<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10K
ANNUAL REPORT
Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the calendar year ended December 31,1996 Commission file no 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) (Zip Code)
Registrant's telephone number, including area code: (216) 468-1380
--------------
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.10 per share.
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 checkmark 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. Yes __x__ No ____
The aggregate market value of voting stock held by nonaffiliates of the
Registrant as of February 28,1997 was $5,693,166
As of February 28,1997, 3,882,264 shares of the Registrant's Common
Stock were outstanding.
Documents Incorporated by Reference: The registrant's definitive proxy statement
for its 1997 Annual Meeting of Stockholders, which the registrant intends to
file with the Securities and Exchange Commission within 120 days of the close of
its fiscal year end, December 31, 1996, is incorporated by reference in Part III
of this Annual Report on Form 10-K from the date of filing of such document.
Page 1 of 43
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL. The Company was incorporated in Delaware in 1982 for the purpose of
operating family oriented restaurants and entertainment centers. By 1988, the
Company had concluded that enhanced growth required a change in the Company's
business focus from the operation of the restaurants to the building of an
industrial corporation. As a result, the Company acquired Aerosol Systems, Inc.
("ASI"), effective December 31, 1988, for an aggregate purchase price of
approximately $40,000,000, of which approximately $14,750,000 was paid for stock
and approximately $25,250,000 of liabilities were assumed. The Company disposed
of the restaurants October 31, 1991. ASI was merged into the Company on December
30, 1992.
The Company's principal executive offices are located at 9100 Valley
View Road, Macedonia, Ohio 44056; telephone (216) 468-1380. Unless the context
otherwise indicates, the term "Company" refers to Specialty Chemical Resources,
Inc.
On February 26, 1992, the Company effected a 1-for-14 reverse stock
split, whereby each share of the Common Stock of the Company outstanding
immediately prior to the reverse split was converted into 1/14 of a share of the
Common Stock. Unless otherwise indicated, the information in this Report is
adjusted to reflect the 1-for-14 reverse stock split.
BUSINESS. The Company is a leading custom formulator and packager of specialty
chemical products, primarily for the automotive service, industrial maintenance
and janitorial/sanitation markets. The Company specializes in developing,
formulating and packaging new products for customers which do not have the
expertise or volume to maintain captive research and development departments and
manufacturing operations. The Company produces and sells over 900 "proprietary"
chemical formulations, substantially all of which are packaged in aerosol
containers. In 1996, the Company sold approximately 30 million units. These
proprietary formulations represent know-how of the Company developed through the
skill and experience of its employees. These proprietary formulations are not
generally patented. Approximately 84% of the Company's sales are of its
proprietary products sold under the brand names of the Company's customers. The
Company's products include cleaners, sealants, gasket components, lubricants,
waxes, adhesives, paints, coatings, degreasers, polishes, anti-statics and tire
inflators. Most all of the Company's products are used by professionals in
commercial applications. In addition, the Company produces and sells its own
branded products. Approximately 16% of the Company's sales are of its branded
products.
Page 2 of 43
<PAGE> 3
The Company acts as an extension of its customers' marketing, research
and development, procurement, production and quality control departments. It
provides a wide range of services including: aerosol product design and concept
origination; chemical formulation; container selection; marketing program
development; labeling; filling and packaging; component and raw materials
purchasing; vendor verification; regulatory compliance; inventory control and
overall program management. As such, the Company differentiates itself from
contract packagers, which fill aerosol cans for a fee but do not provide the
same range of services. The Company believes that it is one of three companies
providing such a wide range of services in the Company's product markets.
The Company's customers are principally distribution companies. The
Company sells to approximately 350 core accounts with no single customer
accounting for 10% of the Company's sales. The Company provides customers with
prompt shipment, normally within four weeks after receipt of order, and will
accept short production run orders (as few as 100 cases), thereby reducing the
inventory requirements of its customers. Markets served by the Company include
automotive service, janitorial, industrial maintenance and sanitation, high tech
electronic and electrical manufacturing, and art and crafts. Less than 2% of the
Company's sales are to chain store merchandisers. The Company believes, based on
its experience with its customers and its knowledge of its industry, that it is
the only custom packager in its principal markets that provides this wide range
of services, and on a routine basis will produce as few as 100 cases of a
product and offers delivery within four weeks.
The Company relies heavily on its pre-sale consultation and ongoing
involvement with customers to establish long-term relationships. Its specialized
equipment permits it to meet the varied needs of its customers. The Company's
strong technical capabilities, proprietary products and formulations,
manufacturing expertise and customer support are key elements in the Company's
operating strategy.
In December, 1992, the Company experienced a non-chemical fire at its
Macedonia, Ohio facility. Machinery and equipment were damaged affecting the
Company's production capabilities. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
PRODUCT DEVELOPMENT PROCESS. The product development process typically takes six
to nine months from new product concept origination to completion. Existing
formulations may also serve as the basis for new products, in which case the
product development process may be substantially accelerated.
The Company's product development activities typically originate through
the identification by the Company's sales or research and development personnel
of a perceived product need for its customers and its potential customers. The
Company also develops products by utilizing technology developed by third
parties. After the product concept is originated, the Company develops the
formula and manufactures samples of the product. The Company's sales staff then
demonstrates the product for its customers, who field test the product through
end-users. Concurrently, the Company conducts product stability tests in its
laboratories. The Company makes any necessary adjustments resulting from
customer and end-user comments. These adjustments may include changes in
formulation, valve, spray pattern and propellant chemistry. Then, the Company,
with customer input, designs the label, both for the aerosol cans and for the
carton in which it is packaged. The Company's package and container design
services include artistic design, writing of product instructions, product name
creation and regulatory compliance, if necessary. Alternatively, the product
concept origination may be initiated by the customer with the product
development activity continuing in substantially the same way from that point
forward.
Page 3 of 43
<PAGE> 4
PRODUCTS. Aerosol containers are a convenient, effective and efficient way to
deliver thousands of products. The containers, 3.0 billion of which were sold in
the United States in 1995, are generally made of steel or aluminum and can be
recycled. Since 1978, when the use of chlorofluorocarbons ("CFC's") as
propellant was discontinued in the United States, the Company's aerosol products
generally have used compressed gases, such as carbon dioxide and nitrogen and
liquefied gases, such as propane and butane, as propellants. The Company's
aerosol containers range from 4 ounces to 24 ounces in capacity. The Company
combines its chemical formulation, an appropriate propellant, dip tube, valve,
actuator, cap and the aerosol container to produce the final product.
Products developed by the Company for the automotive service and
industrial maintenance markets include cleaners, degreasers, lubricants and
paints. The Company has also developed specialized products for the automotive
service market, such as its patented non-flammable tire inflator, carburetor,
brake and choke cleaners, gasket and trim adhesives, undercoatings, silicones,
belt dressings, and fabric protectors. Specialized products for the industrial
maintenance market include molybdenum lubricants, food-grade lubricants and
cleaners, release agents and protectors for injection and cast molding
applications.
The Company introduced its environmentally responsive, water-carried (as
opposed to solvent-carried), aerosol products under the program name of
SmartLine TM. Products using this system significantly reduce solvent release.
Additionally, these products meet the National Fire Prevention Agency's most
stringent fire prevention and storage standards for aerosol products. Products
using this technology include a range of cleaners, degreasers and lubricants
produced for the Company's principal markets.
The Company has developed a number of products using barrier packages.
In a typical aerosol, the propellant and product are mixed and released from the
can as a foam or spray. In a barrier package, the product is separated from the
propellant by a liner (a can within a can) and only the product, and not the
propellant, is released. This is important with products that cannot be mixed
with a propellant, such as room temperature vulcanizing silicones (RTV's), or
products which are too viscous to be propelled through a standard aerosol, such
as caulking compounds.
The Company also produces its own brand name products through its Taylor
Made Products Division (TMP), which are sold principally to the automotive
do-it-yourself market through chain store merchandisers. The products include,
cleaners, lubricants and degreasers. In addition, the Company produces its own
brand name products through its Aerosol Maintenance Products Division (AMP).
These products are sold principally to janitorial and sanitation supply
distributors and include cleaning compounds and disinfectants.
MARKETING AND DISTRIBUTION. The Company's marketing and sales activities are
carried out by a full-time salaried sales force. Sales of the Company's brand
name products are marketed and sold through 30 manufacturer's representative
agencies. The Company's customers are distributors of a broad range of products
to the automotive service and industrial maintenance markets. The Company's
efforts to obtain sales involve detailed pre-production and ongoing involvement
with a customer. The Company seeks to develop long-term customer relationships.
More than 48% of the Company's current sales volume is attributable to customers
who have been with the Company for more than 10 years. The Company's active core
customers number more than 350, with no single customer accounting for 10% of
the Company's net sales. Substantially all of the Company's customers are
located in the eastern two-thirds of the United States.
Page 4 of 43
<PAGE> 5
RESEARCH AND DEVELOPMENT. The Company's research and development activities are
directed toward aerosol product development and improvement, product screening
and custom applications designed to meet the specific requirements of its
customers. The Company's research and development activities involve both the
formulation of proprietary chemical compounds and the development of associated
aerosol delivery systems. The Company works with its customers to develop new
products and to modify existing products for them. It also seeks to develop new,
proprietary products such as its patented fuel injection system cleaner,
water-carried aerosol products, and patented non-flammable tire inflators. The
Company's technical activities are carried out by a staff of chemists and
laboratory technicians. The Company holds several registered trademarks and
patents.
MANUFACTURING. The manufacturing facility contains seven production lines. Each
line has different characteristics, providing the Company with flexibility to
accommodate the short production runs required for many customized products, the
longer high speed production runs, and the specialized barrier packaging
production. In addition, the Company is able to package its products in one
gallon cans, five gallon pails, and fifty-five gallon drums.
In 1996, the Company sold approximately 30 million units. The handling
of large volumes of liquid propellants requires that the manufacturing area be
compartmentalized, permitting the isolation of each step in the production
process. Control systems automatically shut down operation if safety limits are
exceeded. Raw materials are stored within the plant, while propellants and most
solvents are stored in above-ground tanks outside the plant. The raw materials
are moved as needed to the mixing area and the product is piped into a separate
filling area where cans are filled. The cans are then conveyed into propellant
charging rooms, where the propellant is loaded and the cans are crimped (sealed)
automatically. After leaving the propellant charging room, the cans are run
through a hot water test tank to test for leaking and container integrity at
elevated temperatures. In cases where the can label has not been preprinted, a
label is applied. The cans are coded, then packed and palletized for shipment
or, in some cases, stored in the warehouse on racks for order picking.
