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Filed Pursuant to Rule 424(b)3
Registration No. 333-35537
PROSPECTUS
October 9, 1997
OFFER TO EXCHANGE
10 3/8% SENIOR SUBORDINATED NOTES DUE 2007, SERIES B
FOR ALL OUTSTANDING
10 3/8% SENIOR SUBORDINATED NOTES DUE 2007, SERIES A
OF
HYDROCHEM INDUSTRIAL SERVICES, INC.
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THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
FRIDAY, NOVEMBER 7, 1997, UNLESS EXTENDED.
HydroChem Industrial Services, Inc. (the "Company") is offering upon the
terms and subject to the conditions set forth in this Prospectus and the
accompanying letter of transmittal (the "Letter of Transmittal") (which
together constitute the "Exchange Offer") to exchange $1,000 principal amount
of its new 10 3/8% Senior Subordinated Notes due 2007, Series B (the "New
Notes") for each $1,000 principal amount of its outstanding 10 3/8% Senior
Subordinated Notes due 2007, Series A (the "Old Notes") in the aggregate
principal amount of $110,000,000. The form and terms of the New Notes are
identical to the form and terms of the Old Notes, except that the Old Notes
were offered and sold in reliance upon certain exemptions from registration
under the Securities Act of 1933, as amended (the "Securities Act"), while the
offering and sale of the New Notes in exchange for the Old Notes has been
registered under the Securities Act, with the result that the New Notes will
not bear any legends restricting their transfer. The New Notes will evidence
the same debt as the Old Notes and will be issued pursuant to, and entitled to
the benefits of, the Indenture (as defined) governing the Old Notes. The
Exchange Offer is being made in order to satisfy certain contractual
obligations of the Company. See "The Exchange Offer" and "Description of
Notes." The New Notes and the Old Notes are sometimes collectively referred to
herein as the "Notes."
The New Notes will mature on August 1, 2007. The New Notes will be
redeemable at the option of the Company, in whole or in part, at any time on or
after August 1, 2002, at the redemption prices set forth herein, plus accrued
and unpaid interest and Liquidated Damages (as defined), if any, to the date of
redemption. Notwithstanding the foregoing, at any time prior to August 4, 2000,
the Company may redeem up to 35% of the original aggregate principal amount of
the Notes with the net proceeds of one or more Equity Offerings (as defined) at
a redemption price equal to 109.375% of the principal amount thereof, plus
accrued and unpaid interest and Liquidated Damages, if any, to the date of
redemption; provided, that after any such redemption, 65% of the original
aggregate principal amount of the Notes remains outstanding. Upon the
occurrence of a Change of Control (as defined), the Company will be required,
subject to certain conditions, to make an offer to purchase the New Notes at a
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, to the date of purchase. However,
there can be no assurance that the Company would have or be able to acquire
sufficient funds to repurchase the Notes in such an event. See "Description of
Notes."
The New Notes will be senior subordinated unsecured obligations of the
Company and will rank junior in right of payment to all existing and future
Senior Debt (as defined) of the Company, including contemplated borrowings
under the New Credit Facility (as defined). The New Notes will be fully and
unconditionally guaranteed on an unsecured senior subordinated and joint and
several basis (the "Subsidiary Guarantees") by the Company's present subsidiary
(HydroChem International, Inc.) and the Company's future subsidiaries that
execute a Subsidiary Guarantee (collectively, the "Subsidiary Guarantors") in
accordance with the Indenture. Each Subsidiary Guarantee will rank junior in
right of payment to all existing and future Senior Debt of the Subsidiary
Guarantor. The Indenture permits the Company and its Restricted Subsidiaries
(as defined) to incur additional Indebtedness (as defined), subject to the
satisfaction of certain financial tests. As of June 30, 1997, on a pro forma
basis after giving effect to the offering of the Old Notes (the "Offering"), no
Indebtedness would rank senior to the Notes (excluding $2.3 million in
outstanding undrawn letters of credit), although the Company currently
contemplates that it will enter into a new credit facility pursuant to which it
could borrow up to $25 million ("New Credit Facility"). See "Description of
Notes."
Continued on Page 2
FOR A DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED IN CONNECTION WITH AN
INVESTMENT IN THE NEW NOTES, SEE "RISK FACTORS" BEGINNING ON PAGE 11.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Each broker-dealer that receives New Notes for its own account in exchange
for Old Notes, where the Old Notes were acquired by that broker-dealer as a
result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Old Notes where such Old Notes were acquired as a
result of market-making activities or other trading activities. See "The
Exchange Offer" and "Plan of Distribution."
The Company will accept for exchange any and all validly tendered Old Notes
on or before 5:00 p.m., New York City time, on Friday, November 7, 1997, unless
extended (the "Expiration Date"). Tenders of Old Notes may be withdrawn at any
time before 5:00 p.m., New York City time, on the Expiration Date, but after
that time are irrevocable. Norwest Bank, Minnesota, N.A. will be acting as
Exchange Agent in connection with the Exchange Offer. The Exchange Offer is not
conditioned on any minimum principal amount of Old Notes being tendered for
exchange, but is otherwise subject to certain customary conditions.
The New Notes will bear interest from the most recent date to which
interest has been paid on the Old Notes or, if no interest has been paid, from
the date of issuance of the Old Notes at a rate per annum of 10 3/8%. Interest
on the New Notes will be payable semiannually on February 1 and August 1 of
each year commencing on the first such date following the date of issuance of
the New Notes. Old Notes that are accepted for exchange will cease to accrue
interest on and after the date on which interest on the New Notes begins to
accrue. Accrued and unpaid interest on the Old Notes that are tendered in
exchange for the New Notes will be payable on the first February 1 or August 1
following the date of issuance of the New Notes.
The Old Notes were sold by the Company on August 4, 1997, to Donaldson,
Lufkin & Jenrette Securities Corporation (the "Initial Purchaser") in a
transaction not registered under the Securities Act in reliance on the
exemption provided in Section 4(2) of the Securities Act. The Initial Purchaser
subsequently placed the Old Notes with qualified institutional buyers in
reliance on Rule 144A under the Securities Act. Accordingly, the Old Notes may
not be reoffered, resold or otherwise transferred in the United States unless
so registered or unless an applicable exemption from the registration
requirements of the Securities Act is available. The New Notes are being
offered hereunder in order to satisfy the obligations of the Company under a
Registration Rights Agreement entered into among the Company, the Subsidiary
Guarantor and the Initial Purchaser (the "Registration Rights Agreement"). See
"The Exchange Offer."
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission" or the "SEC") set forth in no-action letters
issued to third parties, the Company believes that New Notes issued pursuant to
this Exchange Offer may be offered for resale, resold and otherwise transferred
by a holder who is not an affiliate of the Company or the Subsidiary Guarantor
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that the holder is acquiring the New Notes in its
ordinary course of business and is not participating in and has no arrangement
or understanding with any person to participate in the distribution (within the
meaning of the Securities Act) of the New Notes. Persons wishing to exchange
Old Notes in the Exchange Offer must represent to the Company that these
conditions have been met.
The Company does not intend to list the New Notes on any national
securities exchange or to seek the admission thereof to trading in the National
Association of Securities Dealers Automated Quotation System. The Initial
Purchaser has advised the Company that it intends to make a market in the New
Notes; however, it is not obligated to do so and any market-making may be
discontinued at any time without notice. Accordingly, no assurance can be given
that an active public or other market will develop for the New Notes or as to
the liquidity of or the trading market for the New Notes.
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding. To the extent that any Old Notes are tendered and accepted in the
Exchange Offer, a holder's ability to sell untendered Old Notes could be
adversely affected. Following consummation of the Exchange Offer, the holders
of Old Notes will continue to be subject to the existing restrictions on
transfer thereof.
The Company expects that the New Notes issued pursuant to this Exchange
Offer will be issued in the form of a Global New Note (as defined), which will
be deposited with, or on behalf of, The Depository Trust Company ("DTC") and
registered in its name or in the name of Cede & Co., its nominee. Beneficial
interests in the Global New Note representing the New Notes will be shown on,
and transfers thereof to qualified institutional buyers will be effected
through, records maintained by DTC and its participants. After the initial
issuance of the Global New Note, New Notes in certificated form will be issued
in exchange for the Global New Note on the terms set forth in the Indenture.
See "Description of Notes--Book Entry; Delivery and Form."
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SUMMARY
The following summary is qualified in its entirety by reference to and
should be read in conjunction with the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in the Prospectus.
Unless the context otherwise indicates or requires, all references herein to
"HydroChem" or the "Company" are to HydroChem Industrial Services, Inc. and its
consolidated subsidiary.
This Prospectus includes "forward-looking statements" within the meaning of
various provisions of the Securities Act and the Securities Exchange Act of 1934
(the "Exchange Act"). All statements, other than statements of historical facts,
included in this Prospectus that address activities, events or developments that
the Company expects or anticipates will or may occur in the future, including
statements regarding future capital expenditures (including the amount and
nature thereof), business strategy and measures to implement strategy,
competitive strengths, goals, expansion and growth of the Company's business and
operations, plans, references to future success, references to intentions as to
future matters and other similar matters are forward-looking statements. These
statements are based on certain assumptions and analyses made by the Company in
light of its experience and its perception of historical trends, current
conditions and expected future developments as well as other factors it believes
are appropriate in the circumstances. However, whether actual results and
developments will conform with the Company's expectations and predictions is
subject to a number of risks and uncertainties, including the risk factors
discussed in this Prospectus; general economic, market or business conditions;
the opportunities (or lack thereof) that may be presented to and pursued by the
Company; competitive actions by other industrial services companies; changes in
laws or regulations; and other factors, many of which are beyond the control of
the Company. Consequently, all of the forward-looking statements made in this
Prospectus are qualified by these cautionary statements and there can be no
assurance that the actual results or developments anticipated by the Company
will be realized or, even if substantially realized, that they will have the
expected consequences to or effects on the Company or its business or
operations.
THE COMPANY
The Company is a leading provider of industrial cleaning services to a wide
range of processing industries, including petrochemical plants, oil refineries,
electric utilities, pulp and paper mills, rubber plants and aluminum plants.
Services provided include high pressure water cleaning ("hydroblasting"),
chemical cleaning, industrial vacuuming, waste minimization, commissioning and
other specialized services. This type of work is typically recurring
maintenance to improve or sustain the operating efficiencies and extend the
useful lives of process equipment and facilities. The Company provides services
to approximately 1,200 customers at approximately 2,500 customer sites from 49
branch locations in the United States and one location in Singapore.
In 1996, 44.5% of the Company's revenue was derived from hydroblasting,
40.2% from chemical cleaning, 7.4% from industrial vacuuming and 7.9% from
other services. Also, in 1996, 45.8% of HydroChem's revenue came from
petrochemical plants, 16.9% from oil refineries, 14.3% from electric utilities,
8.3% from pulp and paper mills and 14.7% from other industries. Approximately
40% of the Company's 1996 revenue was derived from its 15 largest customers,
all of which are Fortune 500 companies, and approximately 60% was derived from
its 40 largest customers, 34 of which are Fortune 500 companies. The Company
has increased revenue from $27.1 million in fiscal 1992 to $157.5 million for
the twelve months ended June 30, 1997, and has increased EBITDA (as defined)
from $4.4 million to $20.1 million over the same period, through strategic
acquisitions, increased market share and geographic expansion.
Demand for HydroChem's industrial cleaning services has been favorably
affected by a variety of market factors. Industrial cleaning is required as
part of the recurring maintenance necessary to improve or sustain operating and
energy efficiencies and to enhance the profitability and useful lives of its
customers' equipment and facilities. For many years, the Company's customers
have increased their use of outside contractors in an attempt to control their
internal labor and insurance costs and to eliminate the need for maintaining
expensive, under-utilized equipment. In recent years, these customers have also
been reducing the number of vendors they utilize to streamline their internal
operations, thus further reducing costs. This trend, together with the high
costs of maintaining an excellent safety record, training employees and
complying with rapidly changing government regulations, is driving the
consolidation of the fragmented industrial cleaning industry. Management
believes that these trends benefit larger industry participants such as
HydroChem. In addition, the enactment of laws and regulations designed to
protect the environment and public health have created additional opportunities
for the Company to offer new services or enhance existing services to help keep
its customers in compliance or lessen their cost of complying with these laws
and regulations.
HydroChem believes it has achieved a strong position in the industrial
cleaning services industry by identifying changing customer needs and industry
trends and successfully providing high-quality, cost-effective services to meet
these needs on a timely basis. The Company's competitive strengths include its
(i) long-term relationships with
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quality customers; (ii) broad range of services offered; (iii) excellent safety
record; (iv) nationwide network of strategic locations; (v) master service
agreements with most of its major customers; (vi) customer alliances with some
of its largest customers; and (vii) experienced management personnel, both at
the corporate and field levels.
BUSINESS STRATEGY
The Company's business strategy includes the following key elements:
o Expand Services Provided to Existing Customers. The Company generally
does not provide its full range of industrial cleaning services to
each customer. HydroChem believes that expanding the amount of work
performed for existing customers is the most efficient and cost
effective method of achieving growth. The Company actively leverages
its existing customer relationships and the breadth of services it
offers to capitalize on its customers' trend to reduce the number of
vendors utilized and thereby gain additional market share. Also, the
Company seeks to identify opportunities for new services that it can
provide to its extensive customer base.
o Establish Relationships with New Customers in Existing Geographic
Areas. Most of the geographic areas in which the Company has branch
locations contain concentrations of processing plants that are
potential customers for the Company. The Company seeks to penetrate
these geographic markets further by obtaining contracts at plants
where it does not currently provide services.
o Expand Geographically. The Company identifies attractive geographic
markets for its services based on the number and types of plants
located in those areas, establishes a branch location and then builds
its business over time. This type of expansion often involves securing
at least one contract with a customer before establishing a branch and
then placing a complement of equipment and personnel in the area to
perform this work and pursue other work. These actions establish a
revenue stream to cover overhead costs and provide a base for
expanding throughout the surrounding geographic area.
o Establish Customer Alliances. The Company seeks to increase the number
of its customer alliance relationships. Under this type of
relationship, the Company's strategy is to provide its services as a
sole-source supplier, thereby obtaining additional market share and
strengthening customer relationships.
o Pursue Additional Strategic Acquisitions. The Company has successfully
grown its business in the past through strategic acquisitions.
HydroChem intends to continue to pursue acquisitions that add
additional services and products to market to its existing customer
base or facilitate expansion of the Company's customer base or
geographic coverage.
CORPORATE BACKGROUND
Hydro Environmental Services Limited Partnership ("Hydro Services") was
formed in 1990 by an investor group including B. Tom Carter, Jr., the Company's
Chairman, CEO and President, to acquire an industrial cleaning business that
had been operating since 1961. HydroChem was formed in September 1993 for the
purpose of combining, in December 1993, the business and operations of Hydro
Services with the Dowell Industrial Services division of Dowell Schlumberger
Inc. ("DIS"), a business founded in 1938 and engaged in providing industrial
cleaning services. In January 1995, the Company acquired the business of
Halliburton Industrial Services ("HIS"), a business founded in 1962 and a
division of Brown & Root Industrial Services, Inc., which was also engaged in
providing industrial cleaning services. The Company is a wholly-owned
subsidiary of HydroChem Holding, Inc. ("Parent"), which is owned by Citicorp
Venture Capital, Ltd. ("CVC"), management of the Company, LKCM Venture Partners
I Ltd., BT Capital Partners, Inc. and other investors.
THE NOTE OFFERING
The Old Notes . . . . . . . . The Old Notes were sold by the Company on
August 4, 1997, to the Initial Purchaser
pursuant to a Purchase Agreement. The Initial
Purchaser resold the Old Notes to qualified
institutional buyers pursuant to Rule 144A
under the Securities Act.
Registration Statement . . . The Registration Rights Agreement granted the
holders of the Old Notes certain exchange and
registration rights. The Exchange Offer is
intended to satisfy those exchange rights,
which terminate upon consummation of the
Exchange Offer. If applicable law or applicable
interpretations of the staff of the Commission
do not permit the Company to effect the
Exchange Offer, or in certain other
circumstances, the Company has agreed to file a
shelf registration covering
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resales of Transfer Restricted Notes (as
defined in the Registration Rights Agreement).
THE EXCHANGE OFFER
The Exchange Offer applies to $110,000,000 aggregate principal amount of
the Old Notes. The form and terms of the New Notes are identical to the form
and terms of the Old Notes except that the Old Notes were offered and sold in
reliance upon certain exemptions from registration under the Securities Act,
while the offering and sale of the New Notes in exchange for the Old Notes has
been registered under the Securities Act, with the result that the New Notes
will not bear any legends restricting their transfer. See "Description of
Notes."
The Exchange Offer . . . . . $1,000 principal amount of New Notes for each
$1,000 principal amount of Old Notes. As of the
date hereof, Old Notes representing
$110,000,000 aggregate principal amount were
outstanding. The terms of the New Notes and the
Old Notes are substantially identical. Based on
an interpretation by the Commission's staff set
forth in no-action letters issued to third
parties unrelated to the Company, the Company
believes that, with the exceptions discussed
herein, New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise
transferred by any person receiving the New
Notes, whether or not that person is the holder
(other than any such holder or such other person
that is an "affiliate" of the Company or the
Subsidiary Guarantor within the meaning of Rule
405 under the Securities Act), without
compliance with the registration and prospectus
delivery provisions of the Securities Act,
provided that (i) the New Notes are acquired in
the ordinary course of business of that holder
or such other person, (ii) neither the holder
nor such other person is engaging in or intends
to engage in a distribution of the New Notes,
and (iii) neither the holder nor such other
person has an arrangement or understanding with
any person to participate in the distribution of
the New Notes. However, the Company has not
sought, and does not intend to seek, its own
no-action letter, and there can be no assurance
that the Commission's staff would make a similar
determination with respect to the Exchange
Offer. Each broker-dealer that receives New
Notes for its own account in exchange for Old
Notes, where those Old Notes were acquired by
the broker-dealer as a result of its
market-making activities or other trading
activities, must acknowledge that it will
deliver a prospectus in connection with any
resale of those New Notes. See "The Exchange
Offer -- Purpose and Effect" and "Plan of
Distribution."
Expiration Date . . . . . . The Exchange Offer will expire at 5:00 p.m.,
New York City time, on Friday, November 7,
1997, or such later date and time to which it is
extended.
Withdrawal Rights . . . . . . The tender of Old Notes pursuant to the
Exchange Offer may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the
Expiration Date. Any Old Notes not accepted for
exchange for any reason will be returned
without expense to the tendering holder thereof
as promptly as practicable after the expiration
or termination of the Exchange Offer.
Interest on the New Notes
and Old Notes . . . . . . Interest on each New Note will accrue from the
date of issuance of the Old Note for which the
New Note is exchanged or from the date of the
last periodic payment of interest on such Old
Note, whichever is later. No interest will be
paid on Old Notes which are exchanged for New
Notes, and holders of such Old Notes will be
deemed to have waived the right to receive
interest accrued thereon to the date of
exchange.
Conditions to the Exchange
Offer . . . . . . . . . . . The Exchange Offer is subject to certain
customary conditions, certain of which may be
waived by the Company. See "The Exchange Offer
-- Conditions."
Procedures for Tendering
Old Notes . . . . . . . . . Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a copy thereof, in
accordance with the instructions contained
herein and therein, and mail or otherwise
deliver the Letter of Transmittal, or the copy,
together with the Old Notes and any other
required
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documentation, to the Exchange Agent at the
address set forth herein. Persons holding Old
Notes through the DTC and wishing to accept the
Exchange Offer must do so pursuant to the DTC's
Automated Tender Offer Program, by which each
tendering Participant (as defined) will agree to
be bound by the Letter of Transmittal. By
executing or agreeing to be bound by the Letter
Transmittal, each holder will represent to the
Company that, among other things, (i) any New
Notes to be received by it will be acquired in
the ordinary course of its business and (ii) it
is not an "affiliate," as defined in Rule 405 of
the Securities Act, of the Company or the
Subsidiary Guarantor, or if it is an affiliate,
it will comply with the registration and
prospectus delivery requirements of the
Securities Act to the extent applicable. If the
holder is not a broker-dealer, it will be
required to represent that it is not engaged in,
and does not intend to engage in, the
distribution of the New Notes and has no
arrangement with any person to participate in
the distribution of the New Notes. If the holder
is a broker-dealer that will receive New Notes
for its own account in exchange for Old Notes
that were acquired as a result of market-making
activities or other trading activities, it will
be required to acknowledge that it will deliver
a prospectus in connection with any resale of
such New Notes.
Pursuant to the Registration Rights Agreement,
the Company is required to file a registration
statement for a continuous offering pursuant to
Rule 415 under the Securities Act in respect of
the Old Notes if existing Commission
interpretations are changed such that the New
Notes received by holders in the Exchange Offer
are not or would not be, upon receipt,
transferable by each such holder (other than an
affiliate of the Company or the Subsidiary
Guarantor) without restriction under the
Securities Act. See "The Exchange Offer --
Purpose and Effect."
Acceptance of Old Notes and
Delivery of New Notes . . . The Company will accept for exchange any and
all Old Notes which are properly tendered in
the Exchange Offer prior to 5:00 p.m., New York
City time, on the Expiration Date. The New
Notes issued pursuant to the Exchange Offer
will be delivered promptly following the
Expiration Date. See "The Exchange Offer --
Terms of the Exchange Offer."
Exchange Agent . . . . . . . Norwest Bank, Minnesota, N.A. is serving as
Exchange Agent in connection with the Exchange
Offer and is also serving as Trustee under the
Indenture.
Federal Income Tax
Considerations . . . . . . The exchange pursuant to the Exchange Offer
will not be a taxable event for federal income
tax purposes. See "Certain U.S. Federal Income
Tax Considerations."
Effect of Not Tendering . . . Old Notes that are eligible for exchange in the
Exchange Offer, but are not tendered or are
tendered but not accepted will, following the
completion of the Exchange Offer, continue to
be subject to the existing restrictions upon
transfer thereof. The Company will have no
further obligation to provide for the
registration under the Securities Act of such
Old Notes.
Global Note . . . . . . . . . The New Notes will be issued in fully
registered form and are expected to initially
be represented by one Global Note, registered
in the name of DTC or its nominee and deposited
with DTC. Holders of beneficial interests in
the Global Note will not be considered the
owners or holders of any New Notes under the
Global Note or the Indenture for any purpose.
Holders of beneficial interests in the Global
Note may be unable to transfer or pledge their
interest in the Global Notes if physical
delivery is required. Payments by the
Participants (as defined) and the Indirect
Participants (as defined) to the beneficial
owners of New Notes will be governed by
standing instructions and customary practice
and will be the responsibility of the
Participants or Indirect Participants and not
the Company or the Trustee. See "Exchange Offer
-- Book Entry; Delivery and Form."
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TERMS OF THE NEW NOTES
Notes Offered . . . . . . . . $110,000,000 aggregate principal amount of
10 3/8% Senior Subordinated Notes due 2007,
Series B.
Maturity . . . . . . . . . . August 1, 2007.
Interest and Payment Dates. . The New Notes will bear interest at the rate of
10 3/8% per annum. Interest will accrue from
the date of original issuance of the Old Notes,
or from the most recent date to which interest
has been paid, whichever is later, and will be
payable semi-annually in arrears on February 1
and August 1 of each year, commencing on
February 1, 1998.
Optional Redemption . . . . On or after August 1, 2002, the New Notes will
be redeemable at the option of the Company, in
whole or in part, at the redemption prices set
forth herein, plus accrued and unpaid interest
and Liquidated Damages, if any, to the date of
redemption. Notwithstanding the foregoing,
prior to August 4, 2000, the Company may redeem
up to 35% of the original aggregate principal
amount of the Notes issued in the Offering
(including New Notes exchanged for Old Notes
pursuant to the Exchange Offer) with the net
proceeds of one or more Equity Offerings at a
redemption price of 109.375% of the principal
amount thereof, in each case plus accrued and
unpaid interest and Liquidated Damages, if any,
to the redemption date; provided that at least
65% of the aggregate principal amount of the
Notes originally issued remains outstanding
immediately after such redemption. See
"Description of Notes -- Optional Redemption."
Subsidiary Guarantees . . . The New Notes will be guaranteed on an
unsecured senior subordinated and joint and
several basis by each of the Subsidiary
Guarantors, which consist of the Company's
current subsidiary and future subsidiaries, if
any, that the Company may designate. The
Subsidiary Guarantees may be released under
certain circumstances. See "Description of
Notes -- Subsidiary Guarantees."
Ranking . . . . . . . . . . The New Notes will be subordinated in right of
payment to all existing and future Senior Debt
of the Company, including borrowings under the
New Credit Facility. Each Subsidiary Guarantee
will be subordinated in right of payment to all
existing and future Senior Debt of the
Subsidiary Guarantor, including guarantees of
the New Credit Facility. As of June 30, 1997,
on a pro forma basis, the Company and its
Subsidiary Guarantor would have had no Senior
Debt (excluding $2.3 million in outstanding
undrawn letters of credit that are secured by
cash of the Company until the New Credit
Facility is in place). The Indenture permits
the Company and its Restricted Subsidiaries to
incur additional Indebtedness, including Senior
Debt, subject to certain limitations, and
prohibits the incurrence of any Indebtedness by
the Company and each of the Subsidiary
Guarantors that is senior to the New Notes and
the Subsidiary Guarantees, as the case may be,
and subordinated to Senior Debt and Senior Debt
of the Subsidiary Guarantors, as the case may
be. See "Description of Notes -- Subordination"
and "-- Certain Covenants."
Change of Control . . . . . Upon the occurrence of a Change of Control,
holders of the New Notes will have the right to
require the Company to purchase all or any part
of their Notes at a price equal to 101% of the
aggregate principal amount thereof, plus
accrued and unpaid interest and Liquidated
Damages, if any, to the date of purchase. See
"Description of Notes -- Certain Covenants --
Change of Control."
Certain Covenants . . . . . The Indenture pursuant to which the Old Notes
were issued and the New Notes will be issued
contains certain covenants that, among other
things, limit the ability of the Company and
its Restricted Subsidiaries to: (i) pay
dividends or make certain other Restricted
Payments (as defined); (ii) incur additional
Indebtedness; (iii) encumber or sell assets;
(iv) enter into certain guarantees of
Indebtedness; (v) enter into transactions with
Affiliates (as defined); and (vi) merge or
consolidate with any other entity or transfer
or lease all or substantially all of their
assets. In addition, under certain
circumstances, the Company will be required to
offer to purchase Notes at a price of 100% of
the principal amount
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thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of
purchase with the proceeds of certain Asset
Sales (as defined). The Company may not have
sufficient funds to redeem the Notes upon a
Change of Control. In addition, the New Credit
Facility may prohibit the Company from
purchasing any Notes and may also provide that
certain change of control events with respect to
the Company would constitute a default
thereunder. In the event a Change of Control
occurs at a time when the Company is prohibited
from purchasing Notes, then prior to purchasing
the Notes in a Change of Control Offer, the
Company must either repay all outstanding Senior
Debt that contains such prohibitions or obtain
the requisite consents, if any, under all
agreements governing such outstanding Senior
Debt. If the Company does not obtain such a
consent or repay such borrowings, the Company
will remain prohibited from purchasing Notes. In
such case, the Company's failure to purchase all
Notes validly tendered and not withdrawn under
such Change of Control Offer would constitute an
Event of Default under the Indenture which may,
in turn, constitute a default under the New
Credit Facility. In such circumstances, the
subordination provisions in the Indenture would
likely restrict payments to the Holders of
Notes. See "Description of Notes -- Certain
Covenants."
8
<PAGE> 9
RISK FACTORS
For a discussion of certain factors that should be considered by
prospective investors in connection with an investment in the New Notes, see
"Risk Factors."
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following summary historical consolidated financial data of the Company
for the year ended December 31, 1992, and the period from January 1, 1993, to
December 14, 1993, have been derived from the audited financial statements of
Hydro Services, a predecessor to the Company's business and operations. The
summary historical consolidated financial data of the Company for the period
from December 15, 1993, to December 31, 1993, and for each of the years ended
December 31, 1994, 1995 and 1996, have been derived from the Company's audited
consolidated financial statements. The unaudited pro forma consolidated
financial data of the Company for the year ended December 31, 1996, has been
derived from the Company's audited financial statements. The summary unaudited
historical consolidated financial data of the Company for the six months ended
June 30, 1996, and unaudited historical and pro forma consolidated financial
data of the Company as of and for the six months ended June 30, 1997, have been
derived from the Company's unaudited consolidated financial statements. The
Company's unaudited consolidated financial statements include all adjustments,
consisting of normal recurring accruals, that the Company's management
considers necessary for a fair presentation of such data. The results of
operations for any interim period are not necessarily indicative of results of
operations for the fiscal year. The summary historical and pro forma
consolidated financial data set forth below should be read in conjunction with
"The Company," "Pro Forma Consolidated Financial Statements," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements and the Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------- ------------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
---------------------------------------------------- --------- ------------------- --------
1992(1) 1993(1) 1994 1995 1996 1996(2) 1996 1997 1997(2)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue .................... $ 27,121 $ 32,529 $101,103 $156,484 $156,003 $ 156,003 $ 79,201 $ 80,714 $ 80,714
Gross profit ............... 10,904 12,041 36,521 61,855 61,630 61,630 31,325 32,924 32,924
SG&A expense ............... 6,394 6,881 20,504 39,465 42,103 42,103 20,184 21,161 21,161
Depreciation ............... 1,049 1,616 3,930 6,752 7,765 7,765 3,712 3,889 3,889
Operating income ........... 3,356 3,497 12,087 15,638 11,762 11,762 7,429 7,874 7,874
Interest expense, net ...... 1,613 1,822 5,605 8,693 7,920 11,743 4,038 3,787 5,871
Amortization of
intangibles .............. 468 493 1,151 1,407 1,523 1,523 762 779 779
Income (loss) before
taxes .................... 1,134 532 5,409 5,903 1,829 (1,994) 2,777 3,285 1,201
Net income (loss) .......... na(1) na(1) 2,950 2,851 545 (1,825) 828 1,747 455
OTHER FINANCIAL DATA:
Gross margin ............... 40.2% 37.0% 36.1% 39.5% 39.5% 39.5% 39.6% 40.8% 40.8%
EBITDA(3) .................. $ 4,405 $ 5,113 $ 16,017 $ 22,390 $ 19,527 $ 19,527 $ 11,141 $ 11,763 $ 11,763
EBITDA margin(4) ........... 16.2% 15.7% 15.8% 14.3% 12.5% 12.5% 14.1% 14.6% 14.6%
Capital expenditures ....... $ 1,869 $ 3,047 $ 5,576 $ 8,493 $ 6,829 $ 6,829 $ 3,245 $ 2,847 $ 2,847
PRO FORMA DATA:
Cash interest expense(5) ... $ 11,413 $ 5,706
Ratio of EBITDA to cash
interest expense ......... 1.7x 2.1x
Ratio of net debt to
EBITDA(6) ................ 4.1x 3.3x
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-------------------------
HISTORICAL PRO FORMA(2)
(IN THOUSANDS)
BALANCE SHEET DATA:
<S> <C> <C>
Cash and cash equivalents(7) . . . . . . . . . . . . . . . . . $ 1,458 $ 32,114
Working capital . . . . . . . . . . . . . . . . . . . . . . . . 14,212 51,784
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . 117,759 148,488
Total long-term debt, including current maturities . . . . . . 65,582 110,000
Stockholder's equity . . . . . . . . . . . . . . . . . . . . . 27,517 16,925
</TABLE>
- ----------
(1) Results for the years ended December 31, 1992 and 1993, were derived
from (i) the audited financial statements of Hydro Services, a
predecessor to the Company's business and operations, for the year
ended December 31, 1992, and the period from January 1, 1993, to
December 14, 1993, and (ii) the Company's audited financial statements
for the period from December 15, 1993, to December 31, 1993.
Operations for 1993 have been combined for purposes of this
presentation. Because Hydro Services was reported on a limited
partnership basis, net income (loss) is not available on a comparable
basis. See "The Company."
(2) Gives effect to (i) the issuance of the Old Notes, (ii) the
application of the net proceeds therefrom, and (iii) the write-off of
the unamortized balance of deferred financing costs relating to the
Senior Credit Facility and Senior Subordinated Debt which were
discharged using a portion of the net proceeds from the sale of the
Old Notes. The Company will record in the quarter in which the
Offering was consummated an extraordinary loss on retirement of debt,
net of related tax benefit. The pro forma statement of operations data
does not give effect to such loss. As of June 30, 1997, the amount of
such loss would have been approximately $2.3 million, net of income
taxes. See "Use of Proceeds" and "Pro Forma Consolidated Financial
Statements."
(3) EBITDA for any relevant period presented above is defined as net
income plus interest expense, income taxes, depreciation,
amortization, and other income and expenses (including a special
charge of $511,000 in 1996) reflected in the determination of net
income. EBITDA should not be construed as a substitute for operating
income, as an indicator of liquidity or as a substitute for net cash
provided by operating activities, which are determined in accordance
with generally accepted accounting principles. EBITDA is included
because management believes that certain investors may find it to be a
useful tool for analyzing operating performance, leverage, liquidity,
and a company's ability to service debt. See "Pro Forma Consolidated
Financial Statements" and the Company's Consolidated Financial
Statements and the Notes thereto included elsewhere in this
Prospectus.
(4) EBITDA margin for any relevant period reflects EBITDA divided by
revenue.
(5) Cash interest expense represents total interest expense less
amortization of deferred financing costs, on a pro forma basis giving
effect to the issuance of the Old Notes pursuant to the Offering and
the application of the net proceeds therefrom, as if the transaction
had occurred on January 1, 1996.
(6) Ratio of net debt to EBITDA for the six months ended June 30, 1997,
reflects net debt divided by the product of EBITDA times 2. Net debt
represents total long-term debt, including current maturities, less
cash and cash equivalents.
(7) A portion of the Company's cash is required to secure the Company's
outstanding undrawn letters of credit ($2.3 million at June 30, 1997),
which were principally incurred in connection with the Company's
property and casualty insurance program.
