or
more series. The Board has the power, without stockholder approval, to issue
shares of one or more series of preferred stock, at any time, for such
consideration and with such relative rights, privileges, preferences and other
terms as the Board may determine, including terms relating to dividend rates,
redemption rates, liquidation preferences and voting, sinking fund and
conversion or other rights. The rights and terms relating to any new series of
preferred stock could adversely affect the voting power or other rights of the
holders of the common stock or could be utilized, under certain circumstances,
as a method of discouraging, delaying or preventing a change in control of
Hudson.
54
Series A Convertible Preferred Stock
The description of the Series A Convertible Preferred Stock (the
"Preferred A Stock") as set forth below is only a summary of the terms of the
Preferred A Stock which is qualified in its entirety by reference to the
Certificates of Amendment to our Certificate of Incorporation designating the
Preferred A Stock, a copy of which is available upon request from Hudson.
The Preferred A Stock converts to common stock at an initial rate of
$2.375 per share, subject to adjustment under certain circumstances, including a
sale of common stock at less than the effective conversion price of the
Preferred A Stock or the issuance of any security convertible into common stock
with an exercise or conversion price less than the conversion price of the
Preferred A Stock.
The Preferred A Stock has voting rights on an as-if converted basis. The
number of votes applicable to the Preferred A Stock is equal to the number of
shares of common stock into which the Preferred A Stock is then convertible.
Hudson pays dividends, in arrears, on the Preferred A Stock,
semi-annually, either in cash or additional shares of Preferred A Stock, at our
option. Hudson may redeem the Preferred A 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, we may call
the Preferred A Stock if the market price of our common stock is equal to or
greater than 250% of the Preferred A Stock 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.
We have 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 have agreed to waive their registration and preemptive rights
with respect to the registration and issuance of the securities in this
offering. In addition, the holders of the Preferred A Stock, voting as a
separate class, have the right to elect up to two members of Hudson's Board of
Directors or at their option, to designate up to two advisors to our 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.
Convertible Notes
Between December 2002 and April 2003 Hudson issued an aggregate of
$1,660,000 principal amount of Convertible Notes. The Convertible Notes have a
term of two years and earn interest at an annual rate of 10% payable quarterly
in arrears. The Convertible Notes are unsecured and subordinate in payment to
our obligations under our credit facility with Keltic. We may not prepay the
Convertible Notes in cash without the prior consent of Keltic and payment of
interest, if any, in cash on any scheduled quarterly interest payment date is
limited to an aggregate of $20,000 per calendar year. In connection with this
offering, the principal and all accrued and unpaid interest on the Notes will
convert to shares of our common stock as follows: (i) to the extent shares
offered hereby are available after expiration of the rights offering and the
sale to members of the public, holders of the Convertible Notes may elect to
purchase such shares by a reduction of the principal amount and, if applicable,
accrued and unpaid interest of the Convertible Notes in an amount equal to the
number of shares to be acquired multiplied by the $ ___ subscription price; (ii)
to the extent shares are not available for purchase by the holders of the
Convertible Notes in this offering or such holders do not elect to purchase
these shares, the remaining outstanding principal amount and accrued and unpaid
interest of the Convertible Notes will automatically convert into restricted
shares of our common stock at conversion prices ranging from the lesser of the
subscription price and: (i) $0.79 per share with respect to up to $665,000
principal amount and accrued and unpaid interest; (ii) $1.41 with respect to up
to $500,000 principal amount and accrued and unpaid interest and (iii) $1.13 per
share with respect to up to $495,000 principal amount and accrued and unpaid
interest.
Warrants
Hudson is obligated to issue to the holders of the Convertible Notes, on
the earlier of (a) the first anniversary of their respective date of issuance,
or (b) the consummation by Hudson of an Equity Offering, warrants to purchase an
aggregate number of shares of our common stock equal to 10% of the number of
shares of common stock into which the Convertible Notes were convertible at
their date of issuance. Each warrant will be exercisable to purchase one share
of common stock for a period of five years from issuance at an exercise price
equal to 110% of the lesser of (i) the conversion rate of the Convertible Notes
as of their date of issuance, or (ii) the conversion rate of the Convertible
Notes on the date of issuance of the warrants. The exercise
55
price of the warrants will be subject to anti-dilution adjustment on terms
substantially similar to anti-dilution adjustment of the conversion rate of the
Convertible Notes.
Transfer Agent
The transfer agent and registrar for the common stock is Continental Stock
Transfer & Trust Company, New York, New York.
CERTAIN TRANSACTIONS
In connection with the Keltic credit facility, Hudson also entered into a
loan arrangement with the Flemings Funds for the principal amount of $575,000.
The loan is unsecured, is for a term of three years, and accrues interest at an
annual rate equal to the greater of the prime rate plus 2.0%, or 6.5%. In
accordance with the terms of the Keltic credit facility, the amount of principal
and interest outstanding under this loan arrangement reduces Hudson's aggregate
borrowing availability by a like amount under its credit facility with Keltic.
This loan is expected to be retired in conjunction with the completion of this
Rights Offering.
In November 2002, Hudson consummated the private sale of Bridge Notes to a
limited number of purchasers, including certain officers of Hudson and their
family members as well as holders of Hudson's Series A Preferred Stock, for
which Hudson received gross proceeds of $655,000. The Bridge Notes were for a
term of one year and were subordinate in payment to Hudson's obligations under
its credit facility with CIT. The Bridge Notes automatically exchanged for
convertible notes identical in terms to the Convertible Notes, upon approval of
such exchange by Hudson's shareholders, which approval was obtained at the
annual meeting on December 20, 2002.
Effective December 2002, Hudson consummated the private sale of
Convertible Notes to a limited number of purchasers, including certain officers
of Hudson and their family members as well as holder of Hudson's Series A
Preferred Stock, for which Hudson received gross proceeds of $495,000. At or
about the same time, the Bridge Notes were cancelled and exchanged for
Convertible Notes in a principal amount equal to the outstanding principal
amount of the Bridge Notes immediately prior to the exchange together with
accrued and unpaid interest thereon. The Convertible Notes have a term of two
years and earn interest at an annual rate of 10% payable quarterly in arrears.
The Convertible Notes are unsecured and are subordinate in payment to Hudson's
obligations under its credit facility with Keltic. Holders of the Convertible
Notes have the right to convert all or a portion of the outstanding principal
balance, and any accrued interest thereon, to common stock of Hudson, upon, but
not prior to, the first anniversary of the issuance of the Convertible Notes.
The initial conversion rate of these Convertible Notes was $.79 per share.
On April 15, 2003 Hudson issued an additional principal amount of $500,000
of Convertible Notes to the holders of the Series A Preferred Stock. The April
15, 2003 Convertible Notes are identical to the Convertible Notes issued in
December 2002, except that the conversion rate of these notes is $1.41 per share
and the first anniversary of their issuance will be in April 2004.
In April 2003, holders of the Convertible Notes holding an aggregate
principal amount of $495,000 entered into agreements with Hudson whereby the
holders agreed to modify the conversion rate of their Convertible Notes to the
modified conversion rate of $1.13 which was the average closing sale price of
Hudson's common stock as reported on the NASDAQ SmallCap Market for the five
business days immediately preceding the execution of the modification
agreements; provided further, that, in the event of an Equity Offering by Hudson
prior to the first anniversary of the issuance of the Convertible Notes, at a
public offering price which includes the exercise price of stock purchase rights
offered in the Equity Offering below the modified Conversion Rate but in excess
of $.79, the conversion rate of the Convertible Notes will be adjusted to not
less than the public offering price.
Hudson is obligated to issue to the holders of the Convertible Notes, on
the earlier of (a) the first anniversary of their respective date of issuance,
or (b) the consummation by Hudson of an Equity Offering, warrants to purchase an
aggregate number of shares of common stock equal to 10% of the number of shares
of common stock into which the Convertible Notes were convertible at their date
of issuance. Each warrant will be exercisable to purchase one share of common
stock for a period of five years from issuance at an exercise price equal to
110% of the lesser of (i) the conversion rate of the Convertible Notes as their
date of issuance, or (ii) the conversion price of the Convertible Notes on the
date of issuance of the warrants. The exercise price of the warrants will be
subject to anti-dilution adjustment on terms substantially similar to
anti-dilution
56
adjustment of the conversion rate of the Convertible Notes. As of December 20,
2002, Hudson has recognized an original issue discount of $220,000 in connection
with the obligation to issue the warrants.
On February 16, 2001, Hudson completed the sale of 30,000 shares of its
Series A Preferred Stock, with a liquidation value of $100 per share, to Fleming
US Discovery Fund III, L.P. and Fleming US Discovery Offshore Fund III, L.P. The
gross proceeds from the sale of the Series A Preferred Stock were $3,000,000.
