United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarterly Period ended March 31, 1999
Commission File Number 333-34323
HYDROCHEM INDUSTRIAL SERVICES, INC. (*)
(Exact name of registrant as specified in its charter)
Delaware 75-2503906
(State or other jurisdiction of (I.R.S. Employer
incorporation or organizatio Identification Number)
900 Georgia Avenue
Deer Park, Texas 77536
(Address of principal executive offices) (Zip Code)
(713) 393-5600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
The number of shares of Common Stock of the Registrant outstanding on
February 28, 1999 was 100 shares. The Registrant's Common Stock is not
registered under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended.
- ------------------------------------------------------------------------------
* HydroChem International, Inc., a wholly owned subsidiary of HydroChem
Industrial Services, Inc., is a Co-Registrant. It is incorporated under the laws
of the State of Delaware. Its I.R.S. Employer Identification Number is
75-2512100.
<PAGE>
TABLE OF CONTENTS
Part IFinancial Information
Item 1Financial Statements
Consolidated Balance Sheets as of December 31, 1998 and
March 31, 1999 (unaudited)............................ 3
Consolidated Statements of Operations for each of the three month
periods ended March 31, 1998 and 1999 (unaudited)..... 4
Consolidated Statement of Stockholder's Equity for the three
month period ended March 31, 1999 (unaudited)......... 5
Consolidated Statements of Cash Flows for each of the three month
periods ended March 31, 1998 and 1999 (unaudited)..... 6
Notes to Consolidated Financial Statements (unaudited)... 7
Item 2Management's Discussion and Analysis of Financial Condition
and Results of Operations........................... 11
Item 3Quantitative and Qualitative Disclosures About Market Risk 16
Part IOther Information
Item 1Legal Proceedings........................................ 17
Item 6Exhibits and Reports on Form 8-K......................... 17
Signatures........................................................... 21
Exhibit Index........................................................ 22
2
<PAGE>
HYDROCHEM INDUSTRIAL SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 33,775 $ 884
Receivables, less allowance of
$536 and $833, respectively............. 23,941 38,008
Inventories................................. 3,902 4,848
Prepaid expenses and other current assets... 1,714 2,291
Income taxes receivable..................... 243 243
Deferred income taxes....................... 1,467 1,837
Total current assets..................... 65,042 48,111
Property and equipment, at cost................ 81,459 90,716
Accumulated depreciation.................... (33,322) (36,032)
------- -------
48,137 54,684
Intangible assets, net......................... 43,246 70,475
------- -------
Total assets............................. $156,425 $173,270
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable............................ $ 4,973 $ 8,408
Accrued liabilities......................... 13,193 15,150
Current portion of long-term debt (Note 3).. 121 162
------- -------
Total current liabilities................ 18,287 23,720
Long-term debt (Note 3)........................ 115,996 125,669
Deferred income taxes.......................... 8,626 8,996
Commitments and contingencies (Note 6)
Stockholder's equity:
Common stock, $.01 par value:
1,000 shares authorized, 100 shares
outstanding 1 1
Additional paid-in capital.................. 16,558 16,558
Retained deficit............................ (3,043) (1,674)
Total stockholder's equity.................. 13,516 14,885
Total liabilities and stockholder's equity $156,425 $173,270
======== ========
</TABLE>
See accompanying notes.
3
<PAGE>
HYDROCHEM INDUSTRIAL SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------
1998 1999
---- ----
<S> <C> <C>
Revenue................................ $40,888 $50,905
Cost of revenue........................ 24,885 30,263
------ ------
Gross profit........................ 16,003 20,642
Selling, general and administrative expense 10,787 12,500
Depreciation........................... 2,193 2,913
------ ------
Operating income.................... 3,023 5,229
Other (income) expense:
Interest expense, net............... 2,517 3,268
Other (income) expense, net......... 3 (42)
Amortization of intangibles......... 376 634
------ ------
Income before taxes.................... 127 1,369
Income tax provision (Note 4)....... 75 -
------ ------
Net income............................. $ 52 $ 1,369
====== ======
</TABLE>
See accompanying notes.
4
<PAGE>
HYDROCHEM INDUSTRIAL SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(in thousands)
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained
Stock Capital Deficit Total
----- ------- ------- -----
<S> <C> <C> <C> <C>
Balance at December 31, 1998 .... $ 1 $16,558 $(3,043) $13,516
Net income.................... - - 1,369 1,369
-------- ------ ------ ------
Balance at March 31, 1999 ....... $ 1 $16,558 $(1,674) $14,885
======== ====== ====== ======
</TABLE>
See accompanying notes.
5
<PAGE>
HYDROCHEM INDUSTRIAL SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------
1998 1999
---- ----
<S> <C> <C>
Operating activities:
Net income................................... $ 52 $ 1,369
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation.............................. 2,193 2,913
Amortization.............................. 376 634
Amortization of deferred financing costs.. 85 105
Deferred income tax provision............. (63) -
Gain on sale of property and equipment.... (26) (26)
Changes in operating assets and liabilities,
net of effects of acquisition:
Restricted cash........................... 2,858 -
Receivables, net.......................... (1,187) (9,027)
Inventories............................... (501) (946)
Prepaid expenses and other current assets. (1,223) 66
Accounts payable.......................... 2,808 2,686
Income taxes payable...................... (34) -
Accrued liabilities....................... (4,052) (1,764)
------ ------
Net cash provided by (used in)
operating activities................... 1,286 (3,990)
------ ------
Investing activities:
Expenditures for property and equipment...... (5,781) (2,021)
Proceeds from sale of property and equipment. 96 40
Purchase of assets, net of cash.............. - (30,867)
------ ------
Net cash used in investing activities.. (5,685) (32,848)
Financing activities:
Proceeds from long-term debt, net............ - 4,006
Debt financing costs......................... (124) (59)
------ ------
Net cash provided by (used in)
financing activities .................. (124) 3,947
------ ------
Net decrease in cash............................ (4,523) (32,891)
Cash at beginning of period..................... 33,862 33,775
------ ------
Cash at end of period........................... $29,339 $ 884
====== ======
</TABLE>
See accompanying notes.
6
<PAGE>
HYDROCHEM INDUSTRIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
1. Organization, Formation and Basis of Presentation
The consolidated financial statements include the accounts of HydroChem
Industrial Services, Inc. ("HydroChem") and its wholly-owned subsidiaries,
including HydroChem International, Inc. ("International"). HydroChem
generally conducts business outside the United States through
International. (HydroChem and its subsidiaries are hereinafter sometimes
referred to either separately or collectively as the "Company.") HydroChem
is a wholly-owned subsidiary of HydroChem Holding, Inc. ("Holding").
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 (hydroblasting), chemical cleaning, industrial
vacuuming, mechanical services, waste minimization, and commissioning and
other specialized services.
The accompanying unaudited consolidated financial statements presented
herein have been prepared in accordance with generally accepted accounting
principles for interim financial information and the rules and regulations of
the Securities and Exchange Commission. Accordingly, they do not include all
of the information and disclosures required by generally accepted accounting
principles for complete financial statements. Certain information and
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
In the opinion of management, the accompanying unaudited interim financial
statements include all adjustments, consisting of only normal recurring
accruals, necessary for a fair presentation of the results of the interim
periods. Operating results for the three month interim period ended March 31,
1999 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1999. These unaudited consolidated financial
statements should be read in conjunction with the Company's audited
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.
