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Filed pursuant to Rule 424(b)(3)
Registration No. 333-66737
PROSPECTUS
SPECIALTY CHEMICAL RESOURCES, INC.
6% CONVERTIBLE SUBORDINATED NOTES DUE 2009
We are offering subscription rights to purchase an aggregate principal
amount of $1,360,000 of our 6% Convertible Subordinated Notes Due 2009 to our
stockholders and holders of our 6% Convertible Subordinated Notes Due 2006. You
will receive one subscription right for each 551 shares of our common stock that
you hold as of the close of business on February 23, 1999 and one subscription
right for each 551 shares of our common stock that your 6% Convertible
Subordinated Notes Due 2006 would be convertible into on February 23, 1999. Each
subscription right entitles you to purchase $100 principal amount of the new 6%
Convertible Subordinated Notes Due 2009 for $100.
TERMS OF THE NEW NOTES
- Unsecured, subordinated obligations
- Convertible into shares of our common stock after:
- March 15, 2002; or
- A change of control of Specialty Chemical or an election contest for
directors of Specialty Chemical
- Interest at 6% per year compounded semi-annually in arrears and payable
at maturity
- Redeemable by us at a premium after:
- March 15, 2002; or
- A change of control of Specialty Chemical
Our common stock is listed on the AMEX under the symbol "CHM."
INVESTING IN THESE NEW NOTES INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 8.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated February 16, 1999
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
Certain information contained in this summary and elsewhere in this prospectus
are forward-looking statements. For a more comprehensive understanding of the
rights offering, you should read the entire prospectus carefully, including the
"Risk Factors" section and the documents we have referred to.
THE COMPANY
Specialty Chemical mixes chemicals into formulas and packages them
primarily in aerosol cans, although some formulas are packaged in quart, gallon,
5-gallon and 55-gallon drums. These chemical products are then sold into the
automotive service, manufacturing plant maintenance and cleaning service
markets. Specialty Chemical specializes in creating products for customers who
do not have the skills or knowledge to develop these products themselves, or
customers who will not require enough products for them to justify the expense
of developing their own products. Typically, when we develop a formula, we
retain the right to sell that formula to any of our customers. Specialty
Chemical produces and sells over 850 different formulas. Our products include
cleaners, sealants, lubricants, waxes, adhesives, paints, coatings, degreasers,
polishes, static electricity reducing sprays and tire inflators. See "The
Company."
Specialty Chemical is a Delaware corporation with its principal executive
offices located at 9055 S. Freeway Drive, Macedonia, Ohio 44056; its telephone
number is (330) 468-1380.
TERMS OF THE RIGHTS
RIGHTS........................ In this rights offering, you will receive one
subscription right for each 551 shares of our
common stock that you hold of record as of
the close of business on February 23, 1999
and one right for each 551 shares of our
common stock that your original 6%
Convertible Subordinated Notes Due 2006,
including accrued and compounded interest,
would be convertible into as of February 23,
1999. The number of rights distributed by
Specialty Chemical to each holder of common
stock and original notes will be rounded up
to the nearest whole number. See "The Rights
Offering -- The Rights."
RECORD DATE................... February 23, 1999
EXPIRATION DATE............... March 12, 1999, 5:00 p.m., Cleveland, Ohio
local time.
NONTRANSFERABILITY OF
RIGHTS........................ The rights will be nontransferable.
BASIC SUBSCRIPTION
PRIVILEGE..................... Your basic subscription privilege will entitle
you to purchase $100 principal amount of new
6% Convertible Subordinated Notes Due 2009
for each of your rights.
OVERSUBSCRIPTION PRIVILEGE.... If you purchase all the new notes that you are
entitled to pursuant to the basic
subscription privilege, you will have an
oversubscription privilege that will entitle
you to subscribe at the subscription price
for any principal amount of additional new
notes. See "The Rights Offering
-- Subscription Privileges --
Oversubscription Privilege."
SUBSCRIPTION PRICE............ $100 per $100 principal amount of new notes
purchased by exercise of the basic
subscription privilege or the oversubscrip-
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tion privilege. See "The Rights Offering --
Determination of Subscription Price."
PROCEDURE FOR EXERCISING
RIGHTS........................ To exercise your rights, including subscribing
for additional new notes under the
oversubscription privilege, you should
complete the subscription certificate and
forward it, along with payment of the
subscription price for the principal amount
of new notes you would like to purchase, to
the subscription agent for receipt on or
prior to March 12, 1999. If you plan to mail
the subscription certificate, we recommend
that you use insured, registered mail. See
"The Rights Offering -- Exercise of Rights."
NO REVOCATION................. You may not revoke your subscription after the
subscription agent receives your subscription
certificate. See "The Rights Offering -- No
Revocation."
TERMS OF THE NEW NOTES
TOTAL AMOUNT OF NEW NOTES..... $1,360,000 principal amount of new 6%
Convertible Subordinated Notes Due 2009.
MATURITY DATE................. March 15, 2009.
INTEREST...................... Annual Rate 6%.
Interest accrues and compounds every six months
on September 15 and March 15, beginning on
September 15, 1999.
The accrued interest is payable on the day we
redeem the new notes, the day you convert the
new notes into common stock, or on March 15,
2009.
At our option, we may pay this interest in cash
or, using the fair market value, shares of
common stock. The fair market value will be
the average closing price of the common stock
for the five consecutive trading days prior
to the day immediately before the payment
date.
CONVERSION.................... After March 15, 2002 or upon a change of
control of Specialty Chemical or an election
contest for directors of Specialty Chemical,
you will be able to convert each $100
principal amount of the new notes into 250
shares of common stock. This $0.40 Conversion
Rate is subject to adjustment as a result of
stock dividends, subdivisions, combinations,
reclassifications and as a result of mergers,
consolidations or sales of property of
Specialty Chemical.
DEFINITION OF CHANGE OF
CONTROL....................... You may convert the new notes or we may redeem
the new notes upon a change of control. A
"change of control" in these instances means
the acquisition of, or announcement of an
intent to acquire, our common stock, which
when added to stock already owned, permits
that person or entity to vote 25% or more of
the aggregate outstanding voting power in the
election of our directors. A change of
control will not occur if
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Edwin Roth, Corey Roth, CEW Partners or
Martin Trust acquires 25% of the voting
power.
REDEMPTION.................... We may redeem the principal of, and accrued and
unpaid interest on, the new notes after March
15, 2002 and earlier upon a change of control
of Specialty Chemical. If we redeem the new
notes before March 15, 2007, we will pay you
a premium. On or after March 15, 2007, we may
redeem the new notes at face value. In
addition, we may redeem the new notes at a
premium if a change of control occurs. Upon
redemption, we may elect to pay the accrued
and unpaid interest in shares of our common
stock based on the fair market value of the
stock, rather than in cash. See "Description
of the New Notes -- Redemption."
RANKING....................... The new notes will be unsecured and
subordinated to all of our current and future
senior debt. As of February 12, 1999,
approximately $10,341,358 aggregate amount of
senior debt was outstanding. The indenture
prohibits us from incurring additional
indebtedness that would rank senior to the
new notes except for specified indebtedness,
including debt under our current senior
credit facility and renewals, refinancings,
or extensions of the credit facility. See
"Description of the New Notes
-- Subordination."
The new notes rank equally with the original
notes, which were issued in October, 1996 in
connection with our rights offering to our
stockholders. As of February 12, 1999,
$3,985,000 principal amount of the original
notes was outstanding, along with $500,152
aggregate accrued interest.
OTHER INFORMATION
USE OF PROCEEDS............... We will raise approximately $1,160,000 from the
rights offering, after all expenses. We will
use these monies to repay a portion of the
loans made to us by Edwin Roth, CEW Partners
and Martin Trust in the aggregate principal
amount of $1,500,000. See "Use of Proceeds."
REFINANCING AGREEMENT WITH
EDWIN ROTH, CEW PARTNERS AND
MARTIN TRUST................ In connection with the loans made to us by
Edwin Roth, CEW Partners and Martin Trust, we
entered into an agreement with each of them
at the time the loans were made providing
that the debt would be refinanced with the
net proceeds of a pro rata rights offering of
Specialty Chemical's debt to its stockholders
and its holders of original notes. See "Use
of Proceeds."
ALLOCATION AGREEMENT.......... Edwin Roth, Corey Roth, CEW Partners and Martin
Trust have entered into an agreement
regarding the allocation of new notes among
themselves. This allocation agreement
provides that the aggregate principal amount
of new notes received by the parties will be
re-allocated so that each of Edwin and Corey
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Roth, CEW Partners and Martin Trust will
receive one-third of the total aggregate
principal amount of the new notes.
For example, if no other stockholders exercise
their rights and the Roths, CEW Partners and
Martin Trust purchase all the principal
amount of new notes, the Roths will receive
approximately $565,573 principal amount of
new notes, CEW Partners will receive
approximately $397,213 principal amount of
new notes and Martin Trust will receive
approximately $397,213 principal amount of
new notes. The reallocation will result in
each of CEW Partners and Martin Trust
receiving and paying the Roths in cash or
other consideration for an additional $56,120
principal amount of new notes. CEW Partners
and Martin Trust will receive a greater
principal amount of new notes than they
otherwise would be entitled to receive, and
the Roths will pay for a smaller principal
amount of the new notes. As discussed below,
under the voting agreement, the Roths will
still be able to exercise voting control of
the shares of common stock that the
reallocated notes may be converted into. See
"The Allocation Agreement and Voting
Agreement."
VOTING AGREEMENT.............. Edwin Roth, Corey Roth, CEW Partners and Martin
Trust have entered into a voting agreement.
This voting agreement requires the parties to
vote their shares of common stock as
specified by the Roths and for the election
of directors designated by one another,
prohibits CEW Partners and Martin Trust from
engaging in activities designed to cause a
change of control of Specialty Chemical and
restricts the transferability of shares of
common stock or new notes owned by the Roths,
CEW Partners and Martin Trust. See "The
Allocation Agreement and Voting Agreement."
CONCENTRATED SHARE OWNERSHIP
OF AFFILIATES............... As of February 11, 1999, Edwin Roth, Corey
Roth, CEW Partners and Martin Trust had the
following aggregate ownership interests:
<TABLE>
<CAPTION>
% OF OUTSTANDING
COMMON SHARES
----------------
<S> <C>
Beneficial ownership.................. 39%
Beneficial ownership, fully diluted... 61%
Beneficial ownership, fully diluted,
assuming these stockholders purchase
100% of the new notes............... 73%
</TABLE>
The fully diluted ownership percentages include
the shares of common stock that the
stockholders' original notes, plus accrued
interest, would be convertible into on
February 11, 1999.
Additionally, Edwin and Corey Roth are each
officers and directors of Specialty Chemical.
Geoffrey Colvin and Terence Conklin,
principals of CEW Partners and Martin Trust,
respectively, are directors of Specialty
Chemical.
