<PAGE> 1
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the quarter ended June 30, 1996 Commission file number 1-11013
SPECIALTY CHEMICAL RESOURCES, INC.
----------------------------------------------------
Exact name of registrant as specified in its charter
Delaware 34-1366838
---------------------- ------------------------
State of incorporation I.R.S. Employer I.D. No.
9100 Valley View Road; Macedonia, Ohio 44056
---------------------------------------------
Address of principal executive offices and zip code
(216) 468-1380
----------------------------------------------------
Registrant's telephone number, including area code
Indicate by a 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 twelve (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 ninety (90) days. Yes X No .
----- -----
The number of outstanding shares of the Registrant's common stock as of
July 31, 1996 was 3,947,765.
================================================================================
Page 1 of 15
<PAGE> 2
Specialty Chemical Resources, Inc.
Form 10-Q
For the quarter ended June 30, 1996
Index
<TABLE>
<CAPTION>
Part I Financial Information Page
<S> <C>
Item 1. Financial Statements..........................................3
Condensed Balance Sheets......................................3
Condensed Statements of Operations, 3 Months..................5
Condensed Statements of Operations, 6 Months..................6
Condensed Statements of Cash Flows, 3 Months..................7
Condensed Statements of Cash Flows, 6 Months..................8
Notes to Financial Statements.................................9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................10
Part II Other Information
Item 1. Legal Proceedings............................................13
Item 4. Submission of Matters to a Vote of Security Holders..........13
Item 6. Exhibits & Reports on Form 8-K...............................14
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Specialty Chemical Resources, Inc.
Condensed Balance Sheets
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
(Unaudited) (Audited)
------------ -----------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 8,948 $ 1,238
Accounts Receivables 4,528,088 6,218,508
Receivable - Other 221,209 810,102
Inventories 6,750,357 6,717,310
Prepaid expenses 399,720 201,420
Refundable Income Taxes 1,134,079 1,134,079
------------ ------------
Total current assets 13,042,401 15,082,657
Property, plant and equipment
At cost 14,198,746 14,130,242
Less accumulated depreciation
and amortization (3,941,218) (3,426,847)
------------ ------------
10,257,528 10,703,395
Other assets
Goodwill, other intangibles 21,163,966 21,266,161
Other 220,236 220,236
------------ ------------
21,384,202 21,486,397
------------ ------------
Total assets $ 44,684,131 $ 47,272,449
============ ============
</TABLE>
See accompanying Notes to Financial Statements.
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<PAGE> 4
Specialty Chemical Resources, Inc.
Condensed Balance Sheets
(continued)
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
(Unaudited) (Audited)
------------- -----------------
<S> <C> <C>
Current liabilities
Current Maturities $ 44,500 $ 44,500
Accounts payable 5,116,296 6,695,517
Accrued expenses 1,157,394 1,200,666
----------- -----------
Total current liabilities 6,318,190 7,940,683
Long-term obligations 10,135,184 10,399,126
Deferred Income Taxes 138,805 138,805
Redeemable Preferred Stock, $.01 par
value and $100 redemption value;
authorized and issued 3,500 shares 350,000 350,000
Stockholders' equity
Preferred stock - $.01 par value;
authorized 1,996,500 shares
Common Stock - $.10 par value;
authorized 13,000,000 shares;
issued and outstanding 3,947,767
and 3,947,769 394,777 394,777
Additional paid in capital 41,935,125 41,935,125
Accumulated deficit (14,549,250) (13,847,367)
Unearned Compensation (38,700) (38,700)
----------- -----------
27,741,952 28,443,835
----------- -----------
$44,684,131 $47,272,449
=========== ===========
</TABLE>
See accompanying Notes to Financial Statements.
4 of 15
<PAGE> 5
Specialty Chemical Resources, Inc.
