United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of earliest event reported January 5, 1999
Date of Report March 22, 1999
HYDROCHEM INDUSTRIAL SERVICES, INC. (*)
(Exact name of registrant as specified in its charter)
Delaware 333-34323 75-2503906
(State or other jurisdiction of (Commission File (I.R.S. Employer
incorporation or organization) Number) 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)
- --------------------------------------------------------------------------------
* HydroChem International, Inc., a direct and 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. 1
<PAGE>
EXPLANATORY NOTE
This Form 8-K/A Current Report of HydroChem Industrial Services, Inc. and
HydroChem International, Inc. (separately or collectively, the "Registrant" or
"HCIS") amends the Registrant's Form 8-K Current Report dated January 20, 1999
regarding the acquisition of substantially all of the assets of Valley Systems,
Inc. and Valley Systems of Ohio, Inc. (collectively, the "Company" or "Valley").
Item 7. Financial Statements and Exhibits.
TABLE OF CONTENTS
(a) Financial statements of the business acquired
Report of Independent Accountants......................... 3
Consolidated Balance Sheets as of June 30, 1998
and September 30, 1998.................................. 4
Consolidated Statements of Income for the year ended
June 30, 1998 and the three months
ended September 30, 1998................................ 5
Consolidated Statements of Stockholders' Equity for the
year ended June 30, 1998 and the three months
ended September 30, 1998................................ 6
Consolidated Statements of Cash Flow for the year ended
June 30, 1998 and the three months
ended September 30, 1998................................ 7
Notes to Consolidated Financial Statements-June 30, 1998.. 8
Notes to Consolidated Financial Statements-September 30, 1998..16
(b) Pro forma financial information
Explanatory Note........................................... 17
Unaudited Pro Forma Balance Sheet as of September 30, 1998... 18
Unaudited Pro Forma Consolidated Statement of Operations
for the year ended December 31, 1997....................... 19
Unaudited Pro Forma Consolidated Statement of Operations
for the nine months ended September 30, 1998.............. 20
Notes to Unaudited Pro Forma Consolidated Financial Statements.21
(c) Exhibits
None
2
<PAGE>
Report of Independent Accountants
To the Stockholders of
Valley Systems, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Valley
Systems, Inc. and subsidiaries (the "Company") at June 30, 1998, and the results
of their operations and their cash flows for the year ended June 30, 1998, in
conformity with generally accepted accounting principles. 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 audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
Pricewaterhouse Coopers LLP
Cleveland, Ohio
August 27, 1998, except for Note 13, as to which the date is September 9, 1998
3
<PAGE>
VALLEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
June 30, 1998
1998 (Unaudited)
---- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash $ 207,492 $ 48,916
Accounts receivable 5,740,394 7,163,059
Prepaid supplies 522,992 550,833
Prepaid expenses 155,439 265,064
------------ ------------
Total current assets 6,626,317 8,027,872
Property and equipment, net 8,896,650 9,794,261
Intangible assets 411,000 376,750
------------ ------------
Total assets $ 15,933,967 $ 18,198,883
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 726,054 $ 722,304
Accrued expenses 1,610,470 1,756,807
Current portion of long-term debt 659,257 845,425
------------ ------------
Total current liabilities 2,995,781 3,324,536
Long-term debt 7,584,593 8,589,720
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.10 par value; authorized
2,000,000 shares, issued and outstanding
55,000 shares 5,500 5,500
Common stock, $.01 par value; authorized
12,000,000 shares, issued and outstanding
8,512,073 shares 85,121 85,121
Paid-in capital 26,786,040 26,786,040
Accumulated deficit (20,840,060) (19,909,026)
Treasury stock, at cost, 605,456 shares (683,008) (683,008)
------------ ------------
5,353,593 6,284,627
----------- ----------
Total liabilities and stockholders'
equity $ 15,933,967 $18,198,883
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
VALLEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
Year Ended September 30, 1998
June 30, 1998 (Unaudited)
------------- -----------
<S> <C> <C>
Sales $ 24,431,385 $ 7,597,337
Cost of sales 15,391,490 4,643,927
---------- ----------
Gross profit 9,039,895 2,953,410
Selling, general and
administrative expenses 7,144,739 1,785,594
Interest expense 593,127 140,532
---------- ----------
Income from operations
before income taxes 1,302,029 1,027,284
Income taxes - -
---------- ----------
Net income $ 1,302,029 $ 1,027,284
========== ==========
Earnings per share:
Net earnings per common