COMPETITION. The aerosol industry is highly fragmented geographically, along
product lines and by production capacity. Within these areas, the industry is
highly competitive. Although many companies perform some of the individual
operations and services carried out by the Company, and some of its competitors
have greater financial and other resources, the Company believes it has few
competitors that offer the same type of technical assistance, product
formulation and packaging. Further, the Company's competitors do not routinely
offer to produce as few as 100 cases of product and to deliver products within
four weeks. These services are provided by the Company. Most of the Company's
customers do not have their own aerosol research or production facilities.
Because of the highly specialized nature of the Company's business, price, while
important, is not normally the principal competitive factor. The Company
believes that the principal competitive factors in the industry are quality of
product and the product's ease of use by its end-user.
Page 5 of 43
<PAGE> 6
EMPLOYEES. As of February 28, 1997, the Company employed approximately 187
people on a full-time basis, of whom 71 are salaried and the remainder are
hourly. All of the Company's hourly employees are represented by one collective
bargaining unit with one collective bargaining agreement. The Company's current
collective bargaining agreement expires in November, 1997. The Company considers
its relationship with its employees to be good. There have not been any work
stoppages or slowdowns due to labor related problems.
ENVIRONMENTAL MATTERS. The Company's manufacturing facility is subject to
extensive environmental laws and regulations concerning, among other things,
emissions to the air, discharges to the land, surface, subsurface strata and
water, and the generation, handling, storage, transportation, treatment and
disposal of waste and materials, and are also subject to other federal, state
and local laws and regulations regarding health and safety matters. Management
believes that the Company's business, operations and facilities are being
operated in substantial compliance in all material respects with applicable
environmental and health and safety laws and regulations. As a result,
compliance with existing federal, state and local environmental laws is not
expected to have a material effect upon the earnings or competitive position of
the Company. However, management of the Company cannot predict the effect, if
any, of environmental laws that may be enacted in the future. Capital
expenditures for environmental control facilities for the next two fiscal years
(exclusive of expenses that are expected to be substantially reimbursed) are not
expected to be material. See "Legal Proceedings". Such costs, if any, should
comprise a part of normal purchases of new or replacement equipment or
facilities.
ITEM 2. PROPERTIES
PROPERTY. The Company's Macedonia production facility is leased. Under a lease
amendment dated July 25, 1994, upon completion of certain leasehold
improvements, the term of the Macedonia lease was extended through the year
2005, with four (4) five-year unilateral options to extend the lease through the
year 2025. The Company leases 8,000 square feet of space for its executive
offices, which are located adjacent to the Macedonia plant. The lease expires in
1997. On October 6, 1995 the Company purchased its previously leased
distribution center in Macedonia, Ohio. The Company plans to move its executive
offices in 1997 from the currently leased space adjacent to the Macedonia plant,
to office space which is available at its distribution center which was
purchased in 1995.
ITEM 3. LEGAL PROCEEDINGS
LEGAL PROCEEDINGS. The Company is currently involved in litigation pertaining to
environmental concerns by the State of Ohio in connection with several potential
problems at its Macedonia, Ohio manufacturing plant. In 1990 the Company entered
into a Consent Order with the State of Ohio. The Company was required to submit
to the Ohio Environmental Protection Agency (Ohio EPA), a closure plan to
address contamination identified at the property. The Company submitted the
closure plan as required. Ohio EPA also requested, in the event the remedial
measures in the proposed closure plan are not successful within a two-year
period, that at that time the Company provide supplemental or alternative
measures to clean up the remaining contamination.
Page 6 of 43
<PAGE> 7
On May 17, 1994, the Ohio EPA approved the revised closure plan which
included unilateral modifications as deemed necessary by the Ohio EPA. On June
17, 1994, the Company appealed the Ohio EPA's action on the grounds that the
unilateral modifications were unreasonable and unlawful. On January 6, 1995, the
Company and the State of Ohio entered into a settlement agreement, which
resulted in a termination of the Company's appeal of this matter before the
Environmental Board of Review. On May 3, 1995, the Ohio EPA issued a
supplemental closure plan approval letter that established certain deadlines
with regard to the Company's implementation and a Groundwater Extraction and
Treatment System, a Soil Vapor Extraction System, and certain other closure plan
tasks. On December 9, 1996, the Company revised its estimate to address closure
costs at the Macedonia facility. Based on estimates of closure costs received
from the Company's environmental consultant, the revised total closure costs are
estimated at approximately $1,291,000. As of December 31, 1996, $1,178,000 of
closure costs were expended, of which $792,000 was received from both escrow
funds and an Ohio EPA Trust Account(the Trust). The escrow funds and trust funds
were deposited by previous owners. During 1996, the Company received $621,000
from the Trust for reimbursement of expenditures; in addition it has requested
approximately $258,000 from the Trust for reimbursement of EPA expenditures and
has recorded this amount as an Account Receivable - Other on the December 31,
1996 balance sheet. As of December 31, 1996, the Trust contained approximately
$329,000. The Company believes that the expenditures for which reimbursement has
been requested are in accordance with the closure activities contemplated by the
Trust requirements. While the Company is not aware of any reason that it would
not receive reimbursement for these expenditures, the Ohio EPA has discretion in
responding to the Company's request. If the remediation techniques proposed in
the closure plan are not successful, or if supplemental or alternative
technologies are required to be used, then the Company may incur costs in excess
of the $1,291,000 closure cost estimate. The Company believes, based on
discussions with its technical consultants, that the cost of additional testing
and operation of the proposed remedial systems will be approximately $150,000
and that the costs of the supplemental or alternative cleanup measures, if
determined to be necessary, would not exceed $2,000,000.
On January 31, 1997, the Company received a Notice of Violation (NOV)
from the Ohio EPA in association with an inspection conducted by the Ohio EPA in
June 1996 regarding the operations at the Macedonia facility. At this time, the
Company does not know whether these violations had, in fact, occurred or for
what time period the alleged violations lasted. A number of the alleged
violations will be addressed by the completion of closure activities described
above. Other violations will be addressed through negotiations with the Ohio
EPA. At this time, the Ohio EPA has not stipulated any penalties, nor can it be
predicted whether the Ohio EPA will seek penalties or to what extent those
penalties will aggregate.
The Company is one of several defendants in two personal injury lawsuits.
HAMRICK V. COASTAL LUMBER COMPANY, DONALD MEGERT, MONONGAHELA POWER COMPANY,
LAWSON PRODUCTS, INC. AND SPECIALTY CHEMICAL RESOURCES, INC. was filed in 1995
and is currently pending in the Circuit Court of Webster County, West Virginia.
The lawsuit alleges that the plaintiff was injured due to unsafe working
conditions and that his injury was caused, in part, by his use of one of the
Company's products. The lawsuit asks for unspecified damages. RENFRO, SPEARS ET
AL V. SPECIALTY CHEMICAL RESOURCES, INC., GOODYEAR TIRE AND RUBBER COMPANY AND
SANDRA VOGLER was filed in 1994 and is currently pending in the District Court
of Harris County, Texas. The lawsuit alleges that the injuries suffered by
plaintiffs were caused, in part, by their use of one of the Company's products.
The lawsuit asks for unspecified damages. In both cases the plaintiffs' claims
have been settled by the Company's insurance company. By virtue of the
settlement in the Lawson case, all cross-claims by the codefendants against the
Company have been extinguished, except for an implied indemnity claim by Lawson.
The Company denies any and all liability to Lawson
Page 7 of 43
<PAGE> 8
and will continue to vigorously defend against the claim. Settlement discussions
between Lawson and the plaintiff's attorney have resulted in a settlement of
this claim against Lawson.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1996.
Executive Officers
- ------------------
Set forth below is certain information concerning the Executive Officers of
the Company. Officers of the Company are elected annually by the Board of
Directors of the Company, and serve at the pleasure of the Board of Directors
that elects them.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Edwin M. Roth 69 President, Chairman of the
Board and Director
Corey B. Roth 39 Vice President, Treasurer,
Asst. Secretary and
Director
John H. Ehlert 44 Vice President and President of
the Aerosol Systems Division
David F. Spink 46 Vice President(Principal Financial
and Accounting Officer)
</TABLE>
Mr. Edwin M. Roth has been a Director and President of the Company and
Chairman of the Board of Directors of the Company since its formation in June
1982. Mr. Roth was Chief Executive Officer of ASI from the time of its
acquisition in December 1988 until its merger into the Company in December
1992. Mr. Roth is the father of Mr. Corey B. Roth.
Mr. Corey B. Roth has been Vice President of the Company since June 1982,
a Director since October 1984 and Asst. Secretary since June, 1992. Mr. Roth
served as Treasurer from November 1987 until January 30, 1990 and has again
served in that capacity since June, 1992. Mr. Roth served as secretary from
October 1984 until June 1992. Mr. Roth was Vice President of Administration
of ASI from April 1989 until December 1992. Mr. Roth is the son of Mr. Edwin
M. Roth.
Mr. John H. Ehlert joined the Company in 1990. He has been Vice President
of the Company since April 1992. Mr. Ehlert was President of ASI from April
1992 until December 1992. In December of 1992, he was named President of the
Aerosol Systems Division.
Mr. David F. Spink joined the Company in 1996. He has been Vice President
of the Company since June, 1996. Prior to joining the Company, Mr. Spink
worked 17 years at B.F. Goodrich Company in a progression of financial
positions. In 1992 he was Controller of the Research Division. From 1993 to
1996 Mr. Spink was Director of Planning and Analysis for the corporation.
Page 8 of 43
<PAGE> 9
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Common Stock is listed on the American Stock Exchange ("AMEX") under
the symbol "CHM".
During 1996, the closing sales prices on the AMEX ranged from $1.13 to
$3.88. During 1995, the closing sales prices on the AMEX ranged from $1.88 to
$4.94. The following table sets forth the high and low sale prices by quarter
for 1996 and 1995.
<TABLE>
<CAPTION>
Calendar Year Ended December 31,
--------------------------------
1996 1995
-------------------- ------------------
Quarter High Low High Low
<S> <C> <C> <C> <C>
First Quarter........ 2.875 1.250 4.188 2.375
Second Quarter....... 3.875 1.250 4.938 2.750
Third Quarter........ 3.688 1.750 4.625 3.750
Fourth Quarter....... 2.063 1.125 4.500 1.875
</TABLE>
As of February 28, 1997, the closing price for the Common Stock on AMEX
was $1.875. As of February 28, 1997, there were 755 holders of record of Common
Stock.