10
<PAGE> 11
RISK FACTORS
Prospective investors in the New Notes should consider carefully the risk
factors set forth below, as well as the other information in this Prospectus.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS
The Company has substantial indebtedness and debt service obligations,
principally represented by the Notes. As of June 30, 1997, the Company's total
indebtedness, including current portion, would have been $110.0 million on a
pro forma basis, exclusive of $2.3 million of outstanding undrawn letters of
credit which were principally incurred in connection with the Company's
property and casualty insurance program and are expected to be secured by cash
of the Company until the New Credit Facility is in place. The Company intends
to enter into the New Credit Facility, pursuant to which the Company
anticipates that it will be able to borrow up to $25.0 million. In addition,
subject to any restrictions under the New Credit Facility and the Indenture,
the Company and its subsidiaries may incur additional indebtedness from time to
time. There can be no assurance that the New Credit Facility will be available
on terms acceptable to the Company, if at all. See "Use of Proceeds,"
"Capitalization" and "Description of Notes -- Certain Covenants."
The Company's indebtedness will have several important consequences to the
holders of the New Notes, including, but not limited to, the following: (i) the
Company will incur significant interest expense and principal repayment
obligations in connection with the Notes; (ii) the Company's ability to obtain
additional or replacement financing in the future, as needed, may be limited;
(iii) the Company's leveraged position and the covenants contained in the
Indenture could limit the Company's ability to expand its business and take
advantage of certain business opportunities; and (iv) the Company's leverage
may make it more vulnerable to economic downturns, limit its ability to
withstand competitive pressures, and reduce its flexibility in responding to
changing business and economic conditions. See "Description of Notes."
The Company's ability to pay interest and principal on the New Notes and to
satisfy its other debt obligations will depend upon its future operating
performance, which will be affected by prevailing economic conditions and
financial, business and other factors, certain of which are beyond its control,
as well as the availability of revolving credit borrowings under the New Credit
Facility or a successor facility. The Company anticipates that its net cash
provided by operating activities will be sufficient to meet its operating
expenses, expenditures for property and equipment, and debt service
requirements as they become due. However, if the Company is unable to service
its debt, it will be forced to pursue one or more alternative strategies such
as selling assets, curtailing any expansion, restructuring or refinancing its
indebtedness, or seeking additional equity capital. There can be no assurance
that any of these strategies could be effected on terms satisfactory to the
Company, if at all. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
SENIOR SUBORDINATED RANKING OF THE NEW NOTES
The New Notes will be senior subordinated unsecured obligations of the
Company and will rank junior in right of payment to all existing and future
Senior Debt of the Company, including any indebtedness to be incurred under the
New Credit Facility. The Company's obligations under the New Notes will be
jointly and severally guaranteed by the Company's subsidiary; however,
substantially all of the assets of the Company's subsidiary may also be pledged
as security under the New Credit Facility. Although on a pro forma basis, as of
June 30, 1997, after giving effect to the application of the net proceeds from
the Offering, no indebtedness would rank senior to the New Notes (excluding
$2.3 million in outstanding undrawn letters of credit), the Indenture allows
the Company to incur Senior Debt from time to time, including pursuant to the
New Credit Facility. See "Description of Notes -- Certain Covenants."
RESTRICTIVE COVENANTS
The Indenture restricts, among other things, the Company's and its
Restricted Subsidiaries' ability to pay dividends or make certain other
Restricted Payments, to incur additional Indebtedness, to encumber or sell
assets, to enter into transactions with Affiliates, to enter into certain
guarantees of Indebtedness, to make Restricted
11
<PAGE> 12
Investments (as defined), to merge or consolidate with any other entity, and to
transfer or lease all or substantially all of their assets. In addition, the
Company believes the New Credit Facility may contain other covenants and may
prohibit the Company and its subsidiaries from prepaying other indebtedness,
including possibly the New Notes. The New Credit Facility may also require the
Company to maintain specified financial ratios and satisfy certain financial
tests. The Company's ability to meet these financial ratios and tests can be
affected by events beyond its control, and there can be no assurance that the
Company will meet these tests. A breach of any of these covenants could result
in a default under the New Credit Facility or the Indenture. Upon the
occurrence of an event of default under the New Credit Facility, the lenders
thereunder could elect to declare all amounts outstanding under the New Credit
Facility, together with accrued interest, to be immediately due and payable. If
the Company were unable to repay those amounts, such lenders could proceed
against the collateral granted to them to secure that indebtedness. If the
Senior Debt were to be accelerated, there can be no assurance that the assets
of the Company would be sufficient to repay in full all Senior Debt or the New
Notes. See "Description of Notes -- Certain Covenants."
PERIODIC FLUCTUATIONS
A variety of factors may cause period-to-period fluctuations in the
operating results of the Company. Many of these factors are beyond the control
of the Company. The majority of the Company's revenue in each quarter results
from orders received in that quarter. As a result, the Company establishes its
staffing levels and operating expenditures based on anticipated revenue levels.
Thus, if revenue does not occur when expected, expenditure levels could be
disproportionately high, and operating results for the period, and potentially
for other periods, would be adversely affected.
Historically, the Company's business has been subject to seasonality.
Typically, the Company's revenue is greater during the second and fourth
calendar quarters. Demand for major industrial cleaning projects tends to be
higher in these periods due to process industry cycles. For example, electric
utilities typically schedule maintenance projects in advance of their peak
summer and winter production seasons.
The majority of the Company's revenue is derived from customers in
processing industries, including petrochemical plants, oil refineries, electric
utilities and pulp and paper mills. Many of the Company's customers are highly
sensitive to the prices paid for commodity inputs and the prices received for
finished processed products. The prices of many of these inputs and products
are highly volatile and cyclical in nature and can greatly impact the operating
profitability of those customers. There can be no assurance that these
companies will continue to use the Company's services in the event of a
cyclical downturn or will utilize the Company's services during peak cyclical
periods.
HIGHLY COMPETITIVE BUSINESS ENVIRONMENT
The industrial cleaning service industry is highly competitive and includes
companies with significantly greater resources than the Company and a number of
smaller, local or regional companies. These companies at times compete
principally on the basis of price. Reductions in the demand for, or increases
in competition in, certain service lines may cause prices for that service line
to decline. In addition, in connection with certain potential contracts of the
Company, the Company may be required to commit substantial resources over a
long period of time without any assurance of being selected to perform, or
successfully completing, such projects. Such events could have a material
adverse effect on the Company's financial condition and results of operations.
OPERATING RISKS
In the normal course of business, the Company is subject to numerous
operating risks, including risks associated with the safety of its employees
and its customers' employees while providing industrial cleaning services,
potential damage to a customer's property or business in performing such
services, and the potential for an environmental accident. The Company believes
that, subject to policy exclusions and limits, it has adequate insurance to
cover these risks. However, no assurance can be given that the insurance will
adequately protect the Company and, if the Company is only partially insured or
completely uninsured, such a claim could result in a material adverse effect on
the Company's financial condition and results of operations.
12
<PAGE> 13
DEPENDENCE ON KEY PERSONNEL
The Company's success depends upon the continued contribution of its
officers and key personnel, many of whom would be difficult to replace.
Although the Company has entered into employment agreements with certain of
such officers, the loss of one or more of these individuals could have a
material adverse effect on the Company. The Company's continued growth depends
on its ability to attract and retain skilled employees. See "Management."
RISKS ATTENDANT TO ACQUISITION STRATEGY
The Company regularly considers the acquisition of other companies. At any
given time, the Company may be in various stages of considering such
opportunities. Such acquisitions are subject to the negotiation of definitive
agreements and to conditions typical in acquisition transactions, certain of
which conditions may be beyond the Company's control. There is no assurance
that the Company will be able to identify desirable acquisition candidates or
will be successful in entering into any definitive agreements with respect to
desirable acquisitions. Moreover, even if definitive agreements are entered
into, there is no assurance that any future acquisition will thereafter be
completed or, if completed, that the anticipated benefits of the acquisition
will be realized. The process of integrating acquired operations into the
Company's operations may result in unforeseen operating difficulties, may
absorb significant management attention, and may require significant financial
resources that would otherwise be available for the ongoing development or
expansion of the Company's existing operations. Future acquisitions by the
Company could result in the incurrence of additional indebtedness and
contingent liabilities which could have a material adverse effect on the
Company's financial condition and results of operations.
RISKS ASSOCIATED WITH GOVERNMENT REGULATION
The Company's operations are subject to various federal, state and local
regulations governing employee health and safety, protection of the
environment, and motor carriers. While the Company believes it operates safely
and prudently and is in substantial compliance with these laws and regulations,
there can be no assurance that accidents will not occur or that the Company
will not incur penalties or fines for violations. In addition, noncompliance
with these laws and regulations may negatively impact the Company's ability to
secure contracts with customers or obtain adequate insurance at reasonable
costs. Any of these factors could have a material adverse effect on the
Company's financial condition or results of operations. See "Business --
Governmental Regulation."
VOTING CONTROL BY OFFICERS, DIRECTORS AND AFFILIATES
The Company is a wholly-owned subsidiary of HydroChem Holding, Inc., a
Delaware corporation which in turn is principally owned by entities that also
hold its outstanding indebtedness. Such owners, should they act together, would
have sufficient voting power to (i) elect the entire Boards of Directors of
Parent and the Company, (ii) exercise control over the business, policies and
affairs of Parent and the Company, and (iii) in general, determine the outcome
of any corporate transaction or other matters submitted to the stockholders for
approval such as (a) any amendment to the Company's Certificate of
Incorporation, (b) the authorization of additional shares of capital stock, and
(c) any merger, consolidation or sale of all or substantially all of the assets
of the Company which could prevent or cause a change of control of the Company.
Pursuant to a Stockholders Agreement, these owners have agreed, among other
things, to elect Mr. Carter and persons designated by certain stockholders as
directors of Parent and the Company. See "Principal Stockholders."
POSSIBLE DEFAULT UPON CHANGE OF CONTROL
In the event of a Change of Control, each holder of the New Notes will be
entitled to require the Company to purchase any or all of the New Notes held by
such holder at the prices stated herein. The Company expects that prepayment of
the New Notes pursuant to a Change of Control would constitute a default under
the New Credit Facility and any other agreements relating to Senior Debt to
which the Company may become a party. In the event that a Change of Control
occurs, the Company would likely be required to refinance the indebtedness
outstanding under the New Credit Facility and the New Notes. There can be no
assurance that the Company would be able to refinance such indebtedness or, if
such refinancing were to occur, that such refinancing would be on terms
favorable to the Company. If such refinancing does not occur, the Company would
remain prohibited from purchasing the New
13
<PAGE> 14
Notes and such failure to purchase the New Notes would constitute an event of
default under the Indenture which may, in turn, constitute a default under the
New Credit Facility. In such circumstances, the subordination provisions in the
Indenture would likely restrict payments to the holders of the New Notes. See
"Description of Notes -- Certain Covenants -- Change of Control" and "--
Certain Definitions."
LACK OF PUBLIC MARKET
The Old Notes are designated for trading in the PORTAL market. There is no
established trading market for the New Notes. The Company does not currently
intend to list the New Notes on any securities exchange or to seek approval for
quotation through any automated quotation system. Accordingly, there can be no
assurance as to the development of any market or the liquidity of any market
that may develop for the New Notes. If such a market were to exist, no
assurance can be given as to the trading prices of the New Notes, which will
depend on many factors, including, among other things, prevailing interest
rates, the Company's operating results and the market for similar securities.
The liquidity of, and trading market for, the New Notes may be adversely
affected by general declines in the market for similar securities. Such a
decline may adversely affect such liquidity and trading markets independent of
the financial performance of, and prospects for, the Company.
ADVERSE CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes were sold pursuant to an exemption from the registration
requirements of the Securities Act and their transfer is subject to certain
restrictions under the Securities Act. In general, Old Notes may not be
offered or sold unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. Holders of Old Notes who do not exchange
their Notes for New Notes pursuant to the Exchange Offer will continue to be
subject to such restrictions on transfer of the Old Notes. The Company
currently does not anticipate that it will register the Old Notes under the
Securities Act. To the extent that Old Notes are tendered and accepted in the
Exchange Offer, the trading market for untendered and tendered but unaccepted
Old Notes could be adversely affected. See "The Exchange Offer -- Consequences
of Failure to Exchange."
RISKS ASSOCIATED WITH EXCHANGE OFFER PROCEDURES
The New Notes will be issued in exchange for Old Notes only after timely
receipt by the Exchange Agent of such Old Notes, a properly completed and duly
executed Letter of Transmittal and all other required documents. Therefore,
holders of Old Notes desiring to tender such Old Notes in exchange for New
Notes should allow sufficient time to ensure timely delivery. Neither the
Exchange Agent nor the Company is under any duty to give notification of
defects or irregularities with respect to tenders of Old Notes for exchange.
Old Notes that are not tendered or are tendered but not accepted will,
following consummation of the Exchange Offer, continue to be subject to the
existing restrictions upon transfer thereof. In addition, any holder of Old
Notes who tenders in the Exchange Offer for the purpose of participating in a
distribution of the New Notes will be required to comply with the registration
and prospectus delivery requirements of the Securities Act in connection with
any resale transaction. Each broker-dealer that receives New Notes for its own
account in exchange for Old Notes, where the Old Notes were acquired by the
broker-dealer as a result of market-making or any other trading activities,
must acknowledge that it will deliver a prospectus in connection with any
resale of such New Notes. See "Plan of Distribution."
FRAUDULENT TRANSFER RISKS
Under fraudulent transfer law, if a court were to find in a lawsuit by an
unpaid creditor or representative of creditors of the Company or a Subsidiary
Guarantor, that the Company or a Subsidiary Guarantor received less than fair
consideration or reasonable equivalent value for incurring the indebtedness
represented by the New Notes, and, at the time of such incurrence, the Company
or the Subsidiary Guarantor (i) was insolvent or was rendered insolvent by
reason of such incurrence, (ii) was engaged or about to engage in a business or
transaction for which its remaining property constituted unreasonably small
capital or (iii) intended to incur, or believed it would incur, indebtedness
beyond its ability to pay as such indebtedness matures, such court could, among
other things, (a) void all or a portion of the Company's obligations to the
holders of New Notes and/or (b) subordinate the Company's or the Subsidiary
Guarantor's obligations to the holders of the New Notes to other existing and
future indebtedness of the Company
14
<PAGE> 15
or the Subsidiary Guarantor, the effect of which would be to entitle such other
creditors to be paid in full before any payment could be made on the New Notes.
The measure of insolvency for purposes of determining whether a transfer is
avoidable as a fraudulent transfer varies depending upon the law of the
jurisdiction which is being applied. Generally, however, a debtor would be
considered insolvent if the sum of all of its liabilities were greater than the
value of all of its property at a fair valuation or if the present fair salable
value of the debtor's assets were less than the amount required to repay its
probable liability on its indebtedness as it becomes absolute and matures.
There can be no assurance as to what standard a court would apply in order to
determine solvency. To the extent that proceeds from the sale of the Old Notes
were used to repay indebtedness under the Company's Senior Credit Facility (as
defined), a court may find that the Company or a Subsidiary Guarantor did not
receive fair consideration or reasonably equivalent value for the incurrence of
the indebtedness represented thereby.
The Indenture contains a savings clause which generally will limit the
obligations of any Subsidiary Guarantor under its Subsidiary Guarantee to the
maximum amount that will, after giving effect to all of the liabilities of such
Subsidiary Guarantor, result in such obligations not constituting a fraudulent
conveyance. To the extent any Subsidiary Guarantee was avoided or limited as a
fraudulent conveyance or held unenforceable for any other reason, holders of
the New Notes would cease to have any claim against such Subsidiary Guarantor
and would be creditors solely of HydroChem. In such event, the claims of
holders of the New Notes against such Subsidiary Guarantor would be subject to
the prior payment of all liabilities (including trade payables) of such
Subsidiary Guarantor. There can be no assurance that, after providing for all
prior claims, there would be sufficient assets to satisfy the claims of the
holders of the New Notes relating to any avoided portion of the Subsidiary
Guarantees.
On the basis of its historical financial information, its recent operating
history and other factors, the Company believes that, at the time of, and after
issuance of the Old Notes and the incurrence of indebtedness pursuant to the
New Credit Facility, each of the Company and the Subsidiary Guarantor was not
and will not be insolvent nor rendered insolvent thereby, had and will have
sufficient capital for the business in which it is engaged and did not and will
not have incurred indebtedness beyond its ability to pay such indebtedness as
it matures. There can be no assurance, however, that a court would necessarily
agree with these conclusions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
15
<PAGE> 16
THE EXCHANGE OFFER
PURPOSE AND EFFECT
The Old Notes were sold by the Company on August 4, 1997, in a private
placement pursuant to an exemption from registration under the Securities Act.
In connection with that private placement, the Company and the Subsidiary
Guarantor entered into the Registration Rights Agreement which requires that
the Company and the Subsidiary Guarantor file the registration statement of
which this Prospectus is a part (the "Registration Statement") under the
Securities Act with respect to the New Notes on or prior to 60 days after the
date of issuance of the Old Notes (the "Issue Date"). The Registration Rights
Agreement further requires that, upon the effectiveness of the Registration
Statement, the Company offer to the holders of the Old Notes the opportunity to
exchange their Old Notes for a like principal amount of New Notes, which will
be issued without a restrictive legend and may be reoffered and resold by the
holder without further registration under the Securities Act. The Company and
the Subsidiary Guarantor have agreed to use their reasonable best efforts to
cause the Registration Statement to be declared effective within 120 days
following the Issue Date and to consummate the Exchange Offer within 30 days
after the Registration Statement is declared effective by the Commission. A
copy of the Registration Rights Agreement has been filed as an exhibit to the
Registration Statement.
In order to participate in the Exchange Offer, a holder must represent to
the Company, among other things, that (i) any New Notes to be received by it
will be acquired in the ordinary course of its business, (ii) if the holder is
not a broker-dealer, that it is not engaged in, and does not intend to engage
in, the distribution of the New Notes and it has no arrangement with any person
to participate in the distribution of the New Notes and (iii) it is not an
"affiliate" (as defined in Rule 405 of the Securities Act) of the Company or
the Subsidiary Guarantor, or if it is an affiliate, it will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable. Each broker-dealer that receives New Notes for its own
account pursuant to the Exchange Offer should acknowledge that it acquired the
Old Notes for its own account as the result of market making activities or
other trading activities. Any holder who is unable to make the appropriate
representations to the Company will not be permitted to tender the Old Notes in
the Exchange Offer and will be required to comply with the registration and
prospectus delivery requirements of the Securities Act (or an appropriate
exemption therefrom) in connection with any sale or transfer of the Old Notes.
Based on an interpretation by the Commission's staff set forth in no-action
letters issued to third parties unrelated to the Company, the Company believes
that, with the exceptions discussed herein, New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by any person receiving the New Notes, whether or not
that person is the holder (other than any such holder or such other person that
is an "affiliate" of the Company or the Subsidiary Guarantor within the meaning
of Rule 405 under the Securities Act), without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that (i) the
New Notes are acquired in the ordinary course of business of that holder or
such other person, (ii) neither the holder nor such other person is engaging in
or intends to engage in a distribution (within the meaning of the Securities
Act) of the New Notes, and (iii) neither the holder nor such other person has
an arrangement or understanding with any person to participate in the
distribution of the New Notes. See "Plan of Distribution."
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes are designated for trading in the PORTAL market. To the
extent Old Notes are tendered and accepted in the Exchange Offer, the principal
amount of outstanding Old Notes will decrease with a resulting decrease in the
liquidity in the market therefor. Following the consummation of the Exchange
Offer, holders of Old Notes who were eligible to participate in the Exchange
Offer but who did not tender their Old Notes will not be entitled to certain
rights under the Registration Rights Agreement, and such Old Notes will
continue to be subject to certain restrictions on transfer. In general, the
Old Notes may not be offered or sold, unless registered under the Securities
Act and applicable state securities laws, except pursuant to an exemption from,
or in a transaction not subject to, the Securities Act and applicable state
securities laws. The Company does not intend to register the Old Notes under
the Securities Act and, after consummation of the Exchange Offer, will not be
obligated to do so.
16
<PAGE> 17
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. As soon as practicable after the Expiration Date, the
Company will issue $1,000 principal amount of New Notes in exchange for each
$1,000 principal amount of outstanding Old Notes accepted in the Exchange
Offer. Holders may tender some or all of their Old Notes pursuant to the
Exchange Offer. However, Old Notes may be tendered only in integral multiples
of $1,000 in principal amount.
The form and terms of the New Notes are identical to the form and terms of
the Old Notes except that the Old Notes were offered and sold in reliance upon
certain exemptions from registration under the Securities Act, while the
offering and sale of the New Notes in exchange for the Old Notes have been
registered under the Securities Act, with the result that the New Notes will
not bear any legends restricting their transfer. Also, holders of the New Notes
will not be entitled to certain rights under the Registration Rights Agreement.
The New Notes will evidence the same debt as the Old Notes and will be issued
pursuant to, and entitled to the benefits of, the Indenture.
As of the date of this Prospectus, $110,000,000 aggregate principal amount
of the Old Notes was outstanding and registered in the name of Cede & Co., as
nominee for the DTC. The Company has fixed the close of business on October 8,
1997, as the record date for the Exchange Offer for purposes of determining the
persons to whom this Prospectus, together with the Letter of Transmittal, will
initially be sent. Holders of Old Notes do not have any appraisal or
dissenters' rights under the General Corporation Law of the State of Delaware or
the Indenture in connection with the Exchange Offer. The Company intends to
conduct the Exchange Offer in accordance with the applicable requirements of the
Exchange Act and the rules and regulations of the Commission promulgated
thereunder, including Rule 14e-1 thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as, and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the New Notes from the Company. If any tendered
Old Notes are not accepted for exchange because of an invalid tender, the
occurrence of certain other events set forth herein or otherwise, the
certificates for such unaccepted Old Notes will be returned, without expense,
to the tendering holder thereof as promptly as practicable after the Expiration
Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than transfer taxes, in connection with the Exchange Offer. See "The
Exchange Offer -- Solicitation of Tenders; Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
Friday, November 7, 1997, unless the Company, in its sole discretion, extends
the Exchange Offer, in which case the term "Expiration Date" shall mean the
latest date and time to which the Exchange Offer is extended. In order to extend
the Exchange Offer, the Company will notify the Exchange Agent of any extension
by oral or written notice prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date. The Company
reserves the right, in its sole discretion, (i) to delay accepting any Old
Notes, to extend the Exchange Offer or, if any of the conditions set forth under
"The Exchange Offer -- Conditions" shall not have been satisfied, to terminate
the Exchange Offer, by giving oral or written notice of such delay, extension or
termination to the Exchange Agent, or (ii) to amend the terms of the Exchange
Offer in any manner. If the Exchange Offer is amended in a manner determined by
the Company to constitute a material change, the Company will promptly disclose
such amendment in a manner reasonably calculated to inform the holders of the
Old Notes of such amendment. Without limiting the manner in which the Company
may choose to make public announcements of any delay in acceptance, extension,
termination or amendment of the Exchange Offer, the Company shall have no
obligation to publish, advertise, or otherwise communicate any such public
announcement, other than by making a timely release to the Dow Jones News
Service.
17
<PAGE> 18
INTEREST ON THE NEW NOTES
The New Notes will bear interest from August 4, 1997, the date of issuance
of the Old Notes that are tendered for exchange of the New Notes (or the most
recent interest payment date to which interest on such Old Notes has been
paid). Accordingly, holders of Old Notes accepted for exchange will not
receive interest that is accrued but unpaid on the Old Notes at the time of
tender, but such interest will be payable on the first interest payment date
after the consummation of the Exchange Offer. Holders of Old Notes accepted
for exchange in the Exchange Offer will be deemed to have waived the right to
receive interest accrued but unpaid thereon as of the date of exchange.
Interest on the New Notes will be payable semi-annually on February 1 and
August 1 of each year, commencing February 1, 1998.
PROCEDURES FOR TENDERING
Only a registered holder of Old Notes may tender the Old Notes in the
Exchange Offer. Except as set forth under "The Exchange Offer -- Book Entry
Transfer," to tender in the Exchange Offer a holder must complete, sign and
date the Letter of Transmittal, or a copy thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver the Letter of Transmittal or copy to the Exchange Agent for receipt
prior to 5:00 p.m. on the Expiration Date. In addition, either (i) certificates
for such Old Notes must be received by the Exchange Agent along with the Letter
of Transmittal, (ii) a timely confirmation of a book-entry transfer (a
"Book-Entry Confirmation") of such Old Notes, if that procedure is available,
into the Exchange Agent's account at DTC (the "Book-Entry Transfer Facility")
pursuant to the procedure for book-entry transfer described below, must be
received by the Exchange Agent prior to the Expiration Date, or (iii) the
holder must comply with the guaranteed delivery procedures described below. To
be tendered effectively, the Old Notes, Letter of Transmittal and other
required documents must be received by the Exchange Agent at the address set
forth under "The Exchange Offer -- Exchange Agent" prior to 5:00 p.m. on the
Expiration Date.
The tender by a holder that is not withdrawn before the Expiration Date
will constitute an agreement between that holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE 5:00 P.M. ON THE
EXPIRATION DATE AND PROPER INSURANCE SHOULD BE OBTAINED. NO LETTER OF
TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST
THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES, OR
NOMINEES TO EFFECT THESE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company, or other nominee and who wishes
to tender should contact the registered holder promptly and instruct the
registered holder to tender on the beneficial owner's behalf. If the
beneficial owner wishes to tender on its own behalf, such owner must, prior to
completing and executing the Letter of Transmittal and delivering the owner's
Old Notes, either make appropriate arrangements to register ownership of the
Old Notes in the beneficial owner's name or obtain a properly completed bond
power from the registered holder. The transfer of registered ownership may take
considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined herein)
unless the Old Notes tendered pursuant thereto are tendered (i) by a registered
holder who has not completed the box titled "Special Registration Instructions"
or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. If signatures on a Letter of Transmittal or
a notice of withdrawal, as the case may be, are required to be guaranteed, the
guarantee must be by any eligible guarantor institution that is a member of or
participant in the Securities Transfer Agents Medallion Program, the New
18
<PAGE> 19
York Stock Exchange Medallion Signature Program or the Stock Exchange Medallion
Program (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by a properly completed bond power, signed by the
registered holder as that registered holder's name appears on the Old Notes
with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations, or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal unless waived by the Company.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Notes will be determined by
the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old
Notes not properly tendered or any Old Notes the Company's acceptance of which
would, in the opinion of counsel for the Company, be unlawful. The Company also
reserves the right to waive any defects, irregularities or conditions of tender
as to particular Old Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be cured
within such time as the Company shall determine. Although the Company intends
to notify holders of defects or irregularities with respect to tenders of Old
Notes, neither the Company, the Exchange Agent nor any other person shall incur
any liability for failure to give such notification. Tenders of Old Notes will
not be deemed to have been made until such defects or irregularities have been
cured or waived. Any Old Notes received by the Exchange Agent that the Company
determines are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion to
purchase or make offers for any Old Notes that remain outstanding after the
Expiration Date or, as set forth under "The Exchange Offer -- Conditions," to
terminate the Exchange Offer and, to the extent permitted by applicable law,
purchase Old Notes in the open market, in privately negotiated transactions or
otherwise. The terms of any such purchases or offers could differ from the
terms of the Exchange Offer.
By tendering, each holder will represent to the Company that, among other
things, (i) the New Notes acquired pursuant to the Exchange Offer are being
acquired in the ordinary course of business of the person receiving such New
Notes, whether or not such person is the holder, (ii) if it is not a
broker-dealer, neither the holder nor any such other person is engaging in or
intends to engage in a distribution of such New Notes nor has an arrangement or
understanding with any person to participate in the distribution of such New
Notes, and (iii) neither the holder nor any such other person is an "affiliate"
(as defined in Rule 405 of the Securities Act) of the Company or the Subsidiary
Guarantor. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities (other than Old Notes acquired directly from the Company), may
participate in the Exchange Offer but may be deemed an "underwriter" under the
Securities Act and, therefore, must acknowledge in the Letter of Transmittal
that it will deliver a prospectus in connection with any resale of such New
Notes. The Letter of Transmittal states that, by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. See "Plan of
Distribution."
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal (or, with respect to the DTC and its participants, electronic
instructions in which the tendering holder acknowledges its receipt of and
agreement to be bound by the Letter of Transmittal), and all other required
documents. If any tendered Old Notes are submitted for a greater
19
<PAGE> 20
principal amount than the holder desires to exchange, such unaccepted or
non-exchanged Old Notes will be returned without expense to the tendering
holder thereof (or, in the case of Old Notes tendered by book-entry transfer
into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant
to the book-entry transfer procedures described below, such non-exchanged Old
Notes will be credited to an account maintained with such Book-Entry Transfer
Facility) as promptly as practicable after the expiration of the Exchange
Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility system may make book-entry delivery of Old Notes being tendered by
causing the Book-Entry Transfer Facility to transfer such Old Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility in accordance with
such Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or copy thereof, with
any required signature guarantees and any other required documents, must, in
any case other than as set forth in the following paragraph, be transmitted to
and received by the Exchange Agent at the address set forth under "The Exchange
Offer -- Exchange Agent" on or prior to the Expiration Date or the guaranteed
delivery procedures described below must be complied with.
The DTC's Automated Tender Offer Program ("ATOP") is the only method of
processing exchange offers through the DTC. To accept the Exchange Offer
through ATOP, participants in the DTC must send electronic instructions to the
DTC through the DTC's communication system in lieu of sending a signed, hard
copy Letter of Transmittal. The DTC is obligated to communicate those
electronic instructions to the Exchange Agent. To tender Old Notes through
ATOP, the electronic instructions sent to the DTC and transmitted by the DTC to
the Exchange Agent must contain the character by which the participant
acknowledges its receipt of and agrees to be bound by the Letter of
Transmittal.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes
and the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) prior to the Expiration Date, the
Exchange Agent received from such Eligible Institution a properly completed and
duly executed Letter of Transmittal (or a facsimile thereof) and Notice of
Guaranteed Delivery, substantially in the form provided by the Company (by
telegram, telex, facsimile transmission, mail or hand delivery), setting forth
the name and address of the holder of Old Notes and the amount of Old Notes
tendered, stating that the tender is being made thereby and guaranteeing that
within three New York Stock Exchange ("NYSE") trading days after the date of
execution of the Notice of Guaranteed Delivery, the certificates for all
physically tendered Old Notes, in proper form for transfer, or a Book-Entry
Confirmation, as the case may be, and any other documents required by the
Letter of Transmittal will be deposited by the Eligible Institution with the
Exchange Agent, and (iii) the certificates for all physically tendered Old
Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case
may be, and all other documents required by the Letter of Transmittal, are
received by the Exchange Agent within three NYSE trading days after the date of
execution of the Notice of Guaranteed Delivery. Upon request to the Exchange
Agent, a Notice of Guaranteed Delivery will be sent to holders who wish to
tender their Old Notes according to the guaranteed delivery procedures set
forth above.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the Expiration Date.
For a withdrawal of a tender of Old Notes to be effective, a written or
(for DTC participants only) electronic ATOP transmission notice of withdrawal
must be received by the Exchange Agent at its address set forth herein prior
20
<PAGE> 21
to 5:00 p.m., New York City time, on the Expiration Date. Any such notice of
withdrawal must (i) specify the name of the person having deposited the Old
Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to be
withdrawn (including the certificate number or numbers and principal amount of
such Old Notes), (iii) be signed by the holder in the same manner as the
original signature on the Letter of Transmittal by which such Old Notes were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee with respect to the Old
Notes register the transfer of such Old Notes into the name of the person
withdrawing the tender, and (iv) specify the name in which any such Old Notes
are to be registered, if different from that of the Depositor. All questions as
to the validity, form and eligibility (including time of receipt) of such
notices will be determined by the Company, in its sole discretion, whose
determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for exchange for
purposes of the Exchange Offer. Any Old Notes which have been tendered for
exchange but which are not exchanged for any reason will be returned to the
holder thereof without cost to such holder as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Old Notes may be retendered by following one of the procedures
described under "The Exchange Offer -- Procedures for Tendering" at any time on
or prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange New Notes for, any Old Notes,
and may terminate the Exchange Offer as provided herein before the acceptance
of such Old Notes, if (i) the Exchange Offer shall violate applicable law or
any applicable interpretation of the staff of the Commission, (ii) any action
or proceeding is instituted or threatened in any court or by any governmental
agency that might materially impair the ability of the Company to proceed with
the Exchange Offer or any material adverse development has occurred in any
existing action or proceeding with respect to the Company, or (iii) any
governmental approval has not been obtained, which approval the Company shall
deem necessary for the consummation of the Exchange Offer. If the Company
determines in its sole discretion that any of the conditions are not satisfied,
the Company may (i) refuse to accept any Old Notes and return all tendered Old
Notes to the tendering holders (or, in the case of Old Notes tendered by
book-entry transfer into the Exchange Agent's account at the Book-Entry
Transfer Facility pursuant to the book-entry transfer procedures described
above, such Old Notes will be credited to an account maintained with such
Book-Entry Transfer Facility), (ii) extend the Exchange Offer and retain all
Old Notes tendered prior to the expiration of the Exchange Offer, subject,
however, to the rights of holders to withdraw such Old Notes (see "--
Withdrawal Rights") or (iii) waive such unsatisfied conditions with respect to
the Exchange Offer and accept all properly tendered Old Notes which have not
been withdrawn. If such waiver constitutes a material change to the Exchange
Offer, the Company will promptly disclose such waiver by means of a prospectus
supplement that will be distributed to the registered holders, and the Company
will extend the Exchange Offer for a period of five to ten business days,
depending upon the significance of the waiver and the manner of disclosure to
the registered holders, if the Exchange Offer would otherwise expire during
such five-to-ten-business-day period.
EXCHANGE AGENT
All executed Letters of Transmittal should be directed to the Exchange
Agent. Norwest Bank, Minnesota, N.A. has been appointed as Exchange Agent for
the Exchange Offer. Questions, requests for assistance and requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent addressed as follows:
By Registered or Certified Mail:
Norwest Bank Minnesota, National Association
Corporate Trust Operations
P. O. Box 1517
Minneapolis, MN 55480-1517
21
<PAGE> 22
By Overnight Courier:
Norwest Bank Minnesota, National Association
Corporate Trust Operations
Norwest Center
Sixth and Marquette
Minneapolis, MN 55479-0069
By Hand:
Norwest Bank Minnesota, National Association
Corporate Trust Operations
Northstar East, 12th Floor
608 2nd Avenue
Minneapolis, MN 55479-0113
By Facsimile:
Norwest Bank Minnesota, National Association
Corporate Trust Operations
(612) 667-4927
Confirm by Telephone: (612) 667-9764
SOLICITATIONS OF TENDERS; FEES AND EXPENSES
The expenses of soliciting acceptances to the Exchange Offer will be borne
by the Company. The principal solicitation is being made by mail; however,
additional solicitations may be made in person or by telephone by officers and
employees of the Company. The Company has not retained any dealer-manager or
similar agent in connection with the Exchange Offer and will not make any
payments to brokers, dealers or others soliciting acceptances of the Exchange
Offer. The Company, however, will pay the Exchange Agent reasonable and
customary fees for its services and will reimburse it for its reasonable
out-of-pocket expenses in connection therewith. Other cash expenses to be
incurred in connection with the Exchange Offer and to be paid by the Company
include registration, accounting and legal fees and printing costs, among
others.