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SELECTED FINANCIAL DATA
The following selected financial information is not complete and should be
read together with the detailed information and financial statements, including
the notes, incorporated into this prospectus by reference. The information at
September 30, 1998 and for the nine months ended September 30, 1998 is derived
from unaudited financial data, but, in the opinion of management, reflects all
adjustments, which consist only of normal recurring adjustments, necessary for a
fair presentation of the financial position and results of operations at that
date and for the period then ended. The financial position and results of
operations at September 30, 1998 and for the nine months ended September 30,
1998 may not be indicative of the financial data for the entire fiscal year.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED FISCAL YEAR ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------------------------------
1998 1997 1996 1995 1994 1993
------------- -------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales....................... $27,997 $ 40,283 $38,914 $43,419 $44,931 $47,362
Cost of goods sold.............. 22,443 33,628 32,783 39,123 38,066 36,988
------- -------- ------- ------- ------- -------
Gross profit.................. 5,554 6,655 6,131 4,296 6,865 10,374
Selling, general and
administrative expenses....... 5,002 6,903 6,067 7,648 6,995 6,327
Amortization of intangibles..... 320 997 907 869 874 862
Loss on impairment.............. -- 18,501 -- -- -- --
Restructuring charges........... -- -- -- -- 954 --
------- -------- ------- ------- ------- -------
Operating profit (loss)......... 232 (19,746) (843) (4,221) (1,958) 3,185
Other income (expense)
Interest expense.............. 1,241 (1,405) (1,059) (779) (560) (531)
Other......................... -- 66 11 10 39 29
------- -------- ------- ------- ------- -------
1,241 (1,339) (1,048) (769) (521) (502)
------- -------- ------- ------- ------- -------
Earnings (loss) before income
taxes and extraordinary
item.......................... (1,009) (21,085) (1,891) (4,990) (2,479) 2,683
Income tax benefits (expense)... -- -- 128 2,981 840 (944)
------- -------- ------- ------- ------- -------
Earnings (loss) before
extraordinary item............ (1,009) (21,085) (1,763) (2,009) (1,639) 1,739
Extraordinary Item:
Gain (loss) due to fire (net
of income taxes)........... -- -- -- -- 2,265 (884)
------- -------- ------- ------- ------- -------
Net earnings (loss)............. $(1,009) $(21,085) $(1,763) $(2,009) $ 626 $ 855
======= ======== ======= ======= ======= =======
</TABLE>
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<TABLE>
<CAPTION>
NINE MONTHS
ENDED FISCAL YEAR ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------------------------------
1998 1997 1996 1995 1994 1993
------------- -------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed
charges....................... 0.29x -- -- -- -- 4.76x
Earnings (deficiency of
earnings) over fixed
charges....................... $(1,009) $(21,085)(1) $(1,891) $(4,990) $(2,479) $ 2,683
SHARE DATA:
Basic earnings (loss) per
common share:
Before extraordinary
item..................... $ (0.26) $ (5.43) $ (0.45) $ (0.51) $ (0.42) $ 0.44
Extraordinary Item......... -- -- -- -- 0.58 (0.22)
------- -------- ------- ------- ------- -------
Net earnings (loss)........ $ (0.26) $ (5.43) $ (0.45) $ (0.51) $ 0.16 $ 0.22
======= ======== ======= ======= ======= =======
Dividends paid.................. -- -- -- -- -- --
Weighted average common shares
outstanding................... 3,882 3,882 3,946 3,939 3,935 3,946
BALANCE SHEET DATA (AT END OF
PERIOD):
Working capital................. $ 7,546 $ 6,415 $ 7,550 $ 7,142 $ 6,420 $10,883
Total assets.................... $26,598 $ 29,518 $43,923 $47,272 $44,558 $49,914
Long-term debt.................. $16,789 $ 15,446 $12,246 $10,399 $ 4,512 $ 9,948
Redeemable preferred stock...... -- -- -- $ 350 -- --
Stockholders' equity............ $ 4,488 $ 5,497 $26,562 $28,444 $30,439 $29,814
</TABLE>
- ---------------
(1) 1997 includes $18,501 loss on impairment of goodwill
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RISK FACTORS
You should carefully consider the following risk factors as well as the
other information included in this prospectus before you purchase any new notes.
IF YOU DO NOT EXERCISE YOUR RIGHTS, YOU WILL SUFFER DILUTION AND A LOSS OF
INVESTMENT OPPORTUNITY
Securityholders who do not exercise all of their rights will experience a
substantial reduction in their equity ownership and percentage voting interests
in Specialty Chemical when the new notes are converted into common stock.
Securityholders who exercise their rights will preserve, and through the
oversubscription privilege may increase, their proportionate interest in their
equity ownership and voting power of Specialty Chemical.
Securityholders who do not exercise their rights will also lose any value
inherent in the rights, including the possibility that the common stock into
which the new notes are convertible will increase in value.
WE HAVE HAD NET LOSSES SINCE 1995 AND MAY CONTINUE TO HAVE NET LOSSES IN THE
FUTURE
We have had net losses since 1995 and may continue to have net losses in
the future. We had net losses in 1997 of $21,085,000 or $5.43 per share on
weighted average shares outstanding of 3,882,000. This compared to net losses in
1996 of $1,763,000, or $0.45 per share on weighted average shares outstanding of
3,946,000 and net losses in 1995 of $2,009,000, or $0.51 per share on weighted
average shares outstanding of 3,939,000.
In the first nine months of 1998, we had net losses of $1,008,869 or $0.26
per share on weighted average shares outstanding of 3,882,261, net losses of
$786,082 or $0.20 per share for the first nine months of 1997 and net losses of
$874,836 or $0.22 per share for the first nine months of 1996. We may continue
to have net losses and may never be or remain profitable.
EDWIN ROTH, COREY ROTH, MARTIN TRUST AND CEW PARTNERS OWN A SUBSTANTIAL PORTION
OF SPECIALTY CHEMICAL AND MAY CONTROL CORPORATE POLICY WHICH MAY ADVERSELY
AFFECT THE MARKET PRICE OF OUR STOCK
Edwin Roth, Corey Roth, Martin Trust and CEW Partners have each told us
that they intend, but are not obligated, to purchase the maximum principal
amount of new notes pursuant to their basic subscription privileges and
oversubscription privileges. Depending on the unsubscribed principal amount of
new notes available pursuant to the oversubscription privilege, one or more of
these stockholders could substantially increase his or its controlling equity
position in Specialty Chemical and would thereby increase his or its ability to
control corporate policy. If no other stockholders exercise their rights and
these stockholders purchase all the principal amount of new notes, as of
February 11, 1999, they would have owned an aggregate of approximately 73% of
the outstanding common stock on a fully diluted basis. The market price for
shares of common stock may be adversely affected by this concentration of
ownership. See "The Allocation Agreement and Voting Agreement."
ACCELERATION OF THE NEW NOTES BY EDWIN ROTH, COREY ROTH, MARTIN TRUST AND CEW
PARTNERS MAY CAUSE AN ACCELERATION OF THE SENIOR DEBT WHICH COULD RESULT IN
NONPAYMENT OF AMOUNTS OWED TO HOLDERS OF NEW NOTES
In the event of a default under the indenture, the holders of at least 25%
of the principal amount of the new notes may declare the principal of, and
accrued interest on, the new notes immediately due and
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payable and exercise other powers under the indenture. Because of their
intention to purchase the maximum amount of new notes, Edwin Roth, Corey Roth,
Martin Trust and CEW Partners could own, in the aggregate, at least 25% of the
principal amount of new notes. If these stockholders cause the new notes to
become immediately due and payable, the senior debt may also become due and
payable. The senior debt will be paid before any amounts owed to new
noteholders. We may not be able to pay amounts owed to holders of new notes
after paying off our senior debt. See "Description of the New Notes -- Default
and Remedies."
CONTROL OF SPECIALTY CHEMICAL BY EDWIN ROTH, COREY ROTH, CEW PARTNERS AND MARTIN
TRUST THROUGH THEIR VOTING AGREEMENT MAY PREVENT ANY CHANGE OF CONTROL AND
ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK
Edwin Roth, the Chairman of the Board and Chief Executive Officer, and
Corey Roth, President, Chief Operating Officer and a director and CEW Partners
and Martin Trust have entered into a voting agreement. The effect of this voting
agreement could be to inhibit any change of control of Specialty Chemical. The
voting agreement requires that the parties vote their shares of common stock
together on matters requiring a stockholder vote, including the election of
directors. Under the voting agreement, each of CEW Partners and Martin Trust and
Edwin Roth and Corey Roth have a right to purchase all of the other parties'
stock and new notes before any sale of the stock and new notes to another party.
The market price for shares of common stock may be adversely affected by these
control arrangements.
YOU MAY NOT BE ABLE TO SELL THE NEW NOTES BECAUSE THEY ARE NOT LISTED ON ANY
EXCHANGE OR NATIONAL QUOTATION SYSTEM AND WE DO NOT ANTICIPATE THAT THERE WILL
BE A PUBLIC MARKET FOR SALE OF THE NEW NOTES
There is no public market for the new notes, and we do not expect that a
public market will develop for the new notes. The new notes will not be listed
on any exchange or national quotation system and current market quotations may
not be available. Investors may not be able to sell the new notes at any price.
The new notes are convertible into our common stock after March 15, 2002,
except that the new notes may be converted earlier if there is a change of
control of Specialty Chemical or an election contest for directors of Specialty
Chemical. The common stock is traded on the AMEX. Holders of new notes may need
to convert their new notes into shares of common stock in order to dispose of
their economic interest in the new notes. Investors should consider the
difficulties they may encounter in selling their new notes and should only
subscribe for the new notes with a long-term investment intent. See "Description
of the New Notes" and "Price Range of Common Stock."
YOU MAY HAVE TO PAY TAX ON INTEREST INCOME FROM THE NEW NOTES BEFORE INTEREST IS
ACTUALLY PAID TO YOU
Although the interest on the new notes will not be paid until maturity,
holders of the new notes will be required to recognize, any therefore may have
to pay tax on, interest income for federal income tax purposes throughout the
term of the new notes. Each holder of new notes will receive an increase in
their tax basis in the new notes equal to the amount of interest income that is
included in the holder's gross income. See "Certain Federal Income Tax
Considerations -- Original Issue Discount."
WE DO NOT INTEND TO PAY ANY DIVIDENDS
We have never paid and do not intend to pay cash dividends. In addition, we
cannot pay cash dividends if we have net losses for any year under the terms of
our current debt agreements. See "Dividend Policy."
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WE MAY HAVE ADDITIONAL TAX LIABILITY IF NET OPERATING LOSS CARRYOVERS ARE
UNAVAILABLE BECAUSE OF AN "OWNERSHIP CHANGE"
We may have additional tax liability if our net operating loss carryovers
are unavailable because of an "ownership change." The rights offering increases
the risk that we may experience an "ownership change" within the meaning of
Section 382 of the Internal Revenue Code of 1986, as amended. If an ownership
change were to occur, our ability to use our net operating loss carryovers to
offset future income for federal income tax purposes could be severely limited.
As of December 31, 1997, we had approximately $11,335,000 of net operating loss
carryovers. To the extent unused, approximately $3,060,000 of our net operating
loss carryovers will expire on December 31, 1999, approximately $2,475,000 of
our net operating loss carryovers will expire on December 31, 2000 and
approximately $915,000 of our net operating loss carryovers will expire on
December 31, 2001. If we use net operating loss carryovers to reduce future
taxable income, we may be subject to an alternative minimum tax. See "Certain
Federal Income Tax Considerations -- Net Operating Loss Carryovers."
THE MARKET PRICE OF OUR COMMON STOCK MAY DECLINE AFTER YOU SUBSCRIBE OR BEFORE
YOUR NEW NOTES ARE CONVERTIBLE INTO COMMON STOCK AND YOUR DECISION TO SUBSCRIBE
FOR OR TO PURCHASE NEW NOTES IS IRREVOCABLE
The market price of our common stock may fluctuate over time and may
decline before the new notes are convertible into common stock. The new notes
are not convertible until after March 15, 2002 except upon a change of control
of Specialty Chemical or an election contest for directors of Specialty
Chemical. See "Description of the New Notes" and "Price Range of Common Stock."
The market price may decline after you subscribe for the new notes. You may
not revoke your subscription after the subscription agent receives your
subscription certificate. Rights holders will not receive interest on funds
delivered to the subscription agent pending delivery of the new notes.
Fluctuations may be due to changes in our business operations or prospects,
general market and economic conditions and other factors.
THE ANTI-TAKEOVER EFFECT OF THE NEW NOTES, THE VOTING AGREEMENT AND ISSUANCES OF
PREFERRED STOCK MAY INHIBIT ANY CHANGE OF CONTROL AND ADVERSELY AFFECT THE
MARKET PRICE OF OUR STOCK
Certain aspects of the rights offering and the capital structure of
Specialty Chemical may delay, defer or prevent a change of control.
