United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of earliest event reported November 19, 1999
Date of Report January 31, 2000
HYDROCHEM INDUSTRIAL SERVICES, INC. (*)
(Exact name of registrant as specified in its charter)
Delaware 333-34323 75-2503906
(State or other jurisdiction of (Commission File (I.R.S. Employer
incorporation or organization) Number) Identification Number)
900 Georgia Avenue
Deer Park, Texas 77536
(Address of principal executive offices) (Zip Code)
(713) 393-5600
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
* HydroChem International, Inc., a wholly-owned subsidiary of HydroChem
Industrial Services, Inc., is a Co-Registrant. It is incorporated under the
laws of the State of Delaware. Its I.R.S. Employer Identification Number is
75-2512100
<PAGE>
EXPLANATORY NOTE
This Form 8-K/A Current Report of HydroChem Industrial Services, Inc. and
HydroChem International, Inc. is the second amendment of the Registrants' Form
8-K Current Report dated December 3, 1999 regarding the acquisition of all
of the issued and outstanding shares of capital stock of Landry Service Co.,Inc.
TABLE OF CONTENTS
Item 7. Financial Statements and Exhibits.
(a) Financial statements of the business acquired
Independent Auditors' Report................................ 3
Balance Sheets as of November 18, 1999, and
February 28, 1999 and 1998................................. 4
Statements of Operations for the period March 1, 1999
through November 18, 1999, and for the years ended
February 28, 1999 and 1998................................. 6
Statements of Stockholders' Equity for the period
March 1, 1999 through November 18, 1999, and for the
years ended February 28, 1999 and 1998.................... 7
Statements of Cash Flows for the period March 1, 1999
through November 18, 1999, and the years ended
February 28, 1999 and 1998................................. 8
Notes to Financial Statements - February 28, 1999 .......... 9
Notes to Financial Statements - November 18, 1999........... 16
(b) Pro forma financial information
Explanatory Note............................................ 17
Unaudited Pro Forma Consolidated Balance Sheet
as of September 30, 1999................................... 18
Unaudited Pro Forma Consolidated Statement of Operations
for the year ended December 31, 1998....................... 19
Unaudited Pro Forma Consolidated Statement of Operations
for the nine months ended September 30, 1999............... 20
Notes to Unaudited Pro Forma Consolidated Financial
Statements................................................. 21
(c) Exhibits
None
Signatures........................................................... 24
2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
of Landry Service Co., Inc.
We have audited the accompanying balance sheets of Landry Service Co., Inc. (the
"Company") as of February 28, 1999 and 1998 and the related statements of
operations, stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Landry Service Co., Inc. as of
February 28, 1999 and 1998 and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
Pannell Kerr Forster of Texas, P.C.
Houston, Texas
April 21, 1999
3
<PAGE>
LANDRY SERVICE CO., INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
November 18, February 28,
1999 1999 1998
---- ---- ----
(Unaudited)
Assets
<S> <C> <C> <C>
Current assets
Cash and cash equivalents ......... $ 1,242,805 $ 1,925 $ 174,440
Accounts receivable
Trade ............................ 2,722,930 4,531,153 2,826,489
Unbilled ......................... 214,568 970,471 591,293
Other ............................ 508,268 834,029 188,575
Income taxes receivable .......... 156,000 -- --
Prepaid expenses .................. 17,681 22,066 27,415
Deferred income taxes ............. 70,772 341,911 272,462
---------- ---------- ----------
Total current assets ............. 4,933,024 6,701,555 4,080,674
---------- ---------- ----------
Property and equipment
Land .............................. 63,067 63,067 63,067
Machinery and equipment ........... 8,401,830 8,608,891 8,332,277
Buildings and improvements ........ 1,303,810 1,265,618 395,658
Office furniture and equipment .... 326,700 296,835 351,974
Vehicles .......................... 13,116 42,108 42,108
Equipment under assembly .......... 57,163 58,550 --
---------- ---------- ----------
10,165,686 10,335,069 9,185,084
Less accumulated depreciation ..... (7,504,844) (7,466,742) (6,769,485)
---------- ---------- ----------
Total property and equipment ...... 2,660,842 2,868,327 2,415,599
---------- ---------- ------------
Other assets
Deferred income taxes .............. -- 353,064 153,055
Other .............................. -- 329,209 182,162
---------- ---------- ----------
-- 682,273 335,217
---------- ---------- ----------
Total assets ......................... $ 7,593,866 $10,252,155 $ 6,831,490
========== ========== ==========
</TABLE>
See notes to financial statements.
