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, 1999
( ) 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 29, 2000 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..................................... 11
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............... 40
Part III.
Item 10. Directors and Executive Officers of the Registrant..... 40
Item 11. Executive Compensation................................. 42
Item 12. Security Ownership of Certain Beneficial
Owners and Management................................ 44
Item 13. Certain Relationships and Related Transactions......... 46
Part IV.
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K.............................. 46
Signatures................................................................ 50
Exhibit Index............................................................. 52
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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. 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 2000.
Part I.
Item 1. BUSINESS
General
HydroChem Industrial Services, Inc. ("HydroChem"), was formed in 1993 for
the purpose of combining, 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 1995,
HydroChem acquired the industrial cleaning business of the Halliburton
Industrial Services division ("HIS") of Brown & Root Industrial Services, Inc.
HIS had been operating since 1962.
Effective January 1, 1999, HydroChem acquired substantially all of
the assets and assumed certain liabilities of Valley Systems, Inc. and
Valley Systems of Ohio, Inc., (collectively "Valley"). Valley had been operating
since 1973. On November 19, 1999, HydroChem acquired all of the issued and
outstanding shares of capital stock of Landry Service Co., Inc. ("LANSCO").
LANSCO had been operating since 1984. (See "Business Strategy", "Management's
Discussion and Analysis of Financial Condition and Results of Operations", and
Note 15 of Notes to Consolidated Financial Statements).
HydroChem generally conducts business outside the United States through
its wholly owned subsidiary, HydroChem International, Inc. ("International").
HydroChem and its subsidiaries, including International and, since November 19,
1999, LANSCO, 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 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, steel mills
and aluminum plants. Services provided include high-pressure and ultra-high
pressure ("UHP") water cleaning ("hydroblasting"), chemical cleaning, industrial
vacuuming, tank cleaning, mechanical, 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, 1999, the Company provided services to approximately 1,200 customers at
approximately 2,000 customer sites from 85 operating locations (including both
branch and satellite locations) in the United States, and international
locations in Puerto Rico and Singapore.
In 1999, 55.1% of the Company's revenue was derived from its 20 largest
customers, 17 of which are Fortune 500/Global 1000 companies or their
affiliates, and 67.2% was derived from its 40 largest customers, 28 of which
are Fortune 500/Global 1000 companies or their affiliates.
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The Company's revenue by industry is set forth in the following table (in
thousands):
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<CAPTION>
Year ended December 31,
--------------------------------------------------
1997 % 1998 % 1999 %
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
Petrochemical......... $ 77,659 48.4% $ 84,600 50.1% $ 97,834 51.0%
Oil Refining.......... 32,501 20.2 34,245 20.3 32,987 17.2
Electrical utility..... 16,881 10.5 16,779 9.9 20,305 10.6
Pulp and paper......... 12,342 7.7 11,985 7.1 11,633 6.1
Other.................. 21,221 13.2 21,161 12.6 29,177 15.1
-------- ----- ------- ---- ------- -----
Total........ $160,604 100.0% $168,770 100.0% $191,936 100.0%
======= ===== ======= ===== ======= =====
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The Company's revenue by service line is set forth in the following table
(in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------
1997 % 1998 % 1999 %
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
Hydroblasting......... $ 78,919 49.1% $ 79,665 47.2% $ 86,173 44.9%
Chemical cleaning..... 53,366 33.2 52,954 31.4 53,771 28.0
Industrial vacuuming.. 17,534 10.9 24,500 14.5 36,184 18.9
Other................. 10,785 6.8 11,651 6.9 15,808 8.2
------- ----- ------- ---- ------- -----
Total....... $160,604 100.0% $168,770 100.0% $191,936 100.0%
======= ===== ======= ===== ======= =====
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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 tank cleaning, mechanical, waste minimization and
commissioning services, as described below. The majority of these services
involves 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 and UHP 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 UHP of up to 40,000 pounds per square
inch is 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 UHP hydroblasting services has been expanded.
Valley has designed and fabricated special UHP equipment that allows the Company
to enhance the hydroblasting services provided to its customers. Management
believes the UHP technology acquired from Valley more effectively cleans the
most difficult to remove scale and deposits from accessible tubing and surfaces.
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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 as 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 industrial 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, or to assist in other types of cleaning and maintenance services.
The Company provides air-moving services using specialized trucks and
trailer-mounted equipment to collect and remove a variety of solid and
semi-solid materials, including dust, powder, oil, resins, wood chips, steel and
plastic 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.
From 1997 to 1999, the Company increased its fleet of vacuum trucks from
174 to 335 units. Over the same period, industrial vacuuming revenue increased
from $17.5 million in 1997 to $36.2 million in 1999, or 106.4%. 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, management
believes increased depreciation and operating lease expense is more than offset
by proportionately lower levels of incremental selling, general and
administrative expense.
5
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Other Services
Tank Cleaning. With the acquisition of LANSCO, the Company is able to
provide tank cleaning services on a much larger scale. These services involve
the removal of sludge, typically from an above ground storage tank, by
transforming the sludge to a pumpable state, pumping it out of the tank, and
processing it with a centrifuge or filter press in order to separate the liquid
and solid components for disposal and possibly return some product to the
customer. Management believes a significant factor in LANSCO's position in the
tank cleaning market is its technology, including robotic devices and its
process for GT Services(R) tank cleaning.
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.
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.
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 may be attributed to
hydroblasting, chemical cleaning, industrial vacuuming or other services.
Competition and Market Factors
The industrial cleaning service business is highly competitive. Management
believes that the principal competitive factors in this business are price,
quality of service, safety record, reputation, competence and 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 in daily or more
frequently recurring maintenance services than in 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, the Company'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 many of the
Company's smaller competitors do not offer as extensive a line of services as
the Company, future expansion by these companies or the development of
alternative cleaning methods represent potential competition for the Company.
Management believes that factors such as maintenance for improved
efficiency, a trend toward outsourcing, industry consolidation among the
Company's customers and environmental regulations have effected the demand for
the Company's industrial cleaning services. Management also believes that the
Company 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 Service Contracts."
6
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Business Strategy
The Company's business strategy is to expand services provided to existing
customers through cross selling, establish relationships with new customers in
existing geographic areas, expand geographically, establish additional customer
alliances, pursue additional strategic acquisitions and cost control.
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 was comprised of UHP and industrial vacuuming services. In
addition, as a result of this 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.")
The acquisition of LANSCO enhances the Company's tank cleaning
capabilities and broadens the range of services it can offer its customers. In
addition, by taking advantage of cross selling opportunities provided by the
Company's single source and primary supplier contracts, there are opportunities
for improved access to a larger potential customer base for LANSCO, specifically
the petrochemical and oil refining industries along the Gulf Coast, as well as
the electric utility and pulp and paper industries. Management believes the
Company can benefit from LANSCO's strong relationships in plants where HydroChem
currently does limited or no work, and from providing ancillary services and
chemical products in support of LANSCO's tank cleaning operations, such as
industrial vacuuming, hydroblasting and degassing chemistry which LANSCO
previously subcontracted or purchased from other companies.
The Company has successfully grown its business in the past through
strategic acquisitions. Management intends to continue to pursue opportunistic
acquisitions that will add additional services and products to market to the
Company's existing customer base, or to facilitate expansion of the Company's
customer base or geographic coverage.
Field Organizational Structure
The Company's field organization is primarily based on geographical
divisions. Divisions are generally subdivided into areas, regions and branch
locations, some of which are on-site locations. Branch 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 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 centrally
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 shared among
locations as workloads 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 which management believes results 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 the Company's 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
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(regional or national in scope) and (iv) implementing alliance relationships.
These efforts are supplemented by advertising in industry publications and
participating in 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 approved vendors. Contractors may be selected at the individual plant
level, or on a regional or national basis covering multiple plant locations. A
particular plant will typically have two or more approved industrial cleaning
providers. One of these may be designated as the primary service provider and
receive a majority of the work. Alternatively, the work may be spread evenly
between the service providers 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 providers for
specific services (for example, plants may have hydroblasting contracts with one
or more service providers and separate industrial vacuuming contracts with one
or more other service providers) or may have contracts covering multiple
services provided by the same provider.
Master service agreements typically establish general terms and
conditions, as well as time and material pricing for services. These contracts
do not guarantee 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's alliance, or managed services, process is a method of
providing services to its customers. In an alliance, the Company provides a more
comprehensive outsourcing solution to the customer, with the Company more
involved in scheduling, managing and benchmarking the delivery of services in a
manner that reduces costs for the customer and 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.
Management estimates that approximately two-thirds of the Company's
revenue comes from services performed under its master service agreements and
alliances, or separately bid projects in plants where it has master service
agreements or alliances. Management believes these agreements generally enhance
the consistency and stability of the Company's revenue stream.
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 field safety personnel, providing
the proactive support of 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.
Management believes the Company's safety indices are among the best in the
industry. As an example, HydroChem's workers' compensation interstate experience
modification rate ("EMR") is 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'
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compensation claims experience relative to the normally expected experience of
companies within a particular industry.
Major Customer
In 1999, The Dow Chemical Company and its affiliates represented 10.0% of
the Company's total revenue.
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 management believes the
Company 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. These inspections seek to determine whether or not the
Company's work practices are in substantial compliance with the Act. While
management believes the Company 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 locations and transported by the Company to its customers'
plants, no industrial cleaning services are performed at the branch locations.
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 its customers, 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, management does not believe that the
Company's 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 location, at a customer location, or 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. Management believes that the Company has
obtained the permits and licenses material to its business, and 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 liabilities under these laws and regulations.
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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.
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 these 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 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, there can be no assurance 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 accounts receivable, and labor, equipment
and debt service costs. Management believes the Company maintains adequate
working capital to meet its needs in the current business environment.
Employees
As of December 31, 1999, the Company had 2,238 full and part-time
employees. Fifteen of the Company's employees at one branch location are covered
by a collective bargaining agreement. Management believes that relations between
the Company and its employees are good.
Item 2. PROPERTIES
The Company's corporate, corporate support and commissioning services
operations, as well as its operating and west division headquarters are located
in a 132,000 square foot facility constructed in 1998 on 19.4 acres of land in
the Houston, Texas area. This facility, which is owned by the Company, is in
close proximity to many of the Company's branch locations and customers in the
Houston ship channel area
As of February 29, 2000, the Company had 85 operating locations in the
United States, and international locations in Puerto Rico and Singapore. The
Company's current domestic operating locations are located in Texas, Louisiana,
Alabama, California, Delaware, Florida, Georgia, Illinois, Kansas, Kentucky,
Michigan, New York, North Carolina, Ohio, Pennsylvania, Oklahoma, South
Carolina, Tennessee, Utah, and Virginia. The Company owns 11 of these locations.
Generally, the remainder are leased. Of these operating locations, 46 are
on-site facilities provided by or leased from the Company's customers.