share - basic $ .12 $ .12
========== ==========
Net earnings per common share -
assuming dilution $ .12 $ .12
========== ==========
Weighted average shares used in
computation - basic and diluted 7,906,617 7,906,617
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
VALLEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Year Ended June 30, 1998 and
the Three Months Ended September 30, 1998
<TABLE>
<CAPTION>
Preferred Common Paid-In Accumulated Treasury
Stock (1) Stock (2) Capital Deficit Stock Total
--------- --------- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Balance,
July 1, 1997 $5,500 $85,121 $26,786,040 $(21,757,089) $(683,008) $4,436,564
Net income 1,302,029 1,302,029
Series C preferred
dividends (385,000) (385,000)
------ -------- ----------- ------------- --------- ---------
Balance,
June 30, 1998 5,500 85,121 26,786,040 (20,840,060) (683,008) 5,353,593
Net income 1,027,284 1,027,284
Series C preferred
dividends (96,250) (96,250)
------ -------- ----------- ------------- --------- ---------
Balance,
September 30, 1998
(unaudited) $5,500 $85,121 $26,786,040 $(19,909,026 $(683,008) $6,284,627
===== ====== ========== =========== ======== =========
</TABLE>
(1)Share amounts are equivalent to ten times dollar amounts
(2)Share amounts are equivalent to one hundred times dollar amounts
The accompanying notes are an integral part of these consolidated
financial statements.
6
<PAGE>
VALLEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
Year Ended September 30, 1998
June 30, 1998 (Unaudited)
------------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,302,029 $ 1,027,284
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 2,758,868 720,122
Gain on disposition of property
and equipment (66,083) (600)
(Increase) decrease in assets:
Accounts receivable (102,044) (1,422,665)
Prepaid supplies (53,153) (27,841)
Prepaid expenses 5,333 (109,625)
Increase (decrease) in liabilities:
Accounts Payable (245,557) (3,750)
Accrued expenses 181,636 146,337
---------- ----------
Cash provided by operating activities 3,781,029 329,262
---------- ----------
Cash flows from investing activities:
Additions to property and equipment (2,295,049) (1,583,483)
Proceeds from dispositions of property
and equipment 240,092 600
----------- -----------
Cash used by investing activities (2,054,957) (1,582,883)
---------- ----------
Cash flows from financing activities:
Net (payments) borrowings from revolving
line of credit (1,467,355) 179,618
Payments of other long-term debt (252,394) (76,726)
Additional borrowings of long-term debt 386,076 1,088,403
Payments of preferred stock dividends (385,000) (96,250)
----------- -----------
Cash (used in) provided by financing
activities (1,718,673) 1,095,045
---------- ----------
Increase (decrease) in cash 7,399 (158,576)
Cash at beginning of year 200,093 207,492
----------- ----------
Cash at end of period $ 207,492 $ 48,916
=========== ===========
Cash paid for:
Interest $ 589,340
Non-cash investing activities:
Property and equipment acquired with
capital leases $ 1,846,474
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
7
<PAGE>
VALLEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
1. Description of Business:
The Company is engaged in the business of providing specialized
industrial cleaning and other services to divisions and facilities of
Fortune 500 companies and other substantial businesses engaged in heavy
industry. Such services generally involve the removal of industrial
grime, deposits, wastes, encrustations and coatings from equipment and
facilities. The Company's principal customers are in the chemical,
plastics, power generation, petroleum refining and primary metals
businesses. The Company's industrial cleaning methods include, in
addition to the use of waterblasting, vacuuming and other more
conventional procedures, the application of ultra-high pressure ("UHP")
waterjetting methods.
2. Summary of Significant Accounting Policies:
Principles of Consolidation: The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries.
All material intercompany transactions have been eliminated in the
accompanying consolidated financial statements.
Revenue Recognition: Sales and the related cost of sales for services
provided are recorded as the services are performed.
Accounts Receivable: The Company's customers are located primarily
throughout the United States. The Company monitors potential credit
losses and such losses have been within management's expectations.
Accounts receivable which become uncollectible are written off against
operations at the time they are deemed to be worthless. The total
uncollectible accounts charged to operations for the year ended June 30,
1998 was $14,000. The allowance for doubtful accounts was $125,000 at
June 30, 1998.
.
Prepaid Supplies: Prepaid supplies consist of items to be used in
operations, and are stated at the lower of cost (first in, first out) or
market.