The Company has not paid cash dividends on its Common Stock and intends
to follow a policy of retaining earnings in order to finance the continued
growth and development of its business. Payment of dividends will be within the
discretion of the Company's Board of Directors and will depend, among other
factors, on earnings, capital requirements, and the operating and financial
condition of the Company. The terms of outstanding loans to the Company
currently prohibit the Company from paying cash or stock dividends to its
stockholders.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the fiscal years 1992 through 1996 are
derived from the Company's audited financial statements. All financial data have
been restated to reflect the adoption of Financial Accounting Standards Board
(FASB) Statement 109, "Accounting for Income Taxes". This information should be
read in conjunction with the Company's Financial Statements and Notes thereto
and Management's Discussion and Analysis of Financial Condition and Results of
Operations, each of which is included elsewhere in this Report.
Page 9 of 43
<PAGE> 10
SELECTED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of operations
Data (1) (2):
Net sales $ 38,914 $ 43,419 $ 44,931 $ 47,362 $ 47,927
Cost of goods sold 32,783 39,123 38,066 36,988 38,149
-------- -------- -------- -------- --------
Gross profit 6,131 4,296 6,865 10,374 9,778
Selling, general and
administrative expenses 6,067 7,648 6,995 6,327 6,128
Amortization of intangIbles 907 869 874 862 865
Restructuring charges -- -- 954 -- --
-------- -------- -------- -------- --------
Operating profit (loss) (843) (4,221) (1,958) 3,185 2,785
Other income (expense)
Interest expense (1,059) (779) (560) (531) (1,051)
AmortIzation of debt issuance expenses -- -- -- -- (30)
Other 11 10 39 29 69
-------- -------- -------- -------- --------
(1,048) (769) (521) (502) (1,012)
-------- -------- -------- -------- --------
Earnings (Loss) before income taxes and
extraordinary items (1,891) (4,990) (2,479) 2,683 1,773
Income tax benefits (expense) 128 2,981 840 (944) (775)
-------- -------- -------- -------- --------
Earnings (Loss) before extraordinary Items (1,763) (2,009) (1,639) 1,739 998
Extraordinary items:
Gain (loss) due to fire (net of Income taxes) -- -- 2,265 (884) --
Deferred financing cost and original issue
discount (net of income taxes) -- -- -- -- (714)
-------- -------- -------- -------- --------
Net earnings (loss) $ (1,763) $ (2,009) $ 626 $ 855 $ 284
======== ======== ======== ======== ========
Share Data (3):
Earnings (Loss) per common share:
Before extraordinary items $ (0.45) $ (0.51) $ (0.42) $ 0.44 $ 0.29
Extraordinary items -- -- 0.58 (0.22) (0.21)
-------- -------- -------- -------- --------
Net earnings (loss) $ (0.45) $ (0.51) $ 0.16 $ 0.22 $ 0.08
======== ======== ======== ======== ========
Supplemental earnings per share (4) N/A N/A N/A N/A $ 0.34
======== ======== ======== ======== ========
Dividends paid -- -- -- -- --
Weighted average common shares
outstanding 3,946 3,939 3,935 3,946 3,443
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994 1993 1992
-------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data (1):
Working capital $ 7,550 $ 7,142 $ 6,420 $10,883 $ 8,212
Total assets $43,923 $47,272 $44,558 $49,914 $41,520
Long-term debt $12,246 (5) $10,399 $ 4,512 $ 9,948 $ 6,055
Redeemable preferred stock (6) $ -- 350 -- -- --
Stockholders' equity $26,562 $28,444 $30,439 $29,814 $28,958
</TABLE>
Page 10 of 43
<PAGE> 11
(1) The Company adopted FASB Statement 109, "Accounting for Income Taxes",
effective January 1, 1993. All financial data prior to 1993 have been
restated to reflect its adoption.
(2) At December 31, 1996, the Company had approximately $9,686,000 of net
operating loss carryforwards available for federal income tax purposes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Income Taxes and Net Operating Loss Carryforwards" regarding
limitations on the usage of these carryforwards.
(3) Common Stock data are restated to reflect a one for fourteen reverse stock
split effective on February 26, 1992.
(4) The supplemental earnings per share is computed assuming the public stock
offering had been effective on January 1, 1992. (See Note J to Financial
Statements).
(5) Includes long-term obligations (less current maturities), and convertible
subordinated debentures, which are convertible at the option of the holder
into shares of the Company's common stock any time after 2001. (See Note C
to Financial Statements).
(6) On October 6, 1995, the Company issued 3,500 shares of convertible
preferred stock to an officer/director at a $100 per share price, which
aggregated to $350,000. On October 16, 1996, the Company redeemed all of
its 3,500 shares of convertible preferred stock for $350,000 from the
proceeds received in conjunction with the convertible subordinated
debentures. (See Notes C and F to Financial Statements.)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL. This discussion should be read in conjunction with the information
contained in the Financial Statements and Notes thereto of the Company
contained elsewhere in this Report.
In December, 1992, the Company experienced a non-chemical fire at its
Macedonia, Ohio facility. The fire has adversely affected production
capabilities, which adverse effect continued through 1994.
Page 11 of 43
<PAGE> 12
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of net
sales of certain items included in the Company's Statement of Operations.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0%
Cost of goods sold 84.2% 90.1% 84.7%
----- ----- -----
Gross profit 15.8% 9.9% 15.3%
Selling, general and administrative
expenses 15.6% 17.6 15.6%
Amortization of intangibles 2.3% 2.0% 1.9%
Restructuring charge - % -% 2.1%
----- ----- -----
Operating profit(loss) (2.2%) (9.7%) (4.3%)
Interest and expense 2.7% 1.8% 1.2%
</TABLE>
FISCAL YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO 1995
Net sales of $38,914,000 for the year ended December 31, 1996 were
$4,505,000 or 10.4% below the prior year. The decrease was a result of the
Company's efforts to reduce low margin sales, lower demand from automotive and
industrial customers as well as decreased sales of its electronics cleaning
products.
Cost of goods sold for the year ended December 31, 1996, decreased by
$6,340,000 or 16.2% as compared to cost of goods sold for the same period in the
prior year. This decrease was due principally to reduced sales during the year
ended December 31, 1996, and cost reduction efforts in manufacturing labor and
overhead. Cost of goods sold decreased as a percentage of net sales from 90.1%
to 84.2% for the year ended December 31, 1995, and 1996 respectively. The
decrease as a percent of net sales was due primarily to higher unit pricing and
cost reduction efforts in manufacturing labor and overhead.
Selling, general, and administrative expenses were $6,067,000 for the
year ended December 31, 1996, or 15.6% of net sales. Selling, general and
administrative expenses were $7,648,000, or 17.6% of net sales for the same
period in 1995 including $650,000 of non-recurring cost for a Proxy Contest
(described below). The remaining decrease in 1996 selling, general and
administrative expense is due to cost reduction efforts, lower compensation
costs, and lower bad debt expense as a result of settling a fully reserved
account.
Interest expense for the year ended December 31, 1996 was 2.7% of net
sales versus 1.8% for the comparable period in the prior year. Interest expense
was $1,059,000 for the year ended December 31, 1996, an increase of $280,000,
from the year ended December 31, 1995. This increase is due to increased
borrowing under the senior credit facility as well as an increase in the
Company's interest rate during the first nine months of the year. The increase
in interest expense as a percentage of net sales is due primarily to reduced
sales. See "Liquidity and Capital Resources".
The Company recorded a net loss for the year ended December 31, 1996,
of $1,762,713 or $.45 per share on weighted average shares outstanding of
3,945,618. This compared to a net loss of $2,008,606, or $.51 per share on
weighted average shares outstanding of 3,939,348.
Page 12 of 43
<PAGE> 13
FISCAL YEAR ENDED DECEMBER 31, 1995 AS COMPARED TO 1994
Net sales of $43,419,000 for the year ended December 31, 1995 were
$1,512,000 or 3.4% below the prior year. The decrease is due to production
shortfalls which were a result of startup problems for a new manufacturing
information system as well as operational inefficiencies associated with the
facilities consolidation into the Macedonia plant.
Cost of goods sold for the year ended December 31, 1995 increased by
$1,057,000 or 2.8% as compared to the prior year. As a percentage of net sales,
cost of goods increased from 84.7% to 90.1%. The increase in cost of goods sold
is due to raw materials inefficiencies, inventory shrinkage and increased labor
and overhead, all the result of the startup of a new manufacturing information
system and the facilities consolidation.
Selling, general, and administrative expenses increased from $6,996,000
for the year ended December 31, 1994 to $7,648,000 for the year ended December
31, 1995. As a percentage of net sales these expenses were 15.6% for the year
ended December 31, 1994 and 17.6% for the year ended December 31, 1995. The
increase was due principally to charges of $650,000 incurred by the Company in
responding to the "Proxy Contest" (described below).
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.
Interest expense for the year ended December 31, 1995 was 1.8% of net
sales versus 1.2% for the comparable period in the prior year. Interest expense
was $779,000 for the year ended December 31, 1995, an increase of $219,000, from
the year ended December 31, 1994. This increase is due to increased borrowing
under the senior credit facility. See "Liquidity and Capital Resources".
The Company recorded a net loss for the year ended December 31, 1995 of
$2,008,606, or $.51 per share on weighted average shares outstanding of
3,939,348. This compared to a 1994 net loss before an extraordinary gain of
$1,639,573 or $.42 per share on weighted average shares outstanding of 3,935,431
for the same period in the prior year. The loss for the year ended December 31,
1995 was partially the result of expenses totaling $650,000 related to the proxy
contest discussed above and the effects of both the startup of a new
manufacturing information system and the facilities consolidation. Net earnings
for the year ended December 31, 1994 were $625,579 or $.16 per share on
3,935,431 weighted average shares outstanding after an extraordinary gain of
$2,265,152 (net of taxes). The extraordinary gain resulted from the insurance
settlement on the property and business interruption claims related to the
December, 1992 fire at the Macedonia, Ohio plant.
During 1995 the Company completed substantially all of the spending
associated with the restructuring reserve established in 1994 (see Note H).
Operations streamlining activities are continued into the 1st quarter of 1996
related to the facilities consolidation plan.
Page 13 of 43
<PAGE> 14
INCOME TAXES AND NET OPERATING LOSS CARRYFORWARDS
The income tax benefit of $127,600 for the year ended December 31,
1996, consists of approximately $11,000 of current federal income taxes and
approximately $138,600 of deferred tax benefits. The income tax benefit of
$2,981,000 for the year ended December 31, 1995, consists of $1,006,000 of
current refundable federal income taxes and approximately $1,975,000 of deferred
federal income tax benefits. The income tax provision of $320,000 for the year
ended December 31, 1994 consisted of $1,040,000 of current federal tax and local
taxes, and $720,000 of deferred federal income tax benefits.
