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, 2000
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 organization) 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
November 1, 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 I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1999 and
March 31, 2000 (unaudited)........................... 3
Consolidated Statements of Operations for each of the
three month periods ended March 31, 1999
and 2000 (unaudited)................................. 4
Consolidated Statement of Stockholder's Equity for the three
month period ended March 31, 2000 (unaudited)........ 5
Consolidated Statements of Cash Flows for each of the
three month periods ended March 31, 1999 and
2000 (unaudited)..................................... 6
Notes to Consolidated Financial Statements (unaudited).. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................... 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk........................................ 14
Part II.Other Information
Item 1. Legal Proceedings..................................... 15
Item 6. Exhibits and Reports on Form 8-K...................... 15
Signatures............................................................ 19
Exhibit Index......................................................... 20
2
<PAGE>
HYDROCHEM INDUSTRIAL SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.................... $ 4,140 $ 2,399
Receivables, less allowance of $671 and $781,
respectively............................... 33,488 40,433
Inventories.................................. 4,721 4,781
Prepaid expenses and other current assets.... 1,993 2,704
Income taxes receivable...................... 504 505
Deferred income taxes........................ 1,725 1,725
------- -------
Total current assets....................... 46,571 52,547
Property and equipment, at cost.................. 96,672 97,610
Accumulated depreciation..................... (43,756) (46,381)
------- -------
52,916 51,229
Intangible assets, net........................... 101,415 100,195
------- -------
Total assets............................... $200,902 $203,971
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable............................. $ 6,829 $ 7,675
Accrued liabilities.......................... 17,870 12,216
Current portion of long-term debt (Note 2)... 2,670 3,924
------- -------
Total current liabilities.................. 27,369 23,815
Long-term debt (Note 2).......................... 148,209 154,415
Deferred income taxes............................ 9,205 9,205
Commitments and contingencies (Note 5)
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............................. (440) (23)
------- -------
Total stockholder's equity................... 16,119 16,536
------- -------
Total liabilities and stockholder's equity. $200,902 $203,971
======= =======
</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,
1999 2000
---- ----
<S> <C> <C>
Revenue ................................... $ 50,905 $ 53,439
Cost of revenue ........................... 30,263 32,264
------ ------
Gross profit ......................... 20,642 21,175
Selling, general and administrative expense 12,500 12,801
Depreciation .............................. 2,913 2,933
----- -----
Operating income ..................... 5,229 5,441
Other (income) expense:
Interest expense, net ................ 3,268 4,014
Other (income) expense, net .......... (42) 27
Amortization of intangibles .......... 634 983
--- ---
Income before taxes ....................... 1,369 417
Income tax provision (Note 3) ........ - -
--- ---
Net income ................................ $ 1,369 $ 417
======== ========
</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, 1999 .......... $ 1 $ 16,558 $ (440) $16,119
Net income......................... - - 417 417
---- ------- ------ -------
Balance at September 30, 1999 ......... $ 1 $ 16,558 $ (23) $16,536
==== ======= ===== ======
</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,
1999 2000
---- ----
<S> <C> <C>
Operating activities:
Net income............................................ $ 1,369 $ 417
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation...................................... 2,913 2,933
Amortization...................................... 634 983
Amortization of deferred financing costs.......... 105 188
Deferred income tax provision..................... - -
Loss (gain) on sale of property and equipment..... (26) 35
Changes in operating assets and liabilities, net of
effects of acquisition:
Receivables, net.................................. (9,027) (6,945)
Inventories....................................... (946) (60)
Prepaid expenses and other current assets......... 66 (711)
Accounts payable.................................. 2,686 846
Accrued liabilities............................... (1,764) (5,205)
------- ------
Net cash used in operating activities.......... (3,990) (7,519)
------- ------
Investing activities:
Expenditures for property and equipment............... (2,021) (1,345)
Proceeds from sale of property and equipment.......... 40 64
Acquisitions, net of cash............................. (30,867) (351)
------- -------
Net cash used in investing activities.......... (32,848) (1,632)
------- -------
Financing activities:
Proceeds from long-term debt, net..................... 4,006 7,460
Debt financing costs.................................. (59) (50)
------- -------
Net cash provided by financing activities...... 3,947 7,410
------- -------
Net decrease in cash...................................... (32,891) (1,741)
Cash at beginning of period............................... 33,775 4,140
------- -------
Cash at end of period..................................... $ 884 $ 2,399
======= =======
</TABLE>
See accompanying notes.