2. Derivative Financial Instruments
HydroChem has entered into an interest rate swap agreement dated July 17,
1998 (the "Interest Rate Swap") with a financial institution to manage the
interest rate exposure of the $7,500,000 Term Loan (as defined in Note 3)
with the same financial institution. Under the Interest Rate Swap,
HydroChem's effective fixed borrowing rate for the Term Loan is 7.82% per
annum. The Company is exposed to credit loss in the event of non-performance
by the financial institution; however, management does not anticipate
non-performance and, in the event of non-performance, no material loss would
be expected. The Company does not hold or issue financial instruments for
trading purposes. See Note 3.
7
<PAGE>
3. Long-term Debt
Long-term debt at December 31, 1998 and March 31, 1999 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Senior subordinated notes.............. $110,000 $110,000
Construction loan...................... 6,117 -
Term loan.............................. - 7,500
Credit facility........................ - 8,331
----- -----
Total long-term debt................... 116,117 125,831
Less current portion of long-term debt (121) (162)
---- ----
$115,996 $125,669
======== ========
</TABLE>
HydroChem has outstanding $110,000,000 of Senior Subordinated Notes (the
"Notes"). The Notes mature on August 1, 2007 and bear interest at 10 3/8% per
annum which is payable semi-annually in arrears on February 1 and August 1 of
each year. The Notes are redeemable at the option of HydroChem, in whole or
in part, on or after August 1, 2002 at specified redemption prices. In
addition, until August 4, 2000, up to 35% of the Notes are redeemable at the
option of HydroChem with the proceeds from one or more equity offerings at a
redemption price of 109.375% of the principal amount thereof. All HydroChem
subsidiaries, including International, are guarantors of the Notes.
HydroChem is a party to a credit agreement dated December 31, 1997, as
amended, with a financial institution for a credit facility which provides
for unsecured borrowings of up to $25,000,000, subject to borrowing base
limitations (the "Credit Facility"). The term of the Credit Facility is three
years and any borrowings thereunder bear interest at rates adjusted
quarterly. At the discretion of HydroChem, interest rates are based on (i) a
range from LIBOR plus 1.75% to LIBOR plus 3.00%, or, (ii) the higher of (a)
the prime rate, or (b) the Federal Funds Rate plus 0.50%, plus an applicable
margin of up to 1.00%. In addition, a commitment fee of 0.25% to 0.50% per
annum is payable quarterly on the unborrowed portion of the Credit Facility.
The specific rate within each range depends upon the Company's operating
performance. The Credit Facility requires the Company to meet certain
customary financial ratios and covenants, and generally restricts the Company
from pledging its assets. At March 31, 1999, HydroChem's borrowing base under
the Credit Facility was $25,000,000, of which $3,192,000 had been drawn in
the form of standby letters of credit, principally issued in connection with
the Company's property and casualty insurance program. Also at March 31,
1999, there was $8,331,000 outstanding under the Credit Facility and
available borrowings of $13,477,000.
For the purpose of financing the land purchase and construction costs of
the Company's new headquarters and operating facility in the Houston, Texas
area, HydroChem is a party to a loan agreement dated July 17, 1998, as
amended, with a financial institution (the "Construction Loan Agreement").
The Construction Loan Agreement provides for an interim construction loan
(the "Interim Loan") of up to $7,500,000 which was converted to a term loan
as of March 31, 1999, (the "Term Loan"). As with the Interim Loan, the Term
Loan is collateralized by first priority liens on the land and improvements.
Interest on the Interim Loan, which was payable quarterly, was at the
lender's commercial loan rate less 0.50%. The Term Loan matures on September
30, 2006. Under the Term Loan, principal and interest are payable in
quarterly installments with a final payment of $5,977,000 due at maturity.
Pursuant to the Interest Rate Swap, HydroChem's effective fixed borrowing
rate for the Term Loan is 7.82% per annum. The Construction Loan Agreement
requires the Company to meet certain customary financial ratios and covenants
and generally restricts the Company from transferring or pledging the new
facility's assets. The Company obtained a waiver with respect to one of the
ratios for non-compliance resulting from the Company's special and
restructuring charges recorded during the quarter ended December 31, 1998. At
March 31, 1999, HydroChem had borrowed $7,500,000 under the Term Loan and was
in compliance with the financial ratios and covenants contained in the
Construction Loan Agreement.
8
<PAGE>
4. Income Taxes
The Company files a consolidated tax return with Holding. The Company's
effective income tax rate for the interim periods presented is based on
management's estimate of the Company's effective tax rate for the applicable
year and differs from the federal statutory income tax rate primarily due to
nondeductible permanent differences, state income taxes and changes in the
valuation allowance of deferred tax assets.
5. 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, March 31,
1998 1999
------------- -------------
<S> <C> <C>
Current assets................... $ 1,377 $ 1,712
Noncurrent assets................ 103 175
Current liabilities.............. 68 312
Noncurrent liabilities........... - -
</TABLE>
<TABLE>
<CAPTION>
Three months ended
March 31,
---------
1998 1999
---- ----
<S> <C> <C>
Revenue.......................... $ 567 $ 1,110
Gross profit..................... 208 422
Net income (loss)................ (61) 163
</TABLE>
6. Commitments and Contingencies
The Company is a defendant in various lawsuits arising in the normal
course of business. Substantially all of these suits are being defended by
the Company's insurance carriers. While the results of litigation cannot be
predicted with certainty, management believes adequate provision has been
made for such claims and the final outcome of such litigation will not have a
material effect on the Company's consolidated financial position.
Also, the Company is a defendant in approximately 70 lawsuits originally
filed in the 18th Judicial District Court for the Parish of Iberville,
Louisiana against Georgia Gulf Corporation ("Georgia Gulf"), the Company and
other defendants, which arose from a chemical exposure incident at a Georgia
Gulf facility in Plaquemine, Louisiana in September 1996. The suits cover
claims by approximately 640 non-Company employees present at the facility and
by approximately 1,400 persons who are related to or live with the
non-Company employees. All of the plaintiffs seek damages for alleged toxic
exposure resulting from this incident. All but a few of these suits has been
removed to the United States District Court for the Middle District of
Louisiana.
Virtually all of the plaintiffs and each of the defendants in the actions
pending in federal court have agreed upon a settlement in principal. In
response, the court has dismissed these actions subject to reinstatement if
the settlement is not consummated by August 18, 1999. Under this proposed
agreement, the Company would pay its share of the settlement in exchange for
a release from each participating plaintiff or the dismissal, with prejudice,
of the claims of any plaintiff who does not participate. Separately, Georgia
Gulf would indemnify the Company against the claims of approximately twenty
plaintiffs who are not parties to the agreement in principal and against any
future claims which may arise in connection with this incident.
All payments by the Company under this settlement in principal would be
covered by insurance. Accordingly, subject to the consummation thereof,
management believes that the resolution of these matters will not have any
material adverse effect upon the Company's consolidated financial position.