These shares of Series A Preferred Stock currently convert to common stock at a
conversion price of $2.375 per share, which was 23% above the closing market
price of common stock on February 15, 2001.
The Series A Preferred Stock provides for anti-dilution adjustment of the
conversion price in the event of the subsequent offering by Hudson of securities
for consideration per share less than the then-effective conversion price of the
Series A Preferred Stock. At the direction of the NASDAQ Stock Market, Inc., a
minimum conversion price floor of $1.78 per share, below which the conversion
price of the Series A Preferred Stock could not be adjusted, had been instituted
by Hudson and the holders of the Series A Preferred Stock by amendment to the
designation of the Series A Preferred Stock, and at the same time Hudson agreed
not to offer securities for consideration per share less than the Conversion
Price Floor without the consent of the holders of the Series A Preferred Stock.
Subsequently, in consideration for the consent of the holders of the Series A
Preferred Stock to Hudson's engagement in the private offering of the
Convertible Notes at a conversion price below the $1.78 minimum conversion price
floor, the stockholders of Hudson, at the annual meeting on December 20, 2002,
voted in favor of a proposal to remove the $1.78 minimum conversion price floor
and the designation of the Series A Preferred Stock was amended accordingly.
Although the holders of the Series A Preferred Stock agreed to waive their
rights to an immediate downward adjustment of the current $2.375 conversion
price of the Series A Preferred Stock in connection with the issuance of the
Convertible Notes, any subsequent conversion of the Convertible Notes will
result in a downward adjustment of the conversion price of the Series A
Preferred Stock to equal the then effective conversion rate of the Convertible
Notes. Consequently, upon conversion of the Convertible Notes at the $.79 per
share conversion rate the anti-dilution provisions of the Series A Preferred
Stock will cause the conversion rate of the Series A Preferred Stock to adjust
downward to the $.79 per share. Assuming that the Series A Preferred Stock
converts to common stock at a conversion price of $.79 per share and based upon
120,782 shares of Series A Preferred Stock issued as of March 30, 2003, the
holders of the Series A Preferred Stock would receive 15,288,860 shares of
common stock. Similarly, the conversion price of such Series A Preferred Stock
may be adjusted to equal the consideration received by Hudson in connection with
any issuance of securities, such as that contemplated in this offering, below
the current $2.375 conversion price.
The designation of the Series A Preferred Stock provided for a proxy
granted by the holders of the Series A Preferred Stock in favor of certain of
Hudson's officers to vote all shares of common stock into which the Series A
Preferred Stock converts (including any additional shares subsequently acquired
by such holders) in excess of 29% of the votes entitled to be cast by the Series
A Preferred Stock holders. As noted above, in consideration for consent of the
holders of the Series A Preferred Stock to Hudson's engagement in the private
offering of Convertible Notes at a conversion rate below the Conversion Price
Floor, the stockholders of Hudson, at the annual meeting on December 20, 2002,
voted in favor of a proposal to remove the proxy from the designation of the
Series A Preferred Stock.
Any future transaction between us and our officers, directors and/or
stockholders owning in excess of 5% of our outstanding common stock will be on
terms no less favorable to us than we could obtain on an arm's length basis from
unaffiliated independent third parties.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The New York Business Corporation Law (Sections 721 through 726) permits a
corporation to indemnify any of its directors and officers for acts performed in
their capacities, subject to certain conditions. Paragraph 3 of Hudson's
Certificate of Incorporation provides that a director shall not be liable to
Hudson or its shareholders for damages for any breach of duty in such capacity
except for liability if a judgment or other final adjudication adverse to the
director establishes that his or her acts or omissions were in bad faith or
involved intentional misconduct or a knowing violation of law or that the
director personally gained a financial profit or other advantage to which he or
she was not legally entitled or that the director's acts violated Section 719 of
the New York Business Corporation Law. Paragraph 17 of Article III of Hudson's
By-laws provide for indemnification of Hudson's directors and officers to the
fullest extent permitted by the New York Business Corporation Law.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
Hudson pursuant to the foregoing procedures, or otherwise, Hudson has been
advised that in
57
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
58
HUDSON TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Certified Accountants 60
Audited Consolidated Financial Statements:
o Consolidated Balance Sheet 61
o Consolidated Statements of Operations 62
o Consolidated Statements of Stockholders' Equity 63
o Consolidated Statements of Cash Flows 64
o Notes to the Consolidated Financial Statements 65
59
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, 2002 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period ended December 31, 2002. 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 auditing standards generally
accepted in the United States. 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, 2002 and the results of
their operations and their cash flows for each of the two years in the period
ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States.
/s/ BDO Seidman, LLP
Valhalla, New York
March 7, 2003, except
for Note 12 which is
as of May 30, 2003
60
Hudson Technologies, Inc. and subsidiaries
Consolidated Balance Sheet
(Amounts in thousands, except for share and par value amounts)
March 31, December 31,
--------- ------------
2003 2002
---- ----
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 353 $ 545
Trade accounts receivable 3,082 1,971
Inventories 2,985 2,967
Prepaid expense and other current assets 246 249
-------- --------
Total current assets 6,666 5,732
Property, plant and equipment, less accumulated depreciation 2,360 2,551
Other assets 145 139
-------- --------
Total Assets $ 9,171 $ 8,422
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 3,777 $ 3,278
Short-term debt 3,208 2,465
-------- --------
Total current liabilities 6,985 5,743
Long-term debt, less current maturities 140 241
Long-term debt - related parties 960 930
-------- --------
Total Liabilities 8,085 6,914
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, shares authorized 5,000,000:
Series A Convertible Preferred Stock, $.01 par value
($100 liquidation preference value); shares authorized
150,000; issued and outstanding 120,782 and 116,629 12,078 11,663
Common stock, $0.01 par value; shares authorized 50,000,000;
issued outstanding 5,165,020 52 52
Additional paid-in capital 19,604 20,019
Accumulated deficit (30,648) (30,226)
-------- --------
Total Stockholders' Equity 1,086 1,508
-------- --------
Total Liabilities and Stockholders' Equity $ 9,171 $ 8,422
======== ========
See accompanying Notes to the Consolidated Financial Statements.
61
Hudson Technologies, Inc. and subsidiaries
Consolidated Statement of Operations
(Amounts in thousands, except for share and per share amounts)
Three Month Period Year Ended
Ended March 31, December 31,
--------------- ------------
2003 2002 2002 2001
---- ---- ---- ----
(unaudited)
Revenues $ 5,677 $ 6,111 $ 19,963 $ 20,768
Cost of sales 4,037 4,681 14,505 14,971
----------- ----------- ----------- -----------
Gross Profit 1,640 1,430 5,458 5,797
----------- ----------- ----------- -----------
Operating expenses:
Selling and marketing 539 672 2,412 2,322
General and administrative 1,092 1,065 4,357 4,475
Depreciation and amortization 243 285 1,142 1,220
----------- ----------- ----------- -----------
Total operating expenses 1,874 2,022 7,911 8,017
----------- ----------- ----------- -----------
Operating loss (234) (592) (2,453) (2,220)
----------- ----------- ----------- -----------
Other income (expense):
Interest expense (188) (97) (347) (423)
Other income -- 241 253 230
Gain on sale of assets -- -- 25 14
----------- ----------- ----------- -----------
Total other income (expense) (188) 144 (69) (179)
----------- ----------- ----------- -----------
Loss before income taxes (422) (448) (2,522) (2,399)
Income taxes -- -- -- --
----------- ----------- ----------- -----------
Net loss (422) (448) (2,522) (2,399)
Preferred stock dividends (218) (197) (796) (723)
----------- ----------- ----------- -----------
Available for common shareholders $ (640) $ (645) $ (3,318) $ (3,122)
=========== =========== =========== ===========
--------------
Net loss per common share - basic and diluted $ (0.12) $ (0.13) $ (0.64) $ (0.61)
=========== =========== =========== ===========
Weighted average number of shares outstanding 5,165,020 5,156,895 5,162,228 5,103,733
=========== =========== =========== ===========
See accompanying Notes to the Consolidated Financial Statements
62
Hudson Technologies, Inc. and subsidiaries
Consolidated Statements of Stockholders' Equity
(Amounts in thousands, except for share amounts)
Preferred Stock Common Stock
--------------- ------------
Additional
Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
------ ------ ------ ------ ------- ------- -----
Balance at
December 31, 2000 72,195 $ 7,219 5,088,820 $ 51 $ 21,133 $ (25,305) $ 3,098
Issuance of common stock
upon exercise of stock
options -- -- 67,700 1 150 -- 151
Issuance of Series A
Preferred Stock - Net 30,000 3,000 -- -- (60) -- 2,940
Dividends paid in-kind on
Series A Preferred Stock 6,550 656 -- -- (656) -- --
Net Loss -- -- -- -- -- (2,399) (2,399)
--------- --------- --------- --------- --------- --------- ---------
Balance at
December 31, 2001 108,745 10,875 5,156,520 52 20,567 (27,704) 3,790
Issuance of common stock
upon exercise of stock
options -- -- 8,500 -- 20 -- 20
Dividends paid in-kind on
Series A Preferred Stock 7,884 788 -- -- (788) -- --
Original issue discount
on related party debt in
connection with issuance
of warrants -- -- -- -- 220 -- 220
Net Loss -- -- -- -- -- (2,522) (2,522)
--------- --------- --------- --------- --------- --------- ---------
Balance at
December 31, 2002 116,629 11,663 5,165,020 52 20,019 (30,226) 1,508
Dividends paid in-kind on
Series A Preferred Stock 4,153 415 -- -- (415) -- --
Net Loss -- -- -- -- -- (422) (422)
--------- --------- --------- --------- --------- --------- ---------
Balance at
March 31, 2003
(unaudited) 120,782 $ 12,078 5,165,020 $ 52 $ 19,604 $ (30,648) $ 1,086
========= ========= ========= ========= ========= ========= =========
See accompanying Notes to the Consolidated Financial Statements.
