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Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2002
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ____________ to ____________
Commission file number 1-13412
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Hudson Technologies, Inc.
(Name of small business issuer as specified in its charter)
New York 13-3641539
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
275 North Middletown Road
Pearl River, New York 10965
(address of principal executive offices) (ZIP Code)
Issuer's telephone number, including area code: (845) 735-6000
Securities registered under Section 12(b) of the
Securities Exchange Act of 1934: None
Securities registered under Section 12(g) of the
Securities Exchange Act of 1934:
Common Stock, $0.01 par value
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|.
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form and no disclosure will be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |_|
The Issuer's revenues for the fiscal year ended December 31, 2002 were
$19,963,000
The aggregate market value of the Issuer's Common Stock held by non-affiliates
as of March 7, 2003 was approximately $7,334,000. As of March 7, 2003, there
were 5,165,020 shares of the Issuer's Common Stock outstanding.
Documents incorporated by reference: None
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Hudson Technologies, Inc.
Index
Part Item Page
---- ---- ----
Part I. Item 1 - Description of Business 3
Item 2 - Description of Properties 7
Item 3 - Legal Proceedings 8
Item 4 - Submission of Matters to a Vote of Security Holders 9
Part II. Item 5 - Market for the Common Equity and Related Stockholder Matters 10
Item 6 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 7 - Financial Statements 18
Item 8 - Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 18
Part III. Item 9 - Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 19
Item 10 - Executive Compensation 21
Item 11 - Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 25
Item 12 - Certain Relationships and Related Transactions 27
Item 13 - Exhibits and Reports on Form 8-K 29
Item 14 - Controls and Procedures 30
Signatures 31
Financial Statements 34
2
Part I
Item 1. Description of Business
General
Hudson Technologies, Inc., incorporated under the laws of New York on January
11, 1991, together with its subsidiaries (collectively, "Hudson" or the
"Company"), is a refrigerant services company providing innovative solutions to
recurring problems within the refrigeration industry. The Company'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. The Company operates through its wholly owned
subsidiary Hudson Technologies Company.
The Company's Executive Offices are located at 275 North Middletown Road, Pearl
River, New York and its telephone number is (845) 735-6000.
Industry background
The production and use of refrigerants containing chlorofluorocarbons ("CFCs")
and hydrochlorofluorocarbons ("HCFCs"), the most commonly used refrigerants, are
subject to extensive and changing regulation under the Clean Air Act (the
"Act"). The Act, which was amended during 1990 in response to evidence linking
the use of CFCs 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 Act further
requires the recovery of refrigerants used in residential, commercial and
industrial air conditioning and refrigeration systems. In addition, the Act
prohibited production of CFC refrigerants effective January 1, 1996 and limits
the production of refrigerants containing HCFCs, which production is scheduled
to be phased out by the year 2030. Owners, operators and companies servicing
cooling equipment are responsible for the integrity of their systems regardless
of the refrigerant being used and for the responsible management of their
refrigerant.
Products and Services
RefrigerantSide(R) Services
The Company 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
The Company sells reclaimed and virgin (new) refrigerants to a variety of
customers in various segments of the air conditioning and refrigeration
industry. Virgin refrigerants are purchased by the Company from several
suppliers, including E.I. DuPont de Nemours and Company ("DuPont") as part of
the Company's strategic alliance with DuPont (see "Strategic Alliance" below),
and resold by the Company, typically at wholesale. In addition, the Company
regularly purchases used or contaminated refrigerants from many different
sources, which refrigerants are then reclaimed, using the Company's high volume
proprietary reclamation equipment, and resold by the Company.
Refrigerant Management Services
The Company 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:
Baltimore, Maryland --RefrigerantSide(R) Service depot
Baton Rouge, Louisiana --RefrigerantSide(R) Service depot
Charlotte, North Carolina --Reclamation center and RefrigerantSide(R)
Service depot
Chicago, Illinois --RefrigerantSide(R) Service depot
Fort Myers, Florida --Engineering center
3
Fremont, New Hampshire --Telemarketing office
Hillburn, New York --RefrigerantSide(R) Service depot
Houston, Texas --RefrigerantSide(R) Service depot
Norfolk, Virginia --RefrigerantSide(R) Service depot
Pearl River, New York --Company headquarters and administration offices
Punta Gorda, Florida --Refrigerant separation and reclamation center
Rantoul, Illinois --Reclamation and cylinder refurbishment center
and RefrigerantSide(R)Service depot
Seattle, Washington --RefrigerantSide(R) Service depot
Strategic Alliance
In January 1997, the Company entered into agreements with DuPont, pursuant to
which the Company (i) provides recovery, reclamation, separation, packaging and
testing services directly to DuPont for marketing through DuPont's Authorized
Distributor Network and (ii) markets DuPont's SUVA(TM) refrigerant products
together with the Company's reclamation and refrigerant management services.
These agreements provide for automatic annual renewal subject to termination by
either party.
Suppliers
The Company's financial performance is in part dependent on its ability to
obtain sufficient quantities of virgin and reclaimable refrigerants from
manufacturers, wholesalers, distributors, bulk gas brokers and from other
sources within the air conditioning and refrigeration and automotive aftermarket
industries, and on corresponding demand for refrigerants. Most of the Company's
refrigerant sales are CFC based refrigerants, which are no longer manufactured.
To the extent that the Company is unable to source the CFC based refrigerants or
virgin refrigerants, or resell refrigerants at a profit, the Company's financial
condition and results of operations would be materially adversely affected.
Customers
The Company provides its services to commercial, industrial and governmental
customers, as well as to refrigerant wholesalers, distributors, contractors and
to refrigeration equipment manufacturers. Agreements with larger customers
generally provide for standardized pricing for specified services.
For the year ended December 31, 2002, one customer accounted for 11% of the
Company's revenues. For the year ended December 31, 2001, one customer accounted
for 15% of the Company's revenues. The loss of a principal customer or a decline
in the economic prospects of and/or a reduction in purchases of the Company's
products or services by any such customer could have a material adverse effect
on the Company's financial position and results of operations.
Marketing
Marketing programs are conducted through the efforts of the Company's executive
officers, Company sales personnel, and third parties. Hudson employs various
marketing methods, including direct mailings, technical bulletins, in-person
solicitation, print advertising, response to quotation requests and the internet
(www.hudsontech.com).
The Company's sales personnel are compensated on a combination of a base salary
and commission. The Company's executive officers devote significant time and
effort to customer relationships.
Competition
The Company 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 the Company (including proprietary
RefrigerantSide(R) Services and other on-site services) and price (particularly
with respect to refrigerant sales).
The Company 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 the Company and, in some instances, provide services or
products over a more extensive geographic area than the Company.
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 the Company
will be able to compete successfully or penetrate this service market as rapidly
as it anticipates.
4
Insurance
The Company carries insurance coverage that it considers sufficient to protect
the Company's assets and operations. The Company currently maintains general
commercial liability insurance and excess liability coverage for claims up to
$7,000,000 per occurrence and $8,000,000 in the aggregate. There can be no
assurance that such insurance will be sufficient to cover potential claims or
that an adequate level of coverage will be available in the future at a
reasonable cost. The Company attempts to operate in a professional and prudent
manner and to reduce potential liability risks through specific risk management
efforts, including employee training. Nevertheless, a partially or completely
uninsured claim against the Company, if successful and of sufficient magnitude,
would have a material adverse effect on the Company.
The refrigerant industry involves potentially significant risks of statutory and
common law liability for environmental damage and personal injury. The Company,
and in certain instances, its officers, directors and employees, may be subject
to claims arising from the Company's on-site or off-site services, including the
improper release, spillage, misuse or mishandling of refrigerants classified as
hazardous or non-hazardous substances or materials. The Company may be 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 of $1,000,000 per
occurrence, and $2,000,000 annual aggregate for events occurring subsequent to
November 1996. There can be no assurance that the Company will not face claims
resulting in substantial liability for which the Company is uninsured, or that
the Company will not incur liability for environmental impairment or personal
injury.
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 ("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
require the Company and, in certain instances, its employees, to obtain and
maintain licenses in connection with its operations. This extensive regulatory
framework imposes significant compliance burdens and risks on the Company.
Hudson and its customers are subject to the requirements of the 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 Act, reclaimed refrigerant must satisfy the same purity
standards as newly manufactured refrigerants in accordance with standards
established by the Air Conditioning and Refrigeration Institute ("ARI") prior to
resale to a person other than the owner of the equipment from which it was
recovered. The ARI and the EPA administer certification programs pursuant to
which applicants are certified to reclaim refrigerants in compliance with ARI
standards. Under such programs, the ARI issues a certification for each
refrigerant and conducts periodic inspections and quality testing of reclaimed
refrigerants.
The Company has obtained ARI certification for most refrigerants at each of its
reclamation facilities, and is certified by the EPA. In order to maintain ARI
certification, the Company 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 the Company. 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.
The Company is also subject to regulations adopted by the Department of
Transportation which classify most refrigerants handled by the Company as
hazardous materials or substances and impose requirements for handling,
packaging, labeling and transporting refrigerants.
5
The Resource Conservation and Recovery Act of 1976 ("RCRA") requires that
facilities that treat, store or dispose of hazardous wastes comply with certain
operating standards. Before transportation and disposal of hazardous wastes
off-site, generators of such waste must package and label their shipments
consistent with detailed regulations and prepare a manifest identifying the
material and stating its destination. The transporter must deliver the hazardous
waste in accordance with the manifest to a facility with an appropriate RCRA
permit. Under RCRA, impurities removed from refrigerants consisting of oils
mixed with water and other contaminants are not presumed to be hazardous waste.
The Emergency Planning and Community Right-to-Know Act of 1986 requires the
annual reporting of Emergency and Hazardous Chemical Inventories (Tier II
reports) to the various states in which the Company operates and to file annual
Toxic Chemical Release Inventory Forms with the EPA. The Company believes that
it has been and remains in full compliance with these requirements.
The Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), establishes liability for clean-up costs and environmental damages
to current and former facility owners and operators, as well as persons who
transport or arrange for transportation of hazardous substances. Almost all
states have similar statutes regulating the handling and storage of hazardous
substances, hazardous wastes and non-hazardous wastes. Many such statutes impose
requirements, which are more stringent than their federal counterparts. The
Company could be subject to substantial liability under these statutes to
private parties and government entities, in some instances without any fault,
for fines, remediation costs and environmental damage, as a result of the
mishandling, release, or existence of any hazardous substances at any of its
facilities.
The Occupational Safety and Health Act of 1970 mandates requirements for safe
work place for employees and special procedures and measures for the handling of
certain hazardous and toxic substances. State laws, in certain circumstances,
mandate additional measures for facilities handling specified materials.
The Company believes that it is in compliance with all material regulations
relating to its business operations. However, amendments to existing statutes
and regulations or adoptions of new statutes and regulations which affect the
marketing and sale of refrigerants and services could require the Company to
continually adapt its methods of operations and/or discontinue the sale of
certain products and services and such changes could result in substantial
costs. There can be no assurance that Hudson will be able to continue to comply
with applicable laws, regulations and licensing requirements and any future
changes. Failure to comply could subject the Company to civil remedies,
substantial fines, penalties, injunction, or criminal sanctions, which, alone or
in the aggregate could have a material adverse effect on the Company.
Quality Assurance & Environmental Compliance
The Company utilizes in-house quality and regulatory compliance control
procedures. Hudson maintains its own analytical testing laboratories to assure
that reclaimed refrigerants comply with ARI purity standards and employs
portable testing equipment when performing on-site services to verify certain
quality specifications. The Company employs three persons engaged full-time in
quality control and to monitor the Company's operations for regulatory
compliance.
Employees
The Company has 85 full and 5 part time employees including air conditioning and
refrigeration technicians, chemists, engineers, sales and administrative
personnel.
None of the Company's employees are represented by a union. The Company believes
that its employee relations are good.
