United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1998
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( X )
The number of shares of Common Stock of the Registrant, par value of $.01 per
share, outstanding on February 28, 1999 was 100 shares. The Registrant's Common
Stock is not registered under the Securities Act of 1933 or the Securities
Exchange Act of 1934.
Documents Incorporated by Reference: None
- --------------------------------------------------------------------------------
* 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 and its I.R.S. Employer Identification Number is
75-2512100.
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INDEX
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Page
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Part I.
Item 1. Business.............................................. 3
Item 2. Properties............................................ 10
Item 3. Legal Proceedings..................................... 10
Item 4. Submission of Matters to a Vote of Security Holders.. 11
Part II.
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters.......................... 11
Item 6. Selected Financial Data............................... 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 13
Item 7a. Quantitative and Qualitative Disclosure about Market Risk.20
Item 8. Financial Statements and Supplementary Data........... 21
Item 9. Changes in and disagreements with Accountants
on Accounting and Financial Disclosure............... 38
Part III.
Item 10. Directors and Executive Officers of the Registrant..... 38
Item 11. Executive Compensation................................. 40
Item 12. Security Ownership of Certain Beneficial
Owners and Management................................ 42
Item 13. Certain Relationships and Related Transactions......... 44
Part IV.
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K.............................. 45
Signatures................................................................ 48
Exhibit Index............................................................. 50
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Forward-Looking Statements
In addition to historical information, this Form 10-K Annual Report contains
forward-looking statements. These forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in these forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in the sections entitled "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Readers are
cautioned only as of the date on which such statements are made and the Company
undertakes no obligation to revise or publicly release the results of any
revision to these forward-looking statements. Readers should carefully review
the risk factors described in other documents the Company files from time to
time with the Securities and Exchange Commission, including the Quarterly
Reports on Form 10-Q to be filed by the Company in fiscal year 1999.
Part I.
Item 1. BUSINESS
General
HydroChem Industrial Services, Inc. ("HydroChem"), was formed in September
1993 for the purpose of combining, in December 1993, the industrial cleaning
businesses of Hydro Environmental Services Limited Partnership ("Hydro
Services") and the Dowell Industrial Services division ("DIS") of Dowell
Schlumberger Inc. These businesses had been operating since 1961 and 1938,
respectively. In January 1995, HydroChem acquired the industrial cleaning
business of the Halliburton Industrial Services division ("HIS") of Brown & Root
Industrial Services, Inc. The HIS business was founded in 1962. HydroChem
generally conducts business outside the United States through its wholly owned
subsidiary, HydroChem International, Inc. ("International"). (HydroChem and
International are hereinafter sometimes referred to either separately or
collectively as the "Company.") HydroChem is a wholly owned subsidiary of
HydroChem Holding, Inc. ("Holding").
On January 5, 1999, HydroChem acquired substantially all of the assets and
assumed certain liabilities of Valley Systems, Inc., and Valley Systems of Ohio,
Inc., (collectively "Valley"). The acquisition, 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, including customer agreements, customer lists and facility leases,
and (iv) other operating assets. The purchase price for the acquired assets,
which is subject to certain post closing adjustments, was approximately $29.8
million in cash of which $4 million was deposited into escrow. In addition,
HydroChem assumed approximately $2.5 million in capital lease obligations and
paid $5.3 million in cash at closing to retire Valley's bank debt.
The Company is a leading provider of industrial cleaning services to a
wide range of processing industries, including petrochemical plants, oil
refineries, electric utilities, pulp and paper mills, rubber plants, and
aluminum plants. Services provided include high-pressure water cleaning
(hydroblasting), chemical cleaning, industrial vacuuming, mechanical services,
waste minimization, and commissioning and other specialized services. The
majority of these services involve recurring maintenance to improve or sustain
the operating efficiencies and extend the useful lives of process equipment and
facilities. During the year ended December 31, 1998, the Company provided
services to approximately 2,000 customers at approximately 3,400 customer sites
from 54 operating branch locations in the United States and one location in
Singapore.
In 1998, approximately 51.5% of the Company's 1998 revenue was derived
from its 15 largest customers, 11 of which are Fortune 500 companies, and
approximately 69.2% was derived from its 40 largest customers, 24 of which are
Fortune 500 companies.
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The Company's revenue by industry is set forth in the following table:
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Year ended December 31,
-----------------------
1996 % 1997 % 1998 %
---- --- ---- --- ---- ---
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Petrochemical......... $ 72,073 46.2% $ 77,659 48.4% $ 84,600 50.1%
Refineries............ 26,676 17.1 32,501 20.2 34,245 20.3
Electrical utility..... 22,464 14.4 16,881 10.5 16,779 9.9
Pulp and paper......... 13,104 8.4 12,342 7.7 11,985 7.1
Other.................. 21,686 13.9 21,221 13.2 21,161 12.6
-------- ----- ------- ---- ------- ----- ------
Total........ $156,003 100.0% $160,604 100.0% $168,770 100.0%
======= ===== ======= ===== ======= =====
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The Company's revenue by service line is set forth in the following table:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1996 % 1997 % 1998 %
---- --- ---- --- ---- ---
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Hydroblasting......... $ 69,504 44.5% $ 78,919 49.1% $ 79,665 47.2%
Chemical cleaning..... 62,661 40.2 53,366 33.2 52,954 31.4
Industrial vacuuming.. 11,484 7.4 17,534 10.9 24,500 14.5
Other................. 12,354 7.9 10,785 6.8 11,651 6.9
------- ----- ------- ---- ------- ----- ------
Total....... $156,003 100.0% $160,604 100.0% $168,770 100.0%
======= ===== ======= ===== ======= =====
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Services
Hydroblasting, chemical cleaning and industrial vacuuming are the
Company's largest sources of revenue, but the Company also offers a variety of
other services, including mechanical services, waste minimization and
commissioning services, as described below. The majority of these services
involve recurring maintenance programs and may be provided on a time and
materials basis or bid on a project basis.
Hydroblasting Services
The Company's hydroblasting services involve the application of
high-pressure streams of water to clean the interior and exterior surfaces of
process equipment, storage tanks and other vessels, and to unplug piping, tubes
and lines. Hydroblasting is particularly effective in cleaning deposits that
cannot be chemically dissolved or that are located on surfaces where the
circulation of chemical cleaning solvents is not feasible.
Hydroblasting is primarily used for the removal of scale and other fouling
deposits to improve the operating or energy efficiency of equipment, prevent
contamination of finished products, and clean equipment in preparation for, or
subsequent to, other maintenance work. Hydroblasting is also used to prepare
surfaces for welding, inspection or painting, to clean exterior surfaces
cosmetically and, with special additives and equipment, to cut steel or
concrete.
The Company performs its hydroblasting services using equipment that
includes an engine, pump and high-pressure hoses that are attached to
specialized application devices. Water typically emerges at pressures from 5,000
to 20,000 pounds per square inch, although ultra-high-pressures of up to 40,000
pounds per square inch are used for certain cleaning and cutting jobs. The
deposits and wastes removed by hydroblasting, along with water used in the
process, are typically deposited into the customer's waste treatment system for
further processing and disposal by the customer.
With the acquisition of Valley, the Company's ability to provide 36,000 to
40,000 pounds per square inch, ultra-high pressure (UHP) hydroblasting services
has been expanded. Valley has designed and fabricated special UHP
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equipment that should allow the Company to enhance the hydroblasting services
provided to its customers. The Company believes an advantage of UHP technology
to the Company's customers is the ability to more effectively clean the most
difficult to remove scale and deposits from accessible tubing and surfaces.
Chemical Cleaning Services
Chemical cleaning typically involves circulating chemical solvents through
process equipment, piping, and tanks or other storage vessels under controlled
conditions of temperature, pressure and time to remove fouling deposits from
interior surfaces. Chemical cleaning is generally performed in a closed loop
process and employed to dissolve substances on surfaces that are inaccessible to
hydroblasting, or where chemical cleaning is more effective or safer than
hydroblasting. Chemical cleaning also may involve the application of chemical
solvents to deposits on exterior surfaces that cannot be cleaned with water or
the addition of chemicals to by-products or waste products.
Chemical cleaning has many of the same uses and applications as
hydroblasting in industrial cleaning. It is also used for "degassing" process
equipment to remove volatile substances. In addition, the Company's chemical
cleaning services are required from time-to-time in connection with the
commissioning, or pre-operational cleaning, of new equipment or an entire plant
to remove soil, debris and other substances that accumulate during construction.
Most of the Company's chemical cleaning services involve circulation of
chemical solvents through process equipment, piping, and tanks or other storage
vessels. For many of these jobs, a sample of the fouling deposit or substance to
be removed is sent to the Company's laboratory facility in the Houston, Texas
area, where the Company's chemists determine its chemical make-up, the
combination and concentration of chemicals best suited for the cleaning process
and the appropriate temperature, pressure and timing parameters for circulation
of the chemicals. The Company also has mobile laboratory units, which are used
to perform limited chemical analysis on-site and to assist in monitoring ongoing
chemical cleaning jobs. After the proper procedure for the on-site work has been
determined, a field crew mixes the chemicals, typically on the customer's
premises. Using pumping and circulating equipment, the field crew then
circulates the solution through the process equipment and, in most cases,
collects the waste material and used chemical solution. During the circulation
process, the concentration levels of the substance to be removed and the
chemicals that have been introduced into the system are monitored to determine
the rate at which the deposits are being removed and to ensure that proper
conditions are being maintained. After collection, the waste typically is
emptied at the customer's on-site disposal or storage facility, or it may be
pumped into holding tanks that remain on the customer's property for later
disposal or treatment by the customer.
Industrial Vacuuming Services
Industrial vacuuming is the process of removing industrial waste and
debris by conveyance of air or by traditional vacuuming techniques. The
Company's vacuuming services typically are required to recover these materials
for disposal or recycling, to move them within a plant, to remove waste from
sumps, to prepare tanks or other storage facilities for routine maintenance, and
to assist in other types of cleaning and maintenance services.
The Company provides air-moving services using specialized, truck and
trailer-mounted equipment to collect and remove a variety of solid and
semi-solid materials, including dust, powder, oil, resins, wood chips, steel
pellets, solid catalysts and bricks. The Company also furnishes liquid vacuuming
services using conventional vacuum trucks, which maintain a continuous negative
tank pressure, for the removal of liquid waste, sludge or spent process fluids
from pits, ponds, tanks or process equipment. The Company often provides
vacuuming services in connection with its other services.
During 1997 and 1998, the Company increased its fleet of vacuum trucks
from 131 to 228 units. Over the same period, industrial vacuuming revenue
increased from $11.5 million in 1996 to $17.5 million in 1997, or 52.7%, and to
$24.5 million in 1998, or 39.7%. Industrial vacuuming revenue is generally more
capital intensive than other services provided by the Company, resulting in
higher depreciation and operating lease expense. However, because industrial
vacuuming services can be marketed and administered by the Company's existing
sales and support operations, increased depreciation and operating lease expense
is more than offset by proportionately lower levels of incremental selling,
general and administrative expense.
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Mechanical Services
In 1998, the Company began offering certain mechanical services to its
customers, including specialized "turnkey" heat exchanger, piping, tower and
vessel services. These turnkey services involve providing both mechanical and
industrial cleaning services to customers, usually in conjunction with a
scheduled plant shutdown or "turnaround."
Mechanical services typically involve heat exchangers. Heat exchangers are
made up of tube bundles, and are essential components of petroleum refining and
petrochemical processing. Heat exchangers require periodic maintenance and
cleaning. The Company's newly-developed, mechanical services capabilities allow
it to provide customers with services in addition to industrial cleaning. These
include disassembling heat exchangers prior to in-place cleaning or extraction.
If extracted, the tube bundles are placed on nearby concrete slabs for cleaning.
After slab cleaning, the tube bundles are reinserted. Following either in-place
or slab cleaning, heat exchangers are reassembled and pressure tested.
The Company intends to further enhance its capabilities in providing
mechanical services. The Company expects that this will require additional
experienced mechanical services professionals and increased expenditures for
property and equipment.
Waste Minimization Services
The Company employs several techniques to reduce customer waste volumes
collected in the cleaning process before customer disposal, including
de-watering and chemical treatment techniques, as well as on-line water
recycling. Equipment often employed in these processes are plate and frame
filter presses and centrifuges, which are used to reduce the customer's cost of
disposing of waste. Revenue from waste minimization services is generally
included in the other services category.
Commissioning Services
Commissioning services include a variety of processes utilized to clean
newly constructed systems of industrial processing plants prior to their initial
operation. These services include the Company's SILENTSTEAM(R) process for
cleaning steam path components, as well as the application of flushing, cleaning
and passivation technologies to piping, vessels, boilers, and lubrication and
hydraulic oil systems. Depending on the nature of the commissioning services,
the revenue derived therefrom may be attributable to hydroblasting, chemical
cleaning, industrial vacuuming or other services.
Competition and Market Factors
The industrial cleaning service business is highly competitive. The
Company believes that the principal competitive factors in this business are
price, quality of service, safety record, reputation, responsiveness of
personnel, efficiency of service, and knowledge of customer plants and
operations. Location is an important factor in being able to provide timely and
cost-effective services, although this is more of a factor with respect to daily
or more frequently recurring maintenance services than project work.
The Company competes with a large number of companies in substantially all
of the regions in which it operates. Many of these competitors are local or
regional operations servicing a limited geographic area; however, others are
larger companies with broader geographic coverage, similar to the Company.
Accordingly, HydroChem's competitors in any particular geographic market may
differ. In addition, competitors tend to be stronger in certain services and
weaker in others, or may not offer a full range of services. While most of the
Company's direct competitors do not offer as extensive a line of services as the
Company, future expansion by such companies or the development of alternative
cleaning methods represent potential competition for the Company.
The Company believes that factors such as maintenance for improved
efficiency, a trend toward outsourcing, industry consolidation and environmental
regulations have favorably affected the demand for its industrial cleaning
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services. The Company also believes that it benefits from competitive strengths
which include industry experience and long term relationships with quality
customers, a broad range of services and industry expertise, an excellent safety
record, strategic locations, customer contacts, customer alliances, and
experienced management. See "Marketing, Sales and Services Contracts."
Business Strategy
The Company's business strategy is to expand services provided to existing
customers, establish relationships with new customers in existing geographic
areas, expand geographically, establish additional customer alliances and pursue
additional strategic acquisitions. In 1998, the Company's revenue growth
principally resulted from expanded services to existing customers including
customer alliances. The Company intends to continue to focus on these elements
of its strategic growth.
With the acquisition of the former Valley operations, the Company has
expanded both its service offering and geographic coverage. The majority of
Valley's revenue is comprised of UHP and industrial vacuuming services. In
addition, as a result of the acquisition, the Company has increased its number
of branch locations in the northern United States, thereby improving operating
efficiencies in that geographic region. See "Services - Hydroblasting Services,"
and "Field Organizational Structure."
Field Organizational Structure
The Company's field organization is primarily based on geographical
divisions. Divisions are generally subdivided into areas, regions and branches.
Branches, including certain on-site locations, are the primary business or
operating units.
The Company maintains operating and sales personnel at each of its branch
locations and operates each location under the direction of a branch manager in
accordance with policies, procedures and objectives established by the Company's
management. Subject to these guidelines, branch personnel have significant
autonomy in dealing with customers, employees and vendors in their geographic
area. Each branch operates as a separate profit center and is responsible for
billing and collecting accounts receivable, although cash receipts are collected
via lockbox. Each branch is also responsible for initiating vendor purchase
orders and entering payroll hours, although vendor and payroll payments are
processed at the Company's headquarters location. Each branch location is
allotted certain equipment, including pumps, vehicles and various types of
specialized equipment. However, equipment and personnel are shifted among
branches as work loads dictate, enabling the Company to realize better
utilization of its resources.
Marketing, Sales and Service Contracts
The Company's sales and marketing is characterized by long-term customer
relationships resulting from the consistent delivery of high quality, dependable
service, advanced technical capabilities, a broad service offering, competitive
pricing and a strong customer service orientation among its employees. The
Company's services are marketed and sold through a tiered approach, targeting
both maintenance and purchasing personnel at the plant level as well as
corporate purchasing managers. Direct selling at the plant level is the primary
marketing thrust. The Company's sales people and account managers maintain
consistent communications with plant contacts to position the Company better to
obtain upcoming work and to ensure that on-going work is being performed to meet
or exceed customer expectations. The Company's national marketing effort is
focused on (i) servicing existing accounts, (ii) establishing new customer
accounts, (iii) obtaining multi-plant contracts (regional or national in scope)
and (iv) implementing alliance relationships. These efforts are supplemented by
advertising in industry publications and participating in selected industry
trade shows.
Most of the Company's customers, or prospective customers, have procedures
by which they qualify contractors to become approved vendors in their plants.
Customers award master service contracts or contracts for individual projects
only to such approved vendors. Contractors may be selected at the individual
plant level or on a regional or national basis, covering multiple plant
locations. A particular plant will typically have two or more approved
industrial cleaning providers. One of these may be designated as the primary
service provider and receive a majority of the work.
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Alternatively, the work may be spread evenly between the contractors by the
customer, or market share within the plant may be determined by the sales,
marketing and operating capabilities of the different service providers. Plants
also may have approved service companies for specific services (for example,
they may have hydroblasting contracts with one or more vendors and separate
industrial vacuuming contracts with one or more other vendors) or may have
contracts covering multiple services provided by the same vendor.
Master service agreements typically establish general terms and conditions,
as well as time and material pricing for services. These contracts do not
guarantee a particular amount of work, but they do allow Company personnel to
enter the plants more easily, fostering the development of relationships with
plant personnel and the marketing of the Company's services. Specific jobs may
be performed on a time and materials basis or granted as part of a competitive
bid process. Daily or more frequently recurring maintenance work tends to be
performed on a time and materials basis, while larger, less frequent projects
tend to be bid. The Company estimates that approximately two-thirds of its
revenue comes from services performed under its master service agreements or
separately bid projects in plants where it has master service agreements. These
agreements generally enhance the consistency and stability of the Company's
revenue stream.
The Company's alliance or managed services process is an additional, newer
method of providing services to its customers. In an alliance, the Company
provides a more comprehensive outsourcing solution to the customer, with the
Company more involved in scheduling, managing and bench marking the delivery of
services in a manner that reduces costs for the customer and the Company, and
provides for a continuous improvement process over time. Generally, the customer
will further benefit from additional savings resulting from reduced downtime for
maintenance and increased production.
Safety and Training
Industrial cleaning involves exposure to potentially dangerous conditions.
For liability and other reasons, customers are very concerned with the safety
records of contractors used to perform services at their plants. To minimize the
dangers inherent in this type of work, the Company conducts broad training and
educational programs and has developed comprehensive safety policies and
regulations. The main factors driving the Company's investment in these programs
and policies are: (i) achieving employee and customer safety; (ii) controlling
insurance costs; (iii) satisfying customers' growing safety and training
requirements; (iv) meeting increasing governmental and regulatory requirements;
and (v) improving the Company's overall performance. The Company's safety
program includes educating Company personnel, implementing, monitoring and
improving Company safety policies, employing safety personnel at most field
locations, providing proactive support by senior management, working with
insurance companies and safety organizations to make use of their resources and
expertise, using process improvement teams and undertaking safety audits,
providing cash incentive programs for employees and linking a component of
management bonuses to safety, requiring substance abuse screening, and
investigating all accidents, and distributing on a company-wide basis
information regarding accidents that have occurred and how they could have been
avoided, without using names.
The Company's management believes its safety indices are among the best in
the industry. As an example, HydroChem's workers' compensation interstate
experience modification rate ("EMR") is substantially below the average for
companies in its industry. The EMR, calculated by a private advisory rating
organization supporting the insurance industry, is one of the most widely
observed safety statistics. The EMR is a method of reflecting a company's actual
workers' compensation claims experience relative to the normally expected
experience of companies within a particular industry.
Major Customer
In 1997 and 1998, The Dow Chemical Company and its affiliates represented
11.9% and 10.7%, respectively, of the Company's total revenue.
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Governmental Regulations
The Company's operations are subject to various federal, state and local
regulations governing employee health and safety, protection of the environment,
protection of the public, and motor carriers. While the Company believes it
operates safely and prudently and is in substantial compliance with these laws
and regulations, there can be no assurance that accidents will not occur or that
the Company will not incur penalties or fines for violations. In addition,
noncompliance with these laws and regulations could negatively impact the
Company's ability to secure contracts with customers or obtain adequate
insurance at reasonable costs. Any of these factors could have a material
adverse effect on the Company's financial condition and results of operations.
Occupational Safety and Health Act. The operations of the Company are
subject to the requirements of the Occupational Safety and Health Act (the
"Act") and comparable state laws. Regulations promulgated under the Act require
employers in the industries that the Company serves to implement training
programs, work procedures, medical surveillance systems and personnel protection
programs, in order to protect employees from workplace hazards and exposure to
hazardous chemicals. The Company has established comprehensive programs for
complying with these health and safety regulations. The Company is also subject
to inspections by the Occupational Health and Safety Administration ("OSHA") and
comparable state regulatory agencies following accidents involving the Company's
employees, as well as on a random basis at both its facilities and its
customer's facilities. Such inspections seek to determine whether or not the
Company's work practices are in substantial compliance with the Act. While the
Company believes it operates safely and prudently, there can be no assurance
that accidents will not occur or that the Company will not incur fines as a
result of OSHA inspections.
Federal, State and Local Environmental Regulations. The Company performs
substantially all of its industrial cleaning services at industrial process
facilities owned by its customers. Although chemicals may be stored at the
Company's branch offices and transported by the Company to its customers'
plants, no industrial cleaning services are performed at the branches.
Typically, hazardous and non-hazardous waste handled by the Company is disposed
of by the customer using the customer's waste disposal facilities. However, the
Company will transport the customer's waste from one point in the customer's
plant to another point within the plant, which may involve travel on a public
road, or, on a very limited basis, to a commercial disposal facility. As a part
of its services to the customer, the Company may treat the customer's waste
collected by the Company in the cleaning process to neutralize, minimize or
separate it into its components, thus facilitating disposal or recycling by the
customer. At all times, the customer retains title to and is deemed to be the
generator of the waste. Therefore, the Company does not believe that its
activities subject it to the duties pertaining to generators of hazardous waste
or to owners and operators of hazardous waste treatment, storage or disposal
facilities. However, the Company could be subject to liability under applicable
environmental statutes in the event of a spill, discharge or release of
chemicals at a branch or at a customer location or during transportation to a
customer location, or in event of a spill, discharge or release of waste during
transportation.