Condensed Statements of Operations
(Unaudited)
For the 3 month periods ended:
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Net Sales $ 9,345,913 $ 12,250,000
Cost of Goods Sold 7,573,322 10,176,961
----------- ------------
Gross profit 1,772,591 2,073,047
Selling, general and administrative
expenses 1,471,194 1,672,708
Amortization of intangibles 217,173 217,173
Proxy contest expenses -0- 650,000
----------- ------------
Operating profit (loss) 84,224 (466,834)
Other (income) expense
Interest expense 272,612 187,109
Other -0- (16,714)
----------- ------------
272,612 170,395
----------- -----------
Earnings (loss) before income
taxes (188,388) (637,229)
Income taxes -0- -0-
----------- ------------
Earnings (loss) (188,388) (637,229)
=========== ===========
Earnings (loss) per common share: $ (.05) $ (.16)
Weighted average shares outstanding 3,947,766 3,974,961
</TABLE>
See accompanying Notes to Financial Statements.
5 of 15
<PAGE> 6
Specialty Chemical Resources, Inc.
Condensed Statements of Operations
(Unaudited)
For the 6 month periods ended:
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Net Sales $19,409,062 $21,468,954
Cost of Goods Sold 16,158,116 18,096,197
---------- ----------
Gross profit 3,250,946 3,372,757
Selling, general and administrative
expenses 2,996,409 3,290,779
Amortization of intangibles 434,346 434,346
Proxy contest expenses -0- 650,000
---------- ----------
Operating profit (loss) (179,809) (1,002,368)
Other (income) expense
Interest expense 508,989 321,445
Other -0- (26,065)
---------- ----------
508,989 295,380
---------- ----------
Earnings (loss) before income
taxes (688,798) (1,297,748)
Income taxes (benefit) -0- -0-
---------- ----------
Earnings (loss) (688,798) (1,297,748)
Earnings (loss) per common share: $ (.17) $ (.33)
Weighted average shares outstanding 3,947,767 3,955,793
</TABLE>
See accompanying Notes to Financial Statements.
6 of 15
<PAGE> 7
Specialty Chemical Resources, Inc.
Condensed Statements of Cash Flows
(Unaudited)
For the 3 month periods ended:
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Net cash provided (used) by operating
activities $ 265,002 $ (927,828)
Cash flows from investing activities:
Expenditures for property, plant and
equipment - net; other (21,969) (1,144,116)
----------- -----------
Net cash provided (used) by
investing activities (21,969) (1,144,116)
Cash flows from financing activities:
Payments on revolver (15,768,762) (1,460,000)
Proceeds on revolver 15,516,126 3,525,000
----------- -----------
Net cash provided (used) by
financing activities (252,636) 2,065,000
----------- -----------
Net increase (decrease) in cash
and cash equivalents (9,603) (6,944)
Cash and cash equivalents at beginning
of period 18,551 12,227
----------- -----------
Cash and cash equivalents at end
of period $ 8,948 $ 5,283
=========== ===========
</TABLE>
See accompanying Notes to Financial Statements.
7 of 15
<PAGE> 8
Specialty Chemical Resources, Inc.
Condensed Statements of Cash Flows
(Unaudited)
For the 6 month periods ended:
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Net cash provided (used) by operating
activities $ 340,156 $(2,365,857)
Cash flows from investing activities:
Expenditures for property, plant and
equipment - net (68,504) (2,018,885)
------------ -----------
Net cash provided (used) by
investing activities (68,504) (2,018,885)
Cash flows from financing activities:
Payments on revolver (15,780,068) (2,535,000)
Proceeds on revolver 15,516,126 6,910,000
----------- -----------
Net cash provided (used) by
financing activities (263,942) 4,375,000
----------- -----------
Net increase (decrease) in cash
and cash equivalents 7,710 (9,742)
Cash and cash equivalents at beginning
of period 1,238 15,025
----------- -----------
Cash and cash equivalents at end
of period $ 8,948 $ 5,283
=========== ===========
</TABLE>
See accompanying Notes to Financial Statements.
8 of 15
<PAGE> 9
Specialty Chemical Resources, Inc.