63
Hudson Technologies, Inc. and subsidiaries
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
(Amounts in thousands)
Three month period Year ended
ended March 31, December 31,
--------------- ------------
2003 2002 2002 2001
---- ---- ---- ----
(unaudited)
Cash flows from operating activities:
Net loss $ (422) $ (448) $(2,522) $(2,399)
Adjustments to reconcile net loss
to cash provided (used) by operating activities:
Depreciation and amortization 243 285 1,142 1,220
Allowance for doubtful accounts 30 36 144 60
Amortization of original issue discount 30 -- -- --
Gain on sale of assets -- -- (25) (14)
Changes in assets and liabilities:
Trade accounts receivable (1,142) (1,069) 631 (218)
Inventories (18) 16 (580) (486)
Prepaid expense and other current assets 3 72 (99) 47
Other assets 5 1 (24) (17)
Accounts payable and accrued expenses 499 1,251 (9) (548)
Deferred income -- -- -- (6)
------- ------- ------- -------
Cash provided (used) by operating activities (772) 144 (1,342) (2,361)
------- ------- ------- -------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment -- 203 244 937
Additions to patents (14) -- -- (9)
Additions to property, plant and equipment (49) (225) (324) (374)
------- ------- ------- -------
Cash provided (used) by investing activities (63) (22) (80) 554
------- ------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of preferred stock - net -- -- -- 2,940
Proceeds from issuance of common stock - net -- 10 20 151
Proceeds from (repayment of) short-term debt - net 754 (285) 28 272
Proceeds from long-term debt -- 151 1,325 --
Repayment of long-term debt (111) (299) (788) (1,037)
------- ------- ------- -------
Cash provided (used) by financing activities 643 (423) 585 2,326
------- ------- ------- -------
Increase (decrease) in cash and cash equivalents (192) (301) (837) 519
Cash and equivalents at beginning of period 545 1,382 1,382 863
------- ------- ------- -------
Cash and equivalents at end of period $ 353 $ 1,081 $ 545 $ 1,382
======= ======= ======= =======
------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during period for interest $ 188 $ 97 $ 347 $ 423
Supplemental schedule of non-cash investing and
financing activities:
In-kind payment of preferred stock dividends $ 415 $ 387 $ 788 $ 656
See accompanying Notes to the Consolidated Financial Statements
64
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"), is a refrigerant services company providing innovative solutions to
recurring problems within the refrigeration industry. Hudson's products and
services are primarily used in commercial air conditioning, industrial
processing and refrigeration systems, including (i) refrigerant sales, (ii)
RefrigerantSide(R) Services performed at a customer's site, consisting of system
decontamination to remove moisture, oils and other contaminants and (iii)
reclamation of refrigerants. Hudson operates 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.
Hudson's consolidated financial statements include the accounts of wholly-owned
subsidiaries Hudson Holdings, Inc. and Hudson Technologies Company.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principals for interim financial
statements and with the instructions of Regulation S-B. Accordingly, they do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all estimates and adjustments considered necessary for a fair
presentation have been included and all such adjustments were normal and
recurring. Operating results for the three month period ended March 31, 2003 are
not necessarily indicative of the results that may be expected for the fiscal
year ended December 31, 2003.
Fair value of financial instruments
The carrying values of financial instruments including trade accounts
receivable, and accounts payable approximate fair value at March 31, 2003 and
December 31, 2002, 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 March 31,
2003 and December 31, 2002.
Credit risk
Financial instruments, which potentially subject Hudson to concentrations
of credit risk, consist principally of temporary cash investments and trade
accounts receivable. Hudson maintains its temporary cash investments in
highly-rated financial institutions that exceed FDIC insurance coverage.
Hudson's trade accounts receivables are due from companies throughout the U.S.
Hudson reviews each customer's credit history before extending credit.
Hudson establishes an allowance for doubtful accounts based on factors
associated with the credit risk of specific accounts, historical trends, and
other information and the carrying value of its accounts receivable are reduced
by the established allowance. The allowance for doubtful accounts includes any
accounts receivable balances that are determined to be uncollectable, along with
a general reserve for the remaining accounts receivable balances. Hudson may
adjust its general or specific reserves based on factors that affect the
collectibility of the accounts receivable balances.
During the quarter ended March 31, 2003, two customers accounted for 17%
and 11% of the Company's revenues and as of March 31, 2003 there were $483,000
and $10,000, respectively, of accounts receivable balances from these customers.
During the quarter ended March 31, 2002, one customer accounted for 14% of the
Company's revenues and as of March 31, 2002 there was an $11,000 accounts
receivable balance from this customer.
During the year ended December 31, 2002, one customer accounted for 11% of
Hudson's revenues and as of December 31, 2002 there was $223,000 accounts
receivable balance from this customer. During the year ended December 31,
65
2001, one customer accounted for 15% of Hudson's revenues and as of December 31,
2001 there were no related accounts receivable balance from this customer.
The loss of a principal customer or a decline in the economic prospects
and purchases of Hudson's products or services by any such customer could have
an adverse effect on Hudson's financial position and results of operations.
During the years ended December 31, 2002 and 2001, Hudson had sales to
E.I. DuPont de Nemours and Company ("DuPont"), an affiliate, in the amount of
$974,000 and $1,124,000, respectively.
Cash and cash equivalents
Temporary investments with original maturities of ninety days or less are
included in cash and cash equivalents.
Inventories
Inventories, consisting primarily of reclaimed refrigerant products
available for sale, are stated at the lower of cost, on a first-in first-out
basis, or market.
Property, plant, and equipment
Property, plant, and equipment are stated at cost; including internally
manufactured equipment. The cost to complete equipment that is under
construction is not considered to be material to Hudson'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. Costs of maintenance and
repairs are charged to expense when incurred.
Due to the specialized nature of Hudson's business, it is possible that
Hudson'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 and
passage of title to customers in accordance with contractual terms. Hudson
evaluates each sale to ensure collectibility. In addition, each sale is based on
an arrangement with the customer and the sales price to the buyer is fixed. Cost
of sales is recorded based on the cost of products shipped or services performed
and related direct operating costs of Hudson's facilities. To the extent that
Hudson charges shipping fees such amounts are included as a component of revenue
and the corresponding costs are included as a component of cost of sales.
Hudson's revenues are derived from refrigerant and reclamation sales and
RefrigerantSide(R) Services revenues. The revenues for each of these lines are
as follows:
Three Months Ended March 31, Year Ended December 31,
(unaudited)
(in thousands) 2003 2002 2002 2001
---- ---- ---- ----
Refrigerant and reclamation sales $5,002 $5,296 $16,528 $16,810
RefrigerantSide(R) Services 675 815 3,435 3,958
------ ------ ------- -------
Total $5,677 $6,111 $19,963 $20,768
====== ====== ======= =======
Income taxes
Hudson utilizes the asset and liability method for recording deferred
income taxes, which provides for the establishment of deferred tax asset or
liability accounts based on the difference between tax and financial reporting
bases of certain assets and liabilities.
66
Hudson recognized a reserve allowance against the deferred tax benefit for
the current and prior period losses. The tax benefit associated with Hudson's
net operating loss carry forwards would be recognized to the extent that Hudson
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 plus dividends on the outstanding Series A Preferred Stock, $218,000 and
$197,000 for the quarter ended March 31, 2003 and 2002, respectively, and
$796,000 and $723,000 for the years ended December 31, 2002 and 2001,
respectively, 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. The
effect of equivalent shares was not dilutive in either 2002 or 2001.
Estimates and Risks
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States 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.
Hudson participates in an industry that is highly regulated, changes in
which could affect operating results. Currently Hudson purchases virgin and
reclaimable refrigerants from domestic suppliers and its customers. To the
extent that Hudson is unable to obtain refrigerants on commercially reasonable
terms or experiences a decline in demand for refrigerants, Hudson could realize
reductions in refrigerant processing and possible loss of revenues, which would
have a material adverse affect on operating results.