6
<PAGE>
HYDROCHEM INDUSTRIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
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") and, since
November 19, 1999, Landry Service Co., Inc. ("LANSCO"). 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, steel mills, and aluminum plants. Services provided include
high-pressure and ultra-high pressure water cleaning (hydroblasting),
chemical cleaning, industrial vacuuming, tank cleaning, mechanical services,
waste minimization, and commissioning and other specialized services. The
majority of these services involves recurring maintenance to improve or
sustain the operating efficiencies and extend the useful lives of process
equipment and facilities.
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, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000. 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, 1999.
2. Long-term Debt
Long-term debt at December 31, 1999 and March 31, 2000 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1999 2000
---- ----
<S> <C> <C>
Senior Subordinated Notes ................ $ 110,000 $ 110,000
Term Loan ................................ 30,000 30,000
Mortgage Loan ............................ 7,379 7,339
Revolver ................................. -- 7,500
Seller Notes ............................. 3,500 3,500
--------- ---------
Total long-term debt ................. 150,879 158,339
Less current portion of long-term debt (2,670) (3,924)
--------- ---------
$ 148,209 $ 154,415
========= =========
</TABLE>
7
<PAGE>
On November 19, 1999, the Company entered into a credit agreement with
six financial institutions which provides for secured borrowings of up to
$60,000,000, consisting of a $30,000,000 term loan (the "Term Loan"), and a
$30,000,000 revolving loan (the "Revolver") which is subject to borrowing
base limitations. The credit facility expires on December 31, 2004, requires
HydroChem to meet certain customary financial ratios and covenants, and
restricts the Company from any further pledging of its assets. The credit
facility is secured by all current and future assets of the Company and
Holding. HydroChem, at its discretion, can pay interest on a Base Rate or
Eurodollar ("LIBOR") basis, plus applicable margins. Base Rate margins range
from 0.00% to 1.75%, depending on the type of advance and the Company's
leverage ratio as determined quarterly. LIBOR based margins range from 1.75%
to 3.00%, depending on the Company's leverage ratio as determined quarterly.
The length of LIBOR based interest periods is generally one to six months in
duration. However, interest payments are required at least every three
months. In addition, a commitment fee of 0.3% to 0.5% per annum, depending
on the Company's leverage ratio as determined quarterly, is payable
quarterly on the unborrowed portion of the Revolver.
As of March 31, 2000, $30,000,000 was outstanding under the Term Loan.
The Term Loan requires scheduled quarterly principal payments beginning on
September 30, 2000. In addition, the Company may be required to make
mandatory additional principal payments, based on the Company's excess cash
flow and certain other events, as defined in the credit agreement. As of
March 31, 2000, (i) the Company's borrowing base under the Revolver was
$25,937,000, of which $2,260,000 had been drawn in the form of standby
letters of credit, principally issued in connection with the Company's
property and casualty insurance program, (ii) there was $7,500,000
outstanding under the Revolver, and (iii) the Company had available unused
borrowings of $16,177,000, subject to covenant test limitations.
In connection with the Company's new headquarters and operating facility
in the Houston, Texas area, HydroChem entered into a loan agreement with a
financial institution dated July 17, 1998 as amended. The loan agreement
provided for an interim financing construction loan of up to $7,500,000,
which was converted to a term loan (the "Mortgage Loan") in the amount of
$7,500,000 on March 31, 1999. The Mortgage Loan is collateralized by first
priority liens on the land and improvements, matures on September 30, 2006,
and requires quarterly payments of interest and principal. Interest rates on
the Mortgage Loan are at LIBOR plus 1.75% adjusted quarterly. On July 17,
1998, HydroChem also entered into an interest rate protection agreement with
the same financial institution (the "Interest Rate Swap"). Under the
Interest Rate Swap, the Company's effective fixed borrowing rate for the
Mortgage Loan is 7.82%. The loan agreement requires the Company to meet
certain customary financial ratios and covenants and generally restricts the
Company from transferring or pledging the facility's assets. At March 31,
2000, the Company had $7,339,000 outstanding under the Mortgage Loan.