Property and Equipment: Property and equipment are stated at cost. The
Company uses the straight-line method of depreciation for financial
reporting purposes. For income tax purposes, depreciation is computed by
either the accelerated or modified cost recovery methods. The estimated
useful lives for financial reporting purposes are as follows:
Building and leasehold improvements 7 to 20 years
Automobiles and trucks 3 to 7 years
Equipment 3 to 7 years
The cost and related accumulated depreciation of assets retired, sold or
otherwise disposed of are removed from the accounts and any gain or loss
is reflected in the current year's results of operations.
Income Taxes: Deferred income taxes are provided to reflect the tax
effects of temporary differences between financial and tax reporting,
principally related to depreciation.
8
<PAGE>
VALLEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
Intangible Assets: Intangible assets include the cost of certain patents,
technology, trademarks, and a non-compete agreement. These items are
being amortized to operations on a straight-line basis over 10 years, the
period in which the economic benefits are estimated to be realized.
Accumulated amortization amounted to $959,000 as of June 30, 1998.
Income (Loss) Per Common Share: In February 1997 the FASB issued
Statement No. 128, "Earnings Per Share" ("FAS No. 128"). FAS No. 128
specifies the computation, presentation, and disclosure requirements for
earnings per share ("EPS") for entities with publicly held common stock
or potential common stock. It replaces the presentations of primary EPS
with the presentation of basic EPS, and replaces fully diluted EPS with
diluted EPS. It also requires dual presentation of basic and diluted EPS
on the face of the income statement for all entities with complex capital
structures, and requires a reconciliation of the basic EPS computation to
the diluted EPS calculation. FAS No. 128 is effective for financial
statements for periods ending after December 15, 1997.
Earnings per share of common stock for the period ended June 30, 1998
have been calculated according to the guidelines of FAS No. 128.
Basic earnings per common share are computed by dividing net income less
preferred stock dividend requirements ($385,000 per year) for the period
by the weighted average number of shares of common stock outstanding for
the period. Diluted earnings per common share do not vary from basic
earnings per share for any of the periods presented because there were no
dilutive potential shares of common stock outstanding. The dilutive
effect of outstanding potential shares of common stock is computed using
the treasury stock method.
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 of assets and
liabilities and disclosure of contingent assets and liabilities at the
dates of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results may differ from
those estimates.
Fair Value of Financial Instruments: The carrying values of accounts
receivable and short-term borrowings represent reasonable estimates of
the fair values of these instruments due to their short maturities. The
fair value of long-term debt is estimated by discounting the future cash
flows using rates currently available to the Company for debt with
similar terms and remaining maturities. The estimated fair values of the
long-term debt at June 30, 1998 approximated its carrying values.
New Accounting Pronouncements: During 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 established
standards for reporting and display of comprehensive income and its
components. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997 and is not expected to have a significant impact on the
consolidated financial statements of the Company.
9
<PAGE>
VALLEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 will be
effective for the fiscal year ending June 30, 1999. As the adoption of SFAS
No. 131 requires only additional disclosures, there will be no effect on
the Company's consolidated financial position or results of operations or
cash flows.
In March 1998 the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," which
establishes new accounting and reporting standards for the costs of
computer software developed or obtained for internal use. This statement
will be applied prospectively and is effective for financial statements for
fiscal years beginning after December 15, 1998. The impact of this new
standard is not expected to have a significant effect on the Company's
financial position or results of operations.
In April 1998 the AICPA issued SOP 98-05, "Reporting on the Costs of
Start-Up Activities," which requires costs of start-up activities be
expensed as incurred. This statement is effective for financial statements
for fiscal years beginning after December 15, 1998. The statement requires
capitalized costs related to start-up activities to be expenses as a
cumulative effect of a change in accounting principle when the statement is
adopted. The impact of this new standard is not expected to have a
significant effect on the Company's financial position or results of
operations.
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement is effective for fiscal
years beginning after June 15, 1999. The Company plans to adopt this
statement at the beginning of fiscal 2000. This statement is not expected
to have a material impact on the Company's financial position or results of
operations.
3. Property and Equipment:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Land $ 420,683
Building and leasehold improvements 1,032,752
Automobiles and trucks 8,600,072
Equipment 8,637,151
Equipment in progress and parts 199,538
------------
18,890,196
Less accumulated depreciation and amortization 9,993,546
---------
$ 8,896,650
=============
</TABLE>
Included in property and equipment are assets under capital leases of
$3,618,000 with related accumulated depreciation of $1,230,000 as of June
30, 1998.