10
<PAGE>
Item 3. LEGAL PROCEEDINGS
The Company has substantially completed the settlement of approximately 70
lawsuits originally filed in the 18th Judicial District Court for the Parish of
Iberville, Louisiana against Georgia Gulf Corporation ("Georgia Gulf"), the
Company and other defendants, which arose from a chemical exposure incident at a
Georgia Gulf facility in Plaquemine, Louisiana in September 1996. The suits
covered claims by approximately 640 non-Company employees present at the
facility (the "Worker Plaintiffs") and approximately 1,400 persons who are
related to or live with the Worker Plaintiffs. All of the plaintiffs sought
damages for alleged toxic exposure resulting from this incident. Pursuant to a
Memorandum of Understanding between virtually all of the plaintiffs and each of
the defendants in the suits, which was effective April 15, 1999, the Company's
insurance carriers deposited the Company's share of the settlement into escrow,
which is being disbursed as satisfactory evidence of settlement with individual
plaintiffs is received. As of December 31, 1999, approximately 90% of the escrow
had been disbursed. In addition, by separate agreement, Georgia Gulf assumed the
Company's defense and indemnity against the claims of any plaintiff who did not
participate in the settlement, the claims of approximately twenty plaintiffs who
were not parties to the settlement, certain additional claims which have been
filed against the Company since the date of the Memorandum of Understanding, and
future claims which may arise in connection with this incident.
All payments by the Company under these arrangements have been made by the
Company's insurance carriers. In addition, because the settlement process is
sufficiently completed, management believes this litigation will not have a
material adverse affect on the Company's financial position or results of
operations.
The Company is also a defendant in a lawsuit filed on September 20, 1999
in the 24th Judicial District Court for the Parish of Jefferson, Louisiana,
which seeks class certification on behalf of an unknown number of plaintiffs who
allege personal and property damages arising from the release of a single
330-gallon container of hydrochloric acid on a public highway in Kenner,
Louisiana in September 1999. The Company is being defended in this suit by one
of its liability insurance carriers. Although this matter is in its initial
stages and its outcome is therefore difficult to predict with certainty,
management believes that any resolution will be within the limits of its
applicable insurance coverage and will not have a material adverse affect on the
Company's financial position or results of operations.
Item 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, 1999. These companies, all of which
were acquired 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,
-----------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Financial Data:
Revenue.............. $156,484 $156,003 $160,604 $168,770 $191,936
Gross profit......... 63,855 61,630 65,019 63.599 77,984
Gross margin......... 39.5% 39.5% 40.5% 37.7% 40.6%
EBITDA (1)........... $ 22,390 $ 19,527 $ 22,405 $ 19,354 $ 30,163
EBITDA margin (2).... 14.3% 12.5% 14.0% 11.5% 15.7%
Operating income..... $ 15,638 $ 11,762 $ 14,189 $ 10,276 $ 18,699
Income (loss) before
taxes and
extraordinary
loss.............. 5,903 1,829 4,101 (3,191) 2,638
Net income (loss)... 2,851 545 (523) (3,191) 2,603
Capital expenditures 8,493 6,829 9,557 19,149 6,282
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents..... $ 1,088 $ 671 $ 33,862 $ 33,775 $ 4,140
Working capital............... 17,961 13,216 52,324 46,755 19,202
Total assets.................. 121,216 115,522 152,093 156,425 200,902
Total long-term debt, including
current maturities.......... 76,894 68,325 110,000 116,117 150,879
Dividends paid................. - - 8,540 - -
Stockholder's equity........... 25,225 25,770 16,707 13,516 16,119
</TABLE>
- ---------------------------
(1) EBITDA for any relevant period presented above represents gross profit less
selling, general and administrative expense. EBITDA should not be construed
as a substitute for operating income, as an indicator of liquidity or as a
substitute for net cash provided by operating activities, which are
determined in accordance with generally accepted accounting principles.
EBITDA is included because management believes it to be a useful tool for
analyzing operating performance, leverage, liquidity, and a company's
ability to service debt.
(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,
--------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenue......................... 100.0% 100.0% 100.0%
Cost of revenue................. 59.5 62.3 59.4
---- ---- ----
Gross profit.................. 40.5 37.7 40.6
SG&A expense.................... 26.5 26.2 24.9
Depreciation.................... 5.2 5.4 6.0
---- ----- -----
Operating income.............. 8.8 6.1 9.7
Other (income) expense:
Interest expense, net......... 5.3 6.2 6.8
Special charges............... - 0.5 -
Restructuring charge.......... - 0.4 -
Other (income) expense, net... - - -
Amortization of intangibles... 1.0 0.9 1.5
---- ---- -----
Income (loss) before taxes and
extraordinary loss............ 2.5 (1.9) 1.4
Income tax provision.......... 1.4 - -
---- ---- -----
Income (loss) before extraordinary
loss......................... 1.1 (1.9) 1.4
Extraordinary loss on early
extinguishment of debt,
net of taxes................. 1.4 - -
---- ---- -----
Net income (loss)....... (0.3)% (1.9)% 1.4%
==== ==== =====
EBITDA.......................... 14.0 % 11.5 % 15.7%
==== ==== ====
</TABLE>
Comparison of 1999 results to 1998
Revenue. Revenue increased $23.2 million, or 13.7%, to $191.9 million for
the year ended December 31, 1999 from $168.8 million in the prior year. The
increase in revenue, which applied to all service lines, resulted from increases
in industrial vacuuming revenue of $11.7 million, or 47.7%, from $24.5 million
to $36.2 million; hydroblasting revenue of $6.5 million, or 8.2% from $79.7
million to $86.2 million; other services revenue of $4.2 million, or 35.7%, from
$11.6 million to $15.8 million; and chemical cleaning revenue of $817,000, or
1.5%, from $53.0 million to $53.8 million. The increase in industrial vacuuming
revenue resulted from additional vacuum trucks placed in service by the Company
in 1998 and 1999, and the acquisition of the Valley assets. Hydroblasting
revenue increased primarily as a result of the acquisition of the Valley assets,
partially offset by a reduced volume of projects in other locations. The
increase in other services revenue principally resulted from an increased volume
of commissioning services projects, mechanical services projects which the
Company began performing in August 1998, and tank cleaning services resulting
from the acquisition of LANSCO in November 1999. The increase in chemical
cleaning revenue principally resulted from an increased volume of projects.
13
<PAGE>
Gross profit. Gross profit increased $14.4 million, or 22.6%, to $78.0
million in 1999 from $63.6 million in the prior year. Gross profit margins
increased from 37.7% to 40.6%. Cost of revenue increased $8.8 million, or 8.3%,
to $114.0 million in 1999 from $105.2 million in the prior year primarily due to
the revenue increases described above, partially offset by the results of a cost
reduction program implemented in late 1998, which included, among other things,
a reduction in work force.
SG&A expense. SG&A expense increased $3.6 million, or 8.1%, to $47.8
million in 1999 from $44.2 million in the prior year. This increase primarily
resulted from the Valley and LANSCO acquisitions and was partially offset by the
cost reduction program described above. SG&A expense as a percentage of revenue
decreased to 24.9% in 1999 from 26.2% in the prior year.
EBITDA. Increased gross profit, partially offset by increased SG&A
expense, resulted in a $10.8 million, or 55.8%, increase in EBITDA to $30.2
million in 1999 from $19.4 million in the prior year. As a percentage of
revenue, EBITDA increased to 15.7% in 1999 from 11.5% in the prior year.
Depreciation. Depreciation expense increased $2.4 million, or 26.3%, to
$11.5 million in 1999 from $9.1 million in the prior year, and was 6.0% and 5.4%
of revenue, respectively. The increase in depreciation expense principally
resulted from the Valley and LANSCO acquisitions, and from capital expenditures
in 1998 and 1999.
Operating income. Increased gross profit, partially offset by increased
SG&A and depreciation expense, resulted in an increase in operating income of
$8.4 million, or 82.0%, to $18.7 million in 1999 from $10.3 million in the prior
year. As a percentage of revenue, operating income increased to 9.7% in 1999
from 6.1% in the prior year.
Interest expense, net. Interest expense, net increased $2.7 million, or
25.4%, to $13.1 million in 1999 from $10.5 million in the prior year. Increased
interest expense, net resulted from (i) beginning in July 1998, an increase in
debt due to borrowings related to the Company's new headquarters and operating
facility, (ii) additional borrowings to finance the Valley and LANSCO
acquisitions, and (iii) a decrease in interest income due to lower 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 7 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 7 of Notes to Consolidated Financial Statements.)
Amortization. Amortization expense increased $1.3 million, or 88.8%, to
$2.8 million in 1999 from $1.5 million in the prior year. Increased amortization
expense resulted from goodwill incurred in connection with the Valley and LANSCO
acquisitions.
Income (loss) before taxes and extraordinary loss. For the reasons
described above, income before taxes and extraordinary loss increased $5.8
million to $2.6 million in 1999 from a loss before taxes and extraordinary loss
of $3.2 million in the prior year. As a percentage of revenue, income before
taxes and extraordinary loss was 1.4% in 1999 compared to a loss before taxes
and extraordinary loss of 1.9% in the prior year.
Income tax provision. The effective income tax rate remained at zero in
1999 consistent with the prior year, principally as a result from changes in the
valuation allowance of deferred tax assets.
Extraordinary loss. In 1999, as a result of the early repayment of
HydroChem's prior credit facility an extraordinary loss was recognized in the
amount of $35,000.
Net income (loss). For the reasons described above, the Company's net
income increased $5.8 million to $2.6 million in 1999 from a net loss of $3.2
million in the prior year. As a percentage of revenue, net income was 1.4% in
1999 compared to a net loss of 1.9% in the prior year.
14
<PAGE>
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; and an increase
in revenue from other services of $866,000, or 8.0%, from $10.8 million to $11.7
million; and an increase in hydroblasting revenue of $746,000, or 0.9%, from
$78.9 million to $79.7 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. The
increase in other services revenue primarily resulted from mechanical service
projects, which the Company began performing in August 1998, partially offset by
decreased pipeline cleaning. Hydroblasting revenue increased primarily due to
the implementation of sole source provider arrangements with certain existing
customers. The decrease in chemical cleaning revenue primarily resulted from a
small number of projects in the prior year which did not recur.
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 7 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 7 of Notes to Consolidated Financial Statements.)
EBITDA. Decreased gross profit and increased SG&A expense resulted in a
$3.0 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 7 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 7 of Notes to Consolidated Financial Statements.)
Amortization. Amortization expense of $1.5 million in 1998 was relatively
unchanged from the prior year.
15
<PAGE>
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 before taxes and extraordinary
loss of $4.1 million in the prior year. This represented a decrease of $7.3
million. As a percentage of revenue, the loss before taxes and extraordinary
loss was 1.9% in 1998, compared to income before taxes and extraordinary loss of
2.5% in the prior year.
Income tax provision. There was no provision for income tax recorded in
1998 primarily as a result 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 and extraordinary loss in the prior year period.
Extraordinary loss. In 1997, as a result of the early repayment of certain
HydroChem 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, 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.
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 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 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 7 of
Notes to Consolidated Financial Statements.)