Patents and Proprietary Information
The Company holds a United States patent relating to the high-speed equipment,
components and process to reclaim refrigerants, and a registered trademark for
its "Zugibeast(R)". The patent expires in January 2012. The Company believes
that patent protection is important to its business and has received 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 the Company, that any patent
applications will result in issued patents or that patents will not be
circumvented or invalidated. Technological development in the refrigerant
industry may result in extensive patent filings and a rapid rate of issuance of
new patents. Although the Company believes that its existing patents and the
Company's equipment do not and will not infringe upon existing patents or
violate proprietary rights of others, it is possible that the Company's existing
patent rights may not be valid or that infringement of existing or future
patents or violations of proprietary rights of others may occur. In the event
the Company's equipment infringe or are alleged to infringe patents or other
proprietary rights of others, the Company may be required to modify the design
of its equipment, obtain a license or defend a possible patent infringement
action. There can be no assurance that the Company will have the financial or
other resources necessary to enforce or defend a patent infringement or
proprietary rights violation action or that the Company will not become liable
for damages.
6
The Company also relies on trade secrets and proprietary know-how, and employs
various methods to protect its technology. However, such methods may not afford
complete protection and there can be no assurance that others will not
independently develop such know-how or obtain access to the Company's know-how,
concepts, ideas and documentation. Failure to protect its trade secrets could
have a material adverse effect on the Company.
Item 2. Description of Properties
The Company's 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.
The Company'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.
The Company'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. The Company 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 the
Company's Rantoul, Illinois facility.
The Company'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.
The Company's Villa Park (Chicago), Illinois depot facility is located in a
3,500 square foot building leased from an unaffiliated third party at an annual
rent of $25,000 pursuant to an agreement expiring in August 2005.
The Company'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.
The Company's Ft. Myers, Florida engineering facility is located in a 15,000
square foot building leased from an unaffiliated third party at an annual rent
of $60,000 pursuant to an agreement that expired in July 2002. The Company
currently occupies the facility pursuant to a month to month rental agreement at
a monthly rate of $5,000.
The Company'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.
The Company's Houston, Texas depot facility is located in a 5,000 square foot
building leased from an unaffiliated third party at an annual rent of $28,000
pursuant to an agreement which expires in June 2003.
The Company's Norfolk, Virginia depot facility is located in a 2,000 square foot
building leased from an unaffiliated third party at an annual rent of $16,000
pursuant to an agreement that expired in September 2002. The Company currently
occupies the facility pursuant to a month to month rental agreement at a monthly
rate of $1,350.
The Company'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.
The Company's Plainview, New York depot facility is located in a 15,000 square
foot building leased from an unaffiliated third party at an annual rent of
$17,000 that expired in July 2002. The Company currently occupies the facility
pursuant to a month to month rental agreement at a monthly rate of $1,300.
The Company's Punta Gorda, Florida separation facility is located in a 15,000
square foot building leased from an unaffiliated third party at an annual rent
of $76,000 pursuant to an agreement expiring in December 2003.
The Company'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. The Company currently
occupies the facility pursuant to a month to month rental agreement at a monthly
rate of $6,500. The Company is in the process of relocating all of its
operations at this facility to its Champaign, Illinois facility.
The Company's Salem, New Hampshire depot facility is located in a 3,000 square
foot building leased from an unaffiliated third party at an annual rent of
$18,000 pursuant to an agreement that expires in August 2003.
7
The Company's Seattle, Washington depot facility is located in a 3,000 square
foot building leased from an unaffiliated third party at an annual rent of
$20,000 pursuant to an agreement expiring in March 2004.
The Company typically enters into short-term leases for its facilities and
whenever possible extends the expiration date of such leases. Moreover, as a
result of the current economic environment, and in an effort to improve its
market positioning, the Company may terminate the operations of certain of its
service depots. Although the Company is engaging in a comprehensive evaluation
of these service depots, it has not, at this time, identified any such service
depot for termination.
Item 3. Legal Proceedings
In June 1998, United Water of New York Inc. ("United") commenced an action
against the Company in the Supreme Court of the State of New York, Rockland
County, seeking damages in the amount of $1.2 million allegedly sustained as a
result of alleged contamination of certain of United's wells which are in close
proximity to the Company's Hillburn, New York facility.
On April 1, 1999, the Company reported a release at the Company's Hillburn, New
York facility of approximately 7,800 lbs. of R-11, as a result of a failed hose
connection to one of the Company's outdoor storage tanks allowing liquid R-11 to
discharge from the tank into the concrete secondary containment area in which
the subject tank was located.
Between April 1999 and May 1999, with the approval of the New York State
Department of Environmental Conservation ("DEC"), the Company constructed and
put into operation a remediation system at the Company's Hillburn facility to
remove R-11 levels in the groundwater under and around the Company'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, the Company
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. The Company 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, the Company signed an Order on Consent with the DEC regarding all
past contamination of the United well field, whereby, the Company 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, the Company signed an amendment to the Order on Consent
with the DEC, pursuant to which the Company installed one additional monitoring
well and modified the Company's existing remediation system to incorporate a
second recovery well. The Company is continuing to operate the remediation
system.
In May 2000, the Company'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. The Company 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, the Company 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 the Company 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 United well closest to the Village was below 1
ppb. In October, 2002 the Village advised the Company it intends to proceed with
plans to protect its wells and could look to the Company 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, the Company may incur additional costs. The
Company 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. The Company continues to work with the Village, and all applicable
governmental agencies, to prevent contamination of Village's wells and its water
supply.
8
In February 2003, the Company 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 the Company have been
asserted or threatened by Ramapo Land Company.
During the year ended December 31, 2002, the Company 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 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 the Company's
financial condition and results of operations. There can be no assurance that
the Company's opposition to the EPA's listing of the Company'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 the Company's financial condition and
results of operations. Furthermore, there can be no assurance that Ramapo Land
Company will not assert any claim against the Company, or that any such claim
will not have a material adverse effect on the Company's financial condition and
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
On December 20, 2002, the Company held its annual meeting of stockholders. At
the meeting, the stockholders elected the class of the following four directors
of the Company whose terms were expiring and who were nominated for reelection
by the Company as follows:
o Kevin J. Zugibe received 8,856,760 votes for election and 509,937 votes
were withheld
o Dominic J. Monetta received 8,855,173 votes for election and 511,474 were
withheld
o Harry C. Schell received 8,891,710 votes for election and 474,937 votes
were withheld
o Robert M. Zech received 8,884,960 votes for election and 481,687 votes
were withheld
In addition, the following matters were submitted for a vote by the stockholders
of the Company present at the meeting, in person or by proxy and eligible to
vote and each of the following matters were approved by the requisite vote of
such stockholders:
o A proposal authorizing the Company to engage in a convertible debt
financing with lenders which were expected to include certain
officers of the Company received 6,996,199 votes for and 316,327
votes against. There were 46,216 abstentions and 2,007,905
non-votes.
o A proposal authorizing the Company to issue Exchange Notes,
identical in terms to the Convertible Notes to be issued by the
Company in the proposed convertible debt financing, in exchange for
Bridge Notes acquired by lenders which included certain officers of
the Company received 6,995,257 votes for and 320,367 votes against.
There were 42,856 abstentions and 2,007,905 non-votes.
o A proposal to amend the Company's certificate of incorporation to
remove the provision from the designation of the Series A Preferred
Stock relating to the proxy granted by the holders of the Series A
Preferred Stock in favor of certain officers of the Company received
6,978,712 votes for and 329,325 votes against. There were 50,706
abstentions and 2,007,905 non-votes.
o A proposal to amend the Company's certificate of incorporation to
remove the conversion price floor from the designation of the Series
A Preferred Stock received 6,999,212 votes for and 306,799 against.
There were 52,731 abstentions and 2,007,905 non-votes.
o A proposal authorizing the Board of Directors of the Company to
amend the Company's certificate of incorporation to increase the
number of authorized shares of common stock from 20,000,000 shares
to 50,000,000 received 8,810,901 votes for and 513,342 votes
against. There were 42,404 abstentions and zero non-votes.
9
Part II
Item 5. Market for the Common Equity and Related Stockholder Matters
The Company's Common Stock traded from November 1, 1994 to September 20, 1995 on
the NASDAQ Small-Cap Market under the symbol 'HDSN'. 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 Small-Cap Market.
There can be no assurance that, in the future, the Company will be able to meet
the requirements necessary for continued listing of its common stock on NASDAQ
Small Cap 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
--------------------------------------------------------------------------------
The number of record holders of the Company's Common Stock was approximately 250
as of March 1, 2003. The Company believes that there are in excess of 4,000
beneficial owners of its Common Stock.
To date, the Company has not declared or paid any cash dividends on its Common
Stock. The payment of dividends, if any, in the future is within the discretion
of the Board of Directors and will depend upon the Company's earnings, its
capital requirements and financial condition, borrowing covenants, and other
relevant factors. The Company presently intends to retain all earnings, if any,
to finance the Company's operations and development of its business and does not
expect to declare or pay any cash dividends in the foreseeable future. In
addition, the Company has a credit facility with CIT Group/Business Credit, Inc.
("CIT") which, among other things, restricts the Company's ability to declare or
pay any dividends on its capital stock. The Company has obtained a waiver from
CIT to permit the payment of dividends on its Series A Preferred Stock. The
Series A Preferred Stock carries a dividend rate of 7% and as such has a
dividend preference over the common stock. The Company pays dividends, in
arrears, on the Series A Preferred Stock, semi annually, either in cash or
additional shares, at the Company's option (see Item 6 "Management's Discussion
and Analysis of Financial Condition and Results of Operations" - Liquidity and
Capital Resources).
In November 2002, the Company consummated the private sale of unsecured 12%
subordinated promissory notes ("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 the Company'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 the Company's shareholders, which approval was obtained at the annual meeting
on December 20, 2002.
Effective December 2002, the Company consummated the private sale of unsecured
10% convertible subordinated promissory notes ("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
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
Convertible Notes were identical in terms and together are referred to herein as
the ("Notes"). The Notes have a term of two years and earn interest at an annual
rate of 10% payable quarterly in arrears. Holders of the 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 Notes on each quarterly payment date and accrue interest at the then
effective Notes interest rate. The Notes are unsecured and subordinate in
payment to the Company's obligations under its credit facility with CIT. The
Notes may not be prepaid in cash by the Company without the prior consent of CIT
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 Notes have the right to convert all or a portion of the outstanding
principal balance, and any
10
accrued interest thereon, to Common Stock of the Company, upon, but not prior
to, the first anniversary of the issuance of the Notes at the conversion rate of
$.79 per share (the average closing sale price of the Company's Common Stock as
reported on the NASDAQ Small Cap Market for the five business days immediately
preceding the issuance of the Notes), subject to certain anti-dilution
adjustments (the "Conversion Rate").
In the event of a public offering of equity securities ("Equity Offering") by
the Company at any time prior to the first anniversary of the issuance of the
Notes, for gross proceeds of not less than $2 million (inclusive of the
application of all outstanding principal and interest of the Notes), all
outstanding principal and interest, if any, on the 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 Notes have
the right to determine, to the extent that securities are legally available for
purchase in the Equity Offering, whether to apply the Notes to acquire equity
securities or convert the Notes into Common Stock; provided, however, that in
the event that all or a portion of outstanding principal and interest, if any,
of the Notes exceeds the number of equity securities available in the Equity
Offering, the balance of the Notes not applied to the purchase of equity
securities will be converted into restricted shares of Common Stock at the
then-effective Conversion Rate.