Department of Transportation. Certain of the Company's vehicles are
subject to the regulations of the Department of Transportation, which address,
among other things, maintenance of the vehicles, driver qualification and record
keeping. Failure to comply with these regulations could result in fines or
modification of the Company's current procedures with respect to its vehicles.
Certain of the laws and regulations applicable to the Company require that
it obtain permits and licenses. The Company believes that it has obtained the
permits and licenses material to its business and believes that it is in
substantial compliance with all federal, state and local laws and regulations
governing it. To date, the Company has not been subject to any significant
fines, penalties or other labilities under these laws and regulations.
Intellectual Property
While the Company has numerous patents and proprietary techniques related
to its products and services, it does not believe the ongoing success of its
operations is dependent on these patents or techniques, individually or taken as
a whole. The Company historically has not allocated significant financial
resources to research and development.
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Insurance
In the normal course of business, the Company is subject to numerous
operating risks, including risks associated with the safety of its employees and
its customers' employees while providing industrial cleaning services, potential
damage to a customer's property or business in performing such services, and the
potential for an environmental accident.
The Company currently has in force insurance policies covering general
liability, workers' compensation/employer's liability, automobile liability,
environmental liability and property damage, and excess liability. All of these
policies are in amounts the Company believes are consistent with industry
practices and provide for the Company to pay a deductible or self insured
retention on each claim. However, no assurance can be given that the insurance
will adequately protect the Company and, if the Company is only partially
insured or completely uninsured, a related claim could result in a material
adverse effect on the Company's financial condition and results of operations.
Working Capital
As a leading industrial service provider, the Company's working capital
requirements principally include its labor, equipment and debt service costs.
The Company believes it maintains adequate working capital to meet its needs in
the current business environment.
Employees
As of December 31, 1998, the Company had approximately 1,960 employees. As
of February 28, 1999, following the acquisition of Valley, the Company had
approximately 2,260 employees. None of the Company's employees are covered by
collective bargaining agreements. Management believes that relations between the
Company and its employees are good.
Item 2. PROPERTIES
During 1998, the Company consolidated its corporate, laboratory,
manufacturing, West Division, health, safety environmental and training, and
commissioning services operations into a new 132,000 square foot facility on
19.4 acres of land in the Houston, Texas area. These operations previously had
been at five separate locations in various parts of the Houston, Texas area. The
new consolidated facility is in close proximity to many of the Company's branch
locations and customers in the Houston ship channel area. The Company obtained
interim and permanent financing from a commercial bank to finance the land
acquisition and construction costs for this new facility. (See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" and Note 6 of Notes to Consolidated
Financial Statements.)
As of February 28, 1999, the Company had 64 operating branch locations in
the United States, and international locations in Puerto Rico and Singapore.
This includes 15 branches that were previously Valley locations. The Company's
current domestic branches are located in Texas, Louisiana, Alabama, California,
Delaware, Florida, Georgia, Illinois, Kansas, Kentucky, Michigan, Mississippi,
Missouri, New York, North Carolina, Ohio, Pennsylvania, Oklahoma, South
Carolina, Tennessee, Utah, Virginia and Washington. The Company owns nine of
these branches. Generally, the remainder are leased. In certain instances, these
branch locations are on-site facilities provided by the Company's customers.
Item 3. LEGAL 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 have arisen 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 (the "Worker
Plaintiffs") and by approximately 1,400 persons who are related to or live with
the Worker Plaintiffs. All of
10
<PAGE>
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. A date for trial in Federal
Court has not yet been set. The Company is being defended in these suits by one
of its liability insurance carriers.
Recently, the Company has been informed that Georgia Gulf, which is the
primary defendant in these actions, has settled claims with certain of the
plaintiffs and that it will attempt to settle with as many of the remaining
plaintiffs as possible. The Occupational Safety and Health Administration
investigated this incident and issued citations to Georgia Gulf and not to the
Company or any other defendant. Nevertheless, because it is always possible that
a jury would assess some percentage of liability to the Company resulting in an
adverse jury verdict, the Company believes it would be prudent to settle these
suits if possible, especially in view of the recent settlement activity by
Georgia Gulf. Consequently, the Company has initiated preliminary settlement
negotiations with each of Georgia Gulf and a group of attorneys representing a
majority of the plaintiffs. The Company may also pursue other settlement
strategies.
Based on the current circumstances, and although there can be no
assurance, the Company believes it can settle all or substantially all of these
lawsuits, and that the aggregate amount of any such settlements will be within
the limits of its applicable insurance coverage.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Part II.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Not applicable.
11
<PAGE>
Item 6. SELECTED FINANCIAL DATA
The selected financial data below includes the accounts of all companies
acquired by the Company through December 31, 1998. These companies, all of which
were acquired during the past five years in transactions accounted for as
purchases, are included from their respective dates of acquisition. The selected
financial data should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Financial Data:
Revenue.............. $101,103 $156,484 $156,003 $160,604 $168,770
Gross profit......... 36,521 61,855 61,630 65,019 63,599
Gross margin......... 36.1% 39.5% 39.5% 40.5% 37.7%
EBITDA (1)........... $ 16,017 $ 22,390 $ 19,527 $ 22,405 $ 19,354
EBITDA margin (2).... 15.8% 14.3% 12.5% 14.0% 11.5%
Operating income..... $ 12,087 $ 15,638 $ 11,762 $ 14,189 $ 10,276
Income (loss) before taxes
and extraordinary
loss...... 5,409 5,903 1,829 4,101 (3,191)
Net income (loss)... 2,950 2,851 545 (523) (3,191)
Capital expenditures 5,576 8,493 6,829 9,557 19,149
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents..... $ 2,529 $ 1,088 $ 671 $ 33,862 $ 33,775
Working capital............... 10,170 17,961 13,216 52,324 46,755
Total assets.................. 87,146 121,216 115,522 152,093 156,711
Total long-term debt, including
current maturities.......... 52,739 76,894 68,325 110,000 116,117
Dividends paid................ - - - 8,540 -
Stockholder's equity.......... 17,687 25,225 25,770 16,707 13,516
</TABLE>
- -------------------------
(1) EBITDA for any relevant period presented above represents income (loss)
before extraordinary loss plus interest expense, income taxes, depreciation,
amortization, and other income and expenses (including a special charge of
$511,000 in 1996, and special charges of $815,000 and a restructuring charge
of $740,000 in 1998) reflected in the determination of net income (loss).
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.
(2) EBITDA margin for any relevant period presented above represents EBITDA
divided by revenue.
12
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Financial Data, the Company's Consolidated Financial Statements and the Notes
thereto, and the other financial and operating information included elsewhere in
this Form 10-K. This Form 10-K contains, in addition to historical information,
forward-looking statements that include risks and uncertainties. The Company's
actual results may differ materially from the results discussed in the forward-
looking statements. Factors that might cause such a difference include those
discussed below, as well as those discussed elsewhere in this Form 10-K. 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.
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>
Year Ended December 31,
-----------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Revenue......................................... 100.0% 100.0% 100.0%
Cost of revenue................................. 60.5 59.5 62.3
---- ---- ----
Gross profit............................... 39.5 40.5 37.7
SG&A expense.................................... 27.0 26.5 26.2
Depreciation.................................... 5.0 5.2 5.4
---- ---- ----
Operating income........................... 7.5 8.8 6.1
Other (income) expense:
Interest expense, net...................... 5.0 5.3 6.2
Special charges............................ 0.3 - 0.5
Restructuring charge....................... - - 0.4
Other (income) expense, net................ - - -
Amortization of intangibles................ 1.0 1.0 0.9
---- ---- ---
Income (loss) before taxes and extraordinary loss 1.2 2.5 (1.9)
Income tax provision....................... 0.9 1.4 -
---- ---- --
Income (loss) before extraordinary loss......... 0.3 1.1 (1.9)
Extraordinary loss on early extinguishment
of debt, net of taxes................. - 1.4 -
--- ---- --
Net income (loss)........... 0.3% (0.3)% (1.9)%
=== ===== =====
EBITDA.......................................... 12.5% 14.0% 11.5%
==== ==== ====
</TABLE>
Comparison of 1998 results to 1997
Revenue. Revenue increased $8.2 million, or 5.1%, to $168.8 million for
the year ended December 31, 1998 from $160.6 million in the prior year. The
increase principally resulted from an increase in industrial vacuuming revenue
of $7.0 million, or 39.7%, from $17.5 million to $24.5 million; an increase in
hydroblasting revenue of $746,000, or 0.9%, from $78.9 million to $79.7 million
and an increase in revenue from all other services of $866,000, or 8.0%, from
$10.8 million to $11.7 million. These increases were partially offset by a
decrease in chemical cleaning revenue of $412,000, or 0.8%, from $53.4 million
to $53.0 million. The increase in industrial vacuuming revenue resulted from
additional vacuum trucks placed in service by the Company in 1997 and 1998.
Hydroblasting revenue increased primarily due to the implementation of sole
source provider arrangements with certain existing customers. The decrease in
chemical cleaning revenue primarily was caused by a small number of projects in
the prior year which
13
<PAGE>
did not recur, while the increase in other services revenue primarily resulted
from mechanical service projects, which the Company began performing in April
1998, offset by decreased pipeline cleaning.
Gross profit. Gross profit decreased $1.4 million, or 2.2%, to $63.6
million in 1998 from $65.0 million in the prior year. Gross profit margin
decreased from 40.5% in 1997 to 37.7% in 1998. Cost of revenue increased $9.6
million, or 10.0%, to $105.2 million for 1998 from $95.6 million in the prior
year, primarily due to the revenue increases described above and increased
direct compensation costs. Late in 1998, the Company began to implement a cost
reduction program which included, among other things, a reduction in work force.
(See Note 8 of Notes to Consolidated Financial Statements.)
SG&A expense. SG&A expense increased $1.6 million, or 3.8%, to $44.2
million in 1998 from $42.6 million in the prior year. This increase primarily
resulted from increases in compensation expense which were partially offset by
decreased insurance expense. SG&A expense as a percentage of revenue decreased
to 26.2% in 1998 from 26.5% in the prior year. (See Note 8 of Notes to
Consolidated Financial Statements.)
EBITDA. Decreased gross profit and increased SG&A expense resulted in a
$3.1 million, or 13.6% decrease in EBITDA to $19.4 million in 1998 from $22.4
million in the prior year. As a percentage of revenue, EBITDA decreased to 11.5%
in 1998, compared to 14.0% in the prior year.
Depreciation. Depreciation expense increased $862,000, or 10.5%, to $9.1
million in 1998 from $8.2 million in the prior year and was 5.4% and 5.2% of
revenue, respectively. The increase in depreciation expense principally resulted
from increased capital expenditures for vacuum trucks and other operating
equipment.
Operating income. Decreased gross profit, and increased SG&A and
depreciation expense resulted in a decrease in operating income of $3.9 million,
or 27.6%, to $10.3 million in 1998 from $14.2 million in the prior year. As a
percentage of revenue, operating income decreased to 6.1% in 1998, compared to
8.8% in the prior year.
Interest expense, net. Net interest expense increased $2.0 million, or
22.9%, to $10.5 million in 1998 from $8.5 million in the prior year. Increased
interest expense principally resulted from an increase in debt due to the
issuance in August 1997 of $110.0 million of HydroChem's 10 3/8% Senior
Subordinated Notes due 2007, which was partially offset by increased interest
income earned on higher invested cash balances.
Special charges. In 1998, the Company incurred $325,000 in expenses
related to negotiation and due diligence efforts associated with a terminated
acquisition, $290,000 related to the consolidation of corporate facilities and
certain other operations into the Company's new headquarters, and $200,000 in
non-capitalizable costs incurred in connection with the Company's Year 2000
compliance program. (See Note 8 of Notes to Consolidated Financial Statements.)
Restructuring charge. The Company incurred $740,000 in severance,
facilities and other costs in connection with a cost reduction program initiated
in late 1998. (See Note 8 of Notes to Consolidated Financial Statements.)
Amortization. Amortization expense of $1.5 million in 1998 was relatively
unchanged from the prior year.
Income (loss) before taxes and extraordinary loss. For the reasons
described above, the Company incurred a loss before taxes and extraordinary loss
of $3.2 million in 1998 as compared to income of $4.1 million in the prior year.
This represented a decrease of $7.3 million. As a percentage of revenue, income
(loss) before taxes and extraordinary loss was (1.9)% in 1998, compared to 2.5%
in the prior year.
Income tax provision. There was no provision for income tax recorded in
1998 because of a change in the Company's valuation allowance for certain
deferred tax assets. The effective tax rate was 55.6% of income before taxes in
the prior year period.
Extraordinary loss. In 1997, as a result of the early repayment of
HydroChem's debt, an extraordinary loss was recognized in the amount of $2.3
million (net of the related tax benefit of $1.4 million). The extraordinary loss
14
<PAGE>
consisted of the write-off of associated deferred financing costs in the amount
of $3.2 million before related tax benefit, as well as a prepayment premium and
other related fees and expenses.
Net income (loss). For the reasons described above, net loss increased
$2.7 million, or 510.1% to a loss of $3.2 million in 1998 from a loss of
$523,000 in the prior year.
Comparison of 1997 results to 1996
Revenue. Revenue increased $4.6 million, or 2.9%, to $160.6 million for
the year ended December 31, 1997 from $156.0 million in the prior year. The
increase principally resulted from increased hydroblasting revenue of $9.4
million, or 13.5%, and increased industrial vacuuming revenue of $6.1 million,
or 52.7%, all of which was partially offset by decreased chemical cleaning
revenue of $9.3 million, or 14.8%, and decreased revenue from all other services
of $1.6 million, or 12.7%. Hydroblasting revenue increased primarily due to the
implementation of sole source provider arrangements with certain existing
customers and a small number of large projects with other customers. The
increase in industrial vacuuming revenue resulted from additional vacuum trucks
placed in service by the Company in 1996 and 1997. The decrease in chemical
cleaning revenue was primarily caused by a decrease in electric utility boiler
cleaning and certain other projects. The decrease in other services resulted
from reduced activity with one customer.
Gross profit. Gross profit increased $3.4 million, or 5.5%, to $65.0
million in 1997 from $61.6 million in the prior year, and gross profit margin
for the year increased from 39.5% to 40.5%. Cost of revenue increased $1.2
million, or 1.3%, to $95.6 million in 1997 from $94.4 million in the prior year
due to the revenue increases described above. The improvement in gross profit
was primarily attributable to a higher concentration of services being provided
to the Company's largest customers.
SG&A expense. SG&A expense as a percentage of revenue decreased to 26.5%
in 1997 from 27.0% in 1996, while SG&A expense increased $511,000, or 1.2%, to
$42.6 million in 1997 from $42.1 million in the prior year. This increase
primarily resulted from increases in field compensation expense and the
Company's allowance for doubtful accounts, partially offset by lower insurance
costs.
EBITDA. Increased gross profit, partially offset by increased SG&A
expense, resulted in an increase in EBITDA of $2.9 million, or 14.7%, to $22.4
million in 1997 from $19.5 million in the prior year. As a percentage of
revenue, EBITDA increased to 14.0% in 1997, compared to 12.5% in the prior year.
Depreciation. Depreciation expense increased $451,000, or 5.8%, to $8.2
million in 1997 from $7.8 million in the prior year and was 5.2% and 5.0% of
revenue, respectively.
Operating income. Increased gross profit, partially offset by increased
SG&A expense and depreciation expense, resulted in an increase in operating
income of $2.4 million, or 20.6%, to $14.2 million in 1997 from $11.8 million in
the prior year. As a percentage of revenue, operating income increased to 8.8%
in 1997, compared to 7.5% in the prior year.
Interest expense. Interest expense increased $598,000, or 7.6%, to $8.5
million in 1997 from $7.9 million in the prior year. Increased interest expense
resulted from an increase in debt due to the issuance in August 1997 of $110.0
million of HydroChem's 10 3/8% Senior Subordinated Notes due 2007, partially
offset by lower revolving and term loan balances prior to the extinguishment of
that debt, and increased interest income earned on higher invested cash
balances.
Special charges. In 1996, the Company incurred approximately $511,000 in
expenses related to merger negotiations and due diligence efforts between the
Company and a publicly-traded company, which were terminated prior to
consummating the merger.
Amortization. Amortization expense of $1.5 million in 1997 was relatively
unchanged from the prior year.
15
<PAGE>
Income (loss) before taxes and extraordinary loss. For the reasons
described above, income before taxes and extraordinary loss increased $2.3
million, or 124.2%, to $4.1 million in 1997 from $1.8 million in the prior year.
As a percentage of revenue, income before taxes and extraordinary loss was 2.6%
in 1997, compared to 1.2% in the prior year.
Income tax provision. The effective tax rate decreased to 55.6% of income
before taxes and extraordinary loss in 1997 from 70.2% in the prior year. This
decrease principally resulted from proportionately lower nondeductible permanent
differences in 1997 than in the prior year.
Income (loss) before extraordinary loss. For the reasons described above,
income before extraordinary loss increased $1.3 million, or 233.8%, to $1.8
million in 1997 from $545,000 in the prior year. As a percentage of revenue,
income before extraordinary loss increased to 1.1% in 1997, from 0.3% in the
prior year.
Extraordinary loss. In 1997, as a result of the early extinguishment of
HydroChem's debt, an extraordinary loss was recognized in the amount of $2.3
million (net of a related tax benefit of $1.4 million). The extraordinary loss
consisted of the write-off of associated deferred financing costs in the amount
of $3.2 million before related tax benefit, as well as a prepayment premium and
other related fees and expenses.
Net income (loss). For the reasons described above, the Company incurred a
net loss of $523,000 in 1997 compared to net income of $545,000 in the prior
year.
16
<PAGE>
Quarterly Financial Data
The following table sets forth certain unaudited consolidated statement of
operations and other supplemental data of the Company for the quarterly periods
shown. The unaudited quarterly information has been prepared on the same basis
as the Company's annual financial information and, in management's opinion,
includes all adjustments, consisting of normal recurring accruals, necessary to
present fairly the information for the quarters presented. The operating results
for any quarter are not necessarily indicative of results for the year or for
any future period. The extraordinary loss recognized in the third quarter of
1997 was related to early extinguishment of debt. The special charges incurred
in the second and fourth quarters of 1998 were a result of terminated
acquisition negotiations and other non-recurring expenses. The restructuring
charge included severance, facility closure and other costs incurred in
connection with a cost reduction program. (See Note 8 of Notes to Consolidated
Financial Statements.)
<TABLE>
<CAPTION>
Three months ended
1997 1998
---------------------------------------------------------------
Mar.31 June 30 Sept.30 Dec.31 Mar.31 June 30 Sept.30 Dec.31
------ ------- ------- ------ ------ ------- ------- ------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue........ $38,388 $42,326 $40,030 $39,860 $40,888 $45,067 $40,509 $42,306
Cost of revenue 22,919 24,871 23,687 24,108 24,885 28,185 25,632 26,469
------ ------ ------ ------ ------ ------ ------ ------
Gross profit. 15,469 17,455 16,343 15,752 16,003 16,882 14,877 15,837
SG&A expense... 10,298 10,863 11,128 10,325 10,787 10,961 11,799 10,698
Depreciation... 1,911 1,978 2,094 2,233 2,193 2,239 2,296 2,350
------ ------ ------ ------ ------ ------ ------ ------
Operating
income.... 3,260 4,614 3,121 3,194 3,023 3,682 782 2,789
Other (income) expense:
Interest
expense,net... 1,862 1,925 2,374 2,357 2,517 2,599 2,626 2,728
Special charges - - - - - 300 - 515
Restructuring
charge...... - - - - - - - 740
Other (income)
expense, net 4 19 (17) 33 3 13 (142) 67
Amortization of
intangibles.. 388 391 376 376 376 374 375 376
------ ------ ------- ------ ------ ------ ------ ------
Income (loss) before
taxes and
extraordinary
loss........ 1,006 2,279 388 428 127 396 (2,077) (1,637)
Income tax provision
(benefit). 447 1,091 347 397 75 237 (356) 44
------ ------ ------- ------ ------ ------ ------ ------
Income (loss) before
extraordinary
loss...... 559 1,188 41 31 52 159 (1,721) (1,681)
Extraordinary
loss...... - - 2,342 - - - - -
------ ------ ------- ------ ------ ------ ------ ------
Net income
(loss)..... $ 559 $ 1,188 $(2,301)$ 3 $ 52 $ 159 $(1,721)$(1,681)
====== ===== ====== ====== ====== ====== ====== ======
EBITDA......... $ 5,171 $ 6,592 $ 5,215 $ 5,427 $ 5,216 $ 5,921 $ 3,078 $ 5,139
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
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. In August 1997, HydroChem
issued $110.0 million of its 10 3/8% Senior Subordinated Notes due 2007 (the
"Series A Notes") in a private offering pursuant to Rule 144A under the
Securities Act of 1933. HydroChem registered a substantially identical series of
notes (the "Series B Notes") with the Securities and Exchange Commission and on
November 7, 1997, completed an exchange of the Series B Notes for the Series A
Notes. The Series B 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, commencing on February 1, 1998. The Series B 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
Series B 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. International is a guarantor of the Series B Notes. A portion of
the net proceeds from the sale of the Series A Notes was used to repay
indebtedness, accrued interest and fees under the Company's then existing senior
debt ($45.7 million) and subordinated debt ($18.7 million). In addition, $8.5
million was used to fund a dividend to Holding which Holding used to discharge
accrued interest on its indebtedness and
17
<PAGE>
accrued dividends on its preferred stock. The remaining proceeds were invested
in commercial paper and other interest bearing deposits with short-term
maturities and later used for general corporate purposes and the acquisition of
Valley.
On December 31, 1997, HydroChem entered into a participating credit
agreement with a financial institution for a credit facility (the "Credit
Facility") which provides for unsecured borrowings of up to $25 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.
Interest rates are based on (i) a range from LIBOR plus 1.75% to LIBOR plus
3.00%, or, at the discretion of HydroChem, (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%. 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 on 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.
Effective September 30, 1998 and December 31, 1998, the credit agreement was
amended to modify, among other things, certain of these ratios and covenants. As
of December 31, 1998, HydroChem's borrowing base under the Credit Facility was
$22.8 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. At December 31, 1998, there were no other
borrowings under the Credit Facility, and HydroChem had available unused
borrowings of $19.6 million and $33.8 million in cash and cash equivalents.
