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Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ____________ to ____________
Commission file number 1-13412
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Hudson Technologies, Inc.
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(Name of small business issuer as specified in its charter)
New York 13-3641539
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
275 North Middletown Road
Pearl River, New York 10965
(address of principal executive offices) (ZIP Code)
Issuer's telephone number, including area code: (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
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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 _X_.
The Issuer's revenues for the fiscal year ended December 31, 2000 were
$15,455,000
The aggregate market value of the Issuer's Common Stock held by non-affiliates
as of March 13, 2001 was approximately $11,770,000. As of March 13, 2001, there
were 5,088,820 shares of the Issuer's Common Stock outstanding.
Documents incorporated by reference: None
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Hudson Technologies, Inc.
Index
Part Item Page
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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 15
Item 8 - Changes in and Disagreements with Accountants 15
on Accounting and Financial Disclosure
Part III. Item 9 - Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act 16
Item 10 - Executive Compensation 18
Item 11 - Security Ownership of Certain Beneficial Owners
and Management 21
Item 12 - Certain Relationships and Related Transactions 23
Item 13 - Exhibits and Reports on Form 8-K 24
Signatures 26
Financial Statements 27
2
Part I
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Item 1. Description of Business
General
Hudson Technologies, Inc., incorporated under the laws of New York on January
11, 1991, together with its subsidiaries (collectively, "Hudson" or the
"Company"), primarily (i) sells refrigerants, (ii) provides RefrigerantSide(R)
Services performed at a customer's site, consisting of system decontamination to
remove moisture, oils and other contaminants and (iii) provides recovery and
reclamation of the refrigerants used in commercial air conditioning, industrial
processing and refrigeration systems. The Company operates through its wholly
owned subsidiary Hudson Technologies Company.
The Company's Executive Offices are located at 275 North Middletown Road, Pearl
River, New York and its telephone number is (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 to damage to the earth's ozone layer, prohibits any person in
the course of maintaining, servicing, repairing and disposing of air
conditioning or refrigeration equipment, to knowingly vent or otherwise release
or dispose of ozone depleting substances used as refrigerants. That prohibition
also applies to substitute, non-ozone depleting refrigerants. The Act further
requires the recovery of refrigerants used in residential, commercial and
industrial air conditioning and refrigeration systems.
In addition, the Act prohibited production of CFC refrigerants effective January
1, 1996 and limits the production of refrigerants containing HCFCs, which
production is scheduled to be phased out by the year 2030.
Owners, operators and companies servicing cooling equipment are responsible for
the integrity of their systems regardless of the refrigerant being used and for
the responsible management of their refrigerant.
Products and Services
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 reclamation equipment,
including its patented Zugibeast(R) reclamation machine. 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. The Company also provides complete refrigerant
management services, which include testing and banking services tailored to
individual customer requirements. Hudson also separates "crossed" (i.e.
commingled) refrigerants and provides re-usable cylinder repair and hydrostatic
testing services.
Refrigerant Sales
The Company sells reclaimed and virgin (new) refrigerants to a variety of
customers in various segments of the air conditioning and refrigeration
industry. Virgin refrigerants are primarily purchased by the Company from E.I.
DuPont de Nemours and Company ("DuPont") as part of the Company's strategic
alliance with DuPont (see "Strategic Alliance" below), and resold by the
Company, typically at wholesale. In addition, the Company regularly purchases
used or contaminated refrigerants from many different sources, which
refrigerants are then reclaimed, using the Company's high volume proprietary
reclamation equipment, and resold by the Company.
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
Boston, Massachusetts --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
Hillburn, New York --RefrigerantSide(R)Service depot
Houston, Texas --RefrigerantSide(R)Service depot
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
Seattle, Washington --RefrigerantSide(R)Service depot
Strategic Alliance
In January 1997, the Company entered into an Industrial Property Management
Segment Marketer Appointment and Agreement and Refrigeration Reclamation
Services Agreement 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 to selected market segments
together with the Company's reclamation and refrigerant management services.
In addition, in January 1997, the Company entered into a Stock Purchase
Agreement with DuPont and DuPont Chemical and Energy Operations, Inc. ("DCEO")
pursuant to which the Company issued to DCEO 500,000 shares of Common Stock in
consideration of $3,500,000 in cash. Concurrently, the parties entered into a
Standstill Agreement, Shareholders' Agreement and Registration Agreement which,
among other things, provide that (i) subject to certain exceptions, neither
DuPont nor any corporation or entity controlled by DuPont will, directly or
indirectly, acquire any shares of any class of capital stock of the Company if
the effect of such acquisition would be to increase DuPont's aggregate voting
power 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. To the extent that the
Company is unable to obtain sufficient quantities of refrigerants in the future,
or resell refrigerants at a profit, the Company's financial condition and
results of operations would be materially adversely affected.
Customers
The Company provides its services to commercial, industrial and governmental
customers, as well as to refrigerant wholesalers, distributors, contractors and
to refrigeration equipment manufacturers. Agreements with larger customers
generally provide for standardized pricing for specified services.
For the year ended December 31, 2000, one customer accounted for 13% of the
Company's revenues. For the year ended December 31, 1999, one customer accounted
for 17% 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 would 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
participation in trade shows.
The Company's sales personnel are compensated on a commission basis with a
guaranteed minimum draw. The Company's executive officers devote significant
time and effort to customer relationships.
4
Competition
The Company competes primarily on the basis of price, breadth of services
offered (including proprietary RefrigerantSide(R) Services and other on-site
services), and performance of its proprietary high volume, high-speed equipment
used in its operations.
The Company competes with numerous regional companies, which provide refrigerant
recovery and/or reclamation services, as well as companies marketing reclaimed
and new alternative refrigerants. Certain of such competitors, may possess
greater financial, marketing, distribution and other resources for the sale and
distribution of refrigerants than the Company and, in some instances, provide
services or products over a more extensive geographic area than the Company.
The refrigerant recovery and reclamation industry is relatively new and emerging
competition from existing competitors and new market entrants is expected to
increase. Demand and market acceptance for Hudson's RefrigerantSide(R) Services,
and for the Company's refrigerant management products and services are subject
to a high degree of uncertainty. There can be no assurance that the Company will
be able to compete successfully or penetrate this market as rapidly as it
anticipates.
Insurance
The Company carries insurance coverage the Company considers sufficient to
protect the Company's assets and operations. The Company currently maintains
general commercial liability insurance and excess liability coverage for claims
up to $7,000,000 per occurrence and $7,000,000 in the aggregate. There can be no
assurance that such insurance will be sufficient to cover potential claims or
that an adequate level of coverage will be available in the future at a
reasonable cost. The Company attempts to operate in a professional and prudent
manner and to reduce its liability risks through specific risk management
efforts, including employee training. Nevertheless, a partially or completely
uninsured claim against the Company, if successful and of sufficient magnitude,
would have a material adverse effect on the Company.
The refrigerant industry involves potentially significant risks of statutory and
common law liability for environmental damage and personal injury. The Company,
and in certain instances, its officers, directors and employees, may be subject
to claims arising from the Company's on-site or off-site services, including the
improper release, spillage, misuse or mishandling of refrigerants classified as
hazardous or non-hazardous substances or materials. The Company may be strictly
liable for damages, which could be substantial, regardless of whether it
exercised due care and complied with all relevant laws and regulations.
Hudson maintains environmental impairment insurance of $1,000,000 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
5
resale to a person other than the owner of the equipment from which it was
recovered. The ARI and the EPA administer certification programs pursuant to
which applicants are certified to reclaim refrigerants in compliance with ARI
standards. Under such programs, the ARI issues a certification for each
refrigerant and conducts periodic inspections and quality testing of reclaimed
refrigerants.
The Company has obtained ARI certification for most refrigerants at each of its
reclamation facilities, and is certified by the EPA. The Company is required to
submit periodic reports to the ARI and pay annual fees based on the number of
pounds of reclaimed refrigerants. Certification by the ARI is not currently
required to engage in the refrigerant management business.
During February 1996, the EPA published proposed regulations, which, if enacted,
would require participation in third-party certification programs similar to the
ARI program. Such proposed regulations would also require laboratories designed
to test refrigerant purity to undergo a certification process. Extensive
comments to these proposed regulations were received by the EPA. The EPA is
still considering these comments and no further or additional regulations have
been proposed or published.
In addition, the EPA has established a mandatory certification program for air
conditioning and refrigeration technicians. Hudson's technicians have applied
for or obtained such certification.
The Company is subject to regulations adopted by the Department of
Transportation which classify most refrigerants handled by the Company as
hazardous materials or substances and impose requirements for handling,
packaging, labeling and transporting refrigerants.
The Resource Conservation and Recovery Act of 1976 ("RCRA") requires that
facilities that treat, store or dispose of hazardous wastes comply with certain
operating standards. Before transportation and disposal of hazardous wastes
off-site, generators of such waste must package and label their shipments
consistent with detailed regulations and prepare a manifest identifying the
material and stating its destination. The transporter must deliver the hazardous
waste in accordance with the manifest to a facility with an appropriate RCRA
permit. Under RCRA, impurities removed from refrigerants consisting of oils
mixed with water and other contaminants are not presumed to be hazardous waste.
