<PAGE> 1
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, 1997 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.)
9055 S. Freeway Drive, Macedonia, Ohio 44056
-------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (330) 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 27, 1998 was $3,795,440.
As of February 27, 1998, 3,882,261 shares of the Registrant's Common
Stock were outstanding.
Documents Incorporated by Reference: The registrant's definitive proxy statement
for its 1998 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, 1997, 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
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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 9055 S. Freeway
Drive, Macedonia, Ohio 44056; telephone (330) 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 850 "proprietary"
chemical formulations, substantially all of which are packaged in aerosol
containers. In 1997, the Company sold approximately 31 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 92% 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 8% of the Company's sales are of its branded products.
On May 22, 1997, the Company acquired substantially all of the tangible
and intangible non-real estate assets of Hysan Corporation (the "Hysan Assets").
Hysan is a leading producer of aerosol and liquid specialty chemical maintenance
products sold to the institutional janitorial/sanitation market.
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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 3% 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.
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.
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PRODUCTS. Aerosol containers are a convenient, effective and efficient way to
deliver thousands of products. The containers, 3.2 billion of which were sold in
the United States in 1996, 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 generally 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 as well as EPA registered disinfectants and deodorants.
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 and sells several products under its own brand
names. The Taylor Made Products or TMP brand, which includes paints, cleaners,
lubricants and degreasers, is sold principally to the automotive do-it-yourself
market through chain store merchandisers. The Aerosol Maintenance Products or
AMP and Hysan brands are sold principally to janitorial and sanitation supply
distributors and include cleaning, deodorizing, and disinfectant products.
MARKETING AND DISTRIBUTION. A combination of a full time inside sales force and
the use of manufacturer's representative agencies carry out the Company's
marketing and sales activities. The inside sales force focuses on the sale of
the Company's custom packaging services while the manufacturer's representatives
primarily sell the Company's own branded products. The Company's customers are
distributors of a broad range of products to the automotive service, industrial
maintenance and janitorial/sanitation supplies market. 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 40% 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.
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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 1997, the Company sold approximately 31 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.
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EMPLOYEES. As of March 11, 1998, the Company employed approximately 219 people
on a full-time basis, of whom 70 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, 1999. 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. On October 6, 1995 the Company purchased its previously leased
distribution center in Macedonia, Ohio. The Company moved its executive offices
in May, 1997 from the leased space adjacent to the Macedonia plant to office
space which was available at its distribution center which was purchased in
1995.
ITEM 3. LEGAL PROCEEDINGS
NOTE C - 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 (Macedonia Plant) as has
previously been disclosed by the Company. In 1990, the Company entered into a
Consent Order with the State of Ohio regarding the Macedonia Plant (1990 Consent
Order). The Company was required to submit to the Ohio Environmental Protection
Agency (Ohio EPA), a closure plan to address contamination identified at the
Macedonia Plant. Further, the 1990 Consent Order enjoined the Company to comply
with all applicable requirements of Ohio Revised Code Chapter 3734, Ohio's
hazardous waste law, and Ohio Revised Code Chapter 6111, Ohio's water protection
law. The 1990 Consent Order provides for stipulated (automatic) penalties in the
event the Company violates the requirements of the 1990 Consent Order.
Page 6 of
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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. 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. 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 October 15, 1997, the Company received a letter from the Ohio
Attorney General's Office alleging that the Company has failed to comply with
the terms of the 1990 Consent Order. The State alleges that the Company has
committed numerous violations of applicable Ohio hazardous waste laws and
regulations. Ohio EPA bases these allegations upon the results of a number of
inspections conducted from 1993 through 1997. These inspections were documented
by Ohio EPA in the form of Notices of Violation ("NOVs"). The Company prepared
detailed written responses to each NOV and without admitting liability, took
specific actions in response to the allegations identified by Ohio EPA.
Nonetheless, the Attorney General, on behalf of the Ohio EPA, demanded that the
Company pay the State of Ohio the sum of $1,080,000 as stipulated penalties for
alleged violations of the above-referenced rules. Through the October 15, 1997
letter, the Attorney General invited the Company to enter negotiations to
resolve the disagreement regarding the Company's alleged violations of the 1990
Consent Order. Such settlement negotiations currently are in progress.
The Company believes that it has materially complied with the
requirements of the Consent Order and that stipulated penalties due to the State
of Ohio pursuant to the Consent Order, if any, should not have a materially
adverse effect on the financial condition of the Company. However, there can be
no assurance that negotiations with the State of Ohio will be successful and
will not result in extended litigation between the Company and the State of
Ohio. Further, the Company cannot predict whether a court would find the Company
liable for stipulated penalties in excess of the initial demand proposed by the
State of Ohio.
The Company previously disclosed that it was one of several defendants in
two personal injury lawsuits. During Fiscal 1997, the Company and its insurers
settled all claims relative to HAMRICK V. COASTAL LIMBER COMPANY, DONALD MEGERT,
MONONGAHELA POWER COMPANY, LAWSON PRODUCTS, INC. AND SPECIALTY CHEMICAL
RESOURCES, INC. originally filed in 1995 and RENFRO, SPEARS ET AL V. SPECIALTY
CHEMICAL RESOURCES, INC.. GOODYEAR TIRE AND RUBBER COMPANY AND SANDRA VOGLER
originally filed in 1994.
The Company is also a defendant in 9150 GROUP V. AEROSOL SYSTEMS, INC.,
A DIVISION OF SPECIALTY CHEMICAL RESOURCES, INC., Case No. 297562, now pending
in the Cuyahoga County Court of Common Pleas. Plaintiff claims damages in an
unspecified amount together with interest and costs, arising out of the alleged
improper removal of certain manufacturing equipment by Specialty Chemical, Inc.,
following the termination of a commercial lease under which it was a tenant. The
litigation is presently in the discovery stage. This case is set for trial on
May 19, 1998. Management believes that the suit is without merit.
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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 1997.
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.
NAME AGE POSITION
---- --- --------
Edwin M. Roth 70 C.E.O., Chairman of the
Board, and Director
Corey B. Roth 40 President, Chief Operating Officer,
and Director
David F. Spink 47 Vice President, Chief Financial
Officer, Treasurer, and Asst.
Secretary
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 President of the Company since June 1997, 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 from June, 1992 to June 1997. 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. David F. Spink joined the Company in 1996. In June 1997 he was elected
Chief Financial Officer and Treasurer. 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 1994 Mr. Spink was Director of
Planning and Analysis for that corporation.
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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 1997, the closing sales prices on the AMEX ranged from $1.00 to
$2.50. During 1996, the closing sales prices on the AMEX ranged from $1.13 to
$3.88. The following table sets forth the high and low sale prices by quarter
for 1997 and 1996.
<TABLE>
<CAPTION>
Calendar Year Ended December 31,
--------------------------------
1997 1996
---------------- ---------
Quarter High Low High Low
------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter........ 2.500 1.375 2.875 1.250
Second Quarter....... 2.188 1.250 3.875 1.250
Third Quarter........ 2.000 1.250 3.688 1.750
Fourth Quarter....... 1.500 1.000 2.063 1.125
</TABLE>
As of February 27, 1998, the closing price for the Common Stock on AMEX was
$1.25. As of February 27, 1998, there were 804 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 1993 through 1997 are
derived from the Company's audited financial statements. 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.
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SELECTED FINANCIAL DATA
( IN THOUSANDS, EXCEPT PER SHARE DATA )
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of operations
Data (1)
Net sales $ 40,283 $ 38,914 $ 43,419 $ 44,931 $ 47,362
Cost of goods sold 33,628 32,783 39,123 38,066 36,988
-------- -------- -------- -------- --------
Gross profit 6,655 6,131 4,296 6,865 10,374
Selling, general and
administrative expenses 6,903 6,067 7,648 6,995 6,327
Amortization of intangibles 997 907 869 874 862
Loss on Impairment (4) 18,501 -- -- -- --
Restructuring charges -- -- -- 954 --
-------- -------- -------- -------- --------
Operating profit (loss) (19,746) (843) (4,221) (1,958) 3,185
Other income (expense)
Interest expense (1,405) (1,059) (779) (560) (531)
Other 66 11 10 39 29
-------- -------- -------- -------- --------
(1,339) (1,048) (769) (521) (502)
-------- -------- -------- -------- --------
Earnings (Loss) before income taxes and
extraordinary items (21,085) (1,891) (4,990) (2,479) 2,683
Income tax benefits (expense) 0 128 2,981 840 (944)
-------- -------- -------- -------- --------
Earnings (Loss) before extraordinary items (21,085) (1,763) (2,009) (1,639) 1,739
Extraordinary items:
Gain (loss) due to fire (net of income taxes) -- -- -- 2,265 (884)
-------- -------- -------- -------- --------
Net earnings (loss) $(21,085) $ (1,763) $ (2,009) $ 626 $ 855
======== ======== ======== ======== ========
Share Data :
Earnings (Loss) per common share:
Before extraordinary items $ (5.43 ) $ (0.45) $ (0.51) $ (0.42) $ 0 44
Extraordinary items -- -- -- 0.58 (0.22)
-------- -------- -------- -------- --------
Net earnings (loss) $ (5.43) $ (0. 45) $ (0.51) $ 0.16 $ 0.22
======== ======== ======== ======== ========
Dividends paid -- -- -- -- --
Weighted average common shares
outstanding 3,882 3,946 3,939 3,935 3,946
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data :
Working capital $ 6,415 $ 7,550 $ 7,142 $ 6,420 $ 10,883
Total assets $ 29,518 $ 43,923 $ 47,272 $ 44,558 $ 49,914
Long-term debt $ 15,446(2) $ 12,246(2) $ 10,399 $ 4,512 $ 9,948
Redeemable preferred stock (3) -- $ -- $ 350 -- --
Stockholders' equity $ 4,497(4) $ 26,562 $ 28,444 $ 30,439 $ 29,814
</TABLE>
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(1) At December 31, 1997, the Company had approximately $11,335,000 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.