ACCOUNTING TREATMENT
For accounting purposes, the Company will recognize no gain or loss as a
result of the Exchange Offer. The expenses of the Exchange Offer will be
amortized over the term of the New Notes.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith, except that holders who
instruct the Company to register New Notes in the name of, or request that Old
Notes not tendered or not accepted in the Exchange Offer be returned to, a
person other than the registered tendering holder will be responsible for the
payment of any applicable transfer tax thereon.
22
<PAGE> 23
THE COMPANY
Hydro Environmental Services Limited Partnership was formed in 1990 by an
investor group including B. Tom Carter, Jr., the Company's Chairman, CEO and
President, to acquire an industrial cleaning business that had been operating
since 1961. HydroChem was formed in September 1993 for the purpose of
combining, in December 1993, the business and operations of Hydro Services with
the Dowell Industrial Services division of Dowell Schlumberger Inc., a business
founded in 1938 and engaged in providing industrial cleaning services. In
January 1995, the Company acquired the business of Halliburton Industrial
Services, a business founded in 1962 and a division of Brown & Root Industrial
Services, Inc., which was also engaged in providing industrial cleaning
services. The Company is a wholly-owned subsidiary of HydroChem Holding, Inc.,
which is owned by Citicorp Venture Capital, Ltd., management of the Company,
LKCM Venture Partners I Ltd., BT Capital Partners, Inc. and other investors.
Parent's sole assets are all the outstanding shares of stock of the
Company. Unless the context indicates otherwise, references to the "Company" or
"HydroChem" include HydroChem Industrial Services, Inc. and its wholly-owned
subsidiary, HydroChem International, Inc., a Subsidiary Guarantor of the Notes.
HydroChem Industrial Services, Inc. was incorporated in 1993 under the laws of
the State of Delaware. HydroChem's principal executive office is located at
6210 Rothway, Houston, Texas 77040, and its telephone number at that address is
(713) 462-2130.
USE OF PROCEEDS
There will be no cash proceeds to the Company from the Exchange Offer.
The Company used the $110.0 million of the gross proceeds from sale of the
Old Notes (i) to repay in full the Company's outstanding indebtedness,
including accrued interest and fees, of $45.7 million under a credit facility
with a financial institution which included a revolving loan and term loans
(the "Senior Credit Facility"), (ii) to repay in full the Company's outstanding
indebtedness, including a prepayment premium and accrued interest, of $18.7
million under a Senior Subordinated Credit Agreement in the principal amount of
$18.0 million (the "Senior Subordinated Debt"), (iii) to fund a dividend to
Parent of $8.5 million which was used by Parent to discharge accrued interest
on its indebtedness and accrued dividends on its preferred stock, and (iv) to
pay fees and expenses associated with sale of the Old Notes of $3.3 million.
The remaining $33.8 million of gross proceeds from the sale of the Old Notes
will be used for general corporate purposes, including expanding the Company's
industrial vacuuming and other business lines through expenditures for property
and equipment, increasing the Company's marketing and sales efforts and
potentially funding acquisitions. The Company continually evaluates possible
acquisitions but has no present understanding, commitments or agreements
relating thereto.
The Senior Credit Facility included a revolving loan, a term loan A and a
term loan B. The revolving loan and term loan A bore interest at prime plus
1.5% per annum or LIBOR plus 3.25% per annum. The revolving loan allowed for
borrowings of up to $26.0 million based on a borrowing base, as defined, and
was to mature on January 10, 2000. Term loan A principal was due in specified
quarterly payments through maturity on January 1, 2000. Term loan B bore
interest at prime plus 2.0% per annum or LIBOR plus 3.75% per annum and
principal was due in specified quarterly payments beginning April 1, 2000,
through maturity on July 1, 2002. The Senior Subordinated Debt bore interest
at 12.0% per annum and required a principal payment of $9.0 million on July 1,
2003, and a final payment of $9.0 million on July 1, 2004.
23
<PAGE> 24
CAPITALIZATION
The following table sets forth the historical consolidated capitalization
of the Company at June 30, 1997, as adjusted to give effect to (i) the issuance
of the Old Notes and the exchange of Old Notes for New Notes, (ii) the
application of the net proceeds from the sale of the Old Notes, and (iii) the
write-off of the unamortized balance of deferred financing costs relating to
the Senior Credit Facility and the Senior Subordinated Debt which were
discharged using a portion of the net proceeds of the Offering. The table
should be read in conjunction with "Use of Proceeds," "Pro Forma Consolidated
Financial Statements," "Selected Historical Consolidated Financial Data," and
the Consolidated Financial Statements of the Company and the Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT JUNE 30, 1997
--------------------
AS
ACTUAL ADJUSTED
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents ................................................. $ 1,458 $ 32,114
======= ========
Long-term debt (including current maturities):
Senior Credit Facility .................................................. $47,582 $ --
Senior Subordinated Debt ................................................ 18,000 --
Notes ................................................................... -- 110,000
------- --------
Total long-term debt ............................................ 65,582 110,000
Stockholder's equity:
Common stock, $.01 par value:
1,000 shares authorized, 100 shares outstanding ...................... 1 1
Additional paid-in-capital .............................................. 19,670 16,924
Retained earnings ....................................................... 7,846 --
------- --------
Total stockholder's equity ...................................... 27,517 16,925
------- --------
Total capitalization ............................................ $93,099 $126,925
======= ========
</TABLE>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited Pro Forma Consolidated Financial Statements are
derived from the Company's unaudited consolidated financial statements as of
and for the six months ended June 30, 1997, and the historical consolidated
financial statements for the year ended December 31, 1996, included elsewhere
in this Prospectus. The pro forma information gives effect to (i) the issuance
of the Old Notes and the exchange of Old Notes for New Notes, (ii) the
application of the net proceeds from the sale of the Old Notes and (iii) the
write-off of the unamortized balance of deferred financing costs relating to
the Senior Credit Facility and Senior Subordinated Debt which were discharged
using a portion of the net proceeds from the sale of the Old Notes.
The unaudited pro forma consolidated balance sheet gives effect to the
Offering and the application of proceeds therefrom as if such transactions had
occurred on June 30, 1997. The unaudited pro forma consolidated statements of
operations give effect to the Offering and the application of proceeds
therefrom as if such transactions had occurred on January 1, 1996. The pro
forma adjustments are based upon available information and certain assumptions
which the Company's management believes are reasonable. The unaudited pro forma
financial data does not purport to represent what the Company's results of
operations or financial position would actually have been had the Offering in
fact occurred at such prior times or to project the Company's results of
operations or financial position for or at any future period or date.
The unaudited Pro Forma Consolidated Financial Statements should be read in
conjunction with "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations"and the Company's Consolidated
Financial Statements and the Notes thereto included elsewhere in this
Prospectus.
24
<PAGE> 25
HYDROCHEM INDUSTRIAL SERVICES, INC. AND SUBSIDIARY
PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . $1,458 $106,700 (a) $32,114
(65,582) (b)
(1,666) (c)
(540) (d)
(8,256) (e)
Receivables, net . . . . . . . . . . . . . . . . . . . . 27,220 27,220
Inventories . . . . . . . . . . . . . . . . . . . . . . . 3,621 3,621
Prepaid expenses and other current assets . . . . . . . . 1,938 1,938
Deferred income taxes . . . . . . . . . . . . . . . . . . 1,823 1,823
-------- --------
Total current assets . . . . . . . . . . . . . . 36,060 30,656 66,716
Property and equipment, at cost . . . . . . . . . . . . . . 57,065 57,065
Accumulated depreciation . . . . . . . . . . . . . . . . . (20,882) (20,882)
-------- --------
36,183 -- 36,183
Intangible assets, net . . . . . . . . . . . . . . . . . . 45,516 3,300 (a) 45,589
(3,227) (f)
-------- ------- --------
Total assets . . . . . . . . . . . . . . . . . . $117,759 $30,729 $148,488
======== ======= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . $6,296 $ $ 6,296
Income taxes payable . . . . . . . . . . . . . . . . . . 795 795
Accrued liabilities . . . . . . . . . . . . . . . . . . . 9,507 (1,666) (c) 7,841
Current portion of long-term debt . . . . . . . . . . . . 5,250 (5,250 (b) --
-------- ------- --------
Total current liabilities . . . . . . . . . . . . 21,848 (6,916) 14,932
Long-term debt . . . . . . . . . . . . . . . . . . . . . . 60,332 (60,332) (b) --
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 110,000 (a) 110,000
Deferred income taxes . . . . . . . . . . . . . . . . . . . 8,062 (205) (d) 6,631
(1,226) (f)
Stockholder's equity:
Common stock, $.01 par value:
1,000 shares authorized, 100 shares outstanding . . . 1 1
Additional paid-in capital . . . . . . . . . . . . . . . 19,670 (2,746) (e) 16,924
Retained earnings . . . . . . . . . . . . . . . . . . . . 7,846 (335) (d) --
(5,510) (e)
(2,001) (f)
-------- ------- --------
Total stockholder's equity . . . . . . . . . . . 27,517 (10,592) 16,925
-------- ------- --------
Total liabilities and stockholder's equity . . . $117,759 $30,729 $148,488
======== ======= ========
</TABLE>
See accompanying notes.
25
<PAGE> 26
HYDROCHEM INDUSTRIAL SERVICES, INC. AND SUBSIDIARY
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $80,714 $ $80,714
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,790 47,790
------- -------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,924 -- 32,924
Selling, general and administrative expense . . . . . . . . . . . . . . 21,161 21,161
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,889 3,889
------- -------
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,874 -- 7,874
Other (income) expense:
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . 3,787 2,211 (g) 5,871
(292)(h)
165 (i)
Other expense, net . . . . . . . . . . . . . . . . . . . . . . . . . 23 23
Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . 779 779
------- -------
Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 3,285 (2,084) 1,201
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . 1,538 (792)(j) 746
------- ------- -------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,747 $(1,292) $ 455
======= ======= =======
</TABLE>
See accompanying notes.
26
<PAGE> 27
HYDROCHEM INDUSTRIAL SERVICES, INC. AND SUBSIDIARY
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $156,003 $ $156,003
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,373 94,373
-------- --------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,630 -- 61,630
Selling, general and administrative expense . . . . . . . . . . . . . . 42,103 42,103
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,765 7,765
-------- --------
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,762 -- 11,762
Other (income) expense:
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . 7,920 4,077 (g) 11,743
(584)(h)
330 (i)
Special charge . . . . . . . . . . . . . . . . . . . . . . . . . . . 511 511
Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . (21) (21)
Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . 1,523 1,523
-------- --------
Income (loss) before taxes . . . . . . . . . . . . . . . . . . . . . . 1,829 (3,823) (1,994)
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . 1,284 (1,453)(j) (169)
-------- ------- --------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . $ 545 $(2,370) $ (1,825)
======== ======= ========
</TABLE>
See accompanying notes.
27
<PAGE> 28
HYDROCHEM INDUSTRIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Adjustments have been made to the accompanying unaudited Pro Forma
Consolidated Balance Sheet as of June 30, 1997 and the unaudited Pro Forma
Consolidated Statements of Operations for the six months ended June 30, 1997
and the year ended December 31, 1996 to reflect the following:
(a) The Offering of the Old Notes and the net proceeds received therefrom,
after deduction and capitalization of discounts, commissions, fees and
other related expenses.
(b) The repayment in full of all outstanding debt of the Company pursuant
to its Senior Credit Facility and its Senior Subordinated Debt.
(c) The payment of all accrued interest and fees related to the Senior
Credit Facility and Senior Subordinated Debt.
(d) The payment of a prepayment premium related to the Senior Subordinated
Debt.
(e) The dividend to Parent which was used to discharge interest and
dividends accrued on Parent's securities.
(f) The write-off of the unamortized balance of deferred financing costs
relating to the Senior Credit Facility and Senior Subordinated Debt
which were discharged with a portion of the net proceeds of the
Offering.
(g) Interest expense from the issuance of the Notes, net of the
elimination of interest expense on the Senior Credit Facility and
Senior Subordinated Debt.
(h) The reduction in interest expense related to the write-off of the
unamortized balance of deferred financing costs relating to the Senior
Credit Facility and Senior Subordinated Debt which were discharged
with a portion of the net proceeds of the Offering.
(i) Interest expense for the amortization of estimated deferred financing
costs in connection with the issuance of the Notes.
(j) To adjust the income tax provision related to the pro forma
adjustments.
28
<PAGE> 29
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data of the
Company as of December 31, 1992, and for the year ended December 31, 1992, and
the period from January 1, 1993, to December 14, 1993, have been derived from
the audited financial statements of Hydro Services, a predecessor to the
Company's business and operations. The selected historical consolidated
financial data of the Company as of and for the period from December 15, 1993,
to December 31, 1993, and for each of the years ended December 31, 1994, 1995
and 1996, have been derived from the Company's audited consolidated financial
statements. The selected historical consolidated financial data of the Company
as of June 30, 1997, and for the six months ended June 30, 1996 and 1997, have
been derived from the Company's unaudited consolidated financial statements.
The Company's unaudited consolidated financial statements include all
adjustments, consisting of normal recurring accruals, that the Company's
management considers necessary for a fair presentation of such data. The
results of operations for any interim period are not necessarily indicative of
results of operations for the fiscal year. The selected historical consolidated
financial data set forth below should be read in conjunction with "The
Company," "Pro Forma Consolidated Financial Statements," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
with the Company's Consolidated Financial Statements and the Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------------------------- -------------------
1992(1) 1993(1) 1994 1995 1996 1996 1997
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue ........................... $27,121 $32,529 $101,103 $156,484 $156,003 $79,201 $80,714
Gross profit ...................... 10,904 12,041 36,521 61,855 61,630 31,325 32,924
SG&A expense ...................... 6,394 6,881 20,504 39,465 42,103 20,184 21,161
Depreciation ...................... 1,049 1,616 3,930 6,752 7,765 3,712 3,889
Operating income .................. 3,356 3,497 12,087 15,638 11,762 7,429 7,874
Interest expense, net ............. 1,613 1,822 5,605 8,693 7,920 4,038 3,787
Amortization of intangibles ....... 468 493 1,151 1,407 1,523 762 779
Income before taxes ............... 1,134 532 5,409 5,903 1,829 2,777 3,285
Net income ........................ na(1) na(1) 2,950 2,851 545 828 1,747
OTHER FINANCIAL DATA:
Gross margin ...................... 40.2% 37.0% 36.1% 39.5% 39.5% 39.6% 40.8%
EBITDA(2) ......................... $ 4,405 $ 5,113 $ 16,017 $ 22,390 $ 19,527 $11,141 $11,763
EBITDA margin(3) .................. 16.2% 15.7% 15.8% 14.3% 12.5% 14.1% 14.6%
Capital expenditures .............. $ 1,869 $ 3,047 $ 5,576 $ 8,493 $ 6,829 $ 3,245 $ 2,847
Ratio of earnings before taxes to
fixed charges(4) ................ 1.6x 1.2x 1.9x 1.6x 1.2x 1.6x 1.7x
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, JUNE 30,
----------------------------------------------------- 1997
1992(1) 1993 1994 1995 1996 --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ................. $ 983 $ 4,292 $ 2,529 $ 1,088 $ 671 $ 1,458
Working capital ........................... 3,747 10,458 10,170 17,961 13,216 14,212
Total assets .............................. 19,032 83,519 87,146 121,216 115,522 117,759
Total long-term debt, including current
maturities .............................. 12,884 57,000 52,739 76,894 68,325 65,582
Stockholder's equity ...................... na(1) 14,737 17,687 25,225 25,770 27,517
</TABLE>
- ----------
(1) Results for the years ended December 31, 1992 and 1993, were derived from
(i) the audited financial statements of Hydro Services, a predecessor to
the Company's business and operations, for the year ended December 31,
1992, and the period from January 1, 1993, to December 14, 1993, and (ii)
the Company's audited financial statements for the period from December 15,
1993, to December 31, 1993. Operations for 1993 have been combined for
purposes of this presentation. Because Hydro Services was reported on a
limited partnership basis, net income is not available on a comparable
basis. See "The Company."
29
<PAGE> 30
(2) EBITDA for any relevant period presented above represents net income plus
interest expense, income taxes, depreciation, amortization, and other
income and expenses (including a special charge of $511,000 in 1996)
reflected in the determination of net income. EBITDA should not be
construed as a substitute for operating income, as an indicator of
liquidity or as a substitute for net cash provided by operating activities,
which are determined in accordance with generally accepted accounting
principles. EBITDA is included because management believes that certain
investors may find it to be a useful tool for analyzing operating
performance, leverage, liquidity, and a company's ability to service debt.
See "Pro Forma Consolidated Financial Statements" and the Company's
Consolidated Financial Statements and the Notes thereto included elsewhere
in this Prospectus.
(3) EBITDA margin for any relevant period reflects EBITDA divided by revenue.
(4) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings before income taxes, plus fixed charges.
Fixed charges consist of interest expense on all indebtedness, amortization
of deferred financing costs, and the portion of rental expense on operating
leases which represents that portion deemed by the Company to be
attributable to interest.
30
<PAGE> 31
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Historical Consolidated Financial Data, the Company's Consolidated Financial
Statements and the Notes thereto, and the other financial and operating
information included elsewhere in this Prospectus. This Prospectus contains, in
addition to historical information, forward-looking statements that include
risks and uncertainties. The Company's actual results may differ materially
from the results discussed in the forward-looking statements. Factors that
might cause such a difference include those discussed below, as well as those
discussed elsewhere in this Prospectus. The Company undertakes no obligation to
release publicly the result of any revisions to these forward-looking
statements that may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
OVERVIEW
The Company is a leading provider of industrial cleaning services to a wide
range of processing industries, including petrochemical plants, oil refineries,
electric utilities, pulp and paper mills, rubber plants and aluminum plants.
This type of work is typically recurring maintenance to improve or sustain the
operating efficiencies and extend the useful lives of process equipment and
facilities. Services provided include hydroblasting, chemical cleaning,
industrial vacuuming, waste minimization, commissioning and other specialized
services. In 1996, 44.5% of the Company's revenue was derived from
hydroblasting, 40.2% from chemical cleaning, 7.4% from industrial vacuuming and
7.9% from other services. Also, in 1996, 45.8% of HydroChem's revenue came from
petrochemical plants, 16.9% from oil refineries, 14.3% from electric utilities,
8.3% from pulp and paper mills and 14.7% from other industries. Customers are
generally billed on a monthly basis.
Approximately 40% of the Company's 1996 revenue was derived from its 15
largest customers, all of which are Fortune 500 companies, and approximately
60% was derived from its 40 largest customers, 34 of which are Fortune 500
companies. Over 90% of the Company's 1996 revenue was derived from customers
for which it had previously worked. The Company estimates that approximately
two-thirds of its revenue is pursuant to master service agreements with its
customers. Although these agreements typically cover multi-year periods,
most of these contracts can be terminated by the customer upon notice to the
Company.
Cost of revenue primarily consists of direct costs for employee
compensation and benefits, contract labor, travel, equipment, supplies,
chemicals, site services and insurance. In 1996, 44.5% of these costs related
to employee compensation and benefits.
Selling, general and administrative ("SG&A") expense includes employee
compensation and benefits, travel, facilities, supplies, insurance,
advertising, training, professional fees and doubtful accounts expense. In
1996, 56.7% of these expenses related to employee compensation and benefits.
Depreciation and amortization charges result primarily from the
capital-intensive nature of the industrial cleaning industry and the
acquisitions the Company has completed. The principal components of
depreciation relate to vehicles, hydroblasting pumps and chemical pumps and
circulators. Amortization relates to goodwill, customer lists and other
intangibles. In 1993, the Company purchased substantially all of the assets and
assumed certain liabilities of the Dowell Industrial Services division of
Dowell Schlumberger Incorporated and merged with Hydro Environmental Services
Limited Partnership. In 1995, the Company purchased substantially all of the
assets and assumed certain liabilities of Halliburton Industrial Services, a
division of Brown & Root Industrial Services, Inc. The Company accounted for
all of the above transactions under the purchase method. Because the purchase
price of acquired assets exceeded their fair value, the Company recorded
significant amounts of goodwill and other intangibles. As a result, the Company
has incurred significant levels of amortization.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information
derived from the Company's consolidated statements of operations, expressed as
a percentage of revenue. There can be no assurance that the trends in operating
results will continue in the future.
31
<PAGE> 32
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------ ------------------
1994 1995 1996 1996 1997
<S> <C> <C> <C> <C> <C>
Revenue ........................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue ................... 63.9 60.5 60.5 60.4 59.2
------ ------ ------ ------ ------
Gross profit ................. 36.1 39.5 39.5 39.6 40.8
SG&A expense ...................... 20.3 25.2 27.0 25.5 26.2
Depreciation ...................... 3.8 4.3 5.0 4.7 4.8
------ ------ ------ ------ ------
Operating income ............. 12.0 10.0 7.5 9.4 9.8
Other (income) expense:
Interest expense, net ........... 5.6 5.5 5.0 5.1 4.7
Special charge .................. -- -- 0.3 -- --
Other income, net ............... (0.1) (0.2) -- (0.2) --
Amortization of intangibles ..... 1.2 0.9 1.0 1.0 1.0
------ ------ ------ ------ ------
Income before taxes .......... 5.3 3.8 1.2 3.5 4.1
Income tax provision .............. 2.4 2.0 0.9 2.5 1.9
------ ------ ------ ------ ------
Net income ................... 2.9% 1.8% 0.3% 1.0% 2.2%
====== ====== ====== ====== ======
EBITDA ............................ 15.8% 14.3% 12.5% 14.1% 14.6%
</TABLE>
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Revenue. Revenue increased from $79.2 million in the first six months of
1996 to $80.7 million in the first six months of 1997, an increase of $1.5
million, or 1.9%. Hydroblasting revenue increased $3.9 million, or 11.1%, while
chemical cleaning revenue decreased $3.5 million, or 10.9%, from the first six
months of 1996 compared to the first six months of 1997. Industrial vacuuming
revenue increased $2.2 million, or 38.7%, while revenue from all other services
decreased $1.1 million, or 17.1%, for the same period. The increase in
hydroblasting revenue principally resulted from a few large projects completed
early in the year. The decrease in chemical cleaning revenue was primarily
caused by a delayed spring electric utility boiler cleaning season, normally
concentrated in the months of March through May. Growth in industrial vacuuming
revenue resulted from increased customer demand for services provided by vacuum
trucks placed in service in 1996. The decrease in other services was
principally the result of reduced activity with one customer.
Gross profit. The Company's cost of revenue decreased $86,000, or 0.2% to
$47.8 million in the first six months of 1997 from $47.9 million in the first
six months of 1996. Gross profit increased $1.6 million, or 5.1%, to $32.9
million in the first six months of 1997 from $31.3 million in the year earlier
period. As a result of the revenue increases described above and slightly
decreased cost of revenue, gross profit margins increased to 40.8% from 39.6%.
SG&A expense. SG&A expense in the six months ended June 30, 1997, increased
$977,000, or 4.8%, to $21.2 million from $20.2 million in the year earlier
period. This increase primarily resulted from increases in employee
compensation and benefits expense. SG&A expense was 26.2% and 25.5% of revenue
for the first six months of 1997 and 1996, respectively.
EBITDA. Increased gross profit, partially offset by increased SG&A
expense, resulted in a $622,000, or 5.6%, increase in EBITDA to $11.8 million
from $11.1 million in the year earlier period. As a percentage of revenue,
EBITDA was 14.6%, which was up from 14.1% in the prior year period.
Depreciation. Depreciation expense increased $177,000 to $3.9 million in
the first six months of 1997 from $3.7 million in the first six months of 1996.
Operating income. Operating income increased $445,000 to $7.9 million in
the first six months of 1997 from $7.4 million in the first six months of 1996.
Operating income was 9.8% of revenue in the first six months of 1997 and 9.4%
in the first six months of 1996.
Interest expense. Interest expense decreased $251,000, or 6.2%, to $3.8
million from $4.0 million. Reduced interest expense resulted from (i) lower
revolving loan balances due to cumulative increases in net cash provided by
operating activities and (ii) lower term loan balances following $3.9 million
in principal payments since June 30, 1996.
32
<PAGE> 33
Amortization. Amortization expense of $779,000 was relatively unchanged
from $762,000 in the prior year's comparable period.
Income before taxes. Income before taxes increased $508,000, or 18.3%, to
$3.3 million in the first six months of 1997 from $2.8 million in the
comparable 1996 period.
Income tax provision. The effective tax rate decreased to 46.8% of income
before taxes in the first six months of 1997 from 70.2% in the year earlier
period. This decrease principally resulted from higher projected income before
taxes in the year ending December 31, 1997 than was realized in the year ended
December 31, 1996, and comparable amounts of expense projected for 1997 and
incurred in 1996 but not deductible for income tax purposes.
Net income. Net income increased $919,000, or 111.0%, to $1.7 million in
the first six months of 1997 from $828,000 in the first six months of 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenue. Revenue decreased from $156.5 million in the year ended December
31, 1995, to $156.0 million in the year ended December 31, 1996, a decrease of
$481,000, or 0.3%. The decrease in 1996 revenue principally resulted from
reduced services to three large customers. Revenue from other customers,
excluding these three large customers, increased $8.8 million, or 6.9%, in 1996
as compared to 1995. Revenue from the Company's 40 largest customers, excluding
the three large customers referenced above, increased $11.8 million, or 19.2%,
in 1996, as compared to 1995. Revenue from one of the three large customers
cited above declined $4.0 million in 1996 as the customer evaluated alternative
industrial cleaning vendors prior to entering into a managed services
arrangement with the Company on March 1, 1997. Pursuant to this arrangement,
HydroChem became the sole provider of industrial cleaning services for this
customer's five largest production facilities. As a result of this new
arrangement, the Company expects 1997 revenue from this customer to be
comparable to or greater than 1995 levels.
During 1996, hydroblasting revenue decreased $1.1 million, or 1.5%,
primarily as a result of the customer revenue declines with two of the three
large customers discussed above. Chemical cleaning revenue increased $1.3
million, or 2.1%, during 1996, principally due to the Company's expansion of
this service offering in certain geographic regions. During 1996, industrial
vacuuming revenue increased $3.4 million, or 41.6%, as the Company
significantly increased its fleet of vacuum trucks by leasing 25 additional
vehicles. Revenue from all other services decreased $4.1 million, or 24.9%,
during 1996. The decrease in other services was principally the result of
reduced activity with one large customer.
Gross profit. The Company's cost of revenue was $94.4 million in 1996, down
$256,000, or 0.3%, from $94.6 million in 1995. Gross profit decreased $225,000,
or 0.4%, to $61.6 million in 1996 from $61.9 million in 1995. Gross profit
margins were unchanged at 39.5% for both years.
SG&A expense. SG&A expense increased $2.6 million, or 6.7%, to $42.1
million in 1996 from $39.5 million in 1995. This primarily resulted from
increases in (i) insurance costs, (ii) travel, communications, vehicle and
facilities costs associated with new branch locations and implementation of the
Company's customer alliance strategy, and (iii) property taxes related to
increased amounts of property and equipment. SG&A expense was 27.0% and 25.2%
of revenue for 1996 and 1995, respectively.
EBITDA. The combination of decreased gross profit and increased SG&A
expense resulted in a $2.9 million, or 12.8%, decline in EBITDA to $19.5
million in 1996 from $22.4 million in 1995. As a percentage of revenue, EBITDA
was 12.5% in 1996, down from 14.3% in 1995.
Depreciation. Depreciation expense was $7.8 million in 1996, up $1.0
million, or 15.0%, from $6.8 million in 1995. The increase in depreciation
expense resulted from productive assets placed in service in 1995 and 1996. See
"Liquidity and Capital Resources."
Operating income. Operating income declined $3.9 million, or 24.8%, to
$11.8 million in 1996 from $15.6 million in 1995. Operating income was 7.5% and
10.0% of revenue in 1996 and 1995, respectively.
33
<PAGE> 34
Interest expense. Interest expense decreased $773,000, or 8.9%, to $7.9
million in 1996 from $8.7 million in 1995. Reduced 1996 interest expense
resulted from (i) lower revolving loan balances due to cumulative increases in
net cash provided by operating activities, and (ii) lower term loan balances
following $3.3 million and $2.5 million in principal payments in 1996 and 1995,
respectively.
Special charge. In 1996, the Company incurred approximately $511,000 of
expenses relating to merger negotiations between the Company and a
publicly-traded company, which were terminated prior to consummating the
merger.
Amortization. Amortization expense of $1.5 million in 1996 increased
$116,000, or 8.2%, from $1.4 million in 1995. The increase resulted from the
amortization of acquisition costs incurred in 1995.
Income before taxes. Income before taxes decreased $4.1 million, or 69.0%,
to $1.8 million in 1996 from $5.9 million in 1995.
Income tax provision. The effective tax rate in 1996 increased to 70.2%
from 51.7% in 1995. This increase principally resulted from lower income before
taxes in 1996, and comparable amounts of expense in both periods which was not
deductible for income tax purposes.
Net income. Net income decreased $2.3 million, or 80.9%, to $545,000 in
1996 from $2.9 million in 1995.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenue. Revenue increased from $101.1 million in the year ended December
31, 1994, to $156.5 million in the year ended December 31, 1995, an increase of
$55.4 million, or 54.8%. Approximately 74% of the increase in 1995 revenue
resulted from the HIS operations acquired by the Company in January 1995. The
remaining increase principally resulted from the expansion of the Company's
services to existing customers, the completion of several large projects and
the initiation of the Company's first alliance relationship.
Gross profit. The Company's cost of revenue increased $30.0 million, or
46.5%, in 1995 to $94.6 million from $64.6 million in 1994. Gross profit
increased $25.3 million, or 69.4%, to $61.9 million in 1995 from $36.5 million
in 1994. Gross profit margin increased from 36.1% to 39.5%. Approximately 89%
of the increase in cost of revenue and 55% of the increase in gross profit
resulted from the acquired operations of HIS. During the integration of the
acquired HIS operations into HydroChem, gross profit margins were not as high
as the gross profit margins of other HydroChem operations.
SG&A expense. SG&A expense increased $19.0 million, or 92.5%, to $39.5
million in 1995 from $20.5 million in 1994. Approximately 36% of the increase
in SG&A expense resulted from the field operations acquired from HIS, excluding
additional increases in corporate and administrative expenses necessary to
support these operations as well as the Company's other growing business
operations. SG&A expense was 25.2% and 20.3% of revenue for 1995 and 1994,
respectively.
EBITDA. Increased gross profit, partially offset by increased SG&A expense,
resulted in a $6.4 million, or 39.8%, increase in EBITDA to $22.4 million in
1995 from $16.0 million in 1994. As a percentage of revenue, EBITDA was 14.3%
in 1995, down from 15.8% in 1994.
Depreciation. Depreciation expense was $6.8 million in 1995, up $2.8
million, or 71.8%, from $3.9 million in 1994. Approximately 79% of the
increase in depreciation expense resulted from the HIS assets acquired in
January 1995 with the remainder resulting from expenditures for property and
equipment in 1995 to support the expansion of the Company's services.
Operating income. Operating income increased $3.6 million, or 29.4%, to
$15.6 million in 1995 from $12.1 million in 1994. Operating income was 10.0%
and 11.9% of revenue in 1995 and 1994, respectively.
34
<PAGE> 35
Interest expense. Interest expense increased $3.1 million, or 55.1%, to
$8.7 million in 1995 from $5.6 million in 1994. Approximately $2.5 million of
the increase in interest expense resulted from additional debt incurred to
finance the HIS acquisition.
Amortization. Amortization expense of $1.4 million in 1995 increased
$256,000, or 22.2%, from $1.2 million in 1994. The increase resulted from the
amortization of acquisition costs incurred in connection with the HIS
acquisition.
Income before taxes. Income before taxes increased $494,000, or 9.1%, to
$5.9 million in 1995 from $5.4 million in 1994.
Income tax provision. The effective tax rate in 1995 increased to 51.7%
from 45.5% in 1994. This increase principally resulted from a proportionately
higher amount of expense in 1995 which was not deductible for income tax
purposes.
Net income. Net income decreased $99,000, or 3.4%, to $2.9 million in 1995
from $3.0 million in 1994.
SEASONALITY AND RECENT QUARTERLY FINANCIAL DATA
Historically, the Company's business has been subject to seasonality.
Typically, the Company's revenue is greater during the second and fourth
calendar quarters. Demand for major industrial cleaning projects tends to be
higher in these periods due to process industry cycles. For example, electric
utilities typically schedule maintenance projects in advance of their peak
summer and winter production seasons.