As of December 31, 1996, the Company had approximately $9,686,000 of
net operating loss and $51,000 of investment tax credit carryforwards. However,
due to a change in ownership during 1992, the Company has an annual limitation
of approximately $850,000 in the utilization of its net operating loss and
investment tax credit carryforwards. In addition, due to losses in 1996 and 1995
and the realization in 1994 of built-in gains, approximately $7,300,000 of the
carryforwards may be utilized beyond the current annual limitation to offset
future taxable income. Except as discussed below, and subject to limitations of
the Internal Revenue Code of 1986, as amended (the "Code"), the NOLs should be
available to offset future income of the Company. Use of the NOLs to reduce
future taxable income may subject the Company to an alternative minimum tax.
Section 382 of the Code limits the amount of a corporation's taxable
income which can be offset by NOLs arising prior to an "ownership change". An
ownership change occurs when the percentage of stock owned by 5 percent
shareholders, or group of 5 percent shareholders, increases over 50 percent over
a three year period. For example, an ownership change would occur if shares
comprising more than 50 percent of a corporation's stock are sold to new public
shareholders. As a result of the public offering in February 1992 and the
ownership change that occurred in connection therewith, the limitation on the
utilization of the NOLs imposed by Section 382 of the Code will apply. Under the
limitation, the amount of the Company's taxable income that each year can be
offset by NOLs attributable to periods before the ownership change cannot exceed
the product of (I) the fair market value of the stock of the Company immediately
prior to the ownership change and (ii) the long-term tax-exempt rate prescribed
by the IRS. The limitation imposed by the change in ownership may result in the
Company paying income taxes in excess of the amount payable in the absence of a
change in ownership.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company's ratio of current assets to
current liabilities was 2.48 to 1 and the quick ratio (cash and cash
equivalents, and accounts receivable, divided by current liabilities) was 1.26
to 1. As of December 31, 1995, the Company's ratio of current assets to current
liabilities was 1.90 to 1 and the quick ratio (described above) was 1.03 to 1.
The increase in liquidity is due primarily to reduction in accounts payable from
the cash infusion that was the result of the Rights Offering discussed below.
During the twelve months ended December 31, 1996, the Company incurred
$1,059,000 in interest expense and made interest payments totaling $1,095,000.
Accrued interest at December 31, 1996, was $68,000.
Page 14 of 43
<PAGE> 15
The Company, as borrower, entered into a credit agreement in September,
1996 (the "Credit Agreement") that provides for a $12,000,000 facility comprised
of a revolving line of credit and a term loan. The Credit Agreement, which
expires on December 31, 1998, replaced the Company's $10,000,000 revolving
credit facility. The Credit Agreement is a facility that allows for borrowings
based upon collateral comprised of certain inventory, accounts receivable and
machinery and equipment. Borrowings under the Credit Agreement bear interest at
prime rate plus 1.5%, subject to decrease if certain ratios and financial tests
are met.
Under the terms of the Credit Agreement, the Company is required to
comply with various covenants, the most restrictive of which relate to the
maintenance of certain financial ratios, levels of tangible net worth, limits on
capital expenditures and restrictions on distributions from the Company to its
stockholders. As of December 31, 1996, approximately $3,158,000 was unused and
available under the Credit Agreement (see Note C to the Financial Statements).
In addition to the Credit Agreement, the Company is a borrower on an
installment note dated October 15, 1995. The borrowing is collateralized by a
warehouse which serves as the Company's distribution center. Interest is payable
monthly at 1/4% over the bank's prime rate. As of December 31, 1996 the Company
had $871,944 remaining on the note (see Note C to the Financial Statements).
In September 1996, the Company distributed to the record holders of its
common stock subscription rights ("Rights") to subscribe for and purchase an
aggregate principal amount of $4,000,000 of the Company's 6% Convertible
Subordinated Notes due 2006. Stockholders had until the close of business on
October 11, 1996 to exercise their Rights.
On October 16, 1996, the Company received $4,000,000 in proceeds from
the issuance of the subordinated convertible debt (the Rights Offering) $350,000
of which was used to repurchase, at par value, the 3500 shares of the Company's
Cumulative Convertible Preferred stock owned by Mr. Edwin M. Roth. The balance
of the net proceeds of the Rights Offering was used to reduce amounts
outstanding under the Company's revolving credit facility under the Credit
Agreement. In addition, the Company paid out approximately $327,000 in expenses
related to the Rights Offering.
Net cash used by operating activities was $587,000 in 1996, versus cash
used of $2,650,000 for 1995, and net cash provided from operating activities of
$1,735,000 for 1994. Net capital expenditures were $156,000, $3,685,000, and
$612,000 respectively, for the three years 1996, 1995, and 1994. The Company
expects to spend approximately $800,000 in capital expenditures for 1997 to be
funded from operating cash flows and borrowings under the credit agreement.
Under current business conditions, the Company expects no significant change in
its liquidity position during the current fiscal year. The Company continues to
explore opportunities to expand and add new product lines. Any required capital
for these efforts would come from borrowings under the Credit Agreement or
additional borrowings.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page 15 of 43
<PAGE> 16
PART IV
ITEM 14. EXHIBITS; FINANCIAL STATEMENT SCHEDULES;
REPORTS ON FORM 8-K
The Index to Financial Statements and Financial Statement Schedules is listed
below.
Reports on Form 8-K.
1. The Company filed a Form 8-K on October 2, 1996, in which it reported under
Item 5, the current status of certain litigation as well as the extended
expiration date of the Rights Offering.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Pg No.
------
<S> <C>
Report of Independent Certified Public Accountants............... F-1
Balance Sheets
December 31, 1996 and 1995.............................. F-2 & F-3
Statements of Operations
December 31, 1996, 1995 and 1994.............................. F-4
Statements of Stockholders' Equity
December 31, 1996, 1995, and 1994............................. F-5
Statements of Cash Flows
December 31, 1996, 1995, and 1994....................... F-6 & F-7
Notes to Financial Statements............................. F-8 - F-22
Report of Independent Certified Public Accountants
on Schedules................................................. F-23
Schedule II - Valuation and Qualifying Accounts
December 31, 1996, 1995 and 1994................ F-24
</TABLE>
Page 16 of 43
<PAGE> 17
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized, this 28th
day of March, 1997.
SPECIALTY CHEMICAL RESOURCES, INC.
By:/s/ EDWIN M. ROTH
---------------------------------
Edwin M. Roth,
Chairman of the Board and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report on Form 10-K has been signed by the following persons in the
capacities, on the date indicated. This Report may be signed in multiple
counterparts, all of which taken together shall constitute one document.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ Edwin M. Roth President and Chairman March 28, 1997
- ---------------------------- of the Board (Principal
Edwin M. Roth Executive Officer)
/s/ Corey B. Roth Vice President, Treasurer March 28, 1997
- ---------------------------- and Director
Corey B. Roth
/s/ David F. Spink Vice President(Principal March 28, 1997
- ---------------------------- Financial and Accounting
David F. Spink Officer)
/s/ George N. Aronoff Director March 28, 1997
- ----------------------------
George N. Aronoff
/s/ Victor Gelb Director March 28, 1997
- -----------------------------
Victor Gelb
/s/ Lionel N. Sterling Director March 28, 1997
- -----------------------------
Lionel N. Sterling
/s/ Geoffrey J. Colvin Director March 28, 1997
- -----------------------------
Geoffrey J. Colvin
/s/ Terence J. Conklin Director March 28, 1997
- -----------------------------
Terence J. Conklin
</TABLE>
Page 17 of 43
<PAGE> 18
INDEPENDENT AUDITORS' REPORT
Stockholders of
SPECIALTY CHEMICAL RESOURCES, INC.
We have audited the accompanying balance sheets of Specialty Chemical Resources,
Inc. as of December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. 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 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 Specialty Chemical Resources,
Inc. as of December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ GRANT THORNTON LLP
---------------------------
Grant Thornton
Cleveland, Ohio
February 7, 1997
F-1
<PAGE> 19
Specialty Chemical Resources, Inc.
BALANCE SHEETS
December 31
ASSETS
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 168,641 $ 1,238
Accounts receivable - trade, less allowance for doubtful
accounts of $102,000 and $345,000, respectively (note C) 4,948,075 6,218,508
Receivables - other (note D) 258,284 810,102
Inventories (notes A, B and C) 5,909,447 6,717,310
Prepaid expenses 305,259 201,420
Refundable income taxes 1,075,016 1,134,079
----------- -----------
Total current assets 12,664,722 15,082,657
PROPERTY AND EQUIPMENT - at cost
(notes A, C and K)
Building 959,199 959,199
Leasehold improvements 2,579,490 2,572,720
Office equipment and furniture 1,042,432 956,454
Machinery and equipment 9,584,423 9,523,179
----------- -----------
14,165,544 14,011,552
Less accumulated depreciation and amortization 4,451,017 3,426,847
----------- -----------
9,714,527 10,584,705
Land 118,690 118,690
----------- -----------
9,833,217 10,703,395
OTHER ASSETS (NOTE A)
Goodwill 19,738,338 20,354,406
Product formulation 977,150 911,755
Deferred financing costs 421,460 --
Other 288,499 220,236
----------- -----------
21,425,447 21,486,397
----------- -----------
$43,923,386 $47,272,449
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE> 20
Specialty Chemical Resources, Inc.
BALANCE SHEETS - CONTINUED
December 31
LIABILITIES
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt $ 434,733 $ 44,500
Accounts payable 4,004,870 6,695,517
Accrued liabilities:
Compensation and payroll taxes 173,320 504,798
Taxes - other 65,442 55,935
Interest 68,436 154,290
Other 368,421 485,643
------------ ------------
675,619 1,200,666
------------ ------------
Total current liabilities 5,115,222 7,940,683
LONG-TERM DEBT (note C) 12,246,119 10,399,126
DEFERRED INCOME TAXES (note A and I) -- 138,805
COMMITMENTS AND CONTINGENCIES (note D) -- --
REDEEMABLE PREFERRED STOCK,
$.01 par value and $100 redemption value; authorized
and issued, 3,500 shares in 1995 (note F) -- 350,000
STOCKHOLDERS' EQUITY (notes F and G)
Preferred stock - $.01 par value; authorized 2,000,000 and -- --
1,996,500 shares for 1996 and 1995, respectively
Common stock - $.10 par value; authorized 13,000,000 shares;
issued 3,947,764 and 3,947,769 shares, respectively 394,777 394,777
Additional paid-in capital 41,935,125 41,935,125
Accumulated deficit (15,629,785) (13,847,367)
Unearned compensation (19,350) (38,700)
------------ ------------
26,680,767 28,443,835
Less common stock in treasury, at cost;
65,500 shares in 1996 (118,722) --
------------ ------------
26,562,045 28,443,835
------------ ------------
$ 43,923,386 $ 47,272,449
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 21
Specialty Chemical Resources, Inc.