(2) 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 D to Financial Statements).
(3) 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 D and G to
Financial Statements.)
(4) In accordance with FAS 121, the Company recorded a non-cash
charge of $18,501,000 which is reflected as a reduction in the
carrying amount of goodwill.
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.
Page 11 of
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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,
-----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Sales .................................. 100.0% 100.0% 100.0%
Cost of goods sold ....................... 83.4% 84.2% 90.1%
---- ---- ----
Gross profit ............................... 16.6% 15.8% 9.9%
Selling, general and administrative
expenses ................................. 17.2% 15.6% 17.6%
Amortization of intangibles ................ 2.5% 2.3% 2.0%
Impairment of long lived assets ............ 45.9% -- --
---- ---- ----
Operating profit(loss) ..................... (49.0%) (2.2%) (9.7%)
Interest and expense ....................... 3.5% 2.7% 1.8%
</TABLE>
FISCAL YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO 1996
The Company's results include the results attributable to the
acquisition of the Hysan Assets as of May 22, 1997. Net sales $40,284,000 for
the year ended December 31, 1997 were $1,370,000, or 3.5% above the comparable
period in the prior year. $4,867,000 of the current year net sales were
attributed to the acquisition of Hysan Assets. Excluding acquisition related
sales, net sales for the year ended December 31, 1997 were $35,417,000;
$3,497,000, or 9.0% below the comparable period in the prior year. This
reduction in net sales for the year is due primarily to production shortfalls
caused by the difficulty of integrating the Hysan operations.
Cost of goods sold for the year ended December 31, 1997, increased by
$845,000 as compared to cost of goods sold for the same period in the prior
year. This increase was due principally to increased sales unit volume during
the year ended December 31, 1997. Cost of goods sold decreased as a percentage
of net sales from 84.3% to 83.4% for the year ended December 31, 1996 and 1997,
respectively. The decrease as a percent of net sales was due primarily to higher
unit pricing in 1997.
Selling, general and administrative expenses were $6,904,000 for the
year ended December 31, 1997, or 17.1% of net sales. Selling, general and
administrative expenses were $6,067,000, or 15.6% of net sales for year ended
December 31, 1996. The increase in selling, general and administrative expenses
was due primarily to increased shipping costs as a result of operational
disruptions and increased sales commission costs both related to the Hysan
acquisition.
At December 31, 1997, in accordance with FAS 121, the Company estimated
its undiscounted cash flows from operations which results indicate that an
impairment of long-lived assets exists and that a write-down to fair value is
required. The Company utilized an independent third party appraiser to determine
fair value based upon expected future cash flows from operations discounted at a
rate commensurate with the risks involved. Based upon the valuation performed,
the Company recorded a non-cash charge of $18,501,000 which is reflected as a
reduction in the carrying amount of goodwill.
Page 12 of
<PAGE> 13
Interest expense for the year ended December 31, 1997, was 3.5% of net
sales versus 2.7% for the comparable period in the prior year. Interest expense
was $1,405,000 for the year ended December 31, 1997, as compared to $1,059,000
for the year ended December 31, 1996. The increase in interest expense is due to
increased borrowing under the Company's senior credit facility resulting from
the acquisition as well as full year accrual of interest on the 6% convertible
subordinated debentures. See "Liquidity and Capital Resources".
The Company recorded a net loss for the year ended December 31, 1997,
of $21,085,000, or $5.43 per share on weighted average shares outstanding of
3,882,264. The charge for impairment of long-lived assets accounted for
$18,501,000 of the loss, or $4.77 per share. This compared to a net loss of
$1,762,713, or $.45 per share on weighted average shares outstanding of
3,945,618 for the same period in the prior year. The decrease in earnings for
the 1997 period is due primary to the non-cash charge incurred with the
impairment of long-lived assets (Described above).
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 13 of
<PAGE> 14
INCOME TAXES AND NET OPERATING LOSS CARRYFORWARDS
As of December 31, 1997, the Company had approximately $11,335,000 of
net operating loss 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 carryforwards. In addition, due to losses
in 1997, 1996 and 1995 and the realization in 1994 of built-in gains,
approximately $10,000,000 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.
The Company had no income tax expense in 1997. 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.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company's ratio of current assets to
current liabilities was 1.75 to 1 and the quick ratio (cash and cash
equivalents, and accounts receivable, divided by current liabilities) was .66 to
1. As of December 31, 1996, the Company's ratio of current assets to current
liabilities was 2.48 to 1 and the quick ratio (described above) was 1.26 to 1.
The decrease in liquidity is due primarily to increases in the current portion
of the Company's long debt under the senior credit facility and increased
accounts payable to support higher inventory levels from the integration of the
Hysan operations.
During the twelve months ended December 31, 1997, the Company incurred
$1,405,000 in interest expense, of which $240,000 was accrued to the carrying
value of the 6% convertible subordinated debentures, and made interest payments
totaling $1,124,000. Accrued interest at December 31, 1997, was $108,000.
Accrued interest reflected in the carrying value of the 6% convertible
subordinated debentures was $290,000 at December 31, 1997.
On May 22, 1997 the Company, in connection with the acquisition of the
Hysan Assets, executed an amendment to its current agreement (the "Credit
Agreement") with its senior lender Star Bank, N.A. The amended Credit Agreement
provides for the $15,000,000 facility which expires on December 31, 2000,
comprised of a revolving line of credit and three term loans. Borrowings
Page 14
<PAGE> 15
on the revolving line of credit and two of the term loans bear interest at the
prime rate plus 1.5%, subject to decrease if certain ratios and financial tests
are met. The first of these two term loans for $2,680,000 amortizes in
forty-seven consecutive monthly installments of $55,833 commencing June 1, 1998
with a forty-eighth and final principal payment of $55,849. The second of these
term loans for $1,500,000 amortizes in four equal consecutive monthly payments
of $375,000 commenced on July 1, 1997 and was paid off in 1997. The third term
loan bears interest at the prime rate plus 4.5%, subject to decrease if certain
financial tests are met. This term loan for $1,000,000 amortizes in seventeen
consecutive monthly installments of $55,555 commencing July 1, 1997 with an
eighteenth and final installment of $55,565.
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. Based on 1997 financial performance the senior lender has revised
the various covenants by amending the Credit Agreement. The Company is currently
in compliance with all of the covenants. Such amendment requires that such
financial covenants for the future be revised in a form mutually agreeable to
the bank and the Company no later than May 15, 1998. Such amendment further
requires that the Company provide an acceptable plan to the bank no later than
April 30, 1998 to provide additional capital for the Company and consummate such
plan no later than May 30, 1998. The failure to do so would constitute an event
of default under the Credit Agreement. As of December 31, 1997, approximately
$591,000 as unused and available under the Credit Agreement.
In addition to the Credit Agreement, the Company is a borrower under an
installment note dated October 15, 1995 to a bank. The borrowing is
collateralized by a building which serves as the Company's distribution center
and corporate offices. Interest is payable monthly at l/4% over the bank's prime
rate. As of December 31, 1997, the Company had $794,013 remaining on the note.
Effective January, 1998, the Company refinanced the mortgage with a new
$1,125,000 with a new bank. The note, which bears interest at 8.75%, requires
twelve monthly interest only payments until February 1, 1999. Commencing on
February 1, 1999, the note requires 167 monthly principal and interest payments
of $11,790, the final payments being due on November 1, 2012. The borrowing is
collateralized by a facility which serves as the Company's distribution center
and corporate offices.
On May 22, 1997, the Company acquired the Hysan Assets for an estimated
purchase price of $7,432,000 including of expenses related to the transaction.
The asset purchase agreement required that $500,000 of the purchase price be
deposited in escrow with a bank in order to secure any adjustments to the
purchase price that may be necessary pursuant to the asset purchase agreement
and to secure Hysan's indemnification obligations thereunder. The purchase price
is subject to adjustment based upon the final disposition of accounts receivable
and inventory. The Company believes that it is entitled to certain adjustments
and recoveries from such escrow. Such adjustments and recoveries are being
disputed by the Seller. During the third quarter of 1997 the Company incurred an
additional $225,000 of expenditures relating to the acquisition.
Net cash provided by operating activities was $4,376,000 in 1997,
versus cash used of $587,000 for 1996, and net cash used by operating activities
of $2,650,000 for 1995. Net capital expenditures were $932,000, $156,000, and
$3,685,000 respectively, for the three years 1997, 1996, and 1995. The Company
expects to spend approximately $800,000 in capital expenditures for 1998 to be
funded from operating cash flows and borrowings under the senior credit
Page 15
<PAGE> 16
facility. Under current business conditions, and assuming that the Company and
its senior lender agree on revised financial covenants and the plan to provide
additional capital is consummated on a timely basis, the Company expects no
significant change in its liquidity position during the current fiscal year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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<PAGE> 17
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 June 6, 1997, on which it announced the
acquisition of the Hysan Assets.
2. The Company filed a Form 8-K/A on August 5, 1997, on which it disclosed
Audited Financial Statements of Business Acquired (Hysan Corporation) as
well as Proforma Financial Information.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Pg No.