9
<PAGE>
7. Acquisition
On January 5, 1999, the Company acquired substantially all of the assets
and assumed certain liabilities of Valley Systems, Inc. and Valley Systems of
Ohio, Inc. (collectively "Valley"), a regional industrial services provider.
The acquisition, which was effective as of January 1, 1999, was pursuant to
the terms and conditions of a Second Amended and Restated Asset Purchase
Agreement dated as of September 8, 1998. The assets acquired consisted
primarily of (i) accounts receivable, (ii) property, plant and equipment,
(iii) intangibles, and (iv) other operating assets. The adjusted purchase
price for the acquired assets was $30,857,000, of which $4,000,000 was
deposited into escrow. As part of the transaction, the Company also assumed
$2,493,000 in capital lease obligations and $5,594,000 in bank debt. The
Company has converted the capital leases to operating leases and retired the
bank debt. The source of funds for the purchase price and retirement of
Valley's bank debt was a combination of cash on hand and borrowings under the
Credit Facility.
The acquisition of Valley assets has been accounted for using the purchase
method of accounting. The Company's financial statements reflect a
preliminary allocation of the purchase price based upon the Company's initial
valuation. The excess of the purchase price over the fair value of the net
assets acquired is being amortized over periods ranging from 10 to 25 years
and is estimated as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Purchase price (as adjusted)....... $30,857
Transaction and acquisition costs.. 2,101
-----
32,958
Fair value of net assets acquired.. 5,048
-----
Excess of purchase price over fair value $27,910
=======
</TABLE>
The book value of net assets acquired was determined to approximate fair
value at the date of acquisition. Transaction costs consist primarily of fees
to attorneys, accountants and other outside service providers, and costs of
transferring ownership of the acquired assets. Acquisition costs primarily
represent (i) severance and relocation costs for certain Valley employees,
(ii) expenses incurred in connection with the closing or consolidation of
certain Valley facilities, and (iii) certain other costs incurred directly in
connection with the acquisition.
The results of operations derived from assets acquired from Valley are
included in the Company's financial statements from the effective date of
acquisition. Unaudited pro forma consolidated results of operations have been
prepared as if the acquisition of the Valley assets had occurred on January
1, 1998 and include (in thousands):
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1998
----
<S> <C>
Revenue....................... $ 46,753
Net income.................... 114
</TABLE>
The unaudited pro forma consolidated results of operations presented above
do not purport to be indicative of results that would have occurred had the
acquisition been in effect for the period presented, nor do they purport to
be indicative of results that will be obtained in the future.
10
<PAGE>
HYDROCHEM INDUSTRIAL SERVICES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statement Regarding Forward-Looking Information
Management's Discussion and Analysis and other items in this Quarterly
Report on Form 10-Q contain forward- looking statements and information that are
based on management's beliefs, as well as assumptions made by, and information
currently available to, management. When used in this document, the words
"believe", "anticipate", "estimate", "expect", "intend", and similar expressions
are intended to identify forward-looking statements. Although management
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. Such statements are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated. 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.
For supplemental information, it is suggested that "Management's Discussion
and Analysis of Financial Condition and Results of Operations" be read in
conjunction with the corresponding sections included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998. The Form 10-K also
includes the Company's Consolidated Financial Statements and the Notes thereto
for certain prior periods, as well as other relevant financial and operating
information.
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.
<TABLE>
<CAPTION>
Three months ended
March 31,
---------
1998 1999
---- ----
<S> <C> <C>
Revenue............................. 100.0% 100.0%
Cost of revenue..................... 60.9 59.4
------ ------
Gross profit..................... 39.1 40.6
SG&A expense........................ 26.3 24.6
Depreciation........................ 5.4 5.8
------- -------
Operating income................. 7.4 10.2
Other (income) expense:
Interest expense, net............ 6.2 6.4
Other (income) expense, net...... - (0.1)
Amortization of intangibles...... 0.9 1.2
------- -------
Income before taxes................. 0.3 2.7
Income tax provision............ 0.2 -
------- -------
Net income.......................... 0.1% 2.7%
======= =======
EBITDA (1).......................... 12.8% 16.0%
</TABLE>
- -------
(1)EBITDA is defined as net income plus income tax provision, interest expense,
depreciation, amortization, and other income and expense 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 readers may find it to be a useful tool in analyzing
operating performance, leverage, liquidity, and a company's ability to service
debt.
11
<PAGE>
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
- -------------------------------------------------------------------------------
Revenue. Revenue increased $10.0 million, or 24.5%, to $50.9 million for the
three months ended March 31, 1999 from $40.9 million in the prior year period.
The increase in revenue resulted from increases in all service lines, including
industrial vacuuming revenue of $4.0 million, or 75.9%, from $5.3 million to
$9.3 million; hydroblasting revenue of $3.6 million, or 16.4%, from $22.0
million to $25.7 million; other services revenue of $1.4 million, or 96.0%, from
$1.5 million to $2.9 million; and chemical cleaning revenue of $958,000, or
7.9%, from $12.1 million to $13.0 million. The increase in industrial vacuuming
revenue resulted from additional vacuum trucks placed in service by the Company
in 1998 and 1999, and the acquisition of the Valley assets. Hydroblasting
revenue increased primarily as a result of certain large projects and the
acquisition of the Valley assets. The increase in other services revenue
principally resulted from mechanical services projects, which the Company began
performing in April 1998, and an increased volume of commissioning services
projects. The increase in chemical cleaning revenue principally resulted from an
increase in the volume of projects.
Gross profit. Gross profit increased $4.6 million, or 29.0%, to $20.6 million
in 1999 from $16.0 million in the prior year period. Gross profit margins
increased from 39.1% to 40.6%. Cost of revenue increased $5.4 million, or 21.6%,
to $30.3 million for 1999 from $24.9 million in the prior year period primarily
due to the revenue increases described above. Gross profit margins improved, in
part, as a result of a cost reduction program which included, among other
things, a reduction in work force that was implemented in late 1998.
SG&A expense. SG&A expense increased $1.7 million, or 15.9%, to $12.5 million
in 1999 from $10.8 million in the prior year period. This increase primarily
resulted from the acquisition of the Valley assets and was partially offset by
the cost reduction program described above. SG&A expense as a percentage of
revenue decreased to 24.6% in 1999 from 26.3% in the prior year period.
EBITDA. Increased gross profit, partially offset by increased SG&A expense,
resulted in a $2.9 million, or 56.1%, increase in EBITDA to $8.1 million in 1999
from $5.2 million in the prior year period. As a percentage of revenue, EBITDA
increased to 16.0% in 1999, compared to 12.8% in the prior year period.
Depreciation. Depreciation expense increased $720,000, or 32.8%, to $2.9
million in 1999 from $2.2 million in the prior year period and was 5.8% and 5.4%
of revenue, respectively. The increase in depreciation expense principally
resulted from the acquisition of Valley assets and capital expenditures in 1998
for vacuum trucks and other operating equipment.