<TABLE>
<CAPTION>
Three months ended
-------------------------------------------
1998
-------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31
------- ------- -------- -------
(in thousands)
<S> <C> <C> <C> <C>
Revenue................... $ 40,888 $ 45,067 $ 40,509 $ 42,306
Cost of revenue........... 24,885 28,185 25,632 26,469
------ ------- ------ -------
Gross profit........... 16,003 16,882 14,877 15,837
SG&A expense.............. 10,787 10,961 11,799 10,698
Depreciation.............. 2,193 2,239 2,296 2,350
------ ------- ------ -------
Operating income....... 3,023 3,682 782 2,789
Other (income) expense:
Interest expense, net... 2,517 2,599 2,626 2,728
Special charges......... - 300 - 515
Restructuring charge.... - - - 740
Other (income) expense,
net................... 3 13 (142) 67
Amortization of
intangibles............ 376 374 375 376
------ ------- ------ -------
Income (loss) before taxes
and extraordinary loss. 127 396 (2,077) (1,637)
Income tax provision
(benefit).............. 75 237 (356) 44
------ ------- ------ -------
Income (loss) before
extraordinary loss..... 52 159 (1,721) (1,681)
Extraordinary loss...... - - - -
------ ------- ------ -------
Net income (loss)......... $ 52 $ 159 $ (1,721) $ (1,681)
======= ======= ======= =======
EBITDA.................... $ 5,216 $ 5,921 $ 3,078 $ 5,139
======= ======= ======= =======
<CAPTION>
Three months ended
-------------------------------------------
1998 1999
-------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31
------- ------- -------- -------
(in thousands)
Revenue................... $ 50,905 $ 52,194 $ 43,010 $ 45,827
Cost of revenue........... 30,263 30,437 25,709 27,543
------- ------- ------ -------
Gross profit........... 20,642 21,757 17,301 18,284
SG&A expense.............. 12,500 12,874 11,144 11,303
Depreciation.............. 2,913 2,839 2,836 2,876
------- ------- ------ -------
Operating income....... 5,229 6,044 3,321 4,105
Other (income) expense:
Interest expense, net... 3,268 3,228 3,229 3,404
Special charges......... - - - -
Restructuring charge.... - - - -
Other (income) expense,
net................... (42) (26) 105 61
Amortization of
intangibles........... 634 633 634 933
------- ------- ------ -------
Income (loss) before taxes
and extraordinary loss. 1,369 2,209 (647) (293)
Income tax provision
(benefit).............. - - - -
------- ------- ------ -------
Income (loss) before
extraordinary loss..... 1,369 2,209 (647) (293)
Extraordinary loss...... - - - 35
------- ------- ------ -------
Net income (loss)......... $ 1,369 $ 2,209 $ (647) $ (328)
======= ======= ======= =======
EBITDA.................... $ 8,142 $ 8,883 $ 6,157 $ 6,981
======= ======= ======= =======
</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. 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. All HydroChem
subsidiaries, including International, are guarantors 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 HydroChem's then existing
senior debt ($45.7 million) and subordinated debt ($18.7 million).
17
<PAGE>
In addition, $8.3 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 $2.3 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.
On December 31, 1997, HydroChem entered into a participating credit
agreement with a financial institution for a credit facility which provided for
unsecured borrowings of up to $25.0 million, subject to borrowing base
limitations. The term of this credit facility was three years and any borrowings
thereunder bore interest at rates adjusted quarterly. Interest rates were based
on, at the discretion of HydroChem, (i) a range from LIBOR plus 1.75% to LIBOR
plus 3.00%, or (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 was payable quarterly on any
unborrowed portion. The specific rate within each range depended upon the
Company's operating performance. The Company was required to meet certain
customary financial ratios and covenants, and generally was restricted from
pledging its assets.
On November 19, 1999, in conjunction with the LANSCO acquisition, and to
replace the credit facility described above, the Company entered into a new
credit agreement with six financial institutions (the "New Credit Facility").
The New Credit Facility provides for secured borrowings of up to $60.0 million,
and consists of a $30.0 million term loan (the "Term Loan") commitment and a
$30.0 million revolving loan (the "Revolver") commitment, which is subject to
borrowing base limitations. The New Credit Facility expires on December 31,
2004. The New Credit Facility requires HydroChem to meet certain customary
financial ratios and covenants and restricts the Company from any further
pledging of its assets. The New Credit Facility is secured by substantially all
of the assets of the Company and Holding. HydroChem, at its discretion, can pay
interest on a Base Rate or Eurodollar ("LIBOR") basis, plus applicable margins.
Base Rate margins range from 0.00% to 1.75% depending on the type of advance and
the Company's leverage ratio as determined quarterly. LIBOR based margins range
from 1.75% to 3.00%, depending on the Company's leverage ratio as determined
quarterly. The length of the LIBOR based interest periods is generally one to
six months in duration, however interest payments are required at least every
three months. In addition, a commitment fee of 0.3% to 0.5% per annum, depending
on the Company's leverage ratio as determined quarterly, is payable quarterly on
the unborrowed portion of the Revolver. As a result of the early extinguishment
of the previous credit facility, an extraordinary loss was recognized in 1999 in
the amount of $35,000. The extraordinary loss consisted of the write-off of
associated deferred financing costs.
As of December 31, 1999, $30.0 million was outstanding under the Term
Loan. The Term Loan requires scheduled quarterly principal payments beginning on
September 30, 2000. In addition, the Company may be required to make mandatory
additional principal payments, based on the Company's excess cash flow and
certain other events, as defined in the New Credit Facility. As of December 31,
1999, the Company's borrowing base under the Revolver was $25.1 million, of
which $2.3 million had been drawn in the form of standby letters of credit,
principally issued in connection with the Company's property and casualty
insurance program. At December 31, 1999, there were no other borrowings
outstanding under the Revolver, and the Company had available unused borrowings
of $22.9 million.
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 on July 17, 1998. The loan agreement provided for an
interim financing construction loan of up to $7.5 million, which was converted
to a term loan (the "Mortgage Loan") in the amount of $7.5 million on March 31,
1999. The Mortgage Loan is collateralized by first priority liens on the land
and improvements. The construction loan required quarterly payments of interest.
The Mortgage Loan matures on September 30, 2006 and requires quarterly payments
of interest and principal. Interest rates on the Mortgage Loan are at LIBOR plus
1.75% adjusted quarterly. On July 17, 1998, HydroChem also entered into an
interest rate protection agreement with the same financial institution (the
"Interest Rate Swap"). Under the Interest Rate Swap, the Company's effective
fixed borrowing rate for the Mortgage Loan is 7.82%. The loan agreement requires
the Company to meet certain customary financial ratios and covenants and
generally restricts the Company from transferring or pledging the facility's
assets. Effective September 30, 1998, the 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. The Company has remained in compliance with the terms
of the amended loan agreement since that time and expects to remain in
compliance in future periods. At December 31, 1999, the Company had $7.4 million
outstanding under the Mortgage Loan.
18
<PAGE>
In connection with the LANSCO acquisition, the Company issued two
promissory notes (the "Seller Notes") to the principal selling shareholders of
LANSCO in the aggregate principal amount of $3.5 million. The Seller Notes bear
interest at 8% per annum, mature on November 19, 2001, and require semi-annual
interest payments and annual principal payments. The first principal payments on
the Seller Notes in the amount of $1.5 million are due November 19, 2000. The
final principal payments on the Seller Notes, in the amount of $2.0 million, are
due November 19, 2001. The Seller Notes are unsecured, and are subordinated to
all Senior Debt (as defined in the Seller Notes) of the Company, and contain no
financial ratios are covenants that must be met. (See Note 15 of Notes to
Consolidated Financing Statements.)
For the year ended December 31, 1999, the Company used net cash of $52.5
million for operating and investing activities which consisted of $16.8 million
provided by operating activities and $69.3 million used in investing activities.
For the year ended December 31, 1998, $5.9 million of net cash was used in
operating and investing activities which consisted of $12.9 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. Except for the Valley
and LANSCO acquisitions in the current period, investing activities for all
periods primarily consisted of expenditures for property and equipment.
Expenditures for property and equipment for the year ended December 31,
1999 were $6.3 million. Of this amount, $4.2 million principally was used to
purchase operating equipment, $1.2 million to purchase and implement new field
and corporate computer software and hardware systems, and $956,000 in connection
with the construction of the Company's headquarters and operating facility. In
1998, $19.1 million of expenditures for property and equipment included $9.1
million for the purchase of land and the construction of the Company's
headquarters and operating facility, $8.4 million principally for the purchase
of operating equipment, and $1.6 million for the implementation of new field and
corporate computer software and hardware systems.
Effective January 1, 1999, HydroChem acquired substantially all of the
assets and assumed certain liabilities of Valley. The adjusted purchase price
for the acquired assets was $30.1 million in cash, of which $4.0 million was
deposited into escrow. In addition, the Company assumed approximately $2.5
million in capital lease obligations, which were subsequently replaced with
operating leases, and paid $5.6 million in cash at closing to retire Valley's
bank debt. The source of funds for the acquisition was a combination of existing
available cash and bank borrowings.
On November 19, 1999, HydroChem acquired all of the issued and outstanding
shares of capital stock (the "Shares") of LANSCO. The Company paid $35.5 million
for the Shares, consisting of $32.0 million in cash paid at closing and $3.5
million in Seller Notes payable in installments with interest over the two years
following the date of acquisition to the two principal stockholders of LANSCO.
Further, the Company has agreed to pay one of these principal stockholders an
additional $1.25 million over two years as additional consideration for his
Shares and for consulting services. The source of funds for the acquisition was
a combination of existing available cash, the Seller Notes, and bank debt
pursuant to the New Credit Facility.
Management believes that cash and cash equivalents at December 31, 1999,
net cash expected to be provided by operating activities and borrowings, if
necessary, under the Company's New Credit Facility will be sufficient to meet
the Company's cash requirements for operations and expenditures for property and
equipment for the next twelve months and the foreseeable future thereafter. From
time to time, the Company reviews acquisition opportunities as they arise, and
may require additional financing if it decides to make additional acquisitions.
There can be no assurance, however, that any such acquisition opportunities will
arise, that any such acquisitions will be consummated, or that any related
financing will be available when required on terms satisfactory to the Company.
(See Note 5 of Notes to Consolidated Financial Statements.)
19
<PAGE>
Impact of Year 2000
In prior periods, the Company discussed the nature of the issues and
progress of its plans to become Year 2000 ready. In late 1999, the Company
completed its remediation and testing of systems. As a result of those planning
and implementation efforts, the Company experienced no significant disruptions
in mission critical information technology and non-information technology
systems and management believes those systems successfully responded to the Year
2000 date change. In the aggregate, the Company incurred approximately $2.4
million in 1998 and 1999 in connection with remediating its systems. The Company
is not aware of any material problems resulting from Year 2000 issues, either
with its products, its internal systems, or the products and services of third
parties. To management's knowledge, none of the Company's material suppliers
experienced material Year 2000 problems. The Company will continue to monitor
its mission critical computer applications and those of its suppliers on a
limited basis throughout the year 2000 to ensure that any latent Year 2000
matters that may arise are addressed promptly.
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 was put is place during 1999
in connection with the Company's Mortgage Loan.