Report of Independent Certified Public Accountants............... F-1
Balance Sheets
December 31, 1997 and 1996.............................. F-2 & F-3
Statements of Operations
December 31, 1997, 1996 and 1995.............................. F-4
Statements of Stockholders' Equity
December 31, 1997, 1996, and 1995............................. F-5
Statements of Cash Flows
December 31, 1997, 1996, and 1995....................... F-6 & F-7
Notes to Financial Statements............................. F-8 - F-23
Report of Independent Certified Public Accountants
on Schedules................................................. F-24
Schedule II - Valuation and Qualifying Accounts
December 31, 1997, 1996 and 1995................ F-25
Page 17 of
<PAGE> 18
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
C.E.O. and Chairman of the Board
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 C.E.O. and Chairman April 13, 1998
- ---------------------------- of the Board (Principal
Edwin M. Roth Executive Officer)
/s/ Corey B. Roth President, Chief Operating
- ---------------------------- Officer, and Director April 13, 1998
Corey B. Roth
/s/ David F. Spink Vice President, Chief April 13, 1998
- ---------------------------- Financial Officer,
David F. Spink Treasurer, and Asst.
Secretary
/s/ George N. Aronoff Director April 13, 1998
- ----------------------------
George N. Aronoff
/s/ Victor Gelb Director April 13, 1998
- -----------------------------
Victor Gelb
/s/ Lionel N. Sterling Director April 13, 1998
- -----------------------------
Lionel N. Sterling
/s/ Geoffrey J. Colvin Director April 13, 1998
- -----------------------------
Geoffrey J. Colvin
/s/ Terence J. Conklin Director April 13, 1998
- -----------------------------
Terence J. Conklin
</TABLE>
Page 18 of
<PAGE> 19
INDEX TO EXHIBITS
Exhibit Page
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......................................
l0.01 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
10.02 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...........................................................
10.03 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...................
-EX 1-
<PAGE> 20
Exhibit Page
Number
10.04 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.................................................................
10.05 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....................................
10.06 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......................................
10.07 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.......................................
10.08 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..............................
10.09 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......................
10.10 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....................................
10.11 Lease amendment between Specialty Chemical Resources, Inc. (assignee of
ASI) and the 9150 Group dated July 25, 1994............................
10.12 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.......................................
10.13 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.............
10.14 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..................
10.15 Promissory Note between Specialty Chemical Resources, Inc. and
Metropolitan Savings Bank dated December 5, 1997 is incorporated by
reference .........................................................
10.16 Amendment of the Credit Agreement between Specialty Chemical Resources,
Inc. and Star Bank N.A. dated April 14, 1998 is incorporated by
reference..............................................................
23.00 Independent Auditor's Report..........................................
27.00 Financial Data Schedule................................................
-EX 2-
<PAGE> 1
Exhibit 10.15
[LOGO] METROPOLITAN
- ------------
SAVINGS BANK
PROMISSORY NOTE
<TABLE>
<CAPTION>
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$1,125,000.00 12-05-1997 11-01-2012 01-42-20877 C 97-1149 RWS RWS
References in the shaded area are for Lander's use only and do not limit the
applicability of this document to any particular loan or item.
Borrower: Specialty Chemical Resources Inc. (TIN: Lender: METROPOLITAN SAVINGS BANK OF CLEVELAND
341366838) COMMERCIAL LENDING DEPARTMENT
9055 S. Freeway Drive 8001 LANDERHAVEN DRIVE
Macedonia, OH 44056 MAYFIELD HEIGHTS, OH 44124-4190
=================================================================================================================
Principal Amount: $1,125,000.00 Date of Note: December 5, 1997
</TABLE>
PROMISE TO PAY. Specialty Chemical Resources Inc. ("Borrower") promises to pay
to METROPOLITAN SAVINGS BANK OF CLEVELAND ("Lender"), or order, in lawful money
to the United States of America, the principal amount of One Million One Hundred
Twenty Five Thousand & 00/100 Dollars ($1,125,000.00), together with interest on
the unpaid principal balance from December 15, 1997, until paid in full.
PAYMENT. Borrower will pay this loan in accordance with the following payment
schedule:
12 consecutive monthly interest payments, beginning February 1, 1998, with
interest calculated on the unpaid principal balances at an interest rate of
8.750% per annum; and 166 consecutive monthly principal and interest
payments of $11,789.98 each, beginning February 1, 1999, with interest
calculated on the unpaid principal balances at an interest rate of 8.750%
per annum. Borrower's final payment of $11,789.98 will be due on November
1, 2012. This estimated final payment is based on the assumption that all
payments will be made exactly as scheduled; the actual final payment will
be for all principal and accrued interest not yet paid, together
with any other unpaid amounts under this Note.
Interest on this Note is computed on a 365/360 simple interest basis; that is,
by applying the ratio of the annual interest rate over a year of 360 days,
multiplied by the outstanding principal balance, multiplied by the actual number
of days the principal balance is outstanding. Borrower will pay Lender at
Lender's address shown above or at such other place as Lender may designate in
writing. Unless otherwise agreed or required by applicable law, payments will
be applied first to any unpaid collection costs and any late charges, then to
any unpaid interest, and any remaining amount to principal.
PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance
charges are earned fully as of the date of the loan and will not be subject to
refund upon early payment (whether voluntary or as a result of default), except
as otherwise required by law. Except for the foregoing, Borrower may pay without
penalty all or a portion of the amount owed earlier than it is due. Early
payments will not, unless agreed to by Lender in writing, relieve Borrower of
Borrower's obligation to continue to make payments under the payment schedule.
Rather, they will reduce the principal balance due and may result in Borrower
making fewer payments.
LATE CHARGE. If a payment is 15 days or more late, Borrower will be charged
5.000% of the regularly scheduled payment of $16.00, whichever is greater.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower falls to comply with or to perform
when due any other term, obligation, covenant, or condition contained in this
Note or any agreement related to this Note, or in any other agreement or loan
Borrower has with Lender. (c) Borrower defaults under any loan, extension of
credit, security agreement, purchase or sales agreement, or any other
agreement, in favor of any other creditor or person that may materially affect
any of Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor
tries to take any of Borrower's property on or in which Lender has a lien or
security interest. This includes a garnishment of any of Borrower's accounts
with Lender. (g) Any guarantor dies or any of the other events described in this
default section occurs with respect to any guarantor of this Note. (h) A
material adverse change occurs in Borrower's financial condition, or Lender
believes the prospect of payment or performance of the indebtedness is
impaired. (i) Lender is good faith deems itself insecure.
In any default, other than a default in payment, is curable and if borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default
will have occurred) if Borrower, after receiving written notice from Lender
demanding cure of such default: (a) cures the default within thirty (30) days;
or (b) if the cure requires more than thirty (30) days, immediately initiates
steps which Lender deems in Lender's sole discretion to be sufficient to cure
the default and thereafter continues and completes all reasonable and necessary
steps sufficient to produce compliance as soon as reasonably practical.
LENDERS RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon default, including failure
to pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, increase the interest rate on this Note 8.000 percentage points.
The interest rate will not exceed the maximum rate permitted by applicable law,
Lender may hire or pay someone else to help collect this Note if Borrower does
not pay. Borrower also will pay Lender that amount. This includes, subject to
any limits under applicable law, Lender's attorneys' fees and Lender's legal
expenses whether or not there is a lawsuit, including attorneys' fees and legal
expenses for bankruptcy proceedings (including efforts to modify or vacate
any automatic stay or injunction), appeals, and any anticipated post-judgment
collection services. If not prohibited by applicable law, Borrower also will
pay any court costs, in addition to all other sums provided by law. THIS NOTE
HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY LENDER IN THE STATE OF OHIO. IF
THERE IS A LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE
JURISDICTION OF THE COURTS OF CUYAHOGA COUNTY, THE STATE OF OHIO. LENDER AND
BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR
COUNTERCLAIM BROUGHT BY EITHER LENDER OR BORROWER AGAINST THE OTHER. THIS NOTE
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
OHIO.
CONFESSION OF JUDGMENT. Borrower hereby irrevocably authorizes and empowers any
attorney-at-law, including an attorney hired by Lender, to appear in any court
of record and to confess judgment against Borrower for the unpaid amount of
this Note as evidenced by an affidavit signed by an officer of Lender setting
forth the amount then due, plus attorneys' fees as provided in this Note, plus
costs of suit, and to release all errors, and waive all rights of appeal. If a
copy of this Note, verified by an affidavit, shall have been filed in the
proceeding, it will not be necessary to file the original as a warrant of
attorney. Borrower waives the right to any stay of execution and the benefit of
all exemption laws now or hereafter in effect. No single exercise of the
foregoing warrant and power to confess judgment will be deemed to exhaust the
power, whether or not any such exercise shall be held by any court to be
invalid, voidable, or void; but the power to continue undiminished and may be
exercised from time to time as Lender may elect until all amounts owing on this
Note have been paid in full. Borrower waives any conflict of interest that an
attorney hired by Lender may have in acting on
<PAGE> 2
12-05-1997 PROMISSORY NOTE Page 2
Loan No. 01-42-20877 (Continued)
================================================================================
behalf of Borrower in confessing judgment against Borrower while such attorney
is retained by Lender. Borrower expressly consents to such attorney acting for
Borrower in confessing judgment.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $20.00 if Borrower
makes a payment on Borrower's loan and the check or preauthorized charge with
which Borrower pay is later dishonored.
RIGHT OF SETOFF. Borrower grants to Lender a contractual promissory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all
accountts. Borrower may open in the future, excluding however all IRA and Keogh
accounts, and all trust accounts for which the grant of a security interest
would be prohibited by law. Borrower authorizes Lender, to the extent permitted
by applicable law, to charge or setoff all sums owing on this Note against any
and all such accounts.
COLLATERAL. This Note is secured by a Mortgage dated December 5, 1997, to
Lender on real property located in Summit County, State of Ohio, all the terms
and conditions of which are hereby incorporated and made a part of this Note.