- The new notes will be immediately convertible into shares of common stock
upon a change of control of Specialty Chemical or an election contest for
directors of Specialty Chemical. The conversion of the new notes into
shares of common stock may have a dilutive effect on existing
stockholders, including any stockholder attempting to effect a change of
control of Specialty Chemical;
- Edwin Roth, Corey Roth, Martin Trust and CEW Partners, who have a
significant aggregate ownership interest in Specialty Chemical that may
increase as a result of this rights offering, have entered into a voting
agreement. The voting agreement restricts their rights to vote and
dispose of their shares of common stock. Therefore, it would be difficult
for a third party to effect a change of control without the support of
these stockholders; and
- The board has the ability to issue up to 2,000,000 shares of preferred
stock without stockholder approval. The board has the power to establish
the rights, preferences and powers of the preferred
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stock. Therefore, the board can create a class of preferred stockholders with
voting, dividend and liquidation rights senior to those of the common
stockholders.
The market price for shares of common stock may be adversely affected by
these control arrangements. See "-- Control of Specialty Chemical by Certain
Stockholders" and "Description of Capital Stock -- Preferred Stock."
THE SENIOR DEBT MUST BE PAID BEFORE THE NEW NOTES AND WE MAY NOT HAVE SUFFICIENT
FUNDS REMAINING TO PAY AMOUNTS OWED TO HOLDERS OF NEW NOTES
When any of our senior debt matures, all principal of, and premium and
interest on, the senior debt must be paid in full before any payment is made on
the new notes. The subordination terms of the indenture limit the rights of the
holders of new notes upon any distribution of our assets. For example, if we are
insolvent, holders of new notes will not be paid until after all senior debt has
been paid in full, and to the extent any distribution will be made to the
holders of new notes after those payments, it will have to be shared with the
holders of original notes. We may not have sufficient funds to pay all of our
creditors, and holders of the new notes may not receive the full amount due
under the new notes or may not receive anything at all. The indenture also
limits our ability to borrow money that would create an obligation senior to the
new notes. See "Description of the New Notes -- Subordination."
As of February 12, 1999, $10,341,358 of senior debt was outstanding. As of
the same date, $3,985,000 principal amount of original notes was outstanding,
along with $500,152 aggregate accrued interest.
THE AGREEMENTS GOVERNING THE SENIOR DEBT, ORIGINAL NOTES AND NEW NOTES CONTAIN
CROSS-DEFAULT PROVISIONS, WHICH MAY RESULT IN NONPAYMENT OF AMOUNTS OWED TO
HOLDERS OF NEW NOTES BECAUSE THE SENIOR DEBT MUST BE PAID BEFORE THE NEW NOTES
A default under the original notes or the new notes will result in a
default under our senior debt. Our senior debt agreements provide that a default
under any of our other debt instruments will cause a default to exist under the
senior debt. In the event of a default, the senior debt may be accelerated and
declared immediately payable. If there is a default under the original notes or
the new notes, the noteholders cannot receive payment or exercise any other
rights for 179 days after the holders of senior debt receive notice of the
default. After this 179-day period, the noteholders may receive payment of the
principal of and interest on the original notes or the new notes, but only to
the extent that any amounts due under the senior debt have been paid in full.
Therefore, the holders of senior debt will be likely to accelerate the senior
debt during this 179-day period to ensure their payment before the holders of
original notes and new notes.
In addition, a default under any of the senior debt agreements that results
in acceleration of the senior debt will cause a default under both the original
notes and the new notes. The indenture for the original notes and the indenture
for the new notes each state that a default will exist if we default on any of
our other indebtedness in the amount of $1,000,000 or more, which results in the
acceleration of that indebtedness. A default under the new notes resulting in
acceleration will also result in a default under the original notes and vice
versa.
The senior debt must be paid before the new notes under the terms of the
new notes. If we are required to pay off our senior debt, we may not have
sufficient funds to pay our creditors, and holders of the new notes may not
receive the full amount due under the new notes or may not receive anything at
all.
PENDING ENVIRONMENTAL LITIGATION MAY HAVE AN ADVERSE EFFECT ON US
Extensive environmental laws and regulations and various other federal,
state and local laws and regulations regarding health and safety matters affect
our operations. Currently, we are involved in two
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disputes with environmental regulatory authorities involving alleged violations
of an existing consent order and Ohio's air pollution control laws. Adverse
determinations regarding either the consent decree or the air pollution issues
could have a material adverse effect on our business and financial condition.
Additionally, we could become subject to environmental laws in the future which
could have a negative effect on our earnings or competitive position.
The consent order with the State of Ohio that we are currently subject to
is related to closure activities in connection with historical releases of
hazardous substances at our Macedonia facility. Further, the State of Ohio has
threatened litigation against us over alleged violations of the consent order.
The State of Ohio could proceed with litigation against us, resulting in
significant expenses for us which could have a material adverse effect on our
business. Additionally, the Ohio Environmental Protection Agency has requested
that the Ohio Attorney General's office initiate a civil enforcement action for
alleged violations of Ohio's air pollution control laws. In particular, the Ohio
Environmental Protection Agency has requested that we re-evaluate and re-permit
certain air emissions at our Macedonia facility. This air permit evaluation is
currently in process. See "The Company -- Environmental Matters and Legal
Proceedings."
OTHER PENDING LITIGATION MATTERS MAY HAVE AN ADVERSE EFFECT ON US
We are currently involved in two separate lawsuits which, if decided
against us, could have a material adverse effect on our business. The first
lawsuit is in connection with our alleged improper removal of certain
manufacturing equipment following the termination of one of our commercial
leases. The plaintiff alleges damages in an unspecified amount, plus interest
and costs. The other suit involves claims against us for $251,000 in damages in
connection with our purchase of assets from Hysan Corporation. See "The
Company -- Environmental Matters and Legal Proceedings."
YEAR 2000 NON-COMPLIANCE COULD RESULT IN TROUBLE PROCESSING DATA WHICH MAY
RESULT IN SIGNIFICANT LOSSES THAT WOULD HAVE A MATERIAL ADVERSE EFFECT ON US
Many computer systems and software products will have trouble processing
data related to the Year 2000. If our systems or software products, or those of
our material suppliers or vendors, develop Year 2000 problems, we may suffer
significant losses which would have a material adverse effect on our business.
However, we have reviewed all of our information technology and non-information
technology computer systems, computer chips and software products for Year 2000
problems and have determined that our operational systems and products relating
to production and shipments should not have Year 2000 problems, but that certain
financial systems and products and outsourced payroll systems should be upgraded
or replaced. We have recently completed replacement of our vendor for outsourced
payroll systems, which systems are currently in operation. We intend to begin
replacing financial computer systems and software products in early 1999 and
believe that new systems and products will be tested and in place by June 30,
1999.
We have received verbal and written responses from our material suppliers
and vendors regarding their Year 2000 compliance efforts. All have responded
that they either are compliant or have plans to be compliant prior to the Year
2000.
WE MAY BE DELISTED FROM AMEX, WHICH WILL MAKE IT MORE DIFFICULT TO SELL YOUR
COMMON STOCK AND MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK
We have been notified by AMEX that our common stock may be delisted from
trading on the exchange. If the shares of common stock are delisted from AMEX
and our shares are not approved for listing on another exchange or Nasdaq, you
may find it more difficult to dispose of, or to obtain accurate
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price quotations of, our common stock. As a result, the market price for our
common stock may be adversely affected.
USE OF PROCEEDS
The net proceeds available to us from the rights offering will be
approximately $1,160,000. Such net proceeds will be used to repay a portion of
the indebtedness to each of Edwin Roth, Martin Trust and CEW Partners. Such
indebtedness is represented by three subordinated promissory notes, each entered
into on June 15, 1998 and each in the principal amount of $500,000. The
subordinated promissory notes were to originally mature on December 15, 1998,
but were extended until March 15, 1999, and bear interest at a rate equal to 12%
per annum. We used the proceeds from the notes to meet current cash flow and
working capital needs.
We paid the $112,500 aggregate accrued and unpaid interest on the
subordinated promissory notes as of January 31, 1999 to the noteholders in
shares of common stock using the fair market value of the common stock. The fair
market value was determined to be $.30 per share, which was the average closing
price of the common stock for the five consecutive trading days prior to the day
immediately before the payment date. A total of 375,000 shares of common stock
were issued equally among Edwin Roth, CEW Partners and Martin Trust.
To the extent the subordinated promissory notes are not paid in full with
the net proceeds of the rights offering, Edwin Roth, CEW Partners and Martin
Trust have agreed to accept new subordinated promissory notes each in a
principal amount equal to the remaining principal amount outstanding under their
respective existing notes after the pro rata application of the net proceeds of
the rights offering. These new subordinated promissory notes will mature on
January 15, 2001. The principal and accrued interest on the new subordinated
promissory notes will be payable at maturity in cash, or at the holder's option,
shares of common stock based upon the fair market value of the common stock.
However, the noteholders may demand full payment of principal and accrued
interest on the new subordinated promissory notes at any time after we have
authorized, unissued and unreserved shares of common stock sufficient to pay, in
full, the outstanding principal and interest under all the new subordinated
promissory notes. The fair market value will be the average closing price of the
common stock for the five consecutive trading days prior to the day immediately
before the date that our stockholders authorize the issuance of common stock
sufficient to pay all the outstanding principal and interest due under the new
subordinated promissory notes.
In connection with entering into the existing subordinated promissory
notes, Edwin Roth, CEW Partners and Martin Trust and Specialty Chemical agreed
at the time these loans were made that the notes would be refinanced with the
net proceeds of a pro rata rights offering of Specialty Chemical debt to its
stockholders and its holders of original notes. This debt was to be convertible
into, or include detachable warrants to purchase, at least 3,000,000 shares of
common stock for a price not greater than approximately $.50 per share. As part
of this refinancing agreement, Edwin Roth, CEW Partners and Martin Trust agreed
that one-third of the aggregate number of all rights distributed to them would
be exercisable by each of them, or their affiliates, which in the case of Edwin
Roth includes Corey Roth, regardless of the actual number of rights issued to
each of them.
Edwin Roth, CEW Partners and Martin Trust may cancel a portion of the
indebtedness represented by the existing notes as payment of the subscription
price. In this case, the net proceeds available to Specialty Chemical will be
less than $1,160,000 and the indebtedness to be repaid with such net proceeds
will be reduced by the same amount.
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THE COMPANY
OVERVIEW
Specialty Chemical mixes chemicals into formulas and packages them
primarily in aerosol cans, although some formulas are packaged in quart, gallon,
5-gallon and 55-gallon drums. These chemical products are then sold into the
automotive service, manufacturing plant maintenance and cleaning service
markets. Specialty Chemical specializes in creating products for customers who
do not have the skills or knowledge to develop these products themselves, or
customers who will not require enough product for them to justify the expense of
developing their own products. Typically, when we develop a formula, we retain
the right to sell that formula to any of our customers. Specialty Chemical
produces and sells over 850 different formulas. These formulas represent
know-how of Specialty Chemical developed through the skill and expertise of our
employees. These formulas are not generally patented.
In 1997, Specialty Chemical sold approximately 31 million units.
Approximately 98% of Specialty Chemical's sales are of products manufactured by
Specialty Chemical, and 92% of sales are of products sold under our customers'
brand names. Specialty Chemical's products include cleaners, sealants,
lubricants, waxes, adhesives, paints, coatings, degreasers, polishes, static
electricity reducing sprays and tire inflators. In addition, we produce and sell
our own branded products under the Taylor Made Products (TMP) and Hysan/Aerosol
Maintenance Products (Hysan/AMP) names. Approximately 8% of Specialty Chemical's
sales are of its branded products.