The Company provides industrial cleaning services to a wide range of
processing industries including petrochemical plants, oil refineries, electric
utilities, pulp and paper mills, rubber plants, steel mills, and aluminum
plants. Management believes the Company's portfolio of accounts receivable is
well diversified and, as a result, its credit risks are minimal. Management
evaluates the creditworthiness of the Company's customers and monitors accounts
on a periodic basis, but typically does not require collateral. The Company's
trade 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 not been material and have been within
management's expectations. Management believes 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, 1999, the Company had short-term investments
totaling $4.4 million. Due to the short-term nature of these instruments, their
carrying value approximated market value. Management does not believe that a
decrease of 1.0% from 1999 average investment rates would be material to the
Company during 2000.
As of December 31, 1999, the Company's outstanding long-term debt
consisted of the Series B Notes, the Term Loan, the Mortgage Loan, and the
Seller Notes . The Series B 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, 1999,
their fair value was estimated to be $94.3 million. At the same date, the Term
20
<PAGE>
Loan, the Mortgage Loan and the Seller Notes totaled $30.0 million, $7.4 million
and $3.5 million, respectively, and approximated their fair value. The Term Loan
is a component of the New Credit Facility which expires on December 31, 2004.
The interest rates for the New Credit Facility, at the discretion of the
Company, are at Base Rate or LIBOR, plus applicable margins. Margins range from
0.00% to 3.00% depending upon which interest rate option is in effect and the
Company's leverage ratio as determined quarterly. The Company periodically
reviews various alternatives to protect long-term debt against interest rate
fluctuations. The Mortgage Loan bears interest at LIBOR rates plus 1.75%
adjusted quarterly. To protect the Mortgage Loan against interest rate
fluctuations, the Company utilizes the Interest Rate Swap which fixes the
interest rate at 7.82% per annum. The Seller Notes are due in two installments
with the final installment due on November 19, 2001, and bear interest at 8% per
annum. The market risk, estimated as a potential increase in fair value of these
debt instruments resulting from a hypothetical 1.0% decrease in interest rates,
is estimated to not be material to the Company during 2000.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Index to Consolidated Financial Statements on
page 22 of 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
Consolidated Financial Statements Page
Report of Independent Auditors.............................................23
Consolidated Balance Sheets as of December 31, 1998 and 1999...............24
Consolidated Statements of Operations for each of the years ended
December 31, 1997, 1998 and 1999.......................................25
Consolidated Statements of Stockholder's Equity for each of the
years ended December 31, 1997, 1998 and 1999...........................26
Consolidated Statements of Cash Flows for each of the years ended
December 31, 1997, 1998 and 1999.......................................27
Notes to Consolidated Financial Statements.................................28
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 Subsidiaries (the "Company") as of December 31,
1998 and 1999, 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, 1999. 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 auditing standards generally
accepted in the United States. 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 Subsidiaries at December 31, 1998 and 1999, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
Houston, Texas
February 25, 2000
23
<PAGE>
HYDROCHEM INDUSTRIAL SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1999
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ...................... $ 33,775 $ 4,140
Receivables,less allowance of $536 and $671,
respectively .................................. 23,941 33,488
Inventories .................................... 3,902 4,721
Prepaid expenses and other current assets ...... 1,714 1,993
Income taxes receivable ........................ 243 504
Deferred income taxes (Note 8) ................. 1,467 1,725
--------- ---------
Total current assets ..................... 65,042 46,571
Property and equipment, at cost (Note 4) ....... 81,459 96,672
Accumulated depreciation .................... (33,322) (43,756)
--------- ---------
48,137 52,916
Intangible assets, net (Note 2) ................ 43,246 101,415
--------- ---------
Total assets ............................. $ 156,425 $ 200,902
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable................................ $ 4,973 $ 6,829
Accrued liabilities............................. 13,193 17,870
Current portion of long-term debt (Note 5)...... 121 2,670
------- -------
Total current liabilities................. 18,287 27,369
Long-term debt (Note 5)............................ 115,996 148,209
Deferred income taxes (Note 8)..................... 8,626 9,205
Commitments and contingencies (Note 9)
Stockholder's equity:
Common stock, $.01 par value:
1,000 shares authorized, 100 shares outstanding 1 1
Additional paid-in-capital...................... 16,558 16,558
Retained deficit................................ (3,043) (440)
------- -------
Total stockholder's equity................ 13,516 16,119
------- -------
Total liabilities and stockholder's equity $ 156,425 $ 200,902
======= =======
</TABLE>
See accompanying notes.
24
<PAGE>
HYDROCHEM INDUSTRIAL SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenue .................................. $160,604 $168,770 $191,936
Cost of revenue .......................... 95,585 105,171 113,952
------- ------- -------
Gross profit ......................... 65,019 63,599 77,984
Selling, general and administrative
expense .............................. 42,614 44,245 47,821
Depreciation ............................. 8,216 9,078 11,464
------- ------- -------
Operating income ..................... 14,189 10,276 18,699
Other (income) expense:
Interest expense, net ................ 8,518 10,470 13,129
Special charges (Note 7) ............. - 815 -
Restructuring charge (Note 7) ........ - 740 -
Other (income) expense, net .......... 39 (59) 98
Amortization of intangibles .......... 1,531 1,501 2,834
------- ------- -------
Income (loss) before taxes and
extraordinary loss ................... 4,101 (3,191) 2,638
Income tax provision (Note 8) ........ 2,282 - -
------- ------- -------
Income (loss) before extraordinary loss .. 1,819 (3,191) 2,638
Extraordinary loss on early
extinguishment of debt,
net of taxes (Note 5) ............. 2,342 - 35
------- ------- -------
Net income (loss) ........................ $ (523) $ (3,191) $ 2,603
======= ======= =======
</TABLE>
See accompanying notes.
25
<PAGE>
HYDROCHEM INDUSTRIAL SERVICES, INC.
AND SUBSIDIARIES
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, 1996 .... $ 1 $19,670 $ 6,099 $25,770
Dividend to parent (Note 5).. - (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
Net income .................. - - 2,603 2,603
--- ------ ------ ------
Balance at December 31, 1999 .... $ 1 $16,558 $ (440) $16,119
=== ====== ====== ======
</TABLE>
See accompanying notes.
26
<PAGE>
HYDROCHEM INDUSTRIAL SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net income (loss) .......................... $ (523) $(3,191) $ 2,603
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation ............................. 8,216 9,078 11,464
Amortization ............................. 1,531 1,501 2,834
Amortization of deferred financing costs . 480 392 504
Write-off of deferred financing costs .... 3,178 - 35
Deferred income tax provision ............ 969 241 349
Loss (gain) on sale of property and
equipment .............................. 79 (36) 13
Changes in operating assets and liabilities:
Restricted cash .......................... (2,858) 2,858 -
Receivables, net ......................... 16 400 (1,061)
Inventories .............................. (294) (39) (819)
Prepaid expenses and other current assets. (651) 77 256
Income taxes receivable .................. (407) 164 (106)
Accounts payable ......................... (881) 150 292
Income taxes payable ..................... 28 (40) -
Accrued liabilities ...................... 3,799 1,423 416
------ ------ -------
Net cash provided by operating activities 12,682 12,978 16,780
------ ------ -------
Investing activities:
Expenditures for property and equipment .... (9,557) (19,149) (6,282)
Acquisitions, net of cash acquired ......... - - (63,362)
Proceeds from sale of property and equipment 336 308 307
------ ------ -------
Net cash used in investing activities ... (9,221) (18,841) (69,337)
------ ------ -------
Financing activities:
Proceeds from (repayments of) long-term debt,
net ...................................... 41,675 6,117 24,590
Debt financing costs ....................... (3,405) (341) (1,668)
Dividend to parent ......................... (8,540) - -
------ ------ -------
Net cash provided by financing activities 29,730 5,776 22,922
------ ------ -------
Net increase (decrease) in cash and cash
equivalents ................................ 33,191 (87) (29,635)
Cash and cash equivalents at beginning of
period ..................................... 671 33,862 33,775
------ ------ -------
Cash and cash equivalents at end of period .... $33,862 $33,775 $ 4,140
====== ====== =======
Supplemental disclosure:
Cash paid during the year for interest ..... $ 5,869 $11,290 $ 12,738
Cash paid (refunded) during the year for
income taxes, net of refunds ............. 255 (355) (151)
</TABLE>
See accompanying notes.
27
<PAGE>
HYDROCHEM INDUSTRIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1. Organization, Formation and Basis of Presentation
The consolidated financial statements include the accounts of HydroChem
Industrial Services, Inc. ("HydroChem") and its wholly owned subsidiaries,
including HydroChem International, Inc. ("International") and, since November
19, 1999, Landry Service Co., Inc. ("LANSCO"). HydroChem generally conducts
business outside the United States through International. (HydroChem and its
subsidiaries are hereinafter sometimes referred to either separately or
collectively as the "Company.") HydroChem is a wholly owned subsidiary of
HydroChem Holding, Inc. ("Holding").
The Company is engaged in the business of providing industrial cleaning
services to a wide range of processing industries, including petrochemical
plants, oil refineries, electric utilities, pulp and paper mills, rubber plants,
steel mills, and aluminum plants. Services provided include high-pressure and
ultra-high pressure water cleaning (hydroblasting), chemical cleaning,
industrial vacuuming, tank cleaning, mechanical services, waste minimization,
and commissioning and other specialized services. The majority of these services
involves recurring maintenance to improve or sustain the operating efficiencies
and extend the useful lives of process equipment and facilities.
2. Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
HydroChem and its subsidiaries. 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 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, primarily are being amortized over 10 to 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 4 to 40 years. These intangible assets totaled
$40,032,000 and $96,874,000, net of accumulated amortization of $7,148,000 and
$9,985,000, at December 31, 1998 and 1999, respectively. The Company continually
evaluates whether events or circumstances have occurred that indicate the
28
<PAGE>
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 $3,214,000 and
$4,541,000, net of accumulated amortization of $1,337,000 and $1,875,000, at
December 31, 1998 and 1999, respectively. Deferred financing costs are being
amortized over five 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 Financial Accounting Standards Board Statement No. 123,
Accounting for Stock-Based Compensation ("FAS 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 1997 and 1998 amounts have been reclassified to conform with the
1999 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, steel mills, 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.
29
<PAGE>
3. Receivables
Receivables primarily include trade accounts and accrued receivables of
$23,941,000 and $33,488,000, net of allowance for doubtful accounts of $536,000
and $671,000, at December 31, 1998 and 1999, respectively. During 1998 and 1999,
the Company recorded bad debt expense of $13,000 and $85,000, respectively. In
addition, during 1998 and 1999, the Company recorded other adjustments to the
allowance for doubtful accounts in the amount of $72,000 and $9,000,
respectively. During 1999, $59,000 of allowance for doubtful accounts was added
in connection with the acquisition of LANSCO. Also, in 1998 the Company
wrote-off receivables which were uncollectible in the amount of $685,000. Of
this amount, $527,000 was due from one customer, $190,000 of which was
subsequently collected in 1999.