The Emergency Planning and Community Right-to-Know Act of 1986 requires the
annual reporting of Emergency and Hazardous Chemical Inventories (Tier II
reports) to the various states in which the Company operates and to file annual
Toxic Chemical Release Inventory Forms with the EPA.
The Comprehensive Environmental Response, Compensation and Liability Act of
1980, 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, there can be
no assurance that Hudson will be able to continue to comply with applicable
laws, regulations and licensing requirements. Failure to comply could subject
the Company to civil remedies, substantial fines, penalties, injunction, or
criminal sanctions.
Quality Assurance & Environmental Compliance
The Company utilizes in-house quality and regulatory compliance control
procedures. Hudson maintains its own analytical testing laboratories to assure
that reclaimed refrigerants comply with ARI purity standards and employs
portable testing equipment when performing on-site services to verify certain
quality specifications. The Company employs three persons engaged full-time in
quality control and to monitor the Company's operations for regulatory
compliance.
6
Employees
The Company has approximately 104 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 various high-speed
equipment components and a process to reclaim refrigerants, and a registered
trademark for its "Zugibeast(R)". The patent expires in January 2012. The
Company believes that patent protection is important to its business and has
received a notice of allowance for an additional United States patent relating
to a high speed refrigerant recovery process. There can be no assurance as to
the breadth or degree of protection that patents may afford the Company, that
any patent applications will result in issued patents or that patents will not
be circumvented or invalidated. Technological development in the refrigerant
industry may result in extensive patent filings and a rapid rate of issuance of
new patents. Although the Company believes that its existing patents and the
Company's equipment do not and will not infringe upon existing patents or
violate proprietary rights of others, it is possible that the Company's existing
patent rights may not be valid or that infringement of existing or future
patents or violations of proprietary rights of others may occur. In the event
the Company's equipment infringe or are alleged to infringe patents or other
proprietary rights of others, the Company may be required to modify the design
of its equipment, obtain a license or defend a possible patent infringement
action. There can be no assurance that the Company will have the financial or
other resources necessary to enforce or defend a patent infringement or
proprietary rights violation action or that the Company will not become liable
for damages.
The Company also relies on trade secrets and proprietary know-how, and employs
various methods to protect its technology. However, such methods may not afford
complete protection and there can be no assurance that others will not
independently develop such know-how or obtain access to the Company's know-how,
concepts, ideas and documentation. Failure to protect its trade secrets could
have a material adverse effect on the Company.
Item 2. Description of Properties
The Company's Baltimore, Maryland depot facility is located in a 2,700 square
foot building leased from an unaffiliated third party at an annual rent of
approximately $25,600 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
approximately $18,000 pursuant to an agreement expiring in July 2002.
The Company's Haverhill (Boston), Massachusetts depot facility is located in a
3,000 square foot building leased from an unaffiliated third party at an annual
rent of $13,200 pursuant to a month to month rental agreement.
The Company's Charlotte, North Carolina facility is located in a 12,000 square
foot building leased from an unaffiliated third party at an annual rent of
approximately $42,000 pursuant to 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 approximately $23,000 pursuant to an agreement expiring in August 2002.
In March 1995, the Company purchased, for $950,000, a facility in Ft.
Lauderdale, Florida, consisting of a 32,000 square foot building on
approximately 1.7 acres with rail and port access. The property was mortgaged
during 1996 for $700,000. Annual real estate taxes are approximately $24,000.
The Company has principally ceased its operations at this facility and has
entered into a three year lease of the entire facility at the current level of
$13,781 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 from the sale of the property.
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 2001.
The Company's Hillburn facility is located in approximately 21,000 square feet
of leased industrial space at Hillburn, New York. The building is leased from an
unaffiliated third party at an annual rental of approximately $94,000 pursuant
to an agreement expiring in May 2004.
7
The Company's Houston, Texas depot facility, which consists of 5,000 square feet
located in a larger building, is leased from an unaffiliated third party at an
annual rent of $25,200 pursuant to an agreement which expires in June 2001.
The Company's headquarters are located in approximately 5,400 square feet of
leased commercial space at Pearl River, New York. The building is leased from an
unaffiliated third party pursuant to a three year agreement at an annual rental
of approximately $95,000 through January 2002.
The Company's Plainview, New York depot facility is located in a 2,000 square
foot building leased from an unaffiliated third party at an annual rent of
approximately $16,920 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 $60,000 pursuant to an agreement expiring in April 2001.
The Company's Rantoul, Illinois facility is located in a 29,000 square foot
building leased from an unaffiliated third party at an annual rental of
approximately $78,000 pursuant to an agreement expiring in September 2002.
The Company's Seattle, Washington depot facility is located in a 3,000 square
foot building leased from an unaffiliated third party at an annual rent of
approximately $16,200 pursuant to an agreement expiring in March 2001.
The Company 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, which wells showed
elevated levels of refrigerant contamination, specifically
Trichlorofluoromethane (R-11) and Dichlorodifluoromethane (R-12). In December
1998, United served an amended complaint asserting a claim pursuant to the
Resource Conservation and Recovery Act, 42 U.S.C.ss.6901, et. seq. seq.
("RCRA").
On April 1, 1999, the Company reported a release at the Company's Hillburn, New
York facility of approximately 7,800 lbs. of R-11, as a result of a failed hose
connection to one of the Company's outdoor storage tanks allowing liquid R-11 to
discharge from the tank into the concrete secondary containment area in which
the subject tank was located. An amount of the R-11 escaped the secondary
containment area through an open drain from the secondary containment area for
removing accumulated rainwater and entered the ground. In April 1999, the
Company was advised by United that one of its wells within close proximity to
the Company's facility showed elevated levels of R-11 in excess of 200 ppb.
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 following the settlement. The proceeds of the settlement are required to
be used to fund the construction and operation by United of a new remediation
tower, as well as for the continuation of temporary remedial measures
implemented by United and that have successfully contained the spread of R-11.
The remediation tower is expected to be completed by March 31, 2001 and is
designed to treat all of United's impacted wells and restore the water to New
York State drinking water standards for supply to the public. The Company
carries $1,000,000 of pollution liability insurance per occurrence and in
connection with the settlement exhausted all insurance proceeds available under
all applicable policies.
In June 2000, the Company signed an Order on Consent with the DEC regarding all
past contamination of the United well field. Under the Order on Consent, the
Company agreed to pay a $10,000 penalty relating to the April 1, 1999 release
and 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.
8
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 (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.
There can be no assurance that the effects of the April 1, 1999 R-11 release,
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.
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
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1999
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o First Quarter $ 2 1/2 $ 1 1/2
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o Second Quarter $ 3 5/8 $ 1 3/4
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o Third Quarter $ 2 5/8 $ 1 1/2
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o Fourth Quarter $ 4 7/16 $ 1 1/4
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2000
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o First Quarter $ 2 3/4 $ 1 1/2
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o Second Quarter $ 2 3/4 $ 1 3/4
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o Third Quarter $ 3 3/4 $ 1 5/8
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o Fourth Quarter $ 3 11/16 $ 1 7/16
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The number of record holders of the Company's Common Stock was approximately 250
as of March 13, 2001. 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).
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 and other
risks detailed in the Company's other periodic reports filed with the Securities
and Exchange Commission. The words "believe", "expect", "anticipate", "may",
"plan", and similar expressions identify forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date the statement was made.
Overview
Sales of refrigerants continue to represent a significant portion of the
Company's revenues. The Company believes that, in the refrigeration industry
overall, there will be a trend towards lower sales prices, volume and gross
profit margins on refrigerant sales in the foreseeable future, which will
continue to have an adverse effect on the Company's operating results.
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. These new services are offered in addition to the
Company's traditional refrigerant management services, consisting principally of
recovery and reclamation of refrigerants used in commercial air conditioning,
industrial processing and refrigeration systems. Pursuant to this change in
business focus, the Company is currently implementing a strategic business plan
which provides for the creation of a network of service depots and the exiting
of certain operations which may not support the growth of service sales.
Consistent with its plan, the Company has experienced a reduction in refrigerant
sales which were primarily targeted to the automotive aftermarket industry.
During 1999 and 2001 the Company completed sales of its Series A Preferred
Stock. The net proceeds of these sales were used 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 on site 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 will not be sufficient to offset a
substantial reduction in refrigerant revenue. The Company expects that it will
incur additional expenses and losses during the year related to the continued
development of its depot network.
The change in business focus towards revenues generated from service may cause a
material reduction in revenues derived from the sale of refrigerants. In
addition, to the extent that the Company is unable to obtain refrigerants on
commercially reasonable terms or experiences a decline in demand for
refrigerants, the Company could realize reductions in refrigerant processing,
and possible loss of revenues which would have a material adverse effect on its
operating results.