10
<PAGE>
VALLEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
The Company incurred repairs and maintenance costs on property and
equipment of approximately $1,350,000 for the year ended June 30, 1998.
4. Accrued Expenses:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Accrued payroll and compensation $ 927,000
Accrued payroll taxes, workers' compensation
insurance and other employee benefits 373,000
Accrued preferred stock dividends 96,250
Other accrued liabilities 214,220
-----------
$ 1,610,470
</TABLE>
5. Long-Term Debt:
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
<S> <C>
Capitalized leases (A) $ 2,114,640
Revolving loan - bank (C) 5,742,543
Mortgage loan - bank (D) 386,667
-----------
8,243,850
Less: current portion of long-term debt 659,257
-----------
$ 7,584,593
</TABLE>
A. Capitalized leases are due in monthly installments ranging from
$4,000 to $15,000 and bear interest of 8.5%.
B. The Company has a loan agreement with its majority stockholder,
which expires in 2000 and provides a total credit facility to the
Company as follows:
Through July 1999 $9,000,000
August 1999 through July 2000 $8,000,000
This facility may be utilized by borrowings at .5% over the prime
rate (payable quarterly) or, at the Company's option, by having the
stockholder provide bank letters of credit which the Company can
utilize as collateral for other obligations. The Company reimburses
the stockholder for the actual cost of the letters of credit. This
loan agreement is collateralized by essentially all assets of the
Company, and prohibits payments of common stock dividends. At June
30, 1998, there are no loans outstanding under this facility, and
the stockholder has issued $8,280,000 in bank letters of credit,
leaving $720,000 of the facility available to the Company.
11
<PAGE>
VALLEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
C. This obligation represents borrowings under a $7,500,000 revolving
loan agreement with a bank. The loan bears interest at 1.7% below
the prime rate (6.80% at June 30, 1998), payable monthly, and is
collateralized by a bank letter of credit provided by the Company's
majority shareholder under the loan agreement described in B.
above. This revolving loan agreement decreases to $6,500,000 in
July 1999 and expires July 2000.
D. Mortgage loan payable in monthly installments of $2,778 plus
interest on the outstanding balance at the prime rate (8.5% at June
30, 1998), due September 2007. The Company's headquarters facility
is pledged as security for this loan.
The aggregate maturities on the aforementioned debt are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year Ended June 30
1999 $ 659,000
2000 369,000
2001 6,143,000
2002 434,000
2003 428,000
Thereafter 210,850
$ 8,243,850
</TABLE>
6. Income Taxes:
The income tax provision for the year ended June 30, 1998 is comprised of
the following amounts:
<TABLE>
<CAPTION>
<S> <C>
Current:
Federal $ 0
=======
Statutory rate 34%
Operating loss utilized (34)
Operating loss not utilizable
-------
Effective rate -%
=======
</TABLE>
Deferred federal income taxes reflect the impact for financial statement
reporting purposes of temporary differences between the financial
statement and tax basis of assets and liabilities. At June 30, 1998, the
components of the net deferred tax assets and liabilities were as
follows:
12
<PAGE>
VALLEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 50,000
Vacation accrual 144,000
Net operating loss carryforwards 7,654,878
Other 164,912
-----------
8,013,790
Deferred tax liabilities:
Basis difference in fixed assets (596,930)
-----------
Net deferred tax assets 7,416,860
Valuation allowance (7,416,860)
----------
Net deferred taxes recognized $ -0-
</TABLE>
The Company has approximately $19,100,000 of net operating loss
carryforwards for future years, which cannot be utilized to create tax
refunds. Such amounts begin to expire in the year 2005.
7. Commitments:
The Company has various capital and operating leases in effect for
equipment, vehicles and facilities with initial terms ranging from one
month to five years with renewal options generally being available.
Minimum commitments under all capital and operating leases at June 30,
1998 are as follows:
<TABLE>
<CAPTION>
Year: Capital Operating
----- ------- ---------
<S> <C> <C>
1999 $ 755,504 $ 170,000
2000 454,699 142,000
2001 454,699 47,000
2002 454,699 24,000
2003 412,202 2,000
----------- -----------
Total minimum lease payments 2,531,803 $ 385,000
=========
Less amount representing interest 417,163
-----------
Total present value of capital
obligation 2,114,640
Less current portion 617,035
-----------
Long-term obligation under capital
leases $ 1,497,605
=========
</TABLE>
Operating lease expense amounted to $379,000 for the year ended June 30,
1998.