In connection with the Company's new headquarters and operating facilities
in the Houston, Texas area, HydroChem entered into a loan agreement with a
financial institution (the "Construction Loan Agreement") on July 17, 1998. The
Construction Loan Agreement provides for an interim financing construction loan
of up to $7.5 million which, under certain conditions and at the sole discretion
of HydroChem, is convertible to a term loan. As management plans to convert the
construction loan to the term loan prior to July 16, 1999, the outstanding
borrowings at December 31, 1998 have been presented as long-term debt with the
related scheduled maturities expected under the term loan have been presented as
current portion of long-term debt. The loans are collateralized by first
priority liens on the land and improvements. The construction loan requires
quarterly payments of interest, and matures on the earlier of July 16, 1999 or,
when converted,on the date of conversion to the term loan. Interest rates on the
construction loan are at the lender's commercial loan rate less 0.50%. When
converted, the resulting term loan will mature on September 30, 2006 and will
require quarterly payments of principal and interest. Interest rates on the term
loan will be 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 term loan will be 7.82%. It
is anticipated that the Interest Rate Swap will be utilized at the time the
construction loan is converted to the term loan. 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 facility's
assets. At December 31, 1998, the Company had borrowed $6.1 million under the
Construction Loan Agreement. Effective September 30, 1998, the construction loan
agreement was amended to modify, among other things, certain of these ratios and
covenants. In addition, the Company obtained a waiver with respect to one ratio
for non-compliance resulting from the Company's special and restructuring
charges recorded during the quarter ended December 31, 1998. Management expects
that HydroChem will remain in compliance with the terms of the amended loan
agreement in future periods.
For the year ended December 31, 1998, the Company used net cash of $5.9
million for operating and investing activities which consisted of $13.0 million
provided by operating activities and $18.8 million used in investing activities.
For the year ended December 31, 1997, $3.5 million of net cash was provided by
operating and investing activities which consisted of $12.7 million provided by
operating activities and $9.2 million used in investing activities. For the year
ended December 31, 1996, $8.2 million of net cash was provided by operating and
investing activities which consisted of $14.9 million provided by operating
activities and $6.7 million used in investing activities. For all periods
presented, investing activities consisted primarily of expenditures for property
and equipment. In 1998, these expenditures included the purchase of land and the
construction of the Company's new headquarters facility for $9.1 million, and
the implementation of certain field and corporate software and hardware
information systems for $1.6 million.
Management believes that cash and cash equivalents at December 31, 1998
and net cash expected to be provided by operating activities and borrowings, if
necessary, under the Company's existing credit facilities will be sufficient to
18
<PAGE>
meet its cash requirements for operations and expenditures for property and
equipment for the next twelve months and the foreseeable future thereafter and
to fund the acquisition described below. (See Note 6 of Notes to Consolidated
Financial Statements.)
Acquisition
On January 5, 1999, HydroChem acquired substantially all of the assets and
assumed certain liabilities of Valley. The acquisition, 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, including customer agreements, customer lists
and facility leases, and (iv) other operating assets. The purchase price for the
acquired assets, which is subject to certain post closing adjustments, was
approximately $29.8 million in cash of which $4 million was deposited into
escrow. In addition, the Company assumed approximately $2.5 million in capital
lease obligations and paid $5.3 million in cash at closing to retire Valley's
bank debt.
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. The Company has
assessed the Year 2000 issue with regard to its 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. The Company
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
December 31, 1998, $1.2 million had been expended for these new software and
hardware systems, and the Company estimates it will ultimately incur
approximately $2.2 million in connection with these systems.
As part of its Year 2000 compliance program, the Company has identified
certain third parties with which it has material relationships. These parties
are primarily large financial, telecommunication and information processing
entities, vendors, other third party suppliers, and customers. 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. The Company 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, the Company has no reason to believe that
any Year 2000 issues it may experience with third parties will have a material
impact on the Company's 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 could be adversely affected. The Company is
unable to assess the likelihood of such events occurring or the extent of their
effect.
19
<PAGE>
The foregoing Year 2000 discussion contains "forward-looking statements".
Such statements, including without limitation anticipated costs and the dates by
which the Company 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.
Inflation
Certain of the Company's expenses, such as compensation and benefits,
chemicals and supplies, and equipment repair and replacement, are subject to
normal inflationary pressures. Although the Company to date has been able to
offset inflationary cost increases through increased operating efficiencies and
modest price increases, there can be no assurance that the Company will be able
to offset any future inflationary cost increases through these or similar means.
Item 7A. 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 presented do not consider the effects
that such adverse changes may have on overall economic activity nor do they
consider additional actions management may take to mitigate the Company's
exposure to such changes. The Notes to Consolidated Financial Statements
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 is expected to be
used during 1999 in connection with its 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. The Company
believes its portfolio of accounts receivable is well diversified and, as a
result, its credit risks are minimal. The Company evaluates the creditworthiness
of its 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 managements expectations. Timely collection of
trade receivables 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 December 31, 1998, the Company had short-term investments
totaling $35.6 million. Due to the short-term nature of these instruments, the
carrying value approximated market value. The Company does not expect to
continue to make significant investments in short-term financial instruments
during 1999 and, as a result, a decrease of 1.0% over 1998 average rates would
have a nominal effect on interest income.
20
<PAGE>
As of December 31, 1998, the Company's outstanding long-term debt consisted
of senior subordinated notes and a construction loan. The senior subordinated
notes totaled $110.0 million, are due in the year 2007, and bear interest at a
fixed rate of 10 3/8%. As of December 31, 19998, their fair value was estimated
to be $104.5 million. At the same date, the construction loan totaled $6.1
million and approximated its fair value. The construction loan, which bears
interest at the lender's commercial loan rate less 0.50%, is expected to be
converted to a term loan in 1999 and will bear interest at LIBOR rates plus
1.75% adjusted quarterly. To protect the term loan against interest rate
fluctuations, the Company will utilize the Interest Rate Swap which will fix the
interest rate at 7.82%. The 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.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Index to Consolidated Financial Statements on
page 22 for the Company's Consolidated Financial Statements and Notes thereto.
Quarterly financial data for the Company is presented on page 17. Supplementary
schedules for the Company have been omitted as not required or not applicable
because the information required to be presented is included in the Company's
Consolidated Financial Statements and Notes thereto.
21
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Consolidated Financial Statements Page
<S> <C>
Report of Independent Auditors............................................23
Consolidated Balance Sheets as of December 31, 1997 and 1998..............24
Consolidated Statements of Operations for each of the years ended
December 31, 1996, 1997 and 1998.......................................25
Consolidated Statements of Stockholder's Equity for each of the years ended
December 31, 1996, 1997 and 1998.......................................26
Consolidated Statements of Cash Flows for each of the years ended
December 31, 1996, 1997 and 1998.......................................27
Notes to Consolidated Financial Statements................................28
</TABLE>
22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
HydroChem Industrial Services, Inc.
We have audited the accompanying consolidated balance sheets of HydroChem
Industrial Services, Inc. and Subsidiary (the "Company") as of December 31, 1997
and 1998, and the related consolidated statements of operations, stockholder's
equity and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of HydroChem
Industrial Services, Inc. and Subsidiary at December 31, 1997 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
February 12, 1999
23
<PAGE>
HYDROCHEM INDUSTRIAL SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
1997 1998
----------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents................. $ 33,862 $ 33,775
Restricted cash (Note 3).................. 2,858 -
Receivables, less allowance of $1,280 and
$536, respectively 24,341 23,941
Inventories............................... 3,863 3,902
Prepaid expenses and other current assets. 1,791 1,714
Income taxes receivable................... 407 243
Deferred income taxes (Note 9)............ 1,835 1,467
- ----- -----
Total current assets................... 68,957 65,042
Property and equipment, at cost (Note 5)..... 63,210 81,459
Accumulated depreciation.................. (24,872) (33,322)
------- -------
38,338 48,137
Intangible assets, net (Note 2).............. 44,798 43,246
-------- -------
Total assets........................... $152,093 $156,425
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................... $ 4,823 $4,973
Income taxes payable...................... 40 -
Accrued liabilities....................... 11,770 13,193
Current portion of long-term debt (Note 6) - 121
------- -------
Total current liabilities.............. 16,633 18,287
Long-term debt (Note 6)...................... 110,000 115,996
Deferred income taxes (Note 9 ).............. 8,753 8,626
Commitments and contingencies (Note 10)
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 earnings (deficit)............... 148 (3,043)
------- --------
Total stockholder's equity................ 16,707 13,516
------- --------
Total liabilities and stockholder's equity $152,093 $156,425
======== ========
</TABLE>
See accompanying notes.
24
<PAGE>
HYDROCHEM INDUSTRIAL SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Revenue................................ $156,003 $160,604 $168,770
Cost of revenue........................ 94,373 95,585 105,171
------- -------- --------
Gross profit........................ 61,630 65,019 63,599
Selling, general and administrative expense 42,103 42,614 44,245
Depreciation........................... 7,765 8,216 9,078
------- -------- --------
Operating income.................... 11,762 14,189 10,276
Other (income) expense:
Interest expense, net............... 7,920 8,518 10,470
Special charges (Note 8)............ 511 - 815
Restructuring charge (Note 8)....... - - 740
Other (income) expense, net......... (21) 39 (59)
Amortization of intangibles......... 1,523 1,531 1,501
------- -------- --------
Income (loss) before taxes and
extraordinary loss.................. 1,829 4,101 (3,191)
Income tax provision (Note 9)....... 1,284 2,282 -
------- -------- --------
Income (loss) before extraordinary loss 545 1,819 (3,191)
Extraordinary loss on early extinguishment
of debt, net of taxes (Note 6)... - 2,342 -
------- -------- --------
Net income (loss)...................... $ 545 $ (523) $(3,191)
======= ======== ========
</TABLE>
See accompanying notes.
25
<PAGE>
HYDROCHEM INDUSTRIAL SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in thousands)
<TABLE>
<CAPTION>
Additional Retained
Common Paid-in Earnings
Stock Capital (Deficit) Total
----- ------- --------- -----
<S> <C> <C> <C> <C>
Balance at December 31, 1995..... $ 1 $19,670 $5,554 $25,225
Net income.................... - - 545 545
------- ------- ------ -------
Balance at December 31, 1996..... 1 19,670 6,099 25,770
Dividend to parent (Note 6)... - (3,112) (5,428) (8,540)
Net loss...................... - - (523) (523)
------- ------- ------- -------
Balance at December 31, 1997..... 1 16,558 148 16,707
Net loss...................... - - (3,191) (3,191)
--------- ------- ------- -------
Balance at December 31, 1998..... $ 1 $16,558 $(3,043) $13,516
======== ======= ======= =======
</TABLE>
See accompanying notes.
26
<PAGE>
HYDROCHEM INDUSTRIAL SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Operating activities:
Net income (loss)..................... $ 545 $ (523) $ (3,191)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation....................... 7,765 8,216 9,078
Amortization....................... 1,523 1,531 1,501
Amortization of deferred financing costs 584 480 392
Write-off of deferred financing costs - 3,178 -
Deferred income tax provision...... 755 969 241
Loss (gain) on sale of property and equipment 9 79 (36)
Changes in operating assets and liabilities:
Restricted cash.................... - (2,858) 2,858
Receivables, net................... 3,192 16 400
Inventories........................ (430) (294) (39)
Prepaid expenses and other current assets 70 (651) 77
Income taxes receivable............ - (407) 164
Accounts payable................... 777 (881) 150
Income taxes payable............... (373) 28 (40)
Accrued liabilities................ 444 3,799 1,423
------- ------- --------
Net cash provided by operating
activities..................... 14,861 12,682 12,978
-------- ------- --------
Investing activities:
Expenditures for property and equipment (6,829) (9,557) (19,149)
Purchase of assets, net of cash acquired (256) - -
Proceeds from sale of property and equipment 376 336 308
--- --- ---
Net cash used in investing activities (6,709) (9,221) (18,841)
-------- ------- --------
Financing activities:
Proceeds from issuance of senior
subordinated notes................... - 110,000 -
Proceeds from (repayments of)
long-term debt, net (8,569) (68,325) 6,117
Debt financing costs.................. - (3,405) (341)
Dividend to parent.................... - (8,540) -
-------- ------- --------
Net cash provided by (used in) financing
activities.................... (8,569) 29,730 5,776
-------- ------- --------
Net increase (decrease) in cash and
cash equivalents........................ (417) 33,191 (87)
Cash and cash equivalents at
beginning of period..................... 1,088 671 33,862
-------- ------- --------
Cash and cash equivalents at
end of period........................... $ 671 $ 33,862 $ 33,775
======== ======= =======
Supplemental disclosure:
Cash paid during the year for interest $ 7,409 $5,869 $ 11,290
Cash paid (refunded) during the year
for income taxes, net of refunds... 902 255 (355)
</TABLE>
See accompanying notes.
27
<PAGE>
HYDROCHEM INDUSTRIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
1. Organization, Formation and Basis of Presentation
The consolidated financial statements include the accounts of HydroChem
Industrial Services, Inc. ("HydroChem") and its wholly owned subsidiary,
HydroChem International, Inc. ("International"). HydroChem generally conducts
business outside the United States through International. (HydroChem and
International 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.
2. Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
HydroChem and International. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents
All debt instruments and investments that are readily convertible to
known amounts of cash are considered to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (weighted-average cost) or
market.
Property and Equipment
Property and equipment are recorded at cost. Costs assigned to property and
equipment of acquired businesses are based on estimated fair value at the date
of acquisition. Depreciation is provided for using the straight-line method over
estimated useful lives ranging from 3 to 39 years.
When property is retired or otherwise disposed of, the related cost and
accumulated depreciation are removed from the accounts and any resulting gain or
loss is reflected in income.
Intangible Assets
Intangible assets, which relate primarily to costs in excess of the fair
value of net assets acquired, are primarily being amortized over 40 years on a
straight-line basis. Intangible assets also include costs allocated to other
specifically identifiable assets arising from business acquisitions which are
being amortized on a straight-line basis over their estimated useful lives,
which range from 3 to 40 years. These intangible assets totaled $41,534,000 and
$40,032,000, net of accumulated amortization of $5,647,000 and $7,148,000, at
December 31, 1997 and 1998, respectively. The Company
28
<PAGE>
continually evaluates whether events or circumstances have occurred that
indicate the remaining estimated useful lives of the intangible assets may
warrant revision or that the remaining balances may not be recoverable. Should
factors indicate that the intangible assets should be evaluated for possible
impairment, the Company would use an estimate of the acquired business's
undiscounted future cash flows compared to the carrying value of the assets to
determine whether the assets are deemed impaired. Management believes there have
been no events or circumstances which warrant revision to the remaining useful
lives or which affect the recoverability of the Company's intangible assets.
Other intangibles include deferred financing costs of $3,264,000 and
$3,214,000, net of accumulated amortization of $945,000 and $1,337,000, at
December 31, 1997 and 1998, respectively. Deferred financing costs are being
amortized over three to ten year financing terms and are recorded as interest
expense.
Revenues
Revenues are recognized when services are provided.
Income Taxes
Income taxes are provided for based on the liability method of accounting.
Deferred income taxes are recorded to reflect the tax consequences of
differences between the financial statement basis and the tax basis of assets
and liabilities.
Stock-Based Compensation
Holding grants stock options to employees of the Company for a fixed number
of shares with an exercise price no less than the fair value of the shares at
the date of grant. The Company accounts for such stock option grants in
accordance with FASB 123, which permits the measurement of compensation expense
in accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB 25"), and the Company has elected to follow APB
25.
Reclassifications
Certain 1996 and 1997 amounts have been reclassified to conform with the
1998 presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Concentration of Credit Risk
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. The Company
believes its portfolio of accounts receivable is well diversified and, as a
result, its credit risks are minimal. The Company evaluates the creditworthiness
of its customers and monitors accounts on a periodic basis, but typically does
not require collateral.
Credit losses have been within management's expectations.
3. Restricted Cash
At December 31, 1997, restricted cash represented security for letters of
credit which were principally incurred in connection with the Company's property
and casualty insurance program. At December 31, 1998, these letters of credit
were secured by the Company's Credit Facility (see Note 6).
29
<PAGE>
4. Receivables
Receivables primarily include trade accounts and accrued receivables of
$24,341,000 and $23,941,000, net of allowance for doubtful accounts of
$1,280,000 and $536,000, at December 31, 1997 and 1998, respectively. During
1997 and 1998, the Company recorded bad debt expense of $539,000 and $13,000,
respectively. In addition, during 1997 and 1998, the Company recorded other
adjustments to the allowance for doubtful accounts in the amount of $119,000 and
$72,000, respectively. Also in 1998, the Company wrote-off receivables which
were uncollectible in the amount of $685,000, of which $527,000 was due from one
customer.
5. Property and Equipment
Property and equipment at December 31, 1997 and 1998 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Land.............................................. $ 617 $ 1,747
Office facilities, furniture, fixtures
and computer equipment.......................... 6,074 16,223
Machinery and equipment (including vacuum trucks). 53,845 61,200
Vehicles.......................................... 2,150 1,906
Construction in progress.......................... 524 383
--- ---
$ 63,210 $ 81,459
======== ========
</TABLE>
6. Long-term Debt
Long-term debt at December 31, 1997 and 1998 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Senior subordinated notes.......................... $110,000 $110,000
Construction loan.................................. - 6,117
------ ------
Total long-term debt............................... 110,000 116,117
Less current portion of long-term debt.......... - (121)
------ ------
$110,000 $115,996
======== ========
</TABLE>
In August 1997, HydroChem issued $110,000,000 of its 10 3/8% Senior
Subordinated Notes due 2007 (the "Series A Notes") in a private offering
pursuant to Rule 144A under the Securities Act of 1933. HydroChem registered a
substantially identical series of notes (the "Series B Notes") with the
Securities and Exchange Commission and on November 7, 1997 completed an exchange
of the Series B Notes for the Series A Notes. The Series B 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, commencing on
February 1, 1998. The Series B 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 Series B 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.
International is a guarantor of the Series B Notes.
A portion of the net proceeds from the sale of the Series A Notes was used
to repay indebtedness, accrued interest and fees under the Company's then
existing senior debt ($45.7 million) and subordinated debt ($18.7 million). In
addition, $8.5 million was used to fund a dividend to Holding which Holding used
to discharge accrued interest on its indebtedness and accrued dividends on its
preferred stock. As a result of the early repayment of HydroChem's prior debt,
an extraordinary loss was recognized in the amount of $2,342,000 (net of a
related tax benefit of $1,435,000). The extraordinary loss consisted of the
write-off of associated deferred financing costs in the amount of $3,178,000
before related tax benefit, as well as a prepayment premium and other related
fees and expenses.
On December 31, 1997, HydroChem entered into a participating credit
agreement with a financial institution for a credit facility (the "Credit
Facility") which provides for unsecured borrowings of up to $25,000,000, subject
to borrowing base limitations. The term of the Credit Facility is three years
and any borrowings thereunder bear interest at rates adjusted quarterly.
Interest rates are based on (i) a range from LIBOR plus 1.75% to LIBOR plus
3.00%, or, at the discretion of HydroChem, (ii) the higher of (a) the prime rate
and (b) the Federal Funds Rate plus 0.50%, plus an applicable margin of
30
<PAGE>
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.
Effective September 30, 1998 and December 31, 1998, the credit agreement was
amended to modify, among other things, certain of these ratios and covenants. As
of December 31, 1998, HydroChem's borrowing base under the Credit Facility was
$22,839,000, 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. At December 31, 1998, there were no other borrowings
under the Credit Facility, and HydroChem had available unused borrowings of
$19,647,000.
In connection with the Company's new headquarters and operating facilities
in the Houston, Texas area, HydroChem entered into a loan agreement with a
financial institution (the "Construction Loan Agreement") on July 17, 1998. The
Construction Loan Agreement provides for an interim financing construction loan
of up to $7,500,000 which, under certain conditions and at the sole discretion
of HydroChem, is convertible to a term loan. As management plans to convert the
construction loan to the term loan prior to July 16, 1999, the outstanding
borrowings at December 31, 1998 have been presented as long-term debt with the
related scheduled maturities expected under the term loan have been presented as
current portion of long-term debt. The loans are collateralized by first
priority liens on the land and improvements. The construction loan matures on
the earlier of July 16, 1999 or,when converted, on the date of conversion to the
term loan and requires quarterly payments of interest. Interest rates on the
construction loan are at the lender's commercial loan rate less 0.50%. When
converted, the resulting term loan will mature on September 30, 2006 and will
require quarterly payments of principal and interest. Interest rates on the term
loan will be 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,
HydroChem's effective fixed borrowing rate for the term loan will be 7.82%.
It is anticipated that the Interest Rate Swap will be utilized at the time the
construction loan is converted to the term loan.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 facility's
assets. At December 31, 1998, HydroChem had borrowed $6,117,000 under the
Construction Loan Agreement. Effective September 30, 1998, the construction loan
agreement was amended to modify, among other things, certain of these ratios and
covenants. In addition, the Company obtained a waiver with respect to one ratio
for non-compliance resulting from the Company's special and restructuring
charges recorded during the fiscal quarter ended December 31, 1998. The Company
expects to remain in compliance with the terms of the amended loan agreement in
future periods.
Maturities of long-term debt for the years ended December 31, are as
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1999................................ $ 121
2000................................ 170
2001................................ 186
2002................................ 202
2003................................ 218
Thereafter.......................... 115,220
-------
$116,117
========
</TABLE>
7. Stockholder's Equity
A warrant has been issued by Holding on behalf of HydroChem to provide an
option to purchase up to 496,623 shares of Holding's Class A Common Stock at an
exercise price of $.01 per share. This warrant currently expires on July 1, 2004
and has not been exercised as of December 31, 1998. An additional warrant has
been issued which provides an option to purchase up to 310,390 shares of
Holding's Class C Common Stock at an exercise price of $.01 per share. This
warrant expires on January 10, 2005 and has not been exercised as of December
31, 1998. The value of these warrants is associated with deferred financing
costs of extinguished debt (see Note 6).
31
<PAGE>
8. Special and Restructuring Charges
In April 1996, HydroChem signed a letter of intent to merge with a publicly
traded company. Upon subsequent negotiations and the completion of due
diligence, it was determined that the merger would not be beneficial to both
parties and it was agreed to terminate negotiations. The Company incurred
$511,000 of expenses relating to legal, accounting and other services which were
provided in connection with the negotiation and due diligence efforts. These
expenses were recorded as a special charge in 1996.
In March 1998, HydroChem signed a letter of intent to acquire all of the
outstanding capital stock of an industrial cleaning company. The parties were
unable to agree on the terms of a definitive agreement and, as a result,
terminated negotiations. The Company incurred $325,000 of expenses, principally
consisting of legal, accounting and other services which were provided in
connection with negotiation and due diligence efforts. These expenses were
recorded as a special charge in 1998.