Hudson is subject to various legal proceedings. Hudson assesses the merit
and potential liability associated with each of these proceedings. In addition,
Hudson estimates potential liability, if any, related to these matters. To the
extent that these estimates are not accurate, or circumstances change in the
future, Hudson 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
Hudson reviews long-lived assets for impairment 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
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.
Stock options
Hudson has historically used the intrinsic value method of accounting for
employee stock options as permitted by SFAS No. 123, "Accounting for Stock-Based
Compensation." Accordingly, compensation cost for stock options has been
measured as the excess, if any, of the quoted market price of Company stock at
the date of the grant over the amount the employee must pay to acquire the
stock. The compensation cost is recognized over the vesting period of the
options.
Both the stock-based employee compensation cost included in the
determination of the net income as reported and the stock-based employee
compensation cost that would have been included in the determination of net
income if the fair value based method had been applied to all awards, as well as
the resulting pro-forma net income and earning per share using the fair value
approach, are presented in the following table. These pro forma amounts may not
be representative of future disclosures since the estimated fair value of stock
options is amortized to expense over the vesting period, and additional options
may be granted in future years.
67
Three months ended Years ended
March 31, December 31,
--------- ------------
2003 2002 2002 2001
---- ---- ---- ----
(unaudited)
Pro forma results
(In thousands, except per share amounts)
Net loss available for common shareholders:
As reported $ (640) $ (645) $(3,318) $(3,122)
Total stock based employee compensation
expense determined under fair value based
method 74 97 387 447
------- ------- ------- -------
Pro forma $ (714) $ (742) $(3,705) $(3,569)
Loss per common share-basic and diluted:
As reported $ (.12) $ (.13) $ (.64) $ (.61)
Pro forma $ (.14) $ (.14) $ (.72) $ (.70)
Recent accounting pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
FASB statement No. 143, Accounting for Asset Retirement Obligations ("SFAS
143"). SFAS 143 addresses financial reporting for obligations associated with
retirement of tangible long-lived assets and the associated retirement costs.
SFAS 143 is effective for fiscal years beginning after June 15, 2002.
In April 2002, the FASB issued FASB statement No. 145 ("SFAS 145"), which
rescinds FASB statements No. 4, 44 and 64 and amends FASB statement No. 13. SFAS
145 is effective for fiscal years beginning after May 15, 2002.
In June 2002, the FASB issued FASB statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities ("SFAS 146"). SFAS 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities. SFAS 146 is effective for fiscal years beginning after December 31,
2002.
In December 2002, the FASB issued FASB statement No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure ("SFAS 148"), an amendment
of SFAS No. 123. SFAS 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. Hudson plans to continue to use the intrinsic value
method for stock-based compensation. SFAS No. 148 is effective for fiscal years
beginning after December 15, 2002.
Hudson adopted each of the above pronouncements effective January 1, 2003,
except that SFAS 148 was adopted as of December 31, 2002 and these adoptions did
not have a material impact on its financial position and results of operations.
Note 2 - Dispositions
Effective March 19, 1999, Hudson sold 75% of its stock ownership in
Environmental Support Solutions, Inc. ("ESS") to one of ESS's founders. The
consideration for Hudson's sale of its interest was $100,000 in cash and a
six-year 6% interest bearing note in the amount of $380,000. Hudson has
recognized as income the portion of the proceeds associated with the note
receivable upon the receipt of cash. Hudson recognized a valuation allowance for
100% of the note receivable. Subsequent to March 19, 1999, in two separate
transactions, ESS redeemed the balance of Hudson's stock ownership in ESS and
the proceeds from the redemption were included as other income. Pursuant to an
agreement dated January 22, 2002, ESS and Hudson agreed to a 16% discount of the
outstanding balance on the note receivable. On January 25, 2002, as part of a
capital financing completed by ESS, ESS paid Hudson $231,951, representing the
discounted balance as of that date, as full satisfaction of the note received
and as of that date, Hudson recognized the proceeds as other income.
68
Note 3 - Other income
For the three months ended March 31, 2003, other expense of $188,000
consisted of interest expense of approximately $88,000, finance charges
associated with Hudson's credit facility of $70,000 and amortization of the
original issue discount associated with the Company's Convertible Notes to
related parties. For the three months ended March 31, 2002, other income of
$144,000 consisted primarily of the prepayment of the remaining balance of the
note receivable from ESS and, to a lesser extent, interest income offset by
interest expense of $97,000.
For the year ended December 31, 2002, other income of $253,000 consisted
primarily of the prepayment of the remaining balance of the note receivable from
ESS and to a lesser extent, interest income. For the year ended December 31,
2001, other income of $230,000 consisted primarily of interest income, lease
rental income from Hudson's Ft. Lauderdale facility, which was sold on March 22,
2001, and payments received from the note receivable from ESS.
Note 4 - Income taxes
During the quarters ended March 31, 2003 and 2002, and the years ended
December 31, 2002 and 2001, there was no income tax expense recognized due to
Hudson's net losses.
Reconciliation of Hudson's actual tax rate to the U.S. Federal statutory
rate is as follows:
Three months ended Year ended
March 31, December 31,
--------- ------------
(unaudited)
(in percents) 2003 2002 2002 2001
---- ---- ---- ----
Income tax rates
- Statutory U.S. Federal rate (34%) (34%) (34%) (34%)
- States, net U.S. benefits (4%) (4%) (4%) (4%)
- Valuation allowance 38% 38% 38% 38%
---- ---- ---- ----
Total --% --% --% --%
==== ==== ==== ====
As of December 31, 2002, Hudson has net operating loss carryforwards,
("NOL's") of approximately $27,900,000 expiring 2007 through 2022 for which a
100% valuation allowance has been recognized. Included in the NOL's are NOL's
from Refrigerant Reclamation Corporation of America, acquired during 1995 as a
subsidiary of Hudson, in the amount of approximately $4,488,000, which are
subject to annual limitations of approximately $367,000 and expire from 2007
through 2010.
Elements of deferred income tax assets (liabilities) are as follows:
March 31, December 31,
(in thousands) 2003 2002
--------- ------------
Deferred tax assets (liabilities) (unaudited)
- Depreciation & amortization $ 92 $ 91
- Reserves for doubtful accounts 103 92
- NOL 10,678 10,631
- Other 8 8
-------- --------
Subtotal 10,881 10,822
- NOL valuation allowance (10,881) (10,822)
-------- --------
Total $ -- $ --
======== ========
Note 5- Trade accounts receivable - net
At March 31, 2003 and December 31, 2002, trade accounts receivable are net
of reserves for doubtful accounts of $292,000 and $262,000, respectively.
69
Note 6 - Inventories
Inventories consisted of the following:
March 31, December 31,
(in thousands) 2003 2002
------------ ------------
(unaudited)
Refrigerant and cylinders $ 2,089 $ 2,328
Packaged refrigerants 896 639
------------ ------------
Total $ 2,985 $ 2,967
============ ============
Note 7 - Property, plant, and equipment
Elements of property, plant, and equipment are as follows:
March 31, December 31,
(in thousands) 2003 2002
------------ ------------
Property, plant, & equipment (unaudited)
- Equipment $ 6,668 $ 6,661
- Equipment under capital lease 253 253
- Vehicles 1,288 1,288
- Furniture & fixtures 205 203
- Leasehold improvements 569 542
- Equipment under construction 201 188
------------ ------------
Subtotal 9,184 9,135
Accumulated depreciation & amortization 6,824 6,584
------------ ------------
Total $ 2,360 $ 2,551
============ ============
Note 8- Short-term and long-term debt
Elements of short-term and long-term debt are as follows:
March 31, December 31,
(in thousands) 2003 2002
------------ ------------
Short-term & long-term debt (unaudited)
Short-term debt:
- Bank credit line $ 2,788 $ 2,034
- Long-term debt: current 420 431
------------ ------------
Subtotal 3,208 2,465
------------ ------------
Long-term debt:
- Bank term loan 256 303
- Capital lease obligations 62 79
- Vehicle loans 242 290
- Loans from related parties 960 930
- Less: current maturities (420) (431)
------------ ------------
Subtotal 1,100 1,171
------------ ------------
Total $ 4,308 $ 3,636
============ ============
Bank credit line and term loan
Hudson entered into a credit facility with CIT, which provided for
borrowings to Hudson of up to $6,500,000. As of March 31, 2003, Hudson had
availability under its revolving line of credit of approximately $265,000. As of
March 31, 2003, Hudson had approximately $256,000 outstanding under its term
loans and $2,788,000 outstanding under its revolving line of
70
credit. The facility bore interest at the prime rate plus 1.5%, 5.75% at March
31, 2003, and substantially all of Hudson's assets were pledged as collateral
for obligations to CIT.