8. Litigation:
The Company is involved in various litigation arising in the ordinary
course of business. Management believes that the ultimate resolution of
such litigation will not have a material effect on the Company's
operations or financial position.
13
<PAGE>
VALLEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
9. Major Customers:
The following table shows the percentage of total sales made to major
customers for the year ended June 30, 1998:
Customer A 9%
Customer B 7%
Customer C 7%
10. Stockholders' Equity:
. In September 1994, the Company issued 55,000 shares of Series C Preferred
Stock to its majority stockholder, which then transferred them to an
affiliate. Each share of the Series C Preferred Stock is entitled to a
cumulative annual dividend of $7.00, payable quarterly. The proceeds from
the sale of the preferred shares totaled $5.5 million; $3.0 million in
the conversion of debt for equity and $2.5 million of cash. In the event
the Company is merged or consolidated such that the majority shareholder
no longer holds a controlling interest in the surviving or resulting
entity, the preferred stock must be redeemed and retired for $5.5 million
plus any accrued and unpaid cumulative dividends.
11. Stock Options and Warrants:
A. In 1991, the Company adopted a stock option plan. Up to 400,000
shares of common stock may be issued under the plan. Outstanding
options on June 30, 1998 were as follows:
<TABLE>
<CAPTION>
Shares
------
Option Price Total Exercisable Expiration Date
------------ ----- ----------- ---------------
<S> <C> <C> <C>
$3.00 10,000 10,000 2001
$1.50 22,080 22,080 2001
$1.50 40,500 40,500 2002
$1.50 217,000 130,200 2004
$1.50 37,700 7,540 2006
$1.50 20,000 4,000 2007
-------- ---------
347,280 214,320
======= =======
</TABLE>
B. In October 1994, the Company issued stock options to its directors
to purchase a total of 50,000 shares of its common stock at $1.50
per share. These options can be exercised up to 10,000 shares on or
after each of the first five anniversary dates, and expire in
October 2004. These options are not part of the stock option plan
above. These options can be exercised up to 20% of the shares on or
after each of the first five anniversary dates and expire in 2004.
C. In 1998, options to purchase 46,700 shares of common stock were
forfeited.
D. The Company has elected to adopt the "disclosure-only" provisions
of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock Based Compensation" ("SFAS No. 123"), with no
compensation cost recognized for options granted at or above market
value. For SFAS No. 123, the fair value of each
14
<PAGE>
VALLEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
option granted was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions
for 1998: (a) risk-free interest rates of 6.40% to 7.04%; (b) no
dividend yield; (c) expected term of 8 years; and (d) volatility of
95%.
If the Company had elected to recognize the compensation cost of
its stock option plan based on the fair value of the awards under
that plan in accordance with SFAS No. 123, net income would have
increased to $1,383,952 ($.13 per common share, assuming dilution)
for the year ended June 30, 1998.
E. At June 30, 1998, warrants to purchase shares of the Company's
common stock were outstanding as follows:
<TABLE>
<CAPTION>
Warrant
Price Shares Expiration Date
----- ------ ---------------
<S> <C> <C>
$ 3.09 2,314,000 May 2000
$ 15.00 100,000 September 2001
</TABLE>
12. Employee Benefit Plan:
In 1991, the Company adopted a 401(k) plan that covers substantially all
employees. The plan is a discretionary plan in that the Company may or
may not make contributions to the plan. The Company did not contribute to
the plan during the year ended June 30, 1998.
13. Subsequent Event:
On September 9, 1998 the Company entered into an Asset Purchase Agreement
whereby essentially all assets of the Company will be sold to, and
substantially all liabilities of the Company will be assumed by,
HydroChem Industrial Services, Inc. The purchase price for these assets
and liabilities is $29.8 million, adjusted for increases or decreases in
net assets after June 30, 1998. This transaction is expected to close in
the second quarter of the fiscal year ended June 30, 1999.
15
<PAGE>
VALLEY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
1. Basis of Presentation:
Reference is made to the annual report on Form 10-K dated September 25,
1998 for the years ended June 30, 1998.
The financial statements for the period ended September 30, 1998 are
unaudited and include all adjustments which, in the opinion of
management, are necessary for a fair statement of the results of
operations for the periods then ended. All such adjustments are of a
normal recurring nature. The results of the Company's operations for any
interim period are not necessarily indicative of the results of the
Company's operations for a full fiscal year.