STATEMENTS OF OPERATIONS
For the years ended December 31
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 38,914,148 $ 43,419,021 $ 44,931,250
Cost of goods sold 32,783,174 39,123,444 38,066,017
------------ ------------ ------------
Gross profit 6,130,974 4,295,577 6,865,233
Selling, general and administrative expenses 6,066,674 7,647,938 6,995,505
Amortization of intangibles 906,846 868,692 874,101
Restructuring charges (note H) -- -- 954,000
------------ ------------ ------------
Operating (loss) (842,546) (4,221,053) (1,958,373)
Other income (expense)
Interest expense (1,059,217) (779,041) (559,793)
Other 11,450 10,488 38,593
------------ ------------ ------------
(1,047,767) (768,553) (521,200)
------------ ------------ ------------
(Loss) before income taxes and
extraordinary item (1,890,313) (4,989,606) (2,479,573)
Income taxes (benefits) (notes A and I) (127,600) (2,981,000) (840,000)
------------ ------------ ------------
(Loss) before extraordinary item (1,762,713) (2,008,606) (1,639,573)
Extraordinary item
Gain due to fire (net of income tax of
$1,160,000 in 1994 (note K) -- -- 2,265,152
------------ ------------ ------------
NET EARNINGS (LOSS) ($ 1,762,713) ($ 2,008,606) $ 625,579
============ ============ ============
Earnings (loss) per common share (note J)
Earnings (loss) before extraordinary item ($ 0.45) ($ 0.51) ($ 0.42)
Earnings (loss) from extraordinary item -- -- 0.58
------------ ------------ ------------
($ 0.45) ($ 0.51) $ 0.16
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 22
Specialty Chemical Resources, Inc.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
Common Stock Outstanding
$.10 par value Additional
------------------------- Paid-in Accumulated Unearned
Shares Amount Capital Deficit Compensation
--------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 3,932,780 $ 393,278 $ 41,878,574 ($12,458,083) $ --
Retirement of fractional shares received from
prior reverse stock split (4) (1) 1 -- --
Net earnings for the year -- -- -- 625,579 --
--------- ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1994 3,932,776 393,277 41,878,575 (11,832,504) --
Retirement of fractional shares received from
prior reverse stock split (7) -- -- -- --
Net loss for the year -- -- -- (2,008,606) --
Dividends ($1.79 per share) -- -- -- (6,257) --
Issuance of restricted stock 15,000 1,500 56,550 -- (38,700)
--------- ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1995 3,947,769 394,777 41,935,125 (13,847,367) (38,700)
Retirement of fractional shares received from
prior reverse stock split (5) -- -- -- --
Net loss for the year -- -- -- (1,762,713) --
Dividends on redeemable preferred
stock ($1.875 per share) -- -- -- (19,705) --
Issuance of restricted stock -- -- -- -- 19,350
Purchase of common stock for treasury (65,500) -- -- -- --
--------- ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1996 3,882,264 $ 394,777 $ 41,935,125 $(15,629,785) $ (19,350)
========= ============ ============ ============ ============
-----------------------------
Treasury
Stock TOTAL
------------ ------------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1993 $ -- $ 29,813,769
Retirement of fractional shares received from
prior reverse stock split -- --
Net earnings for the year -- 625,579
------------ ------------
BALANCE AT DECEMBER 31, 1994 -- 30,439,348
Retirement of fractional shares received from
prior reverse stock split -- --
Net loss for the year -- (2,008,606)
Dividends ($1.79 per share) -- (6,257)
Issuance of restricted stock -- 19,350
------------ ------------
BALANCE AT DECEMBER 31, 1995 -- 28,443,835
Retirement of fractional shares received from
prior reverse stock split -- --
Net loss for the year -- (1,762,713)
Dividends on redeemable preferred
stock ($1.875 per share) -- (19,705)
Issuance of restricted stock -- 19,350
Purchase of common stock for treasury (118,722) (118,722)
------------ ------------
BALANCE AT DECEMBER 31, 1996 $ (118,722) $ 26,562,045
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 23
Specialty Chemical Resources, Inc.
STATEMENTS OF CASH FLOWS
For the years ended December 31
<TABLE>
<CAPTION>
1996 1995 1994
--------- ---------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $(1,762,713) $(2,008,606) $ 625,579
Adjustment to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation 1,025,799 907,718 783,168
Amortization of intangibles 906,846 868,692 874,101
Deferred income taxes (benefits) (138,805) (1,975,000) (719,558)
Stock compensation 19,350 19,350 --
Change in assets and liablities:
Decrease in accounts receivable 1,270,433 572,735 33,351
(Increase) decrease in accounts receivable-other 551,818 (728,089) (82,013)
(Increase) decrease in inventories 807,863 114,903 (489,834)
(Increase) decrease in prepaid expenses (103,839) 181,664 (217,353)
(Increase) decrease in refundable income taxes 59,063 (1,082,181) 801,885
Increase in other assets (7,337) (26,144) (48,291)
Increase (decrease) in accounts payable (2,690,647) 925,001 (895,829)
Increase (decrease) in accrued liabilities (525,047) (419,824) 1,070,197
--------- ---------- ---------
Total adjustments 1,175,497 (641,175) 1,109,824
--------- ---------- ---------
Net cash (used in) provided by (587,216) (2,649,781) 1,735,403
operating activities
</TABLE>
(CONTINUED ON NEXT PAGE)
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 24
Specialty Chemical Resources, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
For the years ended December 31
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net cash (used in) provided by operating activities
(brought forward from previous page) $ (587,216) $ (2,649,781) $ 1,735,403
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets -- 39,966 --
Expenditures for property and equipment - net (155,621) (3,685,351) (611,797)
Expenditures related to fire damage -- -- (663,179)
Proceeds from insurance claim, net of cash gain -- -- 4,971,660
Purchase of product formulations and license agreement (400,300) -- --
------------ ------------ ------------
Net cash (used in) provided by investing activities (555,921) (3,645,385) 3,696,684
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of redeemable preferred stock -- 350,000 --
Redemption of redeemable preferred stock (350,000) -- --
Dividends paid on redeemable preferred stock (19,705) -- --
Payments on long-term obligations (134,503) (2,371) (1,753)
Proceeds from note payable, net of deferred financing costs 1,688,368 913,750 --
Proceeds from issuance of short-term debt 8,500,265 -- --
Payments on short-term debt (10,121,882) -- --
Proceeds from sale of convertible subordinated debentures,
net of deferred financing costs 3,723,373 -- --
Purchase of common stock for treasury (118,722) -- --
Proceeds on revolver 37,041,248 11,965,000 12,167,000
Payments on revolver (38,897,902) (6,945,000) (17,615,000)
------------ ------------ ------------
Net cash provided by (used in) by financing activities 1,310,540 6,281,379 (5,449,753)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 167,403 (13,787) (17,666)
Cash and cash equivalents at beginning of year 1,238 15,025 32,691
------------ ------------ ------------
Cash and cash equivalents at end of year $ 168,641 $ 1,238 $ 15,025
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE> 25
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Specialty Chemical Resources, Inc. (SCR, Inc.) formulates, blends, and
packages pressurized specialty chemical products for sale to marketers,
distributors, and retailers primarily throughout the United States. Its
primary markets are the automotive and industrial maintenance and
janitorial/sanitation markets.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows.
INVENTORIES
-----------
Inventories are stated at the lower of cost or market. Cost is determined
by the last-in, first-out (LIFO) method for raw materials and the first-in,
first-out (FIFO) method for finished goods.
PROPERTY AND EQUIPMENT
----------------------
Depreciation is provided for in amounts sufficient to relate the costs of
depreciable assets to operations over their estimated service lives. The
straight-line method of depreciation is used for financial reporting
purposes. Accelerated methods are used for tax purposes.
The estimated lives used in determining depreciation and amortization for
financial reporting purposes are as follows:
<TABLE>
<CAPTION>
<S> <C>
Building ...................................................... 20 years
Leasehold improvements......................................... 15 years
Office equipment and furniture................................. 7-10 years
Machinery and equipment........................................10-16 years
</TABLE>
F-8
<PAGE> 26
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
INTANGIBLES
-----------
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards 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, including goodwill, held and used by an entity be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In
performing the review for recoverability, the Company estimates the future
cash flows expected to result from the use of the asset and its eventual
disposition. If the sum of the expected future cash flows (undiscounted and
without interest charges) is less than the carrying amount of the asset, an
impairment loss is recognized. Otherwise, an impairment loss is not
recognized. The projected amounts used in this computation are based upon
management's best estimates utilizing information currently available.
Inherent in these projections are estimates for which the ultimate outcome
cannot be predicted with a high degree of certainty. Therefore, the actual
results could materially differ from the projected amounts.
Goodwill, resulting from the excess of the purchase price over the fair
value of net assets acquired is being amortized over 40 years and purchased
product formulations are being amortized on a straight-line basis over 10
years. All research and development costs are being expensed as incurred.
Deferred financing costs are related to the new bank debt and the issuance
of the convertible subordinated debentures. These costs are being amortized
on a straight-line basis over 3 and 10 years, respectively.
Accumulated amortization for intangibles amounted to approximately
$6,877,000 and $5,970,000 for the years ended December 31, 1996 and 1995,
respectively.
INCOME TAXES
------------
The Company utilizes the asset and liability method in accounting for
income taxes. The asset and liability method requires the recognition of
deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between tax bases and financial
reporting bases of assets and liabilities.
F-9
<PAGE> 27
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
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 amount of assets and liabilities and
disclosure of contingent 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.
STATEMENTS OF CASH FLOWS
------------------------
For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with a maturity of three months or less
to be cash equivalents.
Cash payments for interest amounted to $1,095,000, $687,000 and $556,000 in
the years ended December 31, 1996, 1995 and 1994, respectively. Cash
payments for income taxes amounted to $75,000, $79,000 and $228,000 for the
years ended December 31, 1996, 1995 and 1994, respectively. During 1996,
the Company also accrued $50,000 of interest on convertible subordinated
debentures due 2006. During 1995, the Company accrued $6,257 of preferred
stock dividends and issued $58,050 of restricted stock to an employee.
FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
Statement of Financial Accounting Standards No. 107 (SFAS 107), Disclosures
About Fair Value of Financial Instruments, requires disclosure of estimated
fair value of an entity's financial instrument assets and liabilities. At
December 31, 1996, the following assumptions were used to estimate the fair
value of the Company's financial instruments for which it is practicable to
estimate that value. The carrying amount of "Cash and cash equivalents" and
"Receivables - other" approximates fair value because of the short maturity
of those instruments. The carrying amount of the Company's "Long-term
obligations" approximates fair value. Fair value is estimated based upon
borrowing rates currently available to the Company for obligations with
similar terms and maturity dates.
NEWLY ISSUED ACCOUNTING STANDARDS
---------------------------------
In February 1997, the FASB adopted SFAS No. 128, Earnings Per Share, which
supersedes APB Opinion 15. The Statement simplifies current standards by
eliminating the presentation of primary EPS and requiring the presentation
of basic EPS, which includes no potential common shares and thus no
dilution and requires entities with complex capital structures to present
basic and diluted EPS on the face of the income statement. This Statement
also eliminates the modified treasury stock method of computing potential
common shares.
F-10
<PAGE> 28
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
NEWLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
---------------------------------------------
This Statement is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods. Early
application is NOT permitted. On adoption, restatement of all prior-period
EPS data presented is required. The Company does not expect the effect of
its adoption of SFAS No. 128 to be material.
NOTE B - INVENTORIES
Inventories consist of the following at:
<TABLE>
<CAPTION>
===============================
DECEMBER 31,
-------------------------------
1996 1995
-------------------------------
<S> <C> <C>
Raw materials $3,663,804 $4,111,440
Finished goods 2,890,674 3,323,426
-------------------------------
6,554,478 7,434,866
Less excess of FIFO over LIFO cost 645,031 717,556
===============================
$5,909,447 $6,717,310
===============================
</TABLE>
Had the Company historically followed the FIFO cost method for raw material
inventories, the net loss for the years ended December 31, 1996 and 1995
would have increased by approximately $44,000 and decreased by
approximately $79,000, respectively. The net earnings for the year ended
December 31, 1994 would have increased by approximately $8,000.
F-11
<PAGE> 29
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1995 and 1994
NOTE C - LONG-TERM DEBT
Long-term debt consists of the following at:
<TABLE>
<CAPTION>
=================================
DECEMBER 31,
---------------------------------
1996 1995
---------------------------------
<S> <C> <C>
Revolver $ 6,041,729 $9,520,000
Term loan - bank 1,710,000 913,750
Mortgage loan - bank 871,944 -
6% Convertible subordinated debentures 4,050,000 -
Other 7,179 9,876
---------------------------------
12,680,852 10,443,626
Less current portion 434,733 44,500
=================================
$12,246,119 $10,399,126
=================================
</TABLE>
During September 1996, the Company terminated its revolving credit
agreement with a bank and entered into a $12,000,000 financing agreement
with a new bank. The new credit facility is comprised of a revolving loan
and a term loan. The maximum borrowings under the revolving facility are
pursuant to a formula based upon the amount of the Company's receivables
and inventory and is payable on December 31, 1998. In addition, the bank
can reduce the maximum borrowings under the revolver by establishing an
environmental compliance reserve in certain circumstances. No compliance
reserves have been required as of December 31, 1996. Borrowings are
collateralized by substantially all of the Company's assets and interest is
payable monthly at the bank's prime rate (8.25% at December 31, 1996) plus
1-1/2%. The interest rate charged by the bank can be reduced to the prime
rate based upon the Company meeting certain performance measures. As of
December 31, 1996, approximately $3,158,000 was unused and available under
the revolver.
The term loan portion of the credit facility consists of a $1,800,000
installment note dated September 18, 1996. Principal is payable in sixty
monthly installments of $30,000 and began on October 1, 1996. As of
December 31, 1996, the Company had $1,710,000 remaining on the note. The
borrowing is collateralized by the Company's machinery and equipment.
Interest is payable monthly at the same rate as the revolving loan. Under
the terms of the credit facility, the Company is required to comply with
various covenants, the most restrictive of which relate to maintenance of
certain financial ratios, levels of tangible net worth, limits on capital
expenditures, and restrictions on distributions from the Company to its
stockholders.
F-12
<PAGE> 30
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1995 and 1994
NOTE C - LONG-TERM DEBT - CONTINUED
The mortgage note consists of a $1,075,000 installment note dated October
6, 1995. Monthly principal payments of approximately $6,000 began on June
1, 1996, with the balance due on February 1, 1998. As of December 31, 1996,
the Company had $871,944 remaining on the note. The borrowing is
collateralized by a warehouse which serves as the Company's distribution
center. Interest is payable monthly at an annual rate of 1/4% over the
bank's prime rate.
The 6% convertible subordinated debentures, due October 15, 2006, are
convertible at the option of the holder into shares of the Company's common
stock at a conversion price of $1.50 per share. Each $100 principal amount
of the debentures is convertible into 66.67 shares of common stock at any
time after December 31, 2001, or under certain circumstances, if there is a
change in control (as defined) of the Company. Subsequent to October 15,
1999, the debentures are redeemable at the option of the Company, in whole
or in part, initially at 110%, and thereafter at prices declining to 100%
at October 15, 2004, together with accrued interest. The debentures are
subordinated to all senior debt of the Company. The proceeds were used to
repay a portion of the Company's indebtedness and to repurchase all of its
outstanding redeemable preferred stock from a major shareholder (note F).
Interest accrues semi-annually and is due upon maturity of the debentures.
Aggregate maturities of long-term debt at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 434,733
1998 8,195,495
1999 624
2000 -
2001 -
Thereafter 4,050,000
-----------
$12,680,852
===========
</TABLE>
NOTE D - COMMITMENTS AND CONTINGENCIES
Certain operations of the Company are conducted in leased facilities under
noncancellable operating leases which expire at various dates through 2005.
One of the leases which relates to the manufacturing facility can be
extended at the option of the Company to the year 2025.
F-13
<PAGE> 31
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1995 and 1994
NOTE D - COMMITMENTS AND CONTINGENCIES - CONTINUED
The following table details scheduled minimum rental payments.
<TABLE>
<CAPTION>
RENTAL
YEAR ENDING DECEMBER 31, COMMITMENT
------------------------ ----------
<S> <C>
1997 $ 310,215
1998 271,835
1999 265,437
2000 265,437
2001 216,261
Thereafter 792,956
-----------
$ 2,122,141
===========
</TABLE>
Rent expense for the years ended December 31, 1996, 1995 and 1994 was
approximately $348,000, $512,000 and $606,000, respectively.
The Company is currently involved in litigation and investigations
pertaining to environmental concerns by the State of Ohio in connection
with several potential problems at its Macedonia, Ohio manufacturing plant.
In 1990 the Company entered into a Consent Order with the State of Ohio.
The Company was required to submit to the Ohio Environmental Protection
Agency (Ohio EPA), a closure plan to address contamination identified at
the property. The Company submitted the closure plan as required. Ohio EPA
also requested, in the event the remedial measures in the proposed closure
plan are not successful within a two-year period, that at that time the
Company provide supplemental or alternative measures to clean up the
remaining contamination.
F-14
<PAGE> 32
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1995 and 1994
NOTE D - COMMITMENTS AND CONTINGENCIES - CONTINUED
On May 17, 1994, the Ohio EPA approved the revised closure plan which
included unilateral modifications as deemed necessary by the Ohio EPA. On
June 17, 1994, the Company appealed the Ohio EPA's action on the grounds
that the unilateral modifications were unreasonable and unlawful. On
January 6, 1995, the Company and the State of Ohio entered into a
settlement agreement, which resulted in a termination of the Company's
appeal of this matter before the Environmental Board of Review. On May 3,
1995, the Ohio EPA issued a supplemental closure plan approval letter that
established certain deadlines with regard to the Company's implementation
of a Groundwater Extraction and Treatment System, a Soil Vapor Extraction
System, and certain other closure plan tasks. On December 9, 1996, the
Company revised its estimate to address closure costs at the Macedonia
facility. Based on estimates of closure costs received from the Company's
environmental consultant, the revised total closure costs are estimated at
approximately $1,291,000. As of December 31, 1996, $1,178,000 of closure
costs were expended, of which $792,000 was received from both escrow funds
and an Ohio EPA Trust Account (the Trust). The escrow funds and trust funds
were deposited by previous owners. During 1996, the Company received
$621,000 from the Trust for reimbursement of expenditures; in addition it
has requested approximately $258,000 from the Trust for reimbursement of
EPA expenditures and has recorded this amount as an Account Receivable -
Other on the December 31, 1996 balance sheet. As of December 31, 1996, the
Trust contained approximately $329,000. The Company believes that the
expenditures for which reimbursement has been requested are in accordance
with the closure activities contemplated by the Trust requirements. While
the Company is not aware of any reason that it would not receive
reimbursement for these expenditures, the Ohio EPA has discretion in
responding to the Company's request.
If the remediation techniques proposed in the closure plan are not
successful, or if supplemental or alternative technologies are required to
be used, then the Company may incur costs in excess of the $1,291,000
closure cost estimate. The Company believes, based on discussions with its
technical consultants, that the cost of additional testing and operation of
the proposed remedial systems will be approximately $150,000 and that the
costs of the supplemental or alternative cleanup measures, if determined to
be necessary, would not exceed $2,000,000.
On January 31, 1997, the Company received a Notice of Violation (NOV) from
the Ohio EPA in association with an inspection conducted by the Ohio EPA in
June 1996 regarding the operations at the Macedonia facility. At this time,
the Company does not know whether these violations had, in fact, occurred
or for what time period the alleged violations lasted. A number of the
alleged violations will be addressed by the completion of closure
activities described above. Other violations will be addressed through
negotiations with the Ohio EPA. At this time, the Ohio EPA has not
stipulated any penalties, nor can it be predicted whether the Ohio EPA will
seek penalties or to what extent those penalties will aggregate.
F-15
<PAGE> 33
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1995 and 1994
NOTE D - COMMITMENTS AND CONTINGENCIES - CONTINUED
The Company was also a defendant in two product liability lawsuits. Both of
these suits were defended by the Company's insurance carrier and were
settled by the insurance company within the limits of the insurance
coverage. In one of these cases, Court approval and completion of necessary
paperwork is expected by the end of May 1997. In the second case, the Court
has approved the settlement. By virtue of the settlement, all cross-claims
by a co-defendant against the Company have been extinguished except for an
implied indemnity claim by the co-defendant. The Company denies any and all
liability to the co-defendant and will continue to vigorously defend
against that claim. Settlement discussions between the co-defendant and the
plaintiff's attorney have resulted in a settlement of plaintiff's claim
against the co-defendant.
