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, 2001
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
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, 2001 were
$20,768,000
The aggregate market value of the Issuer's Common Stock held by non-affiliates
as of March 1, 2002 was approximately $14,902,000. As of March 1, 2002, there
were 5,156,520 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 11
Item 7 - Financial Statements 16
Item 8 - Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 16
Part III. Item 9 - Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 17
Item 10 - Executive Compensation 19
Item 11 - Security Ownership of Certain Beneficial Owners and Management 23
Item 12 - Certain Relationships and Related Transactions 24
Item 13 - Exhibits and Reports on Form 8-K 25
Signatures 26
Financial Statements 27
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
its 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 and 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
3
Fort Myers, Florida --Engineering center
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
Plainview, New York --RefrigerantSide(R) Service depot
Punta Gorda, Florida --Refrigerant separation and reclamation center and
RefrigerantSide(R) Service depot
Rantoul, Illinois --Reclamation and cylinder refurbishment center and
RefrigerantSide(R) Service depot
Salem, New Hampshire --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.
In addition, in January 1997, the Company entered into a Stock Purchase
Agreement with DuPont and DuPont Chemical and Energy Operations, Inc. ("DCEO")
pursuant to which the Company issued to DCEO 500,000 shares of its common stock
in consideration of $3,500,000 in cash. Concurrently, the parties entered into a
Standstill Agreement, Shareholders' Agreement and Registration Agreement which,
among other things, provide that (i) subject to certain exceptions, neither
DuPont nor any corporation or entity controlled by DuPont will, directly or
indirectly, acquire any shares of any class of capital stock of the Company if
the effect of such acquisition would be to increase DuPont's aggregate voting
power in the election of directors to greater than 20% of the total combined
voting power in the election of directors; (ii) at DuPont's request, the Company
will cause two persons designated by DCEO and DuPont to be elected to the
Company's Board of Directors; and (iii) subject to certain exceptions, DuPont
will have a five-year right of first refusal to purchase shares of Common Stock
sold by the Company's principal shareholders. The Company also granted to DuPont
certain demand and "piggy-back" registration rights with respect to the shares.
The Standstill Agreement, Shareholders Agreement and the demand and "piggy-back"
registration rights under the Registration Rights Agreement terminated on
January 29, 2002.
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, 2001, one customer accounted for 15% of the
Company's revenues. For the year ended December 31, 2000, one customer accounted
for 13% 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.
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).
4
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, breadth of
services offered (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 new
alternative refrigerants. Certain of such 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 consist 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 market as rapidly as it
anticipates.
Insurance
The Company carries insurance coverage the Company considers sufficient to
protect the Company's assets and operations. The Company currently maintains
general commercial liability insurance and excess liability coverage for claims
up to $7,000,000 per occurrence and $7,000,000 in the aggregate. There can be no
assurance that such insurance will be sufficient to cover potential claims or
that an adequate level of coverage will be available in the future at a
reasonable cost. The Company attempts to operate in a professional and prudent
manner and to reduce its liability risks through specific risk management
efforts, including employee training. Nevertheless, a partially or completely
uninsured claim against the Company, if successful and of sufficient magnitude,
would have a material adverse effect on the Company.
The refrigerant industry involves potentially significant risks of statutory and
common law liability for environmental damage and personal injury. The Company,
and in certain instances, its officers, directors and employees, may be subject
to claims arising from the Company's on-site or off-site services, including the
improper release, spillage, misuse or mishandling of refrigerants classified as
hazardous or non-hazardous substances or materials. The Company may be strictly
liable for damages, which could be substantial, regardless of whether it
exercised due care and complied with all relevant laws and regulations.
Hudson maintains environmental impairment insurance of $1,000,000 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, that
hazardous substances or materials are not or will not be present at the
Company's facilities, or that the Company will not incur liability for
environmental impairment or personal injury.
Government Regulation
The business of refrigerant reclamation and management is subject to extensive,
stringent and frequently changing federal, state and local laws and substantial
regulation under these laws by governmental agencies, including the
Environmental Protection Agency ("EPA"), the United States Occupational Safety
and Health Administration and the United States Department of Transportation.
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
5
are certified to reclaim refrigerants in compliance with ARI standards. Under
such programs, the ARI issues a certification for each refrigerant and conducts
periodic inspections and quality testing of reclaimed refrigerants.
The Company has obtained ARI certification for most refrigerants at each of its
reclamation facilities, and is certified by the EPA. The Company is required to
submit periodic reports to the ARI and pay annual fees based on the number of
pounds of refrigerants reclaimed by the Company. Certification by the ARI is not
currently required to engage in the refrigerant management business.
During February 1996, the EPA published proposed regulations, which, if enacted,
would require participation in third-party certification programs similar to the
ARI program. Such proposed regulations would also require laboratories designed
to test refrigerant purity to undergo a certification process. Extensive
comments to these proposed regulations were received by the EPA. The EPA is
still considering these comments and no further or additional regulations have
been proposed or published.
In addition, the EPA has established a mandatory certification program for air
conditioning and refrigeration technicians. Hudson's technicians have applied
for or obtained such certification.
The Company is subject to regulations adopted by the Department of
Transportation which classify most refrigerants handled by the Company as
hazardous materials or substances and impose requirements for handling,
packaging, labeling and transporting refrigerants.
The Resource Conservation and Recovery Act of 1976 ("RCRA") requires that
facilities that treat, store or dispose of hazardous wastes comply with certain
operating standards. Before transportation and disposal of hazardous wastes
off-site, generators of such waste must package and label their shipments
consistent with detailed regulations and prepare a manifest identifying the
material and stating its destination. The transporter must deliver the hazardous
waste in accordance with the manifest to a facility with an appropriate RCRA
permit. Under RCRA, impurities removed from refrigerants consisting of oils
mixed with water and other contaminants are not presumed to be hazardous waste.
The Emergency Planning and Community Right-to-Know Act of 1986 requires the
annual reporting of Emergency and Hazardous Chemical Inventories (Tier II
reports) to the various states in which the Company operates and to file annual
Toxic Chemical Release Inventory Forms with the EPA.
The Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), establishes liability for clean-up costs and environmental damages
to current and former facility owners and operators, as well as persons who
transport or arrange for transportation of hazardous substances. Almost all
states 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 substantial compliance with all material
regulations relating to its material business operations. However, amendments to
existing statutes and regulations or adoptions of new statutes and regulations
which affect the marketing and sale of refrigerants could require the Company to
continually adapt its methods of operations and/or discontinue the sale of
certain products 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 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.
6
Employees
The Company has 102 full 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
refrigerant side decontamination processes. There can be no assurance as to the
breadth or degree of protection that patents may afford the Company, that any
patent applications will result in issued patents or that patents will not be
circumvented or invalidated. Technological development in the refrigerant
industry may result in extensive patent filings and a rapid rate of issuance of
new patents. Although the Company believes that its existing patents and the
Company's equipment do not and will not infringe upon existing patents or
violate proprietary rights of others, it is possible that the Company's existing
patent rights may not be valid or that infringement of existing or future
patents or violations of proprietary rights of others may occur. In the event
the Company's equipment infringe or are alleged to infringe patents or other
proprietary rights of others, the Company may be required to modify the design
of its equipment, obtain a license or defend a possible patent infringement
action. There can be no assurance that the Company will have the financial or
other resources necessary to enforce or defend a patent infringement or
proprietary rights violation action or that the Company will not become liable
for damages.
The Company also relies on trade secrets and proprietary know-how, and employs
various methods to protect its technology. However, such methods may not afford
complete protection and there can be no assurance that others will not
independently develop such know-how or obtain access to the Company's know-how,
concepts, ideas and documentation. Failure to protect its trade secrets could
have a material adverse effect on the Company.
Item 2. Description of Properties
The Company's Baltimore, Maryland depot facility is located in a 2,700 square
foot building leased from an unaffiliated third party at an annual rent of
$26,064 pursuant to an agreement expiring in August 2002.