On May 30, 2003 Hudson satisfied all outstanding obligations to CIT by
entering into a credit facility with Keltic Financial Partners, LLP, or
"Keltic", see Note 12.
Vehicle Loans
During 1999, Hudson entered into various vehicle loans. The vehicles are
primarily used in connection with Hudson's on-site services. The loans are
payable in 60 monthly payments through October 2004 and bear interest at 9.0% to
9.98%.
Scheduled maturities of Hudson's long-term debts and capital lease
obligations are as follows:
Debts and capital lease obligations
-----------------------------------
Years ended December 31, Amount
------------------------ ------
(in thousands)
- 2003 $ 245
- 2004 1,045
- 2005 3
- 2006 3
- 2007 3
------
Total $1,299
======
Capital Lease Obligations
Hudson rents certain equipment with a net book value of approximately
$124,000 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)
- 2003 $ 52
- 2004 18
- 2005 3
- 2006 3
- 2007 3
----
Total $ 79
====
Loans from Related Parties
In November 2002, Hudson consummated the private sale of unsecured 12%
subordinated promissory notes or referred to herein as "Bridge Notes" to certain
officers and certain members of their family and holders of the Series A
Preferred Stock, for which it received gross proceeds of $655,000. The Bridge
Notes were for a term of one year and were subordinate in payment to Hudson's
obligations under its credit facility with CIT. In accordance with the terms of
the Bridge Notes, each of the purchasers, at their option, elected to defer
quarterly interest payments which were to be added to the principal amount of
the Bridge Notes as of each interest payment date and which accrued interest
would, in turn, accrue interest at 12% per annum. The Bridge Notes automatically
exchanged for unsecured convertible subordinated promissory notes, described in
more detail immediately below, "Exchange Notes" upon approval of such exchange
by Hudson's shareholders, which approval was obtained at the annual meeting on
December 20, 2002.
Effective December 2002, Hudson consummated the private sale of unsecured
10% convertible subordinated promissory notes to certain officers and certain
members of their family and holders of the Series A Preferred Stock, for which
it received gross proceeds of $495,000. At or about the same time, the Bridge
Notes were cancelled and exchanged for the
71
Exchange Notes in a principal amount equal to the outstanding principal amount
of the Bridge Notes immediately prior to the exchange together with accrued and
unpaid interest thereon. As of December 2002, the Exchange Notes and the
December 2002 promissory notes were identical in terms and for the purpose of
this prospectus together are referred to herein as the Convertible Notes. The
Convertible Notes have a term of two years and earn interest at an annual rate
of 10% payable quarterly in arrears. Holders of the Convertible Notes had the
one time option to elect to either receive payments of interest on a quarterly
basis, subject to the limitations described below, or defer quarterly interest
payments, in which case, interest would be added to the outstanding amount of
the Convertible Notes on each quarterly payment date and accrue interest at the
then effective Convertible Notes interest rate. The Convertible Notes are
unsecured and subordinate in payment to Hudson's obligations under its credit
facility with Keltic. The Convertible Notes may not be prepaid in cash by Hudson
without the prior consent of Keltic and payment of interest, if any, in cash on
any scheduled quarterly interest payment date is limited to an aggregate of
$20,000 per calendar year. Holders of the Convertible Notes have the right to
convert all or a portion of the outstanding principal balance, and any accrued
interest thereon, to common stock of Hudson, upon, but not prior to, the first
anniversary of the issuance of the Convertible Notes. The conversion rate of
these Convertible Notes was $.79 per share.
On April 15, 2003 Hudson issued an additional $500,000 principal amount of
Convertible Notes to the holders of the Series A Preferred Stock. The April 15,
2003 note issuance is identical to the December 2002 issuance, except that the
conversion rate of these Convertible Notes is $1.41 per share.
The conversion rate of the Convertible Notes is subject to adjustment on a
full ratchet basis; this means that if Hudson issues any stock at a price less
than the conversion rate, the conversion rate for all shares issuable upon
conversion of the Convertible Notes will be adjusted downward to such price.
This adjustment is applicable in certain events including Hudson's issuance of
common stock, warrants or rights to purchase common stock or securities
convertible into common stock in each case for a consideration per share which
is less than the then-effective conversion rate of the Convertible Notes. The
anti-dilution adjustment would not apply, however where Hudson issues shares
subject to stock options under or reserved for option grants under any
shareholder approved stock option plan or upon exercise or conversion of
options, warrants or other exercisable or exchangeable equity or debt securities
that were outstanding immediately prior to the issuance of the Convertible
Notes. In addition, the conversion rate is subject to an appropriate adjustment
in the event of: (i) any subdivisions, combinations and reclassifications of
Hudson's common stock; (ii) any payment, issuance or distribution by Hudson to
its stockholders of a stock dividend; (iii) the consolidation or merger of
Hudson with or into another corporation whereby Hudson is not the surviving
entity; or (iv) the sale by Hudson of substantially all of its assets.
The Convertible Notes provide that in the event of an equity offering by
Hudson at any time prior to the first anniversary of the issuance of the
Convertible Notes, for gross proceeds of not less than $2 million inclusive of
the application of all outstanding principal and interest of the Convertible
Notes, which is referred to in this prospectus as the "Equity Offering", all
outstanding principal and interest, if any, on the Convertible Notes shall be
either (i) applied to the purchase of equity securities in the Equity Offering
at the public offering purchase price, or (ii) converted into restricted shares
of common stock at the then effective conversion rate. Holders of the
Convertible Notes have the right to determine, to the extent that securities are
legally available for purchase in the Equity Offering, whether to apply the
Convertible Notes to acquire equity securities or convert the Convertible Notes
into common stock; provided, however, that in the event that all or a portion of
outstanding principal and interest, if any, of the Convertible Notes exceeds the
number of equity securities available in the Equity Offering, the balance of the
Convertible Notes not applied to the purchase of equity securities will be
converted into restricted shares of common stock at the then-effective
conversion rate.
In April 2003, holders of $495,000 principal amount of Convertible Notes
acquired as of December 2002 entered into agreements with Hudson whereby the
holders agreed to modify the conversion rate of their Convertible Notes to
$1.13, which was the average closing sale price of Hudson's common stock as
reported on the NASDAQ Small Cap Market for the five business days immediately
preceding the execution of the modification agreements; provided further, that,
in the event of an Equity Offering by Hudson prior to the first anniversary of
the issuance of the Convertible Notes, at a public offering price which includes
the exercise price of stock purchase rights offered in the Equity Offering below
the modified conversion rate but in excess of $.79, the conversion rate of the
Convertible Notes will be adjusted to not less than the public offering price.
Hudson is obligated to issue to the holders of the Convertible Notes, on
the earlier of (a) the first anniversary of their respective date of issuance,
or (b) the consummation by Hudson of an Equity Offering, warrants to purchase an
aggregate number of shares of common stock equal to 10% of the number of shares
of common stock into which the Convertible Notes were convertible at their date
of issuance. Each warrant will be exercisable to purchase one share of common
stock for a period of five years from issuance at an exercise price equal to
110% of the lesser of (i) the conversion rate of the Convertible
72
Notes as of their date of issuance, or (ii) the conversion rate of the
Convertible Notes on the date of issuance of the warrants. The exercise price of
the warrants will be subject to anti-dilution adjustment on terms substantially
similar to anti-dilution adjustment of the conversion rate of the Convertible
Notes. As of December 20, 2002, Hudson has recognized an original issue discount
of $220,000 in connection with the obligation to issue the warrants.
Average short-term debt for the year ended December 31, 2002 totaled
$2,577,000 with a weighted average interest rate of approximately 6.15%.
Note 9 - Stockholders' equity
(i) On April 28, 1998, in connection with the loan agreements with
CIT, Hudson issued to CIT warrants to purchase 30,000 shares of Hudson'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. The value of the
warrants was not deemed to be material and the warrants expired on May 30, 2003.
In addition, among other things, the agreements restrict Hudson's ability to
declare or pay any dividends on its capital stock. Hudson has obtained a waiver
from CIT to permit the payment of dividends on its Series A Preferred Stock.
(ii) On March 30, 1999, Hudson completed the sale of 65,000 shares
of its Series A Preferred Stock, with a liquidation value of $100 per share, to
Fleming US Discovery Fund III, L.P. and Fleming US Discovery Offshore Fund III,
L.P. The gross proceeds from the sale of the Series A Preferred Stock were
$6,500,000. The Series A Preferred Stock currently converts to common stock at a
price of $2.375 per share, which was 27% above the closing market price of
common stock on March 29, 1999.
(iii) On February 16, 2001, Hudson completed the sale of 30,000
shares of its Series A Preferred Stock, with a liquidation value of $100 per
share, to Fleming US Discovery Fund III, L.P. and Fleming US Discovery Offshore
Fund III, L.P. The gross proceeds from the sale of the Series A Preferred Stock
were $3,000,000. The Series A Preferred Stock currently converts to common stock
at a price of $2.375 per share, which was 23% above the closing market price of
common stock on February 15, 2001.