The Conversion Rate of the Notes is subject to adjustment on a full ratchet
basis (i.e., if the Company issues any stock at a price less than the Conversion
Rate, the Conversion Rate for all shares issuable upon conversion of the Notes
will be adjusted downward to such price) in certain events including the
Company's issuance of Common Stock, warrants or rights to purchase Common Stock
(except for 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 outstanding immediately prior to the issuance of the Notes) or
securities convertible into Common Stock in each case for a consideration per
share which is less than the then-effective Conversion Rate. In addition, the
Conversion Rate is subject to an appropriate adjustment in the event of: (i) any
subdivisions, combinations and reclassifications of the Company's Common Stock;
(ii) any payment, issuance or distribution by the Company to its stockholders of
a stock dividend; (iii) the consolidation or merger of the Company with or into
another corporation whereby the Company is not the surviving entity; or (iv) the
sale by the Company of substantially all of its assets.
In April 2003, holders of the Convertible Notes holding an aggregate principal
amount of $495,000 entered into agreements with the Company whereby the holders
agreed to modify the Conversion Rate of their Convertible Notes to $1.13 (the
average closing sale price of the Company's Common Stock as reported on the
NASDAQ Small Cap Market for the five business days immediately preceding the
execution of the modification agreements) (the "Modified Conversion Rate");
provided further, that, in the event of an Equity Offering by the Company 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.
The Company is obligated to issue to the holders of the Notes, on the earlier of
(a) December 20, 2003, or (b) the consummation by the Company of an Equity
Offering, Common Stock purchase warrants (the "Note 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 Notes were convertible at December 20, 2002. Each
Note Warrant will be exercisable to purchase one share of Common Stock for a
period of five years from issuance at an exercise price (the "Exercise Price")
equal to 110% of the lesser of (i) the Conversion Price of the Notes as of
December 20, 2002, or (ii) the Conversion Price of the Notes on the date of
issuance of the Note Warrants. The Exercise Price of the Note Warrants will be
subject to anti-dilution adjustment on terms substantially similar to the
anti-dilution adjustment of the Conversion Rate of the Notes. As of December 20,
2002, the Company has recognized an original issue discount of $220,000, in
connection with the issuance of the Note Warrants.
The Bridge Notes and the Notes were issued by the Company in reliance on Section
4(2) of the Securities Act of 1933, as amended (the "Securities Act") and upon
Regulation D promulgated thereunder. In relying upon such exemption (i) the
Company did not engage in any "general solicitation" and (ii) each of the
purchasers represented that (a) it was either an "accredited investor" as
defined in Rule 501 promulgated under the Securities Act, or otherwise met the
Company's investor suitability standard, (b) it was capable of evaluating the
merits and risks of an investment in the Bridge Notes and the Notes, (c) it was
acquiring the Bridge Notes and the Notes for its own account and not with a view
to, or for resale in connection with, any distribution within the meaning of the
Securities Act, in violation of the Securities Act, and (d) it was provided with
access to all necessary information to enable it to evaluate the financial risk
inherent in the transaction.
See Item 11 for certain information with respect to the Company's equity
compensation plans in effect at December 31, 2002.
11
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Safe Harbor Statement Under The Private Securities Litigation Reform Act of 1995
Certain statements contained in this section and elsewhere in this Form 10-KSB
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve a number of known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
but are not limited to, changes in the markets for refrigerants (including
unfavorable market conditions adversely affecting the demand for, and the price
of refrigerants), regulatory and economic factors, seasonality, competition,
litigation, the nature of supplier or customer arrangements which become
available to the Company in the future, adverse weather conditions, possible
technological obsolescence of existing products and services, possible reduction
in the carrying value of long-lived assets, estimates of the useful life of its
assets, potential environmental liability, customer concentration, the ability
to obtain financing, and other risks detailed in the Company's other periodic
reports filed with the Securities and Exchange Commission. The words "believe",
"expect", "anticipate", "may", "plan", "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.
Critical Accounting Policies
The Company'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 the
Company 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 the Company's accounting policies involve
significant judgements, uncertainties and estimations. The Company 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 the
Company. On an on-going basis, the Company 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, the Company 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, the
Company evaluates both current and anticipated sales prices of its products to
determine if a write down of inventory to net realizable value is necessary. The
Company 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, the Company 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 the Company's traditional refrigerant
management services, which consist primarily of reclamation of refrigerants. The
Company has created a network of service depots that provide a full range of the
Company's RefrigerantSide(R) Services to facilitate the growth and development
of its service offerings.
During 1999 and 2001 the Company completed sales of its Series A Preferred
Stock. The net proceeds of these sales were used to expand the Company's service
offering through a network of service depots and to provide working capital.
Management believes that its RefrigerantSide(R) Services represent the Company's
long term growth potential. However, in recent periods the Company has not been
successful in growing its RefrigerantSide(R) Service revenue. As part of the
Company's goal to grow its RefrigerantSide(R) Service business, in 2002, the
Company commenced a restructuring of its sales and marketing efforts including
hiring a new Vice President of Sales and Marketing. In the near term, the
Company expects that it will incur additional expenses and losses related to the
development of its RefrigerantSide(R) Services. In addition, to the extent that
the network of service depots does not develop to expected operating levels, the
Company may terminate the operations of certain of its service depots.
Sales of refrigerants continue to represent a majority of the Company's
revenues. Most of the Company's refrigerant sales are Chlorofluorocarbon ("CFC")
based refrigerants, which are no longer manufactured. In addition, the Company
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. However, to the extent that the Company is
unable to source CFC based refrigerants on commercially reasonable terms or at
all, or the demand for CFC based refrigerants decreases, the Company's financial
condition and
12
results of operations would be materially adversely affected. In addition, the
Company's long-term strategy of growth in revenues generated from
RefrigerantSide(R) Services may cause reductions in revenues derived from the
sale of refrigerants.
The Company 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 the Company's operating results. In addition, to the extent that the Company
is unable to obtain refrigerants on commercially reasonable terms or experiences
a decline in demand for refrigerants, the Company could realize reductions in
refrigerant processing, and possible loss of revenues which would have a
material adverse effect on its operating results.
Results of Operations
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 the Company's RefrigerantSide(R) Services offset by an increase in cost of
refrigerant. As a percentage of sales, cost of sales 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 the Company'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.
("ESS").
No income taxes for the years ended December 31, 2002 and 2001 were recognized.
The Company recognized a reserve allowance against the deferred tax benefit for
the 2002 and 2001 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 (see Note 4 to
the Notes to the Consolidated Financial Statements).
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 December 31, 2002, the Company had a working capital deficit of approximately
$128,000, a decrease of $1,055,000 from working capital of $927,000 at December
31, 2001. The decrease in working capital is primarily attributable to the net
loss incurred during the year ended December 31, 2002 offset by proceeds from
the sale of Bridge Notes and Convertible Notes to purchasers including certain
officers and the Series A Preferred Stockholders.
Principal components of current assets are inventory and trade receivables. At
December 31, 2002, the Company had inventories of $2,967,000, an increase of
$580,000 or 24% from the $2,387,000 at December 31, 2001. The increase in the
inventory balance is due to the timing and availability of inventory purchases
and the sale of refrigerants. The Company's ability to sell and replace its
inventory on a timely basis and the prices at which it can be sold are subject,
among other things, to current market conditions and the nature of supplier or
customer arrangements (see "Seasonality and Fluctuations in Operating Results").
At December 31, 2002, the Company had trade receivables of $1,971,000, a
decrease of $774,000 or 28% from the $2,745,000 at December 31, 2001. The
Company'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.
13
The Company has historically financed its working capital requirements through
cash flows from operations, the issuance of debt and equity securities, bank and
related party borrowings. In recent years the Company 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 the Company to
finance its working capital requirements through cash flows from operations the
Company must reduce its operating losses. There can be no assurances that the
Company will be successful in lowering its operating losses, in which case the
Company 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 the
Company would be successful in raising additional capital. The inability to
raise additional capital could have a material adverse effect on the Company.
Furthermore, the inability of the Company to renew or replace its existing
credit facility with The CIT Group/Business Credit, Inc. ("CIT") at the
expiration of the term of the current facility on April 29, 2003 would have a
material adverse effect on the Company's operations and financial condition.
Net cash used by operating activities for the year ended December 31, 2002, was
$1,342,000 compared with net cash 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 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 the Company's depot
network.
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 the Company from the sale of Bridge Notes and Convertible
Notes to purchasers including the holders of the Company'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 December 31, 2002, the Company had cash and cash equivalents of $545,000. The
Company continues to assess its capital expenditure needs. The Company may, to
the extent necessary, continue to utilize its cash balances to purchase
equipment primarily associated with its RefrigerantSide(R)Service offering and
consolidation of its reclamation facilities. The Company estimates that capital
expenditures during 2003 may range from approximately $500,000 to $700,000.
The following is a summary of the Company's significant contractual cash
obligations for the periods indicated that existed as of December 31, 2002 and
is more fully disclosed in the Notes to Consolidated Financial Statements (see
Notes 9 and 11 to the Notes of the Consolidated Financial Statements included in
this report on Form 10-KSB) (amounts 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
====== ====== ===== ==== ==== ======
The Company has entered into a credit facility with CIT, which provides for
borrowings to the Company of up to $6,500,000. The facility requires minimum
borrowings of $1,250,000. The facility provides for a revolving line of credit
and a term loan. Advances under the revolving line of credit are limited to (i)
80% of eligible trade accounts receivable and (ii) 50% of eligible inventory
(which inventory amount shall not exceed 200% of eligible trade accounts
receivable or $3,250,000). As of December 31, 2002, the Company had availability
under its revolving line of credit of approximately $292,000. Advances available
to the Company under the term loan are based on existing fixed asset valuations
and future advances under the term loan of up to an additional $1,000,000 are
based on future capital expenditures. As of December 31, 2002, the Company had
approximately $303,000 outstanding under its term loans and $2,034,000
outstanding under its revolving line of credit and due to the expiration of the
credit facility in April 2003, all such amounts are reflected on the Company's
December 31, 2002 Balance Sheet as current liabilities. The facility bears
interest at the prime rate plus 1.5%, 5.75% at December 31, 2002, and
substantially all of the Company's assets are pledged as collateral for
obligations to CIT. In addition, among other things, the agreements restrict the
Company's ability to declare or pay any dividends on its capital stock. The
Company has obtained a waiver from CIT to permit the payment of dividends on its
Series A Preferred Stock.
The Company is currently in negotiations with CIT regarding a possible extension
of the term of the credit facility or the entering into of a new credit
facility, and is also seeking alternate sources of financing. While the Company
believes that it will be able to obtain replacement financing, there can be no
assurance that CIT will continue to lend funds to the Company after the
expiration of the
14
current credit facility or that the Company will be able to obtain financing
from another source should CIT decide not to continue providing financing to the
Company. However, even if the Company is able to obtain replacement financing it
may be on terms that are less favorable to the Company than the current CIT
facility. A failure of the Company to obtain adequate financing from CIT or an
alternate source after the expiration of the current CIT credit facility would
have a material adverse effect on the Company's operations and financial
condition. As a result of this uncertainty, the Company's independent auditors
have added an explanatory paragraph regarding the Company's ability to continue
as a going concern.
Effective March 19, 1999, the Company sold 75% of its stock ownership in ESS to
one of ESS's founders. The consideration for the Company's sale of its interest
was $100,000 in cash and a six-year 6% interest bearing note in the amount of
$380,000. The Company 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 the Company's financial condition or results of
operations. Effective October 11, 1999, the Company sold to three of ESS's
employees an additional 5.4% ownership in ESS. The Company received $37,940 from
the sale of this additional ESS stock. Effective April 18, 2000, ESS redeemed
the balance of the Company's stock ownership in ESS. The Company received cash
in the amount of $188,000 from the redemption. Pursuant to an agreement dated
January 22, 2002, ESS and the Company 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 the Company $231,951, representing
the discounted balance as of that date, as full satisfaction of the note
receivable and as of that date the Company recognized the proceeds as other
income.
In November 2002, the Company consummated the private sale of 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
the Company'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 the Exchange Notes, upon approval of such exchange
by the Company's shareholders, which approval was obtained at the annual meeting
on December 20, 2002.