The following table sets forth certain consolidated statement of operations
and other supplemental data of the Company for the quarterly periods shown. The
unaudited quarterly information has been prepared on the same basis as the
annual financial information and, in management's opinion, includes all
adjustments, consisting of normal recurring accruals, necessary to present
fairly the information for the quarters presented. The operating results for
any quarter are not necessarily indicative of results for the year or for any
future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------------------
1995 1996 1997
----------------------------------------- -------------------------------------- ----------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue ....................... $ 36,769 $ 43,404 $ 36,657 $ 39,654 $ 38,035 $ 41,166 $ 35,450 $41,352 $38,388 $42,326
Cost of revenue ............... 21,757 26,308 22,741 23,823 22,936 24,940 22,183 24,314 22,919 24,871
-------- -------- -------- -------- -------- -------- -------- ------- ------- -------
Gross profit .............. 15,012 17,096 13,916 15,831 15,099 16,226 13,267 17,038 15,469 17,455
SG&A expense .................. 8,989 10,545 9,286 10,645 10,011 10,173 10,518 11,401 10,298 10,863
Depreciation .................. 1,499 1,718 1,738 1,797 1,812 1,900 1,982 2,071 1,911 1,978
-------- -------- -------- -------- -------- -------- -------- ------- ------- -------
Operating income .......... 4,524 4,833 2,892 3,389 3,276 4,153 767 3,566 3,260 4,614
Other (income) expense:
Interest expense,
net ....................... 2,167 2,210 2,165 2,151 2,041 1,997 1,955 1,927 1,862 1,925
Special charge .............. -- -- -- -- -- -- 500 11 -- --
Other (income) expense,
net ....................... (19) (187) (80) (79) (41) (107) (11) 138 4 19
Amortization of
intangibles ............... 352 352 352 351 381 381 381 380 388 391
-------- -------- -------- -------- -------- -------- -------- ------- ------- -------
Income (loss) before
taxes ................... 2,024 2,458 455 966 895 1,882 (2,058) 1,110 1,006 2,279
Income tax provision
(benefit) ................... 1,046 1,271 235 500 628 1,321 (1,444) 779 447 1,091
-------- -------- -------- -------- -------- -------- -------- ------- ------- -------
Net income (loss) ......... $ 978 $ 1,187 $ 220 $ 466 $ 267 $ 561 $ (614) $ 331 $ 559 $ 1,188
======== ======== ======== ======== ======== ======== ======== ======= ======= =======
EBITDA ........................ $ 6,023 $ 6,551 $ 4,630 $ 5,186 $ 5,088 $ 6,053 $ 2,749 $ 5,637 $ 5,171 $ 6,592
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations through net cash provided by
operating activities, existing cash balances, available credit facilities and
capital contributions from its Parent. At June 30, 1997, the Company had $1.5
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<PAGE> 36
million of cash and cash equivalents, total borrowings and letters of credit of
$7.1 million against an available revolving loan borrowing base of $19.8
million, and $60.8 million of other long-term obligations in the form of term
loans and subordinated debt. Borrowings under the Company's revolving loan and
term loans were secured by substantially all assets of the Company. In August
1997, the Company issued $110.0 million of Old Notes and used a portion of the
net proceeds therefrom to repay indebtedness, accrued interest and fees under
the Company's Senior Credit Facility ($45.7 million) and under its Senior
Subordinated Debt ($18.7 million).
For the six months ended June 30, 1997, the Company provided net cash of
$3.5 million from operating and investing activities which consisted of $6.2
million provided by operating activities and $2.7 million used in investing
activities. For the six months ended June 30, 1996, $2.3 million of net cash
was provided by operating and investing activities which consisted of $5.4
million provided by operating activities and $3.1 million used in investing
activities. For the year ended December 31, 1996, $8.2 million of net cash was
provided by operating and investing activities which consisted of $14.9 million
provided by operating activities and $6.7 million used in investing activities.
For the year ended December 31, 1995, the Company used $29.6 million of net
cash for operating and investing activities which consisted of $10.1 million
provided by operating activities and $39.7 million used in investing
activities. For the year ended December 31, 1994, $518,000 of net cash was
provided by operating and investing activities which consisted of $8.5 million
provided by operating activities and $8.0 million used in investing activities.
For all periods presented, investing activities consisted primarily of
expenditures for property and equipment, except for 1995 which also included
the purchase of substantially all of the assets and the assumption of certain
liabilities of HIS for $24.8 million. The following table sets forth, for the
periods indicated, certain information regarding expenditures for property and
equipment:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------- --------------
1994 1995 1996 1996 1997
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Office facilities, furniture, fixtures and computer
equipment ............................................... $ 403 $ 831 $1,111 $ 480 $ 394
Machinery and equipment ................................. 5,035 7,646 5,263 2,765 2,386
Vehicles ................................................ 138 16 455 -- 67
------ ------ ------ ------ ------
$5,576 $8,493 $6,829 $3,245 $2,847
====== ====== ====== ====== ======
</TABLE>
The Company estimates that an additional $5.7 million of expenditures for
property and equipment will be required for the six months ended December 31,
1997.
As of June 30, 1997, on a pro forma basis following the issuance of the
Notes pursuant to the Offering and the application of the net proceeds
therefrom, the Company would have had cash and cash equivalents totaling $32.1
million, $2.3 million of which will be required to secure its outstanding
letters of credit until the New Credit Facility is in place. The remaining cash
balances would be available for general corporate purposes, including expanding
the Company's industrial vacuuming and other business lines through
expenditures for property and equipment, increasing the Company's marketing and
sales efforts, and funding potential acquisitions. The Company continually
evaluates possible acquisitions, but has no present understandings, commitments
or agreements relating thereto. See "Use of Proceeds."
Management believes that cash and cash equivalents at June 30, 1997,
remaining net proceeds from the Offering, net cash expected to be provided by
operating activities and borrowings, if necessary, under the New Credit
Facility will be sufficient to meet its cash requirements for operations and
expenditures for property and equipment for the next twelve months and the
foreseeable future thereafter.
INFLATION
Certain of the Company's expenses, such as compensation and benefits,
chemicals and supplies, and equipment repair and replacement, are subject to
normal inflationary pressures. Although the Company to date has been able to
offset inflationary cost increases through increased operating efficiencies and
modest price increases, there can be no assurance that the Company will be able
to offset any future inflationary cost increases through these or similar
means.
36
<PAGE> 37
BUSINESS
GENERAL
The Company is a leading provider of industrial cleaning services to a wide
range of processing industries, including petrochemical plants, oil refineries,
electric utilities, pulp and paper mills, rubber plants and aluminum plants.
Services provided include hydroblasting, chemical cleaning, industrial
vacuuming, waste minimization, commissioning and other specialized services.
This type of work is typically recurring maintenance to improve or sustain the
operating efficiencies and extend the useful lives of process equipment and
facilities. The Company provides services to approximately 1,200 customers at
approximately 2,500 customer sites from 49 branch locations in the United
States and one location in Singapore.
In 1996, 44.5% of the Company's revenue was derived from hydroblasting,
40.2% from chemical cleaning, 7.4% from industrial vacuuming and 7.9% from
other services. Also in 1996, 45.8% of HydroChem's revenue came from
petrochemical plants, 16.9% from oil refineries, 14.3% from electric utilities,
8.3% from pulp and paper mills and 14.7% from other industries. Approximately
40% of the Company's 1996 revenue was derived from its 15 largest customers,
all of which are Fortune 500 companies, and approximately 60% was derived from
its 40 largest customers, 34 of which are Fortune 500 companies.
MARKET FACTORS
The Company believes that the following factors have favorably affected
demand for its industrial cleaning services.
o Maintenance for Improved Efficiency. The equipment and facilities
owned by companies in process industries require periodic cleaning to
maintain or improve operating and energy efficiencies. Industrial
cleaning is part of the recurring maintenance necessary to prevent
equipment breakdowns, as well as to provide safer working conditions
for customers' employees and enhance the profitability and useful
lives of equipment and facilities. As companies strive to maximize
efficiencies and reduce costs to compete more effectively, industrial
cleaning services, such as those provided by HydroChem, become even
more important.
o Trend Towards Outsourcing. At one time, many of the Company's
customers performed industrial cleaning services using their own
equipment and employees. For many years, industrial companies have
increased the volume and type of maintenance services that they
outsource to contractors in an attempt to control labor and insurance
costs and to eliminate the need for expensive, under-utilized
equipment. More recently, these businesses have been attempting to
reduce the number of industrial cleaning vendors they utilize to
streamline their internal operations, thus reducing costs. HydroChem's
nationwide network of branches, breadth of services offered, technical
capabilities and experience position the Company to capitalize on
these trends.
o Industry Consolidation. While the industrial cleaning industry has
consolidated to some degree over the last decade, the industry is
still fragmented and the consolidation process is continuing. Factors
driving this consolidation include: (i) the costs of meeting
customers' requirements for an excellent safety record and a high
level of employee training; (ii) the high costs associated with
complying with rapidly changing government regulations; and (iii) the
increasing trend by customers to reduce the number of service
providers. This environment works to the advantage of larger companies
within the industrial cleaning industry, such as HydroChem, with the
capital and financial flexibility to offer a broad range of services
across multiple facilities and to support extensive safety and
training programs.
o Environmental Regulations. The enactment and increased enforcement of
laws and regulations designed to protect the environment and public
health, as well as concern by HydroChem's customers for their
potential liability for environmental or toxic damage to people and
property, have increased demand for the Company's services.
Compliance with such laws and regulations requires the Company's
customers to establish systems for the regular inspection, cleaning and
maintenance of their process and storage facilities.
37
<PAGE> 38
These more stringent environmental regulations have created additional
opportunities for the Company to offer new services or enhance existing
services to help keep its customers in compliance with or lessen their
cost of complying with the regulations.
COMPETITIVE STRENGTHS
The Company believes that it benefits from the following competitive
strengths:
o Industry Experience and Long-Term Relationships with Quality
Customers. The businesses that were combined to form HydroChem each
had in excess of 30 years of industrial cleaning experience and many
long-term relationships with large, well-established customers. The
Company believes it benefits from its reputation for providing
reliable, quality service to its customers, which has been established
as a result of HydroChem's extensive industry experience and its
commitment to service and quality.
o Broad Range of Services and Industry Expertise. As a result of
providing a broad range of services, the Company is well-positioned to
capitalize on the trend by many of its customers to reduce the number
of vendors utilized. The Company also has the necessary expertise,
experience, equipment and support services, including a chemical
research laboratory and an equipment manufacturing facility, to
respond to the complex and changing needs of its diverse customer
base.
o Excellent Safety Record. The industries served by the Company
emphasize safety. The Company provides extensive initial and
continuing safety training to its employees and works closely with its
customers to develop and meet mutual safety goals. In addition, the
annual bonus of each operating manager depends, in part, upon the
safety record of that individual's territory. Management believes that
the Company's safety indices are among the best in the industry,
giving the Company a competitive advantage in securing new contracts
and managing expenses.
o Strategic Locations. The Company has established a nationwide network
of 49 branch offices strategically located in selected geographical
areas characterized by higher concentrations of existing and potential
customers. These locations allow the Company to meet the immediate and
continuing needs of its customers and respond to the trend by many of
its larger customers with multiple plant locations to consolidate
vendor relationships. Fourteen of the Company's branch offices are
located within customer facilities. These on-site locations reduce
HydroChem's servicing costs and make it easier to develop customer
relationships and maximize the services provided at these locations.
o Customer Contracts. The Company has succeeded in obtaining master
service agreements or contracts with most of its major customers and
many of its other customers. Although these contracts do not guarantee
a specific amount of business, they: (i) enable HydroChem personnel to
gain entry more easily to the plants to market the Company's services
and develop relationships with plant personnel; and (ii) make it
easier for a customer to select HydroChem for a particular job since
pricing and other terms and conditions have already been established.
o Customer Alliances. To reduce costs and gain operating efficiencies,
many of the Company's larger customers are considering establishing
alliances with vendors. In an alliance, the Company provides a more
comprehensive outsourcing solution to the customer, with the Company
integrally involved in scheduling, managing and benchmarking the
delivery of services in a manner that reduces costs for the customer
and HydroChem and provides for a continuous improvement process over
time. Generally, the customer will further benefit from additional
savings resulting from reduced downtime for maintenance and increased
production. HydroChem has initiated alliances with three of its
largest customers and believes it is the only industrial cleaning
company that has implemented a program of this type.
o Experienced Management. HydroChem benefits from the quality and depth
of its management personnel, both at the corporate and field level,
who are dedicated to building customer relationships and delivering
quality services to meet those customers' needs. Generally, the
Company's field operations are managed at
38
<PAGE> 39
the branch level. Day-to-day operating decisions have been delegated to
experienced branch managers who are closest to the Company's customers
and can be most responsive to their specific needs. HydroChem's branch
managers have an average of over 13 years of experience in the
industrial cleaning industry. The Company's senior operating management
team averages over 17 years in the industry.
For a discussion of certain competitive weaknesses of the
Company and its business operations, see "Risk Factors -- Highly Competitive
Business Environment."
BUSINESS STRATEGY
The Company's business strategy includes the following key elements:
o Expand Services Provided To Existing Customers. The Company generally
does not provide its full range of industrial cleaning services to
each customer. HydroChem believes that expanding the amount of work
performed for existing customers is the most efficient and cost
effective method of achieving growth. The Company actively leverages
its existing customer relationships and the breadth of services it
offers to capitalize on its customers' trend to reduce the number of
vendors utilized and thereby gain additional market share. Also, the
Company seeks to identify opportunities for new services that it can
provide to its extensive customer base.
o Establish Relationships with New Customers in Existing Geographic
Areas. Most of the geographic areas in which the Company has branch
locations contain concentrations of processing plants which are
potential customers for the Company. The Company seeks to penetrate
these geographic markets further by obtaining contracts at plants
where it does not currently provide services.
o Expand Geographically. The Company identifies attractive geographic
markets for its services based on the number and type of plants
located in those areas, establishes a branch location and then builds
its business over time. This type of expansion often involves securing
at least one contract with a customer before establishing a branch and
then placing a complement of equipment and personnel in the area to
perform this work and pursue other work. These actions establish a
revenue stream to cover overhead costs and provide a base for
expanding throughout the surrounding geographic area.
o Establish Customer Alliances. The Company seeks to increase the number
of its customer alliance relationships. Under this type of
relationship, the Company's strategy is to provide its services as a
sole-source supplier, thereby obtaining additional market share and
strengthening customer relationships.
o Pursue Additional Strategic Acquisitions. The Company has successfully
grown its business in the past through strategic acquisitions.
HydroChem intends to continue to pursue acquisitions that add
additional services and products to market to its existing customer
base, or facilitate expansion of the Company's customer base or
geographic coverage.
The Company's recent revenue growth principally has resulted from
expanded services to existing customers and new customer alliances. The
Company will continue to focus on these two elements of its strategic growth
as well as strategic acquisitions.
SERVICES
Hydroblasting and chemical cleaning are HydroChem's largest sources of
revenue, but the Company also offers a variety of other services, including
industrial vacuuming, waste minimization and commissioning services, as
described below. These services are typically part of a recurring maintenance
program and may be provided on a time and materials basis or bid on a project
basis. The Company believes that its ability to offer a broad range of services
is an attractive feature to customers as they seek to reduce the number of
contractors with which they do business. In addition, certain jobs can only be
accomplished using a combination of cleaning methods, and the Company is able to
perform such tasks without subcontracting.
39
<PAGE> 40
The Company's revenue from its major service lines for 1995 and 1996 is set
forth in the following table:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1996
------------------ ------------------
REVENUE % REVENUE %
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Hydroblasting ............................................... $ 70,565 45.1% $ 69,504 44.5%
Chemical cleaning ........................................... 61,365 39.2 62,661 40.2
Industrial vacuuming ........................................ 8,113 5.2 11,484 7.4
Other ....................................................... 16,441 10.5 12,354 7.9
-------- -------- -------- --------
Total ............................................. $156,484 100.0% $156,003 100.0%
======== ======== ======== ========
</TABLE>
Hydroblasting Services
The Company's hydroblasting services involve the application of high
pressure streams of water to clean the interior and exterior surfaces of
process equipment, storage tanks and other vessels and to unplug piping, tubes
and lines. Hydroblasting is particularly effective in cleaning deposits that
cannot be chemically dissolved or that are located on surfaces where the
circulation of chemical cleaning solvents is not feasible.
Hydroblasting is primarily used for the removal of scale and other fouling
deposits to improve the operating or energy efficiency of equipment, prevent
contamination of finished products and clean equipment in preparation for, or
subsequent to, other maintenance work. Hydroblasting is also used to prepare
surfaces for welding, inspection or painting, to clean exterior surfaces
cosmetically and, with special additives and equipment, to cut steel or
concrete.
The Company performs its hydroblasting services using equipment that
includes an engine, pump and high-pressure hoses that are attached to
specialized application devices. Water typically emerges at pressures of from
5,000 to 10,000 pounds per square inch, although ultra-high pressures of up to
40,000 pounds per square inch are used for certain cleaning and cutting jobs.
The deposits and wastes removed by hydroblasting, along with water used in the
process, are typically deposited into the customer's waste treatment system for
further processing and disposal by the customer.
Chemical Cleaning Services
Chemical cleaning typically involves circulating chemical solvents through
process equipment, piping, and tanks or other storage vessels under controlled
conditions of temperature, pressure and time to remove fouling deposits from
interior surfaces. Chemical cleaning is generally performed in a closed loop
process and employed to dissolve substances on surfaces that are inaccessible
to hydroblasting or where chemical cleaning is more effective or safer than
hydroblasting. Chemical cleaning also may involve the application of chemical
solvents to deposits on exterior surfaces that cannot be cleaned with water or
the addition of chemicals to by-products or waste products.
Chemical cleaning has many of the same uses and applications as
hydroblasting in industrial cleaning. It is also used for "degassing" process
equipment to remove volatile substances. In addition, the Company's chemical
cleaning services are required from time-to-time in connection with the
commissioning, or pre-operational cleaning, of new equipment or an entire plant
to remove soil, debris and other substances that accumulate during
construction.
Most of the Company's chemical cleaning services involve circulation of
chemical solvents through process equipment, piping, and tanks or other storage
vessels. For many of these jobs, a sample of the fouling deposit or substance
to be removed is sent to the Company's laboratory facility in Houston, Texas,
where the Company's chemists determine its chemical make-up, the combination
and concentration of chemicals best suited for the cleaning process and the
appropriate temperature, pressure and timing parameters for circulation of the
chemicals. The Company also has mobile laboratory units, which are used to
perform limited chemical analysis on-site and to assist in monitoring ongoing
chemical cleaning jobs. After the proper procedure for the on-site work has
been determined, a field crew mixes the chemicals, typically on the customer's
premises. Using pumping and circulating equipment, the field crew then
circulates the solution through the process equipment and, in most cases,
collects the waste material and used chemical solution. During the circulation
process, the concentration levels of the substance to be removed and the
chemicals that have been introduced into the system are monitored to determine
the rate at which the deposits are being removed and to ensure that proper
conditions are being maintained. After collection, the waste
40
<PAGE> 41
typically is emptied at the customer's on-site disposal or storage facility, or
it may be pumped into holding tanks that remain on the customer's property for
later disposal or treatment by the customer.
Industrial Vacuuming Services
Industrial vacuuming is the process of removing industrial waste and debris
by conveyance of air or by traditional vacuuming techniques. The Company's
vacuuming services typically are required to recover these materials for
disposal or recycling, to move them within a plant, to remove waste from sumps,
to prepare tanks or other storage facilities for routine maintenance and to
assist in other types of cleaning and maintenance services.
The Company provides air-moving services using specialized, truck and
trailer-mounted equipment to collect and remove a variety of solid and
semi-solid materials, including dust, powder, oil, resins, wood chips, steel
pellets, solid catalysts and bricks. The Company also furnishes liquid
vacuuming services using conventional vacuum trucks, which maintain a
continuous negative tank pressure, for the removal of liquid waste, sludge or
spent process fluids from pits, ponds, tanks or process equipment. The Company
often provides vacuuming services in connection with its other services.
Waste Minimization Services
HydroChem employs several techniques to reduce customer waste volumes
collected in the cleaning process before customer disposal, including
de-watering and chemical treatment techniques, as well as on-line water
recycling. Equipment often employed in these processes are plate and frame
filter presses and centrifuges, which are used to reduce the customer's cost of
disposing of these substances. Revenue from waste minimization services is
generally included in the other services category.
Commissioning Services
Commissioning services cover a variety of services utilized to clean newly
constructed systems of industrial processing plants prior to their initial
operation. These services include the Company's SILENTSTEAM(R) process for
cleaning steam path components, as well as the application of flushing,
cleaning and passivation technologies to piping, vessels, boilers and
lubrication and hydraulic oil systems. Depending on the nature of the
commissioning services, the revenue derived therefrom may be attributable to
hydroblasting, chemical cleaning, industrial vacuuming or other services.
Project Services
Given the Company's reputation for excellent service and the ability to
solve complex problems, HydroChem also applies its technologies, individually
or in combination, to address unique market opportunities in several business
and industry segments, including services and project management for large
projects in the marine, utility, defense and other industries. These projects
vary in scope from major cleanings of aircraft carriers to replacing commercial
building fluid coolant systems. Depending upon the nature of the project, the
revenue derived therefrom may be attributable to hydroblasting, chemical
cleaning, industrial vacuuming or other services.
FACILITIES AND FIELD ORGANIZATIONAL STRUCTURE
The Company's field organization is primarily based on geography. Two
divisions, the East Division and the West Division, which comprised over 90% of
the Company's 1996 revenue, are further subdivided into areas, regions and
branches. Branches, including certain on-site locations, are the primary
business or operating units. The Company currently has 49 branch locations in
the United States and one in Singapore.
The Company maintains operating and sales personnel at each of its branch
locations and operates each location under the direction of a branch manager in
accordance with policies, procedures and objectives established by the
Company's management. Subject to these guidelines, branch personnel have
significant autonomy in dealing with customers and employees in their
geographic area. Each branch operates as a separate profit center and is
responsible for collecting accounts receivable, although cash receipts are
collected via lockbox. Each branch location is also allotted certain equipment,
including pumps, vehicles and various types of specialized equipment. However,
41
<PAGE> 42
equipment and personnel are shifted among branches as work loads dictate,
enabling the Company to realize better utilization of its resources.
The Company leases its executive offices, a fully-equipped chemical
laboratory and a manufacturing facility, all located in the greater Houston,
Texas, area. The Company also leases other administrative locations in the
greater Houston area, and certain of these leases, including the executive
office lease, will expire in 1998. The Company is currently pursuing a
consolidation of some or all of these locations in a new facility that may be
owned or leased by HydroChem. The Company owns nine of the field offices, with
the remainder of the offices leased or otherwise provided by a major customer
in that area.
MARKETING, SALES AND SERVICE CONTRACTS
The Company's sales and marketing success is characterized by long-term
customer relationships resulting from the consistent delivery of high quality,
dependable service, advanced technical capabilities, a broad service offering,
competitive pricing and a strong customer service orientation among its
employees. The Company's services are marketed and sold through a tiered
approach, targeting both maintenance and purchasing personnel at the plant
level as well as corporate purchasing managers. Direct selling at the plant
level is the primary marketing thrust, and the Company has approximately 170
people involved in selling and marketing the Company's services. This group
maintains consistent communications with plant contacts to position the Company
better to obtain upcoming work and to ensure that on-going work is being
performed to meet or exceed customer expectations. The Company's national
marketing effort is focused on (i) servicing existing accounts, (ii)
establishing new customer accounts, (iii) obtaining multi-plant contracts
(regional or national in scope) and (iv) implementing alliance relationships.
These efforts are supplemented by advertising in industry publications and
participating in selected industry trade shows.
Most of the Company's customers, or prospective customers, have procedures
by which they qualify contractors to become approved vendors in their plants.
Customers award master service contracts or contracts for individual projects
only to such approved vendors. Contractors may be selected at the individual
plant level or on a regional or national basis, covering multiple plant
locations. A particular plant will typically have two or more approved
industrial cleaning providers. One of these may be designated as the primary
service provider and receive a majority of the work. Alternatively, the work
may be spread evenly between the contractors by the customer or market share
within the plant may be determined by the sales and marketing capabilities of
the different service providers. Plants also may have approved service
companies for specific services (for example, they may have hydroblasting
contracts with one or more vendors and separate industrial vacuuming contracts
with one or more other vendors) or may have contracts covering multiple
services provided by the same vendor.
Master service agreements typically establish general terms and conditions,
as well as time and material pricing for services. These contracts do not
guarantee a particular amount of work, but they do allow Company personnel to
enter the plants more easily, fostering the development of relationships with
plant personnel and the marketing of the Company's services. Specific jobs may
be performed on a time and materials basis or granted as part of a competitive
bid process. Daily or more frequently recurring maintenance work tends to be
performed on a time and materials basis, while larger, less frequent projects
tend to be bid. The Company estimates that approximately two-thirds of its
revenue comes from services performed under its master service agreements or
separately bid projects in plants where it has master service agreements. These
agreements enhance the consistency and stability of the Company's revenue
stream.
The Company's alliance or managed services process is an additional, newer
method of providing services to its customers. In an alliance, the Company
provides a more comprehensive outsourcing solution to the customer, with the
Company more involved in scheduling, managing and benchmarking the delivery of
services in a manner that reduces costs for the customer and HydroChem and
provides for a continuous improvement process over time. Generally, the
customer will further benefit from additional savings resulting from reduced
downtime for maintenance and increased production.
42
<PAGE> 43
SAFETY AND TRAINING
Industrial cleaning involves exposure to potentially dangerous conditions.
For liability and other reasons, customers are very concerned with the safety
records of contractors used to perform services at their plants. To minimize
the dangers inherent in this type of work, the Company conducts broad training
and educational programs and has developed comprehensive safety policies and
regulations. The main factors driving the Company's investment in these
programs and policies are: (i) achieving employee and customer safety; (ii)
controlling insurance costs; (iii) satisfying customers' growing safety and
training requirements; (iv) meeting increasing governmental and regulatory
requirements; and (v) improving the Company's overall performance.
HydroChem's safety program includes:
o Educating Company personnel
o Implementing and monitoring Company safety policies
o Safety personnel at most field locations
o Proactive support by senior management
o Working with insurance companies and safety organizations to make
use of their resources and expertise
o Process improvement teams and safety audits
o Cash incentive programs for employees and a component of management
bonuses tied to safety
o Substance abuse screening
o Investigating all accidents and company-wide dissemination of
information, without using names, of accidents that have occurred
and how they could have been avoided
Management believes that the Company's safety indices are among the best in
the industry. As an example, HydroChem's workers' compensation interstate
experience modification rate ("EMR") is 0.38, which compares to an EMR of 1.0
for an average company in the Company's industry. The EMR, calculated by a
private advisory rating organization supporting the insurance industry, is one
of the most widely observed safety statistics. The EMR is a method of
reflecting a company's actual loss experience relative to the normal expected
loss experience of companies within a particular industry.
COMPETITION
The industrial cleaning service business is highly competitive. The Company
believes that the principal competitive factors in this business are price,
quality of service, safety record, reputation, responsiveness of personnel,
efficiency of service, and knowledge of customer plants and operations.
Location is an important factor in being able to provide timely and
cost-effective services, although this is more of a factor with respect to
daily or more frequently recurring maintenance services than project work. In
addition, competitors tend to be stronger in certain services and weaker in
others or may not offer a full range of services.
The Company competes with a large number of companies in substantially all
of the regions in which it operates. Many of these competitors are local or
regional operations servicing a limited geographic area; however, others are
larger companies with broader geographic coverage, such as the Company.
Accordingly, HydroChem's competitors in any particular geographic market may
differ. While most of the Company's competitors do not offer as extensive a
line of services as the Company, future expansion by such companies or the
development of alternative cleaning
43
<PAGE> 44
methods represent potential competition for the Company. See "Risk Factors --
Highly Competitive Business Environment."
CUSTOMERS
Due to the nature of HydroChem's services, its customers tend to be
concentrated in certain processing industries. In 1996, 45.8% of the Company's
revenue came from petrochemical plants, 16.9% from oil refineries, 14.3% from
electric utilities, 8.3% from pulp and paper mills and 14.7% from other
industries. Approximately 40% of the Company's 1996 revenue was derived from
its 15 largest customers, all of which are Fortune 500 companies, and
approximately 60% was derived from its 40 largest customers, 34 of which are
Fortune 500 companies. No single customer represented 10% or more of the
Company's revenue in 1996. In 1995 and 1994, The Dow Chemical Company and its
affiliates represented 10.9% and 11.2% of total revenue, respectively.
GOVERNMENTAL REGULATION
Occupational Safety and Health Act. The operations of the Company are
subject to the requirements of the Occupational Safety and Health Act ("OSHA")
and comparable state laws. Regulations promulgated under OSHA by the Department
of Labor require employers in the industries that the Company serves to
implement work practices, medical surveillance systems and personnel protection
programs in order to protect employees from workplace hazards and exposure to
hazardous chemicals. The Company has established comprehensive programs for
complying with health and safety regulations. While the Company believes it
operates safely and prudently, there can be no assurance that accidents will
not occur or that the Company will not incur substantial fines.
Federal, State and Local Environmental Regulations. The Company performs
substantially all of its industrial cleaning services at industrial process
facilities owned by its customers. Although chemicals may be stored at the
Company's branch offices and are transported by the Company to its customers'
plants, no industrial cleaning services are performed at the branches.
Typically, all hazardous waste handled by the Company is disposed of by the
customer using the customer's waste disposal facilities. However, on a very
limited basis, HydroChem will transport the customer's waste collected in
connection with the Company's cleaning services from one point in the
customer's plant to another point within the plant, which may involve crossing
a public road. As a part of its services to the customer, the Company may treat
the customer's hazardous waste that was collected by the Company in the
cleaning process to neutralize, minimize or separate it into its components,
thus facilitating disposal or recycling by the customer. At all times, the
waste belongs to and is the responsibility of the customer. The Company does
not believe that its activities subject it to the duties pertaining to
hazardous waste treatment, storage or disposal facilities. However, if it were
determined that HydroChem was a "transporter" of the hazardous wastes that it
collects in the cleaning process, the Company would be responsible for
compliance with all duties imposed on such persons under applicable
environmental statutes and regulations.
Department of Transportation. Certain of the Company's vehicles are subject
to the regulations of the Department of Transportation, which address, among
other things, maintenance of the vehicles, driver qualification and record
keeping. Failure to comply with these regulations may result in fines or
modification of the Company's current procedures with respect to its vehicles.
Certain of the laws and regulations applicable to the Company require that
it obtain permits and licenses. The Company believes that it has obtained the
permits and licenses material to its business and believes that it is in
substantial compliance with all federal, state and local laws and regulations
governing it. To date, the Company has not been subject to any significant
fines, penalties or other labilities under these laws and regulations.
INTELLECTUAL PROPERTY
While the Company has numerous patents and proprietary techniques related
to its products and services, it does not believe the ongoing success of its
operations is dependent on these patents or techniques, individually or taken
as a whole.
44
<PAGE> 45
INSURANCE
The Company currently has in force insurance policies covering general
liability, workers' compensation/ employers liability, automobile liability,
environmental liability and property damage, as well as an umbrella policy. All
of these policies are in amounts the Company believes are consistent with
industry practices and provide for the Company to pay a deductible or self
insured retention on each claim.
EMPLOYEES
As of September 15, 1997, the Company had approximately 1,720 full-time
employees, of which approximately 1,300 were paid on an hourly basis. None of
the Company's employees are covered by collective bargaining agreements.
Management believes that relations between the Company and its employees are
good.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAMES OF DIRECTORS
AND EXECUTIVE OFFICERS AGE POSITION
- ---------------------- ---- -------------------------------------------------
<S> <C> <C>
B. Tom Carter, Jr . . . . . . . . . 53 Chairman of the Board of Directors, Chief Executive
Officer, and President
Robert B. Crates . . . . . . . . . 35 Director
Thomas F. McWilliams . . . . . . . 54 Director
Selby F. Little, III . . . . . . . 43 Executive Vice President, Chief Financial Officer
J. Pat DeBusk . . . . . . . . . . . 56 Executive Vice President
Gary D. Noto . . . . . . . . . . . 42 Executive Vice President
Craig A. Kaple . . . . . . . . . . 38 Executive Vice President
Pelham H. A. Smith . . . . . . . . 40 Vice President
Michael P. Steindler . . . . . . . 49 Secretary and General Counsel
</TABLE>
Subject to the terms of a Stockholders Agreement entered into by Parent and
all of its stockholders, the Board of Directors of the Company currently
consists of three directors who hold office until the next annual meeting of
the stockholders of the Company or until their successors are duly elected and
qualified. Pursuant to the terms of the Stockholders Agreement, one director,
Mr. McWilliams, has been designated by Citicorp Venture Capital, Ltd. and one
director, Mr. Crates, has been designated by LKCM Venture Partners I Ltd. The
stockholders also agreed to elect Mr. Carter as a director so long as he
serves as Chief Executive Officer. The Stockholders Agreement further provides
that CVC has the right to designate an additional director, and that the
holders of a majority of the shares of Parent's capital stock owned by such
stockholders may designate a director, but neither CVC nor the majority
stockholders have exercised these rights.
The executive officers are elected annually by the Board of Directors and
serve at the discretion of the Board until their successors are duly elected
and qualified.
B. Tom Carter, Jr. has been Chairman of the Board, Chief Executive Officer
and President of the Company or Hydro Services since 1990. As a private
investor, he assembled the investment groups which acquired Hydro Services in
1990 and DIS in 1993.
Robert B. Crates has been a director of the Company since 1993. Since
December 1995, Mr. Crates has been a principal of Crates Thompson Capital,
Inc., an investment company engaged in the management of private equity funds.
From May 1988 to November 1995, Mr. Crates served as vice president of Luther
King Capital Management, an investment advisory firm. In that capacity, Mr.
Crates, individually and as President of RBC Investment Corp, served as general
partner of LKCM Venture Partners I Ltd. From October 1994 to January 1995, Mr.
Crates concurrently served as interim Chairman and Chief Executive Officer of
Eddie Haggar Limited, Inc., a company in which LKCM had an investment that
subsequently filed for protection under federal bankruptcy laws. Mr. Crates is
also a director of HealthCor Holdings Inc.
45
<PAGE> 46
Thomas F. McWilliams has been a director of the Company since 1993. Mr.
McWilliams is a Managing Director of CVC where he has been employed since 1983.
He also serves as a director of Chase Industries, Inc., MMI Products, Inc.,
Ergo Science Corporation, Pen-Tab Industries, Inc. and various privately held
companies.
Selby F. Little, III has been an Executive Vice President and Chief
Financial Officer of the Company since December 1996 and served as Vice
President and Chief Financial Officer of the Company from June 1996 until
December 1996. From September 1992 to May 1996, he was Vice President and Chief
Financial Officer of Ross Systems, Inc., a publicly held computer software
company. Prior thereto, Mr. Little had served in various executive, management
or other positions, including, since April 1989, as Vice President and Chief
Financial Officer of Unify Corporation, a computer software company.
J. Pat DeBusk has been an Executive Vice President of the Company since
December 1993. He has also held various executive or other management positions
since 1964 with Hydro Services or the predecessor to its operations.
Gary D. Noto has been an Executive Vice President of the Company since
December 1996. Prior thereto, he had served as a Vice President of the Company
since December 1993 and in various executive, management or other positions
with Hydro Services or the predecessor to its operations since 1978.
Craig A. Kaple has been an Executive Vice President of the Company since
June 1997. Prior thereto, he had served as a Vice President of the Company
since November 1994 and in various executive, management or other positions
with Hydro Services or the predecessor to its operations since 1981.
Pelham H. A. Smith has been a Vice President of the Company since December
1993. Prior thereto, he had been assisting Mr. Carter since 1990 in various
private investment activities.