Operating income. Increased gross profit, partially offset by increased SG&A
and depreciation expense, resulted in an increase in operating income of $2.2
million, or 73.0%, to $5.2 million in 1999 from $3.0 million in the prior year
period. As a percentage of revenue, operating income increased to 10.2% in 1999,
compared to 7.4% in the prior year period.
Interest expense, net. Interest expense, net increased $751,000, or 29.8%, to
$3.3 million in 1999 from $2.5 million in the prior year period. Increased
interest expense, net resulted from (i) an increase in debt due to borrowings
under the Construction Loan Agreement beginning in July 1998 and borrowings
under the Credit Facility in January 1999 to finance a portion of the purchase
price of the Valley assets, and (ii) a decrease in interest income due to lower
invested cash balances.
Amortization. Amortization expense increased $258,000, or 68.6%, to $634,000
in 1999 from $376,000 in the prior year period. Increased amortization expense
resulted from goodwill incurred in connection with the acquisition of Valley
assets.
Income before taxes. For the reasons described above, income before taxes
increased to $1.4 million in 1999 from $127,000 in the prior year period. As a
percentage of revenue, income before taxes was 2.7% in 1999, compared to 0.3% in
the prior year period.
12
<PAGE>
Income tax provision. The effective tax rate decreased to zero in 1999 from
59.1% of income before taxes in the prior year period. This decrease principally
resulted from changes in the valuation allowance of deferred tax assets.
Net income. For the reasons described above, the Company's net income
increased $1.3 million to $1.4 million in 1999 from $52,000 in the prior year
period.
Liquidity and Capital Resources
The Company principally has financed its operations through net cash provided
by operating activities, existing cash balances, available credit facilities,
and capital contributions from Holdings. HydroChem has outstanding $110.0
million of Senior Subordinated Notes (the "Notes"). The Notes mature on August
1, 2007 and bear interest at 10 3/8% per annum which is payable semi-annually in
arrears on February 1 and August 1 of each year. The Notes are redeemable at the
option of HydroChem, in whole or in part, on or after August 1, 2002 at
specified redemption prices. In addition, until August 4, 2000, up to 35% of the
Notes are redeemable at the option of HydroChem with the proceeds from one or
more equity offerings at a redemption price of 109.375% of the principal amount
thereof. All HydroChem subsidiaries, including International, are guarantors of
the Notes.
HydroChem is a party to a credit agreement dated December 31, 1997, as
amended, with a financial institution for a credit facility (the "Credit
Facility") which provides for unsecured borrowings of up to $25.0 million,
subject to borrowing base limitations. The term of the Credit Facility is three
years and any borrowings thereunder bear interest at rates adjusted quarterly.
At the discretion of HydroChem, interest rates are based on (i) a range from
LIBOR plus 1.75% to LIBOR plus 3.00%, or, (ii) the higher of (a) the prime rate,
or (b) the Federal Funds Rate plus 0.50%, plus an applicable margin of up to
1.00%. In addition, a commitment fee of 0.25% to 0.50% per annum is payable
quarterly on the unborrowed portion of the Credit Facility. The specific rate
within each range depends upon the Company's operating performance. The Credit
Facility requires the Company to meet certain customary financial ratios and
covenants, and generally restricts the Company from pledging its assets. At
March 31, 1999, HydroChem's borrowing base under the Credit Facility was $25.0
million, of which $3.2 million had been drawn in the form of standby letters of
credit, principally issued in connection with the Company's property and
casualty insurance program. Also at March 31, 1999, there was $8.3 million
outstanding under the Credit Facility and available borrowings of $13.5 million.
For the purpose of financing the land purchase and construction costs of the
Company's new headquarters and operating facility in the Houston, Texas area,
HydroChem is a party to a loan agreement dated July 17, 1998, as amended, with a
financial institution (the "Construction Loan Agreement"). The Construction Loan
Agreement provides for an interim construction loan (the "Interim Loan") of up
to $7.5 million which was converted to a term loan as of March 31, 1999, (the
"Term Loan"). As with the Interim Loan, the Term Loan is collateralized by first
priority liens on the land and improvements. Interest on the Interim Loan, which
was payable quarterly, was at the lender's commercial loan rate less 0.50%. The
Term Loan matures on September 30, 2006. Under the Term Loan, principal and
interest are payable in quarterly installments with a final payment of $5.9
million due at maturity. Pursuant to the Interest Rate Swap, HydroChem's
effective fixed borrowing rate for the Term Loan is 7.82% per annum. The
Construction Loan Agreement requires the Company to meet certain customary
financial ratios and covenants and generally restricts the Company from
transferring or pledging the new facility's assets. The Company obtained a
waiver with respect to one of the ratios for non-compliance resulting from the
Company's special and restructuring charges recorded during the quarter ended
December 31, 1998. At March 31, 1999, HydroChem had borrowed $7.5 million under
the Term Loan and was in compliance with the financial ratios and covenants
contained in the Construction Loan Agreement.
For the three months ended March 31, 1999, the Company used net cash of $36.8
million in operating and investing activities, which consisted of $4.0 million
used in operating activities and $32.8 million used in investing activities. For
the three months ended March 31, 1998, $4.4 million of net cash was used in
operating and investing activities, which consisted of $1.3 million provided by
operating activities and $5.7 million used in investing activities. Except for
the purchase of the assets of Valley in the current period, investing activities
for both periods consisted primarily of expenditures for property and equipment.
13
<PAGE>
Expenditures for property and equipment for the three months ended March 31,
1999 were $2.0 million. Of this amount, $852,000 was used principally for
purchases of operating equipment, $731,000 to implement new field and corporate
information software and hardware systems, and $438,000 in connection with the
construction of the new headquarters and operating facility.
On January 5, 1999, the Company acquired substantially all of the assets and
assumed certain liabilities of Valley. The assets acquired consisted primarily
of (i) accounts receivable, (ii) property, plant and equipment, (iii)
intangibles, and (iv) other operating assets. The adjusted purchase price for
the acquired assets was $30.9 million, of which $4 million was deposited into
escrow. As part of the transaction, the Company also assumed $2.5 million in
capital lease obligations and $5.6 million in bank debt. The Company has
converted the capital leases to operating leases and retired the bank debt. The
source of funds for the purchase price and retirement of Valley's bank debt was
a combination of cash on hand and borrowings under the Credit Facility.
Management believes that cash and cash equivalents at March 31, 1999, net
cash expected to be provided by operating activities and funds available from
its existing credit facilities 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.
Impact of Year 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. This could
result in a system failure or miscalculation if, for example, a computer program
recognizes a date of "00" as the year 1900 instead of 2000. Management has
assessed the Year 2000 issue with regard to the Company's internal financial and
operating systems as well as certain third parties with which the Company has
material relationships.
With regard to the Company's internal financial and operating systems,
HydroChem has acquired new software and hardware systems which it believes to be
Year 2000 compliant. These systems recently have been implemented. Management
intends to test the new systems for compliance by the end of the second fiscal
quarter of 1999. Although the Company has not yet developed a comprehensive
contingency plan to address situations that may result if the Company is unable
to achieve Year 2000 readiness, the Company's Year 2000 compliance program is
ongoing and its ultimate scope, as well as the consideration of contingency
plans, will continue to be evaluated as new information becomes available. As of
March 31, 1999, $2.0 million had been expended in connection with these new
software and hardware systems. Management estimates it will ultimately incur
approximately $2.2 million in connection with these systems.