The Company acquired LANSCO on November 19, 1999. In connection with the
LANSCO acquisition, the Company issued two promissory notes (the "Seller
Notes") to the principal selling shareholders of LANSCO in the aggregate
principal amount of $3,500,000. The Seller Notes bear interest at 8% per
annum, mature on November 19, 2001, and require semi-annual interest
payments and annual principal payments. The first principal payments, in the
amount of $1,500,000, are due November 19, 2000. The final principal
payments, in the amount of $2,000,000, are due November 19, 2001. The Seller
Notes are unsecured, are subordinated to all Senior Debt (as defined in the
Seller Notes) of the Company, and contain no financial ratios or covenants
that must be met.
3. 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 of deferred tax assets.
8
<PAGE>
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, March 31,
1999 2000
---- ----
<S> <C> <C>
Current assets......................... $ 2,727 $ 2,648
Noncurrent assets...................... 92 94
Current liabilities.................... 496 286
Noncurrent liabilities................. - -
</TABLE>
<TABLE>
<CAPTION>
Three months ended
March 31,
1999 2000
---- ----
<S> <C> <C>
Revenue................................ $ 1,110 $ 1,458
Gross profit........................... 422 657
Net income............................. 163 133
</TABLE>
5. 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.
The Company has substantially completed the settlement of 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 covered claims by approximately 640 non-Company
employees present at the facility (the "Worker Plaintiffs") and
approximately 1,400 persons who are related to or live with the Worker
Plaintiffs. All of the plaintiffs sought damages for alleged toxic exposure
resulting from this incident. Pursuant to a Memorandum of Understanding
between virtually all of the plaintiffs and each of the defendants in the
suits, which was effective April 15, 1999, the Company's insurance carriers
deposited the Company's share of the settlement into escrow, which is being
disbursed as satisfactory evidence of settlement with individual plaintiffs
is received. As of March 31, 2000, approximately 95% of the escrow had been
disbursed. In addition, by separate agreement, Georgia Gulf assumed the
Company's defense and indemnity against the claims of any plaintiff who did
not participate in the settlement, the claims of approximately twenty
plaintiffs who were not parties to the settlement, certain additional claims
which have been filed against the Company since the date of the Memorandum
of Understanding, and future claims which may arise in connection with this
incident.
All payments by the Company under these arrangements have been made by
the Company's insurance carriers. As a result of the settlement process,
management believes this litigation will not have a material adverse affect
on the Company's financial position or results of operations.
The Company is also a defendant in a lawsuit filed on September 20, 1999
in the 24th Judicial District Court for the Parish of Jefferson, Louisiana,
which seeks class certification on behalf of an unknown number of
plaintiffs, who allege personal and property damages arising from the
release of a single 330-gallon container of hydrochloric acid on a public
highway in Kenner, Louisiana in September 1999. The Company is being
defended in this suit by one of its liability insurance carriers. Although
this matter is in its initial stages and its outcome is therefore difficult
to predict with certainty, management believes that any resolution will be
within the limits of its applicable insurance coverage and will not have a
material adverse affect on the Company's financial position or result of
operations.
9
<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 of Financial Condition and Results of
Operations 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 these forward-looking statements are reasonable, it can give no
assurance that these expectations will prove to have been correct. These
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 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, 1999. 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,
1999 2000
---- ----
<S> <C> <C>
Revenue.............................. 100.0% 100.0%
Cost of Revenue...................... 59.4 60.4
---- ----
Gross profit.................... 40.6 39.6
SG&A expense......................... 24.6 23.9
Depreciation......................... 5.8 5.5
---- ----
Operating income................ 10.2 10.2
Other (income) expense:
Interest expense, net........... 6.4 7.5
Other (income) expense, net..... (0.1) 0.1
Amortization of intangibles..... 1.2 1.8
---- ----
Income before taxes.................. 2.7 0.8
Income tax provision............ - -
Net income........................... 2.7% 0.8%
==== ====
EBITDA (1)........................... 16.0% 15.7%
==== ====
</TABLE>
- ----------
(1) EBITDA for any relevant period presented above represents gross profit less
selling, general and administrative expense. 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 it to be a useful tool for analyzing operating
performance, leverage, liquidity and a company's ability to service debt.
10
<PAGE>
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
- -------------------------------------------------------------------------------
Revenue. Revenue increased $2.5 million, or 5.0%, to $53.4 million for the
three months ended March 31, 2000 from $50.9 million in the prior year period.