During 1998, HydroChem incurred other non-recurring expenses of $290,000
related to its consolidation of corporate facilities and certain other
operations into the Company's new headquarters. In addition, HydroChem incurred
$200,000 of non-capitalizable costs incurred in connection with its Year 2000
compliance program (see Note 16). These expenses were also recorded as special
charges in 1998.
In late 1998, HydroChem implemented a cost reduction program which
included, among other things, a reduction in work force. The reduction in work
force affected approximately 92 field and office personnel. The Company
recognized $740,000 of severance, facility closure and other costs in connection
with this program which were recorded as a restructuring charge in 1998.
9. Income Taxes
The Company files a consolidated tax return with Holding. Current and
deferred taxes are allocated on a separate company basis. Significant components
of the Company's deferred tax liabilities and assets as of December 31, 1997 and
1998 were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Deferred tax liabilities:
Property and equipment..................... $ 4,370 $ 5,700
Intangibles................................ 5,528 5,736
------ ------
Total deferred tax liabilities............. 9,898 11,436
Deferred tax assets:
Net operating loss......................... 1,497 3,847
Alternative minimum tax.................... 1,338 1,338
Foreign tax credit......................... 422 366
Accrued liabilities........................ 708 1,059
Receivables................................ 486 179
Other...................................... 26 (20)
Valuation allowance........................ (1,497) (2,492)
------ ------
Total deferred tax assets..................... 2,980 4,277
------ ------
Net deferred tax liability.................... $ 6,918 $ 7,159
====== ======
</TABLE>
The provision (benefit) for income taxes for the years ended December 31,
1996, 1997 and 1998 consisted of the following (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Current................................ $ 529 $1,313 $(241)
Deferred............................... 755 969 241
----- ----- ------
$1,284 $2,282 $ -
===== ===== ======
</TABLE>
32
<PAGE>
The differences between income taxes computed at the federal statutory
income tax rate and the provision for income taxes for the years ended December
31, 1996, 1997 and 1998 consisted of the following (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Income taxes computed at federal income
tax rate.............................. $ 622 $1,396 $(1,085)
State income taxes, net of federal tax benefit 222 339 (64)
Nondeductible permanent differences.... 730 718 538
Change in valuation allowance.......... - - 995
Other, net............................. (290) (171) (384)
------ ----- ------
Provision for income taxes............. $1,284 $2,282 $ -
===== ===== ======
</TABLE>
At December 31, 1998, the Company had alternative minimum tax credit
carryforwards of approximately $1,338,000, foreign tax credit carryforwards of
approximately $366,000 and a net operating loss carryforward of approximately
$10,125,000. The alternative minimum tax credit carryforwards are available
indefinitely, the foreign tax credit carryforwards begin to expire in 1999 and
the net operating loss carryforward begins to expire in 2009.
10. Commitments and Contingencies
The Company leases most of its locations, and certain vehicles and
equipment under operating leases. The leases contain various renewal options,
rent escalation provisions and insurance requirements. Lease expense for the
years ended December 31, 1996, 1997 and 1998 was $6,191,000, $7,544,000 and
$8,470,000, respectively.
Future minimum rental commitments under operating leases with initial terms
of one year or more at December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1999............................................ $ 6,807
2000............................................ 5,043
2001............................................ 3,212
2002............................................ 2,271
2003............................................ 1,501
Thereafter...................................... 1,310
-------
Total........................................... $20,144
======
</TABLE>
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 is also 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 have arisen 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 (the "Worker
Plaintiffs") and by approximately 1,400 persons who are related to or live with
the Worker Plaintiffs. 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. A date for trial in Federal Court has not yet been set. The Company
is being defended in these suits by one of its liability insurance carriers.
Recently, the Company has been informed that Georgia Gulf, which is the
primary defendant in these actions, has settled claims with certain of the
plaintiffs and that it will attempt to settle with as many of the remaining
plaintiffs as possible. The Occupational Safety and Health Administration
investigated this incident and issued citations to Georgia Gulf and not to the
Company or any other defendant. Nevertheless, because it is always possible that
a jury would assess some percentage of liability to the Company resulting in an
adverse jury verdict, the Company believes it would be prudent to settle these
suits if possible, especially in view of the recent settlement activity by
Georgia Gulf. Consequently, the
33
<PAGE>
Company has initiated preliminary settlement negotiations with each of Georgia
Gulf and a group of attorneys representing a majority of the plaintiffs. The
Company may also pursue other settlement strategies.
Based on the current circumstances, and although there can be no assurance,
the Company believes it can settle all or substantially all of these lawsuits,
and that the aggregate amount of any such settlements will be within the limits
of its applicable insurance coverage.
11. 401(k) and Profit Sharing Plan
HydroChem maintains the HydroChem Industrial Services Discretionary Profit
Sharing Plan and 401(k) Plan (the "Plan"). Profit sharing contributions to the
Plan are at the discretion of the Board of Directors of HydroChem. All profit
sharing contributions are allocated to the accounts of individual participants
based upon a formula. Eligible employees, at their option, may also make
contributions to their separate 401(k) accounts within the Plan. In 1996 and
1997, HydroChem matched, on a 50% basis, all employee contributions up to $500.
Effective January 1, 1998, HydroChem matches 100% of the first 3% of
compensation contributed by non-exempt employees and 50% of the first 3% of
compensation contributed by exempt employees, up to a maximum of $750 per
employee. All profit sharing and 401(k) contributions and any earnings thereon
are tax-deferred.
For the years ended December 31, 1996 and 1997, HydroChem recognized as
expense profit sharing contributions to the Plan of $100,000 and $500,000,
respectively. There was no expense recognized in 1998 for profit sharing
contributions. For the same years, there were employer 401(k) matching
contributions to the Plan of $207,000, $196,000 and $502,000, respectively.
12. Stock Option Plan
In 1994, the Board of Directors of Holding (the "Board") adopted, and the
stockholders approved, the HydroChem Holding, Inc. 1994 Stock Option Plan (the
"Option Plan"), pursuant to which options to purchase up to an aggregate of
620,779 shares of Holding's Class A Common Stock may be granted. The Option Plan
is administered by a committee of not fewer than two directors appointed by the
Board. Among other things, the committee decides which employees will receive
options, the number of shares covered by any option granted and the exercise
price and other terms and conditions of each such option. The committee also
decides if each option granted shall be an incentive stock option under Section
422 of the Internal Revenue Code of 1986 (the "Code") or an option that does not
qualify under that section of the Code ("Non-Qualified Stock Option"). The Board
may at any time suspend or terminate the Option Plan or revise or amend it in
any respect.
All options granted under the Option Plan are nontransferable except by the
laws of descent and distribution. All options also expire ten years after the
date of grant or upon earlier termination of employment unless due to death,
disability or retirement, in which case the option remains exercisable for an
additional three months in the case of retirement and one year in the case of
death or disability, but, in all cases, only to the extent it was exercisable at
the time of such death, disability or retirement. All options granted since the
inception of the Option Plan have been NonQualified Stock Options and become
exercisable in installments over three to four year periods after the date of
grant. The weighted-average remaining contractual life of outstanding options at
December 31, 1998 was 7.3 years.
34
<PAGE>
A summary of the Option Plan as of December 31, 1996, 1997 and 1998 and
changes during the years ended on those dates is presented below:
<TABLE>
<CAPTION>
Number of Weighted-
Shares Average
Covered by Exercise
Options Price
------- -----
<S> <C> <C>
Outstanding at January 1, 1996..................... 579,890 $1.00
Granted........................................ 57,500 1.00
Exercised...................................... - -
Canceled....................................... 17,500 1.00
---------
Outstanding at December 31, 1996................... 619,890 1.00
Granted........................................ 27,000 1.00
Exercised...................................... 2,000 1.00
Canceled....................................... 26,500 1.00
--------
Outstanding at December 31, 1997................... 618,390 1.00
Granted........................................ - -
Exercised...................................... 308,101 1.00
Canceled....................................... 28,500 1.00
--------
Outstanding at December 31, 1998 .................. 281,789 1.00
=======
Exercisable at:
December 31, 1996.............................. 314,937 $1.00
December 31, 1997.............................. 409,101 $1.00
December 31, 1998.............................. 197,789 $1.00
</TABLE>
The Company has elected to follow APB 25 and related interpretations in
accounting for employee stock options. Accordingly, no compensation expense has
been recognized for these stock options. Pro forma information regarding net
income and earnings per share is required by Financial Accounting Standards
Board Statement No. 123, Accounting for Stock-Based Compensation ("FAS 123"),
which also requires that the information be determined as if the Company had
accounted for its employee stock options granted subsequent to December 31, 1994
under the fair value method of FAS 123. The fair value for these options was
estimated at the date of grant using a minimum value option pricing model. The
minimum value method calculated a fair value that is materially the same as
recorded by the Company according to APB 25; therefore, pro forma presentation
has not been included.
13. Fair Value of Financial Instruments
The Company does not hold or issue financial instruments for trading
purposes.
The following estimated fair value amounts have been determined using
available market information and appropriate valuation methodologies as
described below. However, considerable judgment is required to interpret market
data and to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the Company could
realize in a current market exchange.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value. Potential income tax ramifications related to the realization of
unrealized gains and losses that would be incurred in an actual sale or
settlement have not been taken into consideration.
The carrying amounts for cash and cash equivalents, restricted cash,
accounts receivable, and current liabilities are a reasonable estimate of their
fair values, principally due to the short-term maturities of these instruments.
The estimated fair value of long-term debt is based on the most recent available
traded prices.
35
<PAGE>
The estimated fair values of financial instruments are as follows (in
thousands):
<TABLE>
<CAPTION>
As of December 31,
------------------
1997 1998
------------------ --------------------
Carrying Fair Carrying Fair
Amounts Value Amounts Value
------- ----- ------- -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 33,862 $ 33,862 $ 33,775 $ 33,775
Restricted cash........ 2,858 2,858 - -
Accounts receivable, net 24,341 24,341 23,941 23,941
Financial liabilities:
Current liabilities.... 16,633 16,633 18,573 18,573
Long-term debt - principal:
Senior subordinated notes 110,000 110,000 110,000 104,500
Construction loan...... - - 5,996 5,996
</TABLE>
14. Summary Financial Information
Summary financial information for International as consolidated with
HydroChem is as follows (in thousands):
<TABLE>
<CAPTION>
As of December 31,
------------------
1997 1998
-------- -------
<S> <C> <C>
Current assets............................... $1,623 $1,377
Noncurrent assets............................ 127 103
Current liabilities.......................... 131 68
Noncurrent liabilities....................... - -
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1997 1998
-------- -------- -------
<S> <C> <C> <C>
Revenue................................... $5,088 $3,576 $3,771
Gross profit.............................. 2,257 1,497 1,246
Net income (loss)......................... 100 73 (207)
</TABLE>
15. Major Customer
In 1997 and 1998, one customer and its affiliates represented 11.9% and
10.7%, respectively, of the Company's total revenue. No single customer
represented 10.0% or more of the Company's revenue in 1996.
16. Impact of Year 2000 (unaudited)
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. The Company has
assessed the Year 2000 issue with regard to its 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. The Company
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.
36
<PAGE>
As of December 31, 1998, $1,224,000 had been expended for these new software and
hardware systems, and the Company estimates it will ultimately incur
approximately $2,200,000 in connection with these systems.
As part of its Year 2000 compliance program, the Company has identified
certain third parties with which it has material relationships. These parties
are primarily large financial, telecommunication and information processing
entities, vendors, other third party suppliers and customers. 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. The Company 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, the Company has no reason to believe that
any Year 2000 issues it may experience with third parties will have a material
impact on the Company's 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 could be adversely affected. The Company 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 the Company 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.
17. Subsequent Event
On January 5, 1999, HydroChem acquired substantially all of the assets and
assumed certain liabilities of Valley Systems, Inc., and Valley Systems of Ohio,
Inc., (collectively "Valley"). The acquisition, 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, including customer agreements, customer lists and facility leases,
and (iv) other operating assets. The purchase price for the acquired assets,
which is subject to certain post closing adjustments, was approximately
$29,801,000 in cash of which $4,000,000 was deposited into escrow. In addition,
HydroChem assumed approximately $2,493,000 in capital lease obligations and paid
$5,338,000 in cash at closing to retire Valley's bank debt.
37
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Part III.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of HydroChem are as follows:
<TABLE>
<CAPTION>
Names of Directors
and Executive Officers Age Position
---------------------- --- --------
<S> <C> <C>
B. Tom Carter, Jr........ 54 Chairman of the Board and Chief
Executive Officer
Robert B. Crates......... 36 Director
Thomas F. McWilliams..... 56 Director
Gary D. Noto............. 44 President and Chief Operating Officer
Selby F. Little, III..... 45 Executive Vice President and Chief
Financial Officer
J. Pat DeBusk............ 58 Executive Vice President
Donovan W. Boyd.......... 45 Executive Vice President
Pelham H. A. Smith....... 42 Vice President
Michael P. Steindler..... 51 General Counsel and Secretary
</TABLE>
Subject to the terms of a stockholders agreement entered into by Holding
and all of its stockholders (the "Stockholders Agreement"), the Board of
Directors of HydroChem currently consists of three directors who hold office
until the next annual meeting of the stockholders or until their successors are
duly elected and qualified. Pursuant to the terms of the Stockholders Agreement,
one director, Mr. McWilliams, has been designated by Citicorp Venture Capital,
Ltd. ("CVC") and one director, Mr. Crates, has been designated by LKCM Venture
Partners I Ltd. The stockholders also agreed to elect Mr. Carter as a director
so long as he serves as Chief Executive Officer. The Stockholders Agreement
further provides that CVC has the right to designate an additional director, and
that the holders of a majority of the shares of Holding's capital stock owned by
such stockholders may designate a director, but neither CVC nor the majority
stockholders have exercised these rights. See Item 12. "Security Ownership of
Certain Beneficial Owners and Management."
The executive officers are elected annually by the Board of Directors and
serve at the discretion of the Board until their successors are duly elected and
qualified.
B. Tom Carter, Jr. has been Chairman of the Board and Chief Executive
Officer of HydroChem or Hydro Services since 1990. Mr. Carter was also the
President until August 1998. As a private investor, he assembled the investment
groups which acquired Hydro Services in 1990 and formed HydroChem in 1993 for
the purposes of combining the businesses of Hydro Services and DIS.
Robert B. Crates has been a director of HydroChem since 1993. Since
December 1995, Mr. Crates has been a principal of Crates Thompson Capital, Inc.,
an investment company engaged in the management of private equity funds. From
May 1988 to November 1995, Mr. Crates served as the general partner of LKCM
Venture Partners I Ltd., a private equity fund affiliated with Luther King
Capital Management ("LKCM"), an investment advisory firm. From October 1994 to
January 1995, Mr. Crates concurrently served as interim Chairman and Chief
Executive Officer of Eddie Haggar Limited, Inc., a company in which LKCM had an
investment that subsequently filed for protection under federal bankruptcy laws.
Mr. Crates is also a director of HealthCor Holdings, Inc. and various privately
held companies.
Thomas F. McWilliams has been a director of HydroChem since 1993. Mr.
McWilliams is a Managing Director of CVC, where Mr. McWilliams has been employed
since 1983. He also serves as a director of Chase Industries, Inc., MMI
Products, Inc., Ergo Science Corporation, Pen-Tab Industries, Inc. and various
privately held companies.
38
<PAGE>
Gary D. Noto has been President and Chief Operating Officer of HydroChem
since August 1998. Mr. Noto had served as an Executive Vice President of
HydroChem since December 1996 and in various executive, management or other
positions with HydroChem and Hydro Services or the predecessor to its operations
since 1978.
Selby F. Little, III has been Executive Vice President and Chief Financial
Officer of HydroChem since December 1996 and served as Vice President and Chief
Financial Officer of HydroChem from June 1996 until December 1996. From
September 1992 to May 1996, Mr. Little was Vice President and Chief Financial
Officer of Ross Systems, Inc., a publicly held computer software company.
J. Pat DeBusk has been an Executive Vice President of HydroChem since
December 1993. Mr. DeBusk has also held various executive or other management
positions with Hydro Services or the predecessor to its operations since 1964.
Donovan W. Boyd has been an Executive Vice President of HydroChem since
August 1998. Mr. Boyd had served as a Vice President of HydroChem since November
1997. From April 1995 to October 1997, Mr. Boyd was Senior Vice President and
Chief Operating Officer of North American Technologies Group, a publicly held
technology development company. Prior thereto, Mr. Boyd was Vice President of
Rust Industrial Services, Inc. for more than two years.
Pelham H. A. Smith has been a Vice President of HydroChem since December
1993. Prior thereto, Mr. Smith had been assisting Mr. Carter since 1990 in
various private investment activities.
Michael P. Steindler has functioned as the General Counsel of HydroChem
since April 1994 and has been the Secretary of HydroChem since March 1995. From
August 1993 to February 1998, Mr. Steindler was also a partner in the law firm
of Cassell & Stone, L.L.P.
Directors and Officers of Holding and International
The directors of Holding and International are the same as those of
HydroChem. The executive officers of Holding and International are B. Tom
Carter, Jr. (Chairman and Chief Executive Officer), Gary D. Noto (President and
Chief Operating Officer), Selby F. Little, III (Executive Vice President and
Chief Financial Officer), Pelham H. A. Smith (Vice President) and Michael P.
Steindler (General Counsel and Secretary).
39
<PAGE>
Item 11. EXECUTIVE COMPENSATION
The following table provides certain information concerning compensation
earned by the Chief Executive Officer and the Company's next four most highly
compensated executive officers serving in such capacity at December 31, 1998 who
received compensation in excess of $100,000 (the "Named Executive Officers") for
the period indicated.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation
----------------------
Number of
Shares
Annual Compensation Underlying All Other
Name and Principal Position Year Salary Bonus Options Compensation(1)
- --------------------------- ---- ------ ----- ------- ---------------
<S> <C> <C> <C> <C> <C>
B. Tom Carter, Jr........ 1998 $249,231 $ - - $ 750
Chairman of the Board and 1997 239,077 100,000 - 250
Chief Executive Officer 1996 239,231 100,000 25,000 250
Gary D. Noto............. 1998 159,684 85,000 - 750
President and Chief 1997 122,551 66,000 - 250
Operating Officer 1996 103,200 50,000 - 250
Selby F. Little, III..... 1998 163,664 54,000 - 750
Executive Vice President 1997 125,936 74,000 11,500 250
and Chief Financial Officer 1996 67,308 71,000 15,000 -
J. Pat DeBusk............ 1998 156,741 45,000 - 750
Executive Vice President 1997 146,628 43,000 - 250
1996 136,000 45,000 - 250
Donovan W. Boyd (2)...... 1998 135,000 80,750 - -
Executive Vice President 1997 13,846 20,000 - -
1996 - - - -
</TABLE>
- ----------
(1)Consists of HydroChem's 401(k) matching contribution.
(2)Includes a bonus payment of $25,000 in 1998 which was guaranteed pursuant to
Mr. Boyd's employment agreement. See "Employment Agreements and Other
Arrangements."
Director Compensation
Directors who are employees of the Company do not receive additional
compensation for serving as directors. All directors of the Company are
reimbursed for out-of-pocket expenses incurred in attending meetings of the
Board of Directors and for other expenses incurred in their capacities as
directors of the Company.
Stock Option Information
Holding has adopted the HydroChem Holding, Inc. 1994 Stock Option Plan (the
"Option Plan"). The Option Plan is administered by a committee of Holding's
Board of Directors (the "Committee"), which currently consists of Messrs.
McWilliams and Crates. The purpose of the Option Plan is to advance the
interests of Holding and its subsidiaries by encouraging certain employees of
the Company to acquire a proprietary interest in Holding through ownership of
Holding's Class A Common Stock ("Class A Common"). The total number of shares of
Class A Common that may be subject to options under the Option Plan is 620,779.
As of December 31, 1998, options for 281,789 shares of Class A Common were
outstanding and options for 28,888 shares were available for grant. The duration
of each option and the exercise schedule therefor is determined by the Committee
at the time of grant, but in no event can an option intended to qualify as an
40
<PAGE>
incentive stock option (an "ISO") under Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code"), be exercisable more than ten years after the
date of grant. In the case of an employee who owns (or is considered to own
under Section 424(d) of the Code) stock representing more than 10% of the total
combined voting power of classes of stock of Holding and its subsidiaries, no
ISO shall be exercisable more than five years after the date of grant.
The following table sets forth certain information with respect to the
exercise of stock options and unexercised options granted to the Named Executive
Officers.
Fiscal Year End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of
Underlying Unexercised
Shares Acquired Value Unexercised Options In-the-Money Options
Name on Exercise Realized at December 31, at December 31, 1998(1)
---- ----------- -------- --------------- -----------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
B.Tom Carter. 285,601 $ 0 43,539 6,250 $ 0 $ 0
Gary D. Noto.. - - 17,500 - $ 0 $ 0
Selby F. Little,
III - - 10,375 16,125 $ 0 $ 0
J. Pat DeBusk. - - 20,000 - $ 0 $ 0
Donovan W. Boyd - - - - $ - $ -
</TABLE>
- ----------
(1)There is no established trading market for the Class A Common, but the
Company has attempted to determine its market value based upon the same
criteria which were used to determine the exercise prices of past options
granted. Based upon these criteria, at December 31, 1998, there were no
options which were in-the-money.
Employment Agreements and Other Arrangements
Holding has an employment agreement with Mr. Carter under which he serves as
the Chairman of the Board and Chief Executive Officer of Holding and the
Company. Either Holding or Mr. Carter may terminate this agreement at anytime by
giving one year advance notice. Mr. Carter's current base compensation under
this Agreement is $240,000 per year, and is subject to review and may be
increased periodically at the discretion of the Board. Under the agreement,
bonuses are payable to Mr. Carter at the sole discretion of the Board. Also
under the agreement, Holding granted Mr. Carter in March 1995 an option to
purchase 310,390 shares of Class A Common at an exercise price of $1.00 per
share under Holding's 1994 Stock Option Plan. See "Stock Option Information." If
Mr. Carter's employment is terminated without cause as defined in his agreement,
then he is entitled to a lump sum severance payment equal to one year of his
then current base compensation. Mr. Carter's agreement contains a covenant not
to compete and other customary restrictions. The covenant not to compete does
not apply if there is a termination without cause, or a resignation by Mr.
Carter after a change in control as defined in his agreement or after a
diminution in his duties. The Company has guaranteed Holding's obligations under
the employment agreement.