Michael P. Steindler has functioned as the General Counsel of the Company
since April 1994 and also has been a partner in the law firm of Cassell &
Stone, L.L.P. in Dallas, Texas since August 1993. Mr. Steindler has served as
Secretary of Parent and the Company since March 1995. From October 1988 to
January 1993, he was Vice President, General Counsel and Secretary of Rexene
Corporation, a publicly held petrochemical manufacturer.
DIRECTORS AND OFFICERS OF PARENT
The directors of Parent are the same as those of the Company. The executive
officers of Parent are B. Tom Carter, Jr. (Chief Executive Officer and
President), Selby F. Little, III (Executive Vice President and Chief Financial
Officer), and Pelham H. A. Smith (Vice President).
EXECUTIVE COMPENSATION
The following table provides certain information concerning compensation
earned by the Chief Executive Officer and the Company's next four most highly
compensated executive officers serving in such capacity at December 31, 1996
who received compensation in excess of $100,000 (the "Named Executive
Officers") for the period indicated.
46
<PAGE> 47
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION -----------------------------------
----------------------------------- NUMBER OF SHARES ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS COMPENSATION(1)
- --------------------------- ---------- ---------- ---------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
B. Tom Carter, Jr . . . . . . . 1996 $239,231 $100,000 25,000 $ 250
Chairman of the Board,
Chief Executive Officer and
President
J. Pat DeBusk . . . . . . . . . 1996 136,000 45,000 -- 250
Executive Vice President
Gary D. Noto . . . . . . . . . 1996 103,200 50,000 -- 250
Executive Vice President
Craig A. Kaple . . . . . . . . 1996 95,000 45,600 -- 250
Executive Vice President
Pelham H. A. Smith . . . . . . 1996 93,000 42,400 -- 250
Vice President
</TABLE>
- --------
(1) Consists of the Company's 401(k) matching contribution.
DIRECTOR COMPENSATION
Directors who are employees of the Company do not receive additional
compensation for serving as directors. All directors of the Company are
reimbursed for out-of-pocket expenses incurred in attending meetings of the
Board of Directors and for other expenses incurred in their capacities as
directors of the Company.
STOCK OPTION INFORMATION
Parent has adopted the HydroChem Holding, Inc. 1994 Stock Option Plan (the
"Plan"). The Plan is administered by a committee of Parent's Board of Directors
(the "Committee"), which currently consists of Messrs. McWilliams and Crates.
The purpose of the Plan is to advance the interests of Parent and its
subsidiaries (including the Company) by encouraging certain employees and
non-employee directors to acquire a proprietary interest in Parent through
ownership of Parent's Class A Common Stock ("Class A Common"). The total number
of shares of Class A Common that may be subject to options under the Plan is
620,779. As of May 31, 1997, options for 611,890 shares of Class A Common were
outstanding and options for 8,889 shares were available for grant. The duration
of each option and the exercise schedule therefor is determined by the
Committee at the time of grant, but in no event can an option intended to
qualify as an incentive stock option (an "ISO") under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), be exercisable after
the expiration of ten years after the date of grant. In the case of an employee
who owns (or is considered to own under Section 424(d) of the Code) stock
representing more than 10% of the total combined voting power of classes of
stock of Parent and its subsidiaries, no ISO shall be exercisable after
expiration of five years from the date of grant.
The following table sets forth certain information concerning the grant of
options to Mr. Carter during 1996. None of the other Named Executive Officers
were granted options in 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL STOCK
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES IN PRICE ----------------------
NAME GRANTED FISCAL YEAR PER SHARE EXPIRATION DATE 5% ($) 10% ($)
---- ---------- ----------- --------- --------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
B. Tom Carter, Jr . . . 25,000 43.5% $2.50 February 11, 2006 $39,306(1) $99,609(1)
</TABLE>
- ----------
(1) Potential Realizable Value is based upon assumed annual growth rates of 5%
and 10% for the ten-year option term. Computations result in common stock
prices at the end of the option term of $4.07 and $6.48 per share based
upon 5% and 10% annual appreciation, respectively. The actual value, if
any, Mr. Carter may realize will depend upon an available market for the
Common Stock, as well as the excess of the market price of the Class A
Common over the exercise price on the date the option is exercised.
There can be no assurance that the value realized will be at or near
the amounts reflected in this table.
47
<PAGE> 48
The following table sets forth certain information with respect to the
unexercised options granted to the Named Executive Officers. None of the Named
Executive Officers exercised any stock options during the year ended December
31, 1996.
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY-OPTIONS
AT DECEMBER 31, 1996 AT DECEMBER 31, 1996(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
B. Tom Carter, Jr . . . . . . . . . . . . . . . . 248,312 87,078 $ 0 $ 0
J. Pat DeBusk . . . . . . . . . . . . . . . . . . 5,000 15,000 $ 0 $ 0
Gary D. Noto . . . . . . . . . . . . . . . . . . 4,375 13,125 $ 0 $ 0
Craig A. Kaple . . . . . . . . . . . . . . . . . 3,750 11,250 $ 0 $ 0
Pelham H. A. Smith . . . . . . . . . . . . . . . 7,500 22,500 $ 0 $ 0
</TABLE>
- ---------
(1) There is no established trading market for the Class A Common, but the
Company has attempted to determine its market value based upon the same
criteria used to determine the exercise prices of past options granted.
Based upon these criteria, at December 31, 1996 there were no options
which were "in-the-money."
EMPLOYMENT AGREEMENTS
Parent has an employment agreement with Mr. Carter under which he serves as
the Chairman of the Board, Chief Executive Officer and President of Parent and
the Company (collectively, the "Employer"). The term of Mr. Carter's agreement
is for five years through December 14, 1998. His current base compensation
under this Agreement is $240,000 per year and is subject to review and may be
increased periodically at the discretion of the Board. Mr. Carter's agreement
provided for an initial bonus of $150,000 in recognition of his efforts in the
DIS acquisition. For calendar years 1994 and thereafter, bonuses are payable at
the sole discretion of the Board. In connection with his agreement, the Parent
also granted Mr. Carter in March 1995 an option to purchase 310,390 shares of
Class A Common Stock at an exercise price of $1.00 per share under the Parent's
1994 Stock Option Plan. See "Stock Option Information." If the Employer
terminates Mr. Carter's employment without cause as defined in his agreement,
then he is entitled to a lump sum severance payment equal to one year of his
then current base compensation. Mr. Carter's agreement contains a covenant not
to compete and other customary restrictions. The covenant not to compete does
not apply if there is a termination without cause or a resignation by Mr.
Carter after a change in control as defined in his agreement or after a
diminution in his duties. The Company has guaranteed Parent's obligations under
the employment agreement.
The Company also has employment agreements with Messrs. DeBusk, Noto and
Kaple. Each of these agreements renew automatically on an annual basis unless
either the Company or the employee gives 30 days' notice to the contrary. The
current annual base compensation under these agreements for Messrs. DeBusk,
Noto and Kaple is $150,000, $127,500 and $120,000, respectively. Such amounts
are subject to review and may be increased periodically at the discretion of
the Company. Bonuses are also payable at the sole discretion of the Company. If
the Company terminates the employment of any of these individuals without cause
as defined in their respective agreements, then such individual is entitled to
a continuation of his then current base compensation for six months. Each of
the agreements for Messrs. DeBusk, Noto and Kaple contain covenants not to
compete and other customary restrictions.
RELATED TRANSACTIONS
In May 1995, the Company paid $100,000 to Argent Capital Corporation
("Argent") for investment banking services rendered in connection with the HIS
acquisition. Mr. Carter is the sole shareholder of Argent.
Argent is the tenant under a lease in Dallas, Texas, for office space used
by the Company. The Company pays the rent for this office directly to the
landlord. Total rental payments for 1994, 1995 and 1996 were $43,937, $46,330
and $48,419, respectively.
48
<PAGE> 49
The Company leases its manufacturing facility in Missouri City, Texas, from
Gracey Corporation ("Gracey"). The spouse of Mr. DeBusk is the beneficial owner
of 7 2/3% of the outstanding capital stock of Gracey held in a trust. Total
rental payments made by the Company to Gracey for 1994, 1995 and 1996 for this
facility were $56,100 in each year.
PRINCIPAL STOCKHOLDERS
All of the outstanding capital stock of the Company is owned by Parent. The
following table sets forth certain information known to Parent with respect to
beneficial ownership of Parent's equity securities (rounded to the nearest
share) by (i) each director; (ii) each Named Executive Officer; (iii) all
executive officers and directors of the Company as a group; and (iv) each
stockholder known by the Company to be the beneficial owner of more than five
percent of any class of voting securities of Parent. Such information is
presented as of September 15, 1997. See "Description of Capital Stock."
<TABLE>
<CAPTION>
CLASS A COMMON CLASS B COMMON SERIES A PREFERRED
-------------------- ---------------------- ---------------------
NO. OF % OF NO. OF % OF NO. OF % OF
NAME SHARES CLASS SHARES CLASS SHARES CLASS
- -------------------------------- ---------- ----- ---------- ---------- --------- ---------
EXECUTIVE OFFICERS AND DIRECTORS:
<S> <C> <C> <C> <C> <C> <C>
B. Tom Carter, Jr.(1) . . . . . . . . . 357,212 32.2% -- -- 360,993 7.2%
6210 Rothway
Houston, Texas 77040
Robert B. Crates . . . . . . . . . . . -- -- -- -- -- --
Thomas F. McWilliams(2)(3) . . . . . . 67,343 7.3 67,343 1.7% 33,871 *
399 Park Avenue
New York, New York 10043
J. Pat DeBusk(3)(4) . . . . . . . . . . 46,727 5.4 1,540 * 55,103 1.1
1145 Highway 90-A
Missouri City, Texas 77489
Gary D. Noto(3)(5) . . . . . . . . . . 27,330 3.2 880 * 31,488 *
Craig A. Kaple(3)(6) . . . . . . . . . 23,184 2.7 660 * 23,616 *
Pelham H. A. Smith(7) . . . . . . . . . 15,000 1.7 -- -- -- --
All directors and executive officers as
a group (8 persons)(3)(8) . . . . . . 536,796 44.0 70,424 1.8 505,070 10.1
OTHER PRINCIPAL STOCKHOLDERS:
LKCM Venture Partners I Ltd . . . . . . 673,993 79.0 -- -- 2,100,628 42.0
301 Commerce Street, Suite 1600
Fort Worth, Texas 76102
Citicorp Venture Capital, Ltd.(3) . . . 2,461,712 74.3 2,461,712 62.7 1,250,861 25.0
399 Park Avenue
New York, New York 10043
BT Capital Partners, Inc.(3) . . . . . 705,154 45.2 705,154 18.0 793,959 15.9
280 Park Avenue (32W)
New York, New York 10017
World Equity Partners, L.P.(9) . . . . 496,623 36.8 -- -- -- --
399 Park Avenue
New York, New York 10043
CCT Partners II, L.P.(3)(10) . . . . . 434,420 33.7 434,420 11.1 220,740 4.4
c/o Citicorp Venture Capital, Ltd.
399 Park Avenue
New York, New York 10043
Heller Financial, Inc.(11) . . . 310,390 26.7 -- -- -- --
500 West Monroe Street
Chicago, Illinois 60661
HES Management, Inc . . . . . . . 102,650 12.0 -- -- 360,993 7.2
5956 Sherry Lane, Suite 930
Dallas, Texas 75225
</TABLE>
- -------------------
* Less than one percent.
(1) Includes 102,650 shares of Class A Common and 360,993 shares of Series
A Preferred held in the name of HES Management, Inc., of which Mr.
Carter may be deemed the beneficial owner as the sole stockholder of
HES Management, Inc.; and 254,562 shares of Class A Common that Mr.
Carter may acquire upon the exercise of options within 60 days of May
31, 1997.
49
<PAGE> 50
(2) Includes 56,393 shares of Class B Common held in the name of Alchemy,
L.P., of which Mr. McWilliams may be deemed the beneficial owner as
the sole general partner of Alchemy, L.P.
(3) Includes a number of shares of Class A Common that the stockholder may
acquire upon the conversion of shares of Class B Common on a 1-for-1
basis.
(4) Includes 10,000 shares of Class A Common that Mr. DeBusk may acquire
upon the exercise of options within 60 days of May 31, 1997.
(5) Includes 8,750 shares of Class A Common that Mr. Noto may acquire upon
the exercise of options within 60 days of May 31, 1997.
(6) Includes 7,500 shares of Class A Common that Mr. Kaple may acquire
upon the exercise of options within 60 days of May 31, 1997.
(7) Represents 15,000 shares of Class A Common that Mr. Smith may acquire
upon the exercise of options within 60 days of May 31, 1997.
(8) Includes 295,812 shares of Class A Common that may be acquired upon
the exercise of options within 60 days of May 31, 1997, and 70,424
shares of Class A Common that may be acquired upon the conversion of
Class B Common.
(9) Represents 496,623 of Class A Common that World Equity Partners, L.P.,
may purchase upon the exercise of a warrant within 60 days of May 31,
1997.
(10) William T. Comfort, whose address is c/o Citicorp Venture Capital,
Ltd., 399 Park Avenue, New York, New York, 10043, is the sole
director, the sole executive officer, and the sole stockholder of the
general partner of CCT Partners II, L.P., and may be deemed the
beneficial owner of the securities held in the name of CCT Partners
II, L.P.
(11) Heller Financial, Inc. may acquire 310,390 shares of Class C Common
upon the exercise of a warrant within 60 days of May 31, 1997. Heller
Financial, Inc. may acquire 310,390 shares of Class A Common within 60
days of May 31, 1997, upon exercise of its right to convert all of its
shares of Class C Common into Class A Common on a 1-for-1 basis.
DESCRIPTION OF CAPITAL STOCK
COMPANY CAPITAL STOCK
The authorized capital stock of the Company consists of 1,000 shares of
common stock, par value $.01 per share (the "Company Common Stock"). There
currently are 100 shares of the Company Common Stock outstanding, all of which
are owned of record and beneficially by Parent.
PARENT CAPITAL STOCK
The authorized capital stock of Parent consists of 14,000,000 shares of
Parent Common Stock and 5,000,000 shares of Preferred Stock. The authorized
shares include (i) 8,000,000 shares of Class A Common, par value $.00005 per
share, of which 853,402 shares are issued and outstanding; (ii) 5,000,000
shares of Class B Common Stock, par value $.00005 per share (the "Class B
Common"), of which 3,926,598 shares are issued and outstanding; (iii) 1,000,000
shares of Class C Common Stock, par value $.00005 per share (the "Class C
Common"), of which no shares are issued and outstanding; and (iv) 5,000,000
shares of Series A 13% Cumulative Preferred Stock, par value $.00005 per share
(the "Series A Preferred"), all of which are issued and outstanding.
Certain Voting and Conversion Rights
Holders of Class A Common are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Holders of Class B
Common are entitled, as a class, to 49% of the total votes on all matters
submitted to a vote of stockholders, except as otherwise required by law, and
except for voting on any sale of all or substantially all of Parent's assets,
any amendment to the Certificate of Incorporation, any merger or consolidation
of Parent or any recapitalization or reorganization of Parent in which holders
of Class B Common are treated differently from holders of Class A Common, in
which case the holders of the Class B Common have the right to vote as a
separate class. The holders of the Class C Common and the Series A Preferred
have no voting rights, except as otherwise provided by law.
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The Series A Preferred had an initial liquidation value of $1 per share.
Dividends accrue semi-annually at 13% per annum regardless of declaration or
profitability. To the extent not paid on each January 1 and July 1, dividends
increase the liquidation value. The Series A Preferred may be redeemed by the
Parent at the then-liquidation value at any time prior to the scheduled
redemption date, which has been extended to June 15, 2010, conditioned upon
consummation of the Offering. Upon the occurrence of certain events, the Series
A Preferred is redeemable at the holders' option prior to the redemption date.
A portion of the net proceeds of the Offering (estimated to be $2.9 million
upon the closing of the Offering) will be dividended to the Parent and used to
discharge accrued and unpaid dividends that have been added to the liquidation
value of the Series A Preferred since issuance.
As and when dividends are declared or paid thereon, the holders of Class A
Common, Class B Common and Class C Common are entitled to participate in such
dividends ratably on a per share basis. They also participate ratably, subject
to the rights of holders of Series A Preferred, in any distributions upon the
liquidation of the Company. The shares of the Class B Common and the Class C
Common are convertible into an equal number of shares of Class A Common. The
Series A Preferred has no conversion rights.
Parent Stockholders Agreement
The stockholders of Parent have entered into a Stockholders Agreement. The
Stockholders Agreement provides for, among other things: (i) establishing the
composition of the Boards of Directors for Parent and the Company, (ii)
limiting the manner and terms by which Parent's capital stock may be
transferred, (iii) the waiver of dissenters' rights in respect of a sale of the
Parent, if such sale has been approved by a majority of stockholders, and (iv)
preemptive rights among the stockholders upon the issuance of capital stock by
Parent.
DESCRIPTION OF NOTES
GENERAL
The Old Notes were, and the New Notes will be, issued under an Indenture,
dated as of August 1, 1997 (the "Indenture"), among the Company, the Subsidiary
Guarantor and Norwest Bank, Minnesota, N.A., as Trustee (the "Trustee"), a copy
of which is available upon request to the Company as set forth below. The terms
of the New Notes are identical in all material respects to the Old Notes,
except that the New Notes have been registered under the Securities Act and,
therefore, will not bear legends restricting their transfer. Upon the issuance
of the New Notes, the Indenture will be subject to and governed by the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The following
summary of certain provisions of the Indenture and the Notes does not purport
to be complete and is subject to, and is qualified in its entirety by reference
to, all the provisions of the Indenture (including the definitions of certain
terms therein and those terms made a part thereof by the Trust Indenture Act)
and the Notes. The definitions of certain terms used in the following summary
are set forth below under "-- Certain Definitions." For purposes of this
summary, the term "Company" refers only to HydroChem and not to the Company's
Subsidiary.
The Old Notes are, and the New Notes will be, subordinated in right of
payment to all current and future Senior Debt, including borrowings under the
New Credit Facility. Each of the Subsidiary Guarantees are and will be
subordinated in right of payment to all existing and future Senior Debt of the
Subsidiary Guarantor, including any potential guarantees of the New Credit
Facility. As of June 30, 1997, on a pro forma basis giving effect to the
application of the net proceeds from the Offering, the Company had no Senior
Debt outstanding (excluding $2.3 million in outstanding undrawn letters of
credit, which were principally incurred in connection with the Company's
property and casualty insurance programs). The Indenture permits the Company
and its Subsidiaries to incur additional indebtedness, including Senior Debt,
subject to certain limitations, and will prohibit the incurrence of any
indebtedness that is senior to the Notes and subordinated to Senior Debt.
The Old Notes are, and the New Notes will be, general unsecured obligations
of the Company, are and will be limited in aggregate principal amount to $110.0
million and will mature on August 1, 2007. Interest on the Notes will accrue at
the rate of 10 3/8% per annum and will be payable semi-annually in arrears on
February 1 and August 1 of each year, commencing on February 1, 1998, to
Holders of record on the immediately preceding January 15 and July 15. Interest
on the Notes will accrue from the most recent date to which interest has been
paid or, if no
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interest has been paid, from the Issue Date. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal of, and premium, if any, interest and Liquidated Damages, if any,
on, the Notes will be payable at the office or agency of the Company maintained
for such purpose within the City and State of New York or, at the option of the
Company, payment of interest and Liquidated Damages, if any, may be made by
check mailed to the Holders of the Notes at their respective addresses set
forth in the register of Holders of Notes; provided that all payments of
principal, premium, if any, interest and Liquidated Damages, if any, with
respect to the Global Note and with respect to Certificated Notes the Holders
of which have given wire transfer instructions to the Company, will be required
to be made by wire transfer of immediately available funds to the accounts
specified by the Holders thereof. Until otherwise designated by the Company,
the Company's office or agency in New York will be the office of the Trustee
maintained for such purpose. The Notes will be issued in denominations of
$1,000 and integral multiples thereof.
SUBSIDIARY GUARANTEES
The Company's payment obligations under the Old Notes are, and its
obligations under the New Notes will be, jointly and severally guaranteed (the
"Subsidiary Guarantees") on an unsecured senior subordinated basis by the
Company's existing Subsidiary (HydroChem International, Inc. ("HII")), and all
future Restricted Subsidiaries (other than the Excluded Restricted
Subsidiaries). The Subsidiary Guarantee of each Subsidiary Guarantor will be
subordinated to the prior payment in full of all Senior Debt and will not be
secured by any of the assets of the Subsidiary Guarantor. The obligations of
each Subsidiary Guarantor under its Subsidiary Guarantee are and will be
limited so as not to constitute a fraudulent conveyance under applicable law.
See, however, "Risk Factors -- Fraudulent Transfer Risks."
The Indenture provides that no Subsidiary Guarantor may consolidate with or
merge with or into (whether or not such Subsidiary Guarantor is the surviving
Person) another corporation, Person or entity whether or not affiliated with
such Subsidiary Guarantor unless: (i) subject to the provisions of the
following paragraph, the Person formed by or surviving any such consolidation
or merger (if other than such Subsidiary Guarantor) assumes all the obligations
of such Subsidiary Guarantor, pursuant to a supplemental indenture in form and
substance reasonably satisfactory to the Trustee, under the Subsidiary
Guarantee and the Indenture; (ii) immediately after giving effect to such
transaction, no Default or Event of Default exists; and (iii) the Company would
be permitted by virtue of the Company's pro forma Fixed Charge Coverage Ratio,
immediately after giving effect to such transaction, to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the covenant described below under the caption "-- Certain Covenants
- -- Incurrence of Indebtedness and Issuance of Preferred Stock." The
requirements of clause (iii) of this paragraph will not apply in the case of a
consolidation or merger of a Subsidiary Guarantor with or into the Company or
another Subsidiary Guarantor.
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Subsidiary Guarantor, by way of merger, consolidation
or otherwise, or a sale or other disposition of all of the Capital Stock of any
Subsidiary Guarantor, then such Subsidiary Guarantor (in the event of a sale or
other disposition, by way of such a merger, consolidation or otherwise, of all
of the Capital Stock of such Subsidiary Guarantor) or the corporation acquiring
the property (in the event of a sale or other disposition of all of the assets
of such Subsidiary Guarantor) will be released and relieved of any obligations
under its Subsidiary Guarantee; provided that the Net Proceeds of such sale or
other disposition are applied in accordance with the applicable provisions of
the Indenture. See "-- Certain Covenants -- Asset Sales."
SUBORDINATION
The payment of principal of, and premium, if any, interest and Liquidated
Damages, if any, on, the Notes is and will be subordinated in right of payment,
as set forth in the Indenture, to the prior payment in full in cash of all
Senior Debt, whether outstanding on the date of the Indenture or thereafter
incurred.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshalling of the Company's
assets and liabilities, the holders of
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Senior Debt will be entitled to receive payment in full in cash of all
Obligations due in respect of such Senior Debt (including interest after the
commencement of any such proceeding at the rate specified in the applicable
Senior Debt whether or not allowable as a claim in any such proceeding) before
the Holders of Notes will be entitled to receive any payment with respect to the
Notes, and until all Obligations with respect to Senior Debt are paid in full,
any distribution to which the Holders of Notes would be entitled shall be made
to the holders of Senior Debt (except that Holders of Notes may receive
Permitted Junior Securities and payments made from the trust described under "--
Legal Defeasance and Covenant Defeasance").
The Company also may not make any payment upon or in respect of the Notes
(except in Permitted Junior Securities or from the trust described under "--
Legal Defeasance and Covenant Defeasance") if (i) a default in the payment of
the principal of, and premium, if any, or interest on, Senior Debt occurs and
is continuing or (ii) any other default occurs and is continuing with respect
to Senior Debt that permits holders of the Senior Debt as to which such default
relates to accelerate its maturity and the Trustee receives a notice of such
default (a "Payment Blockage Notice") from the Company or the holders of any
Designated Senior Debt. Payments on the Notes may and shall
be resumed (a) in the case of a payment default, upon the date on which such
default is cured or waived and (b) in case of a nonpayment default, on the
earlier of the date on which such nonpayment default is cured or waived or 179
days after the date on which the applicable Payment Blockage Notice is
received, unless a payment default on any Senior Debt then exists. No new
period of payment blockage may be commenced unless and until 365 days have
elapsed since the delivery of the immediately prior Payment Blockage Notice. No
nonpayment default that existed or was continuing on the date of delivery of
any Payment Blockage Notice to the Trustee shall be, or be made, the basis for
a subsequent Payment Blockage Notice unless such default shall have been cured
or waived for a period of not less than 90 consecutive days.
The Indenture further requires that the Company promptly notify holders of
Senior Debt if payment of the Notes is accelerated because of an Event of
Default.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, Holders of Notes may recover less ratably than
creditors of the Company who are holders of Senior Debt. As of June 30, 1997,
on a pro forma basis giving effect to the application of the net proceeds from
the Offering, no Senior Debt was outstanding (excluding $2.3 million in
outstanding undrawn letters of credit). The Indenture does not limit, subject
to the satisfaction of certain financial tests, the amount of additional
Indebtedness, including Senior Debt, that the Company and its Subsidiaries can
incur. See "-- Certain Covenants -- Incurrence of Indebtedness and Issuance of
Preferred Stock."
OPTIONAL REDEMPTION
Except as set forth below, the Notes will not be redeemable at the
Company's option prior to August 1, 2002. Thereafter, the Notes will be
subject to redemption at any time at the option of the Company, in whole or in
part, upon not less than 30 nor more than 90 days' notice, at the redemption
prices (expressed as percentages of principal amount) set forth below, plus
accrued and unpaid interest and Liquidated Damages, if any, to the applicable
redemption date, if redeemed during the twelve-month period beginning on August
1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ----- ----------
<S> <C>
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105.188%
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103.458%
2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101.729%
2005 and thereafter . . . . . . . . . . . . . . . . . . . . . 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to August 4, 2000, the
Company may on any one or more occasions redeem up to an aggregate of 35% of
the original aggregate principal amount of Notes at a redemption price of
109.375% of the principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, to the redemption date, with the net proceeds of
one or more Equity Offerings; provided that at least 65% of the original
aggregate principal amount of Notes remains outstanding immediately after any
such redemption; and provided, further, that any such redemption shall occur
within 90 days of the date of the closing of any such Equity Offering.
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If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which
the Notes are listed, or, if the Notes are not so listed, on a pro rata basis,
by lot or by such method as the Trustee shall deem fair and appropriate;
provided that no Notes of $1,000 or less shall be redeemed in part. Notices of
redemption shall be mailed by first class mail at least 30 but not more than 90
days before the redemption date to each Holder of Notes to be redeemed at its
registered address. Notices of redemption may not be conditional. If any Note
is to be redeemed in part only, the notice of redemption that relates to such
Note shall state the portion of the principal amount thereof to be redeemed. A
new Note in principal amount equal to the unredeemed portion thereof will be
issued in the name of the Holder thereof upon cancellation of the original
Note. Notes called for redemption become due on the date fixed for redemption.
On and after the redemption date, interest ceases to accrue on Notes or
portions of them called for redemption.
CERTAIN COVENANTS
Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest and Liquidated Damages, if any, to the date of purchase (the "Change
of Control Payment"). For the definition of a Change of Control, see "Certain
Definitions" below. Within 30 days following any Change of Control, the
Company will mail a notice to each Holder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
Notes on the date specified in such notice, which date shall be no earlier than
30 days and no later than 60 days from the date such notice is mailed (the
"Change of Control Payment Date"), pursuant to the procedures required by the
Indenture and described in such notice. The Company will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Notes as a result of a
Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (i) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered, and (iii) deliver or cause to be delivered to the
Trustee for cancellation the Notes so accepted together with an Officer's
Certificate stating the aggregate principal amount of Notes or portions thereof
being purchased by the Company. The Paying Agent will promptly mail to each
Holder of Notes so tendered the Change of Control Payment for such Notes, and
the Trustee will promptly authenticate and mail (or cause to be transferred by
book entry) to each Holder a new Note equal in principal amount to any
unpurchased portion of the Notes surrendered, if any; provided that each such
new Note will be in a principal amount of $1,000 or an integral multiple
thereof. The Company will publicly announce the results of the Change of
Control Offer on or as soon as practicable after the Change of Control Payment
Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders of the Notes to require that the
Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction.
The Company may not have sufficient funds to redeem the Notes upon a Change
of Control. In addition, the New Credit Facility may prohibit the Company from
purchasing any Notes and may also provide that certain change of control events
with respect to the Company would constitute a default thereunder. Any future
credit agreements or other agreements relating to Senior Debt to which the
Company becomes a party may contain similar restrictions and provisions. In the
event a Change of Control occurs at a time when the Company is prohibited from
purchasing Notes, then prior to purchasing the Notes in a Change of Control
Offer, the Company shall either repay all outstanding Senior Debt that contains
such prohibitions or obtain the requisite consents, if any, under all
agreements governing such outstanding Senior Debt. If the Company does not
obtain such a consent or repay such borrowings, the Company will remain
prohibited from purchasing Notes. In such case, the Company's failure to
purchase all Notes validly tendered and not withdrawn under such Change of
Control Offer would constitute an Event of Default
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under the Indenture which may, in turn, constitute a default under the New
Credit Facility. In such circumstances, the subordination provisions in the
Indenture would likely restrict payments to the Holders of Notes. See "Risk
Factors -- Possible Default Upon Change of Control."
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Company, including any requirement to repay in full any Senior Debt or obtain
the consents of such lenders to such Change of Control Offer as set forth in
the preceding paragraph, and purchases all Notes validly tendered and not
withdrawn under such Change of Control Offer.
Pursuant to the terms of the Indenture, the Trustee does not have the right
to waive the covenant relating to Holder's right to redress upon a "Change of
Control."
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance, barter or other disposition of "all or
substantially all" of the assets of the Company and its Subsidiaries taken as a
whole. Although there is a developing body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. However, a sale of "substantially all" the assets of the
Company would require prior approval by the Board of Directors of the Company.
Accordingly, the ability of a Holder of Notes to require the Company to
repurchase such Notes as a result of a sale, lease, transfer, conveyance,
barter or other disposition of less than all of the assets of the Parent or the
Company and its Restricted Subsidiaries taken as a whole to another Person or
group may be uncertain.
Pursuant to the terms of the Indenture, the Trustee does not have the right
to waive the Holder's right of repurchase upon a Change of Control.
Asset Sales
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value, as determined in good faith by the Company (evidenced by a resolution of
the Board of Directors set forth in an Officer's Certificate delivered to the
Trustee), of the assets or Equity Interests issued or sold or otherwise
disposed of, and (ii) at least 75% of the consideration received therefor by
the Company or such Restricted Subsidiary is in the form of (a) cash or Cash
Equivalents, or (b) property or assets useful in the Company's or such
Restricted Subsidiary's business or any business similar or reasonably related
thereto, or (c) stock if the acquired entity becomes a Restricted Subsidiary
and is engaged in a business similar or reasonably related to that of the
Company or any Restricted Subsidiary; provided that the amount of (x) any
liabilities (as shown on the Company's or such Restricted Subsidiary's most
recent balance sheet) of the Company or any Restricted Subsidiary (other than
contingent liabilities and liabilities that are by their terms subordinated to
the Notes or any guarantee thereof) that are assumed by the transferee of any
such assets pursuant to a customary novation agreement that releases the
Company or such Restricted Subsidiary from further liability, and (y) any
securities, notes or other obligations received by the Company or any such
Restricted Subsidiary from such transferee that are converted by the Company or
such Restricted Subsidiary into cash or Cash Equivalents (to the extent of the
cash received) within 180 days following the closing of the Asset Sale, shall
be deemed to be cash for purposes of this provision.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds, at its option, (a) to repay
permanently Senior Debt or Senior Debt of the Restricted Subsidiaries, or (b)
to the acquisition of an interest in another business, the making of a capital
expenditure or the acquisition of other long- term assets, in each case, in the
same business as the Company or any Restricted Subsidiary or any business
similar or reasonably related thereto. Pending the final application of any
such Net Proceeds, the Company or the Restricted Subsidiaries, as the case may
be, may temporarily reduce indebtedness under the New Credit Facility or
otherwise invest such Net Proceeds in any manner that is not prohibited by the
Indenture. Any Net Proceeds from Asset Sales that are not applied or invested
as provided in the first sentence of this paragraph will be deemed to
constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds
exceeds $5.0 million, the Company shall make an offer to all Holders of Notes
(an "Asset Sale Offer") to purchase the maximum principal amount of
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Notes that may be purchased out of the Excess Proceeds, at an offer price in
cash in an amount equal to 100% of the principal amount thereof, plus accrued
and unpaid interest and Liquidated Damages, if any, to the date of purchase, in
accordance with the procedures set forth in the Indenture. If the aggregate
principal amount of Notes tendered by Holders thereof exceeds the amount of
Excess Proceeds, the Trustee shall select the Notes to be purchased on a pro
rata basis. If the aggregate principal amount of Notes tendered pursuant to an
Asset Sale Offer is less than the Excess Proceeds, the Company may use any
remaining Excess Proceeds for general corporate purposes. Upon completion of
such offer to purchase, the amount of Excess Proceeds shall be reset at zero.
Restricted Payments
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay
any dividend or make any other payment or distribution on account of the
Company's or any of its Restricted Subsidiaries' Equity Interests (including,
without limitation, any payment in connection with any merger or consolidation
involving the Company) or to the direct or indirect holders of the Company's or
any of its Restricted Subsidiaries' Equity Interests in their capacity as such
(other than dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of the Company), (ii) purchase, redeem or otherwise acquire
or retire for value (including without limitation, in connection with any
merger or consolidation involving the Company) any Equity Interests of the
Company or any direct or indirect parent of the Company, (other than any such
Equity Interests owned by the Company or any Wholly-Owned Restricted Subsidiary
of the Company), (iii) make any payment on or with respect to, or purchase,
redeem, defease or otherwise acquire or retire for value any Indebtedness that
is subordinated to the Notes, except a payment of interest or principal at
Stated Maturity, or (iv) make any Restricted Investment (all such payments and
other actions set forth in clauses (i) through (iv) above being collectively
referred to as "Restricted Payments"), unless, at the time of and after giving
effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been
made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant
to the Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant described below under the caption "--
Incurrence of Indebtedness and Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the date of the Indenture (excluding Restricted
Payments permitted by clauses (ii), (iii) and (iv) of the next
succeeding paragraph), is less than the sum of (i) 50% of the
Consolidated Net Income of the Company for the period (taken as one
accounting period) from the beginning of the first fiscal quarter
commencing after the date of the Indenture to the end of the Company's
most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment (or,
if such Consolidated Net Income for such period is a deficit, less
100% of such deficit), plus (ii) 100% of the aggregate net cash
proceeds received by the Company since the date of the Indenture from
(A) contributions to the Company's capital, and (B) the issue or sale
of Equity Interests of the Company (other than Disqualified Stock) or
of Disqualified Stock or debt securities of the Company that have been
converted into such Equity Interests (other than Equity Interests (or
Disqualified Stock or convertible debt securities) sold to a
Restricted Subsidiary of the Company and other than Disqualified Stock
or convertible debt securities that have been converted into
Disqualified Stock), plus (iii) to the extent that any Restricted
Investment that was made after the date of the Indenture is sold for
cash or otherwise liquidated or repaid for cash, the lesser of (A) the
cash return of capital with respect to such Restricted Investment
(less the cost of disposition, if any), and (B) the initial amount of
such Restricted Investment, plus (iv) the aggregate amount of $5.0
million.