The increase resulted from an increase in tank cleaning revenue of $2.8 million,
or 551.3%, from $499,000 to $3.3 million, an increase in other services revenue
of $2.0 million, or 81.3%, from $2.4 million to $4.4 million, an increase in
chemical cleaning revenue of $1.4 million , or 10.7%, from $13.0 million to
$14.4 million, and an increase in industrial vacuuming revenue of $1.3 million,
or 13.7%, from $9.3 million to $10.6 million. These increases were partially
offset by a decrease in hydroblasting revenue of $4.9 million, or 19.0%, from
$25.7 million to $20.8 million. The increase in tank cleaning revenue resulted
principally from the acquisition of LANSCO. Other services revenue increased
principally as a result of increased mechanical services and commissioning
services projects. The increase in industrial vacuuming revenue resulted from
additional vacuum trucks placed in service by the Company in 1999. Chemical
cleaning revenue increased as a result of an increased volume of projects. The
decrease in hydroblasting revenue principally resulted from a reduced volume of
projects.
Gross profit. Gross profit increased $533,000, or 2.6%, to $21.2 million in
2000 from $20.6 million in the prior year period. Gross profit margin decreased
from 40.6% to 39.6%. Cost of revenue increased $2.0 million, or 6.6%, to $32.3
million in 2000 from $30.3 million in the prior year period primarily due to the
revenue increases described above, partially offset by reduced profit sharing
and insurance expense accruals.
SG&A expense. SG&A expense increased $301,000, or 2.4%, to $12.8 million in
2000 from $12.5 million in the prior year period. This increase primarily
resulted from the acquisition of LANSCO, partially offset by reduced profit
sharing and insurance expense accruals. SG&A expense as a percentage of revenue
decreased to 23.9% in 2000 from 24.6% in the prior year period.
EBITDA. Increased gross profit, partially offset by increased SG&A expense,
resulted in a $232,000, or 2.8%, increase in EBITDA to $8.4 million in 2000 from
$8.1 million in the prior year period. As a percentage of revenue, EBITDA
decreased to 15.7% in 2000 from 16.0% in the prior year period.
Depreciation. Depreciation expense was relatively unchanged with an increase
of $20,000, or 0.7%, to $2.9 million in 2000 from $2.9 million in the prior year
period, and was 5.5% and 5.8% of revenue, respectively. The increase in
depreciation expense principally resulted from the acquisition of the LANSCO
assets and from capital expenditures in 1999 and 2000, partially offset by a
reduction in depreciation associated with fully depreciated assets.
Operating income. Increased gross profit, partially offset by increased SG&A
expense and depreciation expense, resulted in an increase in operating income of
$212,000, or 4.1%, to $5.4 million in 2000 from $5.2 million in the prior year
period. As a percentage of revenue, operating income remained unchanged at 10.2%
in 2000 from the prior year period.
Interest expense, net. Interest expense, net increased $746,000, or 22.8%,
to $4.0 million in 2000 from $3.3 million in the prior year period. Increased
interest expense, net resulted from additional borrowings to finance the LANSCO
acquisition. Interest expense, net as a percentage of revenue increased to 7.5%
in 2000 from 6.4% in the prior year period.
Amortization. Amortization expense increased $349,000, or 55.0%, to $983,000
in 2000 from $634,000 in the prior year period. Increased amortization expense
resulted from goodwill incurred in connection with the acquisition of LANSCO.
Amortization expense as a percentage of revenue increased to 1.8% in 2000 from
1.2% in the prior year period.
Income before taxes. For the reasons described above, the Company income
before taxes decreased $952,000 to $417,000 in 2000 from $1.4 million in the
prior year period. As a percentage of revenue, income before taxes was 0.8% in
2000 compared to 2.7% in the prior year period.
11
<PAGE>
Income tax provision. The effective income tax rate remained at zero in 2000
consistent with the prior year period, principally as a result of changes in the
valuation of deferred tax assets.
Net income. For the reasons described above, the Company's net income
decreased $952,000 to $417,000 in 2000 from $1.4 million in the prior year
period. As a percentage of revenue, net income was 0.8% in 2000 compared to 2.7%
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 Holding. On November 19, 1999, the
Company entered into a credit agreement with six financial institutions which
provides for secured borrowings of up to $60.0 million consisting of $30.0
million under the Term Loan, and $30.0 million under the Revolver which is
subject to borrowing base limitations. The credit facility expires on December
31, 2004, requires HydroChem to meet certain customary financial ratios and
covenants, and restricts the Company from any further pledging of its assets.