In April 1998, in connection with his exercise of Holding stock options
covering 285,601 shares of Class A Common, HydroChem loaned Mr. Carter the sum
of $285,601. Effective December 31, 1998, HydroChem assigned the loan to Holding
for face value plus accrued interest. The loan is evidenced by a secured
promissory note bearing interest at the rate of 5.7% per annum. Principal is
payable upon the earlier of April 8, 2004, or any termination of Mr. Carter's
employment, but not earlier than April 8, 2000. Interest is payable annually.
The note is secured by a pledge of the Class A Common shares acquired pursuant
to Mr. Carter's stock option exercise.
HydroChem has employment agreements with Messrs. Noto, DeBusk and Boyd.
Each of these agreements renew automatically on an annual basis unless either
HydroChem or the employee gives 30 days notice to the contrary. The current
annual base compensation under these agreements for Messrs. Noto, DeBusk and
Boyd is $185,000, $150,000 and $150,000, respectively. Such amounts are subject
to review and may be increased periodically at the discretion of HydroChem. For
Messrs. Noto and DeBusk, bonuses are also payable at the sole discretion of
HydroChem. Mr. Boyd's agreement provides for a signing bonus of $20,000, a
performance bonus for 1998 and 1999 of up to 50% of his base compensation for
each such year with a minimum of $25,000 for 1998, and a deferred bonus for 1998
and 1999 equal to the amount of the performance bonus for each such year. Each
deferred bonus vests in equal installments over three years subject to
continuing employment. If HydroChem terminates the employment of Messrs. DeBusk
or Boyd without causes defined in their respective agreements, then such
individual is entitled to a continuation of his then current base compensation
for six months. If HydroChem terminates the employment of Mr. Noto without cause
41
<PAGE>
as defined in his agreement, then he is entitled to a continuation of his then
current base compensation for twelve months. Each of the agreements for Messrs.
Noto, DeBusk and Boyd contain covenants not to compete and other customary
restrictions.
HydroChem and Mr. Little are parties to a letter agreement dated June 3,
1996, relating to Mr. Little's initial employment by HydroChem (the "Offer
Letter"). Among other things, the Offer Letter provides that if HydroChem
terminates Mr. Little's employment at any time without cause as therein defined,
it will pay him severance compensation equal to 12 months of his then current
base compensation. The Offer Letter also provided for a bonus to Mr. Little of
$25,000 upon the commencement of his employment, performance bonuses of up to
50% of his base compensation for 1996 and 1997, with a minimum guarantee of
$31,250 for each year, and the reimbursement in 1996 of relocation expenses
which amounted to $93,065.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the outstanding capital stock of International is owned by
HydroChem. All of the outstanding capital stock of HydroChem is owned by
Holding. The authorized capital stock of Holding consists of (i) 8,000,000
shares of Class A Common, par value $.00005 per share, of which 1,163,503 shares
are issued and outstanding; (ii) 5,000,000 shares of Class B Common Stock, par
value $.00005 per share ("Class B Common"), of which 3,926,598 shares are issued
and outstanding; (iii) 1,000,000 shares of Class C Common Stock, par value
$.00005 per share ("Class C Common"), of which no shares are issued and
outstanding; and (iv) 5,000,000 shares of Series A 13% Cumulative Preferred
Stock, par value $.00005 per share ("Series A Preferred"), all of which are
issued and outstanding.
The following table sets forth certain information known to the Company
with respect to beneficial ownership of Holding's equity securities (rounded to
the nearest share) by (i) each director; (ii) each Named Executive Officer;
(iii) all executive officers and directors of the Company as a group; and (iv)
each stockholder known by the Company to be the beneficial owner of more than
five percent of any class of voting securities of Holding. Such information is
presented as of February 28, 1999.
42
<PAGE>
<TABLE>
<CAPTION>
Class A Common Class B Common Series A Preferred
No. of % of No. of % of No. of % of
Name Shares Class Shares Class Shares Class
---- ------ ----- ------ ----- ------ -----
Executive Officers and Directors:
<S> <C> <C> <C> <C> <C> <C>
B. Tom Carter, Jr. (1)... 431,790 32.7% - - 360,993 7.2%
900 Georgia Avenue
Deer Park, Texas 77536
Robert B. Crates......... - - - - - -
Thomas F. McWilliams (2)(3) 67,343 5.5% 67,343 1.7% 33,871 *
7963 Grand Bay Dr.
Naples, Florida 34108
Gary D. Noto (3)(4)...... 36,079 3.1% 880 * 31,488 *
Selby F. Little, III (5). 10,375 * - - - -
J. Pat DeBusk (3)(6)..... 56,727 4.8% 1,540 * 55,103 1.1%
Donovan W. Boyd.......... - - - - - -
All directors and executive
officers as a group
(8 persons)(3)(7)....... 632,314 47.5% 69,764 1.8% 481,454 9.6%
Other Principal Stockholders:
LKCM Venture Partners I Ltd 673,993 78.8% - - 2,100,628 42.0%
301 Commerce Street,
Suite 1600
Fort Worth, Texas 76102
Citicorp Venture Capital,
Ltd. (3)................ 2,461,712 74.2% 2,461,712 62.7% 1,250,861 25.0%
399 Park Avenue
New York, New York 10043
BT Capital Partners,
Inc.(3)................ 705,154 45.2% 705,154 18.0% 793,959 15.9%
280 Park Avenue (32W)
New York, New York 10017
World Equity Partners,
L.P.(8)................ 496,623 36.7% - - - -
399 Park Avenue
New York, New York 10043
CCT Partners II,
L.P. (3)(9)............. 434,420 33.4% 434,420 11.1% 220,740 4.4%
c/o Citicorp Venture Capital,
Ltd.
399 Park Avenue
New York, New York 10043
Heller Financial, Inc. (10) 310,390 26.6% - - - -
500 West Monroe Street
Chicago, Illinois 60661
HES Management, Inc...... 102,650 12.0% - - 360,993 7.2%
5956 Sherry Lane, Suite 930
Dallas, Texas 75225
</TABLE>
- ----------
* Less than one percent.
43
<PAGE>
(1) Includes 102,650 shares of Class A Common and 360,993 shares of Series A
Preferred held in the name of HES Management, Inc., of which Mr. Carter, as
a sole stockholder, may be deemed the beneficial owner, and 43,539 shares
of Class A Common that Mr. Carter may acquire upon the exercise of options
within 60 days of February 28, 1999.
(2) Represents 56,393 shares of Class B Common held in the name of Alchemy,
L.P., of which Mr. McWilliams, as the sole general partner, may be deemed
the beneficial owner, and 10,950 shares of Class B Common and 33,871 shares
of Series A Preferred held in the name of the Thomas F. McWilliams Flint
Trust of which Mr. McWilliams, as the sole beneficiary of such trust, may
be deemed the beneficial owner.
(3) Includes a number of shares of Class A Common that the stockholder may
acquire upon the conversion of shares of Class B Common on a 1-for-1 basis.
(4) Includes 17,500 shares of Class A Common that Mr. Noto may acquire upon the
exercise of options within 60 days of February 28, 1999.
(5) Represents 10,375 shares of Class A Common that Mr. Little may acquire upon
the exercise of options within 60 days of February 28, 1999.
(6) Includes 20,000 shares of Class A Common that Mr. DeBusk may acquire upon
the exercise of options within 60 days of February 28, 1999.
(7) Includes 98,914 shares of Class A Common that may be acquired upon the
exercise of options within 60 days of February 28, 1999, and 69,763 shares
of Class A Common that may be acquired upon the conversion of Class B
Common.
(8) Represents 496,623 shares of Class A Common that World Equity Partners,
L.P. may purchase upon the exercise of a warrant within 60 days of February
28, 1999.
(9) William T. Comfort, whose address is c/o Citicorp Venture Capital, Ltd.,
399 Park Avenue, New York, New York, 10043, is the sole director, executive
officer, and stockholder of the general partner of CCT Partners II, L.P.,
and may be deemed the beneficial owner of the securities held in the name
of CCT Partners II, L.P.
(10) Heller Financial, Inc. may acquire 310,390 shares of Class C Common upon
the exercise of a warrant within 60 days of February 28, 1999. Heller
Financial, Inc. may acquire 310,390 shares of Class A Common within 60 days
of February 28, 1999, upon exercise of its right to convert all of its
shares of Class C Common into Class A Common on a 1-for-1 basis.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In April 1998, in connection with his exercise of Holding stock options
covering 285,601 shares of Class A Common, HydroChem loaned Mr. Carter the sum
of $285,601. Effective December 31, 1998, HydroChem assigned the loan to Holding
for face value plus accrued interest. The loan is evidenced by a secured
promissory note bearing interest at the rate of 5.7% per annum. Principal is
payable upon the earlier of April 8, 2004, or any termination of Mr. Carter's
employment, but not earlier than April 8, 2000. Interest is payable annually.
The note is secured by a pledge of the Class A Common shares acquired pursuant
to Mr. Carter's stock option exercise.
Argent Capital Corporation, of which Mr. Carter is the sole stockholder, is
the tenant under a lease in Dallas, Texas, for office space used by the Company.
The Company pays the rent for this office directly to the landlord. Total rental
payments for 1996, 1997 and 1998 were $48,419, $52,202 and $50,000,
respectively.
Mr. Steindler is not an employee of the Company. For 1998, the Company paid
Mr. Steindler $150,000 for services rendered by him from March 1, 1998 to
December 31, 1998. Mr. Steindler also received bonus payments from the
44
<PAGE>
Company of $30,000, $35,000 and $60,000 for 1996, 1997 and 1998, respectively.
Prior to March 1, 1998, payments for Mr. Steindler's services (excluding any
bonus amounts) were made to a law firm in which he was then a shareholder.
The Company leased its manufacturing facility in Missouri City, Texas,
from Gracey Corporation ("Gracey") until December 1998. The spouse of Mr. DeBusk
is the beneficial owner of 7 2/3% of the outstanding capital stock of Gracey
held in a trust. Total rental payments made by the Company to Gracey for 1996,
1997, and 1998 were $56,100 in each year.
Part IV.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. See the Index to Consolidated Financial Statements in "Item 8 -
Financial Statements and Supplementary Data."
2. Schedules otherwise required by Item 8 or Item 14.2(d) have been
omitted as not required or not applicable.
3. 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
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.)
45
<PAGE>
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 9, 1998 from B. Tom
Carter, Jr. to HydroChem Industrial Services, Inc.(Exhibit
10.9 to the Company's Form 10-Q, filed May 14, 1998, is
hereby incorporated by reference.)
10.5 Pledge Agreement dated April 9, 1998 between HydroChem
Industrial Services, Inc. and B. Tom Carter, Jr. (Exhibit
10.10 to the Company's Form 10-Q, filed May 14, 1998, is
hereby incorporated by reference.)
10.6 Assignment of Secured Promissory Note dated April 9, 1998
due from B. Tom Carter Jr. by HydroChem Industrial
Services, Inc. to HydroChem Holding, Inc. effective
December 31, 1998. (Filed herewith.)
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. (Filed herewith.)
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.)
10.10 Employment Agreement dated September 26, 1997 between
HydroChem Industrial Services, Inc. and Donovan W. Boyd.
(Filed herewith.)
10.11 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.)
10.12 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.) 10.13 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.)
10.14 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.)
10.15 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.)
46
<PAGE>
10.16 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.)
10.17 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.)
10.18 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.)
10.19 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. (Filed
herewith.)
10.20 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.)
10.21 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.
(Filed herewith.)
10.22 Extension Agreement dated as of February 2, 1999 between
HydroChem Industrial Services, Inc. and Bank One, Texas,
National Association. (Filed herewith.)
10.23 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.)
10.24 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.)
27.1 Financial Data Schedule. (Filed herewith.)
(b) Reports on Form 8-K.
None.
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 29th day of
March, 1999.
HYDROCHEM INDUSTRIAL SERVICES, INC.
By: /s/ Selby F. Little, III
-----------------------------
Selby F. Little, III, Executive Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 29th day of March, 1999.
Name: Capacities:
/s/ B. Tom Carter, Jr.
- ----------------------
B. Tom Carter, Jr. Chairman of the Board and
Chief Executive Officer
/s/ Selby F. Little, III
- ------------------------
Selby F. Little, III Executive Vice President and
Chief Financial Officer
/s/ Patricia K. Burns
- ---------------------
Patricia K. Burns Corporate Controller
/s/ Robert B. Crates
- --------------------
Robert B. Crates Director
/s/ Thomas F. McWilliams
- ------------------------
Thomas F. McWilliams Director
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 29th day of
March, 1999.
HYDROCHEM INTERNATIONAL, INC.
By: /s/ Selby F. Little, III
-----------------------------
Selby F. Little, III, Executive Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 29th day of March, 1999.
Name: Capacities:
/s/ B. Tom Carter, Jr.
- ----------------------
B. Tom Carter, Jr. Chairman of the Board and
Chief Executive Officer
/s/ Selby F. Little, III
- ------------------------
Selby F. Little, III Executive Vice President and
Chief Financial Officer
/s/ Patricia K. Burns
- ---------------------
Patricia K. Burns Corporate Controller
/s/ Robert B. Crates
- --------------------
Robert B. Crates Director
/s/ Thomas F. McWilliams
- ------------------------
Thomas F. McWilliams Director
49
<PAGE>
EXHIBIT INDEX
10.6 Assignment of Secured Promissory Note dated April 9, 1998 due from B.
Tom Carter Jr. by HydroChem Industrial Services, Inc. to HydroChem
Holding, Inc. effective December 31, 1998.
10.8 Amendment dated January 27, 1999 to Employment Agreement dated November
1, 1992 between HydroChem Industrial Services, Inc. and Gary D. Noto.
10.10 Employment Agreement dated September 26, 1997 between HydroChem
Industrial Services, Inc. and Donovan Boyd.
10.19 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.
10.21 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.
10.22 Extension Agreement dated as of February 2, 1999 between HydroChem
Industrial Services, Inc. and Bank One, Texas, National Association.
27.1 Financial Data Schedule.
50
ASSIGNMENT OF NOTES
HYDROCHEM INDUSTRIAL SERVICES, INC., a Delaware corporation
hereinafter referred to as "Industrial Services" located at 900 Georgia Avenue,
Deer Park, Texas, 77536 for the sum of Two Hundred Eighty-five Thousand Six
Hundred One and No/100 Dollars ($285,601.00) accrued interest in the amount of
Eleven Thousand Nine Hundred Eight Dollars and 39/100 ($11,908.39) and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, has TRANSFERRED, SET-OVER and ASSIGNED, and by these presents does
TRANSFER, SET-OVER and ASSIGN unto HYDROCHEM HOLDING, INC., a Delaware
corporation hereinafter referred to as "Holding", with offices at 900 Georgia
Avenue, Deer Park, Texas 77536, all of the rights, titles and interests of
Industrial Services in, to and under:
1. That certain Secured Promissory Note dated April 9, 1998,
executed by B. Tom Carter, Jr. (the "Maker"), payable to the order of Industrial
Services in the original principal amount of Two Hundred Eighty-five Thousand
Six Hundred One and No/100 Dollars ($285,601.00), bearing interest and being
payable as therein provided (the "Note"); and
2. Any liens, security interests, mortgages, deeds of trust,
collateral agreements, security agreements, collateral assignments, guaranties,
financing statements, and other lien instruments executed by Maker, in favor of
Industrial Services, or any other party, in connection with the Note, including,
without limitation, that certain Pledge Agreement dated April 9, 1998, executed
by Maker in favor of Industrial Services (the "Pledge Agreement").
Additionally, Industrial Services agrees to execute and
deliver such financing statement changes, assignments, amendments or supplements
as Holding may reasonably request in order to comply with applicable law and to
preserve and protect Holding's rights, liens and security interests hereunder.
Industrial Services also warrants and represents that it is
not aware of any event, condition or circumstance which, with the giving of
notice or the passage of time or both, would constitute a default under the Note
or the Pledge Agreement.
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this
Assignment of Note to be effective as of the 31st day of December, 1998.
HYDROCHEM INDUSTRIAL HYDROCHEM HOLDING, INC.
SERVICES, INC.
By: /s/ Selby F. Little, III By: /s/ Pelham Smith
------------------------ --------------------
Selby F. Little, III Pelham Smith
Executive Vice President, Chief Vice President, Assistant
Financial Officer, and Assistant Secretary Secretary and Assistant
Treasurer
THE STATE OF TEXAS
COUNTY OF HARRIS
BEFORE ME, the undersigned authority, on this day personally
appeared Selby F. Little, III., the Executive Vice President, Chief Financial
Officer, and Assistant Secretary of HydroChem Industrial Services, Inc., a
Delaware corporation, known to me to be the person whose name is subscribed to
the foregoing instrument and acknowledged to me that he executed the same for
the purposes and consideration therein expressed, in the capacity stated, and as
the act and deed of the banking association.
GIVEN UNDER HAND AND SEAL OF OFFICE this the 31st day of
December, 1998.
/s/ Lawanda Weidman
-------------------
Notary Public in and for
The State of Texas
THE STATE OF TEXAS
COUNTY OF HARRIS
BEFORE ME, the undersigned authority, on this day personally
appeared Pelham H. A. Smith, Vice President, Assistant Secretary and Assistant
Treasurer of HydroChem Holding, Inc., a Delaware corporation, known to me to be
the person whose name is subscribed to the foregoing instrument and acknowledged
to me that he executed the same for the purposes and consideration therein
expressed, in the capacity stated, and as the act and deed of the banking
association.
GIVEN UNDER HAND AND SEAL OF OFFICE this the 31st day of
December 1998.
/s/ Lawanda Weidman
-------------------
Notary Public in and for
The State of Texas
2
AMENDMENT
TO
EMPLOYMENT AGREEMENT
Amendment to Employment Agreement entered into as of the 27th day of
January, 1999 between HydroChem Industrial Services, Inc., a Delaware
corporation ("Employer"), and Gary Noto, an individual (the "Employee").
WHEREAS, Employer, as the successor and assignee of Hydro Environmental
Services Limited Partnership, a Delaware limited partnership, and Employee are
parties to an Employment Agreement dated as of November 1, 1992 (the "Employment
Agreement"); and
WHEREAS, Employer and Employee desire to amend the Employment Agreement
as hereinafter provided;
NOW THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt of which is hereby acknowledged, the parties
hereto agree as follows:
1. At the beginning of the last line in section 5 (a)(ii) of the
Employment Agreement, the word "six" shall be deleted and the word "twelve"
shall be substituted therefor.
2. Immediately after the last word in clause (i) in the last paragraph
of section 5 (a) of the Employment Agreement, the phrase "which failure is not
corrected within thirty (30) days after receipt of written notice thereof" shall
be added.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first hereinabove set forth.
EMPLOYER:
HYDROCHEM INDUSTRIAL SERVICES, INC.
By:
/s/ B. Tom Carter, Jr.
---------------------------------------
B. Tom Carter, Jr., Chairman and
Chief Executive Officer
EMPLOYEE:
/s/ Gary Noto
---------------------------------------
Gary Noto
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of the 26th day of September, 1997,
between HydroChem Industrial Services, Inc., a Delaware corporation (the
"Employer"), and Donovan Boyd, an individual (the "Employee").
WHEREAS, Employer desires to employ Employee in connection with the
operation of Employer's business (the "Business") and pursuant to the terms of
this Employment Agreement; and
WHEREAS, Employee desires to accept such employment;
NOW THEREFORE, in consideration of the premises, the full and faithful
performance of the respective agreements herein contained, and the discharge of
the respective obligations herein imposed, the parties mutually covenant and
agree that in lieu of all prior agreements between the parties relating thereto,
Employee will become employed by Employer for the term herein specified and will
enter into a covenant not to compete and certain other covenants for the
protection of trade secrets and confidential information of Employer, all upon
the terms and conditions hereinafter set forth:
1. Term. Subject to the provisions for termination hereinafter set
forth, the term of this Agreement shall be for the fourteen month period from
November 1, 1997 to December 31, 1998 (the "Initial Term"), unless earlier
terminated by Employee's death or disability. Thereafter, this Agreement shall
be renewed automatically on a year to year basis (each such year being a
"Renewal Term") on the conditions herein set forth, unless either party gives
notice under paragraph 10 to the other party, within thirty (30) days prior to
expiration of the Initial Term or any Renewal Term, of such party's election not
to so renew this Agreement.
2. Duties. Employee's duties shall consist initially of serving as a
Vice President of the Employer with responsibility for the Employer's operations
in its Gulf Coast Area.
Employee agrees to perform faithfully the duties assigned to Employee
to the best of Employee's ability.
The Employee agrees to provide Employee's best advice, information,
judgment and knowledge with respect to the Business, and Employee warrants that
Employee is free to enter into the terms of this Agreement, that Employee has no
obligation inconsistent herewith, and that Employee will devote Employee's full
time and best efforts to the Business.
Employee shall serve Employer loyally, diligently and effectively, and
shall at all times exert Employee's best efforts to promote the success of the
Business' activities as hereinabove stated. Employee shall devote all Employee's
time, energy and ability to the interests of Employer and to the discharge of
Employee's duties and responsibilities in an efficient, trustworthy and
businesslike
1
<PAGE>
manner. Employee shall do nothing which will in any way impair or prejudice the
name or reputation of Employer.
3. Compensation. Subject to the performance by Employee of the forgoing
duties, Employer agrees to compensate Employee during the Initial Term and any
Renewal Term at the rate of Ten Thousand Dollars ($10,000) per month, payable in
accordance with the payroll policy of Employer, but not less than once a month
("Base Compensation"). Employer may from time to time change the amount of Base
Compensation; provided, however, that Employee's Base Compensation may not be
reduced without his written consent.
Employee shall be entitled to a "Performance Bonus" for the years 1998
and 1999 of up to Fifty percent (50%) of his Base Compensation for each such
year. The actual amount of the Performance Bonus shall be based upon Employer
performance, Gulf Coast Area performance, and a subjective evaluation of the
Employee's performance in each such year. For 1998, the Employer guarantees that
Employee's Performance Bonus shall be a minimum of Twenty Five Thousand Dollars
($25,000). The Employer shall pay Employee this guaranteed minimum no later than
August 31, 1998 as a non recoverable advance against the full year Performance
Bonus. The payment of any further Performance Bonus for 1998 and any Performance
Bonus for 1999 shall be subject to Employee remaining employed through the date
of payment. The payment of Performance Bonuses for any years after 1999 shall be
in accordance with the bonus plan or plans for other Employer executives at the
same level as Employee in each applicable year.
Employee shall be entitled to a "Deferred Supplemental Bonus" for the
years 1998 and 1999 in accordance with and subject to the Individual Deferred
Supplemental Bonus Plan which is attached hereto and incorporated herein as
Exhibit A.
As authorized from time to time by Employer, Employee may incur
reasonable expenses in furtherance of the business of Employer, including,
without limitation, expenses for entertainment, travel and similar items.