As part of its Year 2000 compliance program, management has identified
certain third parties with which the Company has material relationships. These
parties are primarily large financial, telecommunication and information
processing entities, vendors, and other third party suppliers. Certain of these
third parties have reported to the Company that they are on schedule with their
projects to remediate Year 2000 issues, and that they anticipate being Year 2000
compliant on a timely basis. Management intends to continue to monitor the
progress of these third parties and will develop contingency plans during 1999
in the event one or more of these third parties fail to remediate their Year
2000 issues in such a way as to materially affect the operations of the Company.
Although there can be no assurance, management has no reason to believe that any
Year 2000 issues the Company may experience with third parties will have a
material impact on its operations.
The Year 2000 issue involves significant risks. There can be no assurance
that the Company will succeed in implementing its Year 2000 program, potentially
as a result of factors which are beyond the Company's control. The following
describes the Company's most reasonably likely worst-case scenario, given
current uncertainties: if the Company's newly acquired software and hardware
fail the testing phase, or any software application or embedded microprocessors
central to the Company's operations are overlooked in the assessment or
implementation phases, significant problems could occur including delays in
accounting and financial reporting. It is also possible, given the numerous
other uncertainties that could occur, the Company's business, financial
condition and results of operations
14
<PAGE>
could be adversely affected. Management is unable to assess the likelihood of
such events occurring or the extent of their effect.
The foregoing Year 2000 discussion contains forward-looking statements. Such
statements, including without limitation anticipated costs and the dates by
which management expects to complete certain actions, are based on management's
best current estimates, which were derived utilizing numerous assumptions about
future events, including the continued availability of certain resources,
representations received from third parties, and other factors. However, there
can be no guarantee that these estimates will be achieved, and actual results
could differ materially from those anticipated. Specific factors that might
cause such material differences include, but are not limited to, the ability to
identify and remediate all relevant information technology and non-information
technology systems, results of Year 2000 testing, adequate resolution of Year
2000 issues by businesses and other third parties who are service providers,
suppliers or customers of the Company, unanticipated system costs, the adequacy
of and ability to develop and implement contingency plans, and similar
uncertainties. The forward looking statements made in the foregoing Year 2000
discussion speak only as of the date on which such statements are made, and the
Company undertakes no obligation to update any forward-looking statements to
reflect events or circumstances after the date on which such statements are made
or to reflect the occurrence of unanticipated events.
15
<PAGE>
HYDROCHEM INDUSTRIAL SERVICES, INC.
AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The following discussion regarding the Company's market risk includes
forward-looking statements that involve risk and uncertainties. Actual results
could differ materially from those projected in the forward-looking statements.
The Company is exposed to certain market risks which include financial
instruments such as short-term investments, trade receivables, and long-term
debt. The adverse effects of potential changes in these market risks are
discussed below. The sensitivity analyses discussed below do not reflect: (i)
the effects that such adverse changes may have on overall economic activity; or,
(ii) additional actions management may take to mitigate the Company's exposure
to such changes. The Company does not engage in speculative transactions and
does not use derivative instruments or engage in hedging activities, except for
the Interest Rate Swap which is being utilized in connection with the Term Loan.
The Company provides 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. Management
believes the Company's portfolio of accounts receivable is well diversified and,
as a result, its credit risks are minimal. Management evaluates the
creditworthiness of the Company's customers and monitors accounts on a periodic
basis, but typically does not require collateral. The Company's trade
receivables are primarily denominated in U.S. dollars and are generally due
within 30 days. In general, trade receivables are collected in a timely manner,
and historically bad debts have been immaterial and within management's
expectations. Management believes that diversification and timely collection of
accounts receivable reduces associated credit risk.
The Company's surplus cash is placed in overnight investments with a high
quality financial institution, in accordance with investment guidelines relative
to diversification and maturity to reduce risk and increase liquidity. As of
March 31, 1999, the Company had overnight investment deposits in a cash reserves
money market mutual fund totaling $1.5 million. Due to the short-term nature of
these investments, the carrying value equals the market value. Management
expects to continue to invest surplus cash amounts in overnight deposits during
1999 and, as a result, a decrease of 1.0% over current average investment rates
would have an immaterial effect on interest income.
As of March 31, 1999, the Company's outstanding long-term debt consisted of
the Credit Facility, the Term Loan, and the Notes. The Notes totaled $110.0
million, are due August 1, 2007, and bear interest at a fixed rate of 10 3/8%
per annum. As of March 31, 1999, the fair value of the Notes was estimated to be
$94.6 million.
At the same date, outstanding borrowings under the Credit Facility and the
Term Loan totaled $15.8 million and approximated their fair values. At the
discretion of HydroChem, interest rates under the Credit Facility are based on
(i) a range from LIBOR plus 1.75% to LIBOR plus 3.00%, (ii) the higher of (a)
the prime rate and (b) the Federal Funds Rate plus 0.50%, plus an applicable
margin of up to 1.00%. The Term Loan bears interest at LIBOR rates plus 1.75%
adjusted quarterly. To protect the Term Loan against interest rate fluctuations,
the Company entered into the Interest Rate Swap which effectively fixes the
interest rate at 7.82% per annum.
Market risk, estimated as a potential increase in fair value of debt
instruments resulting from a hypothetical 1.0% decrease in interest rates, is
estimated to not be material to the Company during 1999.
16
<PAGE>
Part II. Other Information
Item 1Legal Proceedings
The Company is a defendant in approximately 70 lawsuits originally
filed in the 18th Judicial District Court for the Parish of Iberville,
Louisiana against Georgia Gulf Corporation ("Georgia Gulf"), the Company and
other defendants, which arose from a chemical exposure incident at a Georgia
Gulf facility in Plaquemine, Louisiana in September 1996. The suits cover
claims by approximately 640 non-Company employees present at the facility and
by approximately 1,400 persons who are related to or live with the
non-Company employees. All of the plaintiffs seek damages for alleged toxic
exposure resulting from this incident. All but a few of these suits has been
removed to the United States District Court for the Middle District of
Louisiana.
Virtually all of the plaintiffs and each of the defendants in the
actions pending in federal court have agreed upon a settlement in principal.
In response, the court has dismissed these actions subject to reinstatement
if the settlement is not consummated by August 18, 1999. Under this proposed
agreement, the Company would pay its share of the settlement in exchange for
a release from each participating plaintiff or the dismissal, with prejudice,
of the claims of any plaintiff who does not participate. Separately, Georgia
Gulf would indemnify the Company against the claims of approximately twenty
plaintiffs who are not parties to the agreement in principal and against any
future claims which may arise in connection with this incident.
All payments by the Company under this settlement in principal would be
covered by insurance. Accordingly, subject to the consummation thereof,
management believes that the resolution of these matters will not have any
material adverse effect upon the Company's consolidated financial position.
Item 6Exhibits and Reports on Form 8-K
(a)Exhibits
Exhibit
Number Description
3.1 Certificate of Incorporation of HydroChem Industrial
Services, Inc. as amended. (Exhibit 3.1 to the Company's
Registration Statement on Form S-4, filed August 25, 1997,
is hereby incorporated by reference.)