4
<PAGE>
LANDRY SERVICE CO., INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
November 18, February 28,
1999 1999 1998
----------- ------ ------
(Unaudited)
Liabilities and Stockholders' Equity
<S> <C> <C> <C>
Current liabilities
Accounts payable....................... $ 816,808 $ 1,139,300 $ 1,072,994
Accrued expenses....................... 803,024 2,004,164 1,092,576
State income tax payable............... -- 56,805 34,662
Federal income tax payable............. -- 219,470 62,662
Current portion of long-term debt...... 956,980 927,652 895,867
----------- ---------- ----------
Total current liabilities............ 2,576,812 4,347,391 3,158,761
----------- ---------- ----------
Long-term debt............................ -- 886,500 367,528
Deferred income taxes..................... 42,167 -- --
----------- ---------- ----------
Total liabilities.................... 2,618,979 5,233,891 3,526,289
----------- ---------- ----------
Redeemable preferred stock
Series A; 200,000 shares authorized.... -- -- --
Series B; 150,000 shares authorized;
33,250 shares issued and outstanding... 665,000 665,000 665,000
----------- ---------- ----------
Commitments and contingencies
Stockholders' equity
Common stock, $.01 per share par
value; 3,000,000 shares authorized;
1,600,000 and 1,500,000
shares issued; and 1,215,000 and
1,115,000 shares outstanding........... 16,000 15,000 15,000
Paid-in capital........................ 2,866,078 399,000 399,000
Retained earnings...................... 4,457,809 6,969,264 5,256,201
Treasury stock, at cost, 385,000 shares (3,030,000) (3,030,000) (3,030,000)
----------- ---------- ----------
Total stockholders' equity........... 4,309,887 4,353,264 2,640,201
----------- ---------- ----------
Total liabilities and stockholders'
equity...................................$ 7,593,866 $10,252,155 $ 6,831,490
========== ========== =========
</TABLE>
See notes to financial statements.
5
<PAGE>
LANDRY SERVICE CO., INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
March 1,1999
through Year Ended February 28,
November 18, 1999 1999 1998
----------------- ---- ----
(Unaudited)
<S> <C> <C> <C>
Sales ......................... $ 14,130,308 $ 23,695,428 $ 20,030,856
Cost of sales .................. 9,577,869 15,114,551 12,629,554
------------ ------------ ------------
Gross profit ................... 4,552,439 8,580,877 7,401,302
Selling, general and administrative 3,306,978 4,785,874 3,570,390
------------ ------------ ------------
Income from operations before
depreciation and stock-based
compensation expense........... 1,245,461 3,795,003 3,830,912
Depreciation expense ........... 441,635 936,798 1,007,184
Stock-based compensation expense 2,468,078 -- 399,000
------------ ------------ ------------
Income (loss) from operations ... (1,664,252) 2,858,205 2,424,728
Other income (expense)
Interest expense ............ (73,555) (139,006) (295,368)
Interest income ............. 38,337 10,711 9,841
Gain (loss) on sale of assets (42,382) 45,670 (47,422)
Other ....................... 901 126,600 13,241
------------ ------------ ------------
Income (loss) before income
tax expense (benefit) ........ (1,740,951) 2,902,180 2,105,020
------------ ------------ ------------
Income tax expense (benefit)
Current ..................... 56,552 1,392,075 1,103,637
Deferred .................... 666,370 (269,458) (247,032)
------------ ------------ ------------
722,922 1,122,617 856,605
------------ ------------ ------------
Net income (loss) .............. $ (2,463,873) $ 1,779,563 $ 1,248,415
============ ============ ============
</TABLE>
See notes to financial statements.
6
<PAGE>
LANDRY SERVICE CO., INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM MARCH 1,1999 THROUGH NOVEMBER 18, 1999,
AND THE YEARS ENDED FEBRUARY 28, 1999 AND 1998
<TABLE>
<CAPTION>
Common Stock
------------
Number
of Paid-In Retained
Shares Amount Capital Earnings
------ ------ ------- --------
<S> <C> <C> <C> <C>
Balance, February 28, 1997 .. 1,500,000 $15,000 $ -- $4,077,330
Net income ............... -- -- -- 1,248,415
Stock options issued to
employees ............... -- -- 399,000 --
Dividends to preferred
stockholders ............ -- -- -- (69,544)
Purchase of treasury
stock ................... -- -- -- --
--------- ------- ---------- -----------
Balance, February 28, 1998 .. 1,500,000 15,000 399,000 5,256,201
Net income ............... -- -- -- 1,779,563
Dividends to preferred
stockholders ............ -- -- -- (66,500)
--------- ------- ---------- -----------
Balance, February 28, 1999 .. 1,500,000 15,000 399,000 6,969,264
Net loss ................. -- -- -- (2,463,873)
Dividends to preferred
stockholders ............ -- -- -- (47,582)
Exercise of stock
options ................. 100,000 1,000 2,467,078 --
--------- ------- ---------- -----------
Balance, November 18, 1999
(Unaudited) ................ 1,600,000 $16,000 $2,866,078 $4,457,809
========= ======= ========== ===========
<CAPTION>
Treasury Stock
--------------
Number
of Total Stockholders'
Shares Amount Equity
------ ------ -------------
<S> <C> <C> <C>
Balance, February 28, 1997 .. 375,000 $(3,000,000) $ 1,092,330
Net income ............... -- -- 1,248,415
Stock options issued to
employees ............... -- -- 399,000
Dividends to preferred
stockholders ............ -- -- (69,544)
Purchase of treasury
stock ................... 10,000 (30,000) (30,000)
------- ----------- -----------
Balance, February 28, 1998 .. 385,000 (3,030,000) 2,640,201
Net income ............... -- -- 1,779,563
Dividends to preferred
stockholders ............ -- -- (66,500)
------- ----------- -----------
Balance, February 28, 1999 .. 385,000 (3,030,000) 4,353,264
Net loss ................. -- -- (2,463,873)
Dividends to preferred
stockholders ............ -- -- (47,582)
Exercise of stock
options ................. -- -- 2,468,078
------- ---------- -----------
Balance, November 18, 1999
(Unaudited) ................ 385,000 $(3,030,000) $ 4,309,887
======= =========== ===========
</TABLE>
See notes to financial statements.