The Company's Baton Rouge, Louisiana facility is located in a 3,800 square foot
building leased from an unaffiliated third party at an annual rental of $18,000
pursuant to an agreement expiring in July 2002.
The Company's Charlotte, North Carolina facility is located in a 12,000 square
foot building leased from an unaffiliated third party at an annual rent of
$42,000 pursuant to a month to month rental agreement.
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 $24,140 pursuant to an agreement expiring in August 2002.
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 $7,200 pursuant to an agreement expiring in June 2002.
The Company's Ft. Myers, Florida engineering facility is located in a 15,000
square foot building leased from an unaffiliated third party at an annual rent
of $57,240 pursuant to an agreement expiring in July 2002.
The Company's Hillburn, New York facility is located in a 21,000 square foot
building is leased from an unaffiliated third party at an annual rental of
$98,440 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 $27,030
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 $16,200
pursuant to an agreement expiring in September 2002.
7
The Company's headquarters are located in a 5,400 square foot building in Pearl
River, New York. The building is leased from an unaffiliated third party
pursuant to a three year agreement at an annual rental of approximately $95,000
through January 2002. The Company is currently occupying the premises on a month
to month basis at a monthly rental rate of $7,938.
The Company's Plainview, New York depot facility is located in a 2,000 square
foot building leased from an unaffiliated third party at an annual rent of
$17,280 pursuant to an agreement expiring in July 2002.
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 rental of $78,000
pursuant to an agreement expiring in September 2002.
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
$19,500 pursuant to an agreement expiring in April 2004.
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
$18,450 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.
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 the prior contamination of certain of United's wells within close
proximity to the Company's Hillburn, New York facility.
On April 1, 1999, the Company reported an accidental release at the Company's
Hillburn, New York facility of approximately 7,800 lbs. of
trichlorofluormenthane ("R-11"). 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 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 upon Court approval of the settlement, and
has agreed to make monthly payments in the amount of $5,000 for a minimum of 18
months, and up to a maximum of 42 months following the settlement. The proceeds
of the settlement were used to fund the construction by United of a new
remediation tower. The purpose of the monthly payments is to defray United's
cost associated with the continuation of remedial measures implemented by
United. 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. In connection with
the settlement with United, the Company exhausted all insurance proceeds
available for the United occurrence.
In June 2000, the Company signed an Order on Consent with the DEC regarding all
past contamination of the United well field. Under the Order on Consent, the
Company agreed to continue operating the remediation system installed by the
Company 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
has installed one additional monitoring well and has modified the Company's
existing remediation system to incorporate a second recovery well. During the
year ended December 31, 2001, the Company recognized $260,000 in additional
remediation costs in connection with this matter.
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 CERCLA. 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.
8
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 well system.
During February 2002, while the levels were below New York State drinking water
standards of 5 ppb, the Village of Suffern expressed concern over the
possibility of R-11 reaching its well system and has advised the Company that it
is investigating available options to protect its well system. The Company is
working with the Village of Suffern, and all applicable governmental agencies to
insure against any contamination of Suffern's wells and its water supply. 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 is also no
assurance that the Company's opposition to the EPA's nomination for inclusion 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.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
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'. Since September 20, 1995,
the Common Stock has traded on the NASDAQ National Market. The following table
sets forth, for the periods indicated the range of the high and low sale prices
for the Common Stock as reported by NASDAQ.
High Low
---- ---
2000
o First Quarter $ 2.75 $ 1.50
o Second Quarter $ 2.75 $ 1.75
o Third Quarter $ 3.75 $ 1.625
o Fourth Quarter $ 3.688 $ 1.437
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
The number of record holders of the Company's Common Stock was approximately 250
as of March 1, 2002. The Company believes that there are in excess of 4,000
beneficial owners of its Common Stock.
To date, the Company has not declared or paid any cash dividends on its Common
Stock. The payment of dividends, if any, in the future is within the discretion
of the Board of Directors and will depend upon the Company's earnings, its
capital requirements and financial condition, borrowing covenants, and other
relevant factors. The Company presently intends to retain all earnings, if any,
to finance the Company's operations and development of its business and does not
expect to declare or pay any cash dividends in the foreseeable future. In
addition, the Company has entered into a credit facility with CIT Group/Credit
Finance Group, Inc. ("CIT") which, among other things, restricts the Company's
ability to declare or pay any dividends on its capital stock. The Company has
obtained a waiver from CIT to permit the payment of dividends on its Series A
Preferred Stock. The Series A Preferred Stock carries a dividend rate of 7%. The
Company will pay dividends, in arrears, on the Series A Preferred Stock, semi
annually, either in cash or additional shares, at the Company's option (see Item
6 "Management's Discussion and Analysis of Financial Condition and Results of
Operations" - Liquidity and Capital Resources).
10
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 if necessary, 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. 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, asset impairments, income taxes,
commitments and contingencies. 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. The
Company believes the accounting policies set forth in Note 1 of the Notes to the
Consolidated Financial Statements are those policies that are most important to
the presentation of its financial statements and such policies may require
subjective and complex judgments on the part of management (see Note 1 to the
Notes to the Consolidated Financial Statements).
Overview
Over the past few years, the Company has changed its business focus from sales
of refrigerants towards 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, consisting primarily of reclamation of
refrigerants. Pursuant to this business focus, the Company has created a network
of service depots and has exited certain operations which may not support the
growth of service sales.
During 1999 and 2001 the Company completed sales of its Series A Preferred
Stock. The net proceeds of these sales were and are being used to expand the
Company's service offering through a network of service depots that provide a
full range of the Company's RefrigerantSide(R) Services and to provide working
capital. Management believes that its RefrigerantSide(R) Services represent the
Company's long term growth potential. However, while the Company believes it
will experience an increase in revenues from its RefrigerantSide(R) Services, in
the short term, such an increase may not be sufficient to offset reductions in
refrigerant revenue which may occur as a result of the Company's shift in its
business focus toward RefrigerantSide(R) Services. The Company expects that it
will incur additional expenses and losses during the year related to the
continued development of its depot network.
Sales of refrigerants continue to represent a significant portion of the
Company's revenues and, in the short term, the Company has experienced an
increase in refrigerant sales. The Company believes that, in the refrigeration
industry overall, there will be a trend towards lower sales prices, volumes and
gross profit margins on refrigerant sales in the foreseeable future, which will
result in an adverse effect on the Company's operating results.
The change in business focus towards revenues generated from RefrigerantSide(R)
Services may cause a material reduction in revenues derived from the sale of
refrigerants. In addition, to the extent that the Company is unable to obtain
refrigerants on commercially reasonable terms or experiences a decline in demand
for refrigerants, the Company could realize reductions in refrigerant
processing, and possible loss of revenues which would have a material adverse
effect on its operating results.
11
Results of Operations
Year ended December 31, 2001 as compared to year ended December 31, 2000
Revenues for 2001 were $20,768,000, an increase of $5,313,000 or 34% from the
$15,455,000 reported during the comparable 2000 period. The increase in revenues
was primarily attributable to an increase in refrigerant revenues and to a
lesser extent an increase in RefrigerantSide(R) Services revenues. The increase
in refrigerant revenues is related to an increase in the sales price of certain
refrigerants and an increase in volume as compared to the 2000 period. The
increase in RefrigerantSide(R) Service revenues reflects growth through the
development of the Company's depot network.
Cost of sales for 2001 was $14,971,000, an increase of $4,574,000 or 44% from
the $10,397,000 reported during the comparable 2000 period. The increase in cost
of sales was primarily due to a higher volume of refrigerant revenues and an
increase in payroll and supply costs associated with RefrigerantSide(R) Service
revenues. As a percentage of sales, cost of sales were 72% of revenues for 2001,
an increase from the 67% reported for the comparable 2000 period. The increase
in cost of sales as a percentage of revenues was primarily attributable to an
increase in the volume of refrigerant sales and associated freight costs and
payroll and supply costs associated with RefrigerantSide(R) Service revenues.