OTHER REQUIREMENTS. Annual accountant prepared Audited Fiscal Year End
Financial Statements; Quarterly 10K interim financial statements.
ESCROW OF FUNDS: Seventy Five Thousand Dollars ($75,000.00) shall be held in
escrow by MSB pending evidence of completion of driveway and parking lot
paving.
INTEREST RATE OF ADJUSTMENT. An exhibit, titled "Interest Rate Adjustment," is
attached to this Note and by this reference is made a part of this Note just
as if all the provisions, terms and conditions of the Exhibit had been fully
set forth in this Note.
GENERAL PROVISIONS. If any part of this Note cannot be enforced, this fact will
not affect the rest of the Note. In particular, this section means (among other
things) that Borrower does not agree or intend to pay, and Lender does not
agree or intend to contract for, charge, collect, take, reserve, or receive
(collectively referred to herein as "charge or collect"), any amount in the
nature of interest or in the nature of a fee for this loan, which would in any
way or event (including demand, prepayment, or acceleration) cause Lender to
charge or collect more for this loan than the maximum Lender would be permitted
to charge or collect by federal law or the law of the State of Ohio (as
applicable). Any such excess interest or unauthorized fee shall, instead of
anything stated to the contrary, be applied first to reduce the principal
balance of this loan, and when the principal has been paid in full, be refunded
to Borrower. Lender may delay or forgo enforcing any of its rights or remedies
under this Note without losing them. Borrower and any other person who signs,
guarantees or endorses this Note, to the extent allowed by law, waive
presentment, demand for payment, protest and notice of dishonor. Upon any
change in the terms of this Note, and unless otherwise expressly stated in
writing, no party who signs this Note, whether as maker, guarantor,
accommodation maker or endorser, shall be released from liability. All such
parties agree that Lender may renew or extend (repeatedly and for any length of
time) this loan, or release any party or guarantor or collateral; or impair,
fail to realize upon or perfect Lender's security interest in the collateral;
and take any other action deemed necessary by Lender without the consent of or
notice to anyone. All such parties also agree that Lender may modify this loan
without the consent of or notice to anyone other than the party with whom the
modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF
A COMPLETED COPY OF THE NOTE.
NOTICE: FOR THIS NOTICE "YOU" MEANS THE BORROWER AND "HIS" MEANS LENDER.
WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT
TRIAL. IF YOU DO NOT PAY ON TIME, A COURT JUDGMENT MAY BE TAKEN AGAINST YOU
WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT
FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR
RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT,
OR ANY OTHER CAUSE.
BORROWER:
Specialty Chemical Resources Inc.
By: /s/ David F. Spink
-----------------------------------
David F. Spink, Vice President/CFO
===============================================================================
<PAGE> 1
Exhibit 10.16
EXECUTION COPY
SECOND AMENDMENT
----------------
TO
--
FINANCING AGREEMENT
-------------------
This Second Amendment to Financing Agreement (the "Amendment") is made
as of the 14th day of April, 1998, by and between Specialty Chemical Resources,
Inc., a Delaware corporation ("Borrower") and Star Bank, National Association, a
national banking association ("Bank").
WITNESSETH:
WHEREAS, Borrower and Bank have entered into that certain Financing
Agreement, dated as of September 18, 1996, as amended by that First Amendment to
Financing Agreement dated as of May 22, 1997 (the "Financing Agreement"),
pursuant to which Bank has made certain financial accommodations available to
Borrower;
WHEREAS, Borrower hereby acknowledges that it is currently in default of
certain financial and other covenants under the Financing Agreement and that it
has discussed with Bank Borrower's need for additional capitalization in the
form of an equity investment, subordinated debt or other form of credit support;
WHEREAS, Borrower hereby acknowledges that it has committed to Bank
(a) that Borrower will deliver to Bank a plan, satisfactory to Bank in its sole
discretion (the "Capitalization Plan"), detailing the amount, source and form of
such additional capitalization no later than April 30, 1998, (b) that Borrower
will have fully consummated the acquisition of such additional capitalization no
later than May 20, 1998, and (c) that, notwithstanding any provision, covenants,
term or agreement to the contrary set forth in the Financing Agreement as
amended hereby, it will constitute an Event of Default under the Financing
Agreement if Borrower shall not timely perform either or both covenants as set
forth in this paragraph;
WHEREAS, Borrower and Bank desire to amend the Financing Agreement as
hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual promises and agreements
contained herein and other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, Bank and Borrower do hereby agree as
follows:
<PAGE> 2
EXECUTION COPY
SECTION 1. DEFINED TERMS.
- -------------------------
Each defined term used herein and not otherwise defined herein shall
have the meaning ascribed to such term in the Financing Agreement.
SECTION 2. AMENDMENT TO SECTION 15.8 OF THE FINANCING AGREEMENT.
- ---------------------------------------------------------------
SECTION 15.8, FEES AND EXPENSES shall be hereby amended by deleting the
following sentence in its entirety where the same appears in said Section:
The number of audits referred to in CLAUSE (IV) of the first sentence of
this SECTION 15.8 shall be limited to no more than four (4) such audits
per calendar year and the amount payable by Borrower for each such audit
shall not exceed Two Thousand Four Hundred Dollars ($2,400) plus the
out-of-pocket expenses of each auditor or field examiner and no more
than three (3) auditors or field examiners shall be used in connection
with each such audit; PROVIDED, HOWEVER, that if an Event of Default
occurs, such limitations shall no longer apply.
SECTION 3. AMENDMENTS TO EXHIBIT L TO FINANCING AGREEMENT.
- ----------------------------------------------------------
SCHEDULE L of the Financing Agreement shall be amended by
deleting existing EXHIBIT L in its entirety and substituting in place thereof
the following EXHIBIT L.
EXHIBIT L
----------
I. Financial Covenants
--------------------
FINANCIAL COVENANTS. Borrower agrees that it shall
(A) CAPITAL EXPENDITURES. Not make capital expenditures (including, but not
by way of limitation, expenditures for fixed assets or leases
capitalized or required to be capitalized on Borrower's books by
purchase, lease-purchase agreement, option or otherwise) in an aggregate
amount exceeding $1,000,000 for the fiscal year ending December 31, 1997
and $1,000,000 for each fiscal year, thereafter. No capital expenditures
are permitted to exceed $300,000 from the closing date through December
31, 1996.
(B) EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION
(EBITDA). Not permit Borrower's Earnings Before Interest, Taxes,
Depreciation, and Amortization ("EBITDA") to be less than the following
amounts for the following periods:
<PAGE> 3
EXECUTION COPY
EBITDA Periods
------ -------
$1,100,000 Fiscal year to date as of 9/30/96
$1,600,000 Fiscal year to date as of 12/31/96
$525,000 Fiscal year to date as of 03/31/97
$1,300,000 Fiscal year to date as of 06/30/97
$2,300,000 Fiscal year to date as of 09/30/97
$821,000 Fiscal year to date as of 12/31/97
$292,000 Fiscal year to date as of 03/31/98
(C) FIXED CHARGE COVERAGE RATIO. Not permit Borrower's ratio of EBITDA to
its Fixed Charges ("Fixed Charge Coverage Ratio") to be less than the
following:
Fixed Charge Coverage Ratio Period
--------------------------- ------
1.00 to 1.00 01/01/96 to 09/30/96
1.10 to 1.00 10/01/96 to 12/31/96
1.20 to 1.00 01/01/97 to 06/30/97
1.20 to 1.00 01/01/97 to 09/30/97
.31 to 1.00 01/01/97 to 12/31/97
.59 to 1.00 01/01/98 to 03/31/98
(D) TANGIBLE NET WORTH. Not permit Borrower's tangible net worth to be less
than the following amounts at any time by and after the following
periods:
Tangible Net Worth Date
------------------ ----
$6,600,000 Closing
$7,200,000 12/31/96
$7,350,000 03/31/97
$8,500,000 05/31/97
$8,500,000 06/30/97
$9,200,000 09/30/97
$8,150,000 12/31/97
$7,800,000 03/31/98 and thereafter
(E) RATIO OF TOTAL LIABILITIES TO TANGIBLE NET WORTH. Not permit Borrower's
ratio of Total Liabilities to Tangible Net Worth to exceed the following
ratios on or after the following dates:
<PAGE> 4
EXECUTION COPY
(E) Ratio Of Total Liabilities To
-----------------------------
Tangible Net Worth Date
------------------ ----
2.50 To 1.00 Closing to 12/31/96
2.20 to 1.00 01/01/97 to 04/30/97
2.40 to 1.00 05/31/97
2.40 to 1.00 06/30/97
2.20 to 1.00 09/30/97
2.99 to 1.00 12/31/97
3.24 to 1.00 03/31/98 and thereafter
II. Definitions to Financial Covenants
--------------------------------------
(A) The term "EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND
AMORTIZATION" or "EBITDA" for purposes of this EXHIBIT L shall mean
Borrower's earnings from operations before income taxes, and interest or
expense, PLUS depreciation, PLUS amortization of all non-cash charges,
all as determined in accordance with generally accepted accounting
principles on a FIFO basis, and shall not include any gains from the
sale of assets outside the normal course of business or any other gains
from extraordinary accounting adjustments or non-recurring items.
(B) The term "FIXED CHARGE" for purposes of this EXHIBIT L shall mean
Borrower's cash interest expense, scheduled principal payments on debt,
dividends, capitalized lease payments, capital expenditures, prepayments
or redemption of principal on subordinated debt, preferred stock or
common stock, tax, cash taxes paid.