Specialty Chemical acts as an extension of its customers' marketing,
research and development, purchasing, production and quality control
departments. We provide a wide range of services including: identification of a
customer's need for, and design of, specific aerosol products; chemical
formulation; container selection; assistance with marketing programs; labeling;
filling and packaging; component and raw materials purchasing; vendor
verification; regulatory compliance; inventory control and overall program
management. As such, Specialty Chemical is distinct from contract packagers,
which can fill aerosol cans for a fee but do not provide the same range of
services.
Specialty Chemical's customers are principally distribution companies.
Specialty Chemical sells to approximately 350 core customers, with no single
customer accounting for more than 10% of net sales. Specialty Chemical provides
customers with prompt shipment, normally within four weeks after receipt of an
order, and will accept orders for as few as 100 cases of products, thereby
reducing the inventory requirements of our customers. Approximately 90% of
Specialty Chemical's aggregate sales are to customers in the automotive service
and manufacturing plant maintenance markets. Other markets served by Specialty
Chemical include janitorial and sanitation, sophisticated electronic and
electrical manufacturing and arts and crafts. Less than 3% of sales are to chain
store merchandisers. Specialty Chemical relies heavily on pre-sale consultation
and ongoing involvement with customers to establish long-term relationships. We
believe, based on our customer experience and knowledge of the industry, that we
are the only custom packager in our principal markets that provides this wide
range of services, offers delivery within four weeks and routinely produces as
few as 100 cases of a product.
On May 22, 1997, Specialty Chemical acquired substantially all of the
non-real estate assets of Hysan Corporation. We acquired these assets for a
purchase price of $7,432,000, including expenses relating to the transaction. We
deposited $500,000 of the purchase price in escrow with a bank in order to
secure any adjustments to the purchase price that may be necessary under the
asset purchase agreement and to secure our indemnification obligations to Hysan.
We financed this acquisition by borrowing under our bank revolving credit
agreement. For the fiscal year 1997, Hysan accounted for $4,867,000, or 12.2%,
of Specialty Chemical's net sales. At the time of purchase, the Hysan assets
accounted for 13.6% of Specialty Chemical's total assets.
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Specialty Chemical is a Delaware corporation with its principal executive
offices located at 9055 S. Freeway Drive, Macedonia, Ohio 44056; its telephone
number is (330) 468-1380.
ENVIRONMENTAL MATTERS AND LEGAL PROCEEDINGS
Applicability of General Environmental Regulations. Specialty Chemical's
manufacturing facilities are subject to extensive environmental laws and
regulations concerning, among other things:
(1) emissions to the air,
(2) discharges to the land, surface, subsurface strata and water, and
(3) the generation, handling, storage, transportation, treatment and
disposal of hazardous waste and other materials.
These facilities are also subject to other federal, state and local laws and
regulations regarding health and safety matters.
The 1990 Consent Order. Specialty Chemical continues to be involved in
implementing a settlement reached pursuant to a consent order entered into
between the State of Ohio and Aerosol Systems, Inc. on July 9, 1990. This
consent order relates to the release of hazardous substances at the
manufacturing facility located at 9150 Valley View Road, Macedonia, Ohio, by
Aerosol Systems prior to our acquisition of it in 1988. Aerosol Systems now
operates as a division of Specialty Chemical.
Specialty Chemical was required to submit to the Ohio Environmental
Protection Agency a closure plan to address contamination identified at the
Macedonia plant. A closure plan is a document approved by the Ohio EPA which
provides a detailed approach to remediation of contamination identified at any
specific property. Further, the 1990 consent order enjoined Specialty Chemical
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 automatic, stipulated
penalties in the event we violate the requirements of the 1990 consent order or
any applicable Ohio environmental law.
Specialty Chemical submitted the closure plan as required. The Ohio EPA
also requested, in the event the remedial measures in the proposed closure plan
were not successful within a two-year period, that Specialty Chemical, at that
time, 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.
These unilateral modifications consisted of changes to the closure plan required
by the Ohio EPA without our concurrence. On June 17, 1994, Specialty Chemical
appealed the Ohio EPA's action on the grounds that the unilateral modifications
were unreasonable and unlawful. On January 6, 1995, Specialty Chemical and the
State of Ohio entered into a settlement agreement, which resulted in a
termination of our 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 our implementation of a
Groundwater Extraction and Treatment System, a Soil Vapor Extraction System, and
certain other closure plan requirements which we agreed to implement. As of
September 23, 1998, we believe that the total costs of necessary closure
activities required to fully implement the closure plan required by the 1990
consent order are consistent with previously disclosed cost estimates which
range from $1,526,300 to $2,000,000, not including any potential stipulated
penalties, which Specialty Chemical believes will not be material when settled.
Based on a recent risk assessment, we believe that necessary remedial activities
have been substantially completed.
Notwithstanding our progress on the closure plan, on October 15, 1997 we
received a letter from the Ohio Attorney General's Office alleging that we have
failed to comply with certain terms of the 1990 consent order. The State alleges
that Specialty Chemical has committed numerous violations of applicable
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Ohio hazardous waste laws and regulations. The Ohio EPA asserts that Specialty
Chemical is liable for stipulated penalties of up to $5,000 per day for each
violation of the 1990 consent order. The Ohio EPA bases these allegations upon
the results of a number of inspections conducted from 1993 through 1997. These
inspections were documented by the Ohio EPA in the form of notices of violation.
We prepared detailed written responses to each notice of violation and without
admitting liability, took specific actions in response to the allegations
identified by the Ohio EPA. Nonetheless, the Attorney General, on behalf of the
Ohio EPA, demanded that we pay the State of Ohio the sum of $1,080,000 as
stipulated penalties for alleged violations of these laws and regulations.
Through the October 15, 1997 letter, the Attorney General invited Specialty
Chemical to enter into negotiations to resolve the disagreement regarding our
alleged violations of the 1990 consent order. Such negotiations are currently in
progress.
Specialty Chemical believes that it has materially complied with the
requirements of the 1990 consent order. However, negotiations with the State of
Ohio may not be successful and may result in extended litigation with the State
of Ohio. Further, Specialty Chemical cannot predict whether a court would find
us liable for stipulated penalties significantly in excess of the initial demand
proposed by the State of Ohio.
Air Pollution Issues. On May 21, 1998, Specialty Chemical received a letter
from the Ohio EPA alleging that odors from the Macedonia plant and dust from its
unpaved parking lot constituted a nuisance. Further, the Ohio EPA contends that
Specialty Chemical must submit revised permit applications for its can filling
and gassing lines, which according to the Ohio EPA have been erroneously granted
permits allowing the filling part of each line to be a separate emissions unit.
We do not believe that odors from our Macedonia plant or dust from our parking
lot constitute a nuisance as defined by applicable law. However, the Ohio EPA's
request to re-evaluate and re-submit our existing air permits ultimately may
require the addition of supplemental air pollution control technology at the
Macedonia plant or lead to litigation regarding these permitting issues.
On December 21, 1998, the Ohio Attorney General's Office notified Specialty
Chemical that it has been asked to initiate a civil enforcement action against
us for alleged violations of Ohio Revised Code Chapter 3704, Ohio's air
pollution control laws. To avoid this litigation, the Ohio Attorney General has
offered to enter settlement negotiations with Specialty Chemical regarding these
alleged violations. We have entered into these discussions in an attempt to
resolve this dispute without litigation.
Commercial Lease Litigation. Specialty Chemical is currently involved in a
legal proceeding related to its former commercial lease. On October 30, 1995,
9150 Group v. Aerosol Systems, Inc., a Division of Specialty Chemical Resources,
Inc., was filed in the Cuyahoga County Court of Common Pleas and is currently in
the discovery stage of litigation. The plaintiff alleges damages in an
unspecified amount, together with interest and costs, arising out of the alleged
improper removal of certain manufacturing equipment by Specialty Chemical
following the termination of a commercial lease under which it was a tenant.
Litigation Regarding Hysan Assets. Specialty Chemical is currently involved
in a legal proceeding related to its 1997 purchase of assets from Hysan
Corporation. In August 1998, Hysan filed a demand for arbitration before the
American Arbitration Association in Chicago in connection with its asset
purchase agreement with Specialty Chemical. In its demand, Hysan seeks $251,000
in compensatory damages from us from a $500,000 post-closing escrow account for
alleged expenses incurred for post-transaction storage of equipment purchased in
the transaction. We have denied the material allegations in the arbitration
demand and have asserted a counterclaim against Hysan related to allegedly
obsolete inventory and for certain indemnity claims related to accounts
receivable and other inventory issues. The counterclaim seeks $542,864 from the
post-closing escrow account and, to the extent that the amount sought exceeds
the escrow account, from Hysan.
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WHERE YOU CAN FIND MORE INFORMATION
Specialty Chemical is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and, in accordance therewith, files
annual, quarterly and current reports, proxy statements and other information
with the Securities and Exchange Commission. Copies of such reports, proxy and
information statements and other information filed by Specialty Chemical with
the Commission can be inspected and copied at the Public Reference Room
maintained by the Commission at Room 1024, Judicial Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following Regional Offices of the
Commission: New York Regional office, Seven World Trade Center, Suite 1300, New
York, New York 10048; and Chicago Regional Office, Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Please call the Commission
at 1-800-SEC-0330 for further information on the public reference rooms. Such
material may also be accessed electronically by means of the Commission's web
site at http://www.sec.gov. Specialty Chemical's common stock is listed on the
AMEX, and reports, proxy and information statements and other information
concerning Specialty Chemical are available for inspection at the offices of the
AMEX located at 86 Trinity Place, New York, New York 10006.
Specialty Chemical has filed with the Commission a registration statement
on Form S-3 under the Securities Act of 1933, as amended, with respect to the
securities offered by this prospectus. This prospectus does not contain all the
information set forth in the registration statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to Specialty Chemical and the securities
offered by this prospectus, reference is made to the registration statement and
the exhibits thereto, copies of which are on file at the offices of the
Commission and may be obtained upon payment of the fee prescribed by the
Commission, or may be examined without charge at the offices of the Commission
or via the Commission's web site. Statements contained in this prospectus or in
any document incorporated in this prospectus by reference regarding the contents
of any contract or other document referred to are not necessarily complete, and,
in each instance, you should refer to the copy of the contract or other document
filed as an exhibit to the registration statement or other document, each
statement being qualified in all respects by such reference.
The following documents, filed with or furnished to the Commission, and the
information included in these documents, are incorporated into this prospectus
by reference and are deemed to be a part of this prospectus:
(1) Specialty Chemical's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997, filed with the Commission on April 15, 1998 (File
No. 1-11013), as amended by Form 10-K/A, filed with the Commission on
January 19, 1999, and as further amended by Form 10-K/A No. 2, filed with
the Commission on February 16, 1999;
(2) Specialty Chemical's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998, filed with the Commission on May 15, 1998, as amended
by Form 10-Q/A, filed with the Commission on January 19, 1999;
(3) Specialty Chemical's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998, filed with the Commission on August 14, 1998, as
amended by Form 10-Q/A, filed with the Commission on January 19, 1999;
(4) Specialty Chemical's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998, filed with the Commission on November 16, 1998,
as amended by Form 10-Q/A, filed with the Commission on January 19, 1999;
(5) Specialty Chemical's Current Report on Form 8-K, filed with the
Commission on June 6, 1997, as amended by Form 8-K/A, filed with the
Commission on August 5, 1997, and as further amended by Form 8-K/A No. 2,
filed with the Commission on January 19, 1999;
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(6) the description of Specialty Chemical's common stock contained in
its Registration Statement on Form S-2, filed with the Commission on
February 27, 1992 (Reg. No. 33-43092); and
(7) all documents filed by Specialty Chemical pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this prospectus
and before the termination of this rights offering.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this prospectus.
Specialty Chemical undertakes to provide, without charge, to each person to
whom a copy of this prospectus has been delivered, upon the written or oral
request of any such person, a copy of any or all of the documents referred to
above that have been incorporated in this prospectus by reference, other than
exhibits to such documents that are incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
this prospectus incorporates. Requests for such copies should be directed to
David F. Spink, Vice President, Specialty Chemical Resources, Inc., 9055 S.