The credit facility is secured by substantially all of the current and future
assets of the Company and Holding. HydroChem, at its discretion, can pay
interest on a Base Rate or LIBOR basis, plus applicable margins. Base Rate
margins range from 0.00% to 1.75%, depending on the type of advance and the
Company's leverage ratio as determined quarterly. LIBOR based margins range from
1.75% to 3.00%, depending on the Company's leverage ratio as determined
quarterly. The length of LIBOR based interest periods is generally one to six
months in duration. However, interest payments are required at least every three
months. In addition, a commitment fee of 0.3% to 0.5% per annum, depending on
the Company's leverage ratio as determined quarterly, is payable quarterly on
the unborrowed portion of the Revolver.
As of March 31, 2000, $30.0 million was outstanding under the Term Loan. The
Term Loan requires scheduled quarterly principal payments beginning on September
30, 2000. In addition, the Company may be required to make mandatory additional
principal payments, based on the Company's excess cash flow and certain other
events, as defined in the credit agreement. As of March 31, 2000, (i) the
Company's borrowing base under the Revolver was $25.9 million, of which $2.3
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,
(ii) there was $7.5 million outstanding under the Revolver, and (iii) the
Company had available unused borrowings of $16.2 million, subject to covenant
test limitations.
In connection with the Company's new headquarters and operating facility in
the Houston, Texas area, HydroChem entered into a loan agreement with a
financial institution on July 17, 1998, as amended. The loan agreement provided
for an interim financing construction loan of up to $7.5 million, which was
converted to the Mortgage Loan in the amount of $7.5 million on March 31, 1999.
The Mortgage Loan is collateralized by first priority liens on the land and
improvements, matures on September 30, 2006, and requires quarterly payments of
interest and principal. Interest rates on the Mortgage Loan are at LIBOR plus
1.75% adjusted quarterly. On July 17, 1998, HydroChem also entered into the
Interest Rate Swap. Under the Interest Rate Swap, the Company's effective fixed
borrowing rate for the Mortgage Loan is 7.82%. The loan agreement requires the
Company to meet certain customary financial ratios and covenants and generally
restricts the Company from transferring or pledging the facility's assets. At
March 31, 2000, the Company had $7.3 million outstanding under the Mortgage
Loan.
In connection with the LANSCO acquisition, the Company issued the Seller
Notes to the principal selling shareholders of LANSCO in the aggregate principal
amount of $3.5 million. The Seller Notes bear interest at 8% per annum, mature
on November 19, 2001, and require semi-annual interest payments and annual
principal payments. The first principal payments, in the amount of $1.5 million,
are due November 19, 2000. The final principal payments, in the amount of $2.0
million, are due November 19, 2001. The Seller Notes are unsecured, are
subordinated to all Senior Debt (as defined in the Seller Notes) of the Company,
and contain no financial ratios or covenants that must be met.
For the three months ended March 31, 2000, the Company used net cash of $9.1
million for operating and investing activities which consisted of $7.5 million
used in operating activities and $1.6 million used in investing activities. For
the three months ended March 31, 1999, $36.8 million of net cash was used in
operating and investing activities which consisted of $4.0 million used in
operating activities and $32.8 million used in investing activities, including
$30.9 million for acquisitions.
12
<PAGE>
Expenditures for property and equipment for the three months ended March 31,
2000 were $1.3 million. These expenditures were principally for operating
equipment. For the three months ended March 31, 1999, $2.0 million of
expenditures for property and equipment included $852,000 for the purchase of
operating equipment, $731,000 to implement new field and corporate information
software and hardware systems, and $438,000 for the construction of the new
headquarters and operating facility.
Management believes that cash and cash equivalents at March 31, 2000, net
cash expected to be provided by operating activities and borrowings, if
necessary, under the Company's credit facility will be sufficient to meet the
Company's cash requirements for operations, expenditures for property and
equipment, and debt service for the next twelve months and the foreseeable
future thereafter. From time to time, the Company reviews acquisition
opportunities as they arise, and may require additional financing if it decides
to make additional acquisitions. There can be no assurance, however, that any
acquisition opportunities will arise, that any acquisitions will be consummated,
or that any related financing will be available when required on terms
satisfactory to the Company.