Results of Operations
Year ended December 31, 2000 as compared to year ended December 31, 1999
Revenues for 2000 were $15,455,000, a decrease of $2,454,000 or 14% from the
$17,909,000 reported during the comparable 1999 period. The decrease in revenues
was primarily attributable to a decrease in refrigerant sales offset, in part,
by an increase in RefrigerantSide(R) Services revenue. The decrease in
refrigerant revenue is related to a decrease in the sales of refrigerant
primarily to the automotive aftermarket industry. The increase in
RefrigerantSide(R) Service revenues reflects growth through the development of
the Company's depot network.
Cost of sales for 2000 was $10,397,000, a decrease of $3,724,000 or 26% from the
$14,121,000 reported during the comparable 1999 period primarily due to lower
costs of certain refrigerants purchased by the Company and a lower volume of
refrigerant revenues. As a percentage of sales, cost of sales were 67% of
revenues for 2000, a decrease from
11
the 79% reported for the comparable 1999 period. The decrease in cost of sales
as a percentage of revenues was primarily attributable to the increase in the
sale price of certain refrigerants and the increase in RefrigerantSide(R)
Service revenues.
Operating expenses for 2000 were $7,465,000, an increase of $70,000 or 1% from
the $7,395,000 reported during the comparable 1999 period. The increase was
primarily attributable to an increase in selling expenses associated with the
expansion of the Company's RefrigerantSide(R) Service offering offset, in part,
by a decrease in rental and depreciation and amortization expense.
Other income (expense) for 2000 was $11,000, compared to the $(348,000) reported
during the comparable 1999 period. Other income (expense) includes interest
expense of $501,000 and $454,000 for 2000 and 1999, respectively, offset by
other income of $512,000 and $106,000 for 2000 and 1999, respectively. The
increase in interest expense is primarily attributed to an increase in
borrowings and interest rates during 2000 as compared to 1999. Other income
primarily relates to lease rental income, interest income and gain from the sale
of the balance of the Company's ownership interest in Environmental Support
Solutions, Inc. ("ESS").
No income taxes for the years ended December 31, 2000 and 1999 were recognized.
The Company recognized a reserve allowance against the deferred tax benefit for
the 2000 and 1999 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 2000 was $2,396,000 a decrease of $1,559,000 from the $3,955,000
net loss reported during the comparable 1999 period. The reduction in net loss
was primarily attributable to an increase in the gross profit margins on certain
refrigerant sales and an increase in RefrigerantSide(R) Service revenues.
Liquidity and Capital Resources
At December 31, 2000, the Company had a working capital deficit of approximately
$456,000, a decrease of $2,133,000 from the working capital of $1,677,000 at
December 31, 1999. The reduction in working capital is primarily attributable to
the net losses incurred during the year ended December 31, 2000. On a pro forma
basis, the Company had working capital of $2,469,000. The increase in pro forma
working capital was due to the February 16, 2001 sale of the Company's Series A
Preferred Stock with net proceeds of $2,925,000. A principal component of
current assets is inventory. At December 31, 2000, the Company had inventories
of $1,901,000, a decrease of $579,000 or 23% from the $2,480,000 at December 31,
1999. 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"). In recent years, the
Company has financed its working capital requirements through cash flows from
operations, the issuance of debt and equity securities and bank borrowings.
Net cash used by operating activities for the year ended December 31, 2000, was
$727,000 compared with net cash used by operating activities of $3,442,000 for
the comparable 1999 period. Net cash used by operating activities was primarily
attributable to the increase in trade receivables and by the net loss for the
2000 period offset by a decrease in inventories and an increase in accounts
payable and accrued expenses.
Net cash used by investing activities for the year ended December 31, 2000, was
$853,000 compared with net cash used by investing activities of $1,822,000 for
the prior comparable 1999 period. The net cash usage primarily consisted of
equipment additions primarily associated with the expansion of the Company's
depot network.
Net cash used by financing activities for the year ended December 31, 2000, was
$40,000 compared with net cash provided by financing activities of $6,971,000
for the comparable 1999 period. The net cash used by financing activities
primarily consisted of repayment of long term debt for the 2000 period.
At December 31, 2000, the Company had cash and equivalents of $863,000.
During 1996, the Company mortgaged its property and building located in Ft.
Lauderdale with Turnberry Savings Bank, NA. The mortgage of $644,000, at
December 31, 2000, bore interest at the rate of 10.125% and was repayable over
20 years through January 2017. The Company had principally ceased its operations
at this facility and had entered into a three year lease of the entire facility
at the current level of $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 oustanding mortgage balance
and transactional expenses, the Company received net proceeds of approximately
$300,000 from the sale of the property.
12
During January 1997, in connection with the execution of various agreements with
DuPont, the Company obtained additional equity funds of $3,500,000 from an
affiliate of DuPont. The proceeds were primarily utilized to retire debt.
The Company has entered into a credit facility with CIT which provides for
borrowings to the Company of up to $6,500,000. The facility requires minimum
borrowings of $1,250,000. The facility provides for a revolving line of credit
and a six-year 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, 2000, the
Company had availability under its revolving line of credit of approximately
$577,000. Advances available to the Company under the term loan are based on
existing fixed asset valuations and future advances under the term loan up to an
additional $1,000,000 are based on future capital expenditures. During 1999, the
Company received advances of $166,000 based on capital expenditures. As of
December 31, 2000, the Company has approximately $675,000 outstanding under its
term loans and $1,734,000 outstanding under its revolving line of credit. The
facility bears interest at the prime rate plus 1.5%, 11% at December 31, 2000,
and substantially all of the Company's assets are pledged as collateral for
obligations to CIT. In addition, among other things, the agreements restrict the
Company's ability to declare or pay any dividends on its capital stock. The
Company has obtained a waiver from CIT to permit the payment of dividends on its
Series A Preferred Stock.
In connection with the loan agreements, the Company issued to CIT warrants to
purchase 30,000 shares of the Company's common stock at an exercise price equal
to 110% of the then fair market value of the stock, which on the date of
issuance was $4.33 per share, and which expires April 29, 2001. The value of the
warrants were not deemed to be material.
Effective March 19, 1999, the Company sold 75% of its stock ownership in ESS to
one of ESS's founders. The consideration for the Company's sale of its interest
was $100,000 in cash and a six year 6% interest bearing note in the amount of
$380,000. The Company will recognize as income the portion of the proceeds
associated with the net receivables upon the receipt of cash. This sale did not
have a material effect on the Company's financial condition or results of
operation. 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.
The Company continues 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 Preferred Stock carries a
dividend rate of 7%. 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. The Company issued a total of 2,483
additional shares of its Series A
13
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 two members to the Board of Directors, Messers. Robert Burr and
Robert Zech.
The Company believes that its anticipated cash flow from operations, together
with the proceeds from the sale of its Preferred Stock, and its credit facility,
will be sufficient to satisfy the Company's working capital requirements and
proposed expansion of its service business for the foreseeable future. However,
any unanticipated expenses or lack of expected revenues from the Company's
depots 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 have future capital needs.
Inflation
Inflation has not historically had a material impact on the Company's
operations.
Reliance on Suppliers and Customers
The Company's financial performance is in part dependent on its ability to
obtain sufficient quantities of virgin and reclaimable refrigerants from
manufacturers, wholesalers, distributors, bulk gas brokers, and from other
sources within the air conditioning and refrigeration and automotive aftermarket
industries, and on corresponding demand for refrigerants. To the extent that the
Company is unable to obtain sufficient quantities of refrigerants in the future,
or resell reclaimed refrigerants at a profit, the Company's financial condition
and results of operations would be materially adversely affected. The loss of a
principal customer would have a material adverse effect on the Company.
During the year ended December 31, 2000, one customer accounted for 13% of the
Company's revenues. During the year ended December 31, 1999, one customer
accounted for 17% 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 would have a material adverse effect on the
Company's financial position and results of operations.
Seasonality and Fluctuations in Operating Results
The Company's operating results vary from period to period as a result of
weather conditions, requirements of potential customers, non-recurring
refrigerant and service sales, availability and price of refrigerant products
(virgin or reclaimable), changes in reclamation technology and regulations,
timing in introduction and/or retrofit or replacement of CFC-based refrigeration
equipment by domestic users of refrigerants, the rate of expansion of the
Company's operations, and by other factors. The Company's business has
historically been seasonal in nature with peak sales of refrigerants occurring
in the first half of each year. 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 seasonal element to this portion of its business in the future.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principals to revenue recognition in financial statements.
SAB 101 was adopted in 2000 and had no material impact on the Company's revenue
recognition policy.