Notes to Financial Statements
Note A - Summary of Significant Accounting Policies
The accompanying audited and unaudited financial statements have been
prepared in conformity with generally accepted accounting principles and all
adjustments are of a normal recurring nature and are, in the opinion of
management, necessary to present fairly the financial position of Specialty
Chemical Resources, Inc. (the "Company") at December 31, 1995 and June 30, 1996
and the results of operations and cash flows for the interim periods ended June
30, 1996 and 1995.
In March 1995, the FASB adopted SFAS No. 121, Accounting For The
Impairment Of Long-Lived Assets and For Long-Lived Assets To Be Disposed Of.
This Statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of such an asset may not be recoverable. The Company has adopted SFAS No. 121
in the first quarter of 1996. Any other significant accounting policies
employed in the preparation of the financial statements are included in the
Company's most recent Form 10-K.
Note B - Inventories
Inventories are stated at the lower of cost or market determined by the
last-in, first-out (LIFO) method for raw materials and the first-in, first-out
(FIFO) method for finished goods.
The Company's inventories consisted of the following at:
<TABLE>
<CAPTION>
June 30, December 3l,
1996 1995
---------- ----------
<S> <C> <C>
Raw materials $4,123,698 $4,111,440
Finished goods 3,369,009 3,323,426
---------- ----------
Total FIFO cost 7,492,707 7,434,866
Less: Excess of FIFO cost over
LIFO 742,350 717,556
---------- ----------
Total LIFO cost $6,750,357 $6,717,310
---------- ----------
</TABLE>
Note C - Legal Proceedings
There have been no material changes in the status of legal proceedings
pending against the Company other than that which was reported on the Company's
most recent Form 10-K.
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<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The following table sets forth, for the periods indicated, the
percentage relationship to net sales of certain items included in the Company's
Statement of Operations.
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
---------------- ------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales......................................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................................ 83.3% 84.3% 81.0% 83.1%
Gross profit.................................... 16.7% 15.7% 19.0% 16.9%
Selling, general and administrative expenses...... 15.4% 15.3% 15.7% 13.7%
Operating profit.(loss)......................... (1.0%) (4.7%) 1.0% (3.8%)
Interest expense.................................. 2.6% 1.5% 2.9% 1.5%
</TABLE>
Net sales of $19,409,000 for the six-month period ended June 30, 1996,
were $2,060,000, or 9.6%, below the comparable period in the prior year. This
decrease was a result of the Company's efforts to reduce low margin sales and
lower demand by the Company's automotive and industrial customers which is
generally consistent with an overall slowdown in the automotive chemical
aftermarket.
For the second quarter ended June 30, 1996, net sales of $9,346,000
were $2,904,000, or 23.7%, below the comparable period in the prior year. This
decrease was mainly attributable to the same factors discussed above with
respect to the three-month period ended June 30, 1996.
Cost of goods sold for the six-month period ended June 30, 1996,
decreased by $1,938,000 as compared to the same period in the prior year. This
decrease was due principally to reduced sales during the six-month period ended
June 30, 1996 and cost reduction efforts in manufacturing labor and overhead.
Cost of goods sold decreased as a percentage of net sales from 84.3% to 83.3%
for the six-month periods ended June 30, 1995 and 1996, respectively. The
decrease in percent of sales was due primarily to higher unit pricing across
most of the Company's product lines.
Cost of goods sold decreased by $2,604,000 for the three-months ended
June 30, 1996 as compared to the prior year. This decrease was due
principally to reduced sales and cost reduction efforts in manufacturing labor
and overhead. Cost of goods sold decreased as a percentage of net sales from
83.1% to 81.0% for the three-
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<PAGE> 11
months ended June 30, 1996 as compared to the same period in the prior year. The
decrease as a percentage of net sales was due primarily to higher unit pricing
across most of the Company's product lines.