4. Property and Equipment
Property and equipment at December 31, 1998 and 1999 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Land ........................................................ $ 1,747 $ 2,104
Office facilities, furniture, fixtures and computer equipment 16,223 21,005
Machinery and equipment (including vacuum trucks) ........... 61,200 69,212
Vehicles .................................................... 1,906 1,857
Construction in progress .................................... 383 2,494
------ ------
Total property and equipment ............................ $81,459 $96,672
====== ======
</TABLE>
5. Long-term Debt
Long-term debt at December 31, 1998 and 1999 consisted of the following
(in thousands):
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Series B Notes ........................... $ 110,000 $ 110,000
Term Loan ................................ - 30,000
Mortgage Loan ............................ 6,117 7,379
Seller Notes ............................. - 3,500
-------- --------
Total long-term debt ................. 116,117 150,879
Less current portion of long-term debt (121) (2,670)
-------- --------
$ 115,996 $ 148,209
======== ========
</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. 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. All HydroChem subsidiaries,
including International, are guarantors 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 HydroChem's then existing
senior debt ($45,727,000) and subordinated debt ($18,705,000). In addition,
$8,340,000 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.
30
<PAGE>
On December 31, 1997, HydroChem entered into a participating credit
agreement with a financial institution for a credit facility which provided for
unsecured borrowings of up to $25,000,000, subject to borrowing base
limitations. The term of this credit facility was three years and any borrowings
thereunder bore interest at rates adjusted quarterly. Interest rates were based
on, at the discretion of HydroChem, (i) a range from LIBOR plus 1.75% to LIBOR
plus 3.00%, or (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 was payable quarterly on any
unborrowed portion. The specific rate within each range depended upon the
Company's operating performance. The Company was required to meet certain
customary financial ratios and covenants, and generally was restricted from
pledging its assets. 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 outstanding under this credit facility, and HydroChem
had available unused borrowings of $19,647,000.
On November 19, 1999, in conjunction with the LANSCO acquisition, and to
replace the credit facility described above, the Company entered into a new
credit agreement with six financial institutions (the "New Credit Facility").
The New Credit Facility provides for secured borrowings of up to $60,000,000,
and consists of a $30,000,000 term loan (the "Term Loan") commitment and a
$30,000,000 revolving loan (the "Revolver") commitment, which is subject to
borrowing base limitations. The New Credit Facility expires on December 31,
2004. The New Credit Facility requires HydroChem to meet certain customary
financial ratios and covenants and restricts the Company from any further
pledging of its assets. The New Credit Facility is principally secured by all
current and future assets of the Company. HydroChem, at its discretion, can pay
interest on a Base Rate or Eurodollar ("LIBOR") basis, plus applicable margins.
Base Rate margins range from 0.00% to 1.75% depending on the type of advance and
the Company's leverage ratio as determined quarterly. LIBOR based margins range
from 1.75% to 3.00%, depending on the Company's leverage ratio as determined
quarterly. The length of the LIBOR based interest periods is generally one to
six months in duration, however interest payments are required at least every
three months. In addition, a commitment fee of 0.3% to 0.5% per annum, depending
on the Company's leverage ratio as determined quarterly, is payable quarterly on
the unborrowed portion of the Revolver. As a result of the early extinguishment
of the previous credit facility, an extraordinary loss was recognized in the
amount of $35,000. The extraordinary loss consisted of the write-off of
associated deferred financing costs.
As of December 31, 1999, $30.0 million was outstanding under the Term
Loan. The Term Loan requires scheduled quarterly principal payments beginning on
September 30, 2000. In addition, the Company may be required to make mandatory
additional principal payments, based on the Company's excess cash flow and
certain other events, as defined in the New Credit Facility. As of December 31,
1999, the Company's borrowing base under the Revolver was $25,181,000, of which
$2,260,000 had been drawn in the form of standby letters of credit, principally
issued in connection with the Company's property and casualty insurance program.
At December 31, 1999, there were no other borrowings outstanding under the
Revolver, and the Company had available unused borrowings of $22,921,000.
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 on July 17, 1998. The loan agreement provided for an
interim financing construction loan of up to $7,500,000, which was converted to
a term loan (the "Mortgage Loan") in the amount of $7,500,000 on March 31, 1999.
The Mortgage Loan is collateralized by first priority liens on the land and
improvements. The construction loan required quarterly payments of interest. The
Mortgage Loan matures on September 30, 2006 and requires quarterly payments of
interest and principal. Interest rates on the Mortgage Loan are at LIBOR plus
1.75% adjusted quarterly. On July 17, 1998, HydroChem also entered into an
interest rate protection agreement with the same financial institution (the
"Interest Rate Swap"). Under the Interest Rate Swap, the Company's effective
fixed borrowing rate for the Mortgage Loan is 7.82%. The loan agreement requires
the Company to meet certain customary financial ratios and covenants and
generally restricts the Company from transferring or pledging the facility's
assets. Effective September 30, 1998, the 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. The Company has remained in compliance with the terms
of the amended loan agreement since that time and expects to remain in
compliance in future periods. At December 31, 1999, the Company had $7,379,000
outstanding under the Mortgage Loan.
31
<PAGE>
In connection with the LANSCO acquisition, the Company issued two
promissory notes (the "Seller Notes") to the principal selling shareholders of
LANSCO in the aggregate principal amount of $3.5 million. The Seller Notes bear
interest at 8% per annum, mature on November 19, 2001, and call for semi-annual
interest payments and annual principal payments. The first principal payments on
the Seller Notes in the amount of $1,500,000 are due November 19, 2000. The
final principal payments on the Seller Notes, in the amount of $2,000,000, are
due November 19, 2001. The Seller Notes are unsecured, and are subordinated to
all Senior Debt (as defined in the Seller Notes) of the Company, and contain no
financial ratios are covenants that must be met. (See Note 15.)
Maturities of long-term debt for the years ended December 31, are as
follows (in thousands):
<TABLE>
<S> <C>
2000......................................... $ 2,670
2001......................................... 7,186
2002......................................... 7,202
2003......................................... 8,218
2004......................................... 9,235
Thereafter................................... 116,368
-------
$ 150,879
</TABLE>
6. Stockholder's Equity
In connection with a previous financing involving the Company, Holding
issued a warrant 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. In a separate previous financing, Holding also issued another
warrant 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. Both
of these warrants remain outstanding as of December 31, 1999. The value of these
warrants is associated with deferred financing costs of extinguished debt.
(See Note 5.)
7. Special and Restructuring Charges
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. 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 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.
32
<PAGE>
8. Income Taxes
The Company files a consolidated tax return with Holding. Current and
deferred taxes are allocated on a separate company basis. Significant components
of the Company's deferred tax liabilities and assets as of December 31, 1998 and
1999 were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
----- ----
<S> <C> <C>
Deferred tax liabilities:
Property and equipment ....... $ 5,700 $ 5,586
Intangibles .................. 5,736 6,409
-------- --------
Total deferred tax liabilities 11,436 11,995
Deferred tax assets:
Net operating loss ........... 3,847 4,011
Alternative minimum tax ...... 1,338 1,367
Foreign tax credit ........... 366 366
Accrued liabilities .......... 1,059 843
Receivables .................. 179 197
Other ........................ (20) 66
Valuation allowance .......... (2,492) (2,335)
-------- --------
Total deferred tax assets .......... 4,277 4,515
-------- --------
Net deferred tax liability ......... $ 7,159 $ 7,480
======== ========
</TABLE>
The provision (benefit) for income taxes for the years ended December 31,
1997, 1998 and 1999 consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Current ................... $1,313 $ (241) $ (349)
Deferred ................... 969 241 349
------ ------ ------
$2,282 $ - $ -
====== ====== ======
</TABLE>
The differences between income taxes computed at the federal statutory
income tax rate and the provision for income taxes for the years ended December
31, 1997, 1998 and 1999 consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Income taxes computed at federal income
tax rate ............................. $ 1,396 $(1,085) $ 885
State income taxes, net of federal tax
benefit .............................. 339 (64) 305
Nondeductible permanent differences .... 718 538 515
Change in valuation allowance .......... -- 995 (1,040)
Other, net ............................. (171) (384) (665)
------ ------ ------
Provision for income taxes ............. $ 2,282 $ - $ -
====== ====== ======
</TABLE>
At December 31, 1999, the Company had alternative minimum tax credit
carryforwards of approximately $1,367,000, foreign tax credit carryforwards of
approximately $366,000 and a net operating loss carryforward of approximately
$10,555,000. The alternative minimum tax credit carryforwards are available
indefinitely, the foreign tax credit carryforwards began to expire in 1999 and
the net operating loss carryforward begins to expire in 2009.
9. Commitments and Contingencies
The Company leases most of its operating 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, 1997, 1998 and 1999 was $7,544,000, $8,470,000
and $8,722,000, respectively.
33
<PAGE>
Future minimum rental commitments under operating leases with initial
terms of one year or more at December 31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000............................................... $ 7,373
2001............................................... 5,211
2002............................................... 4,188
2003............................................... 2,996
2004............................................... 2,065
Thereafter......................................... 1,855
Total.............................................. $ 23,688
========
</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 has substantially completed the settlement of approximately 70
lawsuits originally filed in the 18th Judicial District Court for the Parish of
Iberville, Louisiana against Georgia Gulf Corporation ("Georgia Gulf"), the
Company and other defendants, which arose from a chemical exposure incident at a
Georgia Gulf facility in Plaquemine, Louisiana in September 1996. The suits
covered claims by approximately 640 non-Company employees present at the
facility (the "Worker Plaintiffs") and approximately 1,400 persons who are
related to or live with the Worker Plaintiffs. All of the plaintiffs sought
damages for alleged toxic exposure resulting from this incident. Pursuant to a
Memorandum of Understanding between virtually all of the plaintiffs and each of
the defendants in the suits, which was effective April 15, 1999, the Company's
insurance carriers deposited the Company's share of the settlement into escrow,
which is being disbursed as satisfactory evidence of settlement with individual
plaintiffs is received. As of December 31, 1999, approximately 90% of the escrow
had been disbursed. In addition, by separate agreement, Georgia Gulf assumed the
Company's defense and indemnity against the claims of any plaintiff who did not
participate in the settlement, the claims of approximately twenty plaintiffs who
were not parties to the settlement, certain additional claims which have been
filed against the Company since the date of the Memorandum of Understanding, and
future claims which may arise in connection with this incident.
All payments by the Company under these arrangements have been made by the
Company's insurance carriers. As a result of the settlement process, management
believes this litigation will not have a material adverse affect on the
Company's financial position or results of operations.
The Company is also a defendant in a lawsuit filed on September 20, 1999
in the 24th Judicial District Court for the Parish of Jefferson, Louisiana,
which seeks class certification on behalf of an unknown number of plaintiffs,
who allege personal and property damages arising from the release of a single
330-gallon container of hydrochloric acid on a public highway in Kenner,
Louisiana in September 1999. The Company is being defended in this suit by one
of its liability insurance carriers. Although this matter is in its initial
stages and its outcome is therefore difficult to predict with certainty,
management believes that any resolution will be within the limits of its
applicable insurance coverage and will not have a material adverse affect on the
Company's financial position or result of operations.
10. Employee Benefit Plans
Profit Sharing and 401(k) 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 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.
34
<PAGE>
For the years ended December 31, 1997, 1998 and 1999, HydroChem accrued
profit sharing expense of $500,000, $0 and $500,000, respectively. For the same
years, HydroChem made employer 401(k) matching contributions to the Plan of
$196,000, $502,000 and $522,000, respectively.