Freeway Drive, Macedonia, Ohio 44056, telephone (330) 468-1380. Persons
requesting copies of exhibits that were not specifically incorporated by
reference in such documents will be charged the costs of reproduction and
mailing.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this prospectus under the headings "Risk
Factors" and "The Company," in addition to certain statements contained
elsewhere in this prospectus or incorporated herein by reference, that are not
statements of historical facts are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 and are
prospective. These forward-looking statements include, without limitation,
statements regarding the availability of net operating loss carryovers, the
outcomes of certain environmental and legal proceedings and the adequacy of Year
2000 compliance measures. These forward-looking statements are subject to risks,
uncertainties and other factors that could cause actual results to differ
materially from future results expressed or implied by such forward-looking
statements. There are important factors that could cause actual results to
differ materially from the results expressed or implied by any forward-looking
statements. These factors include the general economic conditions, the
uncertainty of availability of net operating loss carryovers, the outcome of
certain environmental and legal proceedings, the adequacy of Year 2000
compliance measures and other factors disclosed under "Risk Factors." All
subsequent written and oral forward-looking statements relating to the matters
described in this prospectus and attributable to Specialty Chemical or to
persons acting on its behalf are expressly qualified in their entirety by these
factors.
THE RIGHTS OFFERING
THE RIGHTS
Specialty Chemical is distributing nontransferable rights to the record
holders of its outstanding common stock as of the close of business on February
23, 1999 and to the record holders of the original notes as of the close of
business on February 23, 1999. Specialty Chemical will distribute, at no cost to
the record holders, one right for each 551 shares of common stock held on
February 23, 1999 and one right for each 551 shares of common stock that the
original notes, including accrued and compounded interest, would be convertible
into as of February 23, 1999. The conversion price of the original notes, which
is $1.50 per share, will be used to calculate the number of shares of common
stock that the original notes,
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including accrued and compounded interest, would be convertible into. The rights
will be evidenced by nontransferable subscription certificates.
No fractional rights or cash in lieu thereof will be issued or paid, and
the number of rights distributed to each holder of common stock and original
notes will be rounded up to the nearest whole number. No subscription
certificate may be divided in such a way as to permit the holders of common
stock or original notes to receive a greater number of rights than the number to
which the subscription certificate entitles its holder. However, a depository,
bank, trust company or securities broker or dealer holding shares of common
stock on February 23, 1999 for more than one beneficial owner may exchange its
subscription certificate for one which represents the number of rights to which
all those beneficial owners in the aggregate would have been entitled had each
been a holder on February 23, 1999. Specialty Chemical reserves the right to
refuse to issue any subscription certificate if the issuance would be
inconsistent with the principle that each beneficial owner's holdings will be
rounded up to the nearest whole right.
Because the number of rights distributed to each record holder will be
rounded up to the nearest whole number, beneficial owners of common stock who
are also the record holders of those shares might receive more rights under
certain circumstances than beneficial owners of common stock who are not the
record holder of their shares and who do not obtain, or cause the record owner
of their shares of common stock to obtain, a separate subscription certificate
with respect to the shares beneficially owned by them, including shares held in
an investment, advisory or similar account. To the extent that record holders of
common stock or beneficial owners of common stock who obtain a separate
subscription certificate receive more rights, they will be able to subscribe for
an additional principal amount of new notes pursuant to the basic subscription
privilege and pursuant to the oversubscription privilege.
EXPIRATION DATE
The rights will expire at 5:00 p.m., Cleveland, Ohio local time, on March
12, 1999. After this date, unexercised rights will be null and void. Specialty
Chemical will not be obligated to honor any purported exercise of rights
received by the subscription agent after March 12, 1999, regardless of when the
documents relating to such exercise were sent.
SUBSCRIPTION PRIVILEGES
Basic Subscription Privilege. The basic subscription privilege will entitle
each rights holder to receive, upon payment of the subscription price, $100
principal amount of new notes at par. Notes representing the principal amount of
new notes purchased pursuant to the basic subscription privilege will be
delivered to subscribers as soon as practicable after March 12, 1999.
Oversubscription Privilege. Subject to the allocation described below, each
right also has an oversubscription privilege that will entitle the holder to
subscribe, at the subscription price, for an additional principal amount of new
notes. Only Rights Holders who exercise their basic subscription privilege in
full will be entitled to exercise the oversubscription privilege.
Additional principal amounts of new notes will be available for
subscription pursuant to the oversubscription privilege only to the extent that
any principal amounts of new notes are not purchased through the basic
subscription privilege. If the aggregate principal amount of new notes remaining
after purchases through the basic subscription privilege is not sufficient to
satisfy all subscriptions pursuant to the oversubscription privilege, the
aggregate principal amount of the new notes remaining after satisfaction of the
exercised basic subscription privileges will be allocated pro rata among those
rights holders exercising their oversubscription privilege. The aggregate
principal amount of the new notes remaining after satisfaction of the exercised
basic subscription privileges will be allocated in proportion to the principal
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amount of new notes each beneficial holder exercising their oversubscription
privilege has purchased through the basic subscription privilege.
If that pro rata allocation results in any rights holder being allocated a
greater principal amount of new notes than was subscribed for under that
holder's oversubscription privilege, then that holder will be allocated only the
principal amount of new notes as was subscribed for. If a proration of the
principal amount of new notes results in any rights holder being allocated a
principal amount of new notes less than such holder subscribed for under the
oversubscription privilege, then the excess funds paid by that holder as the
subscription price for the new notes not issued will be returned without
interest or deduction. Notes representing the principal amount of new notes
purchased through the oversubscription privilege will be delivered to
subscribers as soon as practicable after March 12, 1999 and after all prorations
have been made.
Banks, brokers and other nominee rights holders who exercise the basic
subscription privilege and subscribe through the oversubscription privilege on
behalf of beneficial owners of rights will be required to certify to the
subscription agent and Specialty Chemical, in connection with the subscription
under the oversubscription privilege, as to the aggregate number of rights that
have been exercised and the principal amount of new notes that is being
subscribed for under the oversubscription privilege by each beneficial owner of
rights on whose behalf the nominee holder is acting.
SUBSCRIPTION PRICE
The subscription price is $100 per $100 principal amount of new notes
purchased pursuant to the basic subscription privilege or the oversubscription
privilege. Edwin Roth, CEW Partners and Martin Trust may tender all or a portion
of the indebtedness represented by the subordinated promissory notes currently
held by them as payment of the subscription price. See " -- Exercise of Rights."
EXERCISE OF RIGHTS
Rights may be exercised by delivering to National City Bank, as the
subscription agent, on or prior to March 12, 1999, (1) the properly completed
and executed subscription certificate evidencing such rights, with any required
signature guaranties and (2) payment in full of the subscription price for the
principal amount of new notes purchased pursuant to the basic subscription
privilege and subscribed for pursuant to the oversubscription privilege. Payment
in full must be by check or bank draft drawn upon a U.S. bank or postal,
telegraphic or express money order payable to National City Bank, as
subscription agent, or in the case of Edwin Roth, CEW Partners and Martin Trust,
payment may also be by delivery of their original subordinated promissory note
with the subscription certificate to the subscription agent for cancellation by
Specialty Chemical, or any combination thereof.
The subscription price will be deemed to have been received by the
subscription agent only upon:
(1) clearance of any uncertified check;
(2) receipt by the subscription agent of any certified check or bank
draft drawn upon a U.S. bank or of any postal, telegraphic or
express money order; or
(3) receipt by the subscription agent of a stockholder's original
subordinated promissory note.
IF PAYING BY UNCERTIFIED PERSONAL CHECK, PLEASE NOTE THAT THE FUNDS PAID
THEREBY MAY TAKE AT LEAST FIVE BUSINESS DAY TO CLEAR. Accordingly, rights
holders who wish to pay the subscription price by means of uncertified personal
check are urged to make payment sufficiently in advance of March 12, 1999 to
ensure that such payment is received and clears by that date and are urged to
consider payment by means of certified or cashier's check or money order.
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The address to which the subscription certificates and payment of the
subscription price should be delivered, as well as the address to which a DTC
Participant Oversubscription Subscription Form must be delivered, is:
<TABLE>
<S> <C>
If by mail: National City Bank, Subscription Agent
Corporate Trust Operations
P.O. Box 94720
Cleveland, Ohio 44101-4720
If by overnight courier or hand delivery: National City Bank, Subscription Agent
Corporate Trust Operations
3rd Floor -- North Annex
4100 West 150th Street
Cleveland, Ohio 44135-1385
</TABLE>
If an exercising rights holder does not indicate the number of rights being
exercised, or does not forward full payment of the aggregate subscription price
for the number of rights that the rights holder indicates are being exercised,
then the rights holder will be deemed to have exercised the basic subscription
privilege with respect to the maximum number of rights that may be exercised for
the aggregate subscription price payment delivered by the rights holder. If the
aggregate subscription price payment delivered by the rights holder exceeds the
payment due for the principal amount of new notes subscribed for, the rights
holder will be deemed to have subscribed through the oversubscription privilege
to purchase, to the extent available, that principal amount of new notes
remaining after satisfaction of exercised basic subscription privileges for
which the excess amount would be sufficient to pay the subscription price. Any
excess funds remaining after the deemed subscription through the
oversubscription privilege will be returned to the rights holder by mail without
interest or deduction as soon as practicable after March 12, 1999.
Funds received in payment of the subscription price for new notes
subscribed for under the oversubscription privilege will be held in a segregated
account until the new notes are issued. If a rights holder subscribing under the
oversubscription privilege is allocated less than all of the new notes that the
holder wished to purchase, the excess funds paid by the holder in respect of the
subscription price for new notes not issued will be returned by mail without
interest or deduction as soon as practicable after March 12, 1999.
If a subscription certificate provides that the new notes are to be
delivered to someone other than the holder of the rights, signatures on the
subscription certificate must be guaranteed by a participant in the Securities
Transfer Agents Medallion Program, the Stock Exchange Medallion Program or the
American Stock Exchange, Inc. Medallion Signature Program.
Persons who hold shares of common stock for the account of others, such as
brokers, trustees or depositaries for securities, should notify the respective
beneficial owners of those shares as soon as possible about the rights offering
to ascertain such beneficial owners' intentions and to obtain instructions with
respect to the rights. If the beneficial owner so instructs, the record holder
of such right should complete subscription certificates and submit them to the
subscription agent with the proper payment. In addition, beneficial owners of
rights held through such a holder should contact the holder and request the
holder to effect transactions in accordance with the beneficial owners'
instructions.
The instructions accompanying the subscription certificates should be read
carefully and followed in detail. DO NOT SEND SUBSCRIPTION CERTIFICATES OR
PAYMENTS TO SPECIALTY CHEMICAL.
The method of delivery of subscription certificates and payment of the
subscription price to the subscription agent will be at the election and risk of
the rights holders. If subscription certificates and
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<PAGE> 22
payments are being sent by mail, it is recommended that certificates and
payments be sent by registered mail, properly insured, with return receipt
requested, and that a sufficient number of days be allowed to ensure delivery to
the subscription agent and clearance of payment prior to 5:00 p.m., Cleveland,
Ohio local time, on March 12, 1999. Because uncertified personal checks may take
at least five business days to clear, you are strongly urged to pay, or arrange
for payment, by means of certified or cashier's check or money order.
All questions concerning the timeliness, validity, form and eligibility of
any exercise of rights, including subscriptions through the oversubscription
privilege, will be determined by Specialty Chemical in its sole discretion.
Specialty Chemical, in its sole discretion, may also waive any defect or
irregularity, or permit a defect or irregularity to be corrected within such
time as it may determine, or reject the purported exercise of any right or
subscription under the oversubscription privilege. Subscriptions will not be
deemed to have been received or accepted until all irregularities have been
waived or cured within such time as Specialty Chemical determines in its sole
discretion. Neither Specialty Chemical nor the subscription agent will be under
any duty to give notification of any defect or irregularity in connection with
the submission of subscription certificates or incur any liability for failure
to give such notification.