7
<PAGE>
LANDRY SERVICE CO., INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
March 1, 1999
through
November 18, Year Ended February 28,
1999 1999 1998
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Operating activities
Net income (loss) ............... $(2,463,873) $ 1,779,563 $ 1,248,415
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities
Depreciation ................. 441,635 936,798 1,007,184
Stock-based compensation expense 2,468,078 -- 399,000
Deferred income tax (benefit) 666,370 (269,458) (247,032)
Loss (gain) on sale of equipment
and other assets ............ 42,382 (45,670) 35,871
Increase in cash surrender value
of officer's life insurance . -- (119,722) (3,482)
Changes in operating assets and
liabilities
Decrease (increase) in
accounts receivable ........ 2,889,887 (2,729,296) 719,828
Increase in federal
income taxes receivable .... (156,000) -- --
Decrease (increase) in
prepaid expenses ........... 4,385 5,349 (9,289)
Decrease (increase) in other
assets ..................... 329,209 (325) 12,484
Increase (decrease) in accounts
payable .................... (322,492) 66,306 459,927
Increase (decrease) in accrued
expenses ................... (1,201,140) 911,588 222,160
Increase (decrease) in federal/state
income tax payable ......... (276,275) 178,951 (108,264)
----------- ----------- -----------
Net cash provided by operating
activities ............... 2,422,166 714,084 3,736,802
----------- ----------- -----------
Investing activities
Purchases of property and
equipment ...................... (276,532) (1,451,933) (1,164,842)
Insurance proceeds received for
replacement of fixed assets .... -- 108,077 --
Proceeds from sale of equipment
and other assets ............... -- -- 250,302
Premiums paid for cash surrender
value of officer's life insurance -- (27,000) (27,000)
----------- ----------- -----------
Net cash used in investing
activities .............. (276,532) (1,370,856) (941,540)
----------- ----------- -----------
Financing activities
Increase (decrease) in net position
on line of credit .............. -- 534,146 (1,115,000)
Repayments of borrowings from
banks .......................... (857,172) (1,042,263) (1,465,484)
Borrowings from banks ........... -- 1,058,874 --
Purchase of treasury stock ...... -- -- (30,000)
Payment of dividends ............ (47,582) (66,500) (69,544)
----------- ----------- -----------
Net cash provided by (used)
in financing activities . (904,754) 484,257 (2,680,028)
----------- ----------- -----------
Increase (decrease) in cash ....... 1,240,880 (172,515) 115,234
Cash and cash equivalents at
beginning of period .............. 1,925 174,440 59,206
----------- ----------- -----------
Cash and cash equivalents at
end of period .................... $ 1,242,805 $ 1,925 $ 174,440
=========== =========== ===========
</TABLE>
See notes to financial statements.
8
<PAGE>
LANDRY SERVICE CO., INC.
NOTES TO FINANCIAL STATEMENTS
February 28, 1999
Note 1 - Organization and Significant Accounting Policies
Organization and activities
Landry Service Co., Inc. (the "Company") is engaged in the business of
tank cleaning, oil reclamation and liquid-solid waste separation for
the oil and utility industries. The Company markets its process
throughout the United States. Customers consist principally of
refineries, petrochemical plants and utilities.
Revenue recognition
Revenues are recognized as services are performed under fixed price and
time-plus-materials contracts. Contracts range in length from one to
five months. Provision is made for estimated losses, if any, in the
period in which such losses become apparent.
Of the Company's revenues in the year ended February 28, 1999,
approximately 36% and 37% were generated from two and three customers,
respectively.
Cash and cash equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Financial instruments and credit risk
Financial instruments which potentially subject the Company to credit
risk include cash and cash equivalents and accounts receivable. Cash is
deposited in demand accounts in federally insured domestic institutions
to minimize risk. Additionally, the Company invests excess cash in
overnight investments offered through its bank, which are not federally
insured. The Company has not incurred losses related to these deposits.
Accounts receivable arise from services provided under contracts and are
generally unsecured. The availability of certain legal remedies reduces
credit risk associated with collection of contract receivables.
Accounts receivable
The Company grants credit to local and national companies in various
geographic regions throughout the United States. The Company performs
ongoing credit evaluations of its customers and generally does not
require collateral.
Unbilled accounts receivable represent revenues recognized on work for
which billings have not been presented to customers at the balance sheet
date.
9
<PAGE>
LANDRY SERVICE CO., INC.