Effective December 2002, the Company 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 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. The Notes have a term of two years and
earn interest at an annual rate of 10% payable quarterly in arrears. Holders of
the 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 Notes on each quarterly payment date and accrue
interest at the then effective Notes interest rate. The Notes are unsecured and
subordinate in payment to the Company's obligations under its credit facility
with CIT. The Notes may not be prepaid in cash by the Company without the prior
consent of CIT 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 Notes have the right to convert all or a portion
of the outstanding principal balance, and any accrued interest thereon, to
Common Stock of the Company, upon, but not prior to, the first anniversary of
the issuance of the Notes at the Conversion Rate of $.79 per share.
In the event of an Equity Offering by the Company at any time prior to the first
anniversary of the issuance of the Notes, for gross proceeds of not less than $2
million (inclusive of the application of all outstanding principal and interest
of the Notes), all outstanding principal and interest, if any, on the 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 Notes have the right to determine, to the extent that securities are
legally available for purchase in the Equity Offering, whether to apply the
Notes to acquire such equity securities sold in the Equity Offering or convert
the Notes into Common Stock; provided, however, that in the event that all or a
portion of outstanding principal and interest, if any, of the Notes exceeds the
number of equity securities available in the Equity Offering, the balance of the
Notes not applied to the purchase of equity securities will be converted into
restricted shares of Common Stock at the then-effective Conversion Rate.
The Conversion Rate of the Notes is subject to adjustment on a full ratchet
basis (i.e., if the Company issues any stock at a price less than the Conversion
Rate, the Conversion Rate for all shares issuable upon conversion of the Notes
will be adjusted downward to such price) in certain events including the
Company's issuance of Common Stock, warrants or rights to purchase Common Stock
(except for 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 outstanding immediately prior to the issuance of the Notes) or
securities convertible into Common Stock in each case for a consideration per
share which is less than the then-effective Conversion Rate. In addition, the
Conversion Rate is subject to an appropriate adjustment in the event of: (i) any
subdivisions, combinations and reclassifications of the Company's Common Stock;
(ii) any payment, issuance or distribution by the Company to its stockholders of
a stock dividend; (iii) the consolidation or merger of the Company with or into
another corporation whereby the Company is not the surviving entity; or (iv) the
sale by the Company of substantially all of its assets.
15
In April 2003, holders of the Convertible Notes holding an aggregate principal
amount of $495,000 entered into agreements with the Company whereby the holders
agreed to modify the Conversion Rate of their Convertible Notes to the Modified
Conversion Rate of $1.13 (the average closing sale price of the Company'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 the Company 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 Notes will be adjusted to not less than the public
offering price.
The Company is obligated to issue to the holders of the Notes, on the earlier of
(a) December 20, 2003, or (b) the consummation by the Company of an Equity
Offering, Note 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 Notes
were convertible at December 20, 2002. Each Note 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 Price of the
Notes as of December 20, 2002, or (ii) the Conversion Price of the Notes on the
date of issuance of the Note Warrants. The Exercise Price of the Note Warrants
will be subject to the anti-dilution adjustment on terms substantially similar
to anti-dilution adjustment of the Conversion Rate of the Notes. As of December
20, 2002, the Company has recognized an original issue discount of $220,000, in
connection with the issuance of the Note Warrants.
On March 30, 1999, the Company completed the sale of 65,000 shares of its Series
A Preferred Stock, with a liquidation value of $100 per share, to Fleming US
Discovery Fund III, L.P. and Fleming US Discovery Offshore Fund III, L.P. The
gross proceeds from the sale of the Series A Preferred Stock were $6,500,000.
The Series A Preferred Stock 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.
On February 16, 2001, the Company 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 the Company 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 the Company 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 the Company 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 the Company's
engagement in the private offering of the Notes at a conversion price below the
Conversion Price Floor, the stockholders of the Company, 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 a downward
adjustment of the conversion price of the Series A Preferred Stock to equal the
conversion price 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 the Company 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 the Company'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 the Company's
engagement in the private offering of the Notes at a conversion rate below the
Conversion Price Floor, the stockholders of the Company, 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
16
7%, which will increase to 16%, if the stock remains outstanding on or after
March 31, 2004. The Company 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.
The Company pays dividends, in arrears, on the Series A Preferred Stock, semi
annually, either in cash or additional shares, at the Company's option. On March
30 and September 30, 2002, the Company declared and paid, in-kind, the dividends
on the outstanding Series A Preferred Stock and issued 3,873 and 4,011,
respectively, additional shares of its Series A Preferred Stock in satisfaction
of the dividends due. The Company may redeem the Series A Preferred Stock on
March 31, 2004 either in cash or shares of Common Stock valued at 90% of the
average trading price of the Common Stock for the 30 days preceding March 31,
2004. In addition, the Company 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.
The Company has provided certain registration, preemptive and tag along rights
to the holders of the Series A Preferred Stock. The holders of the Series A
Preferred Stock, voting as a separate class, have the right to elect up to two
members to the Company's Board of Directors or at their option, to designate up
to two advisors to the Company's Board of Directors who will have the right to
attend and observe meetings of the Board of Directors. Currently, the holders
have elected one member to the Board of Directors.
The Company is continuing to evaluate opportunities to rationalize its operating
facilities and its depot network based on ways to reduce costs or to increase
revenues. As a result, the Company may discontinue certain operations, eliminate
depot and overhead costs and, in doing so, may incur future charges to exit
certain operations.
The Company 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 CIT and any replacement
facility it enters into after the expiration of the current term of the CIT
facility. Although the Company believes it can obtain replacement financing for
the CIT facility there can be no assurance that it will do so. Moreover, even if
the Company obtains replacement financing for the CIT facility it 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 the Company, an
increase in operating expenses or failure to achieve expected revenues from the
Company's depots and/or refrigerant sales or additional expansion or acquisition
costs that may arise in the future would adversely affect the Company's future
capital needs. There can be no assurances that the Company's proposed or future
plans will be successful, and as such, the Company may need to significantly
modify its plans or it may require additional capital sooner than anticipated.
The Company is currently seeking to obtain additional financing through the
issuance of debt and/or equity securities. There can be no assurance that the
Company 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 the Company.
Inflation
Inflation has not historically had a material impact on the Company's
operations. However, the current and anticipated rising cost of fuel prices will
have a negative effect on the Company's purchase price of refrigerants and other
products, which will have an adverse effect on the Company's operations.
Reliance on Suppliers and Customers
The Company's financial performance is in part dependent on its ability to
obtain sufficient quantities of virgin and reclaimable refrigerants from
manufacturers, wholesalers, distributors, bulk gas brokers, and from other
sources within the air conditioning and refrigeration and automotive aftermarket
industries, and on corresponding demand for refrigerants. To the extent that the
Company is unable to obtain sufficient quantities of virgin or reclaimable
refrigerants in the future, or resell reclaimed refrigerants at a profit, the
Company's financial condition and results of operations would be materially
adversely affected.
During the year ended December 31, 2002, one customer accounted for 11% of the
Company's revenues. During the year ended December 31, 2001, one customer
accounted for 15% of the Company's revenues. The loss of a principal customer or
a decline in the economic prospects and purchases of the Company's products or
services by any such customer could have a material adverse effect on the
Company's financial position and results of operations.
Seasonality and Fluctuations in Operating Results
The Company's operating results vary from period to period as a result of
weather conditions, requirements of potential customers, non-recurring
refrigerant and service sales, availability and price of refrigerant products
(virgin or reclaimable), changes in reclamation technology and regulations,
timing in introduction and/or retrofit or replacement of CFC-based refrigeration
equipment by domestic users of refrigerants, the rate of expansion of the
Company's operations, and by other factors. The Company's business 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 the Company's financial position and significant losses. With
respect to the Company's RefrigerantSide(R) Services, to date,
17
the Company has not identified any seasonal pattern. However, the Company 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. The Company 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.
The Company will adopt each of the above pronouncements effective January 1,
2003. Currently, the Company does not believe that these adoptions will have a
material impact on its financial position and results of operations.
Item 7. Financial Statements.
The financial statements appear in a separate section of this report following
Part III.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
18
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
The following table sets forth information with respect to the directors and
executive officers of the Company:
-------------------------------------------------------------------------------------------
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 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 the Company and has been a director and
Chief Executive Officer of the Company 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 the
Company 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, the Company'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 the Company 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 the Company. Mr. Mandracchia was a member of the law firm of
Martin, Vandewalle, Donohue, Mandracchia & McGahan, Great Neck, New York until
December 31, 1995 (having been affiliated with such firm since August 1983). Mr.
Mandracchia is the brother in-law of Mr. Zugibe.
Vincent P. Abbatecola has been a director of the Company 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 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 the Company 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
19
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 the Company since April 1996. Since
August 1993, Mr. Monetta has been the President of Resource Alternatives, Inc.,
a corporate development firm concentrating on solving management and
technological problems facing chief executive officers and their senior
executives. From December 1991 to May 1993, Mr. Monetta served as the Director
of Defense Research and Engineering for Research and Advanced Technology for the
United States Department of Defense. From June 1989 to December 1991, Mr.
Monetta served as the Director of the Office of New Production Reactors of the
United States Department of Energy.
Otto C. Morch has been a director of the Company since March 1996. Mr. Morch was
a Senior Vice President of Commercial Banking at Provident Bank and retired from
that position in December 1997.
Harry C. Schell has been a director of the Company since August 1998. Mr. Schell
is the former chairman and chief executive officer of BICC Cables Corporation,
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 the Company since June 1999. Mr. Zech has
been a Partner of Windcrest Discovery Investments, LLC, an investment management
firm, from its inception in February 2002. 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.
The Company has established a Compensation/Stock Option Committee of the Board
of Directors, which is responsible for recommending the compensation of the
Company's executive officers and for the administration of the Company's Stock
Option Plans. The members of the Committee are Messrs. Abbatecola, Burr, Morch
and Zech. The Company also has an Audit Committee of the Board of Directors,
which supervises the audit and financial procedures of the Company. The members
of the Audit Committee are Messrs. Abbatecola, Morch and Monetta. The Company
also has an Executive Committee of the Board of Directors, which is authorized
to exercise the powers of the board of directors in the general supervision and
control of the business affairs of the Company during the intervals between
meetings of the board. The members of the Executive Committee are Messrs. Burr,
Schell and Zugibe. The Company's Occupational, Safety And Environmental
Protection Committee is responsible for satisfying the Board that the Company's
Environmental, Health and Safety policies, plans and procedures are adequate.
The members of the Occupational, Safety and Environmental Protection Committee
are Messrs. Monetta and Zugibe.
The By-laws of the Company provide that the Board of Directors is divided into
two classes. Each class is to have a term of two years, with the term of each
class expiring in successive years, and is to consist, as nearly as possible, of
one-half of the number of directors constituting the entire Board. The By-laws
provide that the number of directors shall be fixed by the Board of Directors
but in any event, shall be no less than seven (7) (subject to decrease by a
resolution adopted by the shareholders). The holders of the Series A Preferred
Stock, voting as a separate class, have the right to elect up to two members to
the Company's Board of Directors. Currently, the holders have elected one member
to the Board of Directors. At the Company'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. 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.
20
Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10 percent of a registered
class of the Company's equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission ("SEC").
Officers, directors, and greater than 10 percent stockholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
Based solely on the Company's review of the copies of such forms received by the
Company, the Company believes that during the year ended December 31, 2002 all
filing requirements applicable to its officers, directors, and greater than 10
percent beneficial stockholders were complied with, except that Mr. Zugibe
failed to timely file a Form 4 or 5 with respect to options to purchase 15,000
shares of the Company's Common Stock granted to him in each of April 2002, July
2002 and October 2002.
Item 10. Executive Compensation
The following table discloses, for the years indicated, the compensation for the
Company's Chief Executive Officer and each executive officer that earned over
$100,000 during the year ended December 31, 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 Operating 2002 $138,799 -- --
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 and 2002 $123,800 -- --
Secretary 2001 $123,800 -- 15,000 shares
2000 $113,415 -- 77,500 shares
----------
(1) The value of personal benefits furnished to the Named Executives during
2000, 2001 and 2002 did not exceed 10% of their respective annual
compensation.