(C) The term "TANGIBLE WORTH" for purposes of this EXHIBIT L shall mean the
total of Borrower's book net worth, as determined in accordance with
generally accepted accounting principles, consistently applied, PLUS any
debt subordinate to Borrower's debt to Bank, PLUS any preferred stock
LESS any assets considered intangible.
(D) The term "TOTAL LIABILITIES" for purposes of this EXHIBIT L, shall
include any contingent liabilities and shall have the meaning and be
determined in accordance with generally accepted accounting principles
consistently applied in accordance with past practice. The portion of
any debt subordinate to Borrower's debt to Bank shall be excluded from
Total Liabilities.
(E) The term "EXCESS CASH FLOW" shall mean EBITDA less Fixed Charges.
III. Revision to Financial Covenants and Effectuating Capitalization Plan
-------------------------------------------------------------------------
(A) REVISION TO FINANCIAL COVENANTS. Borrower agrees that the Financial
Covenants set forth in paragraphs (B) through (E) of Part I of this
EXHIBIT L shall be revised, in accordance with the mutual agreement of
Bank and Borrower (but subject to the limitation set forth
4
<PAGE> 5
EXECUTION COPY
in the next sentence), and Borrower will execute and deliver to Bank, no
later than May 15, 1998, an agreement setting forth a revised EXHIBIT L,
FINANCIAL COVENANTS, to the Financing Agreement and containing such
revised covenants. Notwithstanding anything to the contrary, Borrower
agrees that (i) in no event shall Borrower's Fixed Charge Ratio, as the
same may be so revised, for any period commencing after March 31, 1998
be less than 1.00 to 1.00, and (ii) an Event of Default under the
Financing Agreement shall exist and occur in the event Borrower and Bank
are not able mutually to agree to the revisions to Financial Covenants
as described above.
(B) CAPITALIZATION PLAN. Borrower agrees to provide the Capitalization Plan
to Bank, in form and substance satisfactory to Bank in its sole and
absolute discretion, no later than April 30, 1998 and to consummate such
Capitalization Plan, as determined by the Bank in its sole and absolute
discretion, no later than May 20, 1998. Borrower acknowledges that,
prior to the effectiveness of this Amendment, certain Events of Default
existed under the Financing Agreement and Bank was under no obligation
to enter into such Amendment. Consequently, Borrower agrees that (i)
under the circumstances, Bank is entitled to exercise its discretion in
the manner described above, and (ii) in the event Bank determines, in
exercising its sole and absolute discretion, that Borrower shall not
have complied with the conditions set forth in this paragraph, an Event
of Default shall have occurred under the Financing Agreement.
5
<PAGE> 6
EXECUTION COPY
IV. Interest Rate Reduction Tests
-----------------------------
<TABLE>
<S> <C>
Applicable Interest
1) Fixed Charge Coverage for previous four fiscal quarter period Rate
2) Total Liabilities/Tangible Net Worth
3) Tangible Net Worth
1) 1.30-1.59
and P+1.00%
2) 1.86-2.00
and
3) $8,000,000 - $8,499,000
1) 1.60-1.79
and P+0.50%
2) 1.71-1.85
and
3) $8,500,000 - $8,999,000
1) 1.80 and greater
and P+0.00%
2) Less than 1.70
and
3) $9,000,000 and greater
</TABLE>
6
<PAGE> 7
EXECUTION COPY
4. SECTION 10 REPRESENTATIONS AND WARRANTIES.
------------------------------------------
In order to induce Bank to enter into this Amendment and in addition to
all of the representations, warranties and covenants made by Borrower under the
Financing Agreement and Loan Documents, Borrower hereby represents, warrants and
covenants that, as of the date hereof, any date upon which a Loan is made
hereunder, and until the Obligations are fully paid, performed and satisfied,
the representations, warranties and covenants set forth in the Financing
Agreement and herein are and shall remain true. The Borrower further hereby
represents and warrants to Bank as follows:
4.1 THE AMENDMENT. This Amendment has been duly and validly
executed by an authorized executive officer of Borrower and constitutes
the legal, valid and binding obligation of Borrower enforceable against
Borrower in accordance with its terms.
4.2 FINANCING AGREEMENT. The Financing Agreement, as amended by
this Amendment, remains in full force and effect and remains the valid
and binding obligation of Borrower enforceable against Borrower in
accordance with its terms. Borrower hereby ratifies and confirms the
Financing Agreement as amended by this Amendment.
4.3 NONWAIVER. Except as specifically set forth in this
Amendment, the execution, delivery, performance and effectiveness of
this Amendment shall not operate nor be deemed to be nor construed as a
waiver (i) of any right, power or remedy of Bank under the Financing
Agreement, nor (ii) of any term, provision, representation, warranty or
covenant contained in the Financing Agreement or any other documentation
executed in connection therewith. Further, except as specifically set
forth in this Amendment, none of the provisions of this Amendment shall
constitute, be deemed to be or construed as, a waiver of any Event of
Default under the Financing Agreement as amended by this Amendment.
4.4 REAFFIRMATION OF REPRESENTATIONS, WARRANTIES AND COVENANTS.
Borrower hereby reaffirms and agrees to be bound by all
representations, warranties and covenants made or entered into it under
the Financing Agreement and under any and all Loan Documents. Borrower
hereby represents and warrants to Bank that no Default or Event of
Default shall exist as of the date of this Amendment after giving effect
to this Amendment and none shall be caused to exist as a result of the
execution, delivery and performance by Borrower of this Amendment.
4.5 REFERENCE TO AND EFFECT ON THE FINANCING AGREEMENT. Upon the
effectiveness of this Amendment, each reference in the Financing
Agreement to "this Agreement", "hereunder", "hereof', "herein", or words
of like import shall mean and be a reference to the Financing Agreement,
as amended hereby, and each reference to the Financing Agreement in any
other document, instrument or
7
<PAGE> 8
EXECUTION COPY
agreement executed and/or delivered in connection with the Financing
Agreement shall mean and be a reference to the Financing Agreement, as
amended hereby.
5. CONDITIONS PRECEDENT TO EFFECTIVENESS OF THIS AMENDMENT.
-----------------------------------------------------------
In addition to all of the other conditions and agreements set
forth herein, the effectiveness of this Amendment is subject to each of the
following conditions precedent:
5.1 AMENDMENT TO FINANCING AGREEMENT. Bank shall have received
an original counterpart of this Second Amendment to Financing Agreement
executed and delivered by a duly authorized officer of Borrower.
5.2 RESOLUTIONS. Bank shall have received certified resolutions
of Borrower authorizing Borrower to execute, deliver and perform this
Amendment.
5.3 NO MATERIAL ADVERSE CHANGE. There shall have occurred no
material and adverse change in the Borrower's assets, liabilities or
financial condition since the date of the last Financials delivered by
Borrower to Bank nor shall there have been any material damage to or
loss of any of Borrower's assets or properties since such date.
6. MISCELLANEOUS.
--------------
6.1 GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the law of the State of Ohio, without
regard to principles of conflict of law.
6.2 SEVERABILITY. In the event any provision of this Amendment
should be invalid, the validity of the other provisions hereof and of
the Financing Agreement shall not be affected thereby.
6.3 COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which, when taken together, shall constitute but
one and the same agreement.
8
<PAGE> 9
EXECUTION COPY
6.4 CONFESSION OF JUDGMENT. Borrower hereby irrevocably
authorizes and empowers any attorney-at law to appear for Borrower in
any action upon or in connection with this Amendment or the Financing
Agreement, as amended hereby, at any time after the Loans and/or other
Obligations become due, as herein provided, in any court in or of the
State of Ohio or elsewhere, and waives the issuance and service of
process with respect thereto, and irrevocably authorizes and empowers
any such attorney-at-law to confess judgment in favor of Bank against
Borrower, the amount due thereon or hereon, plus interest as herein
provided, and all costs of collection, and waives and releases all
errors in said proceedings and judgments and all rights of appeal from
the judgment rendered. The Borrower agrees and consents that the
attorney confessing judgment on behalf of the Borrower may also be
counsel to Bank or any of Bank's Affiliates, waives any conflict of
interest which might otherwise arise, and consents to Bank paying such
confessing attorney a reasonable legal fee or allowing such attorney's
reasonable fees to be paid from the proceeds of Collateral, the Premises
or any other security for the Loans and the other Obligations.
IN WITNESS WHEREOF, Borrower has caused this Second Amendment to
Financing Agreement to be duly executed and delivered by its duly authorized
officer as of the date first above written.
WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT
TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU
WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT
FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR
RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT,
OR ANY OTHER CAUSE.
Signed in Cleveland, Ohio on April 14, 1998.
Signed and acknowledged SPECIALTY CHEMICAL RESOURCES,
in the presence of: INC.
- ------------------------------------------
Name: /s/ Joan M. Flood By: /s/ David F. Spink
------------------------------------- ------------------------------
- ------------------------------------------ Its: Vice President - CFO
Name: /s/ Sue E. Knlick ---------------------------------
-------------------------------------
9
<PAGE> 10
EXECUTION COPY
STATE OF OHIO )
) ss:
COUNTY OF CUYAHOGA )
The foregoing instrument was acknowledged before me this 14th day of
April, 1998, by David F. Spink, Chief Financial Officer of Specialty Chemical
Resources, Inc., a Delaware corporation, on behalf of the corporation.
/s/ Deborah Talani
-----------------------------------
Notary Public
Accepted at Cincinnati, Ohio
as of April 14, 1998.
STAR BANK, NATIONAL ASSOCIATION
By: /s/ Suzanne Geiger
---------------------------------
Its: Vice President
--------------------------------
10
<PAGE> 1
Exhibit 23
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, 1997 and 1996, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. 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, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Cleveland, Ohio
March 6, 1998 (except for the 2nd paragraph of Note D as to which the date is
April 14, 1998)
F-1
<PAGE> 2
Specialty Chemical Resources, Inc.