Employer will reimburse Employee for all such expenses upon presentation each
month by Employee of an itemized account together with supporting receipts for
such expenditures in accordance with the rules, practices, and policies
established from time to time by Employer.
Employee shall have the use of a company vehicle in accordance with the
Employer's motor vehicle policy.
4. Employee Covenants. At all times during the Initial
Term, any Renewal Term and thereafter, Employee agrees as provided below:
(a) Employee understands that Employer's business interests require a
confidential relationship between Employer and its employees and Employer and
its customers, the protection and confidential treatment of its employees and
customers, of its inventions, trade secrets, know-how, programs and other
knowledge of its business, including the Business (hereinafter collectively
termed "Information") whether or not conceived or learned by its employees in
the course of their employment. Accordingly, Employee shall keep confidential
and treat confidentially all
2
<PAGE>
Information, whether patented, or not, and shall not use or aid others in using
Information in competition with Employer, this obligation to exist both during
and after termination of Employee's employment by Employer pursuant to this
Agreement and for so long as any Information remains legally protectable as to
persons receiving it in a confidential relationship.
(b) Employee will disclose to Employer every significant item of Information
relating to Employer's interests and will disclose in writing every invention
while under the employ of Employer and which reasonably relates to the Business.
(c) Upon Employer's request, either during or after termination of this
employment, but without expense to him, Employee will (i) execute any and all
patent applications, assignments, and other legal instruments that Employer
shall deem necessary for the protection of the Information; (ii) render aid and
assistance in all proceedings pertaining to such Information, and (iii) in
general, cooperate with all lawful efforts by Employer to protect the
Information.
(d) Upon termination of employment, or from time to time during the Initial Term
or any Renewal Term as Employer may request, Employee will surrender to Employer
all papers, documents, writings, illustrations, models and other property
produced thereby or coming into Employee's possession by or through his
employment with Employer, and Employee agrees that all such materials are at all
times Employer's property.
(e) During the Initial Term, any Renewal Term, and for an additional period of
one year (two years if the Employee voluntarily terminates employment with
Employer) immediately following the term of employment (the "Restriction
Period"), and in consideration of the employment hereunder for a specified term,
the Information to be disclosed by Employer to Employee, and Employee's right to
severance compensation in certain circumstances under Section 5, Employee shall
not, directly or indirectly, (i) induce any employee of Employer to terminate
his employment with Employer, (ii) hire any such employee, (iii) call upon or
solicit, with the intent to divert or take away, any clients, customers, and
accounts, or (iv) in Employee's own behalf or as a partner, officer, director,
employee, agent, consultant or stockholder (other than as a holder of less than
1% of the outstanding capital stock of any corporation with a class of equity
securities registered under Section 12(b) or 12(g) of the Securities Exchange
Act of 1934, as amended) engage in, invest in, or render services to any person
or entity engaged in the businesses in which Employer or any of its subsidiaries
or affiliates are engaged. The parties intend that the covenants contained in
this Section 4(e) shall be deemed to be a series of separate covenants, one for
each foreign country and each county or parish in each state of the United
States and, expect for geographic coverage, each such separate covenant shall be
identical in terms to the covenant contained in this Section 4(e).
Notwithstanding the foregoing, the covenants contained in this Section 4(e)
shall only apply to the areas of Employer's Business for which Employee renders
services hereunder or receives Information and in the geographical areas where
Employee has responsibilities. If any judicial or administrative body shall
refuse to enforce all of the separate covenants contained in this Section 4(e)
because the time limit is too long, it is expressly understood and agreed
between the parties hereto that for the purposes of such proceeding such time
limitation shall be deemed reduced to the extent necessary to permit enforcement
of such covenants. If any judicial or administrative body shall refuse to
enforce all of the separate covenants contained in this Section 4(e) because
they are
3
<PAGE>
more extensive (whether as to geographic area, scope of business or otherwise)
than necessary to protect the business and goodwill of Employer or any of its
subsidiaries or affiliates, it is expressly understood and agreed between the
parties hereto that for purposes of such proceeding the geographic area , scope
of business or other aspect shall be deemed reduced to the extent necessary to
permit enforcement of such covenants.
(f) Employee acknowledges that, in view of the nature of the business in which
the Employer is engaged, the restrictions contained in this Section 4 (the
"Restrictions") are reasonable and necessary in order to protect the legitimate
interests of the Employer, and that any violation thereof would result in
irreparable injuries to the Employer, and Employee therefore further
acknowledges that , in the event Employee violates, or threatens to violate, any
of such Restrictions, the Employer shall be entitled to obtain from any court of
competent jurisdiction, without the posting of any bond or other security,
preliminary and permanent injunctive relief as well as damages and an equitable
accounting of all earnings, profits, and other benefits arising from such
violation, which rights shall be cumulative and in addition to any other rights
or remedies in law or equity to which the Employer may be entitled. The
legitimate interests of the Employer include, but are not limited to, the
identity of customers, the special needs and requirements of customers, pricing
strategies, cost factors and bidding strategies.
(g) If any of the Restrictions under this Section 4, or any part thereof, shall
be determined in any judicial or administrative proceeding to be invalid,
illegal or unenforceable, the remainder of the Restrictions shall not thereby be
affected and shall be given full effect, without regard to the invalid, illegal
or unenforceable provisions. If the period of time or the area specified in the
Restrictions shall be determined in any judicial or administrative proceeding to
be unreasonable, then the court or administrative body shall have the power to
reduce the period of time or the area covered and, in its reduced form, such
provisions shall then be enforceable and shall be enforced.
(h) If Employee violates any of the Restrictions, any applicable Restriction
Period shall be tolled from the time of the commencement of any such violation
until such time as such violation shall be cured by Employee to the reasonable
satisfaction of the Employer.
5. Termination.
(a) This Agreement may be terminated prior to the expiration of the Initial Term
or any Renewal Term: (i) by mutual agreement of the parties, or (ii) by the
Employer either with or without Cause (as such term is hereinafter defined). If
such termination is by the Employer for Cause, all of the Employee's right to
compensation under Section 3 above shall terminate upon such termination, except
any amount accrued Base Compensation in respect of periods prior to such
termination.
If such termination is by the Employer without Cause, the Employer shall pay to
the Employee, in addition to any amounts accrued as Base Compensation in respect
of periods prior to such termination:
(i) if such termination occurs during the Initial Term, an amount equal
to the Base Compensation that would otherwise be payable to the Employee under
this Agreement during (x)
4
<PAGE>
the remainder of the Initial Term or (y) the next six months following the date
of such termination, whichever is greater, or
(ii) if such termination occurs during any Renewal Term, an amount
equal to the Base Compensation that would otherwise be payable under this
Agreement during the next six months following the date of such termination.
In either case, such amount will be based on the Base Compensation then in
effect and payable in installments as if the employment of Employee had
continued through the applicable number of months. "Cause" shall mean (i)
failure by the Employee to perform assigned duties in a manner which is
satisfactory to the Employer which failure is not corrected within thirty (30)
days after receipt of written notice thereof, (ii) a material breach by Employee
of any of Employee's obligations hereunder, (iii) fraud or conviction of the
Employee for fraud, misappropriation, embezzlement, or any felony, or (iv) any
act or action involving moral turpitude or reflecting negatively on the
Employer.
(b) If the Employee shall die during the term of this Agreement, this Agreement
shall automatically terminate, and no further compensation shall be payable to
Employee hereunder.
(c) If the Employee is unable to discharge his duties hereunder for a period of
two consecutive months by reason of physical or mental illnesses, injury or
incapacity, the Employer may, by written notice to the Employee, terminate this
Agreement and no further compensation shall be payable to Employee hereunder.
6. Severability. In case any term, phrase, clause, paragraph,
restriction, covenant or agreement herein contained shall be held to be invalid,
illegal or unenforceable, the same shall be severed, and it is hereby agreed
that the same are meant to be severable, and shall not defeat or impair the
remaining provisions hereof. Further, there shall be substituted in lieu of such
invalid, illegal or unenforceable provision, a provision as close thereto which
is valid, legal and enforceable.
7. Waiver. A waiver by any party hereto of a breach of any provision of
this Agreement, or of any duties imposed upon any party hereto by law, or of any
other clauses hereof, shall not operate or be construed as a waiver of any
subsequent or continuing breach of this Agreement by any party.
8. Assignment. This Agreement shall bind and inure to the benefit of
Employer, and its successors and assigns, and Employee, and Employee's heirs and
personal representatives.
9. Relationship Between Parties. Employee shall be considered and
treated as having an employee status, and shall be entitled, to the extent
Employee is eligible, to participate in any plans, arrangements or distribution
of and by Employer pertaining to or in connection with any pension, bonus,
profit-sharing, or similar benefits and life, health, accident and disability
insurance or benefits, or similar employee fringe benefits for employees of
Employer. All fees, compensation and other things of value, charged by Employer
and received or realized as a result of the rendering
5
<PAGE>
of services by Employee on behalf of the Employer shall belong to and be paid
and delivered forthwith to Employer.
10. Notices. Any and all notices provided for herein shall be in
writing and shall be considered as properly given if delivered to the party, or
sent by certified mail, return receipt requested, at the addresses set out below
for such party.
If to Employer: HydroChem Industrial Services, Inc.
6210 Rothway
Suite 150
Houston, Texas 77040
Attn: Legal Department
If to Employee: Donovan Boyd
4226 Shady Springs
Seabrook, TX 77586
Either party may change its address for notice by giving proper notice to such
effect under this Section 10.
11. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH INTERNAL SUBSTANTIVE LAWS OF STATE OF
TEXAS WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES.
12. Consent to Jurisdiction and Service of Process. EMPLOYEE HEREBY
CONSENTS TO JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN HARRIS
COUNTY, TEXAS AND AGREES THAT SUBJECT TO EMPLOYER'S ELECTION, ALL ACTIONS OR
PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT SHALL BE LITIGATED IN
SUCH COURTS. EMPLOYEE ACCEPTS AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM
NON CONVENIENS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT OR ORDER
RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. EMPLOYEE ALSO AGREES THAT
SERVICE OF PROCESS UPON EMPLOYEE IN ANY SUCH ACTION IN ANY SUCH COURT MAY BE
EFFECTED IN ACCORDANCE WITH THE NOTICE PROVISIONS SET FORTH IN SECTION 10 OF
THIS AGREEMENT. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY
OTHER MANNER PERMITTED BY LAW OR LIMIT THE RIGHT OF EMPLOYER TO BRING
PROCEEDINGS AGAINST EMPLOYEE IN ANY OTHER JURISDICTION.
13. Captions. The captions to the sections and subsections of this
Agreement are for convenience of reference only and shall not be construed to be
a part hereof.
14. No Conflict. Employee represents and warrants to Employer that
being employed by Employer will not conflict with or violate any covenant not to
compete or any other restrictions to which Employee may be bound.
6
<PAGE>
15. Entire Agreement. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof, and it supersedes
all prior or contemporaneous agreements, negotiations or understandings with
respect to said subject matter. This Agreement may be amended or waived only by
a written instrument duly signed by both parties.
EXECUTED in duplicate original as of the date and year first above
written.
EMPLOYER:
HydroChem Industrial Services, Inc.
By: /s/s Gary D. Noto
-----------------------
Gary D. Noto, Executive Vice President
EMPLOYEE:
/s/ Donovan Boyd
- -------------------------------
Donovan Boyd
7
<PAGE>
EXHIBIT A
INDIVIDUAL SUPPLEMENTAL DEFERRED BONUS PLAN
FOR
DONOVAN BOYD
September 26, 1997
This Individual Supplemental Bonus Plan (the "Plan") for Donovan Boyd (the
"Employee") shall be a part of the Employment Agreement of even date (the
"Employment Agreement") between HydroChem Industrial Services, Inc. ("Employer")
and Employee. The following constitue the provisions of the Plan.
1. 1998 Award. As of April 1, 1999, and subject to Employee remaining
employed by Employer through such date, Employer shall award Employee a
supplemental deferred bonus for 1998 (the "1998 Award"). The amount of the 1998
Award shall be equal to the amount of Employee's Performance Bonus for 1998
under the third paragraph of section 3 of the Employment Agreement.
2. 1999 Award. As of April 1, 2000, and subject to Employee remaining
employed by Employer through such date, Employer shall award Employee a
supplemental deferred bonus for 1999 (the "1999 Award"). The amount of the 1999
Award shall be equal to the amount of the Employee's Performance Bonus for 1999
under the third paragraph of section 3 of the Employment Agreement.
3. Crediting of Awards. Each Award shall be credited to Employee on the
books and records of the Employer as of the respective date of each Award and
shall vest in and become payable to Employee as hereinafter set forth. All
amounts which may become payable under the Plan to the Employee shall be paid
exclusively from the general funds of the Employer. Employee's rights to payment
shall be those of a general unsecured creditor of Employer. Employee shall not
have any claim, right, security interest, or other interest in any fund, account
or other asset of the Company.
4. Vesting of Awards. Each Award shall vest in the Employee in equal
installments on the first, second and third anniversary dates (each such date
being an "Anniversary Date") of the date that such Award is credited to Employee
as set forth in section 3 of the Plan. Accordingly, the 1998 Award and the 1999
Award will become fully vested on April 1, 2002 and April 1, 2003, respectively.
5. Payment of Awards. Each Award shall be payable in full.by the Employer
to the Employee as of the date that such Award becomes fully vested.
Accordingly, the 1998 Award would be payable in full on April 1, 2002 subject to
the Employee remaining employed with Employer through such date. The 1999 Award
would be payable in full on April 1, 2003 subject to Employee remaining employed
through such date.
<PAGE>
6. Termination of Employment. If Employee's employment with Employer
terminates for any reason whatsoever, other than for death or disability, prior
to the time that any Award is fully vested, then (i) withing thirty (30) days
thereafter, the Employer shall pay to Employee the portion of such Award that
was vested as of the last Anniversary Date of that Award prior to the
termination of employment, and (ii) any unvested portion of such Award shall be
forfeited and no longer be payable or credited to Employee.
7. Death of Disability. If Employee's employment with Employer terminates
because of death or disability prior to the time that any Award is fully vested,
then such Award shall immediately become fully vested and payable to Employee or
the personal representative of Employee as the case may be. For the purposes of
this section 7, disability shall be deemed to have occurred if Employer
terminates Employee's employment under section 5 (c) of the Employment
Agreement.
AMENDMENT NO. 2
This Amendment No. 2 dated as of March 26, 1999 ("Agreement") is among
HydroChem Industrial Services, Inc., a Delaware corporation ("Borrower"), the
banks party to the Credit Agreement described below ("Banks"), and NationsBank,
N.A. (successor in interest by merger to NationsBank of Texas, N.A.), as Agent
for the Banks ("Agent").
INTRODUCTION
A. The Borrower, the Agent and the Banks are parties to the Credit
Agreement dated as of December 31, 1997, as amended by the Letter Agreement
dated as of March 6, 1998, the Letter Agreement dated as of August 14, 1998, and
Amendment No. 1 dated as of September 30, 1998 (as so amended, the "Credit
Agreement").
B. The Borrower has requested that the Banks agree to make certain
amendments to the Credit Agreement.
C. The Borrower, as holder of that certain Promissory Note dated as of
April 9, 1998 made by B. Tom Carter, Jr. in the principal amount of Two Hundred
Eighty-five Thousand Six Hundred- one and No/100 Dollars ($285,601.00) (the
"Carter Note"), desires to assign its rights as holder of the Carter Note,
including its right to receive payments thereunder, to HydroChem Holding, Inc.,
a Delaware corporation (such assignment is referred to herein as the "Note
Assignment"). The Borrower has requested that the Agent and the Banks consent to
the Note Assignment.
THEREFORE, the Borrower, the Agent and the Banks hereby agree as
follows:
Section 1. Definitions; References. Unless otherwise defined in this
Agreement, terms used in this Agreement which are defined in the Credit
Agreement shall have the meanings assigned to such terms in the Credit
Agreement.
Section 2. Consent. The Agent and Banks hereby (a) consent to the Note
Assignment as described above and (b) waive any and all Defaults or Events of
Default that may arise under Section 5.9 of the Credit Agreement as a result of
the Note Assignment. This waiver is limited to the extent described herein and
shall not be construed to be a consent to or a waiver of any other actions
prohibited by the Credit Agreement. The Agent and each of the Banks reserves the
right to exercise any rights and remedies available to it in connection with any
future defaults with respect to Section 5.9 of the Credit Agreement or any other
provision of any Credit Document. Further, if the Note Assignment is not
completed as described above, all consents granted hereunder shall be void.
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<PAGE>
Section 3. Amendments.
(a) Section 1.1. Section 1.1 is hereby amended by deleting the
definitions of "Applicable Margin" and "EBITDA" contained in such Section and
replacing them with the following new definitions for such terms:
"Applicable Margin" means, with respect to interest rates, letter of
credit fees and commitment fees and as of any date of its determination, an
amount equal to the percentage amount per annum set forth in the table below
opposite the applicable Tier set forth below determined as a function of the
Leverage Ratio:
<TABLE>
<CAPTION>
Applicable Margin Applicable Applicable
Leverage Applicable Margin for Prime Rate Letter of Commitment
Tier Ratio for LIBOR Tranche Tranches Credit Fees Fees
- ---- ----- ----------------- -------- ----------- ----
<S> <C> <C> <C> <C> <C>
I x<3.50 1.75% 0.00% 1.75% 0.25%
-
II 3.50<x<4.00 2.00% 0.25% 2.00% 0.25%
-
III 4.00<x<4.25 2.25% 0.50% 2.25% 0.30%
-
IV 4.25<x<4.75 2.50% 0.75% 2.50% 0.375%
-
V 4.75<x<5.25 2.75% 1.00% 2.75% 0.50%
-
VI 5.25<x 3.00% 1.00% 3.00% 0.50%
-
</TABLE>
Beginning on the date of this Agreement and until receipt of (i) the
consolidated financial statements of the Borrower for the fiscal quarter ended
March 31, 1999 as required by Section 5.2(b) and (ii) the Compliance Certificate
of the Borrower for such fiscal quarter, the Leverage Ratio shall be deemed to
be within Tier IV set forth above. Upon the receipt of such financial statements
and thereafter, the Agent shall periodically determine the Applicable Margin
based upon the most recent financial statements of the Borrower dated as of the
end of a fiscal quarter (including the fourth fiscal quarter) delivered to the
Agent pursuant to Section 5.2(b) (and in the case of the fourth fiscal quarter
of each fiscal year of the Borrower, subject to additional adjustment in
accordance with the following paragraph based upon audited financial statements
delivered pursuant to Section 5.2(a)).
Any such adjustments to the Applicable Margin shall become effective on the 45th
day following the last day of each fiscal quarter; provided that; any additional
adjustments to the Applicable Margin shall be made on the 90th day following the
last day of the fourth fiscal quarter of the Borrower; provided, further, that
if such financial statements are not delivered when required hereunder, the
Applicable Margin shall increase to the maximum percentage amount set forth in
the
2
<PAGE>
table above from such 45th day following the last day of the applicable quarter
until such financial statements are received by the Agent. Upon any change in
the Applicable Margin, the Agent shall promptly notify the Borrower and the
Banks of the new Applicable Margin.
"EBITDA" means, with respect to any Person and for any period of its
determination, (a) the consolidated net income of such Person for such period,
plus (b) to the extent the following items are deducted for purposes of
determining such consolidated net income: (i) the consolidated interest expense
of such Person for such period; (ii) the consolidated income taxes of such
Person for such period; (iii) the consolidated depreciation and amortization of
such Person for such period, and (iv) to the extent such period includes fiscal
quarters ending during fiscal year 1998, certain special and restructuring
charges of such Person in the amounts set forth for such quarters as set forth
on Schedule II attached hereto, minus (c) any interest income and extraordinary
gains of such Person for such period to the extent included in the calculation
of such consolidated net income.
(b) Section 2.1. Section 2.1 is hereby amended by deleting clause
(a) of such Section and replacing it with the following new clause (a):
(a) (i) Revolving Loan Commitments. Each Bank severally
agrees, on the terms and conditions set forth in this Agreement and for the
purposes set forth in Section 5.4, to make Revolving Loan Advances to the
Borrower as such Bank's ratable share of Revolving Loan Borrowings requested by
the Borrower from time to time on any Business Day during the period from the
date of this Agreement until the Revolving Loan Maturity Date; provided that (i)
the aggregate outstanding principal amount of Revolving Loan Advances made by
such Bank plus such Bank's ratable share of the Letter of Credit Exposure shall
not exceed such Bank's Revolving Loan Commitment and (ii) the aggregate
outstanding principal amount of the Revolving Loans plus the Letter of Credit
Exposure plus the aggregate outstanding principal amount of the Autoborrow
Advances made pursuant to the Autoborrow Agreement shall not exceed the lesser
of (A) the aggregate Commitments and (B) the Borrowing Base. Revolving Loan
Borrowings must be made in an amount equal to or greater than (X) with respect
to Revolving Loan Advances bearing interest based on the Prime Rate, $100,000
and in integral multiples of $100,000 in excess thereof and (Y) with respect to
Revolving Loan Advances bearing interest based on LIBOR, $300,000 and in
integral multiples of $100,000 in excess thereof. Within the limits expressed in
this Agreement, the Borrower may from time to time borrow, prepay, and reborrow
Revolving Loan Borrowings. The indebtedness of the Borrower to the Banks
resulting from the Revolving Loan Advances made by the Banks shall be evidenced
by Revolving Loan Notes made by the Borrower.
(ii) Reduction of Revolving Loan Commitments The
Borrower shall have the right, upon at least 30 days' advance notice to the
Agent, to reduce ratably in part or terminate in whole the Revolving Loan
Commitments. Each such notice shall specify the amount of the
3
<PAGE>
termination or reduction and shall be irrevocable and binding on the Borrower.
Partial reductions shall be in a minimum amount of $1,000,000 and be made in
integral multiples of $1,000,000. In the event of any partial reduction, each
Bank's Revolving Loan Commitment shall be reduced pro rata. The Revolving Loan
Commitments cannot be reduced below the amount of the Revolving Loan plus the
Letter of Credit Exposure plus the aggregate outstanding principal amount of the
Autoborrow Advances. Any termination or reduction of the Revolving Loan
Commitments pursuant to this Section 2.1(a)(ii) shall be permanent, with no
obligation of the Banks to reinstate such reduced or terminated Revolving Loan
Commitments.