The foregoing provisions did not and will not prohibit (i) the payment of
the dividend of approximately $8.5 million to Parent with a portion of the net
proceeds from the Offering, (ii) the payment of any dividend within 60 days
after the date of declaration thereof, if at said date of declaration such
payment would have complied with the provisions of the Indenture, (iii) the
redemption, repurchase, retirement, defeasance or other acquisition of any
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subordinated Indebtedness or Equity Interests of the Company in exchange for,
or out of the net cash proceeds of the substantially concurrent sale (other
than to a Restricted Subsidiary of the Company) of, other Equity Interests of
the Company (other than any Disqualified Stock); provided that the amount of
any such net cash proceeds that are utilized for any such redemption,
repurchase, retirement, defeasance or other acquisition shall be excluded from
clause (c) (ii) of the preceding paragraph, (iv) the defeasance, redemption,
repurchase or other acquisition of subordinated Indebtedness with the net cash
proceeds from an incurrence of Permitted Refinancing Indebtedness, (v) the
payment of any dividend by a Restricted Subsidiary of the Company to the
holders of its common Equity Interests on a pro rata basis, (vi) the repurchase
of any Indebtedness subordinated or pari passu in right of payment
to the Notes at a purchase price not greater than 101% of the principal amount
of such Indebtedness in the event of a Change of Control in accordance with
provisions of the "Change of Control" covenant; provided that prior to or
contemporaneously with such repurchase the Company has made the Change of
Control Offer as provided in such covenant with respect to the Notes and has
repurchased all Notes validly tendered for payment and not withdrawn in
connection with such Change of Control Offer, (vii) the repurchase, redemption
or other acquisition or retirement for value of any Equity Interests of the
Company or any Restricted Subsidiary of the Company held by any current or
former employee or director of the Company (or any of its Restricted
Subsidiaries) pursuant to any management equity subscription agreement or stock
option agreement; provided that the aggregate price paid for all such
repurchased, redeemed, acquired or retired Equity Interests shall not exceed
$1.0 million in any twelve month period or $5.0 million in total and no Default
or Event of Default shall have occurred and be continuing immediately after
such transaction, (viii) any loans, advances, distributions from the Company to
any Restricted Subsidiary, or any loans, advances, distributions or payments by
a Restricted Subsidiary to the Company or to another Restricted Subsidiary, in
each case pursuant to intercompany Indebtedness, intercompany management
agreements and other intercompany agreements and obligations entered into in
the ordinary course of business, including reasonable advisory and service fees
and any indemnity obligations, (ix) if Parent files tax returns which include
the Company, payments to Parent under any customary and reasonable tax sharing
arrangement, and (x) payments to Parent, not to exceed $100,000 in any 12-month
period, in respect of customary and reasonable accounting, legal or other
professional or administrative expenses or reimbursements for franchise or
similar taxes and governmental charges incurred which relate to the business,
operations or finances of the Company or Restricted Subsidiary and in respect
of fees, offering costs and related expenses associated with any future
registration statements filed with the Commission and subsequent ongoing public
reporting requirements.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
The fair market value of any non-cash Restricted Payment shall be determined by
the Board of Directors whose resolution with respect thereto shall be delivered
to the Trustee. Not later than the date of making any Restricted Payment, the
Company shall deliver to the Trustee an Officer's Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required under the covenant described in "-- Restricted Payments"
were computed.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) and that the Company will not issue any
Disqualified Stock and will not permit any of its Restricted Subsidiaries to
issue any shares of Disqualified Stock; provided that the Company may incur
Indebtedness (including Acquired Debt) or issue shares of Disqualified Stock
and may permit any Restricted Subsidiary to incur any Indebtedness (including
Acquired Debt) or issue shares of Disqualified Stock if the Fixed Charge
Coverage Ratio for the Company's most recently ended four full fiscal quarters
for which internal financial statements are available immediately preceding the
date on which such additional Indebtedness is incurred or such Disqualified
Stock is issued would have been at least 2.0 to 1, determined on a pro forma
basis (including a pro forma application of the net proceeds therefrom), as if
the additional Indebtedness had been incurred, or the Disqualified Stock had
been issued, as the case may be, at the beginning of such four-quarter period.
The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
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(i) the incurrence by the Company of Indebtedness and letters of credit
(with letters of credit being deemed to have a principal amount equal to the
maximum potential liability of the Company and its Subsidiaries thereunder)
under the New Credit Facility (or pursuant to any successor facility, which
successor facility need not constitute Permitted Refinancing Indebtedness),
along with any Guarantee thereof by any of the Restricted Subsidiaries, up to
an amount at any time incurred equal to the greater of (a) $25 million, less
the aggregate amount of all Net Proceeds of Asset Sales applied to permanently
repay any such Indebtedness or, in the case of any such revolving Indebtedness,
permanently reduce commitments therefor pursuant to the covenant described
above under the caption
"-- Asset Sales" or (b) the sum of 85% of the Company's consolidated accounts
receivable and 60% of its consolidated inventory, in each case, from time to
time, as determined in accordance with GAAP;
(ii) the incurrence by the Company or any of its Restricted Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or hedging
interest rate risk with respect to any floating rate Indebtedness that is
permitted by the terms of this Indenture to be outstanding or that are incurred
by the Company or any of its Restricted Subsidiaries to protect against
currency exchange rate risk in the conduct of its operations;
(iii) the incurrence by the Company and its Restricted Subsidiaries of the
Existing Indebtedness;
(iv) the incurrence by the Company of Indebtedness represented by the
Notes and the incurrence by the Subsidiary Guarantors of Indebtedness
represented by the Subsidiary Guarantees;
(v) the incurrence by the Company or any of its Restricted Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to refund, refinance or replace Indebtedness that was permitted
by the Indenture to be incurred;
(vi) the incurrence of Indebtedness in respect of performance bonds or
surety or appeal bonds in the ordinary course of business;
(vii) the incurrence by the Company or any of its Restricted Subsidiaries
of intercompany Indebtedness between or among the Company and any of its
Wholly-Owned Restricted Subsidiaries; provided that (a) if the Company is the
obligor on such Indebtedness, such Indebtedness is expressly subordinated to
the prior payment in full in cash of all Obligations with respect to the Notes
and if a Subsidiary Guarantor is the obligor on such Indebtedness, such
Indebtedness is expressly subordinated to the prior payment in full in cash of
all Obligations with respect to the Subsidiary Guarantees and (b)(1) any
subsequent issuance or transfer of Equity Interests that results in any such
Indebtedness being held by a Person other than the Company or a Wholly-Owned
Restricted Subsidiary and (2) any sale or other transfer of any such
Indebtedness to a Person that is not either the Company or a Wholly-Owned
Restricted Subsidiary shall be deemed, in each case, to constitute an
incurrence of such Indebtedness by the Company or such Restricted Subsidiary,
as the case may be;
(viii) the incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness represented by Capital Lease Obligations, mortgage financings
or purchase money obligations, in each case incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvements of property used in the business of the Company or such Restricted
Subsidiaries, in an aggregate principal amount not to exceed $7.5 million at
any time outstanding;
(ix) the incurrence by the Company or any of its Restricted Subsidiaries of
additional Indebtedness in an aggregate principal amount (or accreted value, as
applicable) at any time outstanding, including all Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any other additional
Indebtedness incurred pursuant to this clause (ix), not to exceed $10 million;
and
(x) the incurrence of Indebtedness by any Restricted Subsidiary pursuant to
a Guarantee of Indebtedness permitted to be incurred.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (x) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company shall, in its sole discretion, classify such item of Indebtedness in
any manner that complies with this covenant and such item of Indebtedness will
be treated
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as having been incurred pursuant to only one of such clauses or
pursuant to the first paragraph hereof. Any Indebtedness that may be incurred
pursuant to this covenant may be incurred under the New Credit Facility.
Accrual of interest, the accretion of accreted value and the payment of
interest in the form of additional Indebtedness will not be deemed to be an
incurrence of Indebtedness for purposes of this covenant.
Liens
The Indenture provides that neither the Company nor any of its Restricted
Subsidiaries will, directly or indirectly, create, incur, assume or suffer to
exist any Lien (except Permitted Liens) on any asset now owned or hereafter
acquired, or any income or profits therefrom or assign or convey any right to
receive income therefrom, unless the Notes are equally and ratably secured with
the obligation or liability secured by such Lien until such time as such
obligations are no longer secured by a Lien.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries (1) on
its Capital Stock or (2) with respect to any other interest or participation
in, or measured by, its profits, or (b) pay any Indebtedness owed to the
Company or any of its Restricted Subsidiaries, (ii) make loans or advances to
the Company or any of its Restricted Subsidiaries, or (iii) transfer any of its
properties or assets to the Company or any of its Restricted Subsidiaries,
except for such encumbrances or restrictions existing under or by reason of (a)
Existing Indebtedness, (b) the New Credit Facility and any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings thereof; provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings are no more restrictive in the aggregate with
respect to such dividend and other payment restrictions than those contained in
the New Credit Facility (or any successor facility thereof), (c) the Indenture,
the Notes and the Subsidiary Guarantees, (d) applicable law, (e) any instrument
regarding the sale, lease or purchase of any asset or governing Indebtedness or
Capital Stock of a Person acquired by the Company or any of its Restricted
Subsidiaries as in effect at the time of such acquisition (except to the extent
such Indebtedness was incurred in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any Person,
or the properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired; provided that, in the case of
Indebtedness, such Indebtedness was permitted by the terms of the Indenture to
be incurred, (f) by reason of customary non-assignment provisions in licenses
or leases entered into in the ordinary course of business and consistent with
past practices, (g) mortgages or other purchase money obligations or Capital
Lease Obligations for property acquired in the ordinary course of business that
impose restrictions of the nature described in clause (iii) above on the
property so acquired, (h) contracts for the sale of assets, including
restrictions with respect to a Restricted Subsidiary under an agreement for the
sale or disposition of all the stock or assets of such Restricted Subsidiary,
or (i) Permitted Refinancing Indebtedness; provided that the restrictions
contained in the agreements governing such Permitted Refinancing Indebtedness
are no more restrictive in the aggregate than those contained in the agreements
governing the Indebtedness being refinanced.
Limitation on Layering Debt
The Indenture provides that the Company will not incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that is
subordinate or junior in right of payment to any Senior Debt and senior in any
respect in right of payment to the Notes. In addition, the Indenture provides
that each of the Subsidiary Guarantors will not incur, create, issue, assume,
guarantee or otherwise become liable for any Indebtedness that is subordinate
or junior in right of payment to any Senior Debt of the Subsidiary Guarantor
and senior in any respect in right of payment to its Subsidiary Guarantee.
Additional Subsidiary Guarantees
The Indenture provides that if any entity (other than an Excluded
Restricted Subsidiary) shall become a Restricted Subsidiary after the date of
the Indenture, then such Restricted Subsidiary shall execute a Subsidiary
Guarantee and deliver an Opinion of Counsel with respect thereto, in accordance
with the terms of the Indenture.
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Unrestricted Subsidiaries
The Board of Directors may designate any Subsidiary (including any
Restricted Subsidiary or any newly acquired or newly formed Subsidiary) to be
an Unrestricted Subsidiary so long as: (i) neither the Company nor any
Restricted Subsidiary is directly or indirectly liable for any Indebtedness of
such Subsidiary, (ii) no default with respect to any Indebtedness of such
Subsidiary would permit (upon notice, lapse of time or otherwise) any holder of
any other Indebtedness of the Company or any Restricted Subsidiary to declare a
default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity, (iii) any Investment in
such Subsidiary deemed to be made as a result of designating such Subsidiary an
Unrestricted Subsidiary will not violate the provisions of the covenant entitled
"Restricted Payments," (iv) neither the Company nor any Restricted Subsidiary
has a contract, agreement, arrangement, understanding or obligation of any kind,
whether written or oral, with such Subsidiary other than (A) those that might be
obtained at the time from Persons who are not Affiliates of the Company or (B)
administrative, tax sharing and other ordinary course contracts, agreements,
arrangements and understandings or obligations entered into in the ordinary
course of business, and (v) neither the Company nor any Restricted Subsidiary
has any obligation to subscribe for additional shares of Capital Stock or other
Equity Interests in such Subsidiary, or to maintain or preserve such
Subsidiary's financial condition or to cause such Subsidiary to achieve certain
levels of operating results other than as permitted under the covenant entitled
"Restricted Payments." Notwithstanding the foregoing, the Company may not
designate as an Unrestricted Subsidiary any Subsidiary which, on the date of the
Indenture, is a Significant Subsidiary, and may not sell, transfer or otherwise
dispose of any properties or assets of any such Significant Subsidiary to an
Unrestricted Subsidiary, other than in the ordinary course of business. Any
Investment made by the Company or any Restricted Subsidiary which is designated
from a Restricted Subsidiary to an Unrestricted Subsidiary shall thereafter be
considered as having been a Restricted Payment (to the extent not previously
included as a Restricted Payment) made on the day such Subsidiary is designated
an Unrestricted Subsidiary in the amount of the greater of (i) the fair market
value (as determined by the Board of Directors of the Company in good faith) of
the Equity Interests of such Subsidiary held by the Company and its Restricted
Subsidiaries on such date, and (ii) the amount of the Investments determined in
accordance with GAAP made by the Company and any of its Restricted Subsidiaries
in such Subsidiary.
The Board of Directors may designate any Unrestricted Subsidiary as a
Restricted Subsidiary; provided that such designation will be deemed to be an
incurrence of Indebtedness by a Restricted Subsidiary of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation will only be
permitted if (i) such Indebtedness is permitted under the covenant described in
"-- Incurrence of Indebtedness and Issuance of Preferred Stock" covenant, and
(ii) no Default or Event of Default would occur as a result of such
designation.
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, make any payment to, or sell, lease,
transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an
"Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms
that are at least as favorable as those that could reasonably be expected to be
obtained by the Company or the relevant Restricted Subsidiary in a comparable
transaction by the Company or such Restricted Subsidiary with an unrelated
Person, and (ii) the Company delivers to the Trustee (a) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $1.0 million, a resolution of the Board of
Directors set forth in an Officer's Certificate certifying that such Affiliate
Transaction complies with clause (i) above and that such Affiliate Transaction
has been approved by a majority of the disinterested members of the Board of
Directors, and (b) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration in excess of
$5.0 million, an opinion as to the fairness to the Company of such Affiliate
Transaction from a financial point of view issued by an accounting, appraisal
or investment banking firm of national standing; provided that the following
shall not be deemed to be Affiliate Transactions: (u) any employment agreement
entered into by the Company or any of its Restricted Subsidiaries in the
ordinary course of business and consistent with the past practice of the
Company or such Restricted Subsidiary, (v) transactions between or among the
Company and/or its Restricted Subsidiaries; (w) Restricted Payments that are
permitted by the provisions of the Indenture described above under the caption
"-- Restricted Payments", (x) reasonable and customary fees paid by the Company
or such Restricted Subsidiary to members of their respective Boards of
Directors, (y) transactions or agreements existing as of the date of the
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Indenture, including those described under "Related Transactions", and (z)
reasonable and customary grants of stock, stock options or other Equity
Interests to employees and directors of the Company in accordance with duly
adopted stock grant, stock option and similar plans.
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the
Company will furnish to the Holders of Notes (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual information only, a
report thereon by the Company's certified independent auditors and (ii) all
current reports that would be required to be filed with the Commission on Form
8-K if the Company were required to file such reports. In addition, whether or
not required by the rules and regulations of the Commission, the Company will
file a copy of all such information and reports with the Commission for public
availability (unless the Commission will not accept such a filing) and make
such information available to securities analysts and prospective investors
upon request. In addition, the Company has agreed that, for so long as any Old
Notes remain outstanding, it will furnish to the Holders and to prospective
purchasers designated by such Holders, upon their request, the information
required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
Merger; Consolidation or Sale of Assets
The Indenture provides that the Company will not consolidate or merge with
or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially
all of its properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia, (ii) the entity or
Person formed by or surviving any such consolidation or merger (if other than
the Company) or the entity or Person to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made assumes all the
obligations of the Company under the Notes and the Indenture pursuant to a
supplemental indenture in a form reasonably satisfactory to the Trustee, (iii)
immediately after such transaction no Default or Event of Default exists, and
(iv) except in the case of a merger of the Company with or into a Wholly-Owned
Restricted Subsidiary of the Company, the Company or the entity or Person
formed by or surviving any such consolidation or merger (if other than the
Company), or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made (a) will have Consolidated Net Worth
immediately after the transaction equal to or greater than the Consolidated Net
Worth of the Company immediately preceding the transaction, and (b) will, after
giving pro forma effect thereto as if such transaction had occurred at the
beginning of the applicable four-quarter period, be permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio
test set forth in the first paragraph of the covenant described above under the
caption "-- Incurrence of Indebtedness and Issuance of Preferred Stock."
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Notes (whether or not prohibited by the
subordination provisions of the Indenture), (ii) default in payment when due of
the principal of or premium, if any, on the Notes (whether or not prohibited by
the subordination provisions of the Indenture), (iii) failure by the Company to
comply with the provisions described under the captions "-- Certain Covenants
- -- Change of Control," "-- Asset Sales," or "-- Merger; Consolidation or Sale
of Assets," (iv) failure by the Company for 30 days after written notice from
the Trustee or the Holders of at least 30% in principal amount of the then
outstanding Notes to comply with the provisions described under the captions,
"-- Restricted Payments" or "-- Incurrence of Indebtedness and Issuance of
Preferred Stock", (v) failure by the Company for 60 days after written notice
from the Trustee or Holders of 30% in principal amount of the then outstanding
Notes to comply with any of its other agreements in the Indenture or the Notes,
(vi) except as permitted by the Indenture, any Subsidiary Guarantee shall be
held in any judicial proceeding to be unenforceable or invalid or shall cease
for any reason to be in full force and effect or any
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Subsidiary Guarantor, or any Person acting on behalf of any Subsidiary
Guarantor, shall deny or disaffirm its obligations under its Subsidiary
Guarantee, (vii) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any of its
Restricted Subsidiaries) whether such Indebtedness or guarantee now exists, or
is created after the Issue Date, which default (a) is caused by a failure to pay
principal when due at final stated maturity (a "Payment Default"), or (b)
results in the acceleration of such Indebtedness prior to its express maturity
and, in each case, the principal amount of any such Indebtedness, together with
the principal amount of any other such Indebtedness under which there has been a
Payment Default or the maturity of which has been so accelerated, aggregates
$7.5 million or more, (viii) failure by the Company or any of its Restricted
Subsidiaries to pay final judgments aggregating in excess of $7.5 million, which
judgments are not paid, discharged or stayed for a period of 60 days, and (ix)
certain events of bankruptcy or insolvency with respect to the Company or any of
its Significant Subsidiaries.
If any Event of Default occurs and is continuing (other than certain events
of bankruptcy and insolvency), the Trustee or the Holders of at least 30% in
principal amount of the then outstanding Notes may declare all the Notes to be
due and payable by notice in writing to the Company and the Trustee specifying
the respective Event of Default and that it is a notice of acceleration (the
"Acceleration Notice"), and the same (i) shall become immediately due and
payable, or (ii) if there are any amounts outstanding under the New Credit
Facility, shall become immediately due and payable upon the first to occur of
an acceleration under the New Credit Facility or five Business Days after
receipt by the Company and the Representative under the New Credit Facility of
such Acceleration Notice but only if such Event of Default is then continuing.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency, with respect to the Company, any
Significant Subsidiary or any group of Restricted Subsidiaries that, taken
together, would constitute a Significant Subsidiary, all outstanding Notes will
become due and payable without declaration or other action or notice. Holders
of the Notes may not enforce the Indenture or the Notes, except as provided in
the Indenture. Subject to certain limitations, Holders of a majority in
principal amount of the then outstanding Notes may direct the Trustee in its
exercise of any trust or power. In the event of a declaration of acceleration
of the Notes because an Event of Default has occurred and is continuing as a
result of the acceleration of any Indebtedness described in clause (vii) of the
preceding paragraph, the declaration of acceleration of the Notes shall be
automatically annulled if the holders of any Indebtedness described in clause
(vii) have rescinded the declaration of acceleration in respect of such
Indebtedness within 30 days of the date of such declaration and if (i) the
annulment of the acceleration of the Notes would not conflict with any judgment
or decree of a court of competent jurisdiction, and (ii) all existing Events of
Default, except nonpayment of principal or interest or Liquidated Damages on
the Notes that became due solely because of the acceleration of the Notes, have
been cured or waived. The Trustee may withhold from Holders of the Notes notice
of any continuing Default or Event of Default (except a Default or Event of
Default relating to the payment of principal or interest) if it determines that
withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
August 1, 2002, by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to August 1, 2002, then the
premium specified in the Indenture shall also become immediately due and
payable to the extent permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
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NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or any Restricted Subsidiary, as such, shall have any liability for any
obligations of the Company or any Restricted Subsidiary under the Notes, the
Indenture or any Subsidiary Guarantee or for any claim based on, in respect of,
or by reason of, such obligations or their creation. Each Holder of Notes by
accepting a Note waives and releases all such liability. The waiver and release
are part of the consideration for issuance of the Notes. Such waiver may not be
effective to waive liabilities under the federal securities laws and it is the
view of the Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company and the Subsidiary Guarantors may, at their option and at any
time, elect to have all of their obligations discharged with respect to the
outstanding Notes and Subsidiary Guarantees ("Legal Defeasance") except for (i)
the rights of Holders of outstanding Notes to receive payments in respect of
the principal of, premium, if any, and interest and Liquidated Damages on such
Notes when such payments are due from the trust referred to below, (ii) the
Company's obligations with respect to the Notes concerning issuing temporary
Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and
the maintenance of an office or agency for payment and money for security
payments held in trust, (iii) the rights, powers, trusts, duties and immunities
of the Trustee, and the Company's obligations in connection therewith, and (iv)
the Legal Defeasance provisions of the Indenture. In addition, the Company may,
at its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the
benefit of the Holders of the Notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any, interest and
Liquidated Damages, if any, on the outstanding Notes on the stated maturity or
on the applicable redemption date, as the case may be, and the Company must
specify whether the Notes are being defeased to maturity or to a particular
redemption date, (ii) in the case of Legal Defeasance, the Company shall have
delivered to the Trustee an Opinion of Counsel reasonably acceptable to the
Trustee confirming that (a) the Company has received from, or there has been
published by, the Internal Revenue Service a ruling, or (b) since the date of
the Indenture, there has been a change in the applicable federal income tax
law, in either case to the effect that, and based thereon such opinion of
counsel shall confirm that, the Holders of the outstanding Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Legal Defeasance had not occurred, (iii) in the case of Covenant
Defeasance, the Company shall have delivered to the Trustee an Opinion of
Counsel reasonably acceptable to the Trustee confirming that the Holders of the
outstanding Notes will not recognize income, gain or loss for federal income
tax purposes as a result of such Covenant Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not occurred,
(iv) no Default or Event of Default shall have occurred and be continuing on
the date of such deposit (other than a Default or Event of Default resulting
from the borrowing of funds to be applied to such deposit) or insofar as Events
of Default from bankruptcy or insolvency events are concerned, at any time in
the period ending on the 91st day after the date of deposit, (v) such Legal
Defeasance or Covenant Defeasance will not result in a breach or violation of,
or constitute a default under the New Credit Facility or any other material
agreement or instrument (other than the Indenture) to which the Company or any
of its Restricted Subsidiaries is a party or by which the Company or any of its
Restricted Subsidiaries is bound, (vi) the Company must deliver to the Trustee
an Officer's Certificate stating that the deposit was not made by the Company
with the intent of preferring the Holders of Notes over the other creditors of
the Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others, and (vii) the Company must deliver to the
Trustee an Officer's Certificate and an Opinion of Counsel, each stating that
all conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
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TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note
selected for redemption. Also, the Company is not required to transfer or
exchange any Note for a period of 15 days before a selection of Notes to be
redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender
offer or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed maturity
of any Note or alter the provisions with respect to the redemption of the Notes
(other than provisions relating to the covenants described above under the
caption "-- Certain Covenants -- Change of Control" and "-- Asset Sales"),
(iii) reduce the rate of or change the time for payment of interest on any
Note, (iv) waive a Default or Event of Default in the payment of principal of
or premium, if any, or interest on the Notes (except a rescission of
acceleration of the Notes by the Holders of at least a majority in aggregate
principal amount of the Notes and a waiver of the payment default that resulted
from such acceleration), (v) make any Note payable in money other than that
stated in the Notes, (vi) make any change in the provisions of the Indenture
relating to waivers of past Defaults or the rights of Holders of Notes to
receive payments of principal of or premium, if any, or interest on the Notes,
(vii) waive a redemption payment with respect to any Note (other than a payment
required by the covenants described above under the captions "-- Certain
Covenants -- Change of Control" and "-- Asset Sales"), or (viii) make any
change in the foregoing amendment and waiver provisions. In addition, any
amendment to the provisions of Article 11 of the Indenture (which relate to
subordination) will require the consent of the Holders of at least 66 2/3% in
aggregate principal amount of the Notes then outstanding if such amendment
would adversely affect the rights of Holders of Notes.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of Certificated Notes, to provide for the
assumption of the Company's obligations to Holders of Notes in the case of a
merger or consolidation, to make any change that would provide any additional
rights or benefits to the Holders of Notes or that does not adversely affect
the legal rights under the Indenture of any such Holder, or to comply with
requirements of the Commission in order to effect or maintain the qualification
of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage in
other transactions; however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct
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of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any Holder of Notes, unless such Holder shall have offered to
the Trustee security and indemnity satisfactory to it against any loss,
liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture
without charge by writing to HydroChem Industrial Services, Inc., 6210 Rothway,
Houston, Texas 77040, Attention: Chief Financial Officer.
BOOK-ENTRY, DELIVERY AND FORM
The Old Notes have been, and the New Notes initially will be, issued in the
form of a Global Note (the "Global Note"). The Global Note will be deposited
with, or on behalf of, DTC and registered in the name of DTC or its nominee.
Except as set forth below, the Global Note may be transferred, in whole or in
part, only to DTC or another nominee of DTC. Investors may hold their
beneficial interest in the Global Note directly through DTC if they are
participants in such system or indirectly through organizations which are
participants in such system.
DTC is a limited-purpose trust company that was created to hold securities
for its participating organizations (collectively, the "Participants") and to
facilitate the clearance and settlement of transactions in such securities
between Participants through electronic book-entry changes in accounts of its
Participants. The Participants include securities brokers and dealers
(including the Initial Purchaser), banks and trust companies, clearing
corporations and certain other organizations. Access to DTC's system is also
available to other entities such as banks, brokers, dealers and trust companies
(collectively, the "Indirect Participants") that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly.
Persons who are not Participants may beneficially own securities held by or on
behalf of DTC only through the Participants or Indirect Participants.
Upon the issuance of the Global Note, DTC will credit the accounts of
Participants designated by the Trustee with portions of the principal amount of
the Global Note. Ownership of the Notes evidenced by the Global Note will be
shown on, and the transfer of ownership thereof will be effected only through,
records maintained by DTC (with respect to the interest of Participant), the
Participants and the Indirect Participants. Prospective purchasers are advised
that the laws of some states require that certain persons take physical
delivery in definitive form of securities they own. Consequently, the ability
to transfer Notes evidenced by the Global Note will be limited to such extent.
So long as the nominee of DTC is the registered owner or holder of any
Notes, such nominee will be considered the sole owner or Holder under the
Indenture of any Notes evidenced by the Global Note. Beneficial owners of Notes
evidenced by the Global Note will not be considered the owners or Holders
thereof under the Indenture for any purpose, including with respect to the
giving of any directions, instructions or approvals to the Trustee thereunder.
Neither the Company nor the Trustee will have any responsibility or liability
for any aspect of the records of DTC or for maintaining, supervising or
reviewing any records of DTC relating to the Notes. No beneficial owner of an
interest in any Global Note will be able to transfer that interest except in
accordance with DTC's procedures in addition to those provided for under the
Indenture.
Payments in respect of the principal of, premium, if any, interest and
Liquidated Damages, if any, on, any Notes registered in the name of the nominee
of DTC on the applicable record date will be payable by the Trustee to or at
the direction of DTC or its nominee in its capacity as the registered Holder
under the Indenture. Under the terms of the Indenture, the Company and the
Trustee may treat the person in whose names Notes, including the Global Note,
are registered as the owners thereof for the purpose of receiving such
payments. Consequently, neither the Company, the Trustee nor any paying agent
of the Company has or will have any responsibility or liability for the payment
of such amounts to beneficial owners of Notes (including principal, premium, if
any, interest and Liquidated Damages, if any). The Company believes, however,
that it is currently the policy of DTC or its nominee, to immediately credit
the accounts of the relevant Participants with such payments, in amounts
proportionate to their respective holdings of beneficial interests in the
relevant security as shown on the records of DTC or its nominee. Payments by
the Participants and the Indirect Participants to the beneficial owners of
Notes will be governed by standing instructions and customary practice and will
be the responsibility of the Participants or the Indirect Participants.
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The laws of some states require that certain persons take physical delivery
in definitive, certificated form of securities that they own. This may limit or
curtail the ability to transfer beneficial interests in the Global Note to such
persons. Because DTC can act only on behalf of Participants, which in turn act
on behalf of other parties, the ability of a person having a beneficial
interest in the Global Note to pledge such interest to persons or entities that
are not Participants in DTC, or to otherwise take actions in respect of such
interests, may be affected by the lack of physical certificates evidencing such
interests.
CERTIFICATED NOTES
If (i) the Company notifies the Trustee in writing that DTC or its nominee
is no longer willing or able to act as a depository and the Company is unable
to locate a qualified successor within 90 days, or (ii) the Company, at its
option, notifies the Trustee in writing that it elects to cause the issuance of
Notes in the form of Certificated Securities under the Indenture, then, upon
surrender by DTC or its nominee of the Global Note, Notes in such form will be
issued to each person that DTC or its nominee identify as being the beneficial
owner of the corresponding Notes.
Neither the Company nor the Trustee will be liable for any delay by a
holder of a Global Note or DTC or its nominee in identifying the beneficial
owners of Notes and the Company and the Trustee may conclusively rely on, and
will be protected in relying on, instructions from DTC or its nominee for all
purposes.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
In connection with the Offering of the Old Notes, the Company, HII and the
Initial Purchaser entered into the Registration Rights Agreement whereby the
Company and HII agreed to file with the Commission the registration statement,
of which this Prospectus is a part, under the Securities Act with respect to
the New Notes (the "Exchange Offer Registration Statement"). The Registration
Rights Agreement provides that, if (i) the Company is not required to file the
Exchange Offer Registration Statement or permitted to consummate the Exchange
Offer because the Exchange Offer is not permitted by applicable law or
Commission policy, or (ii) any Holder of Transfer Restricted Securities
notifies the Company within the specified time period that (a) it is prohibited
by law or Commission policy from participating in the Exchange Offer, or (b)
that it may not resell the New Notes acquired by it in the Exchange Offer to
the public without delivering a prospectus and the prospectus contained in the
Exchange Offer Registration Statement is not appropriate or available for such
resales, or (c) that it is a broker-dealer and owns Notes acquired directly
from the Company or an Affiliate of the Company, the Company and HII will file
with the SEC a shelf registration statement (the "Shelf Registration
Statement") to cover resales of the Old Notes by the Holders thereof who
satisfy certain conditions relating to the provision of information in
connection with the Shelf Registration Statement. For purposes of the
foregoing, "Transfer Restricted Securities" means each Note until (i) the date
on which such Note has been exchanged by a person other than a restricted
broker-dealer for a New Note in the Exchange Offer, (ii) the date on which such
Note has been disposed of in accordance with the Shelf Registration Statement,
(iii) the date on which such Note has been disposed of in accordance with the
provisions under "Plan of Distribution" (including delivery of the Prospectus
contained therein), or (iv) the date on which such Note is distributed to the
public pursuant to Rule 144 under the Securities Act or otherwise saleable
under Rule 144(k).
The Registration Rights Agreement provides that (i) the Company and HII
will file an Exchange Offer Registration Statement with the SEC on or prior to
60 days after the Issue Date, (ii) the Company and HII will use their
reasonable best efforts to have the Exchange Offer Registration Statement
declared effective by the SEC on or prior to 120 days after the Issue Date,
(iii) unless the Exchange Offer would not be permitted by applicable law or SEC
policy, the Company and HII will commence the Exchange Offer and use their
reasonable best efforts to issue on or prior to 30 Business Days after the date
on which the Exchange Offer Registration Statement was declared effective by
the SEC, New Notes in exchange for Old Notes tendered prior thereto in the
Exchange Offer, and (iv) if obligated to file the Shelf Registration Statement,
the Company and HII will use their reasonable best efforts to file the Shelf
Registration Statement with the SEC on or prior to 60 days after such filing
obligation arises and to cause the Shelf Registration Statement to be declared
effective by the SEC on or prior to 120 days after such filing obligation
arises. If (a) the Company or HII fails to file any of the Registration
Statements required by the Registration Rights Agreement on or before the date
specified for such filing, (b) any of such Registration Statements is not
declared effective by the SEC on or prior to the date specified for such
effectiveness (the "Effectiveness Target Date"), (c) the Company or HII fails
to consummate the Exchange Offer within 30 Business Days of the
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Effectiveness Target Date with respect to the Exchange Offer Registration
Statement, or (d) the Shelf Registration Statement or the Exchange Offer
Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Transfer Restricted Securities
during the periods specified in the Registration Rights Agreement (each such
event referred to in clauses (a) through (d) above a "Registration Default"),
then the Company and HII, jointly and severally, will pay Liquidated Damages to
each Holder of Notes, with respect to the first 90-day period immediately
following the occurrence of such Registration Default in an amount equal to
$.0481 per week per $1,000 principal amount of Transfer Restricted Securities
held by such Holder. The amount of the Liquidated Damages will increase by an
additional $.0481 per week per $1,000 principal amount of Transfer Restricted
Securities with respect to each subsequent 90-day period until all Registration
Defaults have been cured, up to a maximum amount of Liquidated Damages of $.1924
per week per $1,000 principal amount of Transfer Restricted Securities. All
accrued Liquidated Damages will be paid by the Company to the Global Note Holder
by wire transfer of immediately available funds or by federal funds check and to
Holders of Certificated Securities by wire transfer to the accounts specified by
them or by mailing checks to their registered addresses if no such accounts have
been specified. Following the cure of all Registration Defaults, the accrual of
Liquidated Damages will cease.