14
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
15
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
The following table sets forth information with respect to the directors and
officers of the Company:
Name Age Position
------------------------ ---------- --------------------------------------------
Kevin J. Zugibe 37 Chairman of the Board; President and Chief
Executive Officer
------------------------ ---------- --------------------------------------------
Thomas P. Zugibe 48 Executive Vice President and Director
------------------------ ---------- --------------------------------------------
Stephen P. Mandracchia 41 Executive Vice President, Secretary and
Director
------------------------ ---------- --------------------------------------------
Brian F. Coleman 39 Vice President and Chief Financial Officer
------------------------ ---------- --------------------------------------------
Walter A. Phillips 48 Vice President Marketing and Strategic
Planning
------------------------ ---------- --------------------------------------------
Vincent Abbatecola 54 Director
------------------------ ---------- --------------------------------------------
Robert L. Burr 50 Director
------------------------ ---------- --------------------------------------------
Dominic J. Monetta 59 Director
------------------------ ---------- --------------------------------------------
Otto C. Morch 67 Director
------------------------ ---------- --------------------------------------------
Harry C. Schell 66 Director
------------------------ ---------- --------------------------------------------
Robert M. Zech 35 Director
------------------------ ---------- --------------------------------------------
Kevin T. Zugibe, P.E. is a founder of the Company and has been a director,
President and Chief Executive Officer of the Company since its inception in
1991. Since May 1994, Mr. Zugibe has devoted his full business time to the
Company's affairs. From May 1987 to May 1994, Mr. Zugibe was employed as a power
engineer with Orange and Rockland Utilities, Inc. Mr. Zugibe is a licensed
professional engineer, and from December 1990 to May 1994, he was a member of
Kevin J. Zugibe & Associates, a professional engineering firm. Kevin J. Zugibe
and Thomas P. Zugibe are brothers.
Thomas P. Zugibe has been a Vice President of the Company since its inception in
1991 and a director since April 1995. Mr. Zugibe is responsible for overseeing
the day to day operations of the Company. He has been engaged in the practice of
law in the State of New York since 1980 and is on extended leave from the law
firm of Ferraro, Zugibe, and Albrecht, Garnerville, New York.
Stephen P. Mandracchia has been a Vice President of the Company since January
1993 and Secretary of the Company since April 1995. Mr. Mandracchia served as a
director from June 1994 until August 1996 and was reelected to the Board of
Directors in August 1999. Mr. Mandracchia is responsible for corporate,
administrative and regulatory legal affairs of the Company. Mr. Mandracchia was
a member of the law firm of Martin, Vandewalle, Donohue, Mandracchia & McGahan,
Great Neck, New York until December 31, 1995 (having been affiliated with such
firm since August 1983). Stephen P. Mandracchia is the brother in-law of Kevin
J. Zugibe and Thomas P. Zugibe.
Brian F. Coleman has been Vice President and Chief Financial Officer of the
Company since May 1997. Prior to joining the Company, Mr. Coleman was employed
by and since July 1995, was a partner with BDO Seidman, LLP, the Company's
independent auditors.
Walter A. Phillips has been Vice President of Marketing and Strategic Planning
of the Company since October 1996. Prior to joining the Company, Mr. Phillips
was employed in various sales and marketing roles with York International.
Vincent P. Abbatecola has been a director of the Company since June 1994. Mr.
Abbatecola is the owner of Abbey Ice & Spring Water Company, Spring Valley, New
York, where he has been employed since May 1971.
Robert L. Burr has been a Director of the Company since August 1999. Mr. Burr
has been a Director of J.P. Morgan Chase & Co. since 1995. Mr. Burr is a 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 Funds III, L.P. and Flemming US Discovery
Offshore Fund III, L.P. 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 Caliber Learning, Inc.
Dominic J. Monetta has been a director of the Company since April 1996. Since
August 1993, Mr. Monetta has been the President of Resource Alternatives, Inc.,
a corporate development firm concentrating on solving management and
technological problems facing chief executive officers and their senior
executives. From December 1991 to May 1993, Mr. Monetta served as the Director
of Defense Research and Engineering for Research and Advanced Technology for the
16
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 employed by J.P. Morgan Chase & Co. since 1996. Mr. Zech is a Partner at
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 Funds 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 Schell. The Company also has an Audit Committee of the Board of Directors,
which supervises the audit and financial procedures of the Company. The members
of the Audit Committee are Messrs. Abbatecola, Morch and Zech. The Company also
has an Executive Committee of the Board of Directors, which is authorized to
exercise the powers of the board of directors in the general supervision and
control of the business affairs of the Company during the intervals between
meetings of the board. The members of the Executive Committee are Messrs.
Schell, Zech and Kevin J. Zugibe. 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. Mandracchia, Monetta and Thomas P. Zugibe.
The By-laws of the Company provide that the Board of Directors is divided into
two classes. Each class is to have a term of two years, with the term of each
class expiring in successive years, and is to consist, as nearly as possible, of
one-half of the number of directors constituting the entire Board. The By-laws
provide that the number of directors shall be fixed by the Board of Directors
but in any event, shall be no less than seven (7) (subject to decrease by a
resolution adopted by the shareholders). In 1999, the Board of Directors was
increased to nine members. At the Company's August 24, 2000 Annual Meeting of
the Shareholders, Messrs. Monetta, Schell, Zech and Kevin J. Zugibe, were
elected as directors to terms of office that will expire at the Annual Meeting
of Shareholders to be held in the year 2002. Messrs. Abbatecola, Burr,
Mandracchia, Morch and Thomas P. 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 2001.
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, 2000 all
filing requirements applicable to its officers, directors, and greater than 10
percent beneficial stockholders were complied with.
17
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, 2000 (the "Named Executives").
Summary Compensation
Table Long Term Compensation
Awards
Annual Compensation(1) ----------------------
---------------------- Securities Underlying
Name Position Year Salary Bonus Options
---- -------- ---- ------ ----- -------
Kevin J. Zugibe Chairman of the Board, 2000 $ 80,981 -- 140,000 shares
President and Chief 1999 $136,279 -- 1,000 shares
Executive
Officer 1998 $134,800 -- 40,000 shares
Thomas P. Zugibe Executive Vice President 2000 $110,338 -- 102,500 shares
1999 $104,800 -- 1,000 shares
1998 $104,800 -- 25,000 shares
Stephen P. Mandracchia Executive Vice President 2000 $113,415 -- 77,500 shares
and Secretary 1999 $108,124 -- 1,000 shares
1998 $104,800 -- 25,000 shares
Walter A. Phillips Vice President Marketing and 2000 $161,077 -- 37,500 shares
Strategic Planning 1999 $160,781 -- 1,000 shares
1998 $148,312 -- 10,000 shares
Brian F. Coleman Vice President and Chief 2000 $151,047 -- 37,500 shares
Financial Officer 1999 $138,124 -- 1,000 shares
1998 $124,900 -- 25,000 shares
--------------------------
(1) The value of personal benefits furnished to the Named Executives during
1998, 1999 and 2000 did not exceed 10% of their respective annual compensation.
The Company granted options, which, except as otherwise set forth below,
vest 50% upon the date of grant and 50% on the first anniversary of the grant
date, to the Named Executives during the fiscal year ended December 31, 2000, as
shown in the following table:
Summary of Stock Options Granted to Named Executives
% of Total
Number of Options
Securities Granted to
Underlying Employees
Options in Fiscal
Granted year Exercise or Expiration
Name Position Shares Percent Base price ($/sh) Date
---- -------- ------ ------- ----------------- ----
Kevin J. Zugibe Chairman, President and 140,000(1) 24% $2.375 08/03/2005
Chief Executive Officer
Thomas P. Zugibe Executive Vice President 102,500(1) 17% $2.375 08/03/2005
Stephen P. Executive Vice President 77,500(1) 13% $2.375 08/03/2005
Mandracchia
Walter A. Phillips Vice President of 37,500 6% $2.375 08/03/2005
Marketing and Strategic
Operations
Brian F. Coleman Vice President and Chief 37,500 6% $2.375 08/03/2005
Financial Officer
-----------
(1) Of these options, 40,000 vest on August 3, 2000 and the balance vest 50%
upon the date of grant and 50% on the anniversary of the grant date.
18
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, 2000. No
options were exercised by the Named Executives during the fiscal year ended
December 31, 2000.
Number of Securities
Underlying (1) Value of
Unexercised Options In-the-money Options
Shares At December 31, 2000 At December 31, 2000
------ --------------------------- --------------------
Name Acquired on Value Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------------- ----------- ------------- ----------- -------------
Exercise
--------
Kevin J. Zugibe -- -- 181,000 58,000 0 0
Chairman; President and
Chief Executive Officer
Thomas P. Zugibe -- -- 137,250 31,250 0 0
Executive Vice
President
Stephen P. Mandracchia -- -- 124,750 18,750 0 0
Executive Vice President
And Secretary
Walter A. Phillips -- -- 66,750 18,750 0 0
Vice President of Marketing
& Strategic Planning
Brian F. Coleman -- -- 86,750 18,750 0 0
Vice President and Chief
Financial Officer
-----------------------
(1) Year-end values of unexercised in-the-money options represent the positive
spread between the exercise price of such options and the year-end market value
of the Common Stock of $1.563.