3.2 Certificate of Incorporation of HydroChem International,
Inc., as amended. (Exhibit 3.2 to the Company's
Registration Statement on Form S-4, filed August 25, 1997,
is hereby incorporated by reference.)
3.3 By-Laws of HydroChem Industrial Services, Inc. (Exhibit 3.3
to the Company's Registration Statement on Form S-4, filed
August 25, 1997, is hereby incorporated by reference.)
3.4 By-Laws of HydroChem International, Inc. (Exhibit 3.4 to
the Company's Registration Statement on Form S-4, filed
August 25, 1997, is hereby incorporated by reference.)
4.1 Purchase Agreement, dated as of July 30, 1997, by and among
HydroChem Industrial Services, Inc., HydroChem
International, Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation, as Initial Purchaser, relating to
the 103/8% Series A Senior Subordinated Notes due 2007.
(Exhibit 4.1 to the Company's Registration Statement on
Form S-4, filed August 25, 1997, is hereby incorporated by
reference.)
4.2 Indenture, dated as of August 1, 1997, among HydroChem
Industrial Services, Inc., HydroChem International, Inc.,
as Guarantor, and Norwest Bank, Minnesota, N.A., as
17
<PAGE>
Trustee. (Exhibit 4.2 to the Company's Registration
Statement on Form S-4, filed August 25, 1997, is hereby
incorporated by reference.)
4.3 Registration Rights Agreement dated August 4, 1997, by and
among HydroChem Industrial Services, Inc., HydroChem
International, Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation, as Initial Purchaser. (Exhibit 4.3
to the Company's Registration Statement on Form S-4, filed
August 25, 1997, is hereby incorporated by reference.)
10.1 HydroChem Holding, Inc. 1994 Stock Option Plan. (Exhibit
10.1 to the Company's Registration Statement on Form S-4,
filed August 25, 1997,is hereby incorporated by reference.)
10.2 Employment Agreement dated December 15, 1993 by and among
HydroChem Holding, Inc., HydroChem Industrial Services,
Inc. and B. Tom Carter, Jr., as amended through December 9,
1996. (Exhibit 10.5 to the Company's Registration Statement
on Form S- 4, filed August 25, 1997, is hereby incorporated
by reference.)
10.3 Fourth Amendment to Employment Agreement dated April 9,
1998 by and among HydroChem Holding, Inc., HydroChem
Industrial Services, Inc. and B. Tom Carter, Jr. (Exhibit
10.8 to the Company's Form 10-Q, filed May 14, 1998, is
hereby incorporated by reference.)
10.4 Secured Promissory Note dated April 30, 1999 from B. Tom
Carter, Jr. to HydroChem Holding, Inc. (Filed herewith.)
10.5 Pledge Agreement dated April 30, 1999 between HydroChem
Holding, Inc. and B. Tom Carter, Jr. (Filed herewith.)
10.6 Employment Agreement dated November 1, 1992 between
HydroChem Industrial Services, Inc. and Gary Noto. (Exhibit
10.3 to the Company's Registration Statement on Form S-4,
filed August 25, 1997, is hereby incorporated by
reference.)
10.7 Amendment dated January 27, 1999 to Employment Agreement
dated November 1, 1992 between HydroChem Industrial
Services, Inc. and Gary D. Noto. (Exhibit 10.8 to the
Company's Form 10-K, filed March 29, 1999, is hereby
incorporated by reference.)
10.8 Employment Agreement dated November 1, 1992 between
HydroChem Industrial Services, Inc. and J. Pat DeBusk.
(Exhibit 10.2 to the Company's Registration Statement on
Form S-4, filed August 25, 1997, is hereby incorporated by
reference.)
10.9 Employment Agreement dated September 26, 1997 between
HydroChem Industrial Services, Inc. and Donovan W. Boyd.
(Exhibit 10.10 to the Company's Form 10-K, filed March 29,
1999, is hereby incorporated by reference.)
10.10 Employment Offer Letter dated June 3, 1996 from HydroChem
Industrial Services, Inc. to Selby F. Little, III. (Exhibit
10.6 to the Company's Registration Statement on Form S-4,
filed August 25, 1997, is hereby incorporated by
reference.)
10.11 Letter Agreement regarding severance compensation dated
October 31, 1997 between HydroChem Industrial Services,Inc.
and Pelham H. A. Smith. (Exhibit 10.7 to the Company's Form
10-Q, filed November 14, 1997, is hereby incorporated by
reference.)
18
<PAGE>
10.12 Form of Indemnification Agreement entered into with
directors and officers. (Exhibit 10.8 to the Company's
Amendment No. 1 to the Registration Statement on Form S-4,
filed October 3, 1997, is hereby incorporated by
reference.)
10.13 Lease Agreement dated December 4, 1979 between HydroChem
Industrial Services, Inc. and Gracey Corporation, as
amended through May 29, 1996. (Exhibit 10.7 to the
Company's Registration Statement on Form S-4, filed August
25, 1997, is hereby incorporated by reference.)
10.14 Credit Agreement dated December 31, 1997 among HydroChem
Industrial Services, Inc. and NationsBank, N. A. and
financial institutions named in the Credit Agreement.
(Exhibit 10.10 to the Company's Form 10-K, filed March 30,
1998, is hereby incorporated by reference.)
10.15 Letter Agreement dated March 6, 1998 regarding Credit
Agreement dated December 31, 1997 between HydroChem
Industrial Services, Inc. and NationsBank, N.A. (Exhibit
10.11 to the Company's Form 10-K, filed March 30, 1998, is
hereby incorporated by reference.)
10.16 Letter Agreement dated August 14, 1998 regarding Credit
Agreement dated December 31, 1997 between HydroChem
Industrial Services, Inc. and NationsBank, N.A. (Exhibit
10.15 to the Company's Form 10-Q, filed November 16, 1998,
is hereby incorporated by reference.)
10.17 Amendment No. 1 dated as of September 30, 1998 to Credit
Agreement dated as of December 31, 1997 between HydroChem
Industrial Services, Inc., NationsBank, N.A. and financial
institutions named in the Credit Agreement. (Exhibit 10.16
to the Company's Form 10-Q, filed November 16, 1998, is
hereby incorporated by reference.)
10.18 Amendment No. 2 dated as of December 31, 1998 to Credit
Agreement dated as of December 31, 1997 between HydroChem
Industrial Services, Inc., NationsBank, N.A. and financial
institutions named in the Credit Agreement. (Exhibit 10.19
to the Company's Form 10-K, filed March 29, 1999, is hereby
incorporated by reference.)
10.19 Loan Agreement dated July 17, 1998 between HydroChem
Industrial Services, Inc. and Bank One, Texas, National
Association. (Exhibit 10.15 to the Company's Form 10-Q,
filed August 14, 1998, is hereby incorporated by
reference.)
10.20 Amendment No. 1 dated as of February 2, 1999 to Loan
Agreement dated July 17, 1998 between HydroChem Industrial
Services, Inc. and Bank One, Texas National Association.