NOTE E - EMPLOYEE BENEFIT PLANS
The Company has a defined contribution 401(k) profit-sharing plan (the
Plan) covering certain salaried employees with one year of credited
service. The Company's profit-sharing contributions are at the discretion
of the Board of Directors and are credited to each participant's account
based on a percentage of gross compensation subject to a maximum
contribution for each participant. The Company is also required under the
401(k) provisions to match employee contributions equal to 50% of each such
participant's deferred compensation up to a maximum of 4% of the
participant's annual compensation. Contributions by the Company under the
401(k) provisions for 1996, 1995 and 1994 were approximately $48,000,
$51,700 and $35,400, respectively. The Company did not make any
profit-sharing contributions to the Plan for the years ended December 31,
1996, 1995 and 1994.
The Company has a Retirement Savings Trust and Plan covering full-time
hourly employees who have completed six months of service. The Company's
contributions are made on an annual basis and are credited to each
participant's account at an amount equal to 13 cents per hour of
compensation (maximum of 48 hours per week). In addition, qualified
employees are eligible to make voluntary contributions to the Retirement
Savings Trust and Plan which are fully vested and nonforfeitable.
Contributions by the Company for the years ended December 31, 1996, 1995
and 1994 approximated $34,500, $35,200 and $36,700, respectively.
NOTE F - REDEEMABLE PREFERRED STOCK
During 1995, the Company designated 3,500 shares of its previously
authorized 2,000,000 preferred shares as cumulative, convertible preferred
stock. On October 6, 1995, the Company issued 3,500 shares of cumulative,
convertible preferred stock to an officer/director at a $100 per share
price, which aggregated to $350,000. The cumulative, convertible preferred
stock pays quarterly dividends of $1.875 per share. On October 16, 1996,
the Company redeemed all of its 3,500 shares of redeemable preferred stock
for $350,000 from the proceeds received in conjunction with the convertible
subordinated debentures (note C).
F-16
<PAGE> 34
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1995 and 1994
NOTE G - STOCKHOLDERS' EQUITY
On July 25, 1995, the Company entered into a Restricted Stock Award
Agreement with a key employee for 15,000 shares of common stock. Upon the
issuance of the certificates for the shares, the employee has the rights of
a stockholder, including the right to vote the shares and to receive
dividends. The certificates, along with an executed stock power, are being
held by the Company in its control for the account of the employee until
the restrictions lapse. The restrictions call for forfeiture of the
remaining restricted shares and include selling or otherwise disposing of
the shares and termination, under certain circumstances, of employment. The
Company charged $19,350 to compensation expense and distributed one-third
(1/3) of the shares to the employee annually for 1996 and 1995. The
remaining shares, if not forfeited, will be distributed on July 25, 1997,
at which time the restrictions will lapse. The value of the shares under
restriction at December 31, 1995 were charged to equity as unearned
compensation and are being amortized to operations over the remaining life
of the agreement.
In December 1996, the Board of Directors authorized the Company to redeem
shares of its common stock at the open market price. On December 20, 1996,
the Company redeemed into treasury, 65,500 common shares at $1.8125 per
share at an aggregate cost of $118,722, including expenses.
The Company has a Nonqualified and Incentive Stock Option Plan (the Plan)
under which 650,000 shares of common stock have been reserved. The Plan
provides for grants to officers and key employees of the Company of both
nonqualified and incentive stock options. The exercise price for options
granted under the Plan must be at least equal to fair market value of the
shares on the date of grant. The Plan will terminate in January 1999 but
will not affect any outstanding options previously granted. Such options
granted may be exercised after one year from the date of grant for not more
than one-third of the shares originally subject to the option and an
additional one-third for each of the two years thereafter. The options
granted under the Plan expire five years from the date of grant. As of
December 31, 1996, no incentive stock options have been granted.
The Company also has an Outside Directors' Stock Option Plan (Directors'
Plan) under which 150,000 shares of common stock have been reserved. Under
the Directors' Plan, each outside director will be granted an option to
purchase 10,000 shares of common stock and an additional option to purchase
5,000 shares of common stock every two years thereafter as long as the
individual remains on the Company's Board of Directors and remains an
"outside" director. The exercise price for options granted shall be the
fair market value of the shares on the date of grant. Directors vest in
their options in 25% annual increments commencing one year after the date
of grant. Options granted, to the extent the director has vested, shall be
exercisable for a term of ten years from the date of grant. In addition,
the Directors' Plan calls for the exercising of options by directors within
seven months after their termination and by their beneficiaries within one
year after their death. The Directors' Plan will terminate in January 1999
but will not affect any outstanding options previously granted.
F-17
<PAGE> 35
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1995 and 1994
NOTE G - STOCKHOLDERS' EQUITY - CONTINUED
Transactions for both stock option plan are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------- ---------------------------- -------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -
beginning of year 545,428 $6.14 405,715 $7.82 341,786 $8.76
Granted 50,000 $1.70 236,570 $3.59 105,500 $4.79
Exercised - $ - - $ - - $ -
Cancelled (28,037) $3.85 (96,857) $6.95 (41,571) $7.92
------- ------- -------
Outstanding -
end of year 567,391 $5.86 545,428 $6.14 405,715 $7.82
======= ======= =======
Exercisable at end of year 347,583 $7.48 249,024 $8.80 174,547 $9.15
======= ======= =======
Available for grant 232,609 254,572 394,285
======= ======= =======
Weighted average fair value
of options granted
during the year $1.23 $1.88 N/A
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------- ---------------------------
Outstanding Exercisable
----------------------------------------- ---------------------------
Weighted-
Average
Remaining Weighted- Weighted-
Range of Contractual Average Average
Exercise Prices Shares Life Exercise Price Shares Exercise Price
------------- ------- --- -------------- ------ --------------
<S> <C> <C> <C> <C> <C>
$1.625 - 1.813 50,000 8.4 $1.70 - $ -
$3.375 - 4.06 215,963 3.5 $3.61 69,485 $3.61
$4.50 - 6.38 126,428 2.6 $5.52 103,098 $5.57
$10.00 - 10.50 175,000 1.3 $10.07 175,000 $10.07
-------
567,391
=======
</TABLE>
F-18
<PAGE> 36
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1995 and 1994
NOTE G - STOCKHOLDERS' EQUITY - CONTINUED
Both of the Company's stock option plans are accounted for under APB
Opinion 25 and related Interpretations. Accordingly, no compensation cost
has been recognized for the plans. Had compensation cost for the plans been
determined based on the fair value of the options at the grant dates
consistent with the method of Statement of Financial Accounting Standards
123, Accounting for Stock-Based Compensation (SFAS 123), the Company's net
loss and loss per share would have been increased to the proforma amounts
indicated below.
<TABLE>
<CAPTION>
===================================
1996 1995
-----------------------------------
<S> <C> <C> <C>
Net (loss) As reported $(1,762,713) $(2,008,606)
Pro forma $(1,919,713) $(2,114,606)
Primary (loss) per share As reported $(0.45) $(0.51)
Pro forma $(0.49) $(0.54)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995: expected volatility of 61 and
50 percent; risk-free interest rates of 6.34 and 6.59 percent; expected
lives of 4 and 3 years; and no dividend payments.
NOTE H - RESTRUCTURING CHARGES
In the fourth quarter of 1994, the Company's Board of Directors approved a
plan to reduce the Company's cost structure and to improve operations
through the consolidation of facilities and reductions in the number of
employees.
F-19
<PAGE> 37
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1995 and 1994
NOTE H - RESTRUCTURING CHARGES - CONTINUED
The Company accrued $941,000 of restructuring charges at December 31, 1994.
The actual costs related to the restructuring are comprised of the
following: $148,000 related to the abandonment of leasehold improvements
and lease termination costs; $468,000 for the abandonment of certain
property and equipment; $260,000 related to the discontinuation of a
product line and $65,000 for employee termination benefits. During 1994,
the Company has also expended approximately $13,000 for employee
termination benefits under the Plan.
NOTE I - INCOME TAXES
As of December 31, 1996, the Company had approximately $9,686,000 of net
operating loss and $51,000 of investment tax credit carryforwards. However,
due to a change in ownership during 1992, the Company has an annual
limitation of approximately $850,000 in the utilization of its net
operating loss and investment tax credit carryforwards. In addition, due to
losses in 1996 and 1995 and the realization in 1994 of built-in gains,
approximately $7,300,000 of the carryforwards may be utilized beyond the
current annual limitation to offset future taxable income. The net
operating loss carryforward and investment tax credit carryforwards, to the
extent unused, will expire as follows:
<TABLE>
<CAPTION>
==========================================
NET OPERATING INVESTMENT TAX
LOSS CREDIT
------------------------------------------
YEAR ENDING
DECEMBER 31,
------------------
<S> <C> <C> <C>
1997 $ -- $47,000
1998 -- 3,000
1999 3,079,000 --
2000 2,477,000 1,000
2001 919,000 --
2003 1,000 --
2004 139,000 --
2010 1,383,000 --
2011 1,688,000 --
==========================================
$9,686,000 $51,000
==========================================
</TABLE>
F-20
<PAGE> 38
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1995 and 1994
NOTE I - INCOME TAXES -- CONTINUED
The above-mentioned carryforwards gave rise to deferred tax assets of
approximately $3.8 million, $3.2 million and $2.6 million at December 31,
1996, 1995 and 1994, respectively. Due to the uncertainty of the ultimate
realization of a portion of the deferred tax asset, a valuation allowance
in the amounts of $2 million, $1.3 million and $2.6 million was recorded by
the Company for the years ended December 31, 1996, 1995 and 1994,
respectively. The net change in the valuation allowances for 1996, 1995 and
1994 was $.7 million, $(1.3) million, and $.5 million, respectively.
The asset recognition for 1996 is based principally on the recognition of
the portion of net operating loss carryforwards which are not limited as to
their use. These net operating loss carryforwards offset the deferred tax
credits that are scheduled to reverse in the carryforward period.
Therefore, the Company has reduced the valuation allowance related to this
offset.
The provision for income taxes is different from that which would be
obtained by applying the statutory federal income tax rate for 1996, 1995
and 1994 due primarily to amortization of goodwill and the recognition of
net operating loss carryforwards.