Operating expenses for 2001 were $8,017,000, an increase of $552,000 or 7% from
the $7,465,000 reported during the comparable 2000 period. The increase was
primarily attributable to an increase in professional fees of $203,000 and an
increase in marketing and sales payroll costs associated with the expansion of
the Company's RefrigerantSide(R) Service offering of $196,000.
Other income (expense) for 2001 was $(179,000), compared to the $11,000 reported
during the comparable 2000 period. Other income (expense) includes interest
expense of $423,000 and $501,000 for 2001 and 2000, respectively, offset by
other income of $244,000 and $512,000 for 2001 and 2000, respectively. The
decrease in interest expense is primarily attributed to a decrease in
outstanding indebtedness and interest rates during 2001 as compared to 2000.
Other income primarily relates to interest income and proceeds from the sale of
Environmental Support Solutions, Inc. ("ESS"). During the 2000 period the
Company recognized a non-recurring gain of $188,000 which was included as other
income from the sale of its then remaining ownership interest in ESS.
No income taxes for the years ended December 31, 2001 and 2000 were recognized.
The Company recognized a reserve allowance against the deferred tax benefit for
the 2001 and 2000 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 2001 was $2,399,000 an increase of $3,000 from the $2,396,000 net
loss reported during the comparable 2000 period. The increase in net loss was
primarily attributable to the non-recurring gain of $188,000 from the sale of
ESS during the 2000 period offset by the reduction in the Company's operating
loss during the 2001 period.
Liquidity and Capital Resources
At December 31, 2001, the Company had working capital of approximately $927,000,
an increase of $1,383,000 from the working capital deficit of $456,000 at
December 31, 2000. The increase in working capital is primarily attributable to
proceeds from the sale of the Company's Series A Preferred Stock and by the
proceeds from the sale of its Ft. Lauderdale property offset by the net loss
incurred during the year ended December 31, 2001. A principal component of
current assets is inventory. At December 31, 2001, the Company had inventories
of $2,387,000, an increase of $486,000 or 26% from the $1,901,000 at December
31, 2000. 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"). The Company has historically financed
its working capital requirements through cash flows from operations, the
issuance of debt and equity securities and bank 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.
12
Net cash used by operating activities for the year ended December 31, 2001, was
$2,361,000 compared with net cash used by operating activities of $727,000 for
the comparable 2000 period. Net cash used by operating activities was primarily
attributable to the net loss for the 2001 period, an increase in trade
receivables and inventories, and a reduction in accounts payable and accrued
expenses.
Net cash provided by investing activities for the year ended December 31, 2001,
was $554,000 compared with net cash used by investing activities of $853,000 for
the prior comparable 2000 period. The net cash provided by investing activities
was due to the Company's sale of its Ft. Lauderdale property offset by equipment
additions primarily associated with the expansion of the Company's depot
network.
Net cash provided by financing activities for the year ended December 31, 2001,
was $2,326,000 compared with net cash used by financing activities of $40,000
for the comparable 2000 period. The net cash provided by financing activities
for the 2001 period primarily consisted of the sale of the Company's Series A
Preferred Stock of $2,940,000 offset by the repayment of long term debt of
$1,037,000.
At December 31, 2001, the Company had cash and equivalents of $1,382,000. 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. The
Company estimates that capital expenditures during 2002 may range from
approximately $300,000 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, 2001 and
is more fully disclosed in the Notes to Consolidated Financial Statements (see
Notes 8 and 10 to the Notes of the Consolidated Financial Statements) (amounts
in thousands).
Year ended December 31,
------------------------------------
2002 2003 2004 2005 Total
------ ---- ---- ---- ------
Long term debt and capital lease obligations $2,450 $453 $249 $139 $3,291
Operating leases 700 237 56 2 995
------ ---- ---- ---- ------
Total contractual cash obligations $3,150 $690 $305 $141 $4,286
====== ==== ==== ==== ======
The Company owned improved property located in Ft. Lauderdale which was leased
at $13,781 per month to an unaffiliated third party. On March 22, 2001, the
Company completed the sale of the property to an unaffiliated third party. After
payment of the then outstanding mortgage balance and transactional expenses, the
Company received net proceeds of approximately $300,000 and recognized a $14,000
gain from the sale of this property.
The Company has entered into a credit facility with The CIT Group/Business
Credit, Inc. ("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, 2001, the Company had availability under its
revolving line of credit of approximately $256,000. 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, 2001, the Company has
approximately $489,000 outstanding under its term loans and $2,006,000
outstanding under its revolving line of credit. The facility bears interest at
the prime rate plus 1.5%, 6.25% at December 31, 2001, 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.
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. 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,
13
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.
The Company is continuing to evaluate opportunities to rationalize its operating
facilities based on its emphasis on the expansion of its service sales. As a
result, the Company may discontinue certain operations which it believes do not
support the growth of service sales and, in doing so, may incur future charges
to exit certain operations.
On March 30, 1999, the Company completed the sale of 65,000 shares of its Series
A Preferred Stock, with a liquidation value of $100 per share, to Fleming US
Discovery Fund III, L.P. and Fleming US Discovery Offshore Fund III, L.P. The
gross proceeds from the sale of the Series A Preferred Stock were $6,500,000.
The Series A Preferred Stock converts to Common Stock at a rate of $2.375 per
share, which was 27% above the closing market price of Common Stock on March 29,
1999.
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 converts to Common Stock at a rate 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 has voting rights on an as-if converted basis. The
number of votes applicable to the Series A Preferred Stock is equal to the
number of shares of Common Stock into which the Series A Preferred Stock is then
convertible. However, the holders of the Series A Preferred Stock will provide
the Chief Executive Officer and the Secretary of the Company a proxy to vote all
shares currently owned and subsequently acquired above 29% of the votes entitled
to be cast by all shareholders of the Company. The Series A Preferred Stock
carries a dividend rate of 7%, which will increase to 16%, if the stock remains
outstanding on or after March 31, 2004. The conversion rate may be subject to
certain antidilution provisions. The Company has used and will use 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
September 30, 2001, the Company declared and paid, in-kind, the dividends
outstanding on the Series A Preferred Stock and issued a total of 3,740
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 believes that its anticipated cash flow from operations, together
with the remaining proceeds from the prior sale of its Preferred Stock, and the
availability of funds under its credit facility, will be sufficient to satisfy
the Company's working capital requirements and proposed expansion of its service
business for the foreseeable future. However, any unanticipated expenses,
including but not limited to an increase in the cost of refrigerants purchased
by the Company or an unanticipated increase in operating expenses or failure to
obtain expected revenues from the Company's depots and or refrigerant revenues
or additional expansion or acquisition costs that may arise in the future would
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. There can be no assurance that the Company can, if
necessary, obtain any required additional capital and its inability to do so
could have a material adverse affect on the Company.
Inflation
Inflation has not historically had a material impact on the Company's
operations.
Reliance on Suppliers and Customers
The Company's financial performance is in part dependent on its ability to
obtain sufficient quantities of virgin and reclaimable refrigerants from
manufacturers, wholesalers, distributors, bulk gas brokers, and from other
sources within the air conditioning and refrigeration and automotive aftermarket
industries, and on corresponding demand for refrigerants. To the extent that the
Company is
14
unable to obtain sufficient quantities of refrigerants in the future, or resell
reclaimed refrigerants at a profit, the Company's financial condition and
results of operations would be materially adversely affected.
During the year ended December 31, 2001, one customer accounted for 15% of the
Company's revenues. During the year ended December 31, 2000, one customer
accounted for 13% 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 has
historically been 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, 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
Statements No. 141, Business Combinations (SFAS 141), No. 142, Goodwill and
Other Intangible Assets (SFA 142) and No. 143, Accounting for Asset Retirement
Obligations (SFAS 143). In addition, in August 2001, FASB issued statement No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets.
SFAS 141 addresses the use of the purchase method of accounting and prohibits
the use of the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. SFAS 141 also requires that the
Company recognize acquired intangible assets apart from goodwill if the acquired
intangible assets meet certain criteria. SFAS 141 applies to business
combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. The Company will adopt SFAS 141
effective January 1, 2002.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is effective for fiscal years
beginning after December 15, 2001 to all goodwill and other intangible assets
recognized at that date, regardless of when those assets were initially
recognized. SFAS 142 requires the Company to complete a transitional goodwill
impairment test six months from the date of adoption. The Company is also
required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142. The Company will adopt SFAS
142 effective January 1, 2002.