(Exhibit 10.21 to the Company's Form 10-K, filed March 29,
1999, is hereby incorporated by reference.)
10.21 Extension Agreement dated as of February 2, 1999 between
HydroChem Industrial Services, Inc. and Bank One, Texas,
National Association. (Exhibit 10.22 to the Company's Form
10-K, filed March 29, 1999, is hereby incorporated by
reference.)
10.22 International Swap Dealers Association, Inc. Master
Agreement and Schedule dated July 17, 1998 between
HydroChem Industrial Services, Inc. and Bank One, Texas,
National Association. (Exhibit 10.16 to the Company's Form
10-Q, filed August 14, 1998, is hereby incorporated by
reference.)
10.23 Amended and Restated Asset Purchase Agreement by and among
HydroChem Industrial Services, Inc., Valley Systems of
Ohio, Inc. and Valley Systems, Inc. dated
19
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as of September 8, 1998. (Exhibit 10.1 to the Company's
Form 8-K, filed January 20, 1999, is hereby incorporated by
reference.)
27.1 Financial Data Schedule. (Filed herewith.)
(b) Reports on Form 8-K.
The following reports on Form 8-K or 8-K/A were filed during the
quarter ended March 31, 1999:
January 20, 1999 - Item 2. Acquisition or Disposition of Assets
March 22, 1999 - Item 7. Financial Statements and Exhibits
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HYDROCHEM INDUSTRIAL SERVICES, INC.
Date: May 11, 1999 By: /s/ Selby F. Little, III
-------------------------------------
Selby F. Little, III, Executive Vice
President and Chief Financial Officer
HYDROCHEM INTERNATIONAL, INC.
Date: May 11, 1999 By: /s/ Selby F. Little, III
------------------------------------
Selby F. Little, III, Executive Vice
President and Chief Financial Officer
21
<PAGE>
EXHIBIT INDEX
10.4 Secured Promissory Note dated April 30, 1999 from B. Tom Carter, Jr.
to HydroChem Holding, Inc.
10.5 Pledge Agreement dated April 30,1999 between HydroChem Holding, Inc.
and B. Tom Carter, Jr.
27.1 Financial Data Schedule
22
SECURED PROMISSORY NOTE
$346,355.86 Deer Park, Texas April 30, 1999
FOR VALUE RECEIVED, B. Tom Carter, Jr. ("Maker") hereby promises to pay
to the order of HydroChem Holding, Inc., a Delaware corporation ("Payee"), the
principal amount of Three Hundred Forty Six Thousand Three Hundred Fifty Five
and 86/100 Dollars ($346,355.86) plus interest thereon at the rate of Five and
28/100 percent (5.28)% compounded annually, and payable as provided herein in
lawful money of the United States of America, at Deer Park, Texas, or at such
other place as Payee of this Note may from time to time designate by written
notice to Maker.
The principal amount of this Note and all accrued interest thereon
shall be due and payable upon the earlier of April 30, 2005 or any termination
of Maker's employment with the Payee or Payee's wholly-owned subsidiary,
HydroChem Industrial Services, Inc., but not earlier than April 30, 2002.
Of the principal amount of this Note, Forty Three Thousand Five Hundred
Thirty Nine and 00/100 Dollars ($43,539.00) is in full payment for certain
shares of the Payee's Class A Common Stock being acquired by the Maker as of the
date hereof pursuant to the partial exercise of two stock options each at an
exercise price of One Dollar ($1.00) per share. The balance of the principal
represents a substitution and replacement of Maker's Secured Promissory Note
(including accrued interest thereon) dated April 9, 1998 to Payee as the
assignee of HydroChem Industrial Services, Inc.
Pursuant to a Pledge Agreement of even date herewith between Maker and
Payee, and as more specifically described therein, this Note is secured by the
pledge of certain shares of common stock of Payee which are owned beneficially
and of record by Maker, and which include, but are not limited to, the shares
being acquired by the Maker pursuant to the aforementioned stock option
exercise.
This Note may be prepaid in whole or in part without premium or
penalty.
If this Note is placed in the hands of an attorney for collection after
default, or if all or any part of the indebtedness represented hereby is proved,
established or collected in any court or in any bankruptcy, receivership, debtor
relief, probate or other court proceedings, then Maker agrees to pay reasonable
attorneys' fees and collection costs to Payee in addition to the principal and
interest payable hereunder.
If default is made in the payment of the principal or interest under
this Note, or if a default occurs under any other instrument evidencing or
securing payment hereof, then in any one or more such events, the entire
principal balance and accrued interest owing hereon shall at once become due and
payable, at the option of Payee. Failure to exercise this option
<PAGE>
shall not constitute a waiver of the right to exercise the same in the event of
any subsequent default.
Maker, signers, sureties, and endorsers of this Note severally waive
notice of acceleration of maturity if such shall occur, demand, presentment,
notice of dishonor, diligence in collecting, grace, notice and protest, and
agree to one or more extensions for any period or periods of time and partial
payments, before or after maturity, without prejudice to Payee.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF TEXAS.
MAKER:
/s/ B. Tom Carter, Jr.
----------------------
B. Tom Carter, Jr.
5956 Sherry Lane
Suite #930
Dallas, Texas 75225
PLEDGE AGREEMENT
This Pledge Agreement (the "Agreement") is entered into as of the 30th
day of April, 1999 between HydroChem Holding, Inc. ("Lender") and B. Tom Carter,
Jr. ("Pledgor").
WHEREAS, Pledgor is indebted to Lender in the amount of Three Hundred
Two Thousand Eight Hundred Sixteen and 86/100 Dollars ($302,816.86) for
principal and accrued interest through the date hereof pursuant to that certain
Secured Promissory Note dated April 9, 1998 from Pledgor to Lender, as the
assignee of HydroChem Industrial Services, Inc. (the "Old Note"); and
WHEREAS, under a Pledge Agreement dated as of April 9, 1998 (the "Old
Pledge Agreement") between Pledgor and Lender as the assignee of HydroChem, the
Old Note is secured by the pledge of Two Hundred Eighty Five Thousand Six
Hundred One (285,601) shares of the Lender's Class A Common Stock (the "Existing
Shares") represented by stock certificate CA-28, which shares were purchased on
said date pursuant to the partial exercise by Pledgor of two certain stock
options; and
WHEREAS, as of the date hereof, Pledgor has further exercised the said
two stock options to purchase, for One Dollar ($1.00) per share, an additional
Forty Three Thousand Five Hundred Thirty Nine (43,539) shares of Lender's Class
A Common Stock (the "Additional Shares") represented by Stock Certificate CA-31;
and
WHEREAS, Pledgor has executed and delivered a Secured Promissory Note
to Lender dated as of the date hereof in the principal amount of Three Hundred
Forty Six Thousand Three Hundred Fifty Five and 86/100 Dollars ($346,355.86)
with interest as therein specified (the "Note") which is full payment for the
Additional Shares and in substitution and replacement of the Old Note; and
WHEREAS, Pledgor desires to pledge all of the Stock Collateral (as such
term is hereinafter defined) as collateral and security for Pledgor's
obligations and duties under the Note and this Agreement, and to enter into this
Pledge Agreement in replacement and substitution of the Old Pledge Agreement.