2. Income Taxes:
The provisions for income taxes for the periods presented vary from the
customary relationship with pre-tax income due to utilization of net
operating loss carryforwards.
3. Contingencies:
The Company is involved in various litigation arising in the ordinary
course of business. Management believes that the ultimate resolution of
such litigation will not have a material effect on the Company's
operations, cash flows or financial position.
4. Income per Common Share:
Basic earnings per common share are computed by dividing net income less
preferred stock dividend requirements ($96,250 per quarter) for the
period by the weighted average number of shares of common stock
outstanding for the period. Diluted earnings per common share do not vary
from basic earnings per share for any of the periods presented because
there were no dilutive potential shares of common stock outstanding. The
dilutive effect of outstanding potential shares of common stock is
computed using the treasury stock method.
16
<PAGE>
HYDROCHEM INDUSTRIAL SERVICES, INC.
AND SUBSIDIARY
PRO FORMA FINANCIAL INFORMATION
EXPLANATORY NOTE
On January 5, 1999, the Registrant acquired substantially all of the
assets and assumed certain liabilities of Valley. The assets acquired consisted
primarily of (i) accounts receivable, (ii) property, plant and equipment, (iii)
intangibles, and (iv) other operating assets. The 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 Registrant assumed approximately $2.5 million of
Valley's capital lease obligations and paid $5.3 million in cash at closing to
retire Valley's bank debt. The source of funds for the purchase price and
retirement of Valley's bank debt was a combination of cash on hand and
borrowings under the Registrant's credit facility. The acquisition has been
accounted for using the purchase method of accounting.
The unaudited pro forma financial information being presented consists of
(i) an unaudited pro forma balance sheet as of September 30, 1998, (ii) an
unaudited pro forma consolidated statement of operations for the year ended
December 31, 1997, and (iii) an unaudited pro forma consolidated statement of
operations for the nine months ended September 30, 1998. The following unaudited
Pro Forma Consolidated Financial Statements are derived from the Registrant's
historical unaudited Consolidated Financial Statements as of and for the nine
months ended September 30, 1998, the Registrant's Consolidated Statement of
Operations for the year ended December 31, 1997, and Valley's audited and
unaudited historical financial statements, which have been conformed to be
consistent with the Registrant's fiscal year.
17
<PAGE>
HYDROCHEM INDUSTRIAL SERVICES, INC.
AND SUBSIDIARY
UNAUDITED PRO FORMA BALANCE SHEET
(in thousands)
September 30, 1998
<TABLE>
<CAPTION>
HISTORICAL
Pro Forma
HCIS Valley Combined Adjustments Pro Forma
<S> <C> <C> <C> <C> <C>
---- ------ -------- ----------- ---------
Current assets:
Cash and cash
equivalents $ 29,358 $ 49 $ 29,407 $ (29,241)(a)$ 166
Restricted cash 273 - 273 - 273
Receivables, net 25,435 7,163 32,598 - 32,598
Inventories 4,514 - 4,514 - 4,514
Prepaid expenses and
other current assets 2,637 816 3,453 - 3,453
Income taxes receivable 312 - 312 - 312
Deferred income taxes 1,620 - 1,620 - 1,620
--------- ---------- --------- ---------- -------
Total current assets 64,149 8,028 72,177 (29,241) 42,936
Property and equipment,
at cost 77,886 20,473 98,359 - 98,359
Accumulated depreciation(31,184) (10,679) (41,863) - (41,863)
-------- -------- -------- ---------- -------
46,702 9,794 56,496 - 56,496
Intangible assets, net 43,568 377 43,945 26,665 (b) 70,610
-------- --------- -------- ---------- -------
Total assets $154,419 $18,199 $172,618 $ (2,576) $170,042
======= ======== ======= ======== =======
Current liabilities:
Accounts payable $ 5,975 $ 722 $ 6,697 $ - $ 6,697
Accrued liabilities 9,942 1,757 11,699 1,500 (c) 13,199
Current portion of
long-term debt - 845 845 (33)(d) 812
-------- -------- --------- -------- -------
Total current
liabilities 15,917 3,324 19,241 1,467 20,708
Long-term debt 115,014 8,590 123,604 (6,258)(d) 125,846
8,500 (e)
Deferred income taxes 8,291 - 8,291 - 8,291
Commitments and contingencies
Stockholder's equity:
Preferred stock - 6 6 (6)(f) -
Common stock 1 85 86 (85)(f) 1
Additional paid in
capital 16,558 26,786 43,344 (26,786)(f) 16,558
Retained deficit (1,362) (19,909) (21,271) 19,909 (f) (1,362)
Treasury stock - (683) (683) 683(f) -
-------- -------- -------- --------- --------
Total stockholder's
equity 15,197 6,285 21,482 (6,285) 15,197
------- -------- -------- -------- --------
Total liabilities and stockholder's
equity $154,419 $18,199 $172,618 (2,576) $170,042
========= ======== ======== ======= ========
</TABLE>
See accompanying notes.