Deferred tax (assets) liabilities are as follows:
<TABLE>
<CAPTION>
==========================
DECEMBER 31,
--------------------------
1996 1995
--------------------------
<S> <C> <C>
Depreciation $ 1,441,000 $ 1,341,000
Amortization of product
formulation costs 260,000 365,000
Accounts receivable allowance (41,000) (138,000)
Excess of book inventory over
tax inventory 171,000 346,000
Other (31,000) 124,805
Net operating loss carryforwards (3,800,000) (3,200,000)
Valuation allowance 2,000,000 1,300,000
==========================
$ -- $ 138,805
==========================
</TABLE>
F-21
<PAGE> 39
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1995 and 1994
NOTE I - INCOME TAXES -- CONTINUED
The income tax benefit of $127,600 for the year ended December 31, 1996
consists of approximately $11,000 of current federal income taxes and
approximately $138,600 of deferred tax benefits. The income tax benefit of
$2,981,000 for the year ended December 31, 1995 consists of approximately
$1,006,000 of current refundable federal income taxes and approximately
$1,975,000 of deferred tax benefits. The income tax provision of $320,000
for the year ended December 31, 1994 consists principally of $1,040,000 of
current federal income taxes and $720,000 of deferred tax benefits.
NOTE J - EARNINGS (LOSS) PER SHARE OF COMMON STOCK
Net earnings (loss) per share of common stock has been computed based upon
the weighted average number of common shares and common share equivalents
outstanding for each year as follows: 3,945,618 for the year ended December
31, 1996, 3,939,348 for the year ended December 31, 1995 and 3,935,431 for
the year ended December 31, 1994. Common share equivalents include dilutive
employee stock options, cumulative convertible preferred stock and the
shares exercisable under the common stock warrants (less the number of
treasury shares assumed to be repurchased).
NOTE K - INSURANCE CLAIM
During 1992, a portion of the Macedonia, Ohio plant, machinery and
equipment, and inventory was damaged by a non-chemical fire. The Company
carried (and continues to carry) replacement cost insurance and business
interruption insurance and had notified the insurance company. The Company
had incurred various expenditures related to the repair and restoration of
the fire damaged property as well as business interruption costs. The
replacement cost portion of the claim for property and restoration costs
has been settled with the insurance company for approximately $7.6 million,
of which final payment of $1.8 million was received during 1994. The
business interruption portion of the claim for reimbursement of expenses
incurred and lost sales experienced was settled with the insurance company
for approximately $8.1 million, of which final payment of $6.6 million was
received during 1994.
During 1994, in conjunction with the fire, the Company recorded an
extraordinary gain of $2,265,000, net of taxes related to the insurance
replacement value of machinery and equipment.
F-22
<PAGE> 40
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON SCHEDULES
Stockholders of
SPECIALTY CHEMICAL RESOURCES, INC.
In connection with our audit of the financial statements of Specialty Chemical
Resources, Inc. referred to in our report dated February 7, 1997, we have also
audited Schedule II for each of the three years in the period ended December 31,
1996. In our opinion, this schedule presents fairly, in all material respects,
the information required to be set forth therein.
GRANT THORNTON LLP
Cleveland, Ohio
February 7, 1997
F-23
<PAGE> 41
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
SPECIALTY CHEMICAL RESOURCES, INC.
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
--------------------------
Additions
--------------------------
Balance at Charged to Balance at
Beginning of Costs and Charged to End of
Year Description Period Expenses Other Accounts Deductions Period
------- ----------------- ------------ --------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
1994 Allowance for
doubtful accounts $113,000 $120,300 $ - ($110,300) $123,000
1995 Allowance for
doubtful accounts $123,000 $260,400 $ - ($38,400) $345,000
1996 Allowance for
doubtful accounts $345,000 $65,000 $ - ($308,000) $102,000
</TABLE>
F-24
<PAGE> 42
INDEX TO EXHIBITS
Exhibit Page
Number
- ------
Number
- ------
3.01 The Amended and Restated Bylaws of the Company were filed as Exhibit
3.03 to the Company's Form S-1 Registration Statement (Registration
No. 2-78134) and are incorporated herein by reference................
3.02 The Restated Certificate of Incorporation of the Company was filed as
an exhibit to Company's Second Modified Plan of Reorganization which
was filed as Exhibit 2.1 to the Company's Current Report on Form 8-K
dated December 9, 1986, and is incorporated herein by reference......
3.03 Amendment, effective December 12, 1991, to the Company's Restated
Certificate of Incorporation was filed as Exhibit 3.03 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1991 and is incorporated herein by reference.........................
3.04 Amendment, effective February 26, 1992, to the Company's Restated
Certificate of Incorporation was filed as Exhibit 3.04 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1991 and is incorporated herein by reference.........................
3.05 The Amended and Restated Bylaws of the Company were filed as Exhibit
3.01 to the Company's Form 8-K on June 8, 1995 and are incorporated by
reference herein......................................................
4.01 Specimen Stock Certificate of the Company was filed as Exhibit 4.5 to
the Company's Registration Statement on Form S-2, File No. 33-43092,
and is incorporated herein by reference...............................
4.02 Open ended mortgage note dated October 6, 1995 between the Company and
National City Bank, was filed as Exhibit 4.08 to the Company's Form
10-K for the year ended December 31, 1995 and is incorporated by
herein by reference..................................................
4.03 Indenture Agreement between the Company and Bank One, N.A. dated
October 15, 1996 was filed as Exhibit 4.1 to the Company's Form 10-Q
for its quarter ended September 30, 1996 and is incorporated by
reference herein.
......................................................................
4.04 The Credit Agreement between the Company and Star Bank, N.A. dated
September 18, 1996 was filed as an exhibit to the Company's current
Form 8-K, dated September 23, 1996 an is incorporated by reference
herein................................................................
4.05 Indemnification Agreement between the Company and Martin Trust and CEW
Partners dated August 30, 1996 was filed as Exhibit 4.5 to the
Company's Registration Statement (Registration Number 333-09879) and
is incorporated by reference herein..................................
10.01 Lease between ASI and 9150 Group, dated September 30, 1977 and amended
January 1, 1989 was filed as Exhibit 10.10 to the Company's Annual
Report on Form 10-K for the year ended January 1, 1989 and is
incorporated herein by reference.....................................
10.02 Lease between ASI and 9150 Group, dated September 25, 1977 and amended
January 1, 1989, was filed as Exhibit 10.11 to the Company's Annual
Report on Form 10-K for the year ended January 1, 1989 and is
incorporated herein by reference......................................
l0.03 1989 Non-Qualified and Incentive Stock Option Plan of the Company was
filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K for
the year ended January 1, 1989 and is incorporated herein by reference
-EX 1
<PAGE> 43
Exhibit Page
Number
- ------
Number
- ------
10.04 Form of option agreement pursuant to 1989 Incentive Stock Option Plan
of the Company was filed as Exhibit 10.14 to the Company's Annual
Report on Form 10-K for the year ended January l, 1989 and is
incorporated herein by reference.....................................
10.05 1989 Outside Directors' Stock Option Plan of the Company was filed as
Exhibit 10.5 to the Company's Registration Statement on Form S-2, File
No. 33-43092 and is incorporated by reference herein.................
10.06 First Amendment to 1989 Non-Qualified and Incentive Stock Option Plan
of the Company, adopted October 3, 1991, was filed as Exhibit 10.12 to
the Company's Registration Statement on Form S-2, File No. 33-43092
and is incorporated by reference herein..............................
10.07 Second Amendment to 1989 Non-Qualified and Incentive Stock Option Plan
of the Company, dated February 26, 1992, was filed as Exhibit 10.12 to
the Company's Registration Statement on Form S-2, File No. 33-43092
and is incorporated by reference herein..............................
10.08 First Amendment to 1989 Outside Directors' Stock Option Plan of the
Company, adopted October 3, 1991, was filed as 10.9 to the Company's
Registration Statement on Form S-2, File No. 33-43092 and is
incorporated by reference herein.....................................
10.09 Second Amendment to the 1989 Outside Directors' Stock Option Plan,
dated February 26, 1992, was filed as Exhibit 10.13 to the Company's
Registration Statement on Form S-2, File No. 33-43092 and is
incorporated by reference herein.....................................
10.10 Agreement between ASI and Teamsters Local Union No. 416, dated
November 17, 1993 and effective as of August 15, 1993 was filed as
exhibit 10.10 on the Company's annual report on for the year ended
December 31, 1993 and is incorporated by reference herein
10.11 Agreement between ASI and Teamsters Local Union No. 416, dated January
12, 1992, and effective as of December 23, 1991 was filed as Exhibit
10.11 to the Company's Registration Statement on Form S-2, File No.
33- 43092 and is incorporated by reference herein
10.12 Lease between ASI and Dutton Company, dated October 7, 1987 as amended
May 4, 1989, was filed as Exhibit 10.12 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1990, File No. 2-78134,
and is incorporated herein by reference
10.13 Lease amendment between Specialty Chemical Resources, Inc. (assignee
of ASI) and the 9150 Group dated July 25, 1994
10.14 Agreement between ASI and Teamsters Union Local No. 416 dated May 1,
1995 and effective as of December 16, 1994 was filed as Exhibit 10.14
on the Company's Form 10-Q for the quarter ended March 31, 1995 and is
incorporated by reference herein
10.15 Restricted Stock Award Agreement dated July 25, 1995 between the
Company and John H. Ehlert was filed as Exhibit 10.15 on the company's
Annual Report on Form 10-K for the year ended December 31, 1995
10.16 Agreement of Settlement and Release, dated as of July 21, 1995, among
the Company, the Directors, the Committee and the individual members
of the Committee was filed as Exhibit 10.01 to the Company's Form 8-K
on July 8, 1995 and is incorporated by reference herein
23.00 Independent Auditor's Report
27.00 Financial Data Schedule
-Ex 2-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000703645
<NAME> SPECIALTY CHEMICAL RESOURCES, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 168,641
<SECURITIES> 0
<RECEIVABLES> 5,206,359
<ALLOWANCES> 0
<INVENTORY> 5,909,447
<CURRENT-ASSETS> 12,664,722
<PP&E> 14,284,234
<DEPRECIATION> 4,451,017
<TOTAL-ASSETS> 43,923,386
<CURRENT-LIABILITIES> 5,115,222
<BONDS> 12,246,119
<COMMON> 394,777
0
0
<OTHER-SE> 26,167,268
<TOTAL-LIABILITY-AND-EQUITY> 43,923,386
<SALES> 38,914,148
<TOTAL-REVENUES> 38,914,148
<CGS> 32,783,174
<TOTAL-COSTS> 32,783,174
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,059,217
<INCOME-PRETAX> (1,890,313)
<INCOME-TAX> (127,600)
<INCOME-CONTINUING> (1,762,713)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,762,713)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> (0.45)
</TABLE>