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1999
Note 1 - Organization and Significant Accounting Policies (Continued)
Property and equipment
Property and equipment are recorded at cost. Maintenance and repairs are
charged to expense as incurred, while significant renewals and
replacements are capitalized. Buildings and improvements, machinery and
equipment, automotive equipment and office furniture and fixtures are
depreciated using the straight-line method over the expected useful
lives of individual assets as indicated below:
<TABLE>
<CAPTION>
Depreciable
Class of Assets Term (Years)
------------------------------------ ------------
<S> <C>
Machinery and equipment 3 to 7
Automotive equipment 3
Buildings and improvements 7 to 39
Office furniture and equipment 3 to 7
</TABLE>
Income taxes
The Company accounts for its income taxes under Statement of Financial
Accounting Standard ("SFAS") No. 109, "Accounting for Income Taxes".
Under SFAS No. 109, the liability method is used in accounting for
income taxes. Under this method, deferred tax liabilities are determined
based on differences between financial reporting and tax bases of assets
and liabilities and are measured using the enacted marginal rates and
laws that will be in effect when the differences reverse.
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 reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Accounting for stock-based compensation
In 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation". SFAS No. 123 allows either
adoption of a fair value based method of accounting for stock-based
compensation or continuation under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). The
Company has chosen to account for stock-based compensation using the
intrinsic value based method prescribed in APB 25. Accordingly,
compensation cost for stock options is measured as the excess, if any,
of the estimated market price of the Company's stock at the measurement
date over the exercise price.
10
<PAGE>
LANDRY SERVICE CO., INC.
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1999
Note 2 - Debt
The Company's debt consists of the following:
<TABLE>
<CAPTION>
February 28,
1999 1998
---- ----
<S> <C> <C>
Line of credit of $2,000,000 available
from a bank, maturing May 1999, interest
payable monthly ranging from prime to
prime plus 0.5%(prime of 7.5% at
February 28, 1999), secured by trade
receivables and equipment. $ 534,146 $ -
Note payable to bank, maturing May 1999,
monthly payments of $72,222 plus interest
at prime plus 1%(8.5% at February 28, 1999),
secured by trade receivables and equipment. 216,667 1,083,333
Note payable to bank, which originally
matured May 1999 with monthly payments of
$2,433 plus interest at prime (7.5% at
February 28, 1999). During February 1999,
note was extended in conjunction with
additional proceeds from the bank. Monthly
payments are now $5,960, including principal
and interest at 8.22%, with a revised maturity
of February 2009 which includes a balloon
payment at maturity, secured by real estate
and warehouse facility. 712,169 180,062
Notes payable to bank, maturing March 2001,
monthly payments of $15,367, including
principal and interest at 8.22%, secured by
equipment. 351,170 -
----------- -----------
1,814,152 1,263,395
Less current portion (927,652) (895,867)
----------- -----------
$ 886,500 $ 367,528
----------- -----------
</TABLE>
The aggregate principal payments required on long-term debt for years
subsequent to February 28, 1999 are:
<TABLE>
<CAPTION>
Year Ending
February 28,
------------
<S> <C>
2000 $ 927,652
2001 191,681
2002 31,352
2003 19,130
2004 20,717
Thereafter 623,620
-------
Total $1,814,152
---------
</TABLE>
11
<PAGE>
LANDRY SERVICE CO., INC.
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1999
Note 2 - Debt (Continued)
The line of credit agreement contains various covenants pertaining to
financial ratios and tangible net worth, and the amount available is
limited to 80% of current trade receivables.
Interest paid during the years ended February 28, 1999 and 1998 was
approximately $138,000 and $320,000, respectively.
Note 3 - Leases
The Company leases motor vehicles, office equipment and buildings under
leases classified as operating leases. Minimum future rental payments
under noncancelable operating leases with terms greater than one year as
of February 28, 1999 are:
<TABLE>
<CAPTION>
Year Ending
February 28,
------------
<S> <C>
2000 $189,263
2001 59,359
2002 14,052
2003 3,207
-------
Total $265,881
-------
</TABLE>
Total rent expense under operating leases for the years ending February
28, 1999 and 1998 was approximately $291,400 and $260,500, respectively.
Note 4 - Income Taxes
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Current
Federal $1,141,336 $ 928,863
State 250,739 174,774
--------- ---------
Total current expense 1,392,075 1,103,637
--------- ---------
Deferred
Federal (237,964) (218,158)
State (31,494) (28,874)
--------- ---------
Total deferred expense(benefit) (269,458) (247,032)
--------- ---------
Total income tax expense $1,122,617 $ 856,605
--------- ---------
</TABLE>
12
<PAGE>
LANDRY SERVICE CO., INC.
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1999
Note 4 - Income Taxes (Continued)
Significant components of the Company's deferred tax assets as of
February 28, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
February 28,
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Non-current
Stock-based compensation $153,616 $ -
Book over tax depreciation 199,448 153,055
--------- ---------
Total non-current 353,064 153,055
--------- ---------
Current
Stock-based compensation - 153,616
Various annual expenses not currently
deducted for tax 341,911 118,846
--------- ---------
Total current 341,911 272,462
--------- ---------
Total deferred tax assets $694,975 $425,517
-------- --------
</TABLE>
Income taxes paid during the years ended February 28, 1999 and 1998 were
approximately $1,214,000 and $1,213,000, respectively.
Note 5 - Commitments and Contingencies
The Company becomes a party to legal proceedings and claims in the
normal course of business. In the opinion of management, the outcome of
these matters will not have a material adverse effect on the financial
position, results of operations or cash flows of the Company.