18
<PAGE>
HYDROCHEM INDUSTRIAL SERVICES, INC.
AND SUBSIDIARY
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands)
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
HISTORICAL
----------
Pro Forma
HCIS Valley Combined Adjustments Pro Forma
---- ------ -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenue $160,604 $23,594 $184,198 $ - $184,198
Cost of revenue 95,585 12,149 107,734 (219)(g) 107,515
-------- ------- ------- -------- -------
Gross profit 65,019 11,445 76,464 219 76,683
Selling, general and
administrative expense 42,614 6,777 49,391 (110)(g) 48,905
(376)(h)
Depreciation 8.216 2,736 10,952 (252)(i) 10,700
--------- -------- -------- -------- --------
Operating income 14,189 1,932 16,121 957 17,078
Other expense:
Interest expense, net 8,518 595 9,113 2,470 (j) 11,583
Other expense, net 39 - 39 - 39
Amortization of
intangibles 1,531 137 1,668 945 (k) 2,613
--------- ------- --------- --------- --------
Income before taxes and
extraordinary loss 4,101 1,200 5,301 (2,458) 2,843
Income tax provision 2,282 - 2,282 (700)(l) 1,582
-------- ------- --------- --------- --------
Income before extraordinary
loss 1,819 1,200 3,019 (1,758) 1,261
Extraordinary loss on early
extinguishment of debt,
net of taxes 2,342 - 2,342 - 2,342
------- ------- --------- --------- --------
Net income (loss) $ (523) $ 1,200 $ 677 $(1,758) $ (1,081)
========= ======= ======== ======= =========
</TABLE>
See accompanying notes.
19
<PAGE>
HYDROCHEM INDUSTRIAL SERVICES, INC.
AND SUBSIDIARY
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands)
For the Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
HISTORICAL
----------
Pro Forma
HCIS Valley Combined Adjustments Pro Forma
---- ------ -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenue $126,464 $20,114 $146,578 $ - $146,578
Cost of revenue 78,702 10,517 89,219 (165)(g) 89,054
-------- ------- -------- -------- --------
Gross profit 47,762 9,597 57,359 165 57,524
Selling, general and
administrative expense 33,547 5,195 38,742 (82)(g) 38,366
(294)(h)
Depreciation 6.728 1,981 8,709 (189)(i) 8,520
-------- ------- --------- -------- ---------
Operating income 7,487 2,421 9,908 730 10,638
Other (income) expense:
Interest expense, net 7,742 424 8,166 1,282 (j) 9,448
Special charge 300 - 300 - 300
Other income, net (126) - (126) - (126)
Amortization of
intangibles 1,125 103 1,228 708(k) 1,936
-------- -------- --------- --------- ---------
Income (loss) before
taxes (1,554) 1,894 340 (1,260) (920)
Income tax provision
(benefit) (44) - (44) 18(l) (26)
-------- -------- --------- --------- ---------
Net income (loss) $ (1,510) $ 1,894 $ 384 $(1,278) $ (894)
========= ======== ========= ======== =========
</TABLE>
See accompanying notes.
20
<PAGE>
HYDROCHEM INDUSTRIAL SERVICE, INC.
AND SUBSIDIARY
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
1. Basis of Presentation
The unaudited pro forma consolidated balance sheet presents the financial
position of the Registrant assuming the transaction was consummated as of
September 30, 1998. The unaudited pro forma consolidated statement of
operations for the nine months ended September 30, 1998 and the year
ended December 31, 1997 assume the transaction was consummated on January
1, 1997. These statements were prepared by taking into consideration only
those adjustments that are directly attributable to the transaction and
known to have a continuing impact on operations as a result of the
acquisition.
The unaudited pro forma consolidated financial statements have been
prepared by the Registrant in accordance with generally accepted
accounting principles. All calculations have been made based upon certain
assumptions and adjustments described in these notes. Included in these
assumptions is the presumption that no additional selling, general and
administrative expense is required because the combined infrastructure
is deemed sufficient to support the additional activities anticipated
from the acquisition.