SFAS 143 addresses financial reporting and reporting for obligations associated
with retirement of tangible long-lived assets and the associated retirement
costs. SFAS 143 is effective for the fiscal years beginning after June 15, 2002.
The Company will adopt SFAS 143 effective January 1, 2003.
SFAS 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS 144 is effective for fiscal years beginning
after December 15, 2001. The Company will adopt SFAS effective January 1, 2002.
The Company does not believe that the adoption of SFAS 141, SFAS 142, SFAS 143
and SFAS 144 will have a material impact on its financial position and results
of operations.
15
Item 7. Financial Statements.
The financial statements appear in a separate section of this report following
Part III.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
16
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 38 Chairman of the Board and Chief Executive Officer
Brian F. Coleman 40 President, Chief Operating Officer and
Chief Financial Officer
Thomas P. Zugibe 49 Executive Vice President
Stephen P. Mandracchia 42 Executive Vice President and Secretary
Vincent Abbatecola 55 Director
Robert L. Burr 51 Director
Dominic J. Monetta 60 Director
Otto C. Morch 68 Director
Harry C. Schell 67 Director
Robert M. Zech 36 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. Since May
1994, Mr. Zugibe has devoted his full business time to the Company's affairs.
From May 1987 to May 1994, Mr. Zugibe was employed as a power engineer with
Orange and Rockland Utilities, Inc., 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. Kevin J. Zugibe and Thomas P.
Zugibe are brothers.
Brian F. Coleman has been President and Chief Operating Officer since his
appointment on August 21, 2001 and Chief Financial Officer of the Company since
May 1997. 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.
Thomas P. Zugibe has been an Executive Vice President of the Company since its
inception in 1991. Mr. Zugibe is responsible for legal regulatory affairs,
technical compliance and training for the Company. He has been engaged in the
practice of law in the State of New York since 1980 and is on extended leave
from the law firm of Ferraro and Zugibe, Garnerville, New York.
Stephen P. Mandracchia has been an Executive Vice President of the Company since
January 1993 and Secretary of the Company since April 1995. 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). Stephen P. Mandracchia is the
brother in-law of Kevin J. Zugibe and Thomas P. 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, an investment
management firm, from its inception in February 2002 and has a consulting
agreement with J.P. Morgan Chase & Co. under which he is the lead partner of
Fleming US Discovery Partners, L.P., a private equity sponsor affiliated with
J.P. Morgan Chase & Co. Fleming US Discovery Partners, L.P. is the general
partner of Fleming US Discovery Fund III, L.P. and Fleming US Discovery Offshore
Fund III, L.P. Mr. Burr was employed by J. P. Morgan Chase & Co. from July 1995
to October 2001. From 1992 to 1995, Mr. Burr was head of Private Equity at
Kidder, Peabody & Co., Inc. Previously, Mr. Burr served as the Managing General
Partner of Morgan Stanley Ventures and General Partner of Morgan Stanley Venture
Capital Fund I, L.P. and was a corporate lending officer with Citibank, N.A. Mr.
Burr serves on the Board of Directors of Displaytech, Inc. and Impax
Laboratories, Inc.
Dominic J. Monetta has been a director of 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
17
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,
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 Capital Partners, 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.
Schell, Burr and Kevin J. 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 Kevin J. 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 August 23, 2001 Annual Meeting of
the Shareholders, Messrs. Abbatecola, Burr and Morch, were elected as directors
to terms of office that will expire at the Annual Meeting of Shareholders to be
held in the year 2003. Messrs. Monetta, Schell, Zech and Kevin J. Zugibe are
currently serving as directors and whose terms of office expire at the Annual
Meeting of the Shareholders to be held in the year 2002.
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, 2001 all
filing requirements applicable to its officers, directors, and greater than 10
percent beneficial stockholders were complied with, except that Mr. Thomas P.
Zugibe did not timely file Form 4 for five transactions in July 2001.
18
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, 2001 (the "Named Executives").
Summary Compensation Long Term Compensation
Table Awards
Annual Compensation(1) ----------------------
---------------------- Securities Underlying
Name Position Year Salary Bonus Options
---- -------- ---- ------ ----- -------
Kevin J. Zugibe Chairman of the Board 2001 $ 76,366 -- 170,000 shares
and Chief Executive 2000 $ 80,981 -- 140,000 shares
Officer 1999 $136,279 -- 1,000 shares
Brian F. Coleman President, Chief Operating 2001 $138,799 -- 100,000 shares
Officer and Chief Financial 2000 $151,047 -- 37,500 shares
Officer 1999 $138,124 -- 1,000 shares
Thomas P. Zugibe Executive Vice President 2001 $122,800 -- 20,000 shares
2000 $110,338 -- 102,500 shares
1999 $104,800 -- 1,000 shares
Stephen P Executive Vice President 2001 $123,800 -- 15,000 shares
Mandracchia and Secretary 2000 $113,415 -- 77,500 shares
1999 $108,124 -- 1,000 shares
----------
(1) The value of personal benefits furnished to the Named Executives during
1999, 2000 and 2001 did not exceed 10% of their respective annual
compensation.
The Company granted options, which, except as otherwise set forth below, vest
upon the date of grant, to the Named Executives during the fiscal year ended
December 31, 2001, as shown in the following table:
Summary of Stock Options Granted to Named Executives
% of Total
Number of Options
Securities Granted to
Underlying Employees
Options in Fiscal Exercise or
Granted year Base price Expiration
Name Position Shares Percent ($/sh) Date
---- -------- ------ ------- ------ ----
Kevin J. Zugibe Chairman and Chief 60,000 13% $2.38 02/07/2006
Executive Officer 45,000 10% $2.38 10/23/2006
50,000(1) 11% $2.55 12/13/2006
15,000 3% $2.55 12/13/2006
Brian F. Coleman President, Chief Operating 80,000 18% $2.55 12/13/2006
Officer and Chief 20,000(2) 4% $2.55 12/13/2006
Financial Officer
Thomas P. Zugibe Executive Vice President 20,000(2) 4% $2.55 12/13/2006
Stephen P. Executive Vice President
Mandracchia and Secretary 15,000(3) 3% $2.55 12/13/2006
-----------
(1) Options vest over a three year period at the rate of 4,167 per quarter,
commencing with the first quarter of 2002.
(2) Options vest over a three year period at the rate of 1,667 per quarter,
commencing with the first quarter of 2002.
(3) Options vest over a three year period at the rate of 1,250 per quarter,
commencing with the first quarter of 2002.
19
Aggregated Fiscal Year End Option Values Table
The following table sets forth information concerning the value of unexercised
stock options held by the Named Executives at December 31, 2001. Except as
otherwise indicated, no options were exercised by the Named Executives during
the fiscal year ended December 31, 2001.
Number of Securities
Underlying Value of
Unexercised Options In-the-money Options
Shares At December 31, 2001 At December 31, 2001(1)
Acquired on -------------------- -----------------------
Name Exercise Value Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------------- ----------- ------------- ----------- -------------
Kevin J. Zugibe -- -- 314,500 94,500 $94,077 $33,252
Chairman and
Chief Executive Officer
Brian F. Coleman
President, Chief Operating -- -- 144,715 60,785 $39,327 $ 5,380
Officer and Chief Financial
Officer
Thomas P. Zugibe -- -- 168,500 20,000 $45,612 $ 5,380
Executive Vice
President
Stephen P. Mandracchia 2,200 $4,850 141,300 15,000 $33,953 $ 4,035
Executive Vice President
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 $2.82.
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
an additional $20,000 and an additional 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.
To date, 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, 2001. 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, 2001. 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, 2001.
Employment Agreements
The Company has entered into a two-year employment agreement with Kevin J.