Selling, general and administrative expenses were $2,996,000 for the
six-month period June 30, 1996, or 15.4% of net sales. Selling, general and
administrative expenses were $3,291,000 or 15.3% of net sales for the same
period in 1995. The decrease in selling, general and administrative expense
dollars is due to cost reduction efforts, lower bad debt expense as a result of
better collection performance, and lower compensation costs.
Selling, general and administrative expenses were $1,471,000 for the
quarter ended June 30, 1996, or 15.7% of net sales. Selling, general, and
administrative expenses were $1,673,000, or 13.7% of net sales for the same
period in 1995. The decrease in selling, general and administrative expense
dollars is due to the same reasons discussed above with respect to the 3 months
ended June 30, 1996. The increase as a percentage of sales is due primarily to
decreased sales in both the three and six month periods.
During the second quarter of 1995, a group of stockholders (the
"Committee") solicited proxies in opposition to the Company's nominees for its
Board of Directors (the "Proxy Contest"). The purpose of the Proxy Contest was
to attempt to remove, by stockholder vote, the then-current Board of Directors
and to replace them with a slate of new directors nominated by the Committee.
The Proxy Contest was unsuccessful and the Company's incumbent Board nominees
were reelected. The Company incurred charges of $650,000 in responding to the
Proxy Contest. The Company incurred no additional charges in 1996.
Interest expense for the six-months ended June 30, 1996, was 2.6% of
net sales versus 1.5% for the comparable period in the prior year. Interest
expense was $509,000 for the six-months ended June 30, 1996 as compared to
$321,000 for the six-months ended June 30, 1995. The increase in interest
expense is due to increased borrowing under the credit agreement as well as an
increase in the Company's interest rate. The increase in interest expense as a
percentage of sales is due primarily to decreased sales. See "Liquidity and
Capital Resources".
Interest expense for the quarter ended, June 30, 1996, was 2.9% of net
sales versus 1.5% for the comparable period in the prior year. Interest expense
was $272,612 for the quarter ended June 30, 1996 as compared to $187,109 for the
same period in 1995. The increase in interest expense is due to increased
borrowings under the credit agreement as well as an increase in the Company's
interest rate. The increase in interest expense as a percentage of sales is due
primarily to decreased sales. See "Liquidity and Capital Resources".
The Company recorded a net loss for the six-months ended June 30, 1996,
of $688,798, or $.17 per share on weighted average shares outstanding of
3,947,767. This compared to a net loss of $1,297,748, or $.33 per share on
weighted average shares outstanding of 3,955,793 for the same period in the
11 of 15
<PAGE> 12
prior year. The loss for six-months ended June 30, 1995 was partially the result
of expenses totaling $650,000 related to the proxy contest discussed above. Had
the proxy contest not occurred the net loss would have been $647,748 or $.16 per
share on weighted average shares outstanding of 3,955,793.
For the quarter ended June 30, 1996, the Company lost $188,388, or
$.05 per share on weighted average shares outstanding of 3,947,766 as compared
to a net loss of $637,229, or $.16 per share on weighted average shares
outstanding of 3,974,961 for the same period in the prior year. The loss for the
three-month period ended June 30, 1995 was the result of expenses totaling
$650,000 related to the proxy contest discussed above. Had the proxy contest not
occurred, the Company would have experienced net earnings of $12,771.
Liquidity and Capital Resources
As of June 30, 1996, the Company's ratio of current assets to current
liabilities was 2.06 to 1 and the quick ratio (cash, cash equivalents, and
accounts receivable, divided by current liabilities) was .93 to 1.
During the six-months ended June 30, 1996, the Company incurred
$508,989 in interest expense and made interest payments totaling $578,754.
Accrued interest at June 30, 1996 was $89,899. Substantially all of the
Company's interest expense was related to the "Credit Agreement" discussed
below.