Holders of Old Notes will be required to make certain representations to
the Company and HII (as described in the Registration Rights Agreement) in
order to participate in the Exchange Offer and will be required to deliver
information to be used in connection with the Shelf Registration Statement and
to provide comments on the Shelf Registration Statement within the time periods
set forth in the Registration Rights Agreement in order to have their Old Notes
included in the Shelf Registration Statement and benefit from the provisions
regarding Liquidated Damages set forth above.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means (i) Indebtedness of any Person existing at the time
such Person became a Restricted Subsidiary or is merged with or into the
Company or a Restricted Subsidiary, including, without limitation, Indebtedness
incurred in connection with, or in contemplation of such other Person becoming
a Restricted Subsidiary or merging with or into the Company or a Restricted
Subsidiary, and (ii) Indebtedness secured by a Lien encumbering any asset
acquired by the Company or any Restricted Subsidiary.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall
mean the possession, directly or indirectly, of the power to direct or cause
the direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that, with
respect to Parent and the Company only, beneficial ownership of 10% or more of
the voting securities of Parent or the Company shall be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets (including, without limitation, by way of a sale and leaseback)
other than sales or dispositions of Cash Equivalents and inventory in the
ordinary course of business (provided that the sale, lease, conveyance or other
disposition of all or substantially all of the assets of the Company and its
Restricted Subsidiaries taken as a whole will be governed by the provisions of
the Indenture described above under the caption "-- Certain Covenants -- Change
of Control" and/or the provisions described above under the caption "-- Certain
Covenants -- Merger, Consolidation or Sale of Assets" and not by the provisions
of the Asset Sale covenant), and (ii) the issue or sale by the Company or any
of its Restricted Subsidiaries of Equity Interests of any of the Company's
Restricted Subsidiaries, in the case of either clause (i) or (ii), whether in a
single transaction or a series of related transactions (a) that have a fair
market value in excess of $2.0 million or (b) for net proceeds in excess of
$2.0 million. Notwithstanding the foregoing: (i) a transfer of assets by the
Company to a Wholly-Owned Restricted Subsidiary or by a Wholly-Owned Restricted
Subsidiary to the Company or to another Wholly-Owned Restricted Subsidiary,
(ii) an issuance of Equity Interests by a Wholly-Owned Restricted Subsidiary to
the Company or to another Wholly-Owned Restricted Subsidiary, and (iii) a
Restricted Payment that is permitted by the covenant described above under the
caption "-- Certain Covenants -- Restricted Payments" will not be deemed to be
Asset Sales. Notwithstanding the foregoing, "Asset Sale" does
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not include any sale lease, conveyance or other transfer or disposal of all or
any part of the assets of HII's Singapore branch, having a cumulative value not
to exceed $2.5 million, in exchange for any combination of cash, Cash
Equivalents, assets or Equity Interests in a Person having operations in
Southeast Asia; provided that if assets or Equity Interests are received in
connection with such disposition, such assets must be useful in, or the Person
whose Equity Interests are received must be in, the Company's or HII's business
or any business similar or reasonably related thereto.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the discounted present value of the liability in respect of a
capital lease that would at such time be required to be capitalized on a
balance sheet of such Person in accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited), and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of,
the issuing Person.
"Cash Equivalents" means (i) United States dollars or foreign currency that
is readily exchangeable into United States dollars, (ii) securities issued or
directly and fully guaranteed or insured by the United States government or any
agency or instrumentality thereof having maturities of not more than 12 months
from the date of acquisition, (iii) certificates of deposit and Eurodollar time
deposits with maturities of 12 months or less from the date of acquisition,
bankers' acceptances with maturities not exceeding 12 months and overnight bank
deposits, in each case with any domestic commercial bank having capital and
surplus in excess of $500 million and a Keefe Bank Watch Rating of "B" or
better, (iv) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (ii) and (iii) above
entered into with any financial institution meeting the qualifications
specified in clause (iii) above, and (v) commercial paper having the highest
rating obtainable from Moody's Investors Service, Inc. or Standard & Poor's
Corporation and in each case maturing within 12 months after the date of
acquisition.
"Change of Control" means the occurrence of any of the following events:
(i) the sale, lease, transfer, conveyance, barter or other disposition (other
than by way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of the assets of Parent or the
Company and its Restricted Subsidiaries taken as a whole to any "person" (as
such term is used in Section 13(d)(3) of the Exchange Act) other than the
Principals or their Related Parties (as defined below), (ii) the consummation
of any transaction (including, without limitation, any merger or consolidation)
the result of which is that any "person" (as defined above), other than the
Principals and their Related Parties, becomes the "beneficial owner" (as such
term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except
that a person shall be deemed to have "beneficial ownership" of all securities
that such person has the right to acquire, whether such right is currently
exercisable or is exercisable only upon the occurrence of a subsequent
condition), directly or indirectly, of more than 50% of the Voting Stock of
Parent or the Company (measured by voting power rather than number of shares),
(iii) the first day on which a majority of the members of the Board of
Directors of Parent or the Company are not Continuing Directors, or (iv) Parent
or the Company consolidates with, or merges with or into, any Person (other
than a consolidation or merger of the Parent and the Company) or any Person
consolidates with, or merges with or into, Parent or the Company, pursuant to a
transaction in which any of the outstanding Voting Stock of Parent or the
Company is converted into or exchanged for cash, securities or other property,
other than any such transaction where the majority of the members of the Board
of Directors of such Person are Continuing Directors.
"Consolidated Cash Flow" means, with respect to the Company for any period,
the Consolidated Net Income of the Company and its Restricted Subsidiaries for
such period plus (i) an amount equal to any extraordinary loss, extraordinary
provision or provision for restructuring operations plus any net loss realized
in connection with an Asset Sale (to the extent such losses were deducted in
computing such Consolidated Net Income), plus (ii) provision for taxes based on
income or profits of the Company and its Restricted Subsidiaries for such
period, to the extent that such provision for taxes was included in computing
such Consolidated Net Income, plus (iii) consolidated interest expense of the
Company and its Restricted Subsidiaries for such period, whether paid or
accrued and whether or not capitalized (including, without limitation,
amortization of debt issuance costs and original issue discount, non-cash
interest payments, the interest component of any deferred payment obligations,
the interest component of all
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payments associated with Capital Lease Obligations, commissions, discounts and
other fees and charges incurred in respect of letter of credit or bankers'
acceptance financings, and net payments (if any) pursuant to Hedging
Obligations), to the extent that any such expense was deducted in computing such
Consolidated Net Income, plus (iv) depreciation, amortization (including
amortization of goodwill and other intangibles but excluding amortization of
prepaid cash expenses that were paid in a prior period) and other non-cash
expenses (excluding any such non-cash expense to the extent that it represents
an accrual of or reserve for cash expenses in any future period or amortization
of a prepaid cash expense that was paid in a prior period) of the Company and
its Restricted Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash expenses were deducted in
computing such Consolidated Net Income minus (v) non-cash write-ups increasing
such Consolidated Net Income for such period, in each case, on a consolidated
basis and determined in accordance with GAAP; provided that Consolidated Net
Income shall exclude the impact of foreign currency translations.
Notwithstanding the foregoing, the provision for taxes on the income or profits
of, and the depreciation and amortization and other non-cash charges of, a
Restricted Subsidiary of the referenced Person shall be added to Consolidated
Net Income to compute Consolidated Cash Flow only to the extent that a
corresponding amount would be permitted at the date of determination to be
distributed to the Company by such Restricted Subsidiary either (i) without
prior governmental approval or (ii) with governmental approval that has been
obtained or that could readily and reasonably be obtained, and without direct or
indirect restriction pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that Restricted Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to the Company for any
period, the aggregate of the Net Income of the Company and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP and excluding any extraordinary loss that will be incurred as a
result of the application of the net proceeds from the issuance of the Notes;
provided that (i) the Net Income (but excluding, in all events, any loss) of
any Person that is not a Restricted Subsidiary or that is accounted for by the
equity method of accounting shall be included only to the extent of the amount
of dividends or distributions paid in cash to the referenced Person or a
Wholly-Owned Restricted Subsidiary thereof, (ii) the Net Income of any
Restricted Subsidiary shall be excluded to the extent that the declaration or
payment of dividends or similar distributions by that Restricted Subsidiary of
that Net Income is not at the date of determination permitted without any prior
governmental approval (unless such governmental approval could be readily and
reasonably obtained) or, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to that Subsidiary or its
stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition
shall be excluded, and (iv) the cumulative effect of a change in accounting
principles shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Subsidiaries as of such date plus (ii) the
respective amounts reported on such Person's balance sheet as of such date with
respect to any series of preferred stock (other than Disqualified Stock) that
by its terms is not entitled to the payment of dividends unless such dividends
may be declared and paid only out of net earnings in respect of the year of
such declaration and payment, but only to the extent of any cash received by
such Person upon issuance of such preferred stock, less (x) all write-ups
(other than write-ups resulting from foreign currency translations and
write-ups of tangible assets of a going concern business made within 12 months
after the acquisition of such business) subsequent to the date of the Indenture
in the book value of any asset owned by such Person or a consolidated
Subsidiary of such Person, (y) all investments as of such date in
unconsolidated Subsidiaries and in Persons that are not Subsidiaries (except,
in each case, Permitted Investments), and (z) all unamortized debt discount and
expense and unamortized deferred charges, excluding goodwill and other
purchased intangibles, as of such date, all of the foregoing determined in
accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company or the Parent who (i) was a member of
such Board of Directors on the date of the Indenture, (ii) was nominated for
election or elected to such Board of Directors pursuant to the Stockholders'
Agreement at any time or from time to time, or (iii) was nominated or elected
by a majority of the Continuing Directors who were members of such Board at the
time of such nomination or election.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
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"Designated Senior Debt" means (i) any Indebtedness outstanding under the
New Credit Facility and (ii) any other Senior Debt permitted under the
Indenture, the principal amount of which is $25.0 million or more and that has
been designated by the Company as "Designated Senior Debt" pursuant to the
terms of the Indenture.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable
at the option of the Holder thereof, in whole or in part, on or prior to the
date that is 91 days after the date on which the Notes mature; provided that
Capital Stock issued to employees pursuant to agreements providing that the
employee may require the Company to repurchase such Capital Stock in certain
circumstances shall not be deemed to be Disqualified Stock if such agreements
provide that the repurchase rights are subject to the limitations on such
repurchases set forth in the covenant entitled "-- Restricted Payments."
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means a public or private offering of the Capital Stock
of the Company, Parent or any Subsidiary of the Company or Parent.
"Existing Indebtedness" means up to $3.0 million in aggregate principal
amount of Indebtedness (including outstanding undrawn letters of credit) of the
Company and its Restricted Subsidiaries in existence on the date of the
Indenture after application of the net proceeds from the Offering of the Notes,
until such amounts are repaid.
"Excluded Restricted Subsidiary" means any Wholly-Owned Restricted
Subsidiary principally engaged in a business similar to that of the Company or
any of its Restricted Subsidiaries or any business reasonably related thereto
and domiciled outside the United States of America so long as the issuance of a
Subsidiary Guarantee by such Subsidiary would, as determined in a resolution of
the Board of Directors (based on written advice from an independent accounting
firm of national standing) set forth in an Officers' Certificate delivered to
the Trustee, create a material tax disadvantage.
"Fixed Charges" means, with respect to the Company for any period, the sum,
without duplication, of (i) the consolidated interest expense of the Company
and its Restricted Subsidiaries for such period, whether paid or accrued
(including, without limitation, amortization of debt issuance costs and
original issue discount, non-cash interest payments, the interest component of
any deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, commissions, discounts and other
fees and charges incurred in respect of letter of credit or bankers' acceptance
financings, and net payments (if any) pursuant to Hedging Obligations), and
(ii) the consolidated interest expense of the Company and its Restricted
Subsidiaries that was capitalized during such period, and (iii) any interest
expense on Indebtedness of another Person that is Guaranteed by the Company or
one of its Restricted Subsidiaries or secured by a Lien on assets of the
Company or one of its Restricted Subsidiaries (whether or not such Guarantee or
Lien is called upon), and (iv) the product of (a) all dividend payments,
whether or not in cash, on any series of preferred stock of the Company or any
of its Restricted Subsidiaries, other than dividend payments on Equity
Interests payable solely in Equity Interests of the Company and dividend
payments from Restricted Subsidiaries to the Company, times (b) a fraction, the
numerator of which is one and the denominator of which is one minus the then
current combined federal, state and local statutory tax rate of the Company,
expressed as a decimal, in each case, on a consolidated basis and in accordance
with GAAP.
"Fixed Charge Coverage Ratio" means with respect to the Company for any
period, the ratio of the Consolidated Cash Flow of the Company for such period
to the Fixed Charges of the Company for such period. In the event that the
Company or any of its Restricted Subsidiaries incurs, assumes, Guarantees or
redeems any Indebtedness (other than revolving credit borrowings) or issues
preferred stock subsequent to the commencement of the period for which the
Fixed Charge Coverage Ratio is being calculated but prior to the date on which
the event for which the calculation of the Fixed Charge Coverage Ratio is made
(the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be
calculated giving pro forma effect to such incurrence, assumption, Guarantee or
redemption of Indebtedness, or such issuance or redemption of preferred stock,
as if the same had occurred at the beginning of the applicable four-quarter
reference period. In addition, for purposes of making the computation referred
to above, (i) acquisitions that have been made by the Company or any of its
Restricted Subsidiaries, including through mergers
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or consolidations and including any related financing transactions, during the
four-quarter reference period or subsequent to such reference period and on or
prior to the Calculation Date shall be deemed to have occurred on the first day
of the four-quarter reference period and Consolidated Cash Flow for such
reference period shall be calculated without giving effect to clause (iii) of
the proviso set forth in the definition of Consolidated Net Income, and (ii) the
Consolidated Cash Flow attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, and (iii) the Fixed Charges attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, but
only to the extent that the obligations giving rise to such Fixed Charges will
not be obligations of the Company or any of its Restricted Subsidiaries
following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture; provided, that
all reports and other financial information provided by the Company to the
Holders, the Trustee and/or the Commission shall be prepared in accordance with
GAAP, as in effect on the date of such report or other financial information.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements, (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates, or (iii) agreements or arrangements designed to protect such Person
against fluctuations in foreign currency exchange rates in the conduct of its
operations.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or,
without double counting, reimbursement agreements in respect thereof) or
bankers' acceptances or representing Capital Lease Obligations or the balance
deferred and unpaid of the purchase price of any property or representing any
Hedging Obligations, except any such balance that constitutes an accrued
expense or trade payable, if and to the extent any of the foregoing
indebtedness (other than letters of credit and Hedging Obligations) would
appear as a liability upon a balance sheet of such Person prepared in
accordance with GAAP, as well as all indebtedness of others secured by a Lien
on any asset of such Person (whether or not such indebtedness is assumed by
such Person) and, to the extent not otherwise included, the Guarantee by such
Person of any indebtedness of any other Person.
"Initial Purchaser" means Donaldson, Lufkin & Jenrette Securities
Corporation.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding any advances to customers and any
commission, travel, moving, relocation or similar advances to officers and
employees made in the ordinary course of business), purchases or other
acquisitions for consideration of Indebtedness, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP. If the Company
or any Restricted Subsidiary of the Company sells or otherwise disposes of any
Equity Interests of any direct or indirect Restricted Subsidiary of the Company
such that, after giving effect to any such sale or disposition, such Person is
no longer a Restricted Subsidiary of the Company, the Company shall be deemed
to have made an Investment on the date of any such sale or disposition equal to
the fair market value of the Equity Interests of such Restricted Subsidiary not
sold or disposed of in an amount determined as provided in the final paragraph
of the covenant described above under the caption "Certain Covenants --
Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
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(including any conditional sale or other title retention agreement, any lease
in the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction)
(other than with respect to an operating lease).
"Net Income" means, with respect to the Company, the net income or loss of
the Company and its Restricted Subsidiaries, determined in accordance with GAAP
and before any reduction in respect of preferred stock dividends, excluding,
however, (i) any gain (but not loss), together with any related provision for
taxes on such gain (but not loss), realized in connection with (a) any Asset
Sale (including, without limitation, dispositions pursuant to sale and
leaseback transactions), or (b) the disposition of any securities by the
Company or any of its Restricted Subsidiaries or the extinguishment of any
Indebtedness of the Company or any of its Restricted Subsidiaries, and (ii) any
extraordinary or nonrecurring gain (but not loss), together with any related
provision for taxes on such extraordinary or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any travel or
relocation expenses incurred as a result thereof, taxes (including income
taxes) paid or payable as a result thereof, or as a result of required
prepayments or repayments of Indebtedness resulting in the permanent reduction
thereof (after taking into account any available tax credits or deductions and
any tax sharing arrangements), amounts required to be applied to repay
Indebtedness secured by a Lien on such assets (other than pursuant to the New
Credit Facility) and any reserve for adjustment in respect of the sale price of
such asset or assets established in accordance with GAAP.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, costs, expenses, damages and other
liabilities payable under the documentation governing any Indebtedness.
"Permitted Investments" means: (i) any Investments in the Company or in a
Restricted Subsidiary (other than an Excluded Restricted Subsidiary) of the
Company, (ii) any Investments in Cash Equivalents, to the extent that any such
Investment is not made for speculative investment purposes, (iii) any
Investments by the Company or any Restricted Subsidiary of the Company in a
Person, if as a result of any such Investment (a) such Person becomes a
Restricted Subsidiary (other than an Excluded Restricted Subsidiary) of the
Company, or (b) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to, or is
liquidated into, the Company or a Restricted Subsidiary (other than an Excluded
Restricted Subsidiary) of the Company, (iv) any Restricted Investment made as a
result of the receipt of non-cash consideration from an Asset Sale that was
made pursuant to and in compliance with the covenant described above under the
caption "Certain Covenants -- Asset Sales", (v) any acquisition of assets in
exchange for the issuance of Equity Interests (other than Disqualified Stock)
of the Company, (vi) loans and advances to officers, directors and employees
for business-related travel expenses, moving or relocation expenses and other
similar expenses, in each case incurred in the ordinary course of business;
(vii) Hedging Obligations included in the definition of Permitted Debt, (viii)
advances to employees not exceeding $500,000 outstanding at any one time, in
the aggregate, (ix) Investments, including the acquisition of assets, Equity
Interests or other securities, the payment for which consists of Equity
Interests of the Company (exclusive of Disqualified Stock), and (x) Investments
by the Company or its Restricted Subsidiaries in its Excluded Restricted
Subsidiaries, the aggregate outstanding amount of which does not exceed 7.5% of
the first $500 million of consolidated total assets of the Company and its
Restricted Subsidiaries plus 5% of such total assets in excess of $500 million.
"Permitted Junior Securities" means Equity Interests in the Company or
unsecured debt securities that (i) are subordinated to all Senior Debt (and any
debt securities issued in exchange for Senior Debt) on terms at least as
favorable to the Senior Debt as those contained in Article 11 of the Indenture,
(ii) may be guaranteed by the Subsidiary Guarantors on terms at least as
favorable to the Senior Debt as those contained in the Subsidiary Guarantees,
and (iii) have a final maturity and weighted average life to maturity which is
the same as or greater than, the Notes.
"Permitted Liens" means: (i) Liens securing Senior Debt or Senior Debt of
any Restricted Subsidiary that are permitted by the terms of the Indenture to
be incurred, (ii) Liens in favor of the Company or any Restricted
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Subsidiary, (iii) Liens on property of a Person existing at the time such Person
is merged into or consolidated with the Company or any Restricted Subsidiary of
the Company; provided that such Liens were in existence prior to the
contemplation of such merger or consolidation and do not extend to any assets
other than those of the Person merged into or consolidated with the Company or
any Restricted Subsidiary, (iv) Liens on property existing at the time of
acquisition thereof by the Company or any Restricted Subsidiary of the Company,
provided that such Liens were in existence prior to the contemplation of such
acquisition, (v) Liens to secure the performance of statutory obligations,
surety or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business, (vi) Liens existing on the date of
the Indenture, (vii) Liens to secure Indebtedness (including Capital Lease
Obligations) permitted by clause (viii) of the second paragraph of the covenant
entitled "Incurrence of Indebtedness and Issuance of Preferred Stock" covering
only the assets acquired with such Indebtedness and accessions, modifications,
products and proceeds thereof, (viii) Liens for taxes, assessments or
governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently concluded; provided that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made therefor, (ix)
encumbrances and restrictions consisting of zoning restrictions, easements, or
other restrictions on the use of real property, which do not materially impair
the use thereof for the purpose intended, and none of which is violated by
existing or proposed structures or land use, and (x) Liens incurred in the
ordinary course of business of the Company or any Restricted Subsidiary with
respect to obligations that do not exceed $5.0 million at any one time
outstanding and that (a) are not incurred in connection with the borrowing of
money or the obtaining of advances or credit (other than trade credit in the
ordinary course of business), and (b) do not in the aggregate materially detract
from the value of the property or materially impair the use thereof in the
operation of business by the Company or such Restricted Subsidiary.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any Restricted Subsidiary issued in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any Restricted Subsidiary, provided that: (i)
the principal amount (or accreted value, if applicable) of such Permitted
Refinancing Indebtedness does not exceed the principal amount of (or accreted
value, if applicable), plus accrued interest on, the Indebtedness so extended,
refinanced, renewed, replaced, defeased or refunded (plus the amount of
premiums, prepayments, penalties, and reasonable expenses incurred in
connection therewith), (ii) such Permitted Refinancing Indebtedness has a final
maturity date equal to or later than the final maturity date of, and has a
Weighted Average Life to Maturity equal to or greater than the Weighted Average
Life to Maturity of, the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded, (iii) if the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded is subordinated in right of
payment to the Notes, such Permitted Refinancing Indebtedness has a final
maturity date later than the final maturity date of, and is subordinated in
right of payment to, the Notes on terms at least as favorable to the Holders of
Notes as those contained in the documentation governing the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded, and (iv) such
Indebtedness is incurred either by the Company or by the Restricted Subsidiary
who is the obligor on the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded.
"Principals" means Citicorp Venture Capital, Ltd., BT Capital Partners,
Inc., LKCM Venture Partners I Ltd., World Equity Partners, L.P., CCT Partners
II, L.P., HES Management, Inc., Heller Financial, Inc. and B. Tom Carter, Jr.
"Related Party" with respect to any Principal means (i) any controlling
stockholder, 80% (or more) owned Subsidiary, or any spouse or immediate family
member (in the case of an individual) of such Principal, or (ii) any trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners, owners or Persons beneficially holding an 80% or more controlling
interest of which consist of such Principal and/or such other Persons referred
to in the immediately preceding clause (i).
"Representative" means (a) the administrative agent under the New Credit
Facility or (b) the indenture trustee or other trustee, agent or representative
for any other Senior Debt.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" means (a) each direct or indirect Subsidiary of the
Company existing on the date of the Indenture and (b) any other direct or
indirect Subsidiary of the Company formed, acquired or existing after the date
of the Indenture, in each case which is not designated by the Board of
Directors as an "Unrestricted Subsidiary."
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"Senior Debt" means (i) all Obligations (including without limitation
interest accruing after a filing of a petition in bankruptcy whether or not
such interest is an allowable claim in such proceeding) of the Company under
the New Credit Facility, and (ii) any other Indebtedness permitted to be
incurred by the Company under the terms of the Indenture, unless the instrument
under which such Indebtedness is incurred expressly provides that it is on a
parity with or subordinated in right of payment to the Notes. Notwithstanding
anything to the contrary in the foregoing, Senior Debt will not include (w) any
liability for federal, state, local or other taxes owed or owing by the Company,
(x) any Indebtedness of the Company to any of its Subsidiaries or other
Affiliates, (y) any trade payables or instruments evidencing such liability, or
(z) any Indebtedness that is incurred in violation of the Indenture.
"Senior Debt of the Subsidiary Guarantor" means (i) all Guarantees by the
Subsidiary Guarantor of Obligations (including without limitation interest
accruing after a filing of a petition in bankruptcy whether or not such
interest is an allowable claim in such proceeding) of the Company under the New
Credit Facility and (ii) any Indebtedness permitted to be incurred by the
Subsidiary Guarantor under the terms of the Indenture, unless the instrument
under which such Indebtedness is incurred expressly provides that such
Guarantee is on a parity with or subordinated in right of payment to the
Subsidiary Guarantees. Notwithstanding anything to the contrary in the
foregoing, Senior Debt of the Subsidiary Guarantor will not include (x) any
liability for federal, state, local or other taxes owed by the Company, any of
its Subsidiaries or other Affiliates thereof, (y) any trade payables or
instruments evidencing such liability, or (z) any Indebtedness that is incurred
in violation of the Indenture.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation is in effect on
the date hereof.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness or as amended on or prior to the date of this
Indenture, and shall not include any contingent obligations to repay, redeem or
repurchase any such interest or principal prior to the date originally
scheduled for the payment thereof.
"Stockholders Agreement" means the Stockholders Agreement dated as of
December 15, 1993, and as amended on January 10, 1995, by and among Parent and
all of its stockholders.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a
combination thereof), and (ii) any partnership (a) the sole general partner or
the managing general partner of which is such Person or a Subsidiary of such
Person or (b) the only general partners of which are such Person or of one or
more Subsidiaries of such Person (or any combination thereof).
"Subsidiary Guarantors" means HII and all future direct or indirect
subsidiaries of the Company or any Subsidiary Guarantor that execute a
Subsidiary Guarantee in accordance with the provisions of the Indenture, and
their respective successors and assigns.
"Unrestricted Subsidiary" means (i) any Subsidiary that is designated by
the Board of Directors as an Unrestricted Subsidiary in accordance with the
"Unrestricted Subsidiaries" covenant, and (ii) any Subsidiary of an
Unrestricted Subsidiary.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
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"Wholly-Owned Restricted Subsidiary" of any Person means any Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares or any
similar de minimis requirements of applicable law) shall at the time be owned by
such Person or by one or more Wholly-Owned Restricted Subsidiaries of such
Person.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Haynes and Boone, LLP, special counsel to the Company,
the following discussion describes the material federal income tax consequences
expected to result to holders whose Old Notes are exchanged for New Notes in
the Exchange Offer. Such opinion is based upon current provisions of the
Internal Revenue Code of 1986, as amended, applicable Treasury regulations,
judicial authority and administrative rulings and practice. There can be no
assurance that the Internal Revenue Service (the "Service") will not take a
contrary view, and no ruling from the Service has been or will be sought with
respect to the Exchange Offer. Legislative, judicial administrative changes or
interpretations may be forthcoming that could alter or modify the statements
and conclusions set forth herein. Any such changes or interpretations may or
may not be retroactive and could affect the tax consequences to holders.
Certain holders (including insurance companies, tax exempt organizations,
financial institutions, broker-dealers, foreign corporations and persons who
are not citizens or residents of the United States) may be subject to special
rules not discussed below. EACH HOLDER OF OLD NOTES SHOULD CONSULT ITS OWN TAX
ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES OF EXCHANGING OLD NOTES FOR NEW
NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN
LAWS.
The exchange of Old Notes for New Notes will be treated as a "non-event"
for federal income tax purposes because the New Notes will not be considered to
differ materially in kind or extent from the Old Notes. As a result, no
material federal income tax consequences will result to holders exchanging Old
Notes for New Notes.
PLAN OF DISTRIBUTION
Based on an interpretation by the Commission's staff set forth in no-action
letters issued to third parties unrelated to the Company, the Company believes
that, with the exceptions set forth below, New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by any person receiving such New Notes, whether or not
such person is the holder (other than any such holder or such other person
which is an "affiliate" of the Company or the Subsidiary Guarantor within the
meaning of Rule 405 under the Securities Act), without compliance with the
registration and prospectus delivery provisions of the Securities Act; provided
that, the New Notes are acquired in the ordinary course of business of the
holder or such other person and neither the holder nor such other person is
engaging or intends to engage in a distribution of the New Notes or has an
arrangement or understanding with any person to participate in the distribution
of such New Notes. The Company, however, has not sought, and does not intend to
seek, its own no-action letter and there can be no assurance that the
Commission's staff would make a similar determination with respect to the
Exchange Offer. Any holder who tenders in the Exchange Offer for the purpose of
participating in a distribution of the New Notes cannot rely on this
interpretation by the Commission's staff and must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction.
Each broker-dealer that holds Old Notes that were acquired by that
broker-dealer as a result of market-making activities or other trading
activities may exchange such Old Notes (other than for Old Notes that were
acquired directly from the Company or any affiliate of the Company) pursuant to
the Exchange Offer; provided however, such broker-dealer may be deemed to be an
"underwriter" within the meaning of the Securities Act and must, therefore,
deliver a prospectus meeting the requirements of the Securities Act in
connection with its initial resale of each New Note received in the Exchange
Offer. This Prospectus, as it may be amended or supplemented from time to
time, may be used by a broker-dealer in connection with resales of New Notes in
such circumstances. The Company and the Subsidiary Guarantor have agreed that
they will make this Prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale for a period of one
year following the Expiration Date, or such shorter period ending on the date
that all New Notes received in the Exchange Offer have been resold by any such
broker-dealer.
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Neither the Company nor the Subsidiary Guarantor will receive any proceeds
from any sale of New Notes by broker-dealers. New Notes received by
broker-dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market,
in negotiated transactions, through the writing of options on the New Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer or the purchasers of any such New Notes.
Because any broker-dealer that resells New Notes that were received by it for
its own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act, any profit on any such
resale of New Notes and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act.
The Letter of Transmittal states that, by acknowledging that it will deliver,
and by delivering, a prospectus, a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act.
The Company will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal for such period of time as such
persons must comply with such requirements in order to resell the New Notes.
The Company and the Subsidiary Guarantor have agreed to pay all expenses
relating to their performance under the Registration Rights Agreement,
including the costs of providing this Prospectus, and to indemnify the holders
of the Old Notes against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the New Notes offered hereby will be passed upon for the
Company by Haynes and Boone, LLP, Dallas, Texas.
EXPERTS
The consolidated financial statements of HydroChem Industrial Services,
Inc. as of December 31, 1995 and 1996 and for each of the three years in the
period ended December 31, 1996, appearing in this Prospectus have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein and in the Registration Statement, and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement under
the Securities Act with respect to the New Notes offered hereby. As permitted
by the rules and regulations of the Commission, this Prospectus does not
contain all of the information set forth in the Registration Statement. For
further information with respect to the Company and the New Notes offered
hereby, reference is made to the Registration Statement, including the exhibits
and schedules filed therewith. Statements contained in this Prospectus
concerning the provisions of any contract, agreement or other document referred
to herein or therein are not necessarily complete, but contain a summary of the
material terms of such contracts, agreements or other documents. With respect
to each contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for the complete
contents of the exhibit, and each statement concerning its provisions is
qualified in its entirety by such reference. The Registration Statement may be
inspected, without charge, at the offices of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 and at its regional offices at 7 World
Trade Center, New York, New York, 10048 and Citicorp Center, 500 West Madison
Street, Chicago, Illinois 60661-2551. Copies of such materials may also by
obtained by mail at prescribed rates from the Public Reference Section of the
Commission at its principal office at 450 Fifth Street, N.W., Washington, D.C.
20549. Copies of such materials may also be obtained from the web site that
the Commission maintains at www.sec.gov.
As a result of the Exchange Offer, the Company will become subject to the
informational requirements of the Exchange Act. Pursuant to the Indenture, the
Company has agreed that, whether or not required by the rules and regulations
of the Commission, so long as any Notes are outstanding, the Company shall
furnish to the registered holders of Notes copies of (i) all quarterly and
annual financial information that would be required to be contained
76
<PAGE> 77
in a filing with the Commission on Forms 10-Q and 10-K if the Company were
required to file such Forms, including a "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and, with respect to the
annual information only, a report thereon by the Company's certified independent
accountants and (ii) all current reports that would be required to be filed with
the Commission on Form 8-K if the Company were required to file such reports.
In addition, whether or not required by the rules and regulations of the
Commission, the Company will file a copy of all such information and reports
with the Commission for public availability (unless the Commission will not
accept such a filing) within the time periods that would have been applicable
had the Company been subject to such rules and regulation and make such
information available to securities analysts and prospective investors upon
request.
77
<PAGE> 78
<PAGE> 79
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for each of the years ended
December 31, 1994, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholder's Equity for each of the years ended
December 31, 1994, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for each of the years ended
December 31, 1994, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
INTERIM CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1996, and June 30, 1997 (unaudited) . . . . . . . . . . F-14
Consolidated Statements of Operations for each of the three month periods
ended June 30, 1996 and 1997 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-15
Consolidated Statements of Operations for each of the six month periods
ended June 30, 1996 and 1997 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-16
Consolidated Statement of Stockholder's Equity for the six month period
ended June 30, 1997 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-17
Consolidated Statements of Cash Flows for each of the three month periods
ended June 30, 1996 and 1997 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-18
Consolidated Statements of Cash Flows for each of the six month periods ended
June 30, 1996 and 1997 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-19
Notes to Consolidated Financial Statements (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . F-20
</TABLE>
F-1
<PAGE> 80
REPORT OF INDEPENDENT AUDITORS
Board of Directors
HydroChem Industrial Services, Inc.