Zugibe, which expires in May 2003 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 $134,000 with such increases and
bonuses as the Board may determine. The Board of Directors and Mr. Zugibe have
agreed, at Mr. Zugibe's option, to reduce the cash compensation and issue
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.
20
Stock Option Plan
1994 Stock Option Plan
The Company has adopted an Employee Stock Option Plan (the "Plan") effective
October 31, 1994 pursuant to which 725,000 shares of Common Stock are currently
reserved for issuance upon the exercise of options designated as either (i)
options intended to constitute incentive stock options ("ISOs") under the
Internal Revenue Code of 1986, as amended (the "Code"), or (ii) nonqualified
options. ISOs may be granted under the Plan to employees and officers of the
Company. Non-qualified options may be granted to consultants, directors (whether
or not they are employees), employees or officers of the Company. Stock
appreciation rights may also be issued in tandem with stock options.
The Plan is intended to qualify under Rule 16b-3 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and is administered by the
Compensation/Stock Option Committee of the Board of Directors. The committee,
within the limitations of the Plan, determines the persons to whom options will
be granted, the number of shares to be covered by each option, whether the
options granted are intended to be ISOs, the duration and rate of exercise of
each option, the exercise price per share and the manner of exercise and the
time, manner and form of payment upon exercise of an option. Unless sooner
terminated, the Plan will expire on December 31, 2004.
ISOs granted under the Plan may not be granted at a price less than the fair
market value of the Common Stock on the date of grant (or 110% of fair market
value in the case of persons holding 10% or more of the voting stock of the
Company). The aggregate fair market value of shares for which ISOs granted to
any employee are exercisable for the first time by such employee during any
calendar year (under all stock option plans of the Company) may not exceed
$100,000. Non-qualified options granted under the Plan may not be granted at a
price less than 85% of the market value of the Common Stock on the date of
grant. Options granted under the Plan will expire not more than ten years from
the date of grant (five years in the case of ISOs granted to persons holding 10%
or more of the voting stock of the Company). All options granted under the Plan
are not transferable during an optionee's lifetime but are transferable at death
by will or by the laws of descent and distribution. In general, upon termination
of employment of an optionee, all options granted to such person which are not
exercisable on the date of such termination immediately terminate, and any
options that are exercisable terminate 90 days following termination of
employment.
As of December 31, 2001, options to purchase 618,906 shares of Common Stock were
issued under the Plan. During 2000, the Company granted options to purchase
40,000 shares each to Kevin J. Zugibe, Stephen P. Mandracchia and Thomas P.
Zugibe exercisable at $2.375 per share. Such options vest and are fully
exercisable as of August 3, 2000. During 2001, 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, 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 (see Note 11 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
21
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, 2001, the Company had granted options to purchase 1,405,716
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 420,666
shares to certain officers, directors and employees, exercisable at prices
ranging from $2.50 to $4.375 per share. During 1999, the Company granted options
to purchase 1,000, 1,000 and 1,000 shares at an exercise price of $2.00 per
share to Kevin J. Zugibe, Stephen P. Mandracchia and Thomas P. Zugibe,
respectively. Such options vested and are fully exercisable as of November 3,
2000; November 3, 1999 and November 3, 1999, respectively. In addition, during
1999, the Company also granted options to purchase 153,500 shares to certain
officers, directors and employees, exercisable at prices ranging from $1.781 to
$2.63 per share. 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 269,250 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 (see Note 11 to the Notes to the
Consolidated Financial Statements).
22
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information as of March 1, 2002 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 552,228 (3) 10.1%
Thomas P. Zugibe 400,628 (4) 7.5%
Stephen P. Mandracchia 380,128 (5) 7.2%
Brian F. Coleman 147,715 (6) 2.8%
Vincent P. Abbatecola 25,000 (7) *
Robert L. Burr 0 (11) *
Dominic J. Monetta 30,000 (7) *
Otto C. Morch 20,600 (7) *
Harry C. Schell 69,000 (8) 1.3%
Robert M. Zech 0 *
DuPont Chemical and Energy
Operations, Inc. 500,000 (9) 9.7%
Flemings Funds 4,608,736 (10) 47.2%
All directors and executive
officers as a group (10 persons) 1,625,299 (12) 27.0%
* = 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 1, 2002. 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 1, 2002 have been exercised. Unless
otherwise noted, the Company believes that all persons named in the table have
sole voting and investment power with respect to all shares of Common stock
beneficially owned by them.
(3) Includes (i) 40,000 shares which may be purchased at $4.47 per share; (ii)
40,000 shares which may be purchased at $3.00 per share; (iii) 18,000 shares
which may be purchased at $3.85 per share; (iv) 1,000 shares which may be
purchased at $2.00 per share; (v) 40,000 shares that may be purchased at $2.375
per share; (vi) 55,500 shares which may be purchased at $2.375 per share; (vii)
60,000 shares that may be purchased at $2.375 per share; (viii) 45,000 shares
that may be purchased at $2.375 per share; and (ix) 15,000 shares that may be
purchased at $2.551 per share under immediately exercisable options. Does not
give effect to any voting rights held by Mr. Zugibe as a result of the Company's
agreement with the holders of the Series A Preferred Stock as discussed in (11)
below.
(4) Includes (i) 25,000 shares which may be purchased at $4.47 per share; (ii)
15,000 shares which may be purchased at $3.85 per share; (iii) 25,000 shares
which may be purchased at $3.00 per share; (iv) 1,000 shares which may be
purchased at $2.00 per share; (v) 40,000 shares which may be purchased at $2.375
per share; and (vi) 62,500 shares which may be purchased at $2.375 per share
under immediately exercisable options.
(5) Includes (i) 25,000 shares which may be purchased at $4.47 per share; (ii)
15,000 shares which may be purchased at $3.50 per share; (iii) 25,000 shares
which may be purchased at $3.00 per share; (iv) 40,000 shares which may be
purchased at $2.375 per share; and (v) 36,300 shares which may be purchased at
$2.375 per share under immediately exercisable options. Does not give effect to
any voting rights held by Mr. Mandracchia as a result of the Company's agreement
with the holders of the Series A Preferred Stock as discussed in (11) below.
23
(6) Represents (i) 30,000 shares which may be purchased at $4.06 per share; (ii)
12,000 shares which may be purchased at $3.50 per share; (iii) 25,000 shares
which may be purchased at $2.50 per share; (iv) 1,000 shares which may be
purchased at $1.78 per share; (v) 37,500 shares which may be purchased at $2.375
per share; and (vi) 80,000 shares which may be purchased at $2.551 per share
under immediately exercisable options.
(7) 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; and (iv) 5,000 shares which may be
purchased at $3.08 per share under immediately exercisable options.
(8) 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; and (iv) 10,000 shares which may be
purchased at $3.08 per share under immediately exercisable options.
(9) 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.
(10) 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. The Flemings Funds has provided to the
Chief Executive Officer and Secretary of the Company a Proxy to vote that number
of voting shares held by the Flemings Funds which exceed 29% of the then voting
shares. Also includes 10,000 shares which may be purchased at $2.375 per share;
10,000 shares which may be purchased at $2.785 per share; and 10,000 shares
which may be purchased at $3.08 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.
(11) Mr. Burr has been appointed a director by the Flemings Funds. The Fleming
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
Flemings Funds.
(12) Includes exercisable options to purchase 869,015 shares of Common Stock
owned by the directors and officers as a group. Excludes 4,608,736 shares
beneficially owned by the Flemings Funds.
Kevin J. Zugibe, Thomas P. Zugibe and Stephen P. Mandracchia may be deemed to be
"parents" of the Company as such term is used under the Securities Act of 1933.
Item 12. Certain Relationships and Related Transactions
In 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, 2001 and 2000, the Company had sales to DuPont in the amount
of $1,124,000 and $976,000, 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 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 converts to Common Stock at a rate of $2.375 per
share, which was 23% above the closing market price of Common Stock on February
15, 2001. Mr. Burr, a director of the Company, has a consulting agreement with
J.P. Morgan Chase & Co. 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.
24
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)
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.
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.
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.