The unaudited pro forma consolidated financial statements were prepared
utilizing the accounting policies of the Registrant. The allocation of
the purchase price, which may be subject to certain adjustments as the
Registrant finalizes the allocation of the purchase price in accordance
with generally accepted accounting principles, is included in the
unaudited pro forma consolidated financial statements. The purchase price
has been allocated based upon the estimated fair value of the assets
acquired and liabilities assumed. The excess of the purchase price over
the estimated fair value of the net assets acquired at the acquisition
date has been recorded as goodwill.
Certain amounts from the Valley historical consolidated financial
statements have been reclassified to conform with the basis of
presentation used by the Registrant in preparing its consolidated
financial statements.
The unaudited pro forma consolidated financial statements should be read
in conjunction with the historical consolidated financial statements of
the Registrant and Valley. The Registrant's historical consolidated
financial statements are included in its Form 10-K for the year ended
December 31, 1997 and Form 10-Q for the quarter ended September 30, 1998.
Valley's historical consolidated financial statements are included in its
Form 10-K for the year ended June 30, 1998 and Form 10-Q for the quarter
ended September 30, 1998.
The unaudited pro forma consolidated financial statements do not purport
to be indicative of the financial position of the Registrant or the
results of operations that might have occurred had the acquisition been
concluded on January 1, 1997, nor are they necessarily indicative of
future results.
21
<PAGE>
HYDROCHEM INDUSTRIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
2. Acquisition of Valley
The acquisition of Valley assets has been accounted for using the
purchase method of accounting. The purchase price for the acquisition has
been calculated as follows:
<TABLE>
<CAPTION>
<S> <C>
Cash payment $ 29,800
Estimated purchase price adjustment 1,200
Estimated transaction costs 450
Acquisition accrual 1,500
-------
32,950
Fair value of net assets acquired 5,908
-------
Excess of purchase price over fair value $ 27,042
======
</TABLE>
The book value of net assets acquired was determined to approximate fair
value at the date of acquisition. Transaction costs consist primarily of
fees to accountants, attorneys and other outside service providers. The
acquisition accrual primarily represents severance costs for certain
Valley employees, expenses to be incurred in connection with conforming
Valley's equipment, signage, safety programs and marketing literature to
the Registrant's standards, and costs of transferring ownership of
acquired assets.
3. Pro Forma Adjustments
Adjustments have been made to the accompanying unaudited pro forma
consolidated balance sheet as of September 30, 1998 and the unaudited pro
forma consolidated statements of operations for the year ended December
31, 1997 and the nine months ended September 30, 1998 to reflect the
following:
(a) Cash effects of transaction:
<TABLE>
<CAPTION>
<S> <C>
Cash payment $ (29,800)
Estimated purchase price adjustment (1,200)
Estimated transaction costs (450)
Retirement of Valley long-term debt (6,291)
Registrant's line of credit borrowing 8,500
----------
$ (29,241)
</TABLE>
(b) Estimated excess of purchase price over net assets acquired.
(c) Acquisition accrual as discussed in Note 2.
(d) Retirement of Valley long-term debt.
(e) Line of credit borrowings by Registrant to finance the transaction.
(f) Elimination of Valley stockholders' equity.
(g) Reduction in cost of Valley property and casualty insurance
programs, and increase in cost of group health insurance to
provide benefits for Valley employees consistent with those
provided to the Registrant's employees.
22
<PAGE>
HYDROCHEM INDUSTRIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
(h) Compensation, benefits and other directly associated costs related to
terminated Valley employees.
(i) Change in Valley depreciable lives to be consistent with those of
Registrant.
(j) Incremental interest expense and reduction of interest income to
reflect funding of the transaction.
(k) Elimination of Valley amortization of intangibles and inclusion of
amortization of goodwill related to the transaction over a period
of 25 years.
(l) Adjustment of income tax provision to reflect Registrant's historical
effective tax rate.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HYDROCHEM INDUSTRIAL SERVICES, INC.
Date: March 22, 1999 By: /s/ Selby F. Little, III
Selby F. Little, III, Executive Vice
President and Chief Financial Officer
HYDROCHEM INTERNATIONAL, INC.
Date: March 22, 1999 By: /s/ Selby F. Little, III
Selby F. Little, III, Executive Vice
President and Chief Financial Officer
24
<PAGE>