(2) A certain portion of Mr. Zugibe's compensation has been paid in stock
option awards rather than cash. As a result, options to purchase shares of
common stock of 45,000 and 120,000 for the years ended December 31, 2002
and 2001, respectively, were issued in lieu of cash compensation.
21
The Company granted options, which, except as otherwise set forth below, vest
upon the date of grant, to the Named Executives during the fiscal year ended
December 31, 2002, as shown in the following table:
Summary of Option Grants in the 2002 Fiscal Year
% of Total
Number of Options
Securities Granted to
Underlying Employees
Options in Fiscal Exercise or Expiration
Name Position Granted year Base price($/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. Vice President Operations -- -- -- --
Mandracchia 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 Table
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 -- -- 362,668 33,332 -- --
Chief Executive Officer
Brian F. Coleman
President and Chief -- -- 150,168 13,332 -- --
Operating Officer
Neil B. Gafarian
Vice President Sales and -- -- 40,000 -- -- --
Marketing
Charles F. Harkins, Jr -- -- 94,332 6,668 -- --
Vice President RPS
Stephen P. Mandracchia
Vice President Operations -- -- 108,500 10,000 -- --
And Secretary
----------
(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.
22
Compensation of Directors
Non-employee directors receive an annual fee of $3,000 and receive reimbursement
for out-of-pocket expenses incurred, and an attendance fee of $500 and $250,
respectively, for attendance at meetings of the Board of Directors and Board
committee meetings. In addition, commencing in August 1998, non-employee
directors receive 5,000 nonqualified stock options per year of service under the
Company's Stock Option Plans.
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
the Company. The additional stock options are issued with an exercise price
equal to that of the other directors' option grants.
As of December 31, 2002, the Company 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. The Company 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, the Company has granted to Fleming US Discovery Fund
III, L.P. and Fleming US Discovery Offshore Fund III, L.P. nonqualified options
to purchase 25,854 and 4,146 shares of common stock at an exercise price of
$2.38 per share. All such options issued to the directors are vested and fully
exercisable at December 31, 2002.
Employment Agreements
The Company 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. The Company 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
1994 Stock Option Plan
The Company has adopted an Employee Stock Option Plan (the "1994 Plan")
effective October 31, 1994 pursuant to which 725,000 shares of Common Stock are
currently reserved for issuance upon the exercise of options designated as
either (i) options intended to constitute incentive stock options ("ISOs") under
the Internal Revenue Code of 1986, as amended (the "Code"), or (ii) nonqualified
options. ISOs may be granted under the 1994 Plan to employees and officers of
the Company. Non-qualified options may be granted to consultants, directors
(whether or not they are employees), employees or officers of the Company. Stock
appreciation rights may also be issued in tandem with stock options.
The 1994 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 the 1994 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.
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
the Company). The aggregate fair market value of shares for which ISOs granted
to any employee are exercisable for the first time by such employee during any
calendar year (under all stock option plans of the Company) may not exceed
$100,000. Non-qualified options granted under the 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 will expire not more than ten years
from the date of grant (five years in the case of ISOs granted to persons
holding 10% or more of the voting stock of the Company). All options granted
under the 1994 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, the Company had options outstanding to purchase 610,000
shares of Common Stock under the 1994 Plan. During 2000, the Company granted
options to purchase 40,000 shares each to Kevin J. Zugibe, Stephen P.
Mandracchia and Thomas
23
P. Zugibe exercisable at $2.375 per share. Such options vest and are fully
exercisable as of August 3, 2000. During 2001, the Company 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, the Company 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, the Company 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, the Company 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, the Company 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, the Company 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 12 to the Notes of the
Consolidated Financial Statements).
1997 Stock Option Plan
The Company has adopted the 1997 Stock Option Plan (the "1997 Plan"), pursuant
to which 2,000,000 shares of Common Stock are currently reserved for issuance
upon the exercise of options designated as either (i) ISOs under the Code, or
(ii) nonqualified options. ISOs may be granted under the 1997 Plan to employees
and officers of the Company. Nonqualified options may be granted to consultants,
directors (whether or not they are employees), employees or officers of the
Company. Stock appreciation rights may also be issued in tandem with stock
options.
The 1997 Plan is intended to qualify under Rule 16b-3 under the Exchange Act and
is administered by the Compensation/Stock Option Committee of the Board of
Directors. The Committee, within the limitations of the 1997 Plan, determines
the persons to whom options will be granted, the number of shares to be covered
by each option, whether the options granted are intended to be ISOs, the
duration and rate of exercise of each option, the exercise price per share and
the manner of exercise and the time, manner and form of payment upon exercise of
an option. Unless sooner terminated, the 1997 Plan will expire on June 11, 2007.
ISOs granted under the 1997 Plan may not be granted at a price less than the
fair market value of the Common Stock on the date of grant (or 110% of fair
market value in the case of persons holding 10% or more of the voting stock of
the Company). The aggregate fair market value of shares for which ISOs granted
to any employee are exercisable for the first time by such employee during any
calendar year (under all stock option plans of the Company) may not exceed
$100,000. Nonqualified options granted under the 1997 Plan may not be granted at
a price less than the par value of the Common Stock. Options granted under the
1997 Plan will expire not more than ten years from the date of grant (five years
in the case of ISOs granted to persons holding 10% or more of the voting stock
of the Company). Except as otherwise provided by the committee with respect to
nonqualified options, all options granted under the 1997 Plan are not
transferable during an optionee's lifetime but are transferable at death by will
or by the laws of descent and distribution. In general, upon termination of
employment of an optionee, all options granted to such person which are not
exercisable on the date of such termination immediately terminate, and any
options that are exercisable terminate 90 days following termination of
employment.
As of December 31, 2002, the Company had options outstanding to purchase
1,152,716 shares of Common Stock under the 1997 Plan. During 1998, the Company
granted non-qualified options to purchase 40,000, 25,000 and 25,000 shares at an
exercise price of $3.00 per share to Kevin J. Zugibe, Stephen P. Mandracchia and
Thomas P. Zugibe, respectively. Such options vested on August 31, 1998. In
addition, during 1998, the Company also granted options to purchase 430,666
shares to certain officers, directors and employees, exercisable at prices
ranging from $2.50 to $4.375 per share. During 1999, the Company granted options
to purchase 1,000 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, the Company
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, the Company 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,
the Company 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, the Company 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, the
Company 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, the Company 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, the Company granted options to purchase
10,000 shares to James R. Buscemi exercisable at $1.30 per share. In addition,
during 2002, the Company granted options to purchase
24
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 12 to the Notes to the Consolidated Financial
Statements included in this report on Form 10-KSB).
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholders Matters
The following table sets forth information as of March 7, 2003 based on
information obtained from the persons named below, with respect to the
beneficial ownership of the Company's Common Stock by (i) each person known by
the Company to be the beneficial owner of more than 5% of the Company's
outstanding Common Stock, (ii) the Named Executives, (iii) each director of the
Company, and (iv) all directors and executive officers of the Company as a
group:
Amount and
Nature of Percentage of
Beneficial Common Shares
Name and Address of Beneficial Owner (1) Ownership (2) Owned
---------------------------------------- ------------- -----
Kevin J. Zugibe 604,563(3) 10.9%
Brian F. Coleman 154,835(4) 2.9%
Neil B. Gafarian 40,000(5) *
Charles F. Harkins 89,165(6) 1.7%
Stephen P. Mandracchia 346,378(7) 6.6%
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
Operations, Inc. 500,000(12) 8.8%
Flemings Funds 4,945,694(13) 48.9%
All directors and executive officers as a group
(12 persons) 1,409,541(14) 23.3%
* = Less than 1%
----------
(1) Unless otherwise indicated, the address of each of the persons listed above
is the address of the Company, 275 North Middletown Road, Pearl River, New York
10965.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from March 7, 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 March 7, 2003 have been exercised. Unless
otherwise noted, the Company believes that all persons named in the table have
sole voting and investment power with respect to all shares of Common stock
beneficially owned by them.
(3) Includes (i) 40,000 shares which may be purchased at $3.00 per share; (ii)
1,000 shares which may be purchased at $2.00 per share; (iii) 40,000 shares
which may be purchased at $2.375 per share; (iv) 100,000 shares which may be
purchased at $2.375 per share; (v) 60,000 shares which may be purchased at
$2.375 per share; (vi) 45,000 shares which may be purchased at $2.375 per share;
(vii) 15,000 shares which may be purchased at $2.551 per share; (viii) 15,000
shares which may be purchased at $2.50 per share; (ix) 15,000 shares which may
be purchased at $1.90 per share; (x) 15,000 shares which may be purchased at
$1.40 per share; and (xi) 20,835 shares which may be purchased at $2.551 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; and (iv) 80,335 shares which may be
purchased at $2.551 per share under immediately exercisable options.
(5) Includes 40,000 shares which may be purchased at $2.65 per share under
immediately exercisable options.
(6) Includes (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; and (iv) 4,165 shares which may be
purchased at $2.55 per share under immediately exercisable options.
25
(7) Includes (i) 25,000 shares which may be purchased at $3.00 per share; (ii)
40,000 shares which may be purchased at $2.375 per share; (iii) 36,300 shares
which may be purchased at $2.375 per share; and (iv) 6,250 shares which may be
purchased at $2.551 per share under immediately exercisable options.
(8) Includes (i) 5,000 shares which may be purchased at $3.00 per share; (ii)
5,000 shares which may be purchased at $2.375 per share; (iii) 5,000 shares
which may be purchased at $2.375 per share; (iv) 5,000 shares which may be
purchased at $3.08 per share; and (v) 5,000 shares which may be purchased at
$.85 per share under immediately exercisable options.
(9) Mr. Burr has been appointed a director by the Flemings Funds. The Flemings
Funds have not designated a second director for the Company's board. 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) Includes 5,000 shares which may be purchased at $.85 per share under
immediately exercisable options.
(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 891,385 shares of Common Stock
owned by the directors and officers as a group. Excludes 4,945,694 shares
beneficially owned by the Flemings Funds.
Equity Compensation Plan
The following table provides certain information with respect to all of the
Company's equity compensation plans in effect as of December 31, 2002.
Number of securities remaining
Number of securities to be available for issuance under
issued upon exercise of Weighted-average exercise equity compensation plans
outstanding options, warrants price of outstanding (excluding securities reflected
and rights options, warrants and 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 12 of Notes to the Consolidated
Financial Statements for a description of the Company's Stock Option
Plans.
26
Item 12. Certain Relationships and Related Transactions
In the regular course of its business, the Company purchases refrigerants from
and sells refrigerants to DuPont and performs recovery, reclamation,
RefrigerantSide(R) Services and other services for DuPont. During the years
ended December 31, 2002 and 2001, the Company had sales to DuPont in the amount
of $974,000 and $1,124,000, respectively (see "Description of Business" -
Strategic Alliance).
On February 16, 2001, the Company completed the sale of 30,000 shares of its
Series A Preferred Stock, with a liquidation preference 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. Mr. Burr, a director of the Company, 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.
In November 2002, the Company consummated the private sale of 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 were for a term of one year and were subordinate in payment to the
Company'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 the Exchange Notes, upon approval of such exchange by the
Company's shareholders, which approval was obtained at the annual meeting on
December 20, 2002.
Effective December 2002, the Company consummated the private sale of 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.
At or about the same time, the Bridge Notes were cancelled and exchanged for the
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. The Notes have a term of two years and earn interest at
an annual rate of 10% payable quarterly in arrears. Holders of the 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 Notes on each quarterly payment date and accrue interest at the then
effective Notes interest rate. The Notes are unsecured and subordinate in
payment to the Company's obligations under its credit facility with CIT. The
Notes may not be prepaid in cash by the Company without the prior consent of CIT
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 Notes have the right to convert all or a portion of the outstanding
principal balance, and any accrued interest thereon, to Common Stock of the
Company, upon, but not prior to, the first anniversary of the issuance of the
Notes at the Conversion Rate of $.79 per share.