Compensation of Directors
Non-employee directors receive an annual fee of $3,000 and receive reimbursement
for out-of-pocket expenses incurred, and an attendance fee of $500 and $250,
respectively, for attendance at meetings of the Board of Directors and Board
committee meetings. In addition, commencing in August 1998, non-employee
directors receive 5,000 nonqualified stock options per year of service under the
Company's Stock Option Plans.
To date, the Company has granted to Harry C. Schell nonqualified options to
purchase 30,000 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, 2000. The Company has also granted to each of Dominic J. Monetta, Otto Morch
and Vincent Abbatecola, nonqualified options to purchase 15,000 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, 2000. 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
17,236 and 2,764 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, 2000.
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 $130,000 with such increases and
bonuses as the Board may determine. The Board of Directors and Mr. Zugibe have
agreed 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.
19
Stock Option Plan
1994 Stock Option Plan
The Company has adopted an Employee Stock Option Plan (the "Plan") effective
October 31, 1994 pursuant to which 725,000 shares of Common Stock are currently
reserved for issuance upon the exercise of options designated as either (i)
options intended to constitute incentive stock options ("ISOs") under the
Internal Revenue Code of 1986, as amended (the "Code"), or (ii) nonqualified
options. ISOs may be granted under the Plan to employees and officers of the
Company. Non-qualified options may be granted to consultants, directors (whether
or not they are employees), employees or officers of the Company. Stock
appreciation rights may also be issued in tandem with stock options.
The Plan is intended to qualify under Rule 16b-3 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and is administered by a committee
of the Board of Directors, which currently consists of Messrs. Abbatecola, Burr,
Morch and Schell. The committee, within the limitations of the Plan, determines
the persons to whom options will be granted, the number of shares to be covered
by each option, whether the options granted are intended to be ISOs, the
duration and rate of exercise of each option, the exercise price per share and
the manner of exercise and the time, manner and form of payment upon exercise of
an option. Unless sooner terminated, the Plan will expire on December 31, 2004.
ISOs granted under the Plan may not be granted at a price less than the fair
market value of the Common Stock on the date of grant (or 110% of fair market
value in the case of persons holding 10% or more of the voting stock of the
Company). The aggregate fair market value of shares for which ISOs granted to
any employee are exercisable for the first time by such employee during any
calendar year (under all stock option plans of the Company) may not exceed
$100,000. Non-qualified options granted under the Plan may not be granted at a
price less than 85% of the market value of the Common Stock on the date of
grant. Options granted under the Plan will expire not more than ten years from
the date of grant (five years in the case of ISOs granted to persons holding 10%
or more of the voting stock of the Company). All options granted under the Plan
are not transferable during an optionee's lifetime but are transferable at death
by will or by the laws of descent and distribution. In general, upon termination
of employment of an optionee, all options granted to such person which are not
exercisable on the date of such termination immediately terminate, and any
options that are exercisable terminate 90 days following termination of
employment.
As of December 31, 2000, options to purchase 356,266 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 (see Note 11 to the Notes to the Consolidated
Financial Statements).
1997 Stock Option Plan
The Company has adopted the 1997 Stock Option Plan (the "1997 Plan"), pursuant
to which 2,000,000 shares of Common Stock are currently reserved for issuance
upon the exercise of options designated as either (i) 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 a committee of the Board of Directors, which currently
consists of Messrs. Abbatecola, Burr, Morch and Schell. The committee, within
the limitations of the 1997 Plan, determines the persons to whom options will be
granted, the number of shares to be covered by each option, whether the options
granted are intended to be ISOs, the duration and rate of exercise of each
option, the exercise price per share and the manner of exercise and the time,
manner and form of payment upon exercise of an option. Unless sooner terminated,
the 1997 Plan will expire on June 11, 2007.
ISOs granted under the 1997 Plan may not be granted at a price less than the
fair market value of the Common Stock on the date of grant (or 110% of fair
market value in the case of persons holding 10% or more of the voting stock of
the Company). The aggregate fair market value of shares for which ISOs granted
to any employee are exercisable for the first time by such employee during any
calendar year (under all stock option plans of the Company) may not exceed
$100,000. Nonqualified options granted under the 1997 Plan may not be granted at
a price less than the par value of the Common Stock. Options granted under the
1997 Plan will expire not more than ten years from the date of grant (five years
in the case of ISOs granted to persons holding 10% or more of the voting stock
of the Company). Except as otherwise provided by the committee with respect to
Nonqualified options, all options granted under the 1997 Plan are not
transferable during an optionee's lifetime but are transferable at death by
20
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, 2000, the Company had granted options to purchase 1,241,816
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 (see
Note 11 to the Notes to the Consolidated Financial Statements).
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information as of March 13, 2001 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 418,728 (3) 7.9%
Thomas P. Zugibe 376,918 (4) 7.2%
Stephen P. Mandracchia 358,978 (5) 6.9%
Walter A. Phillips 66,750 (6) *
Brian F. Coleman 89,750 (7) *
Vincent P. Abbatecola 20,000 (8) *
Robert L. Burr 0 (12) *
Dominic J. Monetta 25,000 (8) *
Otto C. Morch 15,600 (8) *
Harry C. Schell 59,000 (9) *
Robert M. Zech 0 (12) *
DuPont Chemical and Energy
Operations, Inc. 500,000 (10) 9.8%
Fleming Funds 3,059,789 (11) 37.5%
All directors and executive officers as a group
(11 persons) 1,430,724 (13) 24.8%
* = 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 13, 2001. 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 13, 2001
21
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; and (vi) 42,000 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. 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) 31,250 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 $3.85 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) 18,750 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.
(6) Represents (i) 15,000 shares which may be purchased at $5.625 per share;
(ii) 10,000 shares which may be purchased at $4.06 per share; (iii) 12,000
shares which may be purchased at $3.50 per share; (iv) 10,000 shares which may
be purchased at $3.06 per share; (v) 1,000 shares which may be purchased at
$1.78 per share; and (vi) 18,750 shares which may be purchased at $2.375 per
share under immediately exercisable options.
(7) Represents (i) 30,000 shares which may be purchased at $4.06 per share; (ii)
12,000 shares which may be purchased at $3.50 per share; (iii) 25,000 shares
which may be purchased at $2.50 per share; (iv) 1,000 shares which may be
purchased at $1.78 per share; and (v) 18,750 shares which may be purchased at
$2.375 per share under immediately exercisable options.
(8) Includes 5,000 shares which may be purchased at $3.00 per share; 5,000
shares which may be purchased at $2.375 per share; and 5,000 shares which may be
purchased at $2.785 per share under immediately exercisable options.
(9) Includes 10,000 shares which may be purchased at $3.00 per share; 10,000
shares which may be purchased at $2.375 per share; and 10,000 shares which may
be purchased at $2.785 per share under immediately exercisable options.
(10) According to a Schedule 13D filed with the Securities and Exchange
Commission, DuPont Chemical and Energy Operations, Inc. ("DCEO") and E.I. DuPont
de Nemours and Company claim shared voting and dispositive power over the
shares. DCEO's address is DuPont Building, Room 8045, 1007 Market Street,
Wilmington, DE 19898.
(11) Fleming US Discovery Fund III, L.P. and Fleming US Discovery Offshore Fund
III, L.P., and their general partner, Fleming 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;
and 10,000 shares which may be purchased at $2.785 per share under immediately
exercisable options. The address of all the Flemings Funds is c/o J.P. Morgan &
Chase Co., 1211 Avenue of the Americas, 38th Floor, New York, New York 10036,
except for the Fleming US Discovery Offshore Fund III, L.P. whose address is c/o
Bank of Bermuda LTD., 6 Front Street, Hamilton HM11 Bermuda.
(12) Messers. Burr and Zech have been appointed directors by the Flemings Funds.
Their share ownership excludes all shares of Common Stock beneficially owned by
the Flemings Funds.
22
(13) Includes exercisable options to purchase 671,500 shares of Common Stock
owned by the directors and officers as a group. Excludes 3,059,789 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 (see "Description of Business -
Strategic Alliance).
23
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Certificate of Incorporation and Amendment. (1)
3.2 Amendment to Certificate of Incorporation, dated July 20,1994. (1)
3.3 Amendment to Certificate of Incorporation, dated October 26, 1994. (1)
3.4 By-Laws. (1)
3.5 Certificate of Amendment of the Certificate of Incorporation dated
March 16, 1999. (12)
3.6 Certificate of Correction of the Certificate of Amendment dated March
25, 1999. (12)
3.7 Certificate of Amendment of the Certificate of Incorporation dated
March 29, 1999. (12)
3.8 Certificate of Amendment of the Certificate of Incorporation dated
February 16, 2001.
10.1 Lease Agreement between the Company and Ramapo Land Co., Inc. (1)
10.2 Consulting Agreement with J.W. Barclay & Co., Inc. (1)
10.3 1994 Stock Option Plan of the Company. (1) (*)
10.4 Employment Agreement with Kevin J. Zugibe. (1) (*)
10.5 Assignment of patent rights from Kevin J. Zugibe to Registrant. (1)
10.6 Agreement dated August 12, 1994 between the Company and PAACO
International, Inc. (1)
10.7 Agreement between the Company and James T. and Joan Cook for the
purchase of premises 3200 S.E. 14th Avenue, Ft. Lauderdale, Florida.