21 Subsidiaries of the Registrant.
23.1 Consent of BDO Seidman, LLP.
-------------------------
(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.
(*) Denotes Management Compensation Plan, agreement or arrangement.
(b) Reports on Form 8-K:
During the quarter ended December 31, 2001, no report on Form 8-K was filed.
25
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: March 28, 2002
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 March 28, 2002
------------------- (Principal Executive Officer)
Kevin J. Zugibe
/s/ Brian F. Coleman President, Chief Operating Officer and Chief Financial March 28, 2002
-------------------- Officer (Principal Financial and Accounting Officer)
Brian F. Coleman
/s/ Vincent Abbatecola Director March 28, 2002
----------------------
Vincent Abbatecola
/s/ Robert L. Burr Director March 28, 2002
-----------------
Robert L. Burr
/s/ Dominic J. Monetta Director March 28, 2002
----------------------
Dominic J. Monetta
/s/ Otto C. Morch Director March 28, 2002
-----------------
Otto C. Morch
/s/ Harry C. Schell Director March 28, 2002
-------------------
Harry C. Schell
/s/ Robert M. Zech Director March 28, 2002
------------------
Robert M. Zech
26
Hudson Technologies, Inc.
Consolidated Financial Statements
Contents
--------
Report of Independent Certified Accountants 28
Audited Consolidated Financial Statements:
o Consolidated Balance Sheet 29
o Consolidated Statements of Operations 30
o Consolidated Statements of Stockholders' Equity 31
o Consolidated Statements of Cash Flows 32
o Notes to the Consolidated Financial Statements 33
27
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, 2001 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period ended December 31, 2001. 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, 2001 and the results of
their operations and their cash flows for each of the two years in the period
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States.
/s/ BDO Seidman, LLP
Valhalla, New York
March 1, 2002
28
Hudson Technologies, Inc. and subsidiaries
Consolidated Balance Sheet
(Amounts in thousands, except for share and par value amounts)
December 31, 2001
-----------------
Assets
Current assets:
Cash and cash equivalents $ 1,382
Trade accounts receivable - net 2,745
Inventories 2,387
Prepaid expenses and other current assets 150
-------
Total current assets 6,664
Property, plant and equipment, less accumulated depreciation 3,581
Other assets 123
-------
Total Assets $10,368
=======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 3,287
Short-term debt 2,450
-------
Total current liabilities 5,737
Long-term debt, less current maturities 841
-------
Total Liabilities 6,578
-------
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 108,745 10,875
Common stock, $0.01 par value; shares authorized 20,000,000;
issued outstanding 5,156,520 52
Additional paid-in capital 20,567
Accumulated deficit (27,704)
-------
Total Stockholders' Equity 3,790
-----
Total Liabilities and Stockholders' Equity $ 10,368
========
See accompanying Notes to the Consolidated Financial Statements.
29
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,
-------------------------------
2001 2000
---- ----
Revenues $20,768 $15,455
Cost of sales 14,971 10,397
------- -------
Gross Profit 5,797 5,058
------- -------
Operating expenses:
Selling and marketing 2,322 2,126
General and administrative 4,475 4,049
Depreciation and amortization 1,220 1,290
------- -------
Total operating expenses 8,017 7,465
------- -------
Operating loss (2,220) (2,407)
------- -------
Other income (expense):
Interest expense (423) (501)
Other income 230 512
Gain on sale of assets 14 --
------- -------
Total other income (expense) (179) 11
------- -------
Loss before income taxes (2,399) (2,396)
Income taxes -- --
------- -------
Net loss (2,399) (2,396)
Preferred stock dividends (723) (497)
------- -------
Available for common shareholders $(3,122) $(2,893)
======= =======
Net loss per common share - basic and diluted $ (0.61) $ (0.57)
======= =======
Weighted average number of shares
outstanding 5,103,733 5,088,570
========= =========
See accompanying Notes to the Consolidated Financial Statements.
30
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, 1999 67,314 $ 6,731 5,085,820 $ 51 $ 21,614 $ (22,909) $ 5,487
Issuance of Common Stock for
services -- -- 3,000 -- 7 -- 7
Dividends paid in-kind on
Series A Preferred Stock 4,881 488 -- -- (488) -- --
Net Loss -- -- -- -- -- (2,396) (2,396)
--------- --------- --------- --------- --------- --------- ---------
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
========= ========= ========= ========= ========= ========= =========
See accompanying Notes to the Consolidated Financial Statements.
31
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,
------------------
2001 2000
---- ----
Cash flows from operating activities:
Net loss $(2,399) $(2,396)
Adjustments to reconcile net loss
to cash used by operating activities:
Depreciation and amortization 1,220 1,290
Allowance for doubtful accounts 60 20
Gain on sale of assets (14) --
Common stock issued for services -- 7
Changes in assets and liabilities:
Trade accounts receivable (218) (691)
Inventories (486) 580
Prepaid expenses and other current assets 47 5
Other assets (17) 13
Accounts payable and accrued expenses (548) 461
Deferred income (6) (16)
------- -------
Cash used by operating activities (2,361) (727)
------- -------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment 937 --
Additions to patents (9) --
Additions to property, plant, and equipment (374) (853)
------- -------
Cash provided (used) by investing activities 554 (853)
------- -------
Cash flows from financing activities:
Proceeds from issuance of preferred stock - net 2,940 --
Proceeds from issuance of common stock - net 151 --
Proceeds of short-term debt - net 272 234
Proceeds from long-term debt -- 529
Repayment of long-term debt (1,037) (803)
------- -------
Cash provided (used) by financing activities 2,326 (40)
------- -------
Increase (decrease) in cash and cash equivalents 519 (1,620)
Cash and equivalents at beginning of period 863 2,483
------- -------
Cash and equivalents at end of period $ 1,382 $ 863
======= =======
Supplemental disclosure of cash flow information:
Cash paid during period for interest $ 423 $ 501
Supplemental schedule of non-cash investing
and financing activities:
In-kind payment of preferred stock dividends $ 656 $ 488
See accompanying Notes to the Consolidated Financial Statements.
32
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, 2001,
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, 2001.
Credit risk
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of temporary cash investments and trade
accounts receivable. The Company maintains its temporary cash investments in
highly-rated financial institutions. The Company's trade accounts receivables
are due from companies throughout the U.S. The Company reviews each customer's
credit history before extending credit.
The Company establishes an allowance for doubtful accounts based on factors
associated with the credit risk of specific accounts, historical trends, and
other information.
During the year ended December 31, 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. During the year ended December 31, 2000,
one customer accounted for 13% 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 an adverse effect
on the Company's financial position and results of operations.
During the years ended December 31, 2001 and 2000, the Company had sales to E.I.
DuPont de Nemours and Company ("DuPont"), an affiliate, in the amount of
$1,124,000 and $976,000, respectively.
Cash and cash equivalents
Temporary investments with original maturities of ninety days or less are
included in cash and cash equivalents.
Inventories
Inventories, consisting primarily of reclaimed refrigerant products available
for sale, are stated at the lower of cost, on a first-in first-out basis, or
market.
Property, plant, and equipment
Property, plant, and equipment are stated at cost; including internally
manufactured equipment. The cost to complete equipment that is under
construction is not considered to be material to the Company's financial
position. Provision for depreciation is recorded (for
33
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 or passage
of title to customers in accordance with contractual terms. Cost of sales is
recorded based on the cost of products shipped or services performed and related
direct operating costs of the Company's facilities. 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.
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
less dividends on the outstanding Series A Preferred Stock, $723,000 and
$497,000 for the years ended December 31, 2001 and 2000, 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 2001 or 2000.
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. The
Company estimates potential liability, if any, related to these matters. To the
extent that these estimates are not accurate, or circumstances change in the
future, the Company could realize liabilities which would have a material
adverse affect on operating results and its financial position.
Impairment of long-lived assets and long-lived assets to be disposed of
The Company reviews 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.