BALANCE SHEETS
December 31
<TABLE>
<CAPTION>
ASSETS
1997 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,100 $ 168,641
Accounts receivable - trade, less allowance for doubtful
accounts of $137,000 and $102,000, respectively (note D) 5,338,168 4,948,075
Receivables - other (note E) 343,657 258,284
Inventories (notes A, C and D) 8,944,905 5,909,447
Prepaid expenses 360,196 305,259
Refundable income taxes -- 1,075,016
----------- -----------
Total current assets 14,990,026 12,664,722
PROPERTY AND EQUIPMENT - at cost
(notes A and D)
Building 1,293,745 959,199
Leasehold improvements 2,798,551 2,579,490
Office equipment and furniture 1,115,738 1,042,432
Machinery and equipment 11,889,611 9,357,362
Construction in-progress 523,932 227,061
----------- -----------
17,621,577 14,165,544
Less accumulated depreciation and amortization 5,536,789 4,451,017
----------- -----------
12,084,788 9,714,527
Land 118,690 118,690
----------- -----------
12,203,478 9,833,217
OTHER ASSETS (note A)
Goodwill (note K) 894,319 19,738,338
Product formulation 692,894 977,150
Deferred financing costs 435,117 421,460
Other 302,044 288,499
----------- -----------
2,324,374 21,425,447
----------- -----------
$29,517,878 $43,923,386
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE> 3
Specialty Chemical Resources, Inc.
BALANCE SHEETS - CONTINUED
December 31
<TABLE>
<CAPTION>
LIABILITIES
1997 1996
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt $ 1,057,497 $ 434,733
Accounts payable 6,893,119 4,004,870
Accrued liabilities:
Compensation and payroll taxes 123,146 173,320
Taxes - other 37,116 65,442
Interest 108,430 68,436
Other 356,067 368,421
------------ ------------
624,759 675,619
------------ ------------
Total current liabilities 8,575,375 5,115,222
LONG-TERM DEBT (note D) 15,445,820 12,246,119
DEFERRED INCOME TAXES (notes A and I) -- --
COMMITMENTS AND CONTINGENCIES (note E) -- --
STOCKHOLDERS' EQUITY (notes G and H)
Preferred stock - $.01 par value; authorized 2,000,000 shares -- --
Common stock - $.10 par value; authorized 13,000,000 shares;
issued 3,947,762 and 3,947,764 shares, respectively 394,777 394,777
Additional paid-in capital 41,935,125 41,935,125
Accumulated deficit (36,714,497) (15,629,785)
------------ ------------
Unearned compensation -- (19,350)
5,615,405 26,680,767
Less common stock in treasury, at cost;
65,500 shares each year (118,722) (118,722)
------------ ------------
5,496,683 26,562,045
------------ ------------
$ 29,517,878 $ 43,923,386
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 4
Specialty Chemical Resources, Inc.
STATEMENTS OF OPERATIONS
For the years ended December 31
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 40,283,662 $ 38,914,148 $ 43,419,021
Cost of goods sold 33,628,380 32,783,174 39,123,444
------------ ------------ ------------
Gross profit 6,655,282 6,130,974 4,295,577
Selling, general and administrative expenses 6,903,620 6,066,674 7,647,938
Amortization of intangibles 996,679 906,846 868,692
Impairment of long-lived assets (note K) 18,501,135 -- --
------------ ------------ ------------
Operating (loss) (19,746,152) (842,546) (4,221,053)
Other income (expense)
Interest expense (1,404,700) (1,059,217) (779,041)
Other 66,140 11,450 10,488
------------ ------------ ------------
(1,338,560) (1,047,767) (768,553)
------------ ------------ ------------
(Loss) before income taxes (21,084,712) (1,890,313) (4,989,606)
Income taxes (benefits) (notes A and I) -- (127,600) (2,981,000)
------------ ------------ ------------
NET (LOSS) (21,084,712) $ (1,762,713) $ (2,008,606)
============ ============ ============
Basic (loss) per common share (note J) $ (5.43) $ (0.45) $ (0.51)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 5
Specialty Chemical Resources, Inc.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Outstanding
$.10 par value Additional
-------------------- Paid-in Accumulated Unearned Treasury
Shares Amount Capital Deficit Compensation Stock TOTAL
--------- -------- ----------- ------------ ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 3,932,776 $393,277 $41,878,575 $(11,832,504) $ -- $ -- $ 30,439,348
Retirement of fractional shares
received from prior reverse
stock split (7) -- -- -- -- -- --
Net loss for the year -- -- -- (2,008,606) -- -- (2,008,606)
Dividends ($1.79 per share) -- -- -- (6,257) -- -- (6,257)
Issuance of restricted stock 15,000 1,500 56,550 -- (38,700) -- 19,350
--------- -------- ----------- ------------ -------- -------- ------------
Balance at December 31, 1995 3,947,769 394,777 41,935,125 (13,847,367) (38,700) -- 28,443,835
Retirement of fractional shares
received from prior reverse
stock split (5) -- -- -- -- -- --
Net loss for the year -- -- -- (1,762,713) -- -- (1,762,713)
Dividends on redeemable preferred
stock ($1.875 per share) -- -- -- (19,705) -- -- (19,705)
Amortization of unearned compensation -- -- -- -- 19,350 -- 19,350
Purchase of common stock for treasury (65,500) -- -- -- -- (118,722) (118,722)
--------- -------- ----------- ------------ -------- --------- ------------
Balance at December 31, 1996 3,882,264 394,777 41,935,125 (15,629,785) (19,350) (118,722) 26,562,045
Retirement of fractional shares
received from prior reverse
stock split (2) -- -- -- -- -- --
Net loss for the year -- -- -- (21,084,712) -- -- (21,084,712)
Amortization of unearned compensation -- -- -- -- 19,350 -- 19,350
--------- -------- ----------- ------------ -------- --------- ------------
Balance at December 31, 1997 3,882,262 $394,777 $41,935,125 $(36,714,497) $ -- $(118,722) $ 5,496,683
========= ======== =========== ============ ======== ========= ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 6
Specialty Chemical Resources, Inc.
STATEMENTS OF CASH FLOWS
For the years ended December 31
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- -----------
Cash Flows from Operating Activities:
<S> <C> <C> <C>
Net loss $(21,084,712) $(1,762,713) $(2,008,606)
Adjustment to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation 1,084,143 1,025,799 907,718
Amortization of intangibles 996,679 906,846 868,692
Impairment of long-lived assets 18,501,135 -- --
Deferred income taxes (benefits) -- (138,805) (1,975,000)
Stock compensation 19,350 19,350 19,350
Change in assets and liabilities:
Decrease in accounts receivable 1,490,817 1,270,433 572,735
(Increase) decrease in accounts receivable - other (85,373) 551,818 (728,089)
(Increase) decrease in inventories (279,840) 807,863 114,903
(Increase) decrease in prepaid expenses (54,937) (103,839) 181,664
Decrease (increase) in refundable income taxes 1,075,016 59,063 (1,082,181)
Increase in other assets (123,557) (7,337) (26,144)
Increase (decrease) in accounts payable 2,888,249 (2,690,647) 925,001
(Decrease) in accrued liabilities (50,860) (525,047) (419,824)
------------ ----------- -----------
Total adjustments 25,460,822 1,175,497 (641,175)
------------ ----------- -----------
Net cash provided by (used in)
operating activities 4,376,110 (587,216) (2,649,781)
</TABLE>
(CONTINUED ON NEXT PAGE)
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 7
Specialty Chemical Resources, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
For the years ended December 31
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
Net cash provided by (used in) operating activities
<S> <C> <C> <C>
(brought forward from previous page) $ 4,376,110 $ (587,216) $ (2,649,781)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets -- -- 39,966
Acquisition of Hysan assets (note B) (7,431,977) -- --
Expenditures for property and equipment - net (932,139) (155,621) (3,685,351)
Purchase of product formulations and license agreement -- (400,300) --
------------ ------------ ------------
Net cash (used in) investing activities (8,364,116) (555,921) (3,645,385)
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 (538,440) (134,503) (2,371)
Proceeds from note payable, net of deferred financing costs 2,090,000 1,688,368 913,750
Proceeds from issuance of short-term debt 1,500,000 8,500,265 --
Payments on short-term debt (1,500,000) (10,121,882) --
Proceeds from sale of convertible subordinated debentures,
net of deferred financing costs 240,000 3,723,373 --
Purchase of common stock for treasury -- (118,722) --
Proceeds on revolver 49,734,451 37,041,248 11,965,000
Payments on revolver (47,703,546) (38,897,902) (6,945,000)
------------ ------------ ------------
Net cash provided by financing activities 3,822,465 1,310,540 6,281,379
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (165,541) 167,403 (13,787)
Cash and cash equivalents at beginning of year 168,641 1,238 15,025
------------ ------------ ------------
Cash and cash equivalents at end of year $ 3,100 $ 168,641 $ 1,238
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE> 8
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
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:
Building....................................................... 20 years
Leasehold improvements......................................... 15 years
Office equipment and furniture................................. 7-10 years
Machinery and equipment........................................10-16 years
INTANGIBLES
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 (SFAS 121) as of January 1, 1996. 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.
F-8
<PAGE> 9
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLES (CONTINUED)
In performing the review for recoverability, the Company estimates its
expected future cash flows (undiscounted and without interest charges) and
compares this amount to the carrying value of its long-lived assets to
determine if an impairment exists. 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 (see note K).
Goodwill, resulting from the excess of the purchase price over the fair value
of net assets acquired is being amortized over 40 years (see note K).