NOW, THEREFORE, for and in consideration of the premises and the
covenants herein contained, and in consideration of the extension of credit to
Pledgor as evidenced by the Note, the parties hereto agree as follows:
1. Pledge of Stock Collateral. As collateral and security for the
prompt and full performance of all duties and obligations of Pledgor under the
Note and this Agreement, Pledgor hereby pledges, assigns and transfers unto
Lender, and grants a security interest to Lender in and to the following
property of Pledgor (collectively, the "Stock Collateral"):
(a) The Existing Shares and the Additional Shares
(collectively, the "Shares")
(b) All stock rights, rights to subscribe, dividends
(including, but not limited to, cash dividends, stock dividends, dividends paid
in stock and liquidating dividends), and any other rights
<PAGE>
and property interest (including, but not limited to, accounts, contract rights,
instruments and general intangibles) arising out of or relating to the Shares;
(c) All other or additional (or less) stock or other
securities or property (including cash) paid or distributed in respect of the
Shares by way of stock split, spin off, reclassification, combination of shares
or similar corporate rearrangement;
(d) All other or additional (or less) stock or other
securities or property (including cash) paid or distributed in respect of the
Shares by reason of any consolidation, merger, exchange of stock, conveyance of
assets, liquidation or similar corporate reorganization; and
(e) All proceeds (both cash and non-cash) of the foregoing,
whether now or hereafter arising under the foregoing.
The above referenced certificates representing the Shares, together with
irrevocable stock powers executed in blank, are herewith delivered to Lender to
hold pursuant to the terms of this Agreement.
2. Dividends. So long as there exists no default by Pledgor under the
Note or this Agreement during the term hereof, all dividends and other amounts
with respect to the Stock Collateral shall be paid to the Pledgor.
3. Voting Rights. During the term of this Agreement, and so long as
Pledgor is not in default in the performance of any of the terms of the Note or
this Agreement, Pledgor shall have the sole and exclusive right to vote the
Stock Collateral on all corporate questions before the stockholders of Lender,
and Lender shall execute and deliver to Pledgor in a due and timely manner
proxies in favor of Pledgor to this end.
4. Representations and Warranties. Pledgor represents and warrants to
Lender (i) that the Shares are validly issued, fully paid and nonassessable,
(ii) that the Shares are validly pledged to Lender in accordance with law, and
(iii) that Pledgor has, and will have, good and marketable title to the Shares,
free and clear of all liens and encumbrances (other than the security interest
granted herein).
5. Covenants. Until full performance of Pledgor's duties and
obligations under the Note and this Agreement, Pledgor shall (i) deliver to
Lender (a) immediately upon Pledgor's receipt of any stock or other securities
paid or distributed in respect of the Shares, the certificates representing such
stock or securities, and (b) irrevocable stock powers executed in blank for all
such stock or securities; (ii) defend, at Pledgor's sole expense, the title to
the Stock Collateral or any part thereof; and (iii) promptly, upon request by
Lender, execute, acknowledge and deliver any financing statement, endorsement,
renewal, affidavit, deed, assignment, continuation statement, security
agreement, certificate or other document as Lender may require in order to
perfect, preserve, maintain, protect, continue and/or extend the lien and
security interest of Lender under this Agreement and the priority thereof.
6. Full Performance. Upon full performance of Pledgor's duties and
obligations under the Note and this Agreement, Lender shall deliver to Pledgor
all of the Stock Collateral that remains
2
<PAGE>
pledged hereunder and this Agreement shall thereupon terminate.
7. Default. Pledgor shall be in default under this Agreement on the
occurrence of any of the following events or conditions:
(a) Failure to make any payment in accordance with the
terms of the Note; or
(b) Pledgor's failure to observe, keep or perform any
covenant, agreement or condition required by this Agreement to be observed, kept
or performed; or
(c) Pledgor's insolvency, or the appointment of an
assignee for the benefit of creditors or of a receiver for Pledgor, or in the
event that a petition under any provision of the Federal Bankruptcy Act is
filed either by or against Pledgor.
8. Remedies. Upon the occurrence of any event of default, in addition
to any other right or remedy that Lender may then have under the Texas Business
and Commerce Code or otherwise, Lender may sell, assign and deliver, in its sole
discretion, all or any part of the Stock Collateral in one or more parcels, and
all right, title and interest, claim and demand therein, at public or private
sale, for cash or other property, upon credit or for future delivery, Pledgor
hereby waiving and releasing any and all equity or right of redemption.
9. No Waiver of Rights or Remedies. No failure or delay by Lender in
exercising any right, power or privilege under the Note or this Agreement shall
operate as a waiver thereof, and no single or partial exercise thereof shall
preclude any other or future exercise of any other right, power or privilege.
10. Notice. Any notice required or permitted hereunder shall be given
in writing and shall be deemed effective when delivered in person or when
deposited in the U.S. mails, postage prepaid, for delivery as registered or
certified mail, return receipt requested, and addressed as follows:
If to Pledgor: B. Tom Carter, Jr.
5956 Sherry Lane
Suite #930
Dallas, Texas 75225
If to Lender:
HydroChem Industrial Services,Inc.
900 Georgia Avenue
Deer Park, Texas 77536
Attention: General Counsel
(or to such other address as may be stated in written notices furnished by any
party to the other party).
3
<PAGE>
11. Governing Law. This Agreement shall be governed by and construed
under and in accordance with the Texas Business and Commerce Code and other
applicable laws of the State of Texas.
12. Parties Bound. This Agreement shall be binding on and inure to the
benefit of the parties hereto and their respective heirs, executors,
administrators, representatives, successors and assigns.
13. Severability. In case any one or more of the provisions contained
in this Agreement shall, for any reason, be held to be invalid, illegal, or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision hereof, and this Agreement shall be
construed as if such invalid, illegal or unenforceable provision had never been
contained herein.
14. Entire Agreement. This Agreement constitutes the entire
understanding between the parties with respect to the subject matter hereof, and
it supercedes all other prior or contemporaneous agreements, understandings,
restrictions warranties or representations between the parties including, but
not limited to, the Old Pledge Agreement which is hereby cancelled. This
Agreement may be amended or waived in the future only by a written instrument
signed by both parties.
15. Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning of this
Agreement or its interpretation.
16. Stockholders Agreement. Notwithstanding any other provision of this
Agreement, Lender hereby acknowledges that is takes the Stock Collateral subject
to the terms and conditions of that certain Stockholders Agreement dated as of
December 15, 1993, as amended, by and among Lender and all holders of Lender's
capital stock.
IN WITNESS WHEREOF, the parties have executed this Agreement
and caused the same to be duly delivered on the day and year hereinabove first
set forth.
PLEDGOR:
/s/ B. Tom Carter, Jr.
----------------------
B. Tom Carter, Jr.
LENDER:
HydroChem Holding, Inc.
By: /s/ Pelham H.A. Smith
--------------------------
Pelham H.A. Smith,
Vice President
4
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<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Mar-01-1999
<PERIOD-END> Mar-31-1999
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<PP&E> 90,716
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0
0
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