(1)
10.8 Agreement dated as of December 12, 1994, by and between the Company and
James Spencer d/b/a CFC Reclamation. (2)
10.9 Employment agreement, dated December 12, 1994, between the Company and
James Spencer. (2)
10.10 Agreement, dated July 25, 1995, between the Company and Refrigerant
Reclamation Corporation of America. (3)
10.11 Employment Agreements with Thomas P. Zugibe, Stephen P. Mandracchia and
Stephen J. Cole-Hatchard. (4) (*)
10.12 Contract of Sale with ESS, Stephen Spain, Robert Johnson and the
Company dated April 23, 1996. (5)
10.13 Agreement dated June 14, 1996 between Environmental Support, Solutions,
Inc. and E-Soft, Inc. (7)
10.14 Agreement dated July 24, 1996 between the Company and GRR Co., Inc. (7)
10.15 Agreements dated June 18, 1996 and September 30, 1996 between Cameron
Capital and the Company. (7)
10.16 Employment agreement, dated October 1, 1996, between the Company and
Walter Phillips. (7) (*)
10.17 Agreement dated February 4, 1997 between Wilson Art, Inc. and the
Company for the purchase of 100 Brenner Drive, Congers, New York. (7)
10.18 Employment agreement, dated April 16, 1997, between the Company and
Brian Coleman. (8) (*)
10.19 Agreements dated January 29, 1997 between E.I. DuPont de Nemours, DCEO,
and the Company. (6)
10.20 Loan and security agreements and warrant agreements dated April 29,
1998 between the Company and CIT Group/Credit Financing Group, Inc. (9)
10.21 Stock Purchase Agreement, Registration Rights Agreement and
Stockholders Agreement dated March 30, 1999 between the Company and
Fleming US Discovery Fund III, L.P. and Fleming US Discovery Offshore
Fund III, L.P. (10)
10.22 Contract of Sale, dated March 19, 1999, for 75% interest in
Environmental Support Solutions, Inc. (11)
10.23 1997 Stock Option Plan of the Company, as amended. (13) (*)
10.24 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.
10.25 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.
10.26 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. 23.1 Consent of BDO Seidman, LLP.
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's Report on Form 8-K dated December 12, 1994.
(3) Incorporated by reference to the comparable exhibit filed with the
Company's Report on Form 10-QSB for the quarter ended June 30, 1995.
(4) Incorporated by reference to the comparable exhibit filed with the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1995.
(5) Incorporated by reference to the comparable exhibit filed with the
Company's Report on Form 8-K dated April 29, 1996.
(6) Incorporated by reference to the comparable exhibit filed with the
Company Report in Form 8-K dated January 29, 1997.
24
(7) Incorporated by reference to the comparable exhibit filed with the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1996.
(8) Incorporated by reference to the comparable exhibit filed with the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1997.
(9) Incorporated by reference to the comparable exhibit filed with the
Company's Report on Form 10-QSB for the quarter ended March 31, 1998.
(10) Incorporated by reference to the comparable exhibit filed with the
Company's Report on Form 10-KSB for the year ended December 31, 1998.
(11) Incorporated by reference to the comparable exhibit filed with the
Company's Report on Form 10-QSB for the quarter ended March 31, 1999.
(12) Incorporated by reference to the comparable exhibit filed with the
Company's Report on Form 10-QSB for the quarter ended June 30, 1999.
(13) Incorporated by reference to the comparable exhibit filed with the
Company's Report on Form 10-KSB for the year ended December 31, 1999.
(*) Denotes Management Compensation Plan, agreement or arrangement.
(b) Reports on Form 8-K:
During the quarter ended December 31, 2000, 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, President
Date: March 29, 2001
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; President March 29, 2001
------------------- and ChiefExecutive Officer
Kevin J. Zugibe (Principal Executive Officer)
/s/ Thomas P. Zugibe Executive Vice President and Director March 29, 2001
--------------------
Thomas P. Zugibe
/s/ Stephen P. Mandracchia Executive Vice President; March 29, 2001
-------------------------- Secretary and Director
Stephen P. Mandracchia
/s/ Brian F. Coleman Vice President and Chief Financial March 29, 2001
-------------------- Officer (Principal Financial and
Brian F. Coleman Accounting Officer)
/s/ Harry C. Schell Director March 29, 2001
-------------------
Harry C. Schell
/s/ Vincent Abbatecola Director March 29, 2001
----------------------
Vincent Abbatecola
/s/ Otto C. Morch Director March 29, 2001
-----------------
Otto C. Morch
/s/ Dominic J. Monetta Director March 29, 2001
----------------------
Dominic J. Monetta
/s/ Robert L. Burr Director March 29, 2001
------------------
Robert L. Burr
/s/ Robert M. Zech Director March 29, 2001
------------------
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, 2000 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period ended December 31, 2000. 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 of America. 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, 2000, and the results of
their operations and their cash flows for each of the two years in the period
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States of America.
/s/ BDO Seidman, LLP
Valhalla, New York
February 19, 2001
28
Hudson Technologies, Inc. and subsidiaries
Consolidated Balance Sheet
(Amounts in thousands, except for share and par value amounts)
December 31, 2000
-----------------
Actual Proforma
------ --------
Assets (Note 8) (Note 8) (Note 9 (v))
Current assets:
Cash and cash equivalents $ 863 $ 3,788
Trade accounts receivable - net (Note 5) 2,588 2,588
Inventories (Note 6) 1,901 1,901
Prepaid expenses and other current assets 197 197
-------- --------
Total current assets 5,549 8,474
Property, plant and equipment, less accumulated depreciation (Note 7) 5,342 5,342
Other assets 105 105
-------- --------
Total Assets $ 10,996 $ 13,921
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 3,836 $ 3,836
Short-term debt (Note 8) 2,169 2,169
-------- --------
Total current liabilities 6,005 6,005
Deferred income 6 6
Long-term debt, less current maturities (Note 8) 1,887 1,887
-------- --------
Total Liabilities 7,898 7,898
-------- --------
Commitments and contingencies (Note 10)
Stockholders' equity (Notes 9 and 11):
Preferred stock shares authorized 5,000,000:
Series A Convertible Preferred stock, $.01 par value ($100
liquidation preference value); shares authorized 150,000; issued
and outstanding 72,195 and 102,195 7,219 10,219
Common stock, $0.01 par value; shares authorized 20,000,000;
issued outstanding 5,088,820 51 51
Additional paid-in capital 21,133 21,058
Accumulated deficit (25,305) (25,305)
-------- --------
Total Stockholders' Equity 3,098 6,023
-------- --------
Total Liabilities and Stockholders' Equity $ 10,996 $ 13,921
======== ========
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,
-------------------------------
2000 1999
---- ----
Revenues $ 15,455 $ 17,909
Cost of sales 10,397 14,121
----------- -----------
Gross Profit 5,058 3,788
----------- -----------
Operating expenses:
Selling and marketing 2,126 1,823
General and administrative 4,049 4,223
Depreciation and amortization 1,290 1,349
----------- -----------
Total operating expenses 7,465 7,395
----------- -----------
Operating loss (2,407) (3,607)
----------- -----------
Other income (expense):
Interest expense (501) (454)
Other income (Note 2 and 3) 512 106
----------- -----------
Total other income (expense) 11 (348)
----------- -----------
Loss before income taxes (2,396) (3,955)
Income taxes (Note 4) -- --
----------- -----------
Net loss (2,396) (3,955)
Preferred stock dividends (497) (349)
----------- -----------
Available for common shareholders $ (2,893) $ (4,304)
=========== ===========
---------------------------------
Net loss per common share - basic and diluted $ (.57) $ (.85)
=========== ===========
Weighted average number of shares
outstanding (Note 1) 5,088,570 5,085,820
=========== ===========
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, 1998 -- $-- 5,085,820 $51 $ 22,545 $(18,954) $ 3,642
Issuance of Series A
Preferred Stock - Net 65,000 6,500 -- -- (700) -- 5,800
Dividends paid in-kind on
Series A Preferred Stock 2,314 231 -- -- (231) -- --
Net Loss -- -- -- -- -- (3,955) (3,955)
------ ------ --------- --- -------- -------- -------
Balance at
December 31, 1999 67,314 6,731 5,085,820 51 21,614 (22,909) 5,487
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
====== ====== ========= === ======== ======== =======
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,
-------------------------------
2000 1999
---- ----
Cash flows from operating activities:
Net loss $(2,396) $(3,955)
Adjustments to reconcile net loss
to cash used by operating activities:
Depreciation and amortization 1,290 1,349
Allowance for doubtful accounts 20 41
Common stock issued for services 7 --
Changes in assets and liabilities:
Trade accounts receivable (691) (883)
Inventories 580 804
Prepaid expenses and other current assets 5 6
Other assets 13 91
Accounts payable and accrued expenses 461 (876)
Deferred income (16) (19)
------- -------
Cash used by operating activities (727) (3,442)
------- -------
Cash flows from investing activities:
Additions to property, plant, and equipment (853) (1,822)
------- -------
Cash used by investing activities (853) (1,822)
------- -------
Cash flows from financing activities:
Proceeds from issuance of preferred stock - net -- 5,800
Proceeds of short-term debt - net 234 737
Proceeds from long-term debt 529 1,064
Repayment of long-term debt (803) (630)
------- -------
Cash provided (used) by financing activities (40) 6,971
------- -------
Increase (decrease) in cash and cash equivalents (1,620) 1,707
Cash and equivalents at beginning of period 2,483 776
------- -------
Cash and equivalents at end of period $ 863 $2,483
======= =======
---------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during period for interest $501 $454
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"), primarily sells refrigerants and provides RefrigerantSide(R)
Services performed at a customer's site, consisting of system decontamination to
remove moisture and oils and other contaminants and recovery and reclamation of
the refrigerants used in commercial air conditioning and refrigeration systems.