13
<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 risks and uncertainties. Actual
results could differ materially from those projected in these 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 presented do not consider the effects
that adverse changes may have on overall economic activity nor do they consider
additional actions management may take to mitigate the Company's exposure to
these changes. The Notes to Consolidated Financial Statements herein and in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999
provide a description of the Company's accounting policies and other information
related to these financial instruments. 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 was entered into
during 1998 in connection with the Company's Mortgage 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, steel mills, 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 accounts receivable are primarily denominated in U.S. dollars and are
generally due within 30 days. In general, trade accounts receivable are
collected in a timely manner, and historically bad debts have not been material
and have been within management's expectations. Management believes timely
collection of trade accounts receivable minimizes associated credit risk.
The Company places its short-term investments, which generally have a term
of less than 90 days, with high quality financial institutions, limits the
amount of credit exposure to any one institution, and has investment guidelines
relative to diversification and maturities designed to maintain safety and
liquidity. As of March 31, 2000, the Company had short-term investments totaling
$2.5 million. Due to the short-term nature of these instruments, their carrying
value approximated market value. Management does not believe that a decrease of
1.0% from 1999 average investment rates would have a material adverse effect on
the Company's financial position or results of operations during 2000.
As of March 31, 2000, the Company's outstanding long-term debt consisted of
its Senior Subordinated Notes, the Term Loan, the Mortgage Loan, the Revolver,
and the Seller Notes. The Senior Subordinated Notes totaled $110.0 million, are
due on August 1, 2007, and bear interest at a fixed rate of 10 3/8%. As of March
31, 2000, their fair value was estimated to be $88.0 million. At the same date,
the Term Loan, the Mortgage Loan, the Revolver, and the Seller Notes totaled
$30.0 million, $7.3 million, $7.5 million, and $3.5 million, respectively, and
approximated their fair values. The Term Loan and Revolver are components of a
credit facility which expires on December 31, 2004. The interest rates for the
credit facility, at the discretion of the Company, are at Base Rate or LIBOR,
plus applicable margins. Margins range from 0.00% to 3.00% depending upon which
interest rate option is in effect and the Company's leverage ratio as determined
quarterly. The Mortgage Loan matures September 30, 2006, and bears interest at
LIBOR rates plus 1.75% adjusted quarterly. The Company periodically reviews
various alternatives to protect long-term debt against interest rate
fluctuations. To protect the Mortgage Loan against interest rate fluctuations,
the Company utilizes the Interest Rate Swap which fixes the interest rate at
7.82% per annum. The Seller Notes are due in two installments with the final
installment due on November 19, 2001, and bear interest at 8% per annum.
Management does not believe that the market risk, estimated as a potential
increase in fair value of these debt instruments resulting from a hypothetical
1.0% decrease in interest rates, would have a material adverse effect on the
Company's financial position or results of operations during 2000.
14
<PAGE>
Part II. Other Information
- -------- -----------------
Item 1.Legal Proceedings
The Company has substantially completed the settlement of
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 covered claims by approximately 640
non-Company employees present at the facility (the "Worker Plaintiffs") and
approximately 1,400 persons who are related to or live with the Worker
Plaintiffs. All of the plaintiffs sought damages for alleged toxic exposure
resulting from this incident. Pursuant to a Memorandum of Understanding
between virtually all of the plaintiffs and each of the defendants in the
suits, which was effective April 15, 1999, the Company's insurance carriers
deposited the Company's share of the settlement into escrow, which is being
disbursed as satisfactory evidence of settlement with individual plaintiffs
is received. As of March 31, 2000, approximately 95% of the escrow had been
disbursed. In addition, by separate agreement, Georgia Gulf assumed the
Company's defense and indemnity against the claims of any plaintiff who did
not participate in the settlement, the claims of approximately twenty
plaintiffs who were not parties to the settlement, certain additional claims
which have been filed against the Company since the date of the Memorandum
of Understanding, and future claims which may arise in connection with this
incident.
All payments by the Company under these arrangements have been made
by the Company's insurance carriers. In addition, because the settlement
process is sufficiently completed, management believes this litigation will
not have a material adverse affect on the Company's financial position or
results of operations.
The Company is also a defendant in a lawsuit filed on September 20,
1999 in the 24th Judicial District Court for the Parish of Jefferson,
Louisiana, which seeks class certification on behalf of an unknown number of
plaintiffs who allege personal and property damages arising from the release
of a single 330-gallon container of hydrochloric acid on a public highway in
Kenner, Louisiana in September 1999. The Company is being defended in this
suit by one of its liability insurance carriers. Although this matter is in
its initial stages and its outcome is therefore difficult to predict with
certainty, management believes that any resolution will be within the limits
of its applicable insurance coverage and will not have a material adverse
affect on the Company's financial position or results of operations.