The Company, as borrower, is a party to a credit agreement (the "Credit
Agreement") that provides for a $10,000,000 revolving line of credit at an
interest rate equal to the prime rate plus 2 1/4%. The Credit Agreement,
entered into on March 30, 1992 and expiring on May 31, 1997, is a facility that
allows for borrowings based upon a formula comprised of inventory, accounts
receivable and fixed assets, less environmental compliance reserve, if any. As
of June 30, 1996, the borrowing base under the credit agreement was $9,157,145
and no compliance reserve has been required. The Company is engaged in
negotiations wih a bank to refinance its current credit facilities. The Company
has received a proposed term letter from the bank and expects the final
agreement, if and when entered into, to be no less restrictive then the current
credit agreement and to not have a detrimental impact on its liquidity. Though
there can be no assurance that the Company can consummate this refinancing, the
Company believes it will be able to do so during the third quarter of 1996.
Under the terms of the Company's existing Credit Agreement, the Company
is required to comply with various covenants, the most restrictive of which
relate to restrictions on distributions from the Company to its stockholders,
maintenance of certain financial ratios and levels of tangible net worth and
limits on capital expenditures. As a result of the foregoing, as of June 30,
1996, approximately $5,000 was unused and available under the Credit Agreement.
12 of 15
<PAGE> 13
The Company spent $22,000 on capital improvements during the period
ended June 30, 1996. In addition, the Company expects to spend approximately
$428,000 on capital improvements during the balance of the current fiscal year
principally as a result of the consolidation of its facilities in Macedonia.
Such expenditures are expected to be funded from cash generated by operations
and borrowings.
Part II - Other Information
Item 1. Legal Proceedings
There have been no material changes in the status of legal proceedings
pending against the Company.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual Meeting of Stockholders of the Company held on June 6, 1996,
the stockholders considered and voted on the election of seven directors for
one-year terms expiring in 1997 or until their successors have been duly
elected and qualified and a resolution by the Board of Directors ratifying the
appointment of Grant Thornton LLP as independent auditors for the Company for
the year ended December 31, 1996.
All of management's nominees for directors, as listed in the proxy
statement, were elected by the following votes:
Edwin M. Roth For 3,565,928
Withheld 103,679
Corey B. Roth For 3,565,927
Withheld 103,680
George N. Aranoff For 3,566,332
Withheld 103,275
Victor Gelb For 3,566,333
Withheld 103,274
Leonard P. Judy For 3,566,341
Withheld 103,266
Norton W. Rose For 3,565,332
Withheld 104,275
Lionel N. Sterling For 3,566,333
Withheld 103,274
The proposal to ratify the appointment of Grant Thornton LLP as the
Company's independent auditors was passed by the following vote :
Shares voted for 3,638,570
Shares voted against 17,521
Abstentions 13,516
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<PAGE> 14
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: The Company filed no reports on Form 8-K during the
quarter ended June 30, 1996.
14 of 15
<PAGE> 15
Pursuant to the requirements 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.
Specialty Chemical Resources, Inc.
By:/s/ Corey B. Roth August 2, 1996
-----------------------------------
Corey Roth
Vice President, and Treasurer
15 of 15
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000703645
<NAME> SPECIALTY CHEMICAL RESOURCES, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 8,948
<SECURITIES> 0
<RECEIVABLES> 4,749,297
<ALLOWANCES> 0
<INVENTORY> 6,750,357
<CURRENT-ASSETS> 13,042,401
<PP&E> 14,198,746
<DEPRECIATION> (3,941,218)
<TOTAL-ASSETS> 44,684,131
<CURRENT-LIABILITIES> 6,318,190
<BONDS> 10,135,184
<COMMON> 394,777
350,000
0
<OTHER-SE> 27,347,175
<TOTAL-LIABILITY-AND-EQUITY> 44,684,131
<SALES> 19,409,062
<TOTAL-REVENUES> 19,409,062
<CGS> 16,158,116
<TOTAL-COSTS> 16,158,116
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 508,989
<INCOME-PRETAX> (688,798)
<INCOME-TAX> 0
<INCOME-CONTINUING> (688,798)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (688,798)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