Note 6 - Redeemable Preferred Stock
The Series B redeemable preferred stock pays dividends at $2.00 per
share and is cumulative and nonparticipating.
Note 7 - Related Party Transactions
Interest expense on loans from two of the Company's common stockholders
was approximately $20,500 for the year ended February 28, 1998.
The Company paid approximately $26,000 and $10,000 to a stockholder for
aircraft rental during the years ended February 28, 1999 and 1998,
respectively.
The Company paid approximately $65,000 in entertainment facility
expenses to a stockholder during the year ended February 28, 1999.
The Company paid certain expenses on behalf of a stockholder resulting
in an accounts receivable from the stockholder of approximately $28,000
and $50,000 which is included in other accounts receivable at February
28, 1999 and 1998, respectively.
13
<PAGE>
LANDRY SERVICE CO., INC.
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1999
Note 8 - Employees' Profit Sharing Plan and Trust
The Company established the Landry Service Co., Inc. Employees' Profit
Sharing Plan and Trust (the "Plan") effective February 27, 1987.
Effective January 1, 1996, the Plan was amended and restated as the
Landry Service Co., Inc. 401(k) Profit Sharing Plan. Qualified
employees with a minimum of one year of employment are eligible to
participate. The Plan is contributory and the Company contributions
are at the discretion of the board of directors. The Company's
contributions to the Plan for the year ended February 28, 1999 and
1998 were approximately $194,500 and $225,000, respectively.
Note 9 - Stock Option Plan
During 1998, the Company executed a stock option plan for a maximum of
100,000 shares which may be granted to certain key employees and
directors. The plan provides that options shall become exercisable upon
the occurrence of an exercisable event and shall terminate upon
termination of employment. An exercisable event shall mean the closing
of a sale of substantially all of the assets or stock of the Company, or
the closing of a reorganization or merger of the Company.
As of February 28, 1999, there were 100,000 stock options granted under
this plan at an option price of $0.01 per share.
Information regarding the option plan for the year ended February 28,
1999 is as follows:
<TABLE>
<S> <C>
Options outstanding, beginning of year 100,000
Options granted --
Options exercised --
-------
Options outstanding, end of year 100,000
-------
Options exercisable, end of year --
-------
Options available for grant, end of year --
-------
</TABLE>
Pro forma information regarding net income has been determined as if the
Company has accounted for its stock options under the fair value method
SFAS No. 123, "Accounting for Stock-Based Compensation". The fair value
of these options was estimated at the date of grant using a
Black-Scholes option-pricing model with the following assumptions:
risk-free interest rate of 5.5%; dividend yield of 0%; and an expected
option life of one year. The average fair value at date of grant for
options granted during the year ended February 28, 1999 was $3.99 per
option.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions. Because the
Company's stock options have characteristics significantly different
from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its stock options.
14
<PAGE>
LANDRY SERVICE CO., INC.
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1999
Note 9 - Stock Option Plan (Continued)
The compensation cost for the Company's stock option plan as determined
based on the fair value at the grant date consistent with the provisions
of SFAS No. 123 was $399,000 for the year ended February 28, 1998. There
would have been no impact on the Company's net income for the year ended
February 28, 1998 had the Company recorded the stock options in
accordance with SFAS No. 123.
Note 10 - Year 2000 Issue (Unaudited)
Management of the Company has evaluated the impact of Year 2000 issues
on its computer systems and applications and developed a remediation
plan. Conversion and testing activities are in process and are expected
to be completed in early 1999. The Company's operations could be
adversely affected to the extent that third parties, such as significant
customers, suppliers, and other third parties would be unable to
transact business in the Year 2000 and thereafter.
15
<PAGE>
LANDRY SERVICE CO., INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 18, 1999
(UNAUDITED)
Note 1 - Basis of Presentation
Reference is made to the Company's audited financial statements for the
years ended February 28, 1999 and 1998.
The financial statements for the period March 1, 1999 through November
18, 1999 are unaudited and include all adjustments which, in the opinion
of management, are necessary for a fair statement of the results of
operations for the period then ended. All such adjustments are of a
normal recurring nature. The results of the Company's operations for any
interim period are not necessarily indicative of the results of the
Company's operations for a full fiscal year.
Note 2 - Income Taxes
The provision for income taxes for the period presented varied from the
federal statutory income tax rate primarily due to not recognizing an
income tax benefit from a net operating loss principally resulting from
a stock-based compensation expense deduction.
Note 3 - Contingencies
The Company is involved in various litigation arising in the ordinary
course of business. Management believes that the ultimate resolution of
such litigation will not have a material effect on the Company's results
of operations or financial position.
Note 4 - Subsequent Event
On November 19, 1999, the Company was acquired by HydroChem Industrial
Services, Inc. Immediately prior to the transaction, all outstanding
options under the Company's Stock Option Plan were exercised. As a
result, the Company recorded compensation costs in the amount of
$2,468,078.
16
<PAGE>
HYDROCHEM INDUSTRIAL SERVICES, INC.