Deferred Compensation Plan
Effective May 1, 1999, the Company adopted a deferred bonus plan (the
"Deferred Plan"). Awards under the Deferred Plan may be granted to a select
group of management employees as determined by the Board of Directors. Subject
to continuing employment, each person who received an initial award under the
Deferred Plan will receive an additional award as of May 1, 2000 equal to at
least one half of that person's discretionary cash bonus for 1999. Awards under
the Deferred Plan vest in equal annual installments on the first four
anniversary dates of the award. Awards also become fully vested if the
participant dies, becomes disabled, or is terminated without cause within one
year after a change of control (an "Acceleration Event"). Generally, the vested
portion of any award is payable with interest either four years from the date of
grant or, at the option of the participant, seven years after the date of the
grant. Awards are also payable upon the occurrence of an Acceleration Event. In
most cases, the interest on any award is at one of two specified rates. The
lower of the two rates applies if the payment is made after four years. The
higher rate applies if the participant elects to defer payment until seven years
after the date of grant or if there is an Acceleration Event. The Company
accrued $275,000 of Deferred Compensation expense for the year ended December
31, 1999.
11. Stock Option Plan
In 1994, the Board of Directors of Holding (the "Board") adopted, and the
stockholders approved, the HydroChem Holding, Inc. 1994 Stock Option Plan (the
"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 Non-Qualified Stock Options and become
exercisable in installments over three to four year periods after the date of
grant. The weighted-average remaining contractual life of outstanding options at
December 31, 1999 was 6.5 years.
35
<PAGE>
A summary of the Option Plan as of December 31, 1997, 1998 and 1999 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, 1997 ..... 618,890 $1.00
Granted ........................ 27,000 1.00
Exercised ...................... 2,000 1.00
Canceled ....................... 25,500 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
Granted ........................ 38,300 1.00
Exercised ...................... 54,539 1.00
Canceled ....................... 19,500 1.00
------- -----
Outstanding at December 31, 1999.... 246,050 $1.00
Exercisable at:
December 31, 1997 .............. 409,101 $ 1.00
December 31, 1998 .............. 197,789 $ 1.00
December 31, 1999 .............. 186,000 $ 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 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.
12. 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, accounts receivable,
and current liabilities are reasonable estimates of their fair values,
principally due to the short-term maturities of these instruments. The estimated
fair value of the Series B Notes is based on the most recently available trading
prices. The carrying amounts for the Term Loan, Mortgage Loan and Seller Notes
are reasonable estimates of their fair values, principally due to their
relatively short term maturities and the lack of markets for these instruments.
36
<PAGE>
The estimated fair values of financial instruments are as follows (in
thousands):
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------
1998 1999
---- ----
Carrying Fair Carrying Fair
Amounts Value Amounts Value
------- ----- ------- -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents.. $ 33,775 $ 33,775 $ 4,148 $ 4,148
Accounts receivable, net .. 23,941 23,941 33,488 33,488
Financial liabilities:
Current liabilities ..... 18,287 18,287 27,219 27,219
Long-term debt - principal:
Series B Notes .......... 110,000 104,500 110,000 94,325
Term Loan ............... - - 29,000 29,000
Mortgage Loan ........... 5,996 5,996 7,209 7,209
Seller Notes ............ - - 2,000 2,000
</TABLE>
13. Summary Financial Information
Summary financial information for International as consolidated with
HydroChem is as follows (in thousands):
<TABLE>
<CAPTION>
As of December 31,
--------------------
1998 1999
---- ----
<S> <C> <C>
Current assets ............... $1,377 $2,727
Noncurrent assets ............ 103 92
Current liabilities .......... 68 496
Noncurrent liabilities........ - -
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenue ................. $ 3,576 $ 3,771 $ 7,155
Gross profit ............ 1,497 1,246 2,692
Net income (loss)........ 73 (207) 910
</TABLE>
14. Major Customer
In 1997, 1998 and 1999, one customer and its affiliates represented 11.9%,
10.7% and 10.0%, respectively, of the Company's total revenue.
15. Acquisitions
Effective January 1, 1999, the Company acquired substantially all of the
assets and assumed certain liabilities of Valley Systems, Inc. and Valley
Systems of Ohio, Inc. (collectively "Valley"), a regional industrial services
provider. The assets acquired consisted primarily of (i) accounts receivable,
(ii) property, plant and equipment, (iii) intangibles, and (iv) other operating
assets. The adjusted purchase price for the acquired assets was $30,857,000 in
cash, of which $4,000,000 was deposited into escrow. As part of the transaction,
the Company also assumed $2,493,000 in capital lease obligations and $5,594,000
in bank debt. The Company has replaced the capital leases with operating leases
and retired the bank debt. The source of funds for the purchase price and
retirement of Valley's bank debt was a combination of cash on hand and
borrowings under a previous credit facility.
37
<PAGE>
The acquisition has been accounted for using the purchase method of
accounting. The excess of the purchase price over the fair value of the net
assets acquired is being amortized over periods ranging from 10 to 25 years and
is estimated as follows (in thousands):
<TABLE>
<S> <C>
Purchase price (as adjusted).............. $ 30,857
Transaction and acquisition costs......... 1,950
-------
32,807
Fair value of net assets acquired......... 5,857
-------
Excess of purchase price over fair value.. $ 26,950
======
</TABLE>
The book value of net assets acquired was determined to approximate fair
value at the date of acquisition. Transaction costs consisted primarily of fees
to attorneys, accountants and other outside service providers, and costs of
transferring ownership of the acquired assets. Acquisition costs primarily
represent (i) severance and relocation costs for certain Valley employees, (ii)
expenses incurred in connection with the closing or consolidation of certain
facilities, and (iii) certain other costs incurred directly in connection with
the acquisition.
On November 19, 1999, the Company acquired all of the issued and
outstanding capital stock (the "Shares") of LANSCO. LANSCO is primarily engaged
in the business of tank cleaning, oil reclamation and liquid-solid waste
separation for the oil refining industry. The Company paid $35,500,000 for the
Shares, consisting of $32,000,000 in cash paid at closing and $3,500,000 in
Seller Notes payable in installments with interest over the two years following
the date of acquisition to the two principal stockholders of LANSCO. Further,
the Company has agreed to pay one of these principal stockholders an additional
$1,250,000 over two years as additional consideration for his Shares and for
consulting services. The source of funds for the acquisition was a combination
of existing available cash, the Seller Notes, and the Term Loan. (See Note 5.)
The acquisition of the Shares has been accounted for using the purchase
method of accounting. The Company's financial statements reflect a preliminary
allocation of the purchase price based upon the Company's initial valuation. The
excess of the purchase price over the fair value of the net assets acquired is
being amortized over periods ranging from 10 to 25 years and is estimated as
follows (in thousands):
<TABLE>
<S> <C>
Cash payment $ 32,000
Seller Notes 3,500
Additional purchase price accrual 1,050
Estimated transaction and acquisition costs 1,150
--------
37,700
Fair value of net assets acquired 4,975
-------
Excess of purchase price over fair value $ 32,725
======
</TABLE>
The book value of net assets acquired was determined to approximate fair
value at the date of acquisition. The additional purchase price accrual
represents amounts payable over two years to a former principal stockholder of
LANSCO. Transaction costs primarily consist of fees to accountants, attorneys
and other outside service providers. Acquisition costs primarily consist of
consulting fees payable over two years to a former principal stockholder of
LANSCO and costs directly associated with the integration of LANSCO operations
and facilities. The results of operations derived from the Valley and LANSCO
acquisitions are included in the Company's financial statements from the
effective date of each acquisition. Unaudited pro forma consolidated results of
operations have been prepared as if the acquisition of the Valley assets and the
Shares had occurred on January 1, 1998 and 1999 and include (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1998 1999
---- ----
<S> <C> <C>
Revenue .................. $ 218,519 $ 210,292
Net income (loss)......... (2,314) 227
</TABLE>
38
<PAGE>
The unaudited pro forma consolidated results of operations presented above
do not purport to be indicative of results that would have occurred had the
acquisition been in effect for the period presented, nor do they purport to be
indicative of results that will be obtained in the future.
16. Impact of Year 2000 (unaudited)
In prior periods, the Company discussed the nature of the issues and
progress of its plans to become Year 2000 ready. In late 1999, the Company
completed its remediation and testing of systems. As a result of those planning
and implementation efforts, the Company experienced no significant disruptions
in mission critical information technology and non-information technology
systems and management believes those systems successfully responded to the Year
2000 date change. In the aggregate, the Company incurred approximately
$2,409,000 in 1998 and 1999 in connection with remediating its systems. The
Company is not aware of any material problems resulting from Year 2000 issues,
either with its products, its internal systems, or the products and services of
third parties. To management's knowledge, none of the Company's material
suppliers experienced material Year 2000 problems. The Company will continue to
monitor its mission critical computer applications and those of its suppliers on
a limited basis throughout the year 2000 to ensure that any latent Year 2000
matters that may arise are addressed promptly.
39
<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 .. 55 Chairman of the Board and Chief Executive
Officer
Robert B. Crates ... 37 Director
Thomas F. McWilliams 57 Director
Gary D. Noto ....... 45 President and Chief Operating Officer
Selby F. Little, III 46 Executive Vice President and Chief
Financial Officer
J. Pat DeBusk ...... 59 Executive Vice President
Donovan W. Boyd .... 46 Executive Vice President
Pelham H. A. Smith . 43 Vice President
R. Dwane Ruiz ...... 45 Vice President
</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 Chief Executive Officer of Hydro Services since 1990.
Mr. Carter was also the President until August 1998. As a private investor, Mr.
Carter 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.
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 Airxcel, Inc., Chase
40
<PAGE>
Industries, Inc., Ergo Science Corporation, MMI Products, Inc., Pen-Tab
Industries, Inc., ROYSTER-CLARK GROUP, INC. and various privately held
companies.
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, or 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 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 a 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.
R. Dwane Ruiz has been a Vice President of HydroChem since August 1998.
Prior thereto, Mr. Ruiz held various management positions with HydroChem or HIS
since 1977.
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).