In the event of an Equity Offering by the Company at any time prior to the first
anniversary of the issuance of the Notes, for gross proceeds of not less than $2
million (inclusive of the application of all outstanding principal and interest
of the Notes), all outstanding principal and interest, if any, on the 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 Notes have the right to determine, to the extent that securities are
legally available for purchase in the Equity Offering, whether to apply the
Notes to acquire such equity securities sold in the Equity Offering or convert
the Notes into Common Stock; provided, however, that in the event that all or a
portion of outstanding principal and interest, if any, of the Notes exceeds the
number of equity securities available in the Equity Offering, the balance of the
Notes not applied to the purchase of equity securities will be converted into
restricted shares of Common Stock at the then-effective Conversion Rate.
The Conversion Rate of the Notes is subject to adjustment on a full ratchet
basis (i.e., if the Company issues any stock at a price less than the Conversion
Rate, the Conversion Rate for all shares issuable upon conversion of the Notes
will be adjusted downward to such price) in certain events including the
Company's issuance of Common Stock, warrants or rights to purchase Common Stock
(except for 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 outstanding immediately prior to the issuance of the Notes) or
securities convertible into Common Stock in each case for a consideration per
share which is less than the then-effective Conversion Rate. In addition, the
Conversion Rate is subject to an appropriate adjustment in the event of: (i) any
subdivisions, combinations and reclassifications of the Company's Common Stock;
(ii) any payment, issuance or distribution by the Company to its stockholders of
a stock dividend; (iii) the consolidation or merger of the Company with or into
another corporation whereby the Company is not the surviving entity; or (iv) the
sale by the Company of substantially all of its assets.
In April 2003, holders of the Convertible Notes holding an aggregate principal
amount of $495,000 entered into agreements with the Company whereby the holders
agreed to modify the Conversion Rate of their Convertible Notes to the Modified
Conversion Rate of
27
$1.13 (the average closing sale price of the Company'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 the Company 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 Notes will be adjusted to not less than the public offering price.
The Company is obligated to issue to the holders of the Notes, on the earlier of
(a) December 20, 2003, or (b) the consummation by the Company of an Equity
Offering, Note 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 Notes
were convertible at December 20, 2002. Each Note 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 Price of the
Notes as of December 20, 2002, or (ii) the Conversion Price of the Notes on the
date of issuance of the Note Warrants. The Exercise Price of the Note Warrants
will be subject to the anti-dilution adjustment on terms substantially similar
to anti-dilution adjustment of the Conversion Rate of the Notes. As of December
20, 2002, the Company has recognized an original issue discount of $220,000, in
connection with the issuance of the Note Warrants.
The Bridge Notes and the Notes were issued by the Company in reliance on Section
4(2) of the Securities Act and upon Regulation D promulgated thereunder. In
relying upon such exemption (i) the Company did not engage in any "general
solicitation" and (ii) each of the purchasers represented that (a) it was either
an "accredited investor" as defined in Rule 501 promulgated under the Securities
Act, or otherwise met the Company's investor suitability standard, (b) it was
capable of evaluating the merits and risks of an investment in the Convertible
Notes, (c) it was acquiring the Convertible Notes for its own account and not
with a view to, or for resale in connection with, any distribution within the
meaning of the Securities Act, in violation of the Securities Act, and (d) it
was provided with access to all necessary information to enable it to evaluate
the financial risk inherent in the transaction.
The Series A Preferred Stock provides for anti-dilution adjustment of the
conversion price in the event of the subsequent offering by the Company 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 the Company 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 the Company 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 the Company's
engagement in the private offering of the Notes at a conversion price below the
Conversion Price Floor, the stockholders of the Company, 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 a 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 the Company in connection with any subsequent issuance of securities
below $2.375.
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 the Company'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 the Company's engagement in the
private offering of Convertible Notes at a conversion rate below the Conversion
Price Floor, the stockholders of the Company, 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.
28
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Certificate of Incorporation and Amendment. (1)
3.2 Amendment to Certificate of Incorporation, dated July 20,1994. (1)
3.3 Amendment to Certificate of Incorporation, dated October 26, 1994. (1)
3.4 By-Laws. (1)
3.5 Certificate of Amendment of the Certificate of Incorporation dated
March 16, 1999. (5)
3.6 Certificate of Correction of the Certificate of Amendment dated March
25, 1999. (5)
3.7 Certificate of Amendment of the Certificate of Incorporation dated
March 29, 1999. (5)
3.8 Certificate of Amendment of the Certificate of Incorporation dated
February 16, 2001. (7)
3.9 Amendment to Certificate of Incorporation dated January 3, 2003
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 Registrant. (1)
10.5 Agreements dated January 29, 1997 between E.I. DuPont de Nemours, DCEO,
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,
2001 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 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 of the Certificate of Incorporation of Hudson
Technologies, Inc., dated March 20, 2002. (8)
10.13 First Amendment to Stock Purchase Agreements and Waiver, between Hudson
Technologies, Inc. and Fleming US Discovery Fund III, L.P., dated March
5, 2002. (8)
10.14 First Amendment to Stock Purchase Agreements and Waiver, between Hudson
Technologies, Inc. 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.
10.16 Form of Common Stock Purchase Warrants to be issued to Holders of 10%
Subordinated Convertible Note dated December 20, 2002.
21 Subsidiaries of the Registrant.
23.1 Consent of BDO Seidman, LLP.
99.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act
of 2002
99.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act
of 2002
----------
(1) Incorporated by reference to the comparable exhibit filed with the
Company's Registration Statement on Form SB-2 (No. 33-80279-NY).
(2) Incorporated by reference to the comparable exhibit filed with the
Company Report in Form 8-K dated January 29, 1997.
(3) Incorporated by reference to the comparable exhibit filed with the
Company's Report on Form 10-QSB for the quarter ended March 31, 1998.
(4) Incorporated by reference to the comparable exhibit filed with the
Company's Report on Form 10-KSB for the year ended December 31, 1998.
(5) Incorporated by reference to the comparable exhibit filed with the
Company's Report on Form 10-QSB for the quarter ended June 30, 1999.
(6) Incorporated by reference to the comparable exhibit filed with the
Company's Report on Form 10-KSB for the year ended December 31, 1999.
(7) Incorporated by reference to the comparable exhibit filed with the
Company's Report on Form 10-KSB for the year ended December 31, 2000.
(8) Incorporated by reference to the comparable exhibit filed with the
Company's Report on Form 10-KSB for the year ended December 31, 2001.
(*) Denotes Management Compensation Plan, agreement or arrangement.
29
(b) Reports on Form 8-K:
During the quarter ended December 31, 2002, no report on Form 8-K was
filed.
Item 14. Controls and Procedures
Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with the participation of the Company's
management, including the Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO"), of the effectiveness of the Company's disclosure controls and
procedures. Based on that evaluation, the CEO and CFO have concluded that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. It should be noted that the design of any
system of controls is based in part upon certain assumptions of the likelihood
of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under the potential future conditions, regardless of
how remote such condition may be. Subsequent to the date of their evaluation,
there were no significant changes in the Company's internal controls or in other
factors that could significantly affect the internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
30
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HUDSON TECHNOLOGIES, INC.
By: /s/ Kevin J. Zugibe
-------------------
Kevin J. Zugibe, Chairman and Chief Executive Officer
Date: April 14, 2003
In accordance with the Exchange Act, this report has been signed below by the
following persons, on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ Kevin J. Zugibe Chairman of the Board and Chief Executive Officer April 14, 2003
------------------------ (Principal Executive Officer)
Kevin J. Zugibe
/s/ James R. Buscemi Chief Financial Officer (Principal Financial and April 14, 2003
------------------------ Accounting Officer)
James R. Buscemi
/s/ Vincent Abbatecola Director April 14, 2003
------------------------
Vincent Abbatecola
/s/ Robert L. Burr Director April 14, 2003
------------------------
Robert L. Burr
/s/ Dominic J. Monetta Director April 14, 2003
------------------------
Dominic J. Monetta
/s/ Otto C. Morch Director April 14, 2003
------------------------
Otto C. Morch
/s/ Harry C. Schell Director April 14, 2003
------------------------
Harry C. Schell
/s/ Robert M. Zech Director April 14, 2003
------------------------
Robert M. Zech
31
Hudson Technologies, Inc.
Certification of Principal Executive Officer
I, Kevin J. Zugibe, Chief Executive Officer and Chairman of the Board, of Hudson
Technologies, Inc., certify that:
1. I have reviewed this annual report on Form 10-KSB of Hudson Technologies,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: April 14, 2003
/s/ Kevin J. Zugibe
-------------------
Kevin J. Zugibe
Chief Executive Officer and
Chairman of the Board
32
Hudson Technologies, Inc.
Certification of Chief Financial Officer
I, James R. Buscemi, Chief Financial Officer, of Hudson Technologies, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-KSB of Hudson Technologies,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: April 14, 2003
/s/ James R. Buscemi
--------------------
James R. Buscemi
Chief Financial Officer
33
Hudson Technologies, Inc.
Consolidated Financial Statements
Contents
--------------------------------------------------------------------------------
Report of Independent Certified Accountants 35
Audited Consolidated Financial Statements:
o Consolidated Balance Sheet 36
o Consolidated Statements of Operations 37
o Consolidated Statements of Stockholders' Equity 38
o Consolidated Statements of Cash Flows 39
o Notes to the Consolidated Financial Statements 40
34
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.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company's credit facility
expires in April 2003 and the Company has not renewed the agreement. This item
has raised substantial doubt about its ability to continue as a going concern.
Management's plans in regard to this matter is also described in Note 2. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ BDO Seidman, LLP
Valhalla, New York
March 7, 2003
35
Hudson Technologies, Inc. and subsidiaries
Consolidated Balance Sheet
(Amounts in thousands, except for share and par value amounts)
December 31, 2002
-----------------
Assets
Current assets:
Cash and cash equivalents $ 545
Trade accounts receivable - net 1,971
Inventories 2,967
Prepaid expenses and other current assets 249
--------
Total current assets 5,732
Property, plant and equipment, less accumulated depreciation 2,551
Other assets 139
--------
Total Assets $ 8,422
--------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 3,278
Short-term debt 2,582
--------
Total current liabilities 5,860
Long-term debt, less current maturities 124
Long-term debt - related parties 930
--------
Total Liabilities 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 116,629 11,663
Common stock, $0.01 par value; shares authorized 50,000,000;
issued outstanding 5,165,020 52
Additional paid-in capital 20,019
Accumulated deficit (30,226)
--------
Total Stockholders' Equity 1,508
--------
Total Liabilities and Stockholders' Equity $ 8,422
========
See accompanying Notes to the Consolidated Financial Statements.
36
Hudson Technologies, Inc. and subsidiaries
Consolidated Statements of Operations
(Amounts in thousands, except for share and per share amounts)
For the year ended December 31,
-------------------------------
2002 2001
----------- -----------
Revenues $ 19,963 $ 20,768
Cost of sales 14,505 14,971
----------- -----------
Gross Profit 5,458 5,797
----------- -----------
Operating expenses:
Selling and marketing 2,412 2,322
General and administrative 4,357 4,475
Depreciation and amortization 1,142 1,220
----------- -----------
Total operating expenses 7,911 8,017
----------- -----------
Operating loss (2,453) (2,220)
----------- -----------
Other income (expense):
Interest expense (347) (423)
Other income 253 230
Gain on sale of assets 25 14
----------- -----------
Total other income (expense) (69) (179)
----------- -----------
Loss before income taxes (2,522) (2,399)
Income taxes -- --
----------- -----------
Net loss (2,522) (2,399)
Preferred stock dividends (796) (723)
----------- -----------
Available for common shareholders $ (3,318) $ (3,122)
=========== ===========
Net loss per common share - basic and diluted $ (0.64) $ (0.61)
=========== ===========
Weighted average number of shares
outstanding 5,162,228 5,103,733
=========== ===========
See accompanying Notes to the Consolidated Financial Statements.