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 bank debt and the issuance of the
convertible subordinated debentures. These costs are being amortized on a
straight-line basis over the period of the respective debt agreements.
Accumulated amortization for intangibles amounted to approximately $2,608,000
and $6,877,000 for the years ended December 31, 1997 and 1996, respectively.
INCOME TAXES
Income taxes are recorded in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS No. 109).
SFAS 109 utilizes the asset and liability method, under which deferred income
taxes are recognized for the tax consequences of "temporary differences" by
applying currently enacted statutory rates to differences between the
financial statement carrying amounts and the tax basis of existing assets and
liabilities. Under SFAS 109, the effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment date.
REVENUE RECOGNITION
The Company recognizes revenue when the product is shipped.
F-9
<PAGE> 10
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
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 income taxes amounted to $38,000, $75,000 and $79,000 for
the years ended December 31, 1997, 1996 and 1995, respectively. In addition,
the Company received income tax refunds of approximately $1,080,000 during
1997. Cash payments for interest amounted to $1,124,000, $1,095,000 and
$687,000 in the year ended December 31, 1997, 1996 and 1995, respectively.
The Company also accrued $240,000 and $150,000 of interest in 1997 and 1996,
respectively, 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
The following methods and assumptions were used by the Company in estimating
the fair value of each class of financial instruments for which it is
practicable to estimate fair value.
For cash, receivables and payables, the carrying amounts approximate fair
value because of the short maturity of these instruments. For long-term
obligations, including current maturities, the fair value of the Company's
long-term obligations approximates historically recorded cost since interest
rates approximate market.
F-10
<PAGE> 11
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEWLY ISSUED ACCOUNTING STANDARDS
In 1997, the FASB issued Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income ("SFAS 130") and Statement of Financial
Accounting Standards No. 131, Disclosures About Segments of an Enterprise and
Related Information ("SFAS 131"). SFAS 130 establishes standards to measure
all changes in equity that result from transactions and other economic events
other than transactions with owners. Comprehensive income is the total of net
income and all other nonowner changes in equity. SFAS 131 introduces a new
segment reporting model called the "management approach". The management
approach is based on the manner in which management organizes segments within
a company for making operating decisions and assessing performance. The
management approach replaces the notion of industry and geographic segments.
The Company will adopt SFAS 130 and SFAS 131 in fiscal year 1998. The Company
believes adoption of SFAS 130 and SFAS 131 will not have a significant effect
on the Company's financial statements.
NOTE B - ACQUISITION
On May 22, 1997, Specialty Chemical Resources, Inc. acquired substantially
all of the tangible and intangible non-real estate assets of Hysan
Corporation ("Hysan") pursuant to an Asset Purchase Agreement (the
"Agreement"). The purchase price for the acquired assets was $7,432,000,
including expenses related to the transaction. The Agreement required that
$500,000 of the purchase price be deposited in escrow with a bank as security
for any adjustments to the purchase price that may be necessary to secure
Hysan's indemnification obligations thereunder. The remaining portion of the
purchase price was paid in cash. The acquisition was recorded under the
purchase method of accounting in accordance with Accounting Principles Board
Opinion (APB) No. 16. The purchase price was allocated based upon the fair
value of assets acquired at the date of acquisition. The excess of the
purchase price over the fair value of the assets acquired of approximately
$273,000 was recorded as goodwill. The Company included the results of
operations of Hysan as of the acquisition date. The following unaudited
proforma information has been prepared assuming Hysan had been acquired as of
the beginning of the periods presented:
==========================================
YEARS ENDED DECEMBER 31,
------------------------------------------
1997 1996
------------------------------------------
Net sales $44,571,000 $53,710,000
Net (loss) $(21,382,000) $( 1,582,000)
Basic (loss) per share $(5.51) $(.40)
F-11
<PAGE> 12
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
NOTE C - INVENTORIES
Inventories consist of the following at:
<TABLE>
<CAPTION>
===========================================
DECEMBER 31,
-------------------------------------------
1997 1996
-------------------------------------------
<S> <C> <C>
Raw materials $5,416,048 $3,663,804
Finished goods 4,224,414 2,890,674
-------------------------------------------
9,640,462 6,554,478
Less excess of FIFO over LIFO cost 695,557 645,031
-------------------------------------------
$8,944,905 $5,909,447
===========================================
</TABLE>
Had the Company historically followed the FIFO cost method for raw material
inventories, the net loss for the years ended December 31, 1997, 1996 and
1995 would have decreased by approximately $51,000, increased by
approximately $44,000, and decreased by approximately $79,000, respectively.
NOTE D - LONG-TERM DEBT
Long-term debt consists of the following at:
<TABLE>
<CAPTION>
=====================================
DECEMBER 31,
-------------------------------------
1997 1996
-------------------------------------
<S> <C> <C>
Revolver $ 8,072,634 $ 6,041,729
Term loan A - bank 2,680,000 1,710,000
Term loan B - bank 666,670 --
Mortgage loan - bank 794,013 871,944
6% Convertible subordinated debentures 4,290,000 4,050,000
Other -- 7,179
------------------------------
16,503,317 12,680,852
Less current portion 1,057,497 434,733
------------------------------
$15,445,820 $12,246,119
==============================
</TABLE>
F-12
<PAGE> 13
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
NOTE D - LONG-TERM DEBT (CONTINUED)
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. During May 1997, the Company entered into a First Amendment to the
financing agreement increasing potential borrowings to $15,000,000. The
amended credit facility is comprised of a Revolving Loan and Term Loan A and
Term Loan B. The maximum borrowings under the credit facility are pursuant to
a formula based upon the amount of the Company's receivables, inventory and
the then outstanding balance under the previous facility. In addition, the
bank can reduce the maximum borrowings under the facility by establishing an
environmental compliance reserve in certain circumstances. No compliance
reserves have been required as of December 31, 1997. Borrowings under this
credit agreement are collateralized by substantially all of the Company's
assets. The Revolving Loan matures on December 31, 2000 and bears interest at
the bank's prime rate (8.5% at December 31, 1997) 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. 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. Based on 1997
financial performance, the senior lender has revised the various covenants by
amending the credit agreement. The Company is currently in compliance with
all of the covenants. Such amendment requires that such financial covenants
for the future be revised in a form mutually agreeable to the bank and the
Company no later than May 15, 1998. Such amendment further requires that
the Company provide an acceptable plan to the bank no later than April 30,
1998 to provide additional capital for the Company and consummate such plan
no later than May 30, 1998. The failure to do so would constitute an event of
default under the credit agreement. As of December 31, 1997, approximately
$591,000 is unused and available under the credit agreement.
The original term loan portion of the credit facility consisted of a
$1,800,000 installment loan payable in sixty monthly installments of $30,000
beginning on October 1, 1996. The amended term loan portion of the credit
facility is comprised of Term Loan A in the amount of $2,680,000 and Term
Loan B in the amount of $1,000,000. Principal on Term Loan A is payable in
forty-eight monthly installments of $55,833 beginning on June 1, 1998.
Interest is payable monthly at the same rate and terms as the Revolving Loan.
Principal on Term Loan B is payable in eighteen monthly installments of
$55,555 commencing on July 1, 1997. Interest is payable monthly at the bank's
prime rate plus 4-1/2%. For each six-month period that Term Loan B remains
outstanding, the Company may be required to make an additional principal
payment based on its "excess cash flow" as defined in the agreement.
In addition to the above loans, the bank advanced to the Company $1,500,000
on a short-term basis in conjunction with the acquisition of Hysan. The
advance was fully repaid in 1997.
F-13
<PAGE> 14
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
NOTE D - LONG-TERM DEBT (CONTINUED)
The mortgage note originally consisted of a $1,075,000 installment note dated
October 15, 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,
1997, the Company had $794,013 remaining on the note. Effective January 1998,
the Company refinanced the mortgage with a new $1,125,000 installment note
with a new bank. The note, which bears interest at 8.75%, requires twelve
monthly interest payments. Commencing on February 1, 1999, the note requires
167 monthly principal and interest payments of $11,790, with final payment on
November 1, 2012. The aggregate maturities schedule of long-term debt
reflects the terms of the new note. The borrowing is collateralized by a
building which serves as the Company's distribution center and corporate
offices.
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 of the Company as defined under the debentures. 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, which were
received in 1996, 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 (see note G). Interest accrues semi-annually and is due
upon maturity of the debentures.
Aggregate maturities of long-term debt at December 31, 1997 are as follows:
1998 $ 1,057,497
1999 709,823
2000 8,789,450
2001 721,423
2002 335,361
Thereafter 4,889,763
----------
$16,503,317
===========
NOTE E - 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. The Company also has
entered into several noncancellable operating leases for various machinery
and equipment which expire at various dates through 2001.
F-14
<PAGE> 15
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
NOTE E - COMMITMENTS AND CONTINGENCIES (CONTINUED)
The following table details scheduled minimum rental payments of all
noncancellable operating leases:
RENTAL
YEAR ENDING DECEMBER 31, COMMITMENT
------------------------ ----------
1998 $ 395,000
1999 402,000
2000 383,000
2001 297,000
2002 216,000
Thereafter 577,000
----------
$2,270,000
==========
Rent expense for the years ended December 31, 1997, 1996 and 1995 was
approximately $518,000, $407,000 and $512,000, 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.