AND SUBSIDIARIES
PRO FORMA FINANCIAL INFORMATION
EXPLANATORY NOTE
On November 19, 1999, HydroChem Industrial Services, Inc.("HCIS") acquired
all of the issued and outstanding shares of capital stock ("the Shares") of
Landry Service Co., Inc. ("LANSCO"). LANSCO is primarily engaged in the business
of tank cleaning, oil reclamation and liquid-solid waste separation for the oil
refining industry. This acquisition was consummated pursuant to a stock purchase
agreement (the "Stock Purchase Agreement") of the same date by and among HCIS,
LANSCO and each stockholder of LANSCO. Under the Stock Purchase Agreement, HCIS
paid $35.5 million for the Shares, consisting of $32.0 million in cash paid at
closing and $3.5 million in promissory notes (the "Seller Notes") payable in
installments with interest over the two years following the date of
acquisition to the two former principal stockholders of LANSCO. In addition,
HCIS entered into an Additional Sales Proceeds and Consulting Agreement with one
of these former principal stockholders which provides for further payments of
$1.25 million to that former stockholder over the two years following the date
of acquisition. The source of funds for the acquisition was a combination of
existing available cash, the Seller Notes, and bank debt from a new senior
secured credit facility. HCIS intends to use LANSCO's assets and operations to
expand LANSCO's customer base and strengthen HCIS' tank cleaning business. The
acquisition has been accounted for using the purchase method of accounting.
On January 5, 1999, HCIS acquired substantially all of the assets and
assumed certain liabilities of Valley Systems, Inc. and Valley Systems of Ohio,
Inc. (collectively, "VALLEY"). The assets acquired consisted primarily of (i)
accounts receivable, (ii) property, plant and equipment, (iii) intangibles, and
(iv) other operating assets. The purchase price for the acquired assets,
including certain post closing adjustments, was approximately $30.9 million in
cash of which $4 million was deposited into escrow. In addition, HCIS assumed
approximately $2.5 million of VALLEY's capital lease obligations, which were
converted to operating leases in March 1999, and paid $5.3 million in cash at
closing to retire VALLEY's bank debt. The source of funds for the purchase price
and retirement of VALLEY's bank debt was a combination of cash on hand and
borrowings under HCIS' then existing credit facility.
The unaudited pro forma financial information presented consists of
(i) an unaudited pro forma consolidated balance sheet as of September 30, 1999,
(ii) an unaudited pro forma consolidated statement of operations for the year
ended December 31, 1998, and (iii) an unaudited pro forma consolidated statement
of operations for the nine months ended September 30, 1999. The following
unaudited pro forma consolidated financial statements are derived from (i) the
HCIS historical unaudited consolidated balance sheet and statement of operations
as of and for the nine months ended September 30, 1999, and the HCIS
consolidated statement of operations for the year ended December 31, 1998, (ii)
VALLEY's unaudited consolidated statement of operations for the year ended
December 31, 1998, which has been conformed to be consistent with HCIS'
fiscal year, and (iii) LANSCO's audited and unaudited historical financial
statements for the year ended February 28, 1999 and the period from March 1,
1999 through November 18, 1999, respectively.
17
<PAGE>
HYDROCHEM INDUSTRIAL SERVICES, INC.
AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(in thousands)
September 30, 1999
<TABLE>
<CAPTION>
HISTORICAL
----------
Pro Forma
HCIS LANSCO Combined Adjustments
-------- -------- -------- -----------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents .. $ 2,206 $ 1,243 $ 3,449 $ (2,007)(a)
Receivables, net ........... 33,169 3,446 36,615 --
Inventories ................ 4,586 -- 4,586 --
Prepaid expenses and other
current assets ............ 2,339 17 2,356 --
Income tax receivable ...... 243 156 399 --
Deferred income taxes ...... 1,655 71 1,726 --
-------- ------- -------- --------
Total current assets ...... 44,198 4,933 49,131 (2,007)
Property and equipment,
at cost, net ................ 51,771 2,661 54,432 --
Intangible assets, net ........ 67,906 -- 67,906 34,523 (b)
-------- ------- -------- --------
Total assets .............. $163,875 $ 7,594 $171,469 $ 32,516
======== ======= ======== =======
Current liabilities:
Accounts payable ........... $ 5,651 $ 817 $ 6,468 $ --
Accrued liabilities ........ 14,543 803 15,346 2,500 (c)
Current portion of long-term
debt ...................... 209 957 1,166 (957)(d)
-------- ------- -------- --------
Total current liabilities . 20,403 2,577 22,980 1,543
Long-term debt ................ 118,211 -- 118,211 36,000 (e)
Deferred income taxes ......... 8,814 42 8,856 --
Preferred stock ............... -- 665 665 (665)(f)
Commitments and contingencies
Stockholders' equity:
Common stock ............... 1 16 17 (16)(f)
Additional paid in capital . 16,558 2,866 19,424 (2,866)(f)
Retained earnings (deficit) (112) 4,458 4,346 (4,510)(f)
Treasury stock ............. -- (3,030) (3,030) 3,030 (f)
-------- ------- -------- --------
Total stockholders' equity 16,447 4,310 20,757 (4,362)
-------- ------- -------- --------
Total liabilities and
stockholders' equity ..... $163,875 $ 7,594 $171,469 $ 32,516
======== ======= ======== ========
<CAPTION>
Pro Forma
------------
<S> <C>
Current assets:
Cash and cash equivalents .. $ 1,442
Receivables, net ........... 36,615
Inventories ................ 4,586
Prepaid expenses and other
current assets ............ 2,356
Income tax receivable ...... 399
Deferred income taxes ...... 1,726
--------
Total current assets ...... 47,124
Property and equipment,
at cost, net ................ 54,432
Intangible assets, net ........ 102,429
--------
Total assets .............. $203,985
========
Current liabilities:
Accounts payable ........... $ 6,468
Accrued liabilities ........ 17,846
Current portion of long-term
debt ...................... 209
--------
Total current liabilities . 24,523
Long-term debt ................ 154,211
Deferred income taxes ......... 8,856
Preferred stock ............... --
Commitments and contingencies
Stockholders' equity:
Common stock ............... 1
Additional paid in capital . 16,558
Retained earnings (deficit) (164)
Treasury stock ............. --
--------
Total stockholders' equity 16,395
--------
Total liabilities and
stockholders' equity ..... $203,985
========
</TABLE>
See accompanying notes.