Any questions or requests for assistance concerning the method of
exercising rights or subscribing through the oversubscription privilege or
requests for additional copies of the prospectus or the instructions as to use
of subscription certificates should be directed to the subscription agent,
National City Bank, at one of its addresses set forth under "Subscription
Agent." National City Bank's telephone number is (800) 622-6757.
NO REVOCATION
Once a rights holder has exercised the basic subscription privilege and/or
subscribed pursuant to the oversubscription privilege, such exercise or
subscription may not be revoked.
RIGHTS OF SUBSCRIBERS
Subscribers have no rights as stockholders of Specialty Chemical with
respect to the shares of common stock into which the new notes are convertible
until shares of common stock are issued upon conversion of the new notes.
PROCEDURES FOR DTC PARTICIPANTS
Specialty Chemical anticipates that the exercise of the basic subscription
privilege, but not the oversubscription privilege, may be effected through the
facilities of the Depository Trust Company. Rights exercised through DTC are
referred to as "DTC Exercised Rights." The holder of a DTC Exercised Right may
subscribe pursuant to the oversubscription privilege in respect of such DTC
Exercised Right by properly executing and delivering to the subscription agent,
at or prior to 5:00 p.m., Cleveland, Ohio local time, on March 12, 1999, a DTC
Participant Oversubscription Form, together with payment of the appropriate
subscription price. Copies of the DTC Participant Oversubscription Subscription
Form may be obtained from the subscription agent.
AMENDMENTS AND TERMINATION
Specialty Chemical reserves the right to amend the terms and conditions of
the rights offering, whether the amended terms are more or less favorable to
rights holders. If Specialty Chemical amends the terms of the rights offering,
the registration statement of which this prospectus forms a part will be
amended, and a new definitive prospectus will be distributed to all rights
holders who have already exercised rights and to holders of record of
unexercised rights on the date Specialty Chemical amends such terms. In
addition, all
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<PAGE> 23
rights holders who have already exercised rights, or who exercise rights within
four business days after the mailing of the new definitive prospectus, will be
provided with a form of consent to amended rights offering terms, on which they
can confirm their exercise of rights and their subscriptions under the terms of
the rights offering as amended by Specialty Chemical. Any rights holder who has
already exercised any rights, or who exercises rights within four business days
after the mailing of the new definitive prospectus, and who does not return the
consent within ten business days after the mailing of the consent by Specialty
Chemical will be deemed to have canceled his or her exercise of rights, and the
full amount of the subscription price already paid will be returned promptly by
mail, without interest or deduction. Any completed subscription certificate
received by the subscription agent five or more business days after the date of
the amendment will be deemed to constitute the consent of the rights holder who
completed the subscription certificate to the amended terms.
We reserve the right at any time before delivery of the new notes to
terminate the rights offering. Such termination would be effected by giving oral
or written notice of the termination to the subscription agent and making a
public announcement. If the rights offering is terminated, the subscription
price will be promptly returned by mail to exercising rights holders, without
interest or deduction. We will have no obligation to a rights holder, whether
such purchase was made through the subscription agent or otherwise, in the event
that the rights offering is terminated.
DETERMINATION OF SUBSCRIPTION PRICE
The subscription price was determined by Specialty Chemical, based on our
objective of achieving the maximum net proceeds obtainable from the rights
offering while providing the holders of common stock or original notes with an
opportunity to make an additional investment in Specialty Chemical, thus
avoiding a dilution of their ownership position in Specialty Chemical.
SUBSCRIPTION AGENT
We have appointed National City Bank as subscription agent for the rights
offering. National City Bank's address, which is the address to which the
subscription certificates and payment of the subscription price must be
delivered, is:
<TABLE>
<S> <C>
If by mail: National City Bank, Subscription Agent
Corporate Trust Operations
P.O. Box 94720
Cleveland, Ohio 44101-4720
If by overnight courier or hand delivery: National City Bank, Subscription Agent
Corporate Trust Operations
3rd Floor -- North Annex
4100 West 150th Street
Cleveland, Ohio 44135-1385
</TABLE>
National City Bank's telephone number is (800) 622-6757, and the facsimile
number is (216) 252-9163.
We will pay the fees and expenses of the subscription agent and have also
agreed to indemnify the subscription agent from certain liability which it may
incur in connection with the rights offering. We have been informed by the
subscription agent that it is a bank within the meaning of Section 3(a)(6) of
the Exchange Act.
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<PAGE> 24
NO BOARD RECOMMENDATION
An investment in the new notes or the common stock must be made by each
rights holder based on that holder's own evaluation of his, her or its best
interests. ACCORDINGLY, THE BOARD DOES NOT MAKE ANY RECOMMENDATION TO ANY RIGHTS
HOLDER OR PROSPECTIVE INVESTOR REGARDING THE EXERCISE OF HIS, HER OR ITS RIGHTS.
DESCRIPTION OF CAPITAL STOCK
The following summary describes the material provisions of Specialty
Chemical's capital stock. You should review our Restated Certificate of
Incorporation in its entirety, because it, not this summary, defines your rights
as a stockholder. A copy of our Restated Certificate of Incorporation is on file
with the Commission. See "Where You Can Find More Information."
Our authorized capital stock consists of 13,000,000 shares of common stock,
$.10 par value, and 2,000,000 shares of preferred stock, $.01 par value. As of
February 12, 1999, 4,257,101 shares of common stock were issued and outstanding,
and 538,963 shares of common stock were reserved for issuance pursuant to the
exercise of options granted and which may be granted by us under our stock
option plans and 4,798,236 shares of common stock were reserved for issuance
upon conversion of the original notes. As of the same date, there were 550
record holders of common stock. Shares of common stock will be reserved for
issuance upon the conversion of the principal amount of new notes issued
pursuant to this rights offering. Upon our election to pay any accrued and
unpaid interest on the new notes in shares of common stock upon conversion or
maturity, we intend to reserve sufficient shares of common stock for that
issuance and intend to register those shares under the Securities Act.
COMMON STOCK
General. The holders of the common stock are entitled to one vote for each
share held of record on all matters submitted to a vote of stockholders.
Stockholders may not cumulate their votes for the election of directors. The
holders of the common stock are entitled to share ratably in any dividends that
may be declared, from time to time, by the board out of funds legally available
for distribution. However, it is not presently anticipated that dividends will
be paid on the common stock and certain of our debt instruments prohibit or
restrict the payment of cash dividends to stockholders in excess of 20% of
Specialty Chemical's net income for that fiscal year. See "Risk Factors -- Lack
of Dividends." In the event of a liquidation, dissolution or winding up of
Specialty Chemical, holders of common stock will be entitled to share ratably in
all assets remaining after payment of liabilities. Holders of common stock do
not have preemptive rights. All of the issued and outstanding shares of common
stock are, and the shares of common stock to be issued upon conversion of the
new notes will be, fully paid and nonassessable.
Trading Market. The common stock is traded on the AMEX under the symbol
CHM. The transfer agent for our common stock is National City Bank, Cleveland,
Ohio.
PREFERRED STOCK
General. The board has the authority to issue up to 2,000,000 shares of
preferred stock in one or more series and to fix the designation and relative
powers, preferences and rights and qualifications, limitations or restrictions
of all shares of each such series, including, without limitation, dividend
rates, conversion rights, voting rights, redemption and sinking fund provisions,
liquidation preferences and the number of shares constituting each such series,
without any further vote or action by the stockholders.
Issuances. Although we have no present intention to issue shares of
preferred stock, because the board has the power to establish the terms of each
series of preferred stock, it may issue preferred stock with
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<PAGE> 25
rights, preferences and powers, in particular voting rights, senior to the
rights of the holders of common stock, including the holders of common stock
issued upon conversion of the new notes. The issuance of shares of preferred
stock could further decrease the amount of earnings and assets available for
distribution to holders of common stock, including holders of common stock to be
issued upon conversion of the new notes. The issuance of the preferred stock
could have the effect of delaying, deferring or preventing a change of control
of Specialty Chemical without further action by the stockholders.
DESCRIPTION OF THE NEW NOTES
The new notes will be issued under an indenture between Specialty Chemical
and Bank One, N.A., as trustee. Holders of the new notes are referred to the
indenture and the Trust Indenture Act of 1939, as amended, as if the indenture
were governed by the same, for the terms and provisions of the new notes. The
following discussion summarizes the material terms and provisions of the new
notes. You should review the indenture in its entirety because it, not this
summary, defines your rights as holders of the new notes. We have filed a copy
of the indenture as an exhibit to the registration statement.
General. The new notes:
- are unsecured obligations of Specialty Chemical;
- are subordinate in right of payment to all current and future senior
debt;
- rank equally with the original notes, which have substantially similar
terms as the new notes except with respect to maturity date and
conversion price;
- bear interest at a rate of 6% per year;
- accrue and compound interest every six months on September 15 and March
15, beginning on September 15, 1999;
- bear interest which is payable only at maturity, conversion or
redemption;
- mature on March 15, 2009;
- are convertible into shares of common stock;
- are redeemable by us; and
- are in registered form in denominations of $100 and multiples of $100.
Initially, the trustee will act as paying agent, conversion agent and
registrar. We may change the paying agent, conversion agent and registrar
without notice.
Interest. The new notes bear interest at the annual rate of 6%. The accrued
and compounded interest is only payable upon maturity, conversion or redemption.
In any case, we may choose to pay the accrued and compounded interest on the new
notes in cash or, using the fair market value, shares of common stock. The fair
market value will be the average closing price of the common stock for the five
consecutive trading days prior to the day immediately before the payment date.
Conversion. The new notes are convertible into shares of common stock:
(1) at any time after March 15, 2002 and before the close of business on
March 15, 2009;
(2) in the event of a change of control of Specialty Chemical; or
(3) in the event of an election contest, which is defined as any filing
pursuant to Rule 14a-11 under the Exchange Act, by any person or group of
persons for the purpose of opposing a solicitation by us with respect to
the election of directors of Specialty Chemical.
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The conversion rate is $0.40 per share of common stock, subject to
adjustment as described below. The board determined the conversion rate based
primarily on the average of the closing sale price of the common stock on the
AMEX during the 20 active trading days between December 21, 1998 and January 22,
1999, which was approximately $0.375 per share.
In addition, if a new note is called for redemption upon a change of
control or otherwise, it is convertible at any time prior to the redemption
date. Instead of issuing fractional shares upon conversion, if any, we will
round fractional shares to be issued upon conversion up to the nearest whole
share.
The accrued interest payable upon conversion of the new notes will be
payable in cash, or at our option, in shares of common stock using the fair
market value of the common stock.
The conversion rate will be adjusted upon:
(1) the issuance of stock as a dividend or distribution on the common
stock;
(2) subdivisions and combinations of the common stock;
(3) reclassifications of the common stock;
(4) a dividend of securities convertible into common stock; or
(5) consolidations, mergers and sales of property of Specialty Chemical.
The conversion rate will not be adjusted unless the adjustment causes a
change of at least one percent in the number of shares of common stock for which
the new notes may be converted. Any adjustment that should be made but does not
cause a change of at least one percent will be carried forward and taken into
account in any subsequent adjustment. If Specialty Chemical consolidates with,
merges into, or transfers or leases all or substantially all of its assets to
any person, or is a party to a merger that reclassifies or changes its
outstanding common stock, the right to convert a new note into common stock, to
the extent the right has not been previously exercised by the new noteholder,
may be changed into a right to convert it into securities, cash or other assets
of Specialty Chemical or another entity into which the common stock was
reclassified or changed.
A "change of control" means the acquisition of shares of capital stock of
Specialty Chemical which, when added to any prior holdings of capital stock,
permits that person or entity to vote 25% or more of the aggregate outstanding
voting power in the election of directors of Specialty Chemical. This also
includes the announcement of an intent to acquire shares of common stock as
described in this paragraph. However, a change of control will not happen if
Edwin Roth, Corey Roth, CEW Partners or Martin Trust acquire shares as described
in this paragraph.