41
<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 capacities at December 31, 1999
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
Annual Compensation Shares
Underlying All Other
Name and Principal Position Year Salary Bonus Options Compensation(1)
- --------------------------- ---- ------ ----- ------- ---------------
<S> <C> <C> <C> <C> <C>
B. Tom Carter, Jr ........... 1999 $240,406 $150,000 - $ 750
Chairman of the Board and . 1998 249,231 - - 750
Chief Executive Officer ... 1997 239,077 100,000 25,000 250
Gary D. Noto ................ 1999 186,028 97,000 4,000 750
President and Chief ....... 1998 159,684 85,000 - 750
Operating Officer ......... 1997 122,551 66,000 - 250
Selby F. Little, III ........ 1999 173,591 73,500 - 750
Executive Vice President .. 1998 163,664 52,500 - 750
and Chief Financial Officer 1997 125,936 74,000 11,500 250
J. Pat Debusk ............... 1999 151,342 50,000 - 750
Executive Vice President .. 1998 156,741 50,000 - 750
1997 146,628 43,000 - 250
Donovan W. Boyd (2) ......... 1999 150,155 75,000 20,000 750
Executive Vice President .. 1998 135,000 80,750 - -
1997 13,846 20,000 - -
</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, 1999, options for 246,050 shares of Class A Common were
outstanding and options for 10,089 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
42
<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
Underlying
Shares Acquired Value Unexercised Options
Name on Exercise Realized at December 31,
---- ----------- -------- ---------------
Exercisable Unexercisable
----------- -------------
<S> <C> <C> <C> <C>
B.Tom Carter..... 329,140 $ 0 - 6,250
Gary D. Noto..... - - 17,500 4,000
Selby F. Little, III - - 17,000 9,500
J. Pat DeBusk.... - - 20,000 -
Donovan W. Boyd.. - - - 20,000
<CAPTION>
Value of
Unexercised
In-the-Money Options
Name at December 31, 1998(1)
---- -----------------------
Exercisable Unexercisable
----------- -------------
<S> <C> <C>
B.Tom Carter..... $ 0 $ 0
Gary D. Noto..... 0 0
Selby F. Little,III 0 0
J. Pat DeBusk.... 0 0
Donovan W. Boyd.. 0 0
</TABLE>
- ----------
(1)There is no established trading market for the Class A Common, but the
Company has attempted to determine its market value based upon the same
criteria which were used to determine the exercise prices of past options
granted. Based upon these criteria, at December 31, 1999, 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 this agreement,
bonuses are payable to Mr. Carter at the sole discretion of the Board. Also
under this 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 connection with the exercise of certain stock options and the payment
of accrued interest on a prior loan, Holding has loaned to Mr. Carter the
principal sum of $346,356. The loan is evidenced by a secured promissory note
bearing interest at the rate of 5.28% per annum. Principal is payable upon the
earlier of April 30, 2005, or any termination of Mr. Carter's employment, but
not earlier than April 30, 2001. 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 exercises.
HydroChem has employment agreements with Messrs. Noto, DeBusk and Boyd.
Each of these agreements renews 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, and 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. Mr. Boyd's agreement also
provides for an award under HydroChem's Deferred Plan as defined below of
$80,000 in 1999 and an amount in 2000 equal to at least 100% of Mr. Boyd's
performance bonus for 1999. If HydroChem terminates the employment of Messrs.
DeBusk or Boyd without cause as defined in their respective agreements, then
43
<PAGE>
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 as defined in his agreement, then he is entitled to a continuation
of his then current base compensation for 12 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.
Deferred Bonus Plan
Effective May 1, 1999, the Company adopted a deferred bonus plan (the
"Deferred Plan"). Awards under the Deferred Plan may be granted to a select
group of management employees as determined by the Board of Directors. Subject
to continuing employment, each person who received an initial award under the
Deferred Plan will receive an additional award as of May 1, 2000 equal to at
least one half of that person's discretionary cash bonus for 1999. Awards under
the Deferred Plan vest in equal annual installments on the first four
anniversary dates of the award. Awards also become fully vested if the
participant dies, becomes disabled, or is terminated without cause within one
year after a change of control (an "Acceleration Event"). Generally, the vested
portion of any award is payable with interest either four years from the date of
grant or, at the option of the participant, seven years after the date of the
grant. Awards are also payable upon the occurrence of an Acceleration Event. In
most cases, the interest on any award is at one of two specified rates. The
lower of the two rates applies if the payment is made after four years after the
date of grant. The higher rate applies if the participant elects to defer
payment until seven years after the date of grant or if there is an Acceleration
Event.
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 1,218,042 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 29, 2000.
44
<PAGE>
<TABLE>
<CAPTION>
Class A Common Class B Common
-------------------- --------------------
No. of % of No. of % of
Name Shares Class Shares Class
- --------------------------------- ---------- ------- ---------- -------
Executive Officers and
Directors:
<S> <C> <C> <C> <C>
B. Tom Carter, Jr. (1) ........ 438,040 35.8% - -
900 Georgia Avenue
Deer Park, Texas 77536
Robert B. Crates .............. - - - -
Thomas F. McWilliams (2) (3) . 67,343 5.2% 67,343 1.7%
7963 Grand Bay Dr.
Naples, Florida 34108
Gary D. Noto (3) (4) .......... 36,079 2.9% 880 *
Selby F. Little, III (5) ...... 17,000 1.4% - -
J. Pat DeBusk (3) (6) ......... 56,727 4.6% 1,540 *
Donovan W. Boyd ............... - - - -
All directors and executive
officers as a group
(10 persons) (3) (7).......... 646,689 50.5% 69,763 1.8%
Other Principal Stockholders:
LKCM Venture Partners I Ltd. .. 673,993 55.3% - -
301 Commerce Street,
Suite 1600
Fort Worth, Texas 76102
Citicorp Venture Capital, Ltd.(3) 2,461,712 66.9% 2,461,712 62.7%
399 Park Avenue
New York, New York 10043
BT Capital Partners, Inc. (3) . 705,154 36.7% 705,154 18.0%
280 Park Avenue (32W)
New York, New York 10017
World Equity Partners, L.P. (8) 496,623 29.0% - -
399 Park Avenue
New York, New York 10043
CCT Partners II, L.P. (3) (9) . 434,420 26.3% 434,420 11.1%
c/o Citicorp Venture Capital, Ltd.
399 Park Avenue
New York, New York 10043
Heller Financial, Inc. ........ 310,390 20.3% - -
500 West Monroe Street
Chicago, Illinois 60661
HES Management, Inc. .......... 102,650 8.4% - -
5956 Sherry Lane, Suite 930
Dallas, Texas 75225
<CAPTION>
Series A Preferred
--------------------
No. of % of
Name Shares Class
- --------------------------------- ---------- -------
Executive Officers and
Directors:
<S> <C> <C>
B. Tom Carter, Jr. (1) ........ 360,993 7.2%
900 Georgia Avenue
Deer Park, Texas 77536
Robert B. Crates .............. - -
Thomas F. McWilliams (2) (3) . 33,871 *
7963 Grand Bay Dr.
Naples, Florida 34108
Gary D. Noto (3) (4) .......... 31,488 *
Selby F. Little, III (5) ...... - -
J. Pat DeBusk (3) (6) ......... 55,103 1.1%
Donovan W. Boyd ............... - -
All directors and executive
officers as a group
(10 persons) (3)(7)........... 481,455 9.6%
Other Principal Stockholders:
LKCM Venture Partners I Ltd. .. 2,100,628 42.0%
301 Commerce Street,
Suite 1600
Fort Worth, Texas 76102
Citicorp Venture Capital, Ltd.(3) 1,250,861 25.0%
399 Park Avenue
New York, New York 10043
BT Capital Partners, Inc. (3) . 793,959 15.9%
280 Park Avenue (32W)
New York, New York 10017
World Equity Partners, L.P. (8) - -
399 Park Avenue
New York, New York 10043
CCT Partners II, L.P. (3) (9) . 220,740 4.4%
c/o Citicorp Venture Capital, Ltd.
399 Park Avenue
New York, New York 10043
Heller Finanical, Inc. ........ - -
500 West Monroe Street
Chicago, Illinois 60661
HES Management, Inc. .......... 360,993 7.2%
5956 Sherry Lane, Suite 930
Dallas, Texas 75225
</TABLE>
- -------
* Less than one percent.
(1) Includes 102,650 shares of Class A Common and 360,993 shares of Series A
Preferred held in the name of HES Management, Inc., of which Mr. Carter,
as a sole stockholder, may be deemed the beneficial owner, and 6,250
shares of Class A Common that Mr. Carter may acquire upon the exercise of
stock options within 60 days of February 29, 2000.
(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.
45
<PAGE>
(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 stock options within 60 days of February 29, 2000.
(5) Represents 17,000 shares of Class A Common that Mr. Little may acquire
upon the exercise of stock options within 60 days of February 29, 2000.
(6) Includes 20,000 shares of Class A Common that Mr. DeBusk may acquire upon
the exercise of stock options within 60 days of February 29, 2000.
(7) Includes 62,250 shares of Class A Common that may be acquired upon the
exercise of stock options within 60 days of February 29, 2000, 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 29, 2000.
(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) Represents 310,390 shares of Class C Common that Heller Financial, Inc.
may purchase upon the exercise of a warrant within 60 days of February 29,
2000. Heller Financial, Inc. may acquire 310,390 shares of Class A Common
within 60 days of February 29, 2000, 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 connection with the exercise of certain stock options and the payment
of accrued interest on a prior loan, Holding has loaned to Mr. Carter the
principal sum of $346,356. The loan is evidenced by a secured promissory note
bearing interest at the rate of 5.28% per annum. Principal is payable upon the
earlier of April 30, 2005, or any termination of Mr. Carter's employment, but
not earlier than April 30, 2001. 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 exercises.
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.
46
<PAGE>
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 10 3/8% Series A Senior Subordinated Notes due 2007.
(Exhibit 4.1 to the Company's Registration Statement on
Form S-4, filed August 25, 1997, is hereby incorporated by
reference.)
4.2 Indenture, dated as of August 1, 1997, among HydroChem
Industrial Services, Inc., HydroChem International, Inc.,
as Guarantor, and Norwest Bank, Minnesota, N.A., as
Trustee. (Exhibit 4.2 to the Company's Registration
Statement on Form S-4, filed August 25, 1997, is hereby
incorporated by reference.)
4.3 Registration Rights Agreement dated August 4, 1997,
by and among HydroChem Industrial Services, Inc.,
HydroChem International, Inc. and Donaldson, Lufkin &
Jenrette Securities Corporation, as Initial Purchaser.
(Exhibit 4.3 to the Company's Registration Statement on
Form S-4, filed August 25, 1997, is hereby incorporated by
reference.)
10.1 HydroChem Holding, Inc. 1994 Stock Option Plan. (Exhibit
10.1 to the Company's Registration Statement on Form S-4,
filed August 25, 1997, is hereby incorporated by
reference.)
10.2 Deferred Bonus Plan of HydroChem Industrial Services,
Inc. effective May 1, 1999. (Exhibit 10.10 to the
Company's Form 10-Q filed August 10, 1999, is hereby
incorporated by reference.)
10.3 Employment Agreement dated December 15, 1993 by and
among HydroChem Holding, Inc., HydroChem Industrial
Services, Inc. and B. Tom Carter, Jr., as amended through
December 9, 1996. (Exhibit 10.5 to the Company's
Registration Statement on Form S-4, filed August 25, 1997,
is hereby incorporated by reference.)
10.4 Fourth Amendment to Employment Agreement dated April 9,
1998 by and among HydroChem Holding, Inc., HydroChem
Industrial Services, Inc. and B. Tom Carter, Jr. (Exhibit
10.8 to the Company's Form 10-Q, filed May 14, 1998, is
hereby incorporated by reference.)
47
<PAGE>
10.5 Secured Promissory Note dated April 30, 1999 from B.
Tom Carter, Jr. to HydroChem Holding Inc. (Exhibit
10.4 to the Company's Form 10-Q filed May 11, 1999, is
hereby incorporated by reference.)