18
<PAGE>
HYDROCHEM INDUSTRIAL SERVICES, INC.
AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
HISTORICAL
----------
Pro Forma
HCIS VALLEY LANSCO Combined Adjustments
--------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
Revenue .................. $ 168,770 $ 26,054 $ 23,695 $218,519 $ --
Cost of revenue .......... 105,171 13,503 15,114 133,788 (219)(g)
-------- ------- ------- ------- ------
Gross profit .......... 63,599 12,551 8,581 84,731 219
Selling, general and
administrative expense .. 44,245 6,795 4,786 55,826 (110)(g)
(376)(h)
(1,909)(i)
Depreciation ............. 9,078 2,686 937 12,701 (252)(j)
-------- ------- ------- ------- ------
Operating income ...... 10,276 3,070 2,858 16,204 2,866
Other (income) expense:
Interest expense, net . 10,470 587 128 11,185 1,481 (k)
3,455 (l)
Special charges ....... 815 -- -- 815 --
Restructuring charges . 740 -- -- 740 --
Other income .......... (59) -- (172) (231) --
Amortization of
intangibles .......... 1,501 136 -- 1,637 945 (m)
1,357 (n)
-------- ------- ------- ------- ------
Income (loss) before taxes (3,191) 2,347 2,902 2,058 (4,372)
Income tax provision
(benefit) ............ -- (5,985) 1,123 (4,862) 4,862 (o)
-------- ------- ------- ------- ------
Net income (loss) ........ $ (3,191) $ 8,332 $ 1,779 $ 6,920 $(9,234)
======== ======= ======= ======= ======
<CAPTION>
Pro Forma
----------
<S> <C>
Revenue .................. $ 218,519
Cost of revenue .......... 133,569
---------
Gross profit .......... 84,950
Selling, general and
administrative expense .. 53,431
Depreciation ............. 12,449
---------
Operating income ...... 19,070
Other (income) expense:
Interest expense, net . 16,121
Special charges ....... 815
Restructuring charges . 740
Other income .......... (231)
Amortization of
intangibles .......... 3,939
---------
Income (loss) before taxes (2,314)
Income tax provision
(benefit) ............ --
---------
Net income (loss) ........ $ (2,314)
=========
</TABLE>
See accompanying notes.
19
<PAGE>
HYDROCHEM INDUSTRIAL SERVICES, INC.
AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands)
For the Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
HISTORICAL
----------
Pro Forma Pro
HCIS LANSCO Combined Adjustments Forma
---- ------ -------- ----------- -----
<S> <C> <C> <C> <C> <C>
Revenue .................. $146,109 $14,130 $160,239 $ -- $160,239
Cost of revenue .......... 86,409 9,578 95,987 -- 95,987
------- ------ ------- ------ -------
Gross profit .......... 59,700 4,552 64,252 -- 64,252
Selling, general and
administrative expense... 36,518 5,775 42,293 (1,432)(i) 38,393
(2,468)(p)
Depreciation ............. 8,588 442 9,030 -- 9,030
------- ------ ------- ------ -------
Operating income (loss) 14,594 (1,665) 12,929 3,900 16,829
Other expense:
Interest expense, net . 9,725 36 9,761 2,487 (l) 12,248
Other expense, net .... 37 40 77 -- 77
Amortization of
intangibles .......... 1,901 -- 1,901 1,017 (n) 2,918
------- ------ ------- ------ -------
Income (loss) before taxes 2,931 (1,741) 1,190 396 1,586
Income tax provision
(benefit) ............ -- 723 723 (723)(o) --
------- ------ ------- ------ -------
Net income (loss) ........ $ 2,931 $(2,464) $ 467 $ 1,119 $ 1,586
======= ====== ======= ====== =======
</TABLE>
See accompanying notes.
20
<PAGE>
HYDROCHEM INDUSTRIAL SERVICE, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
1. Basis of Presentation
The unaudited pro forma consolidated balance sheet presents the financial
position of HCIS assuming the LANSCO transaction was consummated as of
September 30, 1999. The unaudited pro forma consolidated statement of
operations for the nine months ended September 30, 1999 assumes the LANSCO
transaction was consummated on January 1, 1999. The unaudited pro forma
consolidated statement of operations for the year ended December 31, 1998
assumes the VALLEY and LANSCO transactions were consummated on January 1,
1998. These statements were prepared by taking into consideration only
those adjustments that are directly attributable to the transactions and
known to have a continuing impact on operations as a result of the
acquisitions.