37
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
======= ======= ========= ==== ======== ======== =======
See accompanying Notes to the Consolidated Financial Statements.
38
Hudson Technologies, Inc. and subsidiaries
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
(Amounts in thousands)
For the year ended December 31,
-------------------------------
2002 2001
---- ----
Cash flows from operating activities:
Net loss $(2,522) $(2,399)
Adjustments to reconcile net loss
to cash used by operating activities:
Depreciation and amortization 1,142 1,220
Allowance for doubtful accounts 144 60
Gain on sale of assets (25) (14)
Changes in assets and liabilities:
Trade accounts receivable 631 (218)
Inventories (580) (486)
Prepaid expenses and other current assets (99) 47
Other assets (24) (17)
Accounts payable and accrued expenses (9) (548)
Deferred income -- (6)
------- -------
Cash used by operating activities (1,342) (2,361)
------- -------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment 244 937
Additions to patents -- (9)
Additions to property, plant, and equipment (324) (374)
------- -------
Cash provided (used) by investing activities (80) 554
------- -------
Cash flows from financing activities:
Proceeds from issuance of preferred stock - net -- 2,940
Proceeds from issuance of common stock - net 20 151
Proceeds from short-term debt - net 28 272
Proceeds from long-term debt 1,325 --
Repayment of long-term debt (788) (1,037)
------- -------
Cash provided by financing activities 585 2,326
------- -------
Increase (decrease) in cash and cash equivalents (837) 519
Cash and equivalents at beginning of period 1,382 863
------- -------
Cash and equivalents at end of period $ 545 $ 1,382
======= =======
Supplemental disclosure of cash flow information:
Cash paid during period for interest $ 347 $ 423
Supplemental schedule of non-cash investing
and financing activities:
In-kind payment of preferred stock dividends $ 788 $ 656
See accompanying Notes to the Consolidated Financial Statements.
39
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. The Company'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. The Company 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. The Company's
consolidated financial statements include the accounts of wholly-owned
subsidiaries Hudson Holdings, Inc. and Hudson Technologies Company.
Fair value of financial instruments
The carrying values of financial instruments including trade accounts
receivable, and accounts payable approximate fair value at 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 December 31, 2002.
Credit risk
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of temporary cash investments and trade
accounts receivable. The Company maintains its temporary cash investments in
highly-rated financial institutions that exceed FDIC insurance coverage. The
Company's trade accounts receivables are due from companies throughout the U.S.
The Company reviews each customer's credit history before extending credit.
The Company establishes an allowance for doubtful accounts based on factors
associated with the credit risk of specific accounts, historical trends, and
other information 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. The Company
may adjust its general or specific reserves based on factors that affect the
collectibility of the accounts receivable balances.
During the year ended December 31, 2002, one customer accounted for 11% of the
Company's revenues and as of December 31, 2002 there was $223,000 accounts
receivable balance from this customer. During the year ended December 31, 2001,
one customer accounted for 15% of the Company'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 the Company's products or services by any such customer could have
an adverse effect on the Company's financial position and results of operations.
During the years ended December 31, 2002 and 2001, the Company 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.
40
Property, plant, and equipment
Property, plant, and equipment are stated at cost; including internally
manufactured equipment. The cost to complete equipment that is under
construction is not considered to be material to the Company's financial
position. Provision for depreciation is recorded (for financial reporting
purposes) using the straight-line method over the useful lives of the respective
assets. Leasehold improvements are amortized on a straight-line basis over the
shorter of economic life or terms of the respective leases. Costs of maintenance
and repairs are charged to expense when incurred.
Due to the specialized nature of the Company's business, it is possible that the
Company's estimates of equipment useful life periods may change in the future.
Revenues and cost of sales
Revenues are recorded upon completion of service or product shipment and passage
of title to customers in accordance with contractual terms. The Company
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 the Company's facilities. To the extent
that the Company 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.
The Company's revenues are derived from refrigerant and reclamation sales and
RefrigerantSide(R) Services revenues. The revenues for each of these lines are
as follows:
Year Ended December 31, 2002 2001
(in thousands) ---- ----
Refrigerant and reclamation sales $16,528 $16,810
RefrigerantSide(R) Services 3,435 3,958
------- -------
Total $19,963 $20,768
======= =======
Income taxes
The Company utilizes the asset and liability method for recording deferred
income taxes, which provides for the establishment of deferred tax asset or
liability accounts based on the difference between tax and financial reporting
bases of certain assets and liabilities.
The Company recognized a reserve allowance against the deferred tax benefit for
the current and prior period losses. The tax benefit associated with the
Company's net operating loss carry forwards would be recognized to the extent
that the Company recognized net income in future periods.
Loss per common and equivalent shares
Loss per common share, Basic, is calculated based on the net loss for the period
plus dividends on the outstanding Series A Preferred Stock, $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.
The Company participates in an industry that is highly regulated, changes in
which could affect operating results. Currently the Company purchases virgin and
reclaimable refrigerants from domestic suppliers and its customers. To the
extent that the Company is unable to obtain refrigerants on commercially
reasonable terms or experiences a decline in demand for refrigerants, the
Company could realize reductions in refrigerant processing and possible loss of
revenues, which would have a material adverse affect on operating results.
The Company is subject to various legal proceedings. The Company assesses the
merit and potential liability associated with each of these proceedings. In
addition, the Company estimates potential liability, if any, related to these
matters. To the extent that these
41
estimates are not accurate, or circumstances change in the future, the Company
could realize liabilities which would have a material adverse affect on
operating results and its financial position.
Impairment of long-lived assets and long-lived assets to be disposed of
The Company reviews 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
The Company 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.
Years ended December 31, 2002 2001
Pro forma results ---- ----
(In thousands, except per share amounts)
Net loss available for common shareholders:
As reported $(3,318) $(3,122)
Total stock based employee compensation
expense determined under fair value based
method 387 447
------- -------
Pro forma $(3,705) $(3,569)
Loss per common share-basic and diluted:
As reported $ (.64) $ (.61)
Pro forma $ (.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. The Company 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.
The Company will adopt each of the above pronouncements effective January 1,
2003. Currently, the Company does not believe that these adoptions will have a
material impact on its financial position and results of operations.
42
Note 2 - Liquidity and going concern
The Company has been substantially dependent on loans from CIT Group/Business
Credit, Inc. ("CIT") and its principal stockholders, and proceeds from the sale
of its securities. In addition, the agreement between CIT, the Company's primary
lender, and the Company expires on April 29, 2003 and the Company has not
obtained a renewal of this credit facility. Although the Company believes it can
obtain replacement financing should CIT decide not to continue its lending
relationship with the Company there can be no assurance that it can obtain such
financing.
Even if the Company is able to replace its current credit facility with CIT the
Company anticipates that it will need to raise additional capital in 2003. No
assurances can be made that the Company will be successful in the sales of its
securities or in obtaining an extension or renewal of its credit facility to
meet the Company's working capital needs. The accompanying financial statements
have been prepared on a going concern basis, which contemplates the realization
of assets and satisfaction of liabilities in the normal course of business. As
discussed above, the Company is dependent on outside sources of financing to
fund its working capital needs. This condition gives rise to substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from this
uncertainty.
Note 3 - Dispositions
Effective March 19, 1999, the Company sold 75% of its stock ownership in
Environmental Support Solutions, Inc. ("ESS") to one of ESS's founders. The
consideration for the Company's sale of its interest was $100,000 in cash and a
six-year 6% interest bearing note in the amount of $380,000. The Company has
recognized as income the portion of the proceeds associated with the note
receivable upon the receipt of cash. The Company recognized a valuation
allowance for 100% of the note receivable. Subsequent to March 19, 1999, in two
separate transactions, ESS redeemed the balance of the Company'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 the Company 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 the Company
$231,951, representing the discounted balance as of that date, as full
satisfaction of the note received and as of that date, the Company recognized
the proceeds as other income.
Note 4 - Other income
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 the Company's Ft. Lauderdale facility, which was sold on
March 22, 2001, and payments received from the note receivable from ESS.
Note 5 - Income taxes
During the years ended December 31, 2002 and 2001, there was no income tax
expense recognized due to the Company's net losses.
Reconciliation of the Company's actual tax rate to the U.S. Federal statutory
rate is as follows:
Year ended December 31, 2002 2001
(in percents) ---- ----
Income tax rates
----------------
- Statutory U.S. Federal rate (34%) (34%)
- States, net U.S. benefits (4%) (4%)
- Valuation allowance 38% 38%
--- ---
Total --% --%
=== ===
43
As of December 31, 2002, the Company 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 the Company, 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:
December 31, 2002
(in thousands) ----
Deferred tax assets (liabilities)
---------------------------------
- Depreciation & amortization $ 91
- Reserves for doubtful accounts 92
- NOL 10,631
- Other 8
--------
Subtotal 10,822
- NOL valuation allowance (10,822)
--------
Total $ --
========
Note 6- Trade accounts receivable - net
At December 31, 2002, trade accounts receivable are net of reserves for doubtful
accounts of $262,000.
Note 7 - Inventories
Inventories consisted of the following:
December 31, 2002
(in thousands) ----
Refrigerant and cylinders $ 2,328
Packaged refrigerants 639
--------
Total $ 2,967
========
Note 8 - Property, plant, and equipment
Elements of property, plant, and equipment are as follows:
December 31, 2002
(in thousands) ----
Property, plant, & equipment
----------------------------
- Equipment $ 6,661
- Equipment under capital lease 253
- Vehicles 1,288
- Furniture & fixtures 203
- Leasehold improvements 542
- Equipment under construction 188
--------
Subtotal 9,135
Accumulated depreciation & amortization 6,584
--------
Total $ 2,551
========
44
Note 9- Short-term and long-term debt
Elements of short-term and long-term debt are as follows:
December 31, 2002
(in thousands) ----
Short-term & long-term debt
---------------------------
Short-term debt:
- Bank credit line $ 2,034
- Bank term loan 303
- Long-term debt: current 245
-------
Subtotal 2,582
-------
Long-term debt:
- Capital lease obligations 79
- Vehicle loans 290
- Loans from related parties 930
- Less: current maturities (245)
-------
Subtotal 1,054
-------
Total $ 3,636
=======
Bank credit line and term loan
The Company has entered into a credit facility with CIT, which provides for
borrowings to the Company of up to $6,500,000. The facility requires minimum
borrowings of $1,250,000. The facility provides for a revolving line of credit
and a term loan and expires in April 2003. Advances under the revolving line of
credit are limited to (i) 80% of eligible trade accounts receivable and (ii) 50%
of eligible inventory (which inventory amount shall not exceed 200% of eligible
trade accounts receivable or $3,250,000). As of December 31, 2002, the Company
had availability under its revolving line of credit of approximately $292,000.
Advances available to the Company under the term loan are based on existing
fixed asset valuations and future advances under the term loan of up to an
additional $1,000,000 are based on future capital expenditures. As of December
31, 2002, the Company had approximately $303,000 outstanding under its term
loans and $2,034,000 outstanding under its revolving line of credit and due to
the expiration of the credit facility in April 2003, all such amounts are
reflected on the Company's December 31, 2002 Balance Sheet as current
liabilities. The facility bears interest at the prime rate plus 1.5%, 5.75% at
December 31, 2002, and substantially all of the Company's assets are pledged as
collateral for obligations to CIT. In addition, among other things, the
agreements restrict the Company's ability to declare or pay any dividends on its
capital stock. The Company has obtained a waiver from CIT to permit the payment
of dividends on its Series A Preferred Stock.