Item 6.Exhibits 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.)
15
<PAGE>
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 10 3/8% 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 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 Deferred Bonus Plan of HydroChem Industrial Services,
Inc. effective May 1, 1999. (Exhibit 10.14 to the
Company's Form 10-Q filed August 10, 1999, is hereby
incorporated by reference.)
10.3 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.)
10.4 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.)
10.5 Secured Promissory Note dated April 30, 1999 from
B. Tom Carter, Jr. to HydroChem Holding Inc. (Exhibit
10.4 to the Company's Form 10-Q filed May 11, 1999, is
hereby incorporated by reference.)
10.6 Pledge Agreement dated April 30, 1999 between B. Tom
Carter, Jr. and HydroChem Holding, Inc. (Exhibit 10.5
to the Company's Form 10-Q filed May 11, 1999, is
hereby incorporated by reference.)
10.7 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.)
10.8 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.)
10.9 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.)
16
<PAGE>
10.10 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.)
10.11 First Amendment to Employment Agreement dated as of
June 28, 1999 to Employment Agreement dated as of
September 26, 1997 between HydroChem Industrial
Services Inc. and Donovan Boyd. (Exhibit 10.10 to the
Company's Form 10-Q filed August 10, 1999, is hereby
incorporated by reference.)
10.12 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.)
10.13 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.)
10.14 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.)
10.15 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.)
10.16 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.)
10.17 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.)
10.18 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.)
10.19 Credit Agreement dated November 19, 1999 among
HydroChem Holding, Inc., HydroChem Industrial Services
Inc., various lenders and Bank of America, N.A., as
administrative agent. (Exhibit 2.2 to the Company's
Form 8-K filed December 3, 1999, is hereby
incorporated by reference.)
10.20 First Amendment dated as of December 17, 1999 to
Credit Agreement dated November 19, 1999 among
HydroChem Holding,Inc., HydroChem Industrial Services,
Inc., various lenders and Bank of America, N.A., as
administrative agent. (Exhibit 10.20 to the Company's
Form 10-K filed March 24, 2000, is hereby incorporated
by reference.)
10.21 Amended and Restated Asset Purchase Agreement by and
among HydroChem Industrial Services, Inc., Valley
Systems of Ohio, Inc. and Valley Systems, Inc. dated
as of September 8, 1998. (Exhibit 10.1 to the
Company's Form 8-K, filed January 20, 1999, is
hereby incorporated by reference.)
17
<PAGE>
10.22 Stock Purchase Agreement dated November 19, 1999 by
and among HydroChem Industrial Services, Inc. and
each stockholder of Landry Service Co., Inc. including
Kenneth C. Landry and Charles A. Landry, Jr. (Exhibit
2.1 to the Company's Form 8-K filed December 3, 1999,
is hereby incorporated by reference.)
27.1 Financial Data Schedule. (Filed herewith.)
(b) Reports on Form 8-K.
During the quarter ended March 31, 2000, the Registrant filed a
report on Form 8-K/A dated January 31, 2000 and February 1, 2000
pertaining to "Item 7 - Financial Statements and Exhibits".
18
<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 12, 2000 By: /s/ Selby F. Little, III
---------------------------
Selby F. Little, III, Executive Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
HYDROCHEM INTERNATIONAL, INC.
Date: May 12, 2000 By: /s/ Selby F. Little, III
---------------------------
Selby F. Little, III, Executive Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
19
<PAGE>
EXHIBIT INDEX
27.1 Financial Data Schedule
20
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-2000
<PERIOD-END> Mar-31-2000
<CASH> 2,399
<SECURITIES> 0
<RECEIVABLES> 40,433
<ALLOWANCES> 0
<INVENTORY> 4,781
<CURRENT-ASSETS> 52,547
<PP&E> 97,610
<DEPRECIATION> 46,381
<TOTAL-ASSETS> 203,971
<CURRENT-LIABILITIES> 23,815
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0
0
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<TOTAL-LIABILITY-AND-EQUITY> 203,971
<SALES> 53,439
<TOTAL-REVENUES> 53,439
<CGS> 32,264
<TOTAL-COSTS> 32,264
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