The unaudited pro forma consolidated financial statements have been
prepared in accordance with generally accepted accounting principles. All
calculations have been made based upon certain assumptions and adjustments
described in these notes. Included in these assumptions is the presumption
that no additional selling, general and administrative expense is required
because the combined infrastructure is deemed sufficient to support the
additional activities anticipated as a result of the acquisitions.
The unaudited pro forma consolidated financial statements were prepared
utilizing the accounting policies of HCIS. The allocation of the LANSCO
purchase price, which may be subject to certain adjustments as HCIS
finalizes the allocation of the purchase price in accordance with
generally accepted accounting principles, is included in the unaudited pro
forma consolidated financial statements. The LANSCO purchase price has
been allocated based upon the estimated fair value of the assets acquired
and liabilities assumed. The excess of the LANSCO purchase price over the
estimated fair value of the net assets acquired at the acquisition date
has been recorded as goodwill.
Certain amounts from the VALLEY and LANSCO historical consolidated
financial statements have been reclassified to conform with the basis of
presentation used by HCIS in preparing its consolidated financial
statements.
The unaudited pro forma consolidated financial statements should be read
in conjunction with the historical consolidated financial statements of
HCIS, VALLEY and LANSCO. The HCIS historical consolidated financial
statements are included in its Form 10-K for the year ended December 31,
1998 and Form 10-Q for the three and nine month periods ended September
30, 1999. VALLEY's historical consolidated financial statements are
included in its Form 10-K for the year ended June 30, 1998, its Form 10-Q
for the three and six month periods ended December 31, 1998, and the HCIS
Form 8-K/A dated March 22, 1999. LANSCO's audited financial statements for
the years ended February 28, 1999 and 1998 are included herein.
The unaudited pro forma consolidated financial statements do not purport
to be indicative of the financial position of HCIS or the results
of operations that might have occurred had the acquisitions been concluded
on January 1, 1998 or January 1, 1999, nor are they necessarily indicative
of future results.
21
<PAGE>
HYDROCHEM INDUSTRIAL SERVICE, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
2. Acquisition of LANSCO
The acquisition of the Shares has been accounted for using the purchase
method of accounting. The purchase price for the acquisition has been
calculated as follows:
<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.
3. Pro Forma Adjustments
Adjustments have been made to the accompanying unaudited pro forma
consolidated balance sheet as of September 30, 1999, and the unaudited pro
forma consolidated statements of operations for the year ended December
31, 1998 and the nine months ended September 30, 1999 to reflect the
following:
(a) Cash effects of transaction:
<TABLE>
<S> <C>
Cash payment .............................. $(32,000)
Fees and costs paid at closing ............ (1,550)
Retirement of LANSCO debt ................. (957)
HCIS term loan and line of credit borrowing 32,500
-------
$ (2,007)
=======
</TABLE>
(b) Estimated excess of purchase price over net assets acquired, and net
deferred financing costs.
(c) Transaction and acquisition cost accruals, plus deferred financing
cost accrual.
(d) Retirement of LANSCO debt.
(e) Bank borrowings by HCIS to finance the LANSCO acquisition, and
issuance of the Seller Notes.
(f) Elimination of LANSCO preferred stock and stockholder's equity and
to write off deferred financing costs related to HCIS' previous
credit facility.
22
<PAGE>
HYDROCHEM INDUSTRIAL SERVICE, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
(g) Reduction in cost of VALLEY property and casualty insurance
programs, and increase in cost of group health insurance to provide
benefits for VALLEY employees consistent with those provided to the
HCIS employees.
(h) Compensation, benefits and other directly associated costs related
to terminated VALLEY employees.
(i) Compensation, benefits and other directly associated costs related
to two former principal stockholders of LANSCO.
(j) Change in VALLEY depreciable lives to be consistent with those of
HCIS.
(k) Incremental interest expense and reduction of interest income to
reflect funding of the VALLEY transaction.
(l) Incremental interest expense to reflect funding of the
LANSCO transaction and amortization of deferred financing costs.
(m) Elimination of VALLEY amortization of intangibles and inclusion of
amortization of goodwill related to the VALLEY transaction over
25 years.
(n) Amortization of goodwill related to the LANSCO transaction over
periods ranging from 10 to 25 years.
(o) Adjustment of income tax provision to reflect the HCIS
historical effective tax rate.
(p) Reduction in selling, general and administrative expense related to
LANSCO stock-based compensation resulting from the exercise of stock
options.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HYDROCHEM INDUSTRIAL SERVICES, INC.
Date: February 1, 2000 By: /s/ Selby F. Little, III
--------------------------
Selby F. Little, III, Executive Vice
President and Chief Financial Officer
HYDROCHEM INTERNATIONAL, INC.
Date: February 1, 20000 By: /s/ Selby F. Little, III
--------------------------
Selby F. Little, III, Executive Vice
President and Chief Financial Officer
24
<PAGE>