The Series A Preferred Stock provides for anti-dilution adjustment of the
conversion price in the event of the subsequent offering by Hudson of securities
for consideration per share less than the then effective conversion price of the
Series A Preferred Stock. At the direction of the NASDAQ Stock Market, Inc., a
minimum of $1.78 per share (the "Conversion Price Floor"), below which the
conversion price of the Series A Preferred Stock could not be adjusted, had been
instituted by Hudson and the holders of the Series A Preferred Stock by
amendment to the designation of the Series A Preferred Stock, and at the same
time Hudson agreed not to offer securities for consideration per share less than
the Conversion Price Floor without the consent of the holders of the Series A
Preferred Stock. Subsequently, in consideration for the consent of the holders
of the Series A Preferred Stock to Hudson's engagement in the private offering
of the Notes at a conversion price below the Conversion Price Floor, the
stockholders of Hudson, at the annual meeting on December 20, 2002, voted in
favor of a proposal to remove the Conversion Price Floor and the designation of
the Series A Preferred Stock was amended accordingly. Although the holders of
the Series A Preferred Stock agreed to waive their rights to an immediate
downward adjustment of the current $2.375 conversion price of the Series A
Preferred Stock in connection with the issuance of the Notes, any subsequent
conversion of the Notes will result in an immediate downward adjustment of the
conversion price of the Series A Preferred Stock to equal the conversion rate of
the Notes. Consequently, upon conversion of the Exchange Notes at the $.79 per
share conversion price the anti-dilution provisions of the Series A Preferred
Stock will cause the conversion price of the Series A Preferred Stock to adjust
downward to the $.79 per share. Assuming that the Series A Preferred Stock
converts to common stock at a conversion price of $.79 per share and based upon
116,629 shares of Series A Preferred Stock issued as of December 31, 2002, the
holders of the Series A Preferred Stock would receive 14,763,164 shares of
common stock. Similarly, the conversion price of such Series A Preferred Stock
may be subsequently adjusted to equal the consideration received by Hudson in
connection with any subsequent issuance of securities below $2.375.
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. The designation of the Series A Preferred Stock provided
for a proxy granted by the holders of the Series A Preferred Stock in favor of
certain of Hudson's officers to vote all shares of common stock into which the
Series A Preferred Stock converts (including any additional shares subsequently
acquired by such holders) in excess of 29% of the votes entitled to be cast by
the Series A Preferred Stock holders. As noted above, in consideration for
consent of the holders of the Series A
73
Preferred Stock to Hudson's engagement in the private offering of the Notes at a
conversion rate below the Conversion Price Floor, the stockholders of Hudson, at
the annual meeting on December 20, 2002, voted in favor of a proposal to remove
the proxy from the designation of the Series A Preferred Stock and the
designation of the Series A Preferred Stock was amended accordingly. The Series
A Preferred Stock carries a dividend rate of 7%, which will increase to 16%, if
the stock remains outstanding on or after March 31, 2004. Hudson used the net
proceeds from the issuance of the Series A Preferred Stock to expand its
RefrigerantSide(R) Services business and for working capital purposes.
Hudson pays dividends, in arrears, on the Series A Preferred Stock, semi
annually, either in cash or additional shares, at Hudson's option. On March 30
and September 30, 2002 and March 30, 2003, Hudson declared and paid, in-kind,
the dividends outstanding on the Series A Preferred Stock and issued 3,873 and
4,011 and 4,153, respectively, additional shares of its Series A Preferred Stock
in satisfaction of the dividends due. Hudson 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 Hudson may call the Series A Preferred Stock if the market
price of its common stock is equal to or greater than 250% of the conversion
price and the common stock has traded with an average daily volume in excess of
20,000 shares for a period of thirty consecutive days.
Hudson 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 have agreed to waive their registration and preemptive rights
with respect to the registration and issuance of the securities in this
offering. In addition, the holders of the Series A Preferred Stock, voting as a
separate class, have the right to elect up to two members to Hudson's Board of
Directors or at their option, to designate up to two advisors to Hudson'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.
(iv) Hudson engaged an advisor to facilitate Hudson's efforts in
connection with the March 30, 1999 sale of the Series A Preferred Stock. In
addition to the advisor fees, Hudson issued to the advisor, warrants, which
expire on March 30, 2004, to purchase 136,482 shares of Hudson's common stock at
an exercise price per share of $2.73. The value of the warrants was not deemed
to be material.
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, 2007.
Properties
Location Annual Rent Lease Expiration Date
-------- ----------- ---------------------
Baltimore, Maryland $ 27,000 8/2005
Baton Rouge, Louisiana $ 21,000 7/2005
Champaign, Illinois $ 132,000 11/2004
Charlotte, North Carolina $ 42,000 Month to Month
Chicago, Illinois $ 25,000 8/2005
Fremont, New Hampshire $ 8,000 6/2004
Hillburn, New York $ 103,000 5/2004
Pearl River, New York $ 64,000 12/2007
Punta Gorda, Florida $ 76,000 12/2003
Rantoul, Illinois $ 39,000 8/2003
Seattle, Washington $ 18,450 3/2004
Hudson rents properties and various equipment under operating leases. Rent
expense, net of sublease rental income, for the years ended December 31, 2002
and 2001 totaled approximately $743,000 and $837,000, respectively.
74
Future commitments under operating leases, are summarized as follows:
Rent expense
------------
Years ended December 31, Amount
------------------------ ------
(in thousands)
- 2003 $ 664
- 2004 324
- 2005 120
- 2006 70
- 2007 72
-------
Total $ 1,250
=======
Legal Proceedings
In June 1998, United Water of New York Inc. ("United") commenced an action
against Hudson 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
alleged contamination of certain of United's wells which are in close proximity
to Hudson's Hillburn, New York facility.
On April 1, 1999, Hudson reported a release at Hudson's Hillburn, New York
facility of approximately 7,800 lbs. of R-11, as a result of a failed hose
connection to one of Hudson'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.
Between April 1999 and May 1999, with the approval of the New York State
Department of Environmental Conservation ("DEC"), Hudson constructed and put
into operation a remediation system at Hudson's Hillburn facility to remove R-11
levels in the groundwater under and around Hudson's facility. The cost of this
remediation system was $100,000.
In July 1999, United amended its complaint in the Rockland County action
to allege facts relating to, and to seek damages allegedly resulting from the
April 1, 1999 R-11 release.
In June 2000, the Rockland County Supreme Court approved a settlement of
the Rockland County action commenced by United. Under the settlement, Hudson
paid to United the sum of $1,000,000 and has been making additional monthly
payments in the amount of $5,000, which payments will continue through December
2003. The proceeds of the settlement were required to be used to fund the
construction and operation by United of a new remediation tower, as well as for
the continuation of temporary remedial measures implemented by United that have
successfully contained the spread of R-11. The remediation tower was completed
in March 2001, and is designed to treat all of United's impacted wells and
restore the water to New York State drinking water standards for supply to the
public. Hudson carries $1,000,000 of pollution liability insurance per
occurrence and in connection with the settlement, exhausted all insurance
proceeds available for that occurrence under all applicable policies.
In June 2000, Hudson signed an Order on Consent with the DEC regarding all
past contamination of the United well field, whereby, Hudson agreed to continue
operating the remediation system it installed at its Hillburn facility in May
1999, until remaining groundwater contamination has been effectively abated. In
May 2001, Hudson signed an amendment to the Order on Consent with the DEC,
pursuant to which Hudson installed one additional monitoring well and modified
Hudson's existing remediation system to incorporate a second recovery well.
Hudson is continuing to operate the remediation system.
In May 2000, Hudson's Hillburn facility was nominated by the United States
Environmental Protection Agency ("EPA") for listing on the National Priorities
List ("NPL"), pursuant to the Comprehensive Environmental Response, Compensation
and Liability Act of 1980. Hudson believes that the agreements reached with the
DEC and United Water, together with the reduced levels of contamination present
in the United Water wells, make such listing unnecessary and counterproductive.
Hudson submitted opposition to the listing within the sixty-day comment period.
To date, no final decision has been made by the EPA regarding the proposed
listing.
In October 2001, Hudson learned that trace levels of R-11 were detected in
one of United's wells that is closest to the Village of Suffern's ("Village")
well system. During February 2002, the Village expressed concern over the
possibility of R-11 reaching its well system and has advised Hudson that it was
investigating available options to protect its well system. No contamination of
R-11 has ever been detected in any of the Village's wells and, as of October
2002, the level of R-11 in the
75
United well closest to the Village was below 1 ppb. In October, 2002 the Village
advised Hudson it intends to proceed with plans to protect its wells and could
look to Hudson to reimburse the Village for any costs it may incur. To date, no
detailed cost estimate, formal demand or claim has been presented by the
Village, however, to the extent the Village proceeds with its plans, Hudson may
incur additional costs. Hudson has agreed to reimburse the Village for
approximately $10,000 of costs incurred to date for additional sampling by the
Village of its wells and for minor preparatory work in connection with the
Village's plan for protecting its wells. Hudson continues to work with the
Village, and all applicable governmental agencies, to prevent contamination of
Village's wells and its water supply.