(iii) Autoborrow Advances NationsBank has agreed, subject
to the terms and conditions of this Agreement, the Autoborrow Agreement and the
Autoborrow Note, to make Autoborrow Advances to the Borrower on or before the
Maturity Date (as defined in the Autoborrow Note); provided that, (i) the
aggregate outstanding principal amount of Autoborrow Advances shall not exceed
$5,000,000 at any time and (ii) the aggregate outstanding principal amount of
the Revolving Loans plus the Letter of Credit Exposure plus the aggregate
outstanding principal amount of the Autoborrow Advances made pursuant to the
Autoborrow Agreement shall not exceed the lesser of (A) the aggregate
Commitments and (B) the Borrowing Base.
(c) Section 2.3. Section 2.3 is hereby amended by deleting the
first sentence of clause (b) of such Section and replacing it with the following
new sentence:
The Borrower shall pay to the Agent for the ratable
benefit of the Banks an unused commitment fee in an amount equal to the
Applicable Margin for commitment fees multiplied by the average daily amount by
which (i) the aggregate amount of the Revolving Loan Commitments exceeds (ii)
the aggregate outstanding principal amount of the Revolving Loan plus the Letter
of Credit Exposure plus the aggregate outstanding principal amount of the
Autoborrow Advances made pursuant to the Autoborrow Agreement.
(d) Section 4.19. The following new Section 4.19 is added to the
Credit Agreement:
4.19 Year 2000 Compliance.
(a) The Borrower has (i) begun analyzing the operations of the
Borrower and its Subsidiaries and Affiliates that could be adversely affected by
failure to become Year 2000 compliant (that is, that computer applications,
imbedded microchips and other systems will be able to perform date sensitive
functions prior to and after December 31, 1999) and (ii) developed a plan for
becoming Year 2000 compliant in a timely manner, the implementation of which is
on schedule in all material respects. The Borrower reasonably believes that it
will become Year 2000 compliant
4
<PAGE>
for its operations and those of its Subsidiaries and Affiliates on a timely
basis except to the extent that a failure to do so could not reasonably be
expected to have a material adverse effect upon the financial condition of the
Borrower.
(b) The Borrower reasonably believes any suppliers and vendors
that are material to the operations of the Borrower or its Subsidiaries and
Affiliates will be Year 2000 compliant for their own computer applications
except to the extent that a failure to do so could not reasonably be expected to
have a material adverse effect upon the financial condition of the Borrower.
(c) The Borrower will promptly notify Bank in the event the
Borrower determines that any computer application which is material to the
operations of the Borrower, its Subsidiaries or any of its material vendors or
suppliers will not be fully Year 2000 compliant on a timely basis, except to the
extent that such failure could not reasonably be expected to have a material
adverse effect upon the financial condition of the Borrower.
(e) Section 5.5. Clauses (a), (b) and (d) of Section 5.5 are
hereby deleted and replaced in their entirety with the following new clauses
(a), (b) and (d):
(a) Net Worth. The Borrower shall not permit the
consolidated Net Worth of the Borrower as of the last day of each
fiscal quarter to be less than the sum of (i) $13,000,000, plus
(ii) 50% of the cumulative quarterly consolidated net income of
the Borrower since December 31, 1998 for each fiscal quarter
ending after that date during which the Borrower has positive
consolidated net income plus (iii) 80% of the net proceeds
resulting from any sale or issuance of any stock of the Borrower
or its Subsidiaries since December 31, 1998.
(b) Maximum Funded Debt to Proforma EBITDA Ratio.
As of the last day of each fiscal quarter of the Borrower, the
Borrower shall not permit the ratio of (i) the consolidated
Funded Debt of the Borrower as of the end of such fiscal quarter
to (ii) the consolidated EBITDA of the Borrower for the preceding
four fiscal quarters then ended, to be greater than the maximum
ratio set forth in the table below for the applicable fiscal
quarter end set forth in the table below (provided that in
calculating the foregoing, the financial results and balance
sheet effects of any Acquisitions may, if requested by the
Borrower and approved by the Majority Banks (including approval
of any pro forma financial statements), be included in such
calculations on a proforma basis for the full period and on the
relevant dates.
5
<PAGE>
<TABLE>
<CAPTION>
Fiscal Quarter Ending On or Before Maximum Ratio
---------------------------------- -------------
<S> <C>
December 31, 1998 6.50 to 1.00
March 31, 1999 5.75 to 1.00
June 30, 1999 5.75 to 1.00
September 30, 1999 5.50 to 1.00
December 31, 1999 5.50 to 1.00
March 31, 2000 5.25 to 1.00
June 30, 2000 5.25 to 1.00
September 30, 2000 5.00 to 1.00
December 31, 2000 4.75 to 1.00
</TABLE>
(d) Minimum Interest Charge Coverage Ratio. As of
the last day of each fiscal quarter, the Borrower shall not
permit the ratio of (i) the consolidated EBITDA of the Borrower
for the preceding four fiscal quarters then ended to (ii)
Interest Charges for the preceding four fiscal quarters then
ended to be less than the minimum ratio set forth in the table
below for the applicable period set forth in the table below.
<TABLE>
<CAPTION>
Fiscal Quarter Ending On or Before Minimum Ratio
---------------------------------- -------------
<S> <C>
December 31, 1998 1.50 to 1.00
March 31, 1999 1.50 to 1.00
June 30, 1999 1.50 to 1.00
September 30, 1999 1.75 to 1.00
December 31, 1999 2.00 to 1.00
March 31, 2000 2.00 to 1.00
June 30, 2000 2.25 to 1.00
September 30, 2000 2.25 to 1.00
December 31, 2000 2.25 to 1.00
</TABLE>
(f) Exhibits and Schedules. Exhibit C and Exhibit I to the Credit
Agreement are deleted and replaced, respectively, with Exhibit C and Exhibit I
hereto. In addition, the new Schedule II attached hereto is added as Schedule II
to the Credit Agreement.
Section 4. Representations and Warranties. The Borrower represents and
warrants to the Agent and the Banks that:
6
<PAGE>
(a) The representations and warranties set forth in the Credit
Agreement and in the other Credit Documents are true and correct in all material
respects as of the date of this Agreement;
(b) The execution, delivery and performance of this Agreement are
within the corporate power and authority of the Borrower and have been duly
authorized by appropriate proceedings and (ii) this Agreement constitutes a
legal, valid, and binding obligation of the Borrower enforceable in accordance
with its terms, except as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or similar laws affecting the rights of creditors
generally and general principles of equity;
(c) The Note Assignment is within the corporate power and
authority of the Borrower and has been duly authorized by appropriate
proceedings; and
(d) As of the effectiveness of this Agreement, no Default or
Event of Default has occurred and is continuing.
Section 5. Effectiveness. This Agreement shall become effective and the
Credit Agreement shall be amended as provided in this Agreement upon the
occurrence of the following conditions precedent:
(a) The Borrower, the Agent, and the Banks shall have delivered
duly and validly executed originals of this Agreement to the Agent;
(b) the representations and warranties in this Agreement shall be
true and correct in all material respects;
(c) the Borrower shall have delivered a certificate of its
Secretary or Assistant Secretary, to the extent required by the Agent,
certifying its certificate of incorporation, bylaws, resolutions and incumbency
and in form and substance satisfactory to the Agent and the Banks;
(d) HydroChem Industrial Cleaning, Inc., a Delaware corporation,
shall have delivered a certificate of its Secretary or Assistant Secretary, to
the extent required by the Agent, certifying its certificate of incorporation,
bylaws, resolutions and incumbency and in form and substance satisfactory to the
Agent and the Banks;
(e) HydroChem Industrial Cleaning, Inc. shall have delivered
certificates, to the extent required by the Agent, certifying (i) its existence
and good standing in its state of incorporation and (ii) its qualification and
good standing in material jurisdictions where it conducts business;
7
<PAGE>
(f) HydroChem Industrial Cleaning, Inc. shall have executed and
delivered a Joinder Agreement in substantially the form of Exhibit I attached
hereto for the purpose of joining as a party to the Guaranty; and
(g) the Borrower shall have paid to the Agent or the Agent's
designee (i) a $10,000 amendment fee and (ii) within 30 days of billing, all
amounts and expenses required to be paid in connection with the preparation,
execution and delivery of this Agreement and the other documents executed in
connection therewith.
Section 6. Consent of Guarantors. Each Guarantor hereby consents to the
amendments and modifications contained in this Amendment (and the consummation
of the transactions contemplated thereby) and confirms that the Guaranty shall
continue to guarantee the "Guaranteed Debt" (as defined in such Guaranty) as
modified hereby.
Section 7. Choice of Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Texas.
Section 8. Counterparts. This Agreement may be signed in any number of
counterparts, each of which shall be an original.
PURSUANT TO SECTION 26.02 OF THE TEXAS BUSINESS AND COMMERCE CODE, A
LOAN AGREEMENT IN WHICH THE AMOUNT INVOLVED IN THE LOAN AGREEMENT EXCEEDS
$50,000 IN VALUE IS NOT ENFORCEABLE UNLESS THE LOAN AGREEMENT IS IN WRITING AND
SIGNED BY THE PARTY TO BE BOUND OR THAT PARTY'S AUTHORIZED REPRESENTATIVE.
THE RIGHTS AND OBLIGATIONS OF THE PARTIES TO AN AGREEMENT SUBJECT TO THE
PRECEDING PARAGRAPH SHALL BE DETERMINED SOLELY FROM THE WRITTEN LOAN AGREEMENT,
AND ANY PRIOR ORAL AGREEMENTS BETWEEN THE PARTIES ARE SUPERSEDED BY AND MERGED
INTO THE LOAN AGREEMENT. THIS WRITTEN AGREEMENT AND THE CREDIT DOCUMENTS, AS
DEFINED IN THE CREDIT AGREEMENT, REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES
AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.
8
<PAGE>
EXECUTED as of the 26th day of March, 1999 and effective as of the 31st day
of December, 1998.
BORROWER:
HYDROCHEM INDUSTRIAL SERVICES, INC.
By: /s/Selby F. Little, III
-------------------------
Name: Selby F. Little, III
Title: Executive Vice President and
Chief Financial Officer
AGENT:
NATIONSBANK, N.A.
By: /s/ William T. Griffin
--------------------------
Name: William T. Griffin
Title: Vice President
BANKS:
NATIONSBANK, N.A.
By: /s/ William T. Griffin
--------------------------
Name: William T. Griffin
Title: Vice President
9
<PAGE>
Agreed to and Accepted as of the 26th day of March, 1999.
HYDROCHEM INTERNATIONAL, INC.
By: /s/ Selby F. Little, III
-------------------------
Name: Selby F. Little, III
Title: Executive Vice President and
Chief Financial Officer
HYDROCHEM INDUSTRIAL CLEANING, INC.
By: /s/ Selby F. Little, III
-------------------------
Name: Selby F. Little, III
Title: Executive Vice President and
Chief Financial Officer
10
<PAGE>
Exhibit C
FORM OF
BORROWING BASE AND COMPLIANCE CERTIFICATE
[date]
NationsBank, N.A., as Agent
for the financial institutions parties to the
Credit Agreement referred to below
700 Louisiana, 7th Floor
Houston, Texas 77002
Attention: Mr. William T. Griffin, Jr.
Ladies and Gentlemen:
I refer to the Credit Agreement dated as of December 31, 1997 (as the same may
be amended, modified, or supplemented from time to time, the "Credit Agreement",
the defined terms of which are used herein unless otherwise defined herein)
among HydroChem Industrial Services, Inc. (the "Borrower"), the financial
institutions parties thereto, and NationsBank of, N.A., successor in interest by
merger to NationsBank of Texas, N.A., as Agent for such financial institutions
("Agent").
I hereby certify that I have no knowledge of any Defaults by the Borrower in the
observance of any of the provisions in the Credit Agreement which existed as of
[_______________] or which exist as of the date of this letter.
I also certify that the accompanying consolidated Financial Statements present
fairly, in all material respects, the consolidated financial condition of the
Borrower as of [_______________], and the related results of operations for the
[_______________] then ended, in conformity with generally accepted accounting
principles.
The following sets forth the information and computations to demonstrate the
calculation of the Borrowing Base as of [______________] and to demonstrate
compliance with the requirements of Section 5.5 of the Credit Agreement as of
[_______________]:
1
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
I. Borrowing Base
A. Eligible Accounts $
-----------
B. .85 .85
-----------
C. Eligible Inventory $
-----------
D. .60 .60
E. Borrowing Base $
(AxB) + (CxD) -----------
II. Compliance Certificate
A. Section 5.5(a) Net Worth
1. $13,000,000 $13,000,000
-----------
2. 50% of cumulative quarterly
consolidated net income of
Borrower since December 31, 1998
for each fiscal quarter ending
after that date during which
Borrower has positive consolidated
net income $
-----------
3. 80% of net proceeds resulting from
any sale or issuance of any stock
of Borrower or its Subsidiaries
since December 31, 1998 $
-----------
4. Minimum Net Worth requirement =
A.1 + A.2 + A.3 $
-----------
5. Actual Net Worth $
-----------
B. Section 5.5(b) Maximum Funded Debt to Proforma EBITDA Ratio
1. consolidated Funded Debt as of fiscal quarter
then ended
$
-----------
2. consolidated EBITDA for preceding
four fiscal quarters
$
-----------
</TABLE>
2
<PAGE>
3. ratio B.1 / B.2 ____ to 1.00
4. maximum ratio permitted:
<TABLE>
<CAPTION>
Fiscal Quarter Ending On or Before Maximum Ratio
---------------------------------- -------------
<S> <C>
December 31, 1998 6.50 to 1.00
March 31, 1999 5.75 to 1.00
June 30, 1999 5.75 to 1.00
September 30, 1999 5.50 to 1.00
December 31, 1999 5.50 to 1.00
March 31, 2000 5.25 to 1.00
June 30, 2000 5.25 to 1.00
September 30, 2000 5.00 to 1.00
December 31, 2000 4.75 to 1.00
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
C. Section 5.5(c) Minimum Fixed Charge Coverage Ratio
1. consolidated EBITDA for preceding
four fiscal quarters $
-----------
2. consolidated cash taxes paid for preceding
four fiscal quarters $
-----------
3. Capital Expenditures for preceding
four fiscal quarters $
-----------
4. consolidated interest expense for preceding
four fiscal quarters $
-----------
5. capitalized interest for preceding
four fiscal quarters $
-----------
6. consolidated scheduled principal payments
on long term debt(including Capital Leases)
for preceding four fiscal quarters $
-----------
7. cash dividends made in preceding
four fiscal quarters $
-----------
3
<PAGE>
8. ratio=(C.1-C.2-C.3)/(C.4+C.5+C.6+C.7) to 1.00
----
9. minimum required: 1.00 to 1.00
D. Section 5.5(d) Minimum Interest Charge Coverage Ratio
1. consolidated EBITDA for
preceding four fiscal quarters $
-----------
2. consolidated interest expense for preceding
four fiscal quarters $
-----------
3. capitalized interest for preceding
four fiscal quarters $
-----------
4. ratio = (D.1) / (D.2 + D.3) to 1.00
----
5. minimum ratio required:
</TABLE>
<TABLE>
<CAPTION>
Fiscal Quarter Ending On or Before Minimum Ratio
---------------------------------- -------------
<S> <C>
December 31, 1998 1.50 to 1.00
March 31, 1999 1.50 to 1.00
June 30, 1999 1.50 to 1.00
September 30, 1999 1.75 to 1.00
December 31, 1999 2.00 to 1.00
March 31, 2000 2.00 to 1.00
June 30, 2000 2.25 to 1.00
September 30, 2000 2.25 to 1.00
December 31, 2000 2.25 to 1.00
</TABLE>
Very truly yours,
------------------------
Name:
Title:
4
<PAGE>
Exhibit I
FORM OF
JOINDER AGREEMENT
(Subsidiary)
[Subsidiary], a [ ] corporation (the "Subsidiary"), hereby agrees with
(a) NationsBank, N.A., successor in interest by merger to NationsBank of Texas,
N.A.,as Agent for the Banks (the "Agent"), under the Credit Agreement dated as
of December 31, 1997 among HydroChem Industrial Services, Inc. a Delaware
corporation, the financial institutions parties thereto, as Banks, and the Agent
(as amended, modified, or supplemented from time to time, the "Credit
Agreement," the capitalized terms of which are used herein unless otherwise
defined herein), and (b) the other parties to the Guaranty dated as of December
31, 1997 executed in connection with the Credit Agreement, as follows:
In accordance with Section 5.19 of the Credit Agreement, the Subsidiary
hereby (a) joins the Guaranty as a party thereto and assumes all the obligations
of a Guarantor (as defined in the Guaranty) under the Guaranty, (b) agrees to be
bound by the provisions of the Guaranty as if the Subsidiary had been an
original party to the Guaranty, and (c) confirms that, after joining the
Guaranty as set forth above, the representations and warranties set forth in the
Credit Agreement and the Guaranty with respect to the Subsidiary are true and
correct in all material respects as of the date of this Joinder Agreement.
For purposes of notices under the Guaranty, the notice address for the
Subsidiary is as follows:
------------------------
------------------------
------------------------
Attention: ____________
Telephone: ( )________
Telecopy: ( )________
THIS WRITTEN AGREEMENT AND THE CREDIT DOCUMENTS REPRESENT THE FINAL
AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.
<PAGE>
IN WITNESS WHEREOF this Joinder Agreement is executed and delivered as
of the ___ day of ________, 19__.
[SUBSIDIARY]
By:
Name:
Title:
-2-
<PAGE>
JOINDER AGREEMENT
Hydrochem Industrial Cleaning, Inc.
HydroChem Industrial Cleaning, Inc., a Delaware corporation (the
"Subsidiary"), hereby agrees with (a) NationsBank, N.A., successor in interest
by merger to NationsBank of Texas, N.A.,as Agent for the Banks (the "Agent"),
under the Credit Agreement dated as of December 31, 1997 among HydroChem
Industrial Services, Inc. a Delaware corporation, the financial institutions
parties thereto, as Banks, and the Agent (as amended, modified, or supplemented
from time to time, the "Credit Agreement," the capitalized terms of which are
used herein unless otherwise defined herein), and (b) the other parties to the
Guaranty dated as of December 31, 1997 executed in connection with the Credit
Agreement, as follows:
In accordance with Section 5.19 of the Credit Agreement, the Subsidiary
hereby (a) joins the Guaranty as a party thereto and assumes all the obligations
of a Guarantor (as defined in the Guaranty) under the Guaranty, (b) agrees to be
bound by the provisions of the Guaranty as if the Subsidiary had been an
original party to the Guaranty, and (c) confirms that, after joining the
Guaranty as set forth above, the representations and warranties set forth in the
Credit Agreement and the Guaranty with respect to the Subsidiary are true and
correct in all material respects as of the date of this Joinder Agreement.
For purposes of notices under the Guaranty, the notice address for the
Subsidiary is as follows:
c/o HydroChem Industrial Services, Inc.
900 Georgia Avenue
Deer Park, Texas 77536
Attention: Mr. Selby F. Little
Telephone: (713) 393-5665
Telecopy: (713) 393-5965
THIS WRITTEN AGREEMENT AND THE CREDIT DOCUMENTS REPRESENT THE FINAL
AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.
<PAGE>
IN WITNESS WHEREOF this Joinder Agreement is executed and delivered as
of the 26th day of March, 1999.
HYDROCHEM INDUSTRIAL CLEANING, INC.
By: /s/ Selby F. Little, III
--------------------------
Name: Selby F. Little, III
Title: Executive Vice President and
Chief Financial Officer
-2-
<PAGE>
SCHEDULE II
to
Amendment 2
Special and Restructuring Charges
<TABLE>
<CAPTION>
<S> <C>
Three months ended:
June 30, 1998
Landry Services due diligence $ 325,000
December 31, 1998
Moving expenses 290,000
Year 2000 Compliance program 200,000
Cost reduction program 740,000
-------
$ 1,555,000
========
</TABLE>
FIRST AMENDMENT TO LOAN AGREEMENT
THIS FIRST AMENDMENT TO LOAN AGREEMENT (this "Amendment") dated as
of February 2, 1999, is by and between Hydrochem Industrial Services, Inc., a
Delaware corporation (the "Borrower") and Bank One, Texas, National Association
(the "Lender").
WITNESSETH:
WHEREAS, the Borrower and the Lender have entered into that certain
Loan Agreement dated as of July 17, 1998, pursuant to which the Lender agreed to
make a loan to the Borrower pursuant to the terms thereof (the "Loan
Agreement"); and
WHEREAS, the Borrower and the Lender desire to amend the Loan Agreement
as hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein contained, the Borrower and the Lender hereby agree as
follows:
1. Amendments to Loan Agreement.
(a) Section 1.1 of the Loan Agreement (Definitions) is hereby
amended effective as of September 30, 1998, as follows:
(i) The definition of "Capital Expenditures" is
amended by adding the clause ", and related furniture, office equipment,
computers and computer software" after the word Project in the sixth line
thereof.
(ii) The definition of "EBITDA" is hereby amended
and restated in its entirety as follows: "`EBITDA' means for the applicable
period, earnings before depreciation, amortization, interest expense, taxes and
extraordinary gains, plus certain restructuring and special charges accrued in
1998 up to a maximum of $1,000,000."
(b) Section 2.3(b)(i) of the Loan Agreement (Term Loan
Repayment) is amended to reflect September 30, 2006 as the "Term Loan Maturity
Date."
(c) Section 6.12 of the Loan Agreement (Restrictions on
Fundamental Changes) is hereby amended by adding the clause "and except for the
purchase of the assets and assumption of certain liabilities of Valley Systems,
Inc. and Valley Systems of Ohio, Inc." at the end thereof.
(d) Section 6.13 of the Loan Agreement (Liens) is hereby
amended by adding the clause "and except for Liens on assets of Valley Systems,
Inc. or Valley Systems of Ohio, Inc. existing at the time of the purchase of the
assets of such entities" after the word "Indenture" in the fifth line thereof.
1
<PAGE>
(e) Section 6.19 of the Loan Agreement (Minimum Consolidated
Net Worth) is hereby amended and restated in its entirety effective December 31,
1998, as follows:
"Section 6.19. Minimum Consolidated Net Worth The Borrower shall not
permit its Consolidated Net Worth to be less than the greater of (i)
$13,000,000, or (ii) ninety-five percent (95%) of its actual net worth
as of December 31, 1998, plus fifty percent (50%) of positive net
income since December 31, 1998, plus one hundred percent (100%) of the
net proceeds of any stock issuance."
2. Waiver. The Lender hereby waives the Borrower's non-compliance with
Section 6.20 (Fixed Charge Coverage Ratio) for the fiscal quarter ending
December 31, 1998, only.