34
Recent accounting pronouncements
In June 2001, The Financial Accounting Standards Board ("FASB") issued FASB
Statements No. 141, Business Combinations (SFAS 141), No. 142, Goodwill and
Other Intangible Assets (SFA 142) and No. 143, Accounting for Asset Retirement
Obligations (SFAS 143). In addition, in August 2001, FASB issued statement No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets.
SFAS 141 addresses the use of the purchase method of accounting and prohibits
the use of the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. SFAS 141 also requires that the
Company recognize acquired intangible assets apart from goodwill if the acquired
intangible assets meet certain criteria. SFAS 141 applies to business
combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. The Company will adopt SFAS 141
effective January 1, 2002.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is effective for fiscal years
beginning after December 15, 2001 to all goodwill and other intangible assets
recognized at that date, regardless of when those assets were initially
recognized. SFAS 142 requires the Company to complete a transitional goodwill
impairment test six months from the date of adoption. The Company is also
required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142. The Company will adopt SFAS
142 effective January 1, 2002.
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 the fiscal years beginning after June 15, 2002. The
Company will adopt SFAS 143 effective January 1, 2003.
SFAS 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS 144 is effective for fiscal years beginning
after December 15, 2001. The Company will adopt SFAS effective January 1, 2002.
Currently, the Company does not believe that the adoption of SFAS 141, SFAS 142,
SFAS 143 and SFAS 144 will have a material impact on its financial position and
results of operations.
Note 2 - Dispositions
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. The Company
recognized a valuation allowance for 100% of the note receivable. 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, which is included in other income in 2000.
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 3 - Other 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. On March 22, 2001, the Company sold its Ft.
Lauderdale property and, after payment of the then outstanding mortgage and
transactional expenses, it received net proceeds of approximately $300,000. The
Company recognized a $14,000 gain from the sale of this property. For the year
ended December 31, 2000, other income of $512,000 consisted of lease rental
income from the Company's Ft. Lauderdale facility, payments received from the
note receivable from ESS, including a $188,000 gain from the sale of the balance
of the ownership interest in ESS.
35
Note 4 - Income taxes
During the years ended December 31, 2001 and 2000, 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,
(in percents) 2001 2000
---- ----
Income tax rates
- Statutory U.S. Federal rate (34%) (34%)
- States, net U.S. benefits (4%) (4%)
- Valuation allowance 38% 38%
--- ---
Total --% --%
=== ===
As of December 31, 2001, the Company has net operating loss carryforwards,
("NOL's") of approximately $25,700,000 expiring 2007 through 2021 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,
(in thousands) 2001
----
Deferred tax assets (liabilities)
- Depreciation & amortization $ 33
- Reserves for doubtful accounts 57
- NOL 9,774
- Other (90)
-------
Subtotal 9,774
- NOL valuation allowance (9,774)
-------
Total $ --
=======
Note 5- Trade accounts receivable - net
At December 31, 2001, trade accounts receivable are net of reserves for doubtful
accounts of $149,000.
Note 6 - Inventories
Inventories consisted of the following:
December 31,
(in thousands) 2001
------
Refrigerant and cylinders $2,097
Packaged refrigerants 290
------
Total $2,387
======
36
Note 7 - Property, plant, and equipment
Elements of property, plant, and equipment are as follows:
December 31,
(in thousands) 2001
------
Property, plant, & equipment
- Equipment $6,943
- Equipment under capital lease 276
- Vehicles 1,275
- Furniture & fixtures 185
- Leasehold improvements 542
- Equipment under construction 161
------
Subtotal 9,382
Accumulated depreciation & amortization 5,801
------
Total $3,581
======
Note 8 - Short-term and long-term debt
Elements of short-term and long-term debt are as follows:
December 31,
(in thousands) 2001
-------
Short-term & long-term debt
Short-term debt:
- Bank credit line $ 2,006
- Long-term debt: current 444
-------
Subtotal 2,450
-------
Long-term debt:
- Bank credit line 680
- Capital lease obligations 135
- Vehicle loans 470
- Less: current maturities (444)
-------
Subtotal 841
-------
Total $ 3,291
=======
Bank credit line
The Company has entered into a credit facility with The CIT Group/Business
Credit, Inc. ("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, 2001, the Company had availability under its
revolving line of credit of approximately $256,000. 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, 2001, the Company has
approximately $489,000 outstanding under its term loans and $2,006,000
outstanding under its revolving line of credit. The facility bears interest at
the prime rate plus 1.5%, 6.25% at December 31, 2001, 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.
During 2000, the Company entered into a separate term loan with an affiliate of
CIT. The term loan is secured by a specific asset and bears interest at a rate
of 10% per annum. At December 31, 2001 the outstanding balance was $191,000 and
is payable in equal monthly installments of $2,850 with a final payment of
$131,419 due in June 2005.
37
Vehicle Loans
During 1999, the Company entered into various vehicle loans. The vehicles are
primarily used in connection with the Company's on-site services. The loans are
payable in 60 monthly payments through October 2004 and bear interest at 9.0%
through 9.98%.
Scheduled maturities of the Company's debts and capital lease obligations are as
follows:
Debts and capital lease obligations
Years ended December 31, Amount
------------------------ ------
(in thousands)
- 2002 $2,450
- 2003 453
- 2004 249
- 2005 139
------- ------
Total $3,291
======
The Company rents certain equipment with a net book value of about $173,000 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)
- 2002 $ 67
- 2003 52
- 2004 16
------- ----
Total $135
====
Average short-term debt for the year ended December 31, 2001 totaled $2,311,000
with a weighted average interest rate of approximately 8.4%.
Note 9 - Stockholders' equity
(i) In September 1996 and October 1997, in connection with the then outstanding
convertible debentures, the Company issued warrants to purchase an aggregate of
16,071 and 66,000 shares of the Company's Common Stock at an exercise price of
$18.00 and $10.00, respectively, per share. These warrants expire through August
6, 2002.
(ii) On January 29, 1997, the Company entered into a Stock Purchase Agreement
with DuPont and DuPont Chemical and Energy Operations, Inc. ("DCEO") pursuant to
which the Company issued to DCEO 500,000 shares of Common Stock in consideration
of $3,500,000 in cash. Simultaneous with the execution of the Stock Purchase
Agreement, the parties entered into a Standstill Agreement, Shareholders'
Agreement and Registration Agreement.
The Standstill Agreement provides, subject to certain exceptions, that neither
DuPont nor any corporation or entity controlled by DuPont will, directly or
indirectly, acquire any shares of any class of capital stock of the Company if
the effect of such acquisition would be to increase DuPont's aggregate voting
power to greater than 20% of the total combined voting power relating to any
election of directors. The Standstill Agreement also provides that the Company
will cause two persons designated by DCEO and DuPont to be elected to the
Company's Board of Directors.
The Shareholders' Agreement provides that, subject to certain exceptions, DuPont
shall have a right of first refusal to purchase any shares of Common Stock
intended to be sold by the Company's principal shareholders.
Pursuant to the Registration Agreement, the Company granted to DuPont certain
demand and "piggy-back" registration rights. The Standstill Agreement,
Shareholders Agreement and the demand and "piggy-back" registration rights under
the Registration Rights Agreement terminated on January 29, 2002.
(iii) 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 were not deemed to be material and 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.
38
(iv) 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 converts to Common Stock at a rate of $2.375 per
share, which was 27% above the closing market price of Common Stock on March 29,
1999.
(v) 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 converts to Common Stock at a rate 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 has voting rights on an as-if converted basis. The
number of votes applicable to the Series A Preferred Stock is equal to the
number of shares of Common Stock into which the Series A Preferred Stock is then
convertible. However, the holders of the Series A Preferred Stock will provide
the Chief Executive Officer and the Secretary of the Company a proxy to vote all
shares currently owned and subsequently acquired above 29% of the votes entitled
to be cast by all shareholders of the Company. The Series A Preferred Stock
carries a dividend rate of 7%, which will increase to 16%, if the stock remains
outstanding, on or after March 31, 2004. The conversion rate may be subject to
certain antidilution provisions. The Company has used and will use 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
September 30, 2000, the Company declared and paid, in-kind, the dividends
outstanding on the Series A Preferred Stock. During the year ended December 31,
2001, the Company issued an aggregate of 6,550 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.