Redemption. The principal amount of, plus accrued and unpaid interest on,
the new notes may be redeemed at our option at any time on or after March 15,
2002 and prior to March 15, 2009. If a new note is called for redemption, the
holder may convert the new note, including accrued and unpaid interest, into
shares of common stock, rather than have it redeemed. We will give at least 30
days notice, mailed by first class mail to each new noteholder's last address as
it appears on the new note register, of the redemption.
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<PAGE> 27
We will pay you a premium on the principal amount outstanding if we redeem the
new notes before March 15, 2007. The redemption prices are set forth below:
<TABLE>
<CAPTION>
REDEMPTION
IF WE REDEEM BEFORE: PRICE:
-------------------- ----------
<S> <C>
March 15, 2002........................................... 110%
March 15, 2003........................................... 108%
March 15, 2004........................................... 106%
March 15, 2005........................................... 104%
March 15, 2006........................................... 102%
March 15, 2007........................................... 100%
</TABLE>
In addition, we may redeem all the new notes if a change of control
happens. In that case, we will pay you any accrued and unpaid interest plus 105%
of the principal amount. If we do not redeem all the new notes, the trustee will
select the new notes to be redeemed pro rata or by lot or in another manner the
trustee deems fair to the new noteholders.
The accrued interest payable upon a redemption of the new notes will be
payable in cash or at our option, in shares of common stock using the fair
market value of the common stock.
Sinking Fund. There is no sinking fund or other similar mandatory
prepayments of principal on the new notes.
Subordination. The payment of principal of, and interest and any premium
on, the new notes will be subordinated to the prior payment in full of all
senior debt of Specialty Chemical. By reason of this subordination, in the event
of insolvency, new noteholders may not receive the full amount due under the new
notes or may not receive anything at all. See "Risk Factors -- The Senior Debt
Must Be Paid Before the New Notes."
Specialty Chemical may not incur any debt that would rank senior to the new
notes except:
(1) indebtedness existing on the date of the indenture or under
Specialty Chemical's then existing credit facility, including any renewals,
refinancings, extensions or refundings of this debt;
(2) indebtedness secured by purchase money security interests;
(3) any other senior bank or other institutional indebtedness;
(4) any indebtedness of a subsidiary to another subsidiary;
(5) any indebtedness of any other entity existing at the time such
entity merged with or into or became a subsidiary of Specialty Chemical or
of a subsidiary;
(6) any indebtedness incurred in connection with a merger with or into,
or the acquisition of the stock or assets of, another entity; and
(7) any indebtedness to holders of the new notes.
"Senior debt" means all indebtedness of Specialty Chemical created,
incurred, assumed or guaranteed by Specialty Chemical for money borrowed from
another or in connection with an acquisition of any other business or entity or
of any properties or assets, and all renewals, extensions, refinancings or
refundings of this debt. Except for the original notes, which rank equally with
the new notes, indebtedness of Specialty Chemical that is not expressly
subordinate to the indebtedness represented by the new notes will generally
constitute "senior debt" for purposes of the indenture.
"Senior debt" does not include:
(1) indebtedness or liability for compensation to employees or for goods
or materials purchased in the ordinary course of business or for services;
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<PAGE> 28
(2) any indebtedness of Specialty Chemical to or from a subsidiary; and
(3) the original notes and the new notes.
As of February 12, 1999, the senior debt was approximately $10,341,358,
consisting of amounts borrowed under the bank revolving credit agreement which
provides for extensions of credit up to $14,000,000 and amounts borrowed by
Specialty Chemical under its mortgage.
Mergers, Consolidations, Sales of Assets. In the indenture, Specialty
Chemical agrees not to consolidate with, merge with or into, or transfer or
lease all or substantially all of its assets, to any other person unless:
(1) the resulting or surviving person, if other than Specialty Chemical,
or transferee or lessee expressly assumes, by a supplemental indenture
executed and delivered to the trustee, in a form satisfactory to the
trustee, all of the obligations of Specialty Chemical under the new notes
and the indenture;
(2) the resulting or surviving person, transferee or lessee is organized
and existing under the laws of the United States, a state thereof or the
District of Columbia;
(3) immediately after the transaction, no event of default has occurred
and is continuing;
(4) immediately after the transaction on a pro forma basis, the
consolidated net worth of the surviving entity is at least equal to the
consolidated net worth of Specialty Chemical immediately before the
transaction; and
(5) at least 15 days before the consummation of the transaction, the new
noteholders have received notice of the consolidation, merger or transfer
and have been afforded any conversion rights available under the new notes
and the indenture as a result of the transaction.
"Consolidated net worth" means at any date the total amount of
non-redeemable preferred stock and common stockholders' equity, excluding
amounts attributable to securities which are exchangeable for or convertible
into securities other than non-redeemable preferred stock or common stock, which
would appear on a consolidated balance sheet of any person at that date prepared
in accordance with generally accepted accounting principles.
Default and Remedies. An "event of default" means:
(1) a default for 10 days in payment of either interest on or principal
of the new notes;
(2) failure by Specialty Chemical for 30 days after notice to it to
comply with any of its other agreements in the indenture or the new notes;
(3) certain defaults on other indebtedness of Specialty Chemical or any
subsidiary in the amount of $1,000,000 or more, individually or in the
aggregate, resulting in the acceleration of the indebtedness; and
(4) certain events of bankruptcy, insolvency or reorganization.
The trustee will, within 90 days after an event of default, give the new
noteholders notice of all uncured events of default known to it. However, if the
event of default relates to nonpayment of principal, premium, if any, or
interest on the new notes, the trustee will not have to give notice if it in
good faith determines that withholding of notice is in the interest of the new
noteholders.
If an event of default, other than an event of default resulting from
bankruptcy, insolvency or reorganization, has occurred and is continuing, the
trustee or the holders of at least 25% in principal amount of the new notes may
declare the principal of, and accrued interest on, the new notes to be due and
payable immediately. However, no payment on the new notes may be made until the
senior debt is paid in full. If an event of default results from certain events
of bankruptcy, insolvency or reorganization, the principal
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amount of the new notes, together with accrued interest, will be due and payable
without any declaration or any act on the part of the trustee or the new
noteholders.
Any acceleration may be cancelled and past events of default may be waived
by the holders of a majority in principal amount of the new notes upon
conditions provided in the indenture. An event of default relating to nonpayment
of principal, premium, if any, or interest may only be waived if the amounts
have been paid. Except to enforce the right to receive payment of principal or
interest when due, no new noteholder may institute any proceeding with respect
to the indenture or for any remedy under the indenture unless such holder has
previously given to the trustee written notice of a continuing event of default
and the holders of at least 25% of the outstanding principal amount of the new
notes have (1) requested the trustee to institute proceedings in respect of such
event of default, (2) offered the trustee reasonable indemnity against loss,
liability and expense which may be incurred, and (3) the trustee has failed to
so act for 60 days after receipt of the request, provided no inconsistent
direction has been given to the trustee during such 60-day period.
The new noteholders may not exercise any rights or remedies against
Specialty Chemical to enforce or collect upon the new notes unless the senior
debt has been paid in full. However, upon the occurrence of an event of default
involving a default for 10 days in a payment of either principal or interest or
certain events of bankruptcy, insolvency or reorganization, the new noteholder
may exercise any rights and remedies relating to the event of default but only
after the expiration of the 179-day period commencing upon receipt by the
holders of senior debt of notice of an event of default and subject to the right
of holders of senior debt to receive prior payment in full of the senior debt.
The indenture requires us to file annually with the trustee a statement
regarding our compliance with the indenture, specifying any events of default of
which the signers may have knowledge.
Amendment, Supplement, and Waiver. Subject to certain exceptions, the
indenture or the new notes may be amended or supplemented with the consent of
the holders of at least a majority in principal amount of the new notes. Any
past event of default or compliance with any provisions of the indenture may be
waived with the consent of the holders of a majority in principal amount of the
new notes.
Specialty Chemical does not need the consent of the new noteholders to
amend or supplement the indenture or the new notes to cure any ambiguity, defect
or inconsistency or to make any change that does not materially and adversely
affect the rights of any new noteholders or the holders of senior debt. However,
we need the consent of each new noteholder affected to amend or supplement the
indenture or the new notes to, among other things:
(1) extend the maturity of the new notes;
(2) reduce the rate or extend the time of payment of interest on the new
notes;
(3) modify the terms of payment of the principal, premium, if any, or
interest on the new notes;
(4) change redemption provisions in a manner adverse to the new
noteholders;
(5) impair the right to convert the new notes into common stock on the
terms set forth in the indenture; or
(6) reduce the percentage of new noteholders necessary to amend or
supplement the indenture.
Satisfaction and Discharge of Indenture. Specialty Chemical may terminate
its obligations, with certain exceptions, under the new notes and the indenture
if all new notes previously authenticated and delivered have been delivered to
the trustee for cancellation and Specialty Chemical has paid all sums payable by
it under the indenture and certain other conditions are satisfied. Specialty
Chemical may also irrevocably deposit in trust with the trustee money or United
States government obligations sufficient to
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pay principal of and interest on the new notes to maturity or redemption, as the
case may be, and to pay all sums payable to the trustee under the indenture if
all principal of and interest on the new notes and all sums payable under the
indenture have not yet been paid. In neither case will Specialty Chemical have
to deliver destroyed, lost or stolen new notes which have been replaced or paid.
Reports to New Noteholders. So long as any of the new notes remain
outstanding, Specialty Chemical will mail to the new noteholders its annual
report to stockholders and any quarterly or other financial reports furnished by
it to its stockholders.
The Trustee. If the trustee becomes a creditor of Specialty Chemical, it
will be limited in its ability to obtain payment of claims in certain cases, or
to realize on certain property received in respect of any such claim as security
or otherwise. The trustee will be permitted to engage in other transactions with
Specialty Chemical. However, if the trustee acquires certain conflicting
interests specified in the Trust Indenture Act, it must eliminate such conflicts
or resign.
The trustee also acts as trustee, registrar, paying agent and conversion
agent under the indenture dated October 15, 1996 which governs the original
notes. The original notes rank equally to the new notes.
The holders of a majority in principal amount of new notes then outstanding
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, unless that
direction conflicts with any rule of law or with the terms of the indenture or
unduly prejudices the rights of another new noteholder. The trustee may take any
other action deemed proper by the trustee which is not inconsistent with that
direction. If any event of default occurs and is not cured, the trustee is
required to use the degree of care and skill of a prudent person in the conduct
of his own affairs in the exercise of its powers. The trustee is under no other
obligation to exercise any of its rights or powers under the indenture at the
request of any of the new noteholders, unless it has received satisfactory
security and indemnity.
PRICE RANGE OF COMMON STOCK
The common stock is listed on the AMEX under the symbol "CHM." The
following table sets forth the high and low sales prices of the common stock as
reported on the AMEX for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C> <C> <C>
FISCAL YEAR 1996
First Quarter............................................. $ 2 7/8 $ 1 1/4
Second Quarter............................................ 3 7/8 1 1/4
Third Quarter............................................. 3 11/16 1 3/4
Fourth Quarter............................................ 2 1/16 1 1/8
FISCAL YEAR 1997
First Quarter............................................. $ 2 1/2 $ 1 3/8
Second Quarter............................................ 2 3/16 1 1/4
Third Quarter............................................. 2 1 1/4
Fourth Quarter............................................ 1 1/2 1
FISCAL YEAR 1998
First Quarter............................................. $ 1 7/16 $ 1
Second Quarter............................................ 1 1/16 3/4
Third Quarter............................................. 1 3/16
Fourth Quarter............................................ 15/16 1/4
FISCAL YEAR 1999
First Quarter (through February 15, 1999)................. 3/8 1/4
</TABLE>
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<PAGE> 31
On February 12, 1999, the closing sale price of the common stock was $0.25
per share. On February 12, 1999, there were approximately 550 holders of record
of the common stock and 4,257,101 shares of common stock issued and outstanding.