The Company operates as a single segment through its wholly owned subsidiary
Hudson Technologies Company.
Consolidation
The consolidated financial statements represent all companies of which Hudson
directly or indirectly has majority ownership or otherwise controls. Significant
intercompany accounts and transactions have been eliminated. The Company's
consolidated financial statements include the accounts of wholly-owned
subsidiaries Hudson Holdings, Inc. and Hudson Technologies Company. Effective
March 19, 1999, the Company sold 75% of its ownership interest in Environmental
Support Solutions, Inc. ("ESS") and as of that date, no longer includes the
results of that operation in the consolidated results of the Company. On October
11, 1999 and April 18, 2000 the Company sold its remaining ownership interest in
ESS.
Fair value of financial instruments
The carrying values of financial instruments including trade accounts
receivable, and accounts payable approximate fair value at December 31, 2000,
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, 2000.
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, 2000, one customer accounted for 13% of the
Company's revenues. During the year ended December 31, 1999, one customer
accounted for 17% 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 would have an adverse effect on the Company's
financial position and results of operations.
Cash and cash equivalents
Temporary investments with original maturities of ninety days or less are
included in cash and cash equivalents.
Inventories
Inventories, consisting primarily of reclaimed refrigerant products available
for sale, are stated at the lower of cost, on a first-in first-out basis, or
market.
Property, plant, and equipment
Property, plant, and equipment are stated at cost; including internally
manufactured equipment. The cost to complete equipment that is under
construction is not considered to be material to the Company's financial
position. Provision for depreciation is recorded (for financial reporting
purposes) using the straight-line method over the useful lives of the
33
respective assets. Leasehold improvements are amortized on a straight-line basis
over the shorter of economic life or terms of the respective leases.
Due to the specialized nature of the Company's business, it is possible that the
Company's estimates of equipment useful life periods may change in the future.
Revenues and cost of sales
Revenues are recorded upon completion of service or product shipment or passage
of title to customers in accordance with contractual terms. Cost of sales is
recorded based on the cost of products shipped or services performed and related
direct operating costs of the Company's facilities.
Income taxes
The Company utilizes the assets and liability method for recording deferred
income taxes, which provides for the establishment of deferred tax asset or
liability accounts based on the difference between tax and financial reporting
bases of certain assets and liabilities.
The Company recognized a reserve allowance against the deferred tax benefit for
the current and prior period losses. The tax benefit associated with the
Company's net operating loss carry forwards would be recognized to the extent
that the Company recognized net income in future periods.
Loss per common and equivalent shares
Loss per common share, Basic, is calculated based on the net loss for the period
less dividends on the outstanding Series A Preferred Stock, $497,000 and
$349,000 for the years ended December 31, 2000 and 1999, 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. Diluted loss per
share was not presented since the effect was not dilutive.
Estimates and Risks
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts of certain assets and liabilities, the disclosure of
contingent assets and liabilities, and the results of operations during the
reporting period. Actual results could differ from these estimates.
The Company participates in an industry that is highly regulated, changes in
which could affect operating results. Currently the Company purchases virgin and
reclaimable refrigerants from domestic suppliers and its customers. To the
extent that the Company is unable to obtain refrigerants on commercially
reasonable terms or experiences a decline in demand for refrigerants, the
Company could realize reductions in refrigerant processing and possible loss of
revenues, which would have a material adverse affect on operating results.
The Company is subject to various legal proceedings. The Company assesses the
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 December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principals to revenue recognition in financial statements.
SAB 101 was adopted in 2000 and had no material impact on the Company's revenue
recognition policy.
Note 2 - Dispositions
Effective March 19, 1999, the Company sold 75% of its stock ownership in ESS to
one of its founders. The consideration for the Company's sale of its interest
was $100,000 in cash and a six year note in the amount of $380,000. The Company
recognized a valuation allowance for 100% of the note receivable. The Company
will recognize as income the portion of the proceeds associated with the note
receivable upon the receipt of cash. This sale did not have a material effect on
the Company's financial condition or results of operations. 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 the 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 and such amount was included as other income as of that date.
Note 3 - Other income
For the year ended December 31, 2000, other income of $512,000 consisted
primarily of $157,000 of lease rental income from the Company's Ft. Lauderdale
facility, see Note 10 to the Notes to the Consolidated Financial Statements, a
$188,000 gain from the sale of the balance of the Company's ownership interest
in ESS and $100,000 of interest income. For the year ended December 31, 1999
other income of $106,000 consisted primarily of lease rental income from the
Company's Ft. Lauderdale facility and interest income.
Note 4 - Income taxes
During the years ended December 31, 2000 and 1999, 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) 2000 1999
---- ----
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, 2000, the Company has net operating loss carryforwards,
("NOL's") of approximately $23,000,000 expiring 2007 through 2015 for which a
100% valuation allowance has been recognized. Refrigerant Reclamation
Corporation of America ("RRCA"), acquired during 1995 as a subsidiary of the
Company, has available NOL's expiring 2007 through 2010 of approximately
$4,488,000 subject to annual limitations of approximately $367,000.
Elements of deferred income tax assets (liabilities) are as follows:
December 31,
(in thousands) 2000
----
Deferred tax assets (liabilities)
- Depreciation & amortization $ (8)
- Reserves for doubtful accounts 62
- NOL 8,900
- Other (54)
-------
Subtotal 8,900
- NOL valuation allowance (8,900)
-------
Total $ --
=======
35
Note 5- Trade accounts receivable - net
At December 31, 2000, trade accounts receivable are net of reserves for doubtful
accounts of $154,000.
Note 6 - Inventories
Inventories consisted of the following:
December 31, 2000
(in thousands) ----
Refrigerant and cylinders $1,507
Packaged refrigerants 394
------
Total $1,901
======
Note 7 - Property, plant, and equipment
Elements of property, plant, and equipment are as follows:
December 31, 2000
(in thousands) ----
Property, plant, & equipment
- Land $ 335
- Buildings & improvements 776
- Equipment 6,719
- Equipment under capital lease 315
- Vehicles 1,224
- Furniture & fixtures 178
- Leasehold improvements 516
- Equipment under construction 588
--------
Subtotal 10,651
Accumulated depreciation & amortization (5,309)
--------
Total $ 5,342
========
The Company's Ft. Lauderdale land, building, and improvements, with a net book
value of approximately $945,000, are currently being leased to a third party.
The Company intends to sell this property in the foreseeable future.
Note 8 - Short-term and long-term debt
Elements of short-term and long-term debt are as follows:
December 31, 2000
(in thousands) ----
Short-term & long-term debt
Short-term debt:
- Bank credit line $ 1,734
- Long-term debt: current 435
-------
Subtotal 2,169
-------
Long-term debt:
- Bank credit line 880
- Mortgage payable 644
- Capital lease obligations 129
- Vehicle loans 669
- Less: current maturities (435)
-------
Subtotal 1,887
-------
Total $ 4,056
=======
36
Bank credit line
The Company entered into a credit facility with CIT Group/Credit Finance Group,
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 six-year 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, 2000, the Company had availability under its
revolving line of credit of approximately $577,000. Advances, available to the
Company, under the term loan are based on existing fixed asset valuations and
future advances under the term loan up to an additional $1,000,000 are based on
future capital expenditures. During 1999, the Company received advances of
$166,000 based on capital expenditures. As of December 31, 2000, the Company had
approximately $675,000 outstanding under its term loans and $1,734,000
outstanding under its revolving line of credit. The facility bears interest at
the prime rate plus 1.5%, 11% at December 31, 2000, 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, 2000 the outstanding balance was $205,000 and
is payable in 59 equal monthly installments of $2,850 with a final payment of
$131,419 due in June 2005.
Mortgage payable
During 1996, the Company mortgaged its property and building located in Ft.
Lauderdale, Florida with Turnberry Savings Bank, NA. The mortgage of $644,000,
at December 31, 2000 bears interest at the rate of 10.125% and is repayable over
20 years through January 2017.