The Company is currently in negotiations with CIT regarding a possible extension
of the term of the credit facility or the entering into of a new credit facility
and is also seeking alternate sources of financing. While the Company believes
that it will be able to obtain replacement financing, there can be no assurance
that CIT will continue to lend funds to the Company after the expiration of the
current credit facility or that the Company will be able to obtain alternate
financing from another source should CIT decide not to continue providing
financing to the Company. However, even if the Company is able to obtain
replacement financing it may be on terms that are less favorable to the Company
than the current CIT credit facility. A failure of the Company to obtain
financing from CIT or an alternate source after the expiration of the current
CIT credit facility would have a material adverse affect on the Company's
operations and financial condition.
Vehicle Loans
During 1999, the Company entered into various vehicle loans. The vehicles are
primarily used in connection with the Company's on-site services. The loans are
payable in 60 monthly payments through October 2004 and bear interest at 9.0% to
9.98%.
Scheduled maturities of the Company'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
======
45
Lease Obligations
The Company 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, the Company consummated the private sale of unsecured 12%
subordinated promissory notes ("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 the Company'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 the Company's
shareholders, which approval was obtained at the annual meeting on December 20,
2002.
Effective December 2002, the Company consummated the private sale of unsecured
10% convertible subordinated promissory notes ("Convertible Notes"), 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 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 Convertible
Notes were identical in terms and together are referred to herein as the
("Notes"). The Notes have a term of two years and earn interest at an annual
rate of 10% payable quarterly in arrears. Holders of the 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 Notes on each quarterly payment date and accrue interest at the then
effective Notes interest rate. The Notes are unsecured and subordinate in
payment to the Company's obligations under its credit facility with CIT. The
Notes may not be prepaid in cash by the Company without the prior consent of CIT
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 Notes have the right to convert all or a portion of the outstanding
principal balance, and any accrued interest thereon, to Common Stock of the
Company, upon, but not prior to, the first anniversary of the issuance of the
Notes at the conversion rate of $.79 per share (the average closing sale price
of the Company's Common Stock as reported on the Nasdaq Small Cap Market for the
five business days immediately preceding the issuance of the Notes), subject to
certain anti-dilution adjustments (the "Conversion Rate").
In the event of a public offering of equity securities ("Equity Offering") by
the Company at any time prior to the first anniversary of the issuance of the
Notes, for gross proceeds of not less than $2 million (inclusive of the
application of all outstanding principal and interest of the Notes), all
outstanding principal and interest, if any, on the 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 Notes have
the right to determine, to the extent that securities are legally available for
purchase in the Equity Offering, whether to apply the Notes to acquire equity
securities or convert the 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 Notes not applied to the purchase of
equity securities will be converted into restricted shares of Common Stock at
the then-effective Conversion Rate.
The Conversion Rate of the Notes is subject to adjustment on a full ratchet
basis (i.e., if the Company issues any stock at a price less than the Conversion
Rate, the Conversion Rate for all shares issuable upon conversion of the Notes
will be adjusted downward to such price) in certain events including the
Company's issuance of Common Stock, warrants or rights to purchase Common Stock
(except for 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 outstanding immediately prior to the issuance of the Notes) or
securities convertible into Common Stock in each case for a consideration per
share which is less than the then-effective Conversion Rate. In addition, the
Conversion Rate is subject to an appropriate adjustment in the event of: (i) any
46
subdivisions, combinations and reclassifications of the Company's Common Stock;
(ii) any payment, issuance or distribution by the Company to its stockholders of
a stock dividend; (iii) the consolidation or merger of the Company with or into
another corporation whereby the Company is not the surviving entity; or (iv) the
sale by the Company of substantially all of its assets.
In April 2003, holders of the Convertible Notes holding an aggregate principal
amount of $495,000 entered into agreements with the Company whereby the holders
agreed to modify the Conversion Rate of their Convertible Notes to $1.13 (the
average closing sale price of the Company's Common Stock as reported on the
Nasdaq Small Cap Market for the five business days immediately preceding the
execution of the modification agreements) (the "Modified Conversion Rate");
provided further, that, in the event of an Equity Offering by the Company 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.
The Company is obligated to issue to the holders of the Notes, on the earlier of
(a) December 20, 2003, or (b) the consummation by the Company of an Equity
Offering, Common Stock purchase warrants (the "Note 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 Notes were convertible at December 20, 2002. Each
Note Warrant will be exercisable to purchase one share of Common Stock for a
period of five years from issuance at an exercise price (the "Exercise Price")
equal to 110% of the lesser of (i) the Conversion Price of the Notes as of
December 20, 2002, or (ii) the Conversion Price of the Notes on the date of
issuance of the Note Warrants. The Exercise Price of the Note Warrants will be
subject to anti-dilution adjustment on terms substantially similar to the
anti-dilution adjustment of the Conversion Rate of the Notes. As of December 20,
2002, the Company has recognized an original issue discount of $220,000, in
connection with the issuance of the Note 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 10 - Stockholders' equity
(i) On April 28, 1998, in connection with the loan agreements with CIT, the
Company issued to CIT warrants to purchase 30,000 shares of the Company's common
stock at an exercise price equal to 110% of the then fair market value of the
stock, which on the date of issuance was $4.33 per share. The value of the
warrants was not deemed to be material and the warrants expire on April 29,
2003. In addition, among other things, the agreements restrict the Company's
ability to declare or pay any dividends on its capital stock. The Company has
obtained a waiver from CIT to permit the payment of dividends on its Series A
Preferred Stock.
(ii) On March 30, 1999, the Company completed the sale of 65,000 shares of its
Series A Preferred Stock, with a liquidation value of $100 per share, to Fleming
US Discovery Fund III, L.P. and Fleming US Discovery Offshore Fund III, L.P. The
gross proceeds from the sale of the Series A Preferred Stock were $6,500,000.
The Series A Preferred Stock 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, the Company 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 the Company 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 the Company 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 the Company 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 the Company's
engagement in the private offering of the Notes at a conversion price below the
Conversion Price Floor, the stockholders of the Company, 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
47
conversion price of such Series A Preferred Stock may be subsequently adjusted
to equal the consideration received by the Company 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 the Company'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 the Company's
engagement in the private offering of the Notes at a conversion rate below the
Conversion Price Floor, the stockholders of the Company, 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. The Company 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.
The Company pays dividends, in arrears, on the Series A Preferred Stock, semi
annually, either in cash or additional shares, at the Company's option. On March
30 and September 30, 2002, the Company declared and paid, in-kind, the dividends
outstanding on the Series A Preferred Stock and issued 3,873 and 4,011,
respectively, additional shares of its Series A Preferred Stock in satisfaction
of the dividends due. The Company may redeem the Series A Preferred Stock on
March 31, 2004 either in cash or shares of Common Stock valued at 90% of the
average trading price of the Common Stock for the 30 days preceding March 31,
2004. In addition, after March 30, 2001, the Company may call the Series A
Preferred Stock if the market price of its Common Stock is equal to or greater
than 250% of the conversion price and the Common Stock has traded with an
average daily volume in excess of 20,000 shares for a period of thirty
consecutive days.
The Company has provided certain registration, preemptive and tag along rights
to the holders of the Series A Preferred Stock. The holders of the Series A
Preferred Stock, voting as a separate class, have the right to elect up to two
members to the Company's Board of Directors or at their option, to designate up
to two advisors to the Company's Board of Directors who will have the right to
attend and observe meetings of the Board of Directors. Currently, the holders
have elected one member to the Board of Directors.
(iv) The Company engaged an advisor to facilitate the Company's efforts in
connection with the March 30, 1999 sale of the Series A Preferred Stock. In
addition to the advisor fees, the Company issued to the advisor, warrants, which
expire on March 30, 2004, to purchase 136,482 shares of the Company's Common
Stock at an exercise price per share of $2.73. The value of the warrants was not
deemed to be material.
Note 11 - 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
Fort Myers, Florida $ 15,000 Month to Month
Hillburn, New York $103,000 5/2004
Houston, Texas $ 14,000 6/2003
Norfolk, VA $ 4,000 Month to Month
Pearl River, New York $ 64,000 12/2007
Plainview, New York $ 3,000 Month to Month
Punta Gorda, Florida $ 76,000 12/2003
Rantoul, Illinois $ 39,000 Month to Month
Salem, New Hampshire $ 14,000 8/2003
Seattle, Washington $ 18,450 3/2004
48
The Company 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.
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 the Company in the Supreme Court of the State of New York, Rockland
County, seeking damages in the amount of $1.2 million allegedly sustained as a
result of alleged contamination of certain of United's wells which are in close
proximity to the Company's Hillburn, New York facility.
On April 1, 1999, the Company reported a release at the Company's Hillburn, New
York facility of approximately 7,800 lbs. of R-11, as a result of a failed hose
connection to one of the Company's outdoor storage tanks allowing liquid R-11 to
discharge from the tank into the concrete secondary containment area in which
the subject tank was located.
Between April 1999 and May 1999, with the approval of the New York State
Department of Environmental Conservation ("DEC"), the Company constructed and
put into operation a remediation system at the Company's Hillburn facility to
remove R-11 levels in the groundwater under and around the Company'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, the Company
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. The Company 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, the Company signed an Order on Consent with the DEC regarding all
past contamination of the United well field, whereby, the Company 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, the Company signed an amendment to the Order on Consent
with the DEC, pursuant to which the Company installed one additional monitoring
well and modified the Company's existing remediation system to incorporate a
second recovery well. The Company is continuing to operate the remediation
system.
In May 2000, the Company'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. The Company 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, the Company 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 the Company 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 United well closest to the Village was below 1
ppb. In October, 2002 the Village advised the Company it intends to proceed with
plans to protect its wells and could
49
look to the Company 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, the
Company may incur additional costs. The Company 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. The Company
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, the Company 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 the Company have been
asserted or threatened by Ramapo Land Company.
During the year ended December 31, 2002, the Company 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 of the Company's financial condition and results of operations.
There can be no assurance that the Company's opposition to the EPA's listing of
the Company'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
the Company's financial condition and results of operations. Furthermore, there
can be no assurance that Ramapo Land Company will not assert any claim against
the Company, or that any such claim will not have a material adverse effect on
the Company's financial condition and results of operations.
Note 12 - Stock Option Plans
Effective October 31, 1994, the Company 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 the Company. Non-qualified options may be
granted to consultants, directors (whether or not they are employees), employees
or officers of the Company. Stock appreciation rights may also be issued in
tandem with stock options. Unless sooner terminated, the 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
the Company). 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 the Company).
Effective July 25, 1997, and as amended on August 19, 1999, the Company adopted
its 1997 Employee Stock Option Plan ("1997 Plan") pursuant to which 2,000,000
shares of common stock are reserved for issuance upon the exercise of options
designated as either (i) options intended to constitute incentive stock options
("ISOs") under the Internal Revenue Code of 1986, as amended, or (ii)
nonqualified options. ISOs may be granted under the 1997 Plan to employees and
officers of the Company. Non-qualified options may be granted to consultants,
directors (whether or not they are employees), employees or officers of the
Company. Stock appreciation rights may also be issued in tandem with stock
options. Unless sooner terminated, the 1997 Plan will expire on June 11, 2007.
ISOs granted under the 1997 Plan may not be granted at a price less than the
fair market value of the common stock on the date of grant (or 110% of fair
market value in the case of persons holding 10% or more of the voting stock of
the Company). Non-qualified options granted under the 1997 Plan may not be
granted at a price less than 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 the Company).
All stock options have been granted to employees and non-employees at exercise
prices equal to or in excess of the market value on the date of the grant.
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SFAS No. 123 requires the Company to provide pro forma information regarding net
loss and net loss per share as if compensation cost for the Company's stock
option plan had been determined in accordance with the fair value based method
prescribed in SFAS No. 123. The Company estimates the fair value of each stock
option at the grant date by using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants since 1995.
Years ended December 31, 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 the Company'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
Average
Stock Option Plan Grants Shares 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 a nd 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 $1.80 $2.63
options granted during the year
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
=========
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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.
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