(vi) 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 were
not deemed to be material.
39
Note 10 - Commitments and contingencies
Rents, operating leases and contingent income
Hudson utilizes leased facilities and operates equipment under non-cancelable
operating leases through December 31, 2005.
Properties
Location Annual Rent Lease Expiration Date
-------- ----------- ---------------------
Baltimore, Maryland $26,064 8/2002
Baton Rouge, Louisiana $18,000 7/2002
Charlotte, North Carolina $42,000 Month to Month
Chicago, Illinois $24,140 8/2002
Fremont, New Hampshire $ 7,200 6/2002
Fort Myers, Florida $57,240 7/2002
Hillburn, New York $98,440 5/2004
Houston, Texas $27,030 6/2003
Norfolk, VA $16,200 9/2002
Pearl River, New York $95,000 Month to Month
Plainview, New York $17,280 7/2002
Punta Gorda, Florida $76,000 12/2003
Rantoul, Illinois $78,000 9/2002
Salem, New Hampshire $19,500 4/2004
Seattle, Washington $18,450 3/2004
The Company rents properties and various equipment under operating leases. Rent
expense, net of sublease rental income, for the years ended December 31, 2001
and 2000 totaled approximately $837,000 and $790,000, respectively.
Future commitments under operating leases, are summarized as follows:
Rent expense
Years ended December 31, Amount
------------------------ ------
(in thousands)
- 2002 $700
- 2003 237
- 2004 56
- 2005 2
------- ----
Total $995
====
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 the prior contamination of certain of United's wells within close
proximity to the Company's Hillburn, New York facility.
On April 1, 1999, the Company reported an accidental release at the Company's
Hillburn, New York facility of approximately 7,800 lbs. of
trichlorofluormenthane ("R-11"). 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 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 upon Court approval of the settlement, and
has agreed to make monthly payments in the amount of $5,000 for a minimum of 18
months, and up to a maximum of 42 months following the settlement. The proceeds
of the settlement were used to fund the construction by United of a new
remediation tower. The purpose of
40
the monthly payments is to defray United's cost associated with the continuation
of remedial measures implemented by United. 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. In connection with the settlement with United, the Company exhausted
all insurance proceeds available for the United occurrence.
In June 2000, the Company signed an Order on Consent with the DEC regarding all
past contamination of the United well field. Under the Order on Consent, the
Company agreed to continue operating the remediation system installed by the
Company 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
has installed one additional monitoring well and has modified the Company's
existing remediation system to incorporate a second recovery well. During the
year ended December 31, 2001, the Company recognized $260,000 in additional
remediation costs in connection with this matter.
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 ("CERCLA"). 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 well system.
During February 2002, while the levels were below New York State drinking water
standards of 5 ppb, the Village of Suffern expressed concern over the
possibility of R-11 reaching its well system and has advised the Company that it
is investigating available options to protect its well system. The Company is
working with the Village of Suffern, and all applicable governmental agencies to
insure against any contamination of Suffern's wells and its water supply. 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 is also no
assurance that the Company's opposition to the EPA's listing 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.
Note 11 - Stock Option Plan
Effective October 31, 1994, the Company adopted an Employee Stock Option Plan
("Plan") pursuant to which 725,000 shares of common stock are reserved for
issuance upon the exercise of options designated as either (i) options intended
to constitute incentive stock options ("ISOs") under the Internal Revenue Code
of 1986, as amended, or (ii) nonqualified options. ISOs may be granted under the
Plan to employees and officers of the Company. Non-qualified options may be
granted to consultants, directors (whether or not they are employees), employees
or officers of the Company. Stock appreciation rights may also be issued in
tandem with stock options. Unless sooner terminated, the Plan will expire on
December 31, 2004.
ISOs granted under the Plan may not be granted at a price less than the fair
market value of the common stock on the date of grant (or 110% of fair market
value in the case of persons holding 10% or more of the voting stock of the
Company). Non-qualified options granted under the Plan may not be granted at a
price less than 85% of the market value of the common stock on the date of
grant. Options granted under the Plan expire not more than ten years from the
date of grant (five years in the case of ISOs granted to persons holding 10% or
more of the voting stock of the Company).
Effective July 25, 1997, and as amended on August 19, 1999, the Company adopted
its 1997 Employee Stock Option Plan ("1997 Plan") pursuant to which 2,000,000
shares of common stock are reserved for issuance upon the exercise of options
designated as either (i) options intended to constitute incentive stock options
("ISOs") under the Internal Revenue Code of 1986, as amended, or (ii)
nonqualified options. ISOs may be granted under the 1997 Plan to employees and
officers of the Company. Non-qualified options may be granted to consultants,
directors (whether or not they are employees), employees or officers of the
Company. Stock appreciation rights may also be issued in tandem with stock
options. Unless sooner terminated, the 1997 Plan will expire on June 11, 2007.
ISOs granted under the 1997 Plan may not be granted at a price less than the
fair market value of the common stock on the date of grant (or 110% of fair
market value in the case of persons holding 10% or more of the voting stock of
the Company). Non-qualified options granted under the 1997 Plan may not be
granted at a price less than 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).
41
All stock options have been granted to employees and non-employees at exercise
prices equal to or in excess of the market value on the date of the grant.
The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees",
and related Interpretations in accounting for its stock option plan by recording
as compensation expense the excess of the fair market value over the exercise
price per share as of the date of grant. Under APB Opinion 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of the grant, no compensation cost is
recognized.
SFAS No. 123 requires the Company to provide pro forma information regarding net
loss and net loss per share as if compensation cost for the Company's stock
option plan had been determined in accordance with the fair value based method
prescribed in SFAS No. 123. The Company estimates the fair value of each stock
option at the grant date by using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants since 1995.
Years ended December 31, 2001 2000
Assumptions ---- ----
-----------
Dividend Yield 0% 0%
Risk free interest rate 4.4% 5.9%
Expected volatility 60% 60%
Expected lives 5 5
Under the accounting provisions of FASB Statement 123, the Company's net loss
and net loss per share would have been adjusted to the pro forma amounts
indicated below:
Years ended December 31,
Pro forma results 2001 2000
------------------ --------- ---------
(In thousands, except per share amounts)
Net loss available for common shareholders:
As reported $ (3,122) $ (2,893)
Pro forma $ (3,569) $ (3,791)
Loss per common share-basic and diluted:
As reported $ (.61) $ (.57)
Pro forma $ (.70) $ (.75)
A summary of the status of the Company's stock option plan as of December 31,
2001 and 2000 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, 1999 1,034,532 $4.37
--------------------------------
o Granted 589,250 $2.41
o Forfeited (25,700) $7.17
------
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
-------------------------------- =========
42
Data summarizing year-end options exercisable and weighted average fair-value of
options granted during the years ended December 31, 2001 and 2000 is shown
below:
Options Exercisable
Year ended Year ended
December 31, December 31,
2001 2000
------------ ------------
Options exercisable at year-end 1,656,397 1,385,582
--------- ---------
Weighted average exercise price $3.42 $3.64
--------- ---------
Weighted average fair value of
options granted during the year $2.63 $1.13
--------- ---------
Options Exercisable at December 31, 2001
Weighted-average
Range Number Exercise
of Prices Outstanding Price
--------- ----------- ------
$1 to $4 1,388,765 $ 2.74
$4 to $8 151,966 $ 4.30
$8 to $12 115,666 $10.47
---------
$1 to $12 1,656,397 $ 3.42
=========
The following table summarizes information about stock options outstanding at
December 31, 2001:
Options Outstanding At December 31, 2001
Weighted-average Weighted-
Remaining average
Range of Number Contractual Exercise
Prices Outstanding Life Price
------ ----------- ---- -----
$1 to $4 1,600,050 3.55 years $ 2.72
$4 to $8 151,966 1.12 years $ 4.30
$8 to $12 121,666 4.95 years $10.47
-----------
$1 to $12 1,873,682 3.45 years $ 3.35
===========
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.
43