3. Reaffirmation of Representations and Warranties. To induce the
Lender to enter into this Amendment, the Borrower hereby reaffirms, as of the
date hereof, its representations and warranties in their entirety contained in
the Loan Agreement and in all other documents executed pursuant thereto (except
to the extent such representations and warranties relate solely to an earlier
date in which case they shall have been true and accurate in all material
respects as of such earlier date) and additionally represents and warrants as
follows:
(a) The execution and delivery of this Amendment and the
performance by the Borrower of its obligations under this Amendment and the Loan
Agreement as amended hereby are within the Borrower's corporate powers, have
been duly authorized by all necessary corporate action, have received all
necessary governmental and other approvals (if any shall be required), and do
not and will not contravene or conflict with the governance documents of the
Borrower or any provision of law, any presently existing requirement or
restriction imposed by any judicial, arbitral, regulatory or governmental
instrumentality or constitute a default under, or result in the creation or
imposition of any Lien other than a Permitted Lien upon any property or assets
of the Borrower or the Guarantor under, any agreement, instrument or indenture
by which the Borrower or the Guarantor is bound;
(b) This Amendment has been duly executed and delivered on
behalf of the Borrower and this Amendment and the Loan Agreement, as amended
hereby, are the legal, valid and binding obligations of the Borrower,
enforceable in accordance with their terms subject as to enforcement only to
bankruptcy, insolvency, reorganization, moratorium or other similar laws and
equitable principles affecting the enforcement of creditors' rights generally;
and
(c) No Default or Event of Default has occurred and is
continuing after giving effect to this Amendment.
4. Conditions. The effectiveness of this Amendment is subject to the
following conditions, all in form and substance satisfactory to the Lender:
(a) The Lender shall have received:
(i) Consent of Guarantor. The Guarantor shall
consent to this Amendment by executing and delivering to the Lender the Consent
and Acknowledgment attached hereto;
2
<PAGE>
(ii) Certificate of Officer of Borrower. A
certificate of the Secretary or Assistant Secretary and the President or
Vice President of the Borrower containing specimen signatures of the
persons authorized to execute this Amendment on the Borrower's behalf and any
other documents provided for herein, together with (x) copies of resolutions
of the Board of Directors of the Borrower authorizing the execution and
delivery of this Amendment and of all other legal documents or proceedings taken
by the Borrower in connection with the execution and delivery of this Amendment,
and (y) copies of the Borrower's Certificate of Incorporation, certified by the
Secretary of State of Delaware, and Bylaws, to the extent amended since July 17,
1998; and
(iii) Certificate of Existence and Good Standing.
A certificate of existence and good standing from the Secretary of State of the
State of Delaware with respect to the Borrower.
(b) All legal matters incident to the execution and delivery
of this Amendment shall be satisfactory to the Lender.
5. Reaffirmation of Loan Agreement. This Amendment shall be deemed to
be an amendment to the Loan Agreement, and the Loan Agreement, as amended
hereby, is hereby ratified, approved and confirmed in each and every respect.
All references to the Loan Agreement herein and in any other document,
instrument, agreement or writing shall hereafter be deemed to refer to the Loan
Agreement as amended hereby.
6. Defined Terms. Except as amended hereby, terms used herein when
defined in the Loan Agreement shall have the same meanings herein unless the
context otherwise requires.
7. Governing Law; Arbitration; Submission to Jurisdiction.
(a) The Loan Agreement, as amended hereby, and the other Loan
Documents, and the rights and duties of the parties thereto, shall be construed
in accordance with and governed by the internal laws of the State of Texas.
(b) EACH PARTY HERETO HEREBY WAIVES ITS RIGHT TO RESOLVE
DISPUTES, CLAIMS, AND CONTROVERSIES ARISING FROM THE LOAN AGREEMENT, AS AMENDED
HEREBY, ANY OTHER LOAN DOCUMENT OR ANY MATTER IN CONNECTION THEREWITH,
INCLUDING, WITHOUT LIMITATION, CONTRACT DISPUTES AND TORT CLAIMS, THROUGH ANY
COURT PROCEEDING OR LITIGATION AND ACKNOWLEDGES THAT ALL SUCH DISPUTES, CLAIMS
AND CONTROVERSIES SHALL BE RESOLVED PURSUANT TO THIS SECTION, EXCEPT THAT
EQUITABLE RELIEF AND CERTAIN OTHER RIGHTS AND REMEDIES SET FORTH BELOW MAY BE
SOUGHT FROM ANY COURT OF COMPETENT JURISDICTION. The Borrower represents to the
Lender and the Lender represents to the Borrower that this waiver is made
knowingly and voluntarily after consultation with and upon advice of counsel and
is a material part of this Agreement. All such disputes,claims and controversies
shall be resolved by binding arbitration pursuant to the commercial rules of the
American Arbitration Association ("AAA"). Any arbitration proceeding held
pursuant to this
3
<PAGE>
arbitration provision shall be conducted in Houston, Texas or at any other place
selected by mutual agreement of the Lender and the Borrower. No act to take or
dispose of any collateral shall constitute a waiver of this arbitration
agreement or be prohibited by this arbitration agreement. This arbitration
provision shall not limit the right of either party during any dispute, claim or
controversy to seek, use, and employ ancillary or preliminary rights and/or
remedies, judicial or otherwise, for the purposes of realizing upon, preserving,
protecting, foreclosing upon or proceeding under forcible entry and detainer for
possession of, any real or personal property, and any such action shall not be
deemed an election of remedies. Such remedies include, without limitation,
obtaining injunctive relief or a temporary restraining order, invoking a power
of sale under any deed of trust or mortgage, obtaining a writ of attachment or
imposition of a receivership or exercising any rights relating to personal
property, including exercising the right of set-off or taking or disposing of
such property with or without judicial process pursuant to the uniform
commercial code. Any disputes, claims or controversies concerning the lawfulness
or reasonableness of an act or exercise of any right or remedy concerning any
collateral, including any claim to rescind, reform or otherwise modify any
agreement relating to the collateral, shall also be arbitrated; provided,
however that no arbitrator shall have the right or the power to enjoin or
restrain any act of either party. Judgment upon any award rendered by any
arbitrator may be entered in any court having jurisdiction. The statute of
limitations, estoppel, waiver, laches and similar doctrines which would
otherwise be applicable in an action brought by a party shall be applicable in
any arbitration proceeding, and the commencement of an arbitration proceeding
shall be deemed the commencement of any action for these purposes. The Federal
Arbitration Act (Title 9 of the United States Code) shall apply to the
construction, interpretation, and enforcement of this arbitration provision.
(c) To the fullest extent permitted by applicable law, each of
the Borrower and the Lender agrees that any court proceeding or litigation
permitted by Section 7(b) may be brought and maintained in the courts of the
State of Texas sitting in Harris County or the United States District Court for
the Southern District of Texas. To the fullest extent permitted by applicable
law, each of the Borrower and the Lender hereby expressly and irrevocably
submits to the jurisdiction of the courts of the State of Texas and the United
States District Court for the Southern District of Texas for the purpose of any
such litigation as set forth above and irrevocably agrees to be bound by any
judgment rendered thereby in connection with such litigation. To the fullest
extent permitted by applicable law, each of the Borrower and the Lender further
irrevocably consents to the service of process, by registered mail, postage
prepaid or by personal service within or without the State of Texas. To the
fullest extent permitted by applicable law, each of the Borrower and the Lender
hereby expressly and irrevocably waives any objection which it may have or
hereafter may have to the laying of venue of any such litigation brought in any
such court referred to above and any claim that any such litigation has been
brought in an inconvenient forum. To the extent that the Borrower or the Lender
has or hereafter may acquire any immunity from jurisdiction of any court or from
any legal process (whether through service of notice, attachment prior to
judgment, attachment in aid of execution or otherwise) with respect to itself or
its property, each of the Borrower and the Lender hereby irrevocably waives to
the fullest
4
<PAGE>
extent permitted by applicable law, such immunity in respect of its obligations
under this Agreement.
(D) TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, EACH
PARTY HERETO VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY (BY ITS
ACCEPTANCE HEREOF) WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY COURT PROCEEDING
OR LITIGATION PERMITTED BY SECTION 7(B) AND WAIVES ANY RIGHT TO HAVE A JURY
PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED ON CONTRACT, TORT OR
OTHERWISE) ARISING OUT OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, ANY OTHER
RELATED DOCUMENT OR ANY RELATIONSHIP BETWEEN THE LENDER, THE BORROWER, AND/OR
THE GUARANTOR, AND AGREES THAT ANY SUCH ACTION, PROCEEDING OR DISPUTE TO THE
EXTENT PERMITTED BY SECTION 7(B) SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A
JURY. THIS PROVISION IS A MATERIAL INDUCEMENT TO THE LENDER TO PROVIDE THE LOAN.
8. Counterparts. This Amendment may be executed in any number of
counterparts, and by the different parties on different counterpart signature
pages, each of which when executed shall be deemed an original but all such
counterparts taken together shall constitute one and the same Amendment.
9. Severability. Any provision of this Amendment that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
10. Headings. Section headings used in this Amendment are for reference
only and shall not affect the construction of this Amendment.
11. Notice of Entire Agreement. This Amendment, together with the other
Loan Documents, constitute the entire understanding among the Borrower and the
Lender and supersedes all earlier or contemporaneous agreements, whether written
or oral, concerning the subject matter of the Amendment and the other Loan
Documents. THIS WRITTEN AMENDMENT TOGETHER WITH THE OTHER LOAN DOCUMENTS
REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED
BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their duly authorized officers as of the day and
year first above written.
5
<PAGE>
BORROWER:
HYDROCHEM INDUSTRIAL SERVICES, INC., a
Delaware corporation
By: /s/ Selby F. Little, III
----------------------------
Name: Selby F. Little, III
Title: Executive Vice President and Chief
Financial Officer
LENDER:
BANK ONE, TEXAS, NATIONAL ASSOCIATION,
By: /s/ John E. Elam, Jr.
-------------------------
Name: John E. Elam, Jr.
Title: Vice President
6
<PAGE>
CONSENT AND ACKNOWLEDGMENT
The undersigned Guarantor, by its signature hereto, acknowledges and
agrees to the terms and conditions of that certain First Amendment to Loan
Agreement (the "Amendment") dated as of February 2, 1999, by and between
Hydrochem Industrial Services, Inc., a Delaware corporation (the "Borrower") and
Bank One, Texas, National Association (the "Lender"). The undersigned
acknowledges and reaffirms its obligations under its Guaranty (the "Guaranty")
and agrees that the Guaranty shall remain in full force and effect. Although the
undersigned Guarantor has been informed by the Borrower of the matters set forth
in the Amendment, and the undersigned has acknowledged and agreed to same, the
undersigned understands and agrees that the Lender has no duty to notify the
Guarantor or to seek the Guarantor's acknowledgment or agreement, and nothing
contained herein shall create such a duty as to any transactions hereafter.
Dated as of February 2, 1999.
HYDROCHEM INTERNATIONAL, INC., a
Delaware corporation
By: /s/ Selby F. Little, III
----------------------------
Name: Selby F. Little, III
Title: Executive Vice President and Chief
Financial Officer
7
<PAGE>
EXTENSION AGREEMENT
THIS EXTENSION AGREEMENT (this "Agreement") is made and
entered into as of the 2nd day of February, 1999, by and between HYDROCHEM
INDUSTRIAL SERVICES, INC., a Delaware corporation ("Borrower"), and BANK ONE,
TEXAS, National Association, a national banking association ("Lender").
W I T N E S S E T H:
WHEREAS, in accordance with the terms and provisions of a Loan
Agreement dated as of July 17, 1998 (as amended from time to time, the "Loan
Agreement"), Borrower has executed and delivered to Lender a Promissory Note
(the "Note") dated of even date therewith, in original principal amount of
$7,500,000.00; and
WHEREAS, the payment of the Note is secured by, among other
things, the Deed of Trust (with Security Amendment and Assignment of Rents and
Leases) (the "Deed of Trust") dated July 17, 1998, from Borrower to Christopher
T. Klinko, Trustee, filed for record under Clerk's File No. T168142, Film Code
No. ###-##-#### of the Official Public Records of Real Property of Harris
County, Texas, and covering, among other things, the real property (the
"Property") described therein; and
WHEREAS, Borrower and Lender have agreed to renew and extend
the time and manner of payment of the Note and to carry forward the liens
granted in the Deed of Trust, as hereinafter provided.
NOW, THEREFORE, for and in consideration of the premises and
the mutual covenants contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Lender and Borrower agree as follows:
1. Renewal. Borrower and Lender hereby renew and extend the principal
balance of the Note, and Borrower promises to pay to the order of Lender
$7,500,000.00, or so much thereof as may be advanced and outstanding under the
terms of the Loan Agreement, together with interest accruing thereon as herein
provided.
2. Interest. Interest shall continue to accrue on the Note, as hereby
renewed and extended, in the manner provided for in the Note and the Loan
Agreement.
3. Note Payment. The Note, as hereby renewed and extended, shall be due
and payable as follows:
(i) Commencing on the last Business Day of April,
1999, and continuing regularly and quarterly thereafter on the
last Business Day of
-1-
<PAGE>
each fiscal quarter until the earlier of July 16, 1999 (the
"Construction Loan Maturity Date") or the Conversion Date,
interest only at the Construction Loan Rate on the outstanding
principal, shall be due and payable; and
(ii) A final installment in the amount of all
outstanding principal, plus accrued and unpaid interest, shall
be due and payable on the Construction Loan Maturity Date,
unless the Borrower satisfies the conditions of converting the
Construction Loan to the Term Loan described in Section 2.5 of
the Loan Agreement and elects to convert the Construction Loan
to the Term Loan in the manner therein described, in which
case the Borrower shall pay interest only at the Construction
Loan Rate on the outstanding principal on the Conversion Date.
If the undersigned satisfies the conditions of converting the Construction Loan
to the Term Loan described in Section 2.5 of the Loan Agreement, and elects to
convert the Construction Loan to the Term Loan in the manner therein described,
the Borrower shall repay the unpaid principal amount of the Loan, plus interest
thereon, as follows:
(i) On the last Business Day of the first full three
(3) month period after the Conversion Date, and continuing
regularly and quarterly thereafter on the last Business Day of
each and every three (3) month period until September 30, 2006
(the "Term Loan Maturity Date"), quarterly payments of
principal shall be made as set forth in Exhibit A, together
with all accrued and unpaid interest on the Term Loan at the
Term Loan Rate; and
(ii) A final installment in the amount of all
outstanding principal, plus all accrued and unpaid interest
thereon at the Term Loan Rate and any other unpaid amounts due
and payable to the Lender, shall be due and payable on the
Term Loan Maturity Date.
4. Prepayment. Borrower shall have the right at any time or from time
to time to prepay the outstanding principal balance of the Note existing at such
time, or any portion thereof, subject to and in accordance with the terms and
provisions of the Note and the Loan Agreement.
5. Lien Continuation. The liens granted in the Deed of Trust are hereby
ratified and confirmed as continuing to secure the payment of the Note and the
other indebtedness (as such term is defined in the Deed of Trust). Nothing
herein shall in any manner diminish, impair, or extinguish the indebtedness
evidenced by the Note or the liens securing the indebtedness evidenced by the
Note. The liens granted in the Deed of Trust are not waived. Borrower ratifies
and acknowledges the indebtedness evidenced by the Note is just, due, owing, and
unpaid, as stated herein, and is subject
-2-
<PAGE>
to no offsets, deductions, credits, charges, or claims of whatsoever kind or
character, and further agrees that all offsets, credits, charges, and claims of
whatsoever kind or character are fully settled and satisfied.
6. Title Insurance. At the time of the execution of this Agreement,
Borrower shall: (a) cause Lawyers Title Insurance Company ("Title Insurer"), to
issue and deliver to Lender an endorsement to the Mortgagee Policy of Title
Insurance (the "Policy") previously issued to Lender by the Title Insurer and
now insuring the lien of the Deed of Trust, in form and substance acceptable to
Lender, agreeing that the Policy remains in effect and is not impaired or
limited by this Agreement, extending the Title Insurer's liability by reference
to the extended maturity date of the Note (if the maturity date of the Note is
extended by this Agreement), and confirming and stating that indefeasible fee
simple title to the Property remains solely as provided in the Policy; and (b)
pay the costs of the endorsement to the Policy and the filing and recording of
this Agreement and all other out-of-pocket costs and expenses incurred by Lender
in connection with the preparation, negotiation, and delivery of this Agreement
(including attorneys' fees).
7. Limitations on Interest. (a) It is the intention of Lender and
Borrower to confirm strictly to any applicable usury laws. Accordingly, if the
transactions contemplated hereby would be usurious under any applicable, then,
in that event, notwithstanding anything to the contrary in the Note, the Deed of
Trust, the Loan Agreement, or any other agreement entered into in connection
with or as security for or guaranteeing the Deed of Trust, or the Note, it is
agreed as follows: (i) the aggregate of all consideration which constitutes
interest under applicable law that is contracted for, taken, reserved, charged
or received by Lender under the Note, the Deed of Trust, the Loan Agreement, or
under any other agreement entered into in connection with or as security for or
guaranteeing Deed of Trust or the Note shall under no circumstances exceed the
Maximum Rate (as defined in the Note and hereafter used), and any excess shall
be cancelled automatically and, if theretofore paid, shall, at the option of
Lender, be credited by Lender on the principal amount of any indebtedness owed
to Lender by Borrower or refunded by Lender to Borrower, and (ii) in the event
that the maturity of the Note is accelerated or in the event of any required or
permitted prepayment, then such consideration that constitutes interest under
law applicable to Lender may never include more than the Maximum Rate and excess
interest, if any, provided for in the Note, the Deed of Trust, the Loan
Agreement, or otherwise shall be cancelled automatically as of the date of such
acceleration or prepayment and, if theretofore paid, shall, at the option of
Lender, be credited by Lender on the principal amount of any indebtedness owed
to Lender by Borrower or refunded by Lender to Borrower.
(b) Notwithstanding anything herein the contrary, in no event
will interest payable to Lender exceed the maximum amount permitted by the law
applicable to Lender (after taking into account all charges payable to Lender
which constitute interest under such applicable law), but if any amount referred
to in the
-3-
<PAGE>
Note which would be payable to Lender but for the applicability of usury or
other laws limiting the consideration payable to Lender is not paid to Lender as
a result of the applicability of such laws, then interest on the outstanding
principal balance of the Note payable to Lender shall, to the extent permitted
by the law, accrue at the maximum rate of interest permitted by applicable law
(after taking into account all charges payable to Lender which constitute
interest under applicable laws) until the total amount received by Lender equals
the amount it would have received had no such laws been applicable.
8. Preservation. Except as specifically amended and modified by the
terms of this Agreement, all of the terms, provisions, covenants, warranties,
and agreements contained in the Note, the Deed of Trust, and the Loan Agreement
shall remain in full force and effect. Capitalized terms not defined herein
shall have the meanings assigned to them in the Loan Agreement.
9. Counterparts. This Agreement may be executed in two or more
counterparts, and it shall not be necessary that any one of the counterparts be
executed by all of the parties hereto. Each fully or partially executed
counterpart shall be deemed an original, but all such counterparts taken
together shall constitute but one and the same instrument.
10. Joinder by Guarantor. HydroChem International, Inc. joins in the
execution and delivery of this Agreement to evidence his agreement to the terms
and provisions hereof and that its Guaranty dated July 17, 1998, remains in full
force and effect and is not in any way limited, impaired, or discounted as a
result of the delivery of this Agreement by Borrower.
11. NO ORAL AGREEMENTS. THIS WRITTEN AGREEMENT AND THE OTHER WRITTEN
LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CON TEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
EXECUTED as of the date first above written.
LENDER:
BANK ONE TEXAS,
NATIONAL ASSOCIATION
By: /s/ John Elam, Jr.
---------------------------
John E. Elam, Jr.
Vice President
-4-
<PAGE>
BORROWER:
HYDROCHEM INDUSTRIAL SERVICES, INC.,
a Delaware corporation
By: /s/ Selby F. Litttle, III
-----------------------------
Selby F. Little, III,
Executive Vice President and
Chief Financial Officer
JOINED IN FOR THE PURPOSES DESCRIBED
ABOVE AND FOR PURPOSES OF SECTION
26.02 OF THE TEXAS BUSINESS AND
COMMERCE CODE:
HYDROCHEM INTERNATIONAL, INC.
By: /s/ Selby F. Little, III
----------------------------
Selby F. Little, III,
Executive Vice President and
Chief Financial Officer
THE STATE OF TEXAS
COUNTY OF HARRIS
This instrument was acknowledged before me, on February 24, 1999, by John
E. Elam, Jr., Vice President of Bank One, Texas, a national banking association,
on behalf of said institution.
/s/ Mary Dase
-------------
Notary Public Signature
My Commission Expires: Mary Dase
10/6/2002 --------------
Printed Name of Notary Public
-5-
<PAGE>
THE STATE OF TEXAS
COUNTY OF HARRIS
This instrument was acknowledged before me, on February 23, 1999, by
Selby F. Little, III, in his capacity as Executive Vice President and Chief
Financial Officer of HYDROCHEM INDUSTRIAL SERVICES, INC., a Delaware
corporation, on behalf of said corporation.
/s/ Carol Schanafelt
--------------------
Notary Public Signature
My Commission Expires: Carol Schanafelt
--------------------
1/27/2002 Printed Name of Notary Public
THE STATE OF TEXAS
COUNTY OF HARRIS
This instrument was acknowledged before me, on February 23, 1999, by
Selby F. Little, III, in his capacity as Executive Vice President and Chief
Financial Officer of HYDROCHEM INTERNATIONAL, INC., a Delaware corporation, on
behalf of said corporation.
/s/ Carol Schanafelt
--------------------
Notary Public Signature
My Commission Expires: Carol Schanafelt
--------------------
1/27/2002 Printed Name of Notary Public
-6-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Dec-31-1998
<CASH> 33,775
<SECURITIES> 0
<RECEIVABLES> 23,941
<ALLOWANCES> 0
<INVENTORY> 3,902
<CURRENT-ASSETS> 65,042
<PP&E> 81,459
<DEPRECIATION> 33,322
<TOTAL-ASSETS> 156,425
<CURRENT-LIABILITIES> 18,287
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 13,516
<TOTAL-LIABILITY-AND-EQUITY> 156,425
<SALES> 168,770
<TOTAL-REVENUES> 168,770
<CGS> 105,171
<TOTAL-COSTS> 105,171
<OTHER-EXPENSES> 56,320
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,470
<INCOME-PRETAX> (3,191)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,191)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,191)
<EPS-PRIMARY> 0.000
<EPS-DILUTED> 0.000
</TABLE>