Vehicle Loans
During 1999, the Company entered into various vehicle loans. The vehicles are
primarily used in connection with the Company's on-site services. The loans are
payable in 60 monthly payments through October 2004 and bear interest at 9.0%
through 9.98%.
Related Party Loan
In February 1999, a former director made an unsecured loan in the aggregate
principal amount of $365,000 to the Company. The loan was repaid on April 16,
1999 and bore interest at 12% per annum.
Scheduled maturities of the Company's debts and capital lease obligations are as
follows:
Debts and capital lease obligations
-----------------------------------
Years ended December 31, Amount
------------------------ ------
(in thousands)
- 2001 $2,169
- 2002 458
- 2003 462
- 2004 240
- 2005 188
- Thereafter 539
------
Total $4,056
======
37
The Company rents certain equipment with a net book value of about $182,000 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)
- 2001 $48
- 2002 50
- 2003 31
----
Total $129
====
Average short-term debt for the year ended December 31, 2000 totaled $1,575,000
with a weighted average interest rate of approximately 10.7%.
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 E.I. DuPont de Nemours and Company ("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 terminate 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 which expire on April 29, 2001. In
addition, among other things, the agreements restrict the Company's ability to
declare or pay any dividends on its capital stock. The Company has obtained a
waiver from CIT to permit the payment of dividends on its Series A Preferred
Stock.
(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. As of December 31, 2000, the net proceeds of $2,925,000 from the sale
of the Series A Preferred Stock has been reflected in the proforma balance sheet
as if the proceeds were received as of that date.
38
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 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,
2000, the Company issued an aggregate of 4,881 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 two members 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.
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. In addition, the Company leases its
owned Ft. Lauderdale facility to a third party.
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
approximately $25,600 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
approximately $18,000 pursuant to an agreement expiring in July 2002.
The Company's Haverhill (Boston), Massachusetts depot facility is located in a
3,000 square foot building leased from an unaffiliated third party at an annual
rent of $13,200 pursuant to a month to month rental agreement.
The Company's Charlotte, North Carolina facility is located in a 12,000 square
foot building leased from an unaffiliated third party at an annual rent of
approximately $42,000 pursuant to 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 approximately $23,000 pursuant to an agreement expiring in August 2002.
In March 1995, the Company purchased, for $950,000, a facility in Ft.
Lauderdale, Florida, consisting of a 32,000 square foot building on
approximately 1.7 acres with rail and port access. The property was mortgaged
during 1996 for $700,000. Annual real estate taxes are approximately $24,000.
The Company has principally ceased its operations at this facility and has
entered into a three year lease of the entire facility at the current level of
$13,781 per month to an unaffiliated third party. The Company intends to sell
this property in the foreseeable future.
39
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 2001.
The Company's Hillburn facility is located in approximately 21,000 square feet
of leased industrial space at Hillburn, New York. The building is leased from an
unaffiliated third party at an annual rental of approximately $94,000 pursuant
to an agreement expiring in May 2004.
The Company's Houston, Texas depot facility, which consists of 5,000 square feet
located in a larger building, is leased from an unaffiliated third party at an
annual rent of $25,200 pursuant to an agreement which expires in June 2001.
The Company's headquarters are located in approximately 5,400 square feet of
leased commercial space at Pearl River, New York. The building is leased from an
unaffiliated third party pursuant to a three year agreement at an annual rental
of approximately $95,000 through January 2002.
The Company's Plainview, New York depot facility is located in a 2,000 square
foot building leased from an unaffiliated third party at an annual rent of
approximately $16,920 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 $60,000 pursuant to an agreement expiring in April 2001.
The Company's Rantoul, Illinois facility is located in a 29,000 square foot
building leased from an unaffiliated third party at an annual rental of
approximately $78,000 pursuant to an agreement expiring in September 2002.
The Company's Seattle, Washington depot facility is located in a 3,000 square
foot building leased from an unaffiliated third party at an annual rent of
approximately $16,200 pursuant to an agreement expiring in March 2001.
The Company rents properties and various equipment under operating leases. Rent
expense, net of sublease rental income, for the years ended December 31, 2000
and 1999 totaled approximately $790,000 and $1,054,000, respectively.
Future commitments under operating leases, are summarized as follows:
Rent expense
------------
Years ended December 31, Amount
------------------------ ------
(in thousands)
- 2001 $ 635
- 2002 253
- 2003 121
- 2004 48
- 2005 3
------
Total $1,060
======
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, which wells showed
elevated levels of refrigerant contamination, specifically
Trichlorofluoromethane (R-11) and Dichlorodifluoromethane (R-12). In December
1998, United served an amended complaint asserting a claim pursuant to the
Resource Conservation and Recovery Act, 42 U.S.C.ss.6901, et. seq. seq.
("RCRA").
On April 1, 1999, the Company reported a release at the Company's Hillburn, New
York facility of approximately 7,800 lbs. of R-11, as a result of a failed hose
connection to one of the Company's outdoor storage tanks allowing liquid R-11 to
discharge from the tank into the concrete secondary containment area in which
the subject tank was located. An amount of the R-11 escaped the secondary
containment area through an open drain from the secondary containment area for
removing accumulated rainwater and entered the ground. In April 1999, the
Company was advised by United that one of its wells within close proximity to
the Company's facility showed elevated levels of R-11 in excess of 200 ppb.
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.
40
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 following the settlement. The proceeds of the settlement are required to
be used to fund the construction and operation by United of a new remediation
tower, as well as for the continuation of temporary remedial measures
implemented by United and that have successfully contained the spread of R-11.
The remediation tower is expected to be completed by March 31, 2001 and is
designed to treat all of United's impacted wells and restore the water to New
York State drinking water standards for supply to the public. The Company
carries $1,000,000 of pollution liability insurance per occurrence and in
connection with the settlement exhausted all insurance proceeds available under
all applicable policies.
In connection with the above mentioned proceedings, the Company has accrued for
all current and anticipated costs, net of the insurance proceeds which have been
paid by the carrier.
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 pay a $10,000 penalty relating to the April 1, 1999 release
and 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 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 (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.
There can be no assurance that the effects of the April 1, 1999 R-11 release,
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.
41
ISOs granted under the 1997 Plan may not be granted at a price less than the
fair market value of the Common Stock on the date of grant (or 110% of fair
market value in the case of persons holding 10% or more of the voting stock of
the Company). Non-qualified options granted under the 1997 Plan may not be
granted at a price less than the par value of the Common Stock on the date of
grant. Options granted under the 1997 Plan expire not more than ten years from
the date of grant (five years in the case of ISOs granted to persons holding 10%
or more of the voting stock of the Company).
All stock options have been granted to employees and non-employees at exercise
prices equal to or in excess of the market value on the date of the grant.
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, 2000 1999
---- ----
Assumptions
-----------
Dividend Yield 0 % 0 %
Risk free interest rate 5.9 % 5.3 %
Expected volatility 60 % 46.5 %
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, 2000 1999
---- ----
Pro forma results
-----------------
(In thousands, except per share amounts)
Net loss available for common shareholders:
As reported $(2,893) $(3,955)
Pro forma $(3,791) $(4,723)
Loss per common
share-basic and diluted
As reported $ (.57) $ (.85)
Pro forma $ (.75) $ (1.00)
A summary of the status of the Company's stock option plan as of December 31,
2000 and 1999 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, 1998 1,374,642 $ 5.08
--------------------------------
o Granted 226,500 $ 2.24
o Forfeited (566,610) $ 5.23
---------
Outstanding at December 31, 1999 1,034,532 $ 4.37
--------------------------------
o Granted 589,250 $ 2.41
o Forfeited (25,700) $ 7.17
---------
Outstanding at December 31, 2000 1,598,082 $ 3.60
========= ======
42
Data summarizing year-end options exercisable and weighted average fair-value of
options granted during the years ended December 31, 2000 and 1999 is shown
below:
Options Exercisable
-------------------
Year ended Year ended
December 31, December 31,
2000 1999
Options exercisable at year-end 1,385,582 925,532
--------- -------
Weighted average exercise price $3.64 $4.07
----- -----
Weighted average fair value of
options granted during the year $1.13 $.83
----- ----
Options Exercisable at December 31, 2000
Weighted-average
Number Exercise
Range of Prices Outstanding Price
-------------------- ----------- -----
$1 to $4 1,107,916 $ 2.81
$4 to $10 167,666 $ 4.62
$10 to $16 110,000 $10.50
----------
$1 to $16 1,385,582 $ 3.64
==========
The following table summarizes information about stock options outstanding at
December 31, 2000:
Options Outstanding At December 31, 2000
Weighted-average Weighted-
Remaining average
Range of Number Contractual Exercise
Prices Outstanding Life Price
------ ----------- ---- -----
$1 to $4 1,277,750 4.0 years $2.73
$4 to $10 185,332 2.0 years $4.56
$10 to $16 135,000 1.0 years $10.50
---------
$1 to $16 1,598,082 3.5 years $3.60
=========
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