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
F-15
<PAGE> 16
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
NOTE E - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 $1,446,000. As of December 31,
1997, $1,296,000 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 the Company has approximately $344,000 of monies
due from the Trust for reimbursement of EPA expenditures and has recorded
this amount as an Account Receivable - Other on the December 31, 1997
balance sheet. The Company believes that the expenditures for which they are
seeking reimbursement 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 $1,446,000
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 October 15, 1997, the Company received Notices of Violation ("NOV's")
from the Ohio Attorney General's Office alleging that the Company has failed
to comply with the terms of the 1990 Consent Order. The State alleges that
the Company has committed numerous violations of applicable Ohio hazardous
waste laws and regulations. Ohio EPA bases these allegations upon the
results of a number of inspections conducted from 1993 through 1997. The
Company prepared detailed written responses to each NOV and, without
admitting liability, took specific actions in response to the allegations
identified by Ohio EPA. The Ohio EPA has demanded that the Company pay the
State of Ohio the sum of $1,080,000 as stipulated penalties for the alleged
violations. Through the October 15, 1997 letter, the Attorney General
invited the Company to enter negotiations to resolve the disagreement
regarding the Company's alleged violations of the 1990 Consent Order.
The Company believes that it has materially complied with the requirements
of the Consent Order and that stipulated penalties due to the State of Ohio
pursuant to the Consent Order, if any, should not have a materially adverse
effect on the financial condition of the Company. However, there can be no
assurance that negotiations with the State of Ohio will be successful and
will not result in extended litigation between the Company and the State of
Ohio.
F-16
<PAGE> 17
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
NOTE E - 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.
NOTE F - 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
1997, 1996 and 1995 were approximately $57,200, $48,000 and $51,700,
respectively. The Company did not make any profit-sharing contributions to
the Plan for the years ended December 31, 1997, 1996 and 1995.
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, 1997, 1996 and
1995 approximated $38,900, $34,500 and $35,200, respectively.
NOTE G - 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 (see note D).
F-17
<PAGE> 18
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
NOTE H - 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. The Company
charged $19,350 to compensation expense and distributed one-third (1/3) of
the shares to the employee annually for 1997, 1996 and 1995. All shares were
distributed on July 25, 1997, at which time the restrictions lapsed. The
value of the shares under restriction at December 31, 1995 were charged to
equity as unearned compensation and have been fully amortized to operations.
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, 1997, all options granted were under the Nonqualified Option
Plan.
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-18
<PAGE> 19
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
NOTE H - STOCKHOLDERS' EQUITY (Continued)
Transactions for both stock option plans are as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------------------------------------
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 567,391 $ 5.86 545,428 $ 6.14 405,715 $ 7.82
Granted 252,000 $ 1.75 50,000 $ 1.70 236,570 $ 3.59
Exercised -- $ -- -- $ -- -- $ --
Cancelled (174,857) $ 9.02 (28,037) $ 3.85 (96,857) $ 6.95
------- ------- -------
Outstanding -
end of year 644,534 $ 3.40 567,391 $ 5.86 545,428 $ 6.14
======= ======= =======
Exercisable at end of year 291,545 $ 4.91 347,583 $ 7.48 249,024 $ 8.80
======= ======= =======
Available for grant 155,466 232,609 254,572
======= ======= =======
Weighted average fair value
of options granted
during the year $ 0.87 $ 1.23 $ 1.88
</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> <C> <C>
$1.625 - 1.813 294,000 4.7 $ 1.74 12,083 $ 1.70
$3.375 - 4.06 201,963 2.3 $ 3.59 134,641 $ 3.59
$4.50 - 6.38 118,571 1.4 $ 5.49 114,821 $ 5.46
$10.00 - 10.50 30,000 4.2 $ 10.00 30,000 $ 10.00
-------
644,534
=======
</TABLE>
F-19
<PAGE> 20
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
NOTE H - 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 each period to the
proforma amounts indicated below.
<TABLE>
<CAPTION>
==================================================
1997 1996 1995
--------------------------------------------------
<S> <C> <C> <C>
Net (loss) As reported $(21,084,712) $(1,762,713) $(2,008,606)
Pro forma $(21,244,477) $(1,919,713) $(2,114,606)
Basic (loss) per share As reported $(5.43) $(0.45) $(0.51)
Pro forma $(5.47) $(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 1997, 1996 and 1995: expected volatility of
48, 61 and 50 percent; risk-free interest rates of 6.44, 6.34 and 6.59
percent; expected lives of 3, 4 and 3 years; and no dividend payments.
NOTE I - INCOME TAXES
As of December 31, 1997, the Company had approximately $11,335,000 of net
operating loss 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 carryforwards. In addition, due to
losses in 1997, 1996 and 1995 and the realization in 1994 of built-in gains,
approximately $10,000,000 of the carryforwards may be utilized beyond the
current annual limitation to offset future taxable income.
F-20
<PAGE> 21
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
NOTE I - INCOME TAXES (CONTINUED)
The net operating loss carryforwards, to the extent unused, will expire as
follows:
===============
YEAR ENDING NET OPERATING
DECEMBER 31, LOSS
------------- ---------------
1999 $ 3,060,000
2000 2,477,000
2001 919,000
2002 -
2003 1,000
2004 139,000
2010 1,234,000
2011 1,651,000
2012 1,854,000
-------------
$11,335,000
=============
The above-mentioned carryforwards gave rise to deferred tax assets of
approximately $4.5 million, $3.8 million and $3.2 million at December 31,
1997, 1996 and 1995, respectively. Due to the uncertainty of the ultimate
realization of the deferred tax asset, a valuation allowance in the amounts
of $2.7 million, $2 million and $1.3 million was recorded by the Company for
the years ended December 31, 1997, 1996 and 1995, respectively. The net
change in the valuation allowances for 1997, 1996 and 1995 was $.7 million,
$.7 million and $(1.3) million, respectively.
F-21
<PAGE> 22
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
NOTE I - INCOME TAXES (CONTINUED)
The asset recognition of the net operating loss carryforward is based
principally on the portion of the carryforwards which are not limited as to
their use and offset the deferred tax credits that are scheduled to reverse
in the carryforward period.
The provision for income taxes is different from that which would be
obtained by applying the statutory federal income tax rate for 1997, 1996
and 1995 due primarily to amortization of goodwill, impairment losses on
long-lived assets and the recognition of net operating loss carryforwards.
Deferred tax (assets) liabilities are as follows:
<TABLE>
<CAPTION>
================================================
DECEMBER 31,
------------------------------------------------
1997 1996
------------------------------------------------
<S> <C> <C>
Depreciation $ 1,404,000 $ 1,441,000
Amortization of product
formulation costs 155,000 260,000
Accounts receivable allowance (55,000) (41,000)
Excess of book inventory over
tax inventory 324,000 171,000
Other (69,000) (31,000)
Net operating loss carryforwards (4,500,000) (3,800,000)
Valuation allowance 2,741,000 2,000,000
------------------------------------------------
$ - $ -
================================================
</TABLE>
The Company had no income tax expense for 1997. 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.
F-22
<PAGE> 23
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
NOTE J - LOSS PER SHARE OF COMMON STOCK
The Company adopted SFAS No. 128, Earnings Per Share, effective December 31,
1997 and all loss per share amounts disclosed herein have been calculated
under the provisions of SFAS No. 128. Basic loss per common shares was
computed by dividing net loss by the weighted average number of shares of
common stock outstanding during the reporting period. The weighted average
number of common shares used to compute basic loss per common share was
3,882,264 for 1997, 3,945,618 for 1996 and 3,939,348 for 1995. Diluted loss
per common share which would include common share equivalents for employee
stock options, cumulative convertible preferred stock and convertible
subordinated debentures is not reported because their effect would be
anti-dilutive for the years presented.
NOTE K - IMPAIRMENT OF LONG-LIVED ASSETS
At December 31, 1997, in accordance with SFAS 121, the Company estimated its
undiscounted cash flows from operations in order to determine if there has
been an impairment of its long-lived assets. The results of that computation
indicated that an impairment exists and that a write-down of the carrying
value of the long-lived assets to fair value is required. The Company
utilized an independent third party appraiser to determine fair value based
upon expected future cash flows from operations discounted at a rate
commensurate with the risks involved. Based upon the valuation performed,
the Company recorded a non-cash charge of $18.5 million which is reflected
as a reduction in the carrying amount of goodwill.
F-23
<PAGE> 24
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 March 6, 1998, we have also
audited Schedule II for each of the three years in the period ended December 31,
1997. In our opinion, this schedule presents fairly, in all material respects,
the information required to be set forth therein.
GRANT THORNTON LLP
Cleveland, Ohio
March 6, 1998
F-24
<PAGE> 25
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Specialty Chemical Resources, Inc.
For the years ended December 31, 1997, 1996 and 1995
<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>
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
1997 Allowance for
doubtful accounts $ 102,000 $ 73,800 $ - $ (38,800) $ 137,000
</TABLE>
F-25
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000703645
<NAME> SPECIALTY CHEMICAL RESOURCES, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 3,100
<SECURITIES> 0
<RECEIVABLES> 5,338,168
<ALLOWANCES> 0
<INVENTORY> 8,944,905
<CURRENT-ASSETS> 14,990,026
<PP&E> 17,621,577
<DEPRECIATION> 5,536,789
<TOTAL-ASSETS> 29,517,878
<CURRENT-LIABILITIES> 8,575,375
<BONDS> 15,445,820
0
0
<COMMON> 394,777
<OTHER-SE> 5,101,906
<TOTAL-LIABILITY-AND-EQUITY> 29,517,878
<SALES> 40,283,662
<TOTAL-REVENUES> 40,283,662
<CGS> 33,628,380
<TOTAL-COSTS> 33,628,380
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,404,700
<INCOME-PRETAX> (21,084,712)
<INCOME-TAX> 0
<INCOME-CONTINUING> (21,084,712)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,084,712)
<EPS-PRIMARY> (5.43)
<EPS-DILUTED> (5.43)
</TABLE>