In February 2003, Hudson agreed to extend the statute of limitations
applicable to any claims that may be available to Ramapo Land Company, the
lessor of the Hillburn facility, arising out of the April 1, 1999 incident for
an additional two years. To date, no claims against Hudson have been asserted or
threatened by Ramapo Land Company.
During the year ended December 31, 2002, Hudson charged to operating
expense $115,000 in additional remediation costs in connection with these
matters. There can be no assurance that the R-11 will not spread beyond the
United Water well system and impact the Village of Suffern's wells, or that the
ultimate outcome of such a spread of contamination will not have a material
adverse effect on Hudson's financial condition and results of operations. There
can be no assurance that Hudson's opposition to the EPA's listing of Hudson's
Hillburn facility on the NPL will be successful, or that the ultimate outcome of
such a listing will not have a material adverse effect on Hudson's financial
condition and results of operations. Furthermore, there can be no assurance that
Ramapo Land Company will not assert any claim against Hudson, or that any such
claim will not have a material adverse effect on Hudson's financial condition
and results of operations.
Note 11 - Stock Option Plans
Effective October 31, 1994, Hudson adopted an Employee Stock Option Plan
("1994 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
1994 Plan to employees and officers of Hudson. Non-qualified options may be
granted to consultants, directors (whether or not they are employees), employees
or officers of Hudson. Stock appreciation rights may also be issued in tandem
with stock options. Unless sooner terminated, the 1994 Plan will expire on
December 31, 2004.
ISOs granted under the 1994 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
Hudson). Non-qualified options granted under the 1994 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 1994 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 Hudson).
Effective July 25, 1997, and as amended on August 19, 1999, Hudson 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 Hudson. Non-qualified options may be granted to consultants,
directors (whether or not they are employees), employees or officers of Hudson.
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
Hudson). Non-qualified options granted under the 1997 Plan may not be granted at
a price less than the par 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 Hudson).
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.
SFAS No. 123 requires Hudson to provide pro forma information regarding
net loss and net loss per share as if compensation cost for Hudson's stock
option plan had been determined in accordance with the fair value based method
76
prescribed in SFAS No. 123. Hudson 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, 2002 2001
---- ----
Assumptions
Dividend Yield 0% 0%
Risk free interest rate 3.0% 4.4%
Expected volatility 60% 60%
Expected lives 5 5
A summary of the status of Hudson's 1994 and 1997 Plans as of December 31,
2002 and 2001 and changes for the years ending on those dates is presented
below:
Weighted
Stock Option Plan Grants Shares Average
------------------------ Exercise Price
Outstanding at December 31, 2000 1,598,082 $ 3.60
--------------------------------
o Granted 456,000 $ 2.52
o Forfeited (112,700) $ 4.19
o Exercised (67,700) $ 2.23
---------
Outstanding at December 31, 2001 1,873,682 $ 3.35
--------------------------------
o Granted 163,400 $ 1.88
o Forfeited (265,866) $ 4.12
o Exercised (8,500) $ 2.30
---------
Outstanding at December 31, 2002 1,762,716 $ 3.14
-------------------------------- =========
Data summarizing year-end options exercisable and weighted average
fair-value of options granted during the years ended December 31, 2002 and 2001
is shown below:
Options Exercisable
Year ended Year ended
December 31, December 31,
2002 2001
Options exercisable at year-end 1,689,383 1,656,397
Weighted average exercise price $3.17 $3.42
Weighted average fair value of
options granted during the year $1.80 $2.63
Options Exercisable at December 31, 2002
Weighted-average
Number Exercise
Range of Prices Outstanding Price
-------------------- ----------- -----
$1 to $4 1,556,617 $ 2.59
$4 to $8 12,766 $ 4.04
$8 to $12 120,000 $10.50
---------
$1 to $12 1,689,383 $ 3.17
=========
77
The following table summarizes information about stock options outstanding
at December 31, 2002:
Options Outstanding At December 31, 2002
Weighted-average
Remaining Weighted-average
Range of Number Contractual Exercise
Prices Outstanding Life Price
------ ----------- ---- -----
$1 to $4 1,629,950 2.92 years $ 2.59
$4 to $8 12,766 1.00 years $ 4.04
$8 to $12 120,000 1.00 years $10.50
---------
$1 to $12 1,762,716 2.78 years $ 3.14
=========
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.
Note 12 - Subsequent Events
On May 30, 2003 Hudson entered into a credit facility with Keltic, which
provides for borrowings of up to $5,000,000. The facility consists of a
revolving line of credit and a term loan. Advances under the revolving line of
credit may not exceed $4,600,000 and are limited to (i) 85% of eligible trade
accounts receivable and (ii) 50% of eligible inventory. Advances available to
Hudson under the term loan may not exceed $400,000. The facility bears interest
at a rate equal to the greater of the prime rate plus 2.0%, or 6.5%.
Substantially all of Hudson's assets are pledged as collateral for its
obligations to Keltic under the credit facility. In addition, among other
things, the agreements restrict Hudson's ability to declare or pay any cash
dividends on its capital stock. As of May 30, 2003, Hudson had in the aggregate
$1,932,000 outstanding under the Keltic credit facility and $1,140,000 available
for borrowing under the credit facility.
In connection with the Keltic credit facility, Hudson also entered into a
loan arrangement with the Flemings Funds for the principal amount of $575,000.
The loan is unsecured, is for a term of three years, and accrues interest at an
annual rate equal to the greater of the prime rate plus 2.0%, or 6.5%. In
accordance with the terms of the Keltic credit facility, the amount of principal
and interest outstanding under this loan arrangement reduces Hudson's aggregate
borrowing availability by a like amount under its credit facility with Keltic.
This loan is expected to be retired in conjunction with the completion of this
Rights Offering.
78
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You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, common shares only in jurisdictions where offers and sales are permitted.
The information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or of any
sale of the common stock.
----------------------
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY ..................................................... 2
RISK FACTORS ........................................................... 9
FORWARD-LOOKING STATEMENTS ............................................. 13
USE OF PROCEEDS ........................................................ 14
MARKET PRICE FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS ...... 15
ABOUT THE RIGHTS OFFERING .............................................. 15
PLAN OF DISTRIBUTION ................................................... 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ................................................ 29
OUR BUSINESS ........................................................... 38
MANAGEMENT ............................................................. 45
EXECUTIVE COMPENSATION ................................................. 48
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ......... 52
DESCRIPTION OF SECURITIES .............................................. 54
CERTAIN TRANSACTIONS ................................................... 56
INDEMNIFICATION OF DIRECTORS AND OFFICERS .............................. 57
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ............................. 59
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_____________ Shares
HUDSON TECHNOLOGIES, INC.
Common Stock
---------------------------
PROSPECTUS
---------------------------
_____________ ___, 2003
================================================================================
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Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
The New York Business Corporation Law (Sections 721 through 726) permits a
corporation to indemnify any of its directors and officers for acts performed in
their capacities, subject to certain conditions. Paragraph 3 of the Certificate
of Incorporation of the Registrant provides that a director shall not be liable
to the corporation or its shareholders for damages for any breach of duty in
such capacity except for liability if a judgment or other final adjudication
adverse to the director establishes that his or her acts or omissions were in
bad faith or involved intentional misconduct or a knowing violation of law or
that the director personally gained a financial profit or other advantage to
which he or she was not legally entitled or that the director's acts violated
Section 719 of the New York Business Corporation Law. Paragraph 17 of Article
III of the Registrant's By-laws provide for indemnification of directors and
officers to the fullest extent permitted by the New York Business Corporation
Law.
Item 25. Other Expenses of Issuance and Distribution.
The expenses of the offering, which, except for the SEC filing fee, are
estimated, are set forth below.
SEC registration fee ....................................... $ 459.73
NASD Filing Fee ............................................ 1,000.00
NASDAQ Additional Listing Fee* ............................. 22,500.00
Independent Valuation and Fairness Opinion ................. 150,000.00
Legal fees and expenses ** ................................. 175,000.00
Accounting fees and expenses ** ............................ 65,000.00
Printing fees and expenses ** .............................. 20,000.00
Miscellaneous ** ........................................... 46,040.27
--------------
Total ............................................. $ 480,000.00
==============
----------
* Assumes that all of the shares of Common Stock registered hereby are
issued in the offering.
** Estimated
Item 26 Recent Sales of Unregistered Securities.