We have audited the accompanying consolidated balance sheets of HydroChem
Industrial Services, Inc. and Subsidiary (the "Company") as of December 31,
1995 and 1996, and the related consolidated statements of operations,
stockholder's equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of HydroChem
Industrial Services, Inc. and Subsidiary at December 31, 1995 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
February 5, 1997
F-2
<PAGE> 81
HYDROCHEM INDUSTRIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
-------------------
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,088 $ 671
Receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,549 24,357
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,139 3,569
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . 1,210 1,140
Deferred income taxes (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . 1,064 1,791
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,050 31,528
Property and equipment, at cost (Note 4) . . . . . . . . . . . . . . . . . . . . . . 49,074 54,772
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,341) (17,360)
-------- --------
38,733 37,412
Intangible assets, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,433 46,582
-------- --------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $121,216 $115,522
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,927 $ 5,704
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 385 12
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,527 7,971
Current portion of long-term debt (Note 5) . . . . . . . . . . . . . . . . . . . . 3,250 4,625
-------- --------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 16,089 18,312
Long-term debt (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,644 63,700
Deferred income taxes (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,258 7,740
Commitments and contingencies (Note 9)
Stockholder's equity:
Common stock, $.01 par value:
1,000 shares authorized, 100 shares outstanding . . . . . . . . . . . . . . . . 1 1
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,670 19,670
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,554 6,099
-------- --------
Total stockholder's equity . . . . . . . . . . . . . . . . . . . . . . . . 25,225 25,770
-------- --------
Total liabilities and stockholder's equity . . . . . . . . . . . . . . . . $121,216 $115,522
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 82
HYDROCHEM INDUSTRIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue ................................................................. $ 101,103 $ 156,484 $ 156,003
Cost of revenue ......................................................... 64,582 94,629 94,373
--------- --------- ---------
Gross profit ............................................................ 36,521 61,855 61,630
Selling, general and administrative expense ............................. 20,504 39,465 42,103
Depreciation ............................................................ 3,930 6,752 7,765
--------- --------- ---------
Operating income ........................................................ 12,087 15,638 11,762
Other (income) expense:
Interest expense, net ................................................. 5,605 8,693 7,920
Special charge (Note 7) ............................................... -- -- 511
Other income, net ..................................................... (365)
(78) (21)
Amortization of intangibles ........................................... 1,151 1,407 1,523
--------- --------- ---------
Income before taxes ..................................................... 5,409 5,903 1,829
Income tax provision (Note 8) ........................................... 2,459 3,052 1,284
--------- --------- ---------
Net income .................................................... $ 2,950 $ 2,851 $ 545
========= ========= =========
</TABLE>
See accompanying notes.
F-4
<PAGE> 83
HYDROCHEM INDUSTRIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON PAID-IN EARNINGS
STOCK CAPITAL (DEFICIT) TOTAL
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at December 31, 1993 .................................... $ 1 $14,983 $ (247) $14,737
Net income .................................................... -- -- 2,950 2,950
------- ------- ------- -------
Balance at December 31, 1994 .................................... 1 14,983 2,703 17,687
Equity contribution from parent ............................... -- 4,000 -- 4,000
Value of warrants issued (Note 6) ............................. -- 687 -- 687
Net income .................................................... -- -- 2,851 2,851
------- ------- ------- -------
Balance at December 31, 1995 .................................... 1 19,670 5,554 25,225
Net income .................................................... -- -- 545 545
------- ------- ------- -------
Balance at December 31, 1996 .................................... $ 1 $19,670 $ 6,099 $25,770
======= ======= ======= =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 84
HYDROCHEM INDUSTRIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating activities
Net income ................................................................... $ 2,950 $ 2,851 $ 545
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation .............................................................. 3,930 6,752 7,765
Amortization .............................................................. 1,151 1,407 1,523
Amortization of deferred financing costs .................................. 251 484 584
Deferred income tax expense ............................................... 1,745 2,468 755
Loss (gain) on sale of property and equipment ............................. (63) (296) 9
Changes in operating assets and liabilities:
Receivables, net .......................................................... (3,476) (2,256) 3,192
Inventories ............................................................... (975) 26 (430)
Prepaid expenses and other current assets ................................. (183) 733 70
Accounts payable .......................................................... 2,742 (2,060) 777
Income taxes payable ...................................................... 463 (263) (373)
Accrued liabilities ....................................................... (12) 276 444
-------- -------- --------
Net cash provided by operating activities ............................ 8,523 10,122 14,861
Investing activities
Purchase of assets, net of cash acquired ..................................... (2,597) (31,750) (256)
Expenditures for property and equipment ...................................... (5,576) (8,493) (6,829)
Proceeds from sale of property and equipment ................................. 168 525 376
-------- -------- --------
Net cash used in investing activities ................................ (8,005) (39,718) (6,709)
Financing activities
Proceeds from (repayments of) long-term debt, net ............................ (2,281) 24,155 (8,569)
Equity contribution from parent .............................................. -- 4,000 --
-------- -------- --------
Net cash provided by (used in) financing
activities ......................................................... (2,281) 28,155 (8,569)
-------- -------- --------
Net decrease in cash ........................................................... (1,763) (1,441) (417)
Cash at beginning of year ...................................................... 4,292 2,529 1,088
-------- -------- --------
Cash at end of year ............................................................ $ 2,529 $ 1,088 $ 671
======== ======== ========
Supplemental disclosure
Cash paid during the year for interest ....................................... $ 3,554 $ 8,640 $ 7,409
Cash paid during the year for income taxes,
net of refunds ............................................................ $ -- $ 852 $ 902
Discount recognized on note issued to seller ................................. $ 1,980 $ -- $ --
</TABLE>
See accompanying notes.
F-6
<PAGE> 85
HYDROCHEM INDUSTRIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION, FORMATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of HydroChem
Industrial Services, Inc. ("HydroChem") and its wholly owned subsidiary,
HydroChem International, Inc. ("International"), collectively referred to as
the "Company." HydroChem is a wholly owned subsidiary of HydroChem Holding,
Inc. ("Holding").
HydroChem and International are engaged in the business of providing
industrial cleaning services to a wide range of processing industries,
including petrochemical plants, oil refineries, electric utilities, pulp and
paper mills, rubber plants, and aluminum plants. This type of work is typically
recurring maintenance to improve or sustain the operating efficiencies and
extend the useful lives of process equipment and facilities. Services provided
include high-pressure water cleaning, chemical cleaning, industrial vacuuming,
waste minimization, commissioning, and other specialized services.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
HydroChem and International. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Inventories
Inventories are stated at the lower of cost (weighted-average cost) or
market.
Property and Equipment
Property and equipment are recorded at cost. Costs assigned to property and
equipment of acquired businesses are based on estimated fair value at the date
of acquisition. Depreciation is provided for using the straight-line method
over estimated useful lives ranging from 3 to 20 years.
When property is retired or otherwise disposed of, the related cost and
accumulated depreciation are removed from the accounts and any resulting gain
or loss is reflected in income.
Intangible Assets
Intangible assets, which relate primarily to costs in excess of the fair
value of net assets acquired, are primarily being amortized over 40 years on a
straight-line basis. Intangible assets also include costs allocated to other
specifically identifiable assets arising from business acquisitions which are
being amortized on a straight-line basis over their estimated useful lives,
which range from 3 to 40 years. These intangible assets amounted to $44,331,000
and $43,064,000, net of accumulated amortization of $2,595,000 and $4,116,000,
at December 31, 1995 and 1996, respectively. The Company continually evaluates
whether events or circumstances have occurred that indicate the remaining
estimated useful lives of the intangible assets may warrant revision or that
the remaining balances may not be recoverable. Should factors indicate that the
intangible assets should be evaluated for possible impairment, the Company
would use an estimate of the acquired business's undiscounted future cash flows
compared to the carrying value of the assets to determine whether the assets
are deemed impaired. Management believes there have been no events or
circumstances which warrant revision to the remaining useful lives or which
affect the recoverability of the Company's intangible assets.
Other intangibles include deferred financing costs of $4,102,000 and
$3,518,000, net of accumulated amortization of $563,000 and $1,149,000, at
December 31, 1995 and 1996, respectively, which are being amortized over
financing terms of seven to ten years. Amortization of deferred financing costs
is recorded with interest expense.
Income Taxes
Income taxes are provided based on the liability method of accounting.
Deferred income taxes are recorded to reflect the tax consequences of
differences between the financial statement basis and the tax basis of assets
and liabilities.
F-7
<PAGE> 86
Stock-Based Compensation
The Company grants stock options to employees for a fixed number of shares
with an exercise price no less than the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with APB
Opinion 25, Accounting for Stock Issued to Employees, and, accordingly,
recognizes no compensation expense for the stock option grants.
Reclassifications
Certain 1994 and 1995 amounts have been reclassified to conform with the
1996 presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Concentration of Credit Risk
During 1994 and 1995, one customer accounted for approximately 11% of
consolidated revenues, which resulted in an increased exposure to credit risk
because of a proportionately higher concentration of receivables being sourced
from one customer. The Company believes its portfolio of accounts receivable is
well diversified and, as a result, its credit risks are minimal. The Company
continually evaluates the creditworthiness of its customers and monitors
accounts on a periodic basis, but typically does not require collateral.
3. ACQUISITION
On January 10, 1995, HydroChem purchased substantially all of the assets
and assumed certain liabilities of Halliburton Industrial Services ("HIS") for
$24,773,000 in cash, excluding $2,255,000 of direct cash acquisition costs.
HIS was a leading provider of industrial cleaning services to the refining,
petrochemical, utility and pulp and paper industries. The acquisition was
financed through a $4,000,000 private placement of Holding's Class A and Class
B Common Stock, the proceeds of which were subsequently contributed to
HydroChem, and additional borrowings under an amended $76,000,000 senior credit
facility. Direct costs of the acquisition totaled $3,848,000. The assets
acquired primarily included property and equipment, accounts receivable,
customer lists and inventories.
The above-mentioned transaction has been accounted for using the purchase
method of accounting and, accordingly, the operating results have been included
in the consolidated financial statements since the acquisition date. The cost
of the transaction has been allocated on the basis of the estimated fair market
value of the assets acquired and liabilities assumed.
The following unaudited pro forma results of operations have been prepared
assuming the acquisition described above had occurred on January 1, 1994. The
unaudited pro forma results are not necessarily indicative of results of future
operations nor of results that would have occurred had the acquisition been
consummated as of the beginning of 1994. The selected pro forma results of HIS
operations for the year ended December 31, 1994 is presented below. There is no
significant effect on 1995 since the acquisition was consummated on January 10,
1995.
<TABLE>
<S> <C>
Revenue . . . . . . . . . . . . . . . . . . 39,980,000
Net income . . . . . . . . . . . . . . . . $ 263,000
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1995 and 1996 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 617 $ 617
Office facilities, furniture, fixtures and computer equipment . . . . 3,589 4,747
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . 40,932 46,043
Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,243 2,254
Construction in progress . . . . . . . . . . . . . . . . . . . . . . 1,693 1,111
------- -------
$49,074 $54,772
======= =======
</TABLE>
F-8
<PAGE> 87
5. LONG-TERM DEBT
Senior Debt
Senior debt at December 31, 1995 and 1996 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Revolving loan . . . . . . . . . . . . . . . . . . . . $10,769 $ 5,450
Term loan A . . . . . . . . . . . . . . . . . . . . . . 23,125 19,875
Term loan B . . . . . . . . . . . . . . . . . . . . . . 25,000 25,000
------- -------
Total senior debt . . . . . . . . . . . . . . . . . . . 58,894 50,325
Less current portion of senior debt . . . . . . . . . . 3,250 4,625
------- -------
$55,644 $45,700
======= =======
</TABLE>
HydroChem's senior credit facility includes a revolving loan, a term loan A
and a term loan B. The revolving loan bears interest at prime plus 1.50% per
annum or LIBOR plus 3.25% per annum (9.24% and 9.46% at December 31, 1995 and
1996, respectively). The revolving loan allows for borrowings up to $26,000,000
based on a borrowing base, as defined, and matures on January 10, 2000. The
term loan A bears interest at prime plus 1.50% per annum or LIBOR plus 3.25%
per annum (8.99% and 8.92% at December 31, 1995 and 1996, respectively). The
term loan A principal is due in specified quarterly payments through maturity
on January 1, 2000. Term loan B bears interest at prime plus 2.00% per annum or
LIBOR plus 3.75% per annum (9.70% and 9.39% at December 31, 1995 and 1996,
respectively), and principal is due in specified quarterly payments beginning
April 1, 2000 through maturity on July 1, 2002.
A commitment fee of .5% per annum is payable on the unused portion of the
revolving commitment. The agreement also allows for letters of credit and
guarantees to be issued on behalf of HydroChem. Outstanding letters of credit,
which amounted to $1,017,000 and $1,606,000 at December 31, 1995 and 1996,
respectively, reduce the borrowing base. A fee of 2% per annum of the amount of
outstanding letters of credit and guarantees is due quarterly.
The term and revolving loans are secured by all assets of the Company and
Holding. Customary financial covenants and restrictions are included in the
credit agreement.
Maturities of senior debt for years ended December 31 are as follows (in
thousands):
<TABLE>
<S> <C>
1997 . . . . . . . . . . . . . . . . . . . . . . $ 4,625
1998 . . . . . . . . . . . . . . . . . . . . . . 5,750
1999 . . . . . . . . . . . . . . . . . . . . . . 7,500
2000 . . . . . . . . . . . . . . . . . . . . . . 13,450
2001 . . . . . . . . . . . . . . . . . . . . . . 9,500
Thereafter . . . . . . . . . . . . . . . . . . . 9,500
--------
$ 50,325
========
</TABLE>
Senior Subordinated Debt
On December 15, 1993, HydroChem entered into a Senior Subordinated Credit
Agreement in the principal amount of $18,000,000. The note bears interest at
12% per annum and requires a principal payment of $9,000,000 on July 1, 2003
and a final payment of $9,000,000 on July 1, 2004, with interest being paid
semiannually on each January 1 and July 1. The credit agreement restricts
dividend payments and includes customary financial covenants.
6. STOCKHOLDER'S EQUITY
A warrant has been issued by Holding on behalf of HydroChem to provide an
option to purchase up to 496,623 shares of Holding's Class A Common Stock at an
exercise price of $.01 per share. This warrant currently expires on July 1,
2004 and has not been exercised as of December 31, 1996. An additional warrant
has been issued which provides an option to purchase up to 310,390 shares of
Holding's Class C Common Stock at an exercise price of $.01 per share. This
warrant expires on January 10, 2005 and has not been exercised as of December
31, 1996. The value of these warrants is associated with deferred financing
costs and is included in other intangible assets.
F-9
<PAGE> 88
7. SPECIAL CHARGE
In April 1996, the Company signed a letter of intent to merge with a
publicly traded company. The terms of the letter of intent included provisions
which would have resulted in a transfer of a majority of the shares of the
combined companies to Holding's stockholders. Upon subsequent negotiations and
the completion of due diligence, it was determined that the merger would not be
beneficial to both parties and it was agreed to terminate negotiations. The
Company incurred $511,000 of expenses relating to legal, accounting and
financial services which were provided in connection with the negotiation and
due diligence efforts. These expenses have been recorded as a special charge in
1996.
8. INCOME TAXES
The Company files a consolidated tax return with Holding. Current and
deferred taxes are allocated on a separate company basis. Significant
components of the Company's deferred tax liabilities and assets as of December
31, 1995 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
------ -------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment . . . . . . . . . . . . . . . . . . . $3,113 $ 4,686
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . 3,565 3,747
------ -------
Total deferred tax liabilities . . . . . . . . . . . . . . . . 6,678 8,433
Deferred tax assets:
Alternative minimum tax . . . . . . . . . . . . . . . . . . . 374 676
Foreign tax credit . . . . . . . . . . . . . . . . . . . . . 234 329
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . 666 1,257
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . 193 205
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . 17 17
------ -------
Total deferred tax assets . . . . . . . . . . . . . . . . . . . 1,484 2,484
------ -------
Net deferred tax liability . . . . . . . . . . . . . . . . . . $5,194 $ 5,949
====== =======
</TABLE>
The provision for income taxes for the years ended December 31, 1994, 1995
and 1996 consisted of the following (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------ ------- ------
<S> <C> <C> <C>
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 714 $ 584 $ 529
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,745 2,468 755
------ ------- ------
$2,459 $ 3,052 $1,284
====== ======= ======
</TABLE>
The differences between income taxes computed at the federal statutory
income tax rate and the provision for income taxes for the years ended December
31, 1994, 1995 and 1996 consisted of the following (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------ ------- -------
<S> <C> <C> <C>
Income taxes computed at federal income tax rate . . . . . . . . . . . . $1,839 $ 2,007 $ 622
State income taxes, net of federal tax benefit . . . . . . . . . . . . . 200 414 222
Nondeductible permanent differences . . . . . . . . . . . . . . . . . . . 318 579 730
Effects of tax rate changes on existing temporary
differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 -- --
Tax credits and other, net . . . . . . . . . . . . . . . . . . . . . . . 25 52 (290)
------ ------- ------
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . $2,459 $ 3,052 $1,284
====== ======= ======
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
The Company leases most of its locations and certain automobiles and trucks
under operating leases. The leases contain various renewal options, rent
escalation provisions and insurance requirements. Lease expense for the years
ended December 31, 1994, 1995 and 1996 was $2,155,000, $4,402,000 and
$6,191,000, respectively.
F-10
<PAGE> 89
Future minimum rental commitments under operating leases with initial terms
of one year or more at December 31, 1996 are as follows (in thousands):
<TABLE>
<S> <C>
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,093
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,607
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,558
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,563
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 366
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
-------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,251
=======
</TABLE>
HydroChem is a defendant in various lawsuits arising in the normal course
of business. Substantially all of these suits are being defended vigorously by
HydroChem's insurance carriers. While the results of litigation cannot be
predicted with certainty, management believes the final outcome of such
litigation will not have a material adverse effect on the Company's
consolidated financial position.
10. 401(k) AND PROFIT SHARING PLAN
HydroChem maintains the HydroChem Industrial Services Discretionary Profit
Sharing Plan and 401(k) Plan (the "401(k) Plan"). Profit sharing contributions
to the 401(k) Plan are at the discretion of the Board of Directors of
HydroChem. All profit sharing contributions are allocated to the accounts of
the individual participants based upon a formula. Eligible employees, at their
option, may also make contributions to their separate 401(k) accounts within
the 401(k) Plan. In 1995 and 1996, HydroChem matched, on a 50% basis, all
employee contributions up to $500. All profit sharing and 401(k) contributions
and any earnings thereon are tax-deferred.
For the years ended December 31, 1994, 1995 and 1996, HydroChem recognized,
as expense, profit-sharing contributions to the 401(k) Plan of $655,000,
$800,000 and $100,000, respectively. Also, there were employer 401(k) matching
contributions to the 401(k) Plan of $111,000 and $207,000 for 1995 and 1996,
respectively. There were no matching contributions for 1994.
11. STOCK OPTION PLAN
In 1994, the Board of Directors of Holding (the "Board") adopted, and the
stockholders approved, the HydroChem Holding, Inc. 1994 Stock Option Plan (the
"Plan"), pursuant to which options to purchase up to an aggregate of 620,779
shares of Holding's Class A Common Stock may be granted. The Plan is
administered by a committee of not fewer than two directors appointed by the
Board. Among other things, the committee decides which employees will receive
options, the number of shares covered by any option granted and the exercise
price and other terms and conditions of each such option. The committee also
decides if each option granted shall be an incentive stock option under Section
422 of the Internal Revenue Code of 1986 (the "Code") or an option that does
not qualify under that section of the Code ("Non- Qualified Stock Options").
The Board may at any time suspend or terminate the Plan or revise or amend it
in any respect.
All options granted under the Plan are nontransferable except by the laws
of descent and distribution. All options also expire ten years after the date
of grant or upon earlier termination of employment unless due to death,
disability or retirement, in which case the option remains exercisable for an
additional three months in the case of retirement and one year in the case of
death or disability, but, in all cases, only to the extent it was exercisable
at the time of termination of employment. All options granted since the
inception of the Plan have been Non-Qualified Stock Options and become
exercisable in installments over three- to four-year periods after the date of
grant. The weighted-average remaining contractual life of the options at
December 31, 1996 was 8.9 years. The exercise price of the options was equal to
the fair value of the common stock on the date of grant and, accordingly, no
compensation expense was recorded. The weighted-average fair value at grant
date for options granted during the years ended December 31, 1995 and 1996 is
$0.46 per share.
F-11
<PAGE> 90
No options were granted during the year ended December 31, 1994, and a
summary of Holding's stock option activity since that date is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-
SHARES COVERED AVERAGE
BY OPTIONS EXERCISE PRICE
-------------- --------------
<S> <C> <C>
Outstanding at January 1, 1995 ........................................ -- $ --
Granted ............................................................. 584,390 1.00
Exercised ........................................................... -- --
Canceled ............................................................ 4,500 1.00
---------- ----------
Outstanding at December 31, 1995 ...................................... 579,890 1.00
Granted ............................................................. 57,500 1.65
Exercised ........................................................... -- --
Canceled ............................................................ 18,500 1.00
---------- ----------
Outstanding at December 31, 1996 ...................................... 618,890 $ 1.06
========== ==========
Exercisable at:
December 31, 1995 ................................................... 186,234 $ 1.00
December 31, 1996 ................................................... 313,562 $ 1.00
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25"), and related
interpretations in accounting for employee stock options. Pro forma information
regarding net income and earnings per share is required by FASB Statement No.
123, Accounting for Stock-Based Compensation ("FAS 123"), which also requires
that the information be determined as if the Company had accounted for its
employee stock options granted subsequent to December 31, 1994 under the fair
value method of FAS 123. The fair value for these options was estimated at the
date of grant using a minimum value option pricing model. The minimum value
method calculated a fair value that is approximately the same as recorded by
the Company according to APB 25; therefore, pro forma presentation has not been
included.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of certain financial instruments have been
determined by the Company using available market information and appropriate
valuation methodologies. Management believes that the book values of the
Company's cash, net accounts receivable and accounts payable approximate fair
values, principally due to the short-term maturities of these instruments.
Management also believes that the book value of the Company's long-term debt
approximates fair value principally because the rates for the majority of these
instruments are determined based upon certain variable market interest rates
(see Note 5).
13. SUPPLEMENTAL CASH FLOW INFORMATION
On January 10, 1995, the Company purchased substantially all of the assets
and assumed certain liabilities of HIS. The liabilities assumed in connection
with the acquisition for the year ended December 31, 1995 were as follows:
<TABLE>
<S> <C>
Fair value of assets acquired (including goodwill) . . $28,621,000
Cash paid for assets, including direct acquisition
costs . . . . . . . . . . . . . . . . . . . . . . . . . 27,028,000
-----------
Liabilities assumed . . . . . . . . . . . . . . . . . . $ 1,593,000
===========
</TABLE>
F-12
<PAGE> 91
14. SUMMARY FINANCIAL INFORMATION
Summary financial information for International as consolidated with
HydroChem is as follows (in thousands):
<TABLE>
<CAPTION>
As of December 31,
---------------------
1995 1996
------ ------
<S> <C> <C>
Current assets . . . . . . . . . . . . . . . . . $1,879 $1,476
Noncurrent assets . . . . . . . . . . . . . . . . 212 155
Current liabilities . . . . . . . . . . . . . . . 646 85
Noncurrent liabilities . . . . . . . . . . . . . -- --
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Revenue . . . . . . . . . . . . . . . . . . . . . $2,038 $4,850 $5,088
Gross profit . . . . . . . . . . . . . . . . . . 632 2,023 2,257
Net income (loss) . . . . . . . . . . . . . . . . (26) 366 100
</TABLE>
15. SUBSEQUENT EVENT (UNAUDITED)
On August 4, 1997, the Company issued $110,000,000 in principal amount
of HydroChem's 10 3/8% Senior Subordinated Notes due 2007 (the "Notes") in a
private offering pursuant to Rule 144A under the Securities Act of 1933. The
Company is currently in the process of registering an identical series of notes
with the Securities and Exchange Commission, which will be offered in exchange
for the Notes. International is a guarantor of the Notes.
F-13
<PAGE> 92
HYDROCHEM INDUSTRIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31, JUNE 30,
1996 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash .......................................................................... $ 671 $ 1,458
Receivables, net .............................................................. 24,357 27,220
Inventories ................................................................... 3,569 3,621
Prepaid expenses and other current assets ..................................... 1,140 1,938
Deferred income taxes ......................................................... 1,791 1,823
--------- ---------
Total current assets .................................................. 31,528 36,060
Property and equipment, at cost ................................................. 54,772 57,065
Accumulated depreciation ........................................................ (17,360) (20,882)
--------- ---------
37,412 36,183
Intangible assets, net .......................................................... 46,582 45,516
--------- ---------
Total assets .......................................................... $ 115,522 $ 117,759
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable .............................................................. $ 5,704 $ 6,296
Income taxes payable .......................................................... 12 795
Accrued liabilities ........................................................... 7,971 9,507
Current portion of long-term debt (Note 2) .................................... 4,625 5,250
--------- ---------
Total current liabilities ............................................. 18,312 21,848
Long-term debt (Note 2) ......................................................... 63,700 60,332
Deferred income taxes ........................................................... 7,740 8,062
Commitments and contingencies (Note 3)
Stockholder's equity:
Common Stock, $.01 par value:
1,000 shares authorized, 100 shares outstanding ............................ 1 1
Additional paid-in-capital .................................................... 19,670 19,670
Retained earnings ............................................................. 6,099 7,846
--------- ---------
Total stockholder's equity ............................................ 25,770 27,517
--------- ---------
Total liabilities and stockholder's equity ............................ $ 115,522 $ 117,759
========= =========
</TABLE>
See accompanying notes.
F-14
<PAGE> 93
HYDROCHEM INDUSTRIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $41,166 $42,326
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,940 24,871
------- -------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,226 17,455
Selling, general and administrative expense . . . . . . . . . . . . . . . . . . . . . 10,173 10,863
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,900 1,978
------- -------
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,153 4,614
Other (income) expense:
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,997 1,925
Other (income) expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . (107) 19
Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . 381 391
------- -------
Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,882 2,279
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,321 1,091
------- -------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 561 $ 1,188
======= =======
</TABLE>
See accompanying notes.
F-15
<PAGE> 94
HYDROCHEM INDUSTRIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $79,201 $80,714
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,876 47,790
------- -------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,325 32,924
Selling, general and administrative expense . . . . . . . . . . . . . . . . . . . . . 20,184 21,161
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,712 3,889
------- -------
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,429 7,874
Other (income) expense:
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,038 3,787
Other (income) expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . (148) 23
Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . 762 779
------- -------
Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,777 3,285
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,949 1,538
------- -------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 828 $ 1,747
======= =======
</TABLE>
See accompanying notes.
F-16
<PAGE> 95
HYDROCHEM INDUSTRIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at December 31, 1996 . . . . . . . . . . . . . . . $ 1 19,670 $ 6,099 $ 25,770
Net income . . . . . . . . . . . . . . . . . . . . . . -- -- 1,747 1,747
---- ------- ------- --------
Balance at June 30, 1997 . . . . . . . . . . . . . . . . . $ 1 $19,670 $ 7,846 $ 27,517
==== ======= ======= ========
</TABLE>
See accompanying notes.
F-17
<PAGE> 96
HYDROCHEM INDUSTRIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------
1996 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Operating activities
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 561 $ 1,188
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,900 1,978
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 381 391
Amortization of deferred financing costs . . . . . . . . . . . . . . . . . . . . 149 142
Deferred income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . 988 (202)
Loss (gain) on sale of property and equipment . . . . . . . . . . . . . . . . . (31) 14
Changes in operating assets and liabilities:
Receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,471 (1,354)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (306) 32
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . 160 (317)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,485) 156
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (102) 744
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 525 2,477
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (397) 47
-------- --------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . 2,814 5,296
Investing activities
Expenditures for property and equipment . . . . . . . . . . . . . . . . . . . . . . (2,113) (1,231)
Proceeds from sale of property and equipment . . . . . . . . . . . . . . . . . . . 79 31
-------- --------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . (2,034) (1,200)
Financing activities
Repayments of long-term debt, net . . . . . . . . . . . . . . . . . . . . . . . . . (924) (3,760)
-------- --------
Net cash provided by (used in) financing
activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (924) (3,760)
-------- --------
Net increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . (144) 336
Cash at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,570 1,122
-------- --------
Cash at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,426 $ 1,458
======== ========
</TABLE>
See accompanying notes.
F-18
<PAGE> 97
HYDROCHEM INDUSTRIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Operating activities
Net income .............................................................. $ 828 $ 1,747
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation ......................................................... 3,712 3,889
Amortization ......................................................... 762 779
Amortization of deferred financing costs ............................. 294 288
Deferred income tax expense .......................................... 1,777 290
Loss (gain) on sale of property and equipment ........................ (45) 16
Changes in operating assets and liabilities:
Receivables, net ..................................................... 1,025 (2,863)
Inventories .......................................................... (165) (52)
Prepaid expenses and other current assets ............................ (628) (798)
Accounts payable ..................................................... (358) 592
Income taxes payable ................................................. (334) 783
Accrued liabilities .................................................. (1,095) 1,536
Other assets ......................................................... (397) --
------- -------
Net cash provided by operating activities ....................... 5,376 6,207
Investing activities
Expenditures for property and equipment ................................. (3,245) (2,847)
Proceeds from sale of property and equipment ............................ 126 170
------- -------
Net cash used in investing activities ........................... (3,119) (2,677)
Financing activities
Repayments of long-term debt, net ....................................... (1,919) (2,743)
------- -------
Net cash provided by (used in) financing
activities ..................................................... (1,919) (2,743)
------- -------
Net increase in cash ...................................................... 338 787
Cash at beginning of period ............................................... 1,088 671
------- -------
Cash at end of period ..................................................... $ 1,426 $ 1,458
======= =======
</TABLE>
See accompanying notes.
F-19
<PAGE> 98
HYDROCHEM INDUSTRIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
1. ORGANIZATION, FORMATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of HydroChem
Industrial Services, Inc. ("HydroChem") and its wholly owned subsidiary,
HydroChem International, Inc. ("International"), collectively referred to as
the "Company." HydroChem is a wholly owned subsidiary of HydroChem Holding,
Inc. ("Holding").
The accompanying unaudited consolidated financial statements presented
herein have been prepared by HydroChem in accordance with generally accepted
accounting principles for interim financial information and with the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements, although the Company
believes these disclosures are adequate to make the information presented not
misleading. In the opinion of management, the adjustments necessary for a fair
presentation of the periods presented have been reflected and are of a normal
recurring nature. Operating results for the interim periods are not necessarily
indicative of the results that may be expected for the remainder of the fiscal
year. These unaudited consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements.
The Company is engaged in the business of providing industrial cleaning
services to a wide range of processing industries, including petrochemical
plants, oil refineries, electric utilities, pulp and paper mills, rubber plants
and aluminum plants. This type of work is typically recurring maintenance to
improve or sustain the operating efficiencies and extend the useful lives of
process equipment and facilities. Services provided include high-pressure water
cleaning, chemical cleaning, industrial vacuuming, waste minimization,
commissioning and other specialized services.
2. LONG-TERM DEBT
Long-term debt at December 31, 1996 and June 30, 1997 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
----------- -------
<S> <C> <C>
Revolving loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,450 $ 4,832
Term loan A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,875 17,750
Term loan B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000 25,000
------- -------
Total senior debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,325 47,582
Less current portion of senior debt . . . . . . . . . . . . . . . . . . . . . . 4,625 5,250
------- -------
45,700 42,332
Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000 18,000
------- -------
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $63,700 $60,332
======= =======
</TABLE>
3. COMMITMENTS AND CONTINGENCIES
HydroChem is a defendant in various lawsuits arising in the normal course
of business. Substantially all of these suits are being defended vigorously by
HydroChem's insurance carriers. While the results of litigation cannot be
predicted with certainty, management believes the final outcome of such
litigation will not have a material adverse effect on the Company's
consolidated financial position.
F-20
<PAGE> 99
4. SUMMARY FINANCIAL INFORMATION
Summary financial information for International as consolidated with
HydroChem is as follows (in thousands):
<TABLE>
<CAPTION>
As of As of
DECEMBER 31, 1996 JUNE 30, 1997
----------------- --------------
<S> <C> <C>
Current assets . . . . . . . . . . . . . . . . . $ 1,476 $ 1,566
Noncurrent assets . . . . . . . . . . . . . . . . 155 127
Current liabilities . . . . . . . . . . . . . . . 85 164
Noncurrent liabilities . . . . . . . . . . . . . -- --
</TABLE>
<TABLE>
<CAPTION>
Three Months ended June 30, Six Months ended June 30,
--------------------------- -------------------------
1996 1997 1996 1997
---- ----- ---- ----
<S> <C> <C> <C> <C>
Revenue . . . . . . . . . . . . . . $ 736 $ 1,079 $ 1,695 $ 1,549
Gross profit . . . . . . . . . . . 291 482 664 692
Net income (loss) . . . . . . . . . (21) 23 23 (17)
</TABLE>
5. SUBSEQUENT EVENT
On August 4, 1997, the Company issued $110,000,000 in principal amount
of HydroChem's 10 3/8% Senior Subordinated Notes due 2007 (the "Notes") in a
private offering pursuant to Rule 144A under the Securities Act of 1933. The
Company is currently in the process of registering an identical series of notes
with the Securities and Exchange Commission, which will be offered in exchange
for the Notes. International is a guarantor of the Notes.
F-21
<PAGE> 100
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON
IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Summary............................... 3
Risk Factors.......................... 11
The Exchange Offer.................... 16
The Company........................... 23
Use of Proceeds....................... 23
Capitalization........................ 24
Pro Forma Consolidated Financial
Statements.......................... 24
Selected Historical Consolidated
Financial Data...................... 29
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 31
Business.............................. 37
Management............................ 45
Related Transactions.................. 48
Principal Stockholders................ 49
Description of Capital Stock.......... 50
Description of Notes.................. 51
Certain U.S. Federal Income Tax
Considerations...................... 75
Plan of Distribution.................. 75
Legal Matters......................... 76
Experts............................... 76
Available Information................. 76
Index to Financial Statements......... F-1
</TABLE>
UNTIL JANUARY 7, 1998, ALL DEALERS OFFERING TRANSACTIONS IN THE NEW NOTES,
WHETHER OR NOT PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A
PROSPECTUS IN CONNECTION THEREWITH. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
$110,000,000
[HYDROCHEM LOGO]
INDUSTRIAL SERVICES, INC.
10 3/8% SENIOR SUBORDINATED
NOTES DUE 2007
------------------------------------------
PROSPECTUS
------------------------------------------
OCTOBER 9, 1997
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