10.6 Pledge Agreement dated April 30, 1999 between B. Tom
Carter, Jr. and HydroChem Holding, Inc. (Exhibit 10.5
to the Company's Form 10-Q filed May 11, 1999, is hereby
incorporated by reference.)
10.7 Employment Agreement dated November 1, 1992 between
HydroChem Industrial Services, Inc. and Gary Noto.
(Exhibit 10.3 to the Company's Registration Statement
on Form S-4, filed August 25, 1997, is hereby
incorporated by reference.)
10.8 Amendment dated January 27, 1999 to Employment Agreement
dated November 1, 1992 between HydroChem Industrial
Services, Inc. and Gary D. Noto. (Exhibit 10.8 to the
Company's Form 10-K, filed March 29, 1999, is hereby
incorporated by reference.)
10.9 Employment Agreement dated November 1, 1992 between
HydroChem Industrial Services, Inc. and J. Pat DeBusk.
(Exhibit 10.2 to the Company's Registration Statement on
Form S-4, filed August 25, 1997, is hereby incorporated by
reference.)
10.10 Employment Agreement dated September 26, 1997 between
HydroChem Industrial Services, Inc. and Donovan W. Boyd.
(Exhibit 10.10 to the Company's Form 10-K filed March 29,
1999, is hereby incorporated by reference.)
10.11 First Amendment to Employment Agreement dated as of June
28, 1999 to Employment Agreement dated as of September 26,
1997 between HydroChem Industrial Services Inc. and
Donovan Boyd. (Exhibit 10.10 to the Company's Form 10-Q
filed August 10, 1999, is hereby incorporated by
reference.)
10.12 Employment Offer Letter dated June 3, 1996 from HydroChem
Industrial Services, Inc. to Selby F. Little, III.
(Exhibit 10.6 to the Company's Registration Statement on
Form S-4, filed August 25, 1997, is hereby incorporated by
reference.)
10.13 Letter Agreement regarding severance compensation dated
October 31, 1997 between HydroChem Industrial Services,
Inc. and Pelham H. A. Smith. (Exhibit 10.7 to the
Company's Form 10-Q, filed November 14, 1997, is hereby
incorporated by reference.)
10.14 Form of Indemnification Agreement entered into with
directors and officers. (Exhibit 10.8 to the Company's
Amendment No. 1 to the Registration Statement on Form S-4,
filed October 3, 1997, is hereby incorporated by
reference.)
10.15 Loan agreement dated July 17, 1998 between HydroChem
Industrial Services, Inc. and Bank One, Texas, National
Association. (Exhibit 10.15 to the Company's Form 10-Q,
filed August 14, 1998, is hereby incorporated by
reference.)
10.16 Amendment No. 1 dated as of February 2, 1999 to Loan
Agreement dated July 17, 1998 between HydroChem Industrial
Services, Inc. and Bank One, Texas National Association.
(Exhibit 10.21 to the Company's Form 10-K filed March 29,
1999, is hereby incorporated by reference.)
10.17 Extension Agreement dated as of February 2, 1999 between
HydroChem Industrial Services, Inc. and Bank One, Texas,
National Association. (Exhibit 10.22 to the Company's Form
10-K filed March 29, 1999, is hereby incorporated by
reference.)
10.18 International Swap Dealers Association, Inc. Master
Agreement and Schedule dated July 17, 1998 between Hydro
Chem Industrial Services, Inc. and Bank One, Texas,
48
<PAGE>
National Association. (Exhibit 10.16 to the Company's Form
10-Q, filed August 14, 1998, is hereby incorporated by
reference.)
10.19 Credit Agreement dated November 19,1999 among HydroChem
Holding, Inc., HydroChem Industrial Services, Inc.,
various lenders and Bank of America, N.A., as
administrative agent. (Exhibit 2.1 to the Company's Form
8-K filed December 3, 1999, is hereby incorporated by
reference.)
10.20 First Amendment dated as of December 17, 1999 to Credit
Agreement dated November 19, 1999 among HydroChem Holding,
Inc., various lenders and Bank of America, N.A., as
administrative agent. (Filed herewith.)
10.21 Amended and Restated Asset Purchase Agreement by and
among HydroChem Industrial Services, Inc., Valley Systems
of Ohio, Inc. and Valley Systems, Inc. dated as of
September 8, 1998. (Exhibit 10.1 to the Company's Form
8-K, filed January 20, 1999, is hereby incorporated by
reference.)
10.22 Stock Purchase Agreement dated November 19, 1999 by and
among HydroChem Industrial Services, Inc. and each
stockholder of Landry Service Co., Inc. including Kenneth
C. Landry and Charles A. Landry, Jr. (Exhibit 2.2 to the
Company's Form 8-K filed December 3, 1999, is hereby
incorporated by reference.)
27.1 Financial Data Schedule. (Filed herewith.)
(b) Reports on Form 8-K.
During the quarter ended December 31, 1999, the Registrant filed a report
on Form 8-K dated December 3, 1999 pertaining to "Item 2 - Acquisition or
Disposition of Assets".
49
<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 24th day of
March, 2000.
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 24th day of March, 2000.
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
(Principal Financial and Accounting Officer)
/s/ Robert B. Crates
- --------------------
Robert B. Crates Director
/s/ Thomas F. McWilliams
- ------------------------
Thomas F. McWilliams Director
50
<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 24th day of
March, 2000.
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 24h day of March, 2000.
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
(Principal Financial and Accounting Officer)
/s/ Robert B. Crates
- --------------------
Robert B. Crates Director
/s/ Thomas F. McWilliams
- ------------------------
Thomas F. McWilliams Director
51
<PAGE>
EXHIBIT INDEX
10.20 First Amendment dated as of December 17, 1999 to Credit Agreement dated
November 19, 1999 among HydroChem Holding, Inc., HydroChem Industrial
Services, Inc., various lenders and Bank of America, N.A., as
administrative agent.
27.1 Financial Data Schedule.
FIRST AMENDMENT TO CREDIT AGREEMENT
FIRST AMENDMENT, dated as of December 17, 1999 (this
"Amendment"), among HYDROCHEM HOLDING, INC., a Delaware corporation ("Holding"),
HYDROCHEM INDUSTRIAL SERVICES, INC., a Delaware corporation (the "Borrower"),
the financial institutions party to the Credit Agreement described below (the
"Lenders"), and BANK OF AMERICA, N.A., as Administrative Agent. All capitalized
terms used herein and not otherwise defined herein shall have the respective
meanings provided such terms in the Credit Agreement referred to below.
WITNESSETH:
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WHEREAS, Holding, the Borrower, the Lenders and the
Administrative Agent are parties to a Credit Agreement, dated as of November 19,
1999 (the "Credit Agreement"); and
WHEREAS, the parties hereto wish to amend the Credit Agreement
as herein provided;
NOW THEREFORE, it is agreed:
I. First Amendment to Credit Agreement.
------------------------------------
1. The Lenders hereby agree (i) that Section 9.04(xi) of the
Credit Agreement is hereby amended by deleting the amount "$500,000" appearing
in the last line thereof and inserting the amount "$1,000,000" in lieu thereof,
and (ii) that as of the Amendment Effective Date (as defined below) the
foregoing amendment to Section 9.04(xi) shall be deemed to have been effective
as of the Initial Borrowing Date and any Default or Event of Default that has
arisen solely as a result of such indebtedness under Section 9.04(xi) being in
excess of $500,000 and less than or equal to $1,000,000 is hereby waived.
II. Miscellaneous.
--------------
1. In order to induce the Lenders to enter into this
Amendment, each of Holding and the Borrower hereby represents and warrants that
(i) all representations, warranties and agreements contained in Section 7 of the
Credit Agreement are true and correct in all material respects on and as of the
Amendment Effective Date (unless such representations and warranties relate to a
specific earlier date, in which case such representations and warranties shall
be true and correct in all material respects as of such earlier date) and (ii)
there exists no Default or Event of Default on the Amendment Effective Date, in
each case after giving effect to this Amendment.
<PAGE>
2. This Amendment is limited as specified and shall not
constitute a modification, acceptance or waiver of any other provision of the
Credit Agreement or any other Credit Document.
3. This Amendment may be executed in any number of
counterparts and by the different parties hereto on separate counterparts, each
of which counterparts when executed and delivered (including by way of
facsimile) shall be an original, but all of which shall together constitute one
and the same instrument. A complete set of counterparts shall be lodged with the
Borrower and the Administrative Agent.
4. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW
OF THE STATE OF NEW YORK.
5. This Amendment shall become effective on the date (the
"Amendment Effective Date") when each of Holding, the Borrower and the Required
Lenders shall have signed a counterpart hereof (whether the same or different
counterparts) and shall have delivered (including, without limitation, by usage
of facsimile transmission) the same to the Administrative Agent at the Notice
Office. This Amendment and the agreements contained herein shall be binding on
the successors and assigns of the parties hereto.
6. From and after the Amendment Effective Date, all references
in the Credit Agreement and in the other Credit Documents to the Credit
Agreement shall be deemed to be references to the Credit Agreement as modified
hereby.
* * *
2
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Amendment to be duly executed and delivered as of the date
first above written.
HYDROCHEM HOLDING, INC.
By: /s/ Selby F. Little, III
----------------------------
Name: Selby F. Little, III
Title:Executive Vice President
Chief Financial Officer
HYDROCHEM INDUSTRIAL SERVICES, INC.
By: /s/ Selby F. Little, III
----------------------------
Name: Selby F. Little, III
Title:Executive Vice President
Chief Financial Officer
BANK OF AMERICA, N.A.
Individually and as Administrative Agent
By: /s/ John J. ONeill
----------------------------
Name: John J. ONeill
Title:Managing Director
WELLS FARGO BANK (TEXAS), NATIONAL
ASSOCIATION
By: /s/ Linda Masera
----------------------------
Name: Linda Masera
Title:Vice President
NATEXIS BANQUE - BFCE
By: /s/ Daniel Payer
----------------------------
Name: Daniel Payer
Title:Assistant Vice President
By: /s/ Louis P. Laville, III
----------------------------
Name: Louis P. Laville, III
Title:Vice President and Group Manager
NATIONAL CITY BANK OF KENTUCKY
By: /s/ Tom Gurbach
----------------------------
Name: Tom Gurbach
Title:Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Dec-31-1999
<CASH> 4,140
<SECURITIES> 0
<RECEIVABLES> 33,488
<ALLOWANCES> 0
<INVENTORY> 4,721
<CURRENT-ASSETS> 46,571
<PP&E> 96,672
<DEPRECIATION> 43,756
<TOTAL-ASSETS> 200,902
<CURRENT-LIABILITIES> 27,369
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 16,119
<TOTAL-LIABILITY-AND-EQUITY> 200,902
<SALES> 191,936
<TOTAL-REVENUES> 191,936
<CGS> 113,952
<TOTAL-COSTS> 113,952
<OTHER-EXPENSES> 62,217
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,129
<INCOME-PRETAX> 2,638
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,638
<DISCONTINUED> 0
<EXTRAORDINARY> 35
<CHANGES> 0
<NET-INCOME> 2,603
<EPS-BASIC> 0.000
<EPS-DILUTED> 0.000
</TABLE>