On March 30 and September 30, 2000; March 30 and September 30, 2001; March
30 and September 30, 2002 and March 30, 2003 the Registrant issued a total of
2,398; 2,483; 2,571; 3,740; 3,873; 4,011 and 4,153, respectively, additional
shares of its Series A Preferred Stock to the holders thereof in satisfaction of
the dividends then due.
On March 17, 2000, the Registrant issued 3,000 shares of its common stock
to Brian F. Coleman as bonus compensation.
On February 16, 2001, the Registrant completed the sale of 30,000 shares
of its Series A Preferred Stock with gross proceeds of $3,000,000 to the
Flemings Funds.
In November 2002, the Registrant consummated the private sale of 12%
Unsecured Bridge Notes to certain officers and certain members of their family
and the holders of the Series A Preferred Stock, for which it received gross
proceeds of $655,000. The Bridge Notes automatically exchanged for the
convertible notes, upon approval of such exchange by Hudson's shareholders,
which approval was obtained at the annual meeting on December 20, 2002.
Effective December 2002, the Registrant consummated the private sale of
10% Subordinated Convertible Notes to certain officers and certain members of
their family and the holders of the Series A Preferred Stock, for which it
received gross proceeds of $495,000. The Notes have a term of two years and earn
interest at an annual rate of 10% payable quarterly in arrears.
II-1
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On April 15, 2003, the Registrant issued an additional $500,000 principal
amount of 10 % Subordinated Convertible Notes to the holders of the Series A
Preferred Stock. The April 15, 2003 note issuance is identical to the December
2002 issuance, except that the conversion rate of these notes is $1.41 per
share.
The Registrant is obligated to issue warrants to the holders of
Convertible Notes which warrants will have exercise prices equal to 110% of the
per share conversion price of the Convertible Notes on the date of issuance.
With respect to these foregoing sales and issuances, the Registrant relied
on the exemption from registration provided by Section 4 (2) under the
Securities Act of 1933 as amended and upon Regulation D promulgated thereunder,
as transactions by an issuer not involving a public offering.
Item 27. Exhibits
Exhibit Description of Exhibit
------- ----------------------
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. (5)
3.6 Certificate of Correction of the Certificate of Amendment dated
March 27, 1999. (5)
3.7 Certificate of Amendment of the Certificate of Incorporation dated
March 29, 1999. (5)
3.8 Certificate of Amendment to the Certificate of Incorporation dated
February 16, 2001. (7)
3.9 Amendment to the Certificate of Incorporation dated January 3,
2003. (9)
5 Opinion of Blank Rome LLP***
10.1 Lease Agreement between the Company and Ramapo Land Co., Inc. (1)
10.2 1994 Stock Option Plan of the Company. (1)*
10.3 Employment Agreement with Kevin J. Zugibe. (1)*
10.4 Assignment of patent rights from Kevin J. Zugibe to the Company.
(1)
10.5 Agreements dated January 27, 1997 between E.I. DuPont de Nemours,
DECEO, and the Company. (2)
10.6 Loan and security agreements and warrant agreements dated April 29,
1998 between the Company and CIT Group/Credit Financing Group, Inc.
(3)
10.7 Stock Purchase Agreement, Registration Rights Agreement and
Stockholders Agreement dated March 30, 1999 between the Company and
Fleming US Discovery Fund III, L.P. and Fleming US Discovery
Offshore Fund III, L.P. (4)
10.8 1997 Stock Option Plan of the Company, as amended. (6)*
10.9 Stock Purchase Agreements dated February 16, 2001 between the
Company and Fleming US Discovery Fund III, L.P. and Fleming US
Discovery Offshore Fund III, L.P. (7)
10.10 First Amendment to Registration Rights Agreement dated February 16,
201 between the Company and Fleming US Discovery Fund III, L.P. and
Fleming US Discovery Offshore Fund III, L.P. (7)
10.11 First Amendment to the Stockholders Agreement dated February 16,
2001 between the Company and Fleming US Discovery Fund III, L.P.
and Fleming US Discovery Offshore Fund III, L.P. (7)
10.12 Certificate of Amendment to the Certificate of Incorporation of the
Company dated March 20, 2002. (8)
10.13 First Amendment to Stock Purchase Agreements and Waiver, between
the Company and Fleming US Discovery Fund III, L.P. dated March 5,
2002. (8)
10.14 First Amendment to Stock Purchase Agreements and Waiver, between
the Company and Fleming US Discovery Offshore Fund III, L.P. dated
March 5, 2002. (8)
10.15 Form of 10% Subordinated Convertible Note dated December 20, 2002.
(9)
10.16 Form of Common Stock Purchase Warrants to be issued to Holders of
10% Subordinated Convertible Note dates December 20, 2002. (9)
10.17 Revolving Loan agreement dated May 30, 2003 between Hudson
Technologies Company and Keltic Financial Partners, LP.**
10.18 Security Agreement dated May 30, 2003 between Hudson Technologies
Company and Keltic Financial Partners, LP.**
10.19 Letter Agreement between the Company and Fleming US Discovery Fund
III, L.P. and Fleming US Discovery Offshore Fund III, L.P. dated
May 30, 2003.**
II-2
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21 Subsidiaries of the Registrant. (9)
23.1 Consent of BDO Seidman, LLP.
23.2 Consent of Blank Rome LLP (included in Exhibit 5***)
24 Power of Attorney (included on the signature page of this
Registration Statement).**
99.1 Form of Subscription Agreement for Stockholders.**
99.2 Form of Subscription Agreement for Members of the Public and
Holders of Hudson Technologies, Inc.'s 10% Subordinated Convertible
Notes.**
99.3 Fairness Opinion of Houlihan Lokey Howard & Zukin Financial
Advisors, Inc. (included in the prospectus as Annex ____).***
-----------------
(1) Incorporated by reference to the comparable exhibit filed with
Hudson's Registration Statement on Form SB-2 (No. 33-80279-NY).
(2) Incorporated by reference to the comparable exhibit filed with
Hudson's Current Report in Form 8-K dated January 29, 1997.
(3) Incorporated by reference to the comparable exhibit filed with the
Company's Quarterly Report on Form 10-QSB for the quarter ended
March 31, 1998.
(4) Incorporated by reference to the comparable exhibit filed with
Hudson's Annual Report on Form 10-KSB for the year ended December
31, 1998.
(5) Incorporated by reference to the comparable exhibit filed with
Hudson's Quarterly Report on Form 10-QSB for the quarter ended June
30, 1999.
(6) Incorporated by reference to the comparable exhibit filed with
Hudson's Annual Report on Form 10-KSB for the year ended December
31, 1999.
(7) Incorporated by reference to the comparable exhibit filed with
Hudson's Annual Report on Form 10-KSB for the year ended December
31, 2000.
(8) Incorporated by reference to the comparable exhibit filed with
Hudson's Annual Report on Form 10-KSB for the year ended December
31, 2001.
(9) Incorporated by reference to the comparable exhibit filed with
Hudson's Annual Report on Form 10-KSB for the year ended December
31, 2002.
-----------------
* Denotes management compensation arrangement
** Previously filed
*** To be filed by amendment
Item 28. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement or the most recent
post-effective amendment thereof which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8, and the Information
required to be included in a post-effective amendment by those paragraphs
is contained in periodic reports filed by Hudson pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities herein, and the offering
of such securities at that time shall be deemed to be the initial bona fide
offering thereof, and
II-3
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(3) To remove from registration by means of a post-effective amendment any
of the securities being registered, which remain, unsold at the termination of
this offering.
(4) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(5) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-4
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Amendment No. 2
to the Registration Statement to be signed on its behalf by the undersigned, in
the city of Pearl River, State of New York, on the day 31st of July 2003.
HUDSON TECHNOLOGIES, INC.
By: /s/ Kevin J. Zugibe
------------------------------------
Name: Kevin J. Zugibe
Title: Chairman of the Board and
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 2 to the registration statement has been signed by the following
persons in the capacities and on the dates stated:
Signature Title Date
--------- ----- ----
/s/ Kevin J. Zugibe Chairman of the Board, Chief July 31, 2003
--------------------------- Executive Officer and a Director
Kevin J. Zugibe
/s/ James R. Buscemi Chief Financial Officer (Principal July 31, 2003
--------------------------- Financial and Accounting Officer)
James R. Buscemi
* Director July 31, 2003
---------------------------
Vincent P. Abbatecola
* Director July 31, 2003
---------------------------
Robert L. Burr
* Director July 31, 2003
---------------------------
Dominic J. Monetta
* Director July 31, 2003
---------------------------
Otto C. Morch
* Director July 31, 2003
---------------------------
Harry C. Schell
/s/ Robert M. Zech Director July 31, 2003
---------------------------
Robert M. Zech
* By /s/ Kevin J. Zugibe
----------------------
Attorney in-fact