See "Description of Capital Stock."
DIVIDEND POLICY
Specialty Chemical 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 board and will depend, among other factors, on
earnings, capital requirements and the operating and financial condition of
Specialty Chemical. The terms of certain of our outstanding loans currently
prohibit us from paying cash dividends to our stockholders in any fiscal year in
excess of 20% of our net income for that fiscal year. See "Risk Factors -- Lack
of Dividends."
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of certain anticipated federal income
tax consequences to holders of common stock and to holders of the original notes
of the issuance to them of rights and to rights holders upon the exercise or
lapse of the rights and is not intended as tax advice. This discussion is based
on the provisions of the Internal Revenue Code of 1986, as amended, final,
temporary and proposed treasury regulations, and administrative and judicial
interpretations of these laws, all as in effect as of the date of this
prospectus and all of which are subject to change, possibly on a retroactive
basis. Legislative, judicial or administrative changes or interpretations could
alter or modify the tax discussion set forth below. This discussion does not
purport to deal with all aspects of federal income taxation that may be relevant
to (1) a particular rights holder in light of such rights holder's personal
investment circumstances, (2) certain types of rights holders subject to special
treatment under the federal income tax laws, such as life insurance companies,
tax exempt organizations, foreign corporations and nonresident aliens or (3)
rights holders who tender subordinated promissory notes as payment of the
subscription price for new notes. No attempt is made to consider any aspects of
state, local or foreign taxation. Finally, substantial uncertainties resulting
from the lack of definitive judicial or administrative authority and
interpretations apply to various tax issues addressed in this section. Specialty
Chemical has not sought, nor does it intend to seek, any rulings from the
Internal Revenue Service relating to these issues or any other issues.
EACH RECIPIENT OF RIGHTS IS THEREFORE URGED TO CONSULT HIS OR ITS OWN
ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF THE RIGHTS OFFERING ON HIS OR ITS
OWN PARTICULAR TAX SITUATION, INCLUDING THE APPLICATION AND EFFECT OF THE CODE,
AS WELL AS STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
ISSUANCE OF RIGHTS
For the reasons set forth below, Specialty Chemical believes that the
issuance of the rights will not result in the receipt of taxable income by those
stockholders and holders of original notes who receive the rights. Accordingly,
Specialty Chemical does not intend to issue IRS Forms 1099 in connection with
the issuance of the rights.
The tax consequences of the issuance of the rights are dependent upon the
applicability of Section 305 of the Code and whether the rights have a market
value. In this regard, the IRS has taken the position that the issuance by a
corporation to its stockholders, which, for purposes of Section 305 of the Code,
is defined to include holders of convertible securities, of rights entitling
them to subscribe to convertible debt
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<PAGE> 32
securities will be nontaxable under Section 305 of the Code if both of the
following two requirements are satisfied:
(1) substantially all of the value of the rights is attributable to the
conversion privilege of the convertible debt securities; and
(2) no exception to the general rule of nontaxability of distributions of
stock and stock rights under Section 305(a) of the Code applies.
Specialty Chemical believes that any market value attributable to the
rights would be attributable to the conversion privilege of the new notes. It
should be noted that Specialty Chemical has not sought nor relied upon the
advice of any independent securities dealers or investment bankers in making
this determination and that the determination might be subject to challenge by
the IRS. Specialty Chemical also believes that no exception to the general rule
of nontaxability under Section 305(a) of the Code will apply to the issuance of
the rights.
If, contrary to Specialty Chemical's belief, the rights were determined to
both fall outside of the general rule of nontaxability under Section 305 of the
Code and to have a market value, the distribution of the rights could result in
taxable dividend income to those stockholders exercising rights and could result
in taxable interest income to holders of original notes exercising the rights.
Stockholders exercising rights would only recognize taxable dividend income to
the extent of the lesser of the market value of the rights or that stockholders'
allocable share of Specialty Chemical's current or accumulated earnings and
profits. Although not free from doubt, because the rights are nontransferable,
stockholders and noteholders who do not exercise their rights could reasonably
take the position that they have not received taxable dividend income or
interest income, as the case may be. No assurance can be given that such
position would ultimately be sustained if challenged.
BASIS IN AND EXERCISE OF THE RIGHTS
Specialty Chemical believes that the fair market value of the rights, if
any, on the date of issuance of the rights will be less than 15% of the fair
market value on the date of issuance of the common stock or the original notes
with respect to which the rights are received. Assuming that Specialty
Chemical's belief is accurate, the basis of the rights received by a stockholder
or original noteholder pursuant to the issuance will be zero, unless the holder
makes the election described in clause (2) of the next sentence. If either:
(1) contrary to Specialty Chemical's belief, the fair market value of the
rights on the date of issuance is determined to be 15% or more of the
fair market value on the date of issuance of the common stock or
original notes with respect to which the rights are received, or
(2) the rights holder makes an affirmative election in his, her or its
federal income tax return for the taxable year in which the rights are
received,
then all holders who exercise rights or an electing holder who exercises rights,
as the case may be, will be required to allocate the holder's aggregate basis in
the common stock or original notes with respect to which the rights were
distributed between the rights and such common stock or original notes in
proportion to the fair market values of each on the date of the issuance of the
rights. The holding period of the rights received as a distribution on a
stockholder's common stock or on a holder's original note will include the
stockholder's or original noteholder's holding period for the common stock or
original note with respect to which the rights were issued.
No gain or loss will be recognized by a rights holder who pays the
subscription price of new notes in cash upon exercise of the rights. The basis
for federal income tax purposes of new notes acquired upon exercise of the
rights by rights holders who pay the subscription price for new notes in cash
will equal the
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<PAGE> 33
sum of the holder's basis in the exercised rights, if any, and the amount of
cash paid for the new notes. The holding period of the new notes acquired upon
exercise of the rights will begin on the date of issuance of the new notes. No
rights holder will recognize a loss upon expiration of the rights unless such
rights holder has recognized taxable income in connection with receipt of the
rights.
CONVERSION OF NOTES
Generally, no gain or loss should be recognized upon the conversion of a
new note into common stock. The aggregate tax basis of shares of common stock
received pursuant to the conversion of a new note will be equal to the basis
such holder had in the new note. The holding period for the common stock will
include the holding period of the new note. Under certain circumstances, an
adjustment to the conversion price of the new notes or the failure to adjust the
conversion price of the new notes may result in a taxable dividend to the
holders of the new notes.
ORIGINAL ISSUE DISCOUNT
Stated interest on the new notes will not be paid until maturity. Because
of the delayed interest payment, the new notes will be considered to have been
issued with original issue discount in an amount equal to the amount of stated
interest that would be payable upon maturity of the new notes. A holder of a new
note will be required to recognize the original issue discount as ordinary
income throughout the term of the new note, assuming that the new note is not
converted or redeemed prior to maturity, even though the holder of such new note
will not be receiving the stated interest until the maturity date and even
though the holder may be a cash basis taxpayer.
The amount of original issue discount required to be included in a new
noteholder's income for any taxable year will be determined by allocating to
each day in the taxable year during which the holder owns a new note, a portion
of the original issue discount that accrues during the taxable year. The amount
of the accrual will be determined by utilizing a constant yield method. A new
noteholder's tax basis in a new note will be increased by the amount of original
issue discount which is included in the holder's income. As required by law,
Specialty Chemical will report annually to the IRS and to each holder of new
notes the amount of original issue discount accrued with respect to each new
note.
Any payment of stated interest received by a holder of a new note upon
maturity of that new note, will not be treated as interest income for federal
income tax purposes. Instead, the interest payment will be treated as a return
of principal.
NON-DEDUCTIBILITY OF INTEREST ON NEW NOTES
Since the interest on the new notes may be payable, at the option of
Specialty Chemical, in shares of common stock, Specialty Chemical will not be
allowed a deduction for federal income tax purposes for any interest, including
original issue discount, paid or accrued on the new notes, even if such interest
is ultimately paid in cash.
SALE OR REDEMPTION OF A NEW NOTE OR SALE OF THE COMMON STOCK
On a sale or redemption of the new notes or a sale of the common stock into
which a new note has been converted, a holder of new notes or stockholder will
generally recognize gain or loss measured by the difference between the amount
of cash and the fair market value of property received and the holder's tax
basis in the new notes or the stockholder's tax basis in the common stock.
Subject to the market discount rules of the Code, any gain or any loss on a new
note should be capital gain or loss, assuming the new note is held as a capital
asset. If the common stock into which a new note has been converted is held as a
capital asset, any gain or loss recognized upon its sale should be capital gain
or loss.
33
<PAGE> 34
NET OPERATING LOSS CARRYOVERS
Section 382 of the Code imposes limitations on the amount of "pre-change"
losses and deductions, including, in certain instances, losses and deductions
attributable to periods prior to an "ownership change" that are not realized for
federal income tax purposes until after the "ownership change," that may be used
to offset "post-change" taxable income of a corporation which undergoes an
"ownership change." Similarly, Section 383 of the Code limits the amount of
"pre-change" tax credits that may be used to reduce the "post-change" tax
liability of a corporation which undergoes an ownership change. An "ownership
change" occurs if the percentage of a corporation's stock owned, directly or
indirectly, by one or more of its "5-percent stockholders," which is defined to
include one or more groups of less than "5-percent stockholders," increases by
more than 50 percentage points in the aggregate relative to the lowest
percentage of the corporation's stock owned by such stockholders during a
constant rolling three year testing period. The rules regarding "5-percent
stockholders" and the amount of stock owned by such "5-percent stockholders" are
complex and in many instances lack interpretive guidance.
Although Specialty Chemical experienced an ownership change during 1992,
due to the carryover of unused Code Section 382 limitations in prior years and
the recognition of certain "built-in gains," that ownership change will no
longer materially limit Specialty Chemical's ability to utilize its pre-1992
ownership change net operating loss carryovers.
Although no assurances can be given, Specialty Chemical does not believe
that it has experienced an ownership change since 1992. It is possible, however,
that transactions that occur subsequent to this rights offering, or transactions
that have already occurred but which are not now known to Specialty Chemical,
may, when considered with other previous, concurrent and/or future transactions,
result in another ownership change of Specialty Chemical. The consummation of
the rights offering will increase the risk of another ownership change, since,
for example, it is possible and, in certain cases, likely that the rights will
not be exercised by Specialty Chemical's existing "5-percent stockholders" on a
pro rata basis, that the new notes, even if acquired on a pro rata basis, may be
transferred prior to conversion, that some but not all new notes may be
converted into common stock or that the new notes may be converted into common
stock at different times.
If another ownership change were to occur, then Specialty Chemical's
ability to utilize its net operating loss carryovers to offset future income
would generally be subject to an annual limitation equal to the value of
Specialty Chemical's equity immediately before such ownership change multiplied
by the then applicable long-term tax-exempt rate applicable to ownership
changes, which is currently 4.71% for ownership changes occurring in February,
1999. Such limitation would severely limit Specialty Chemical's ability to use
its net operating loss carryovers on a current basis. As of December 31, 1997,
Specialty Chemical's net operating loss carryovers were approximately
$11,335,000. It should be noted, however, that to the extent unused,
approximately $3,060,000 of Specialty Chemical's net operating loss carryovers
will expire on December 31, 1999, approximately $2,475,000 of Specialty
Chemical's net operating loss carryovers will expire on December 31, 2000 and
approximately $915,000 of Specialty Chemical's net operating loss carryovers
will expire on December 31, 2001.
PLAN OF DISTRIBUTION
The new notes offered pursuant to the rights offering are being offered by
Specialty Chemical directly to its holders of common stock and its holders of
original notes. We estimate that our expenses in connection with the rights
offering will be $200,000.
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<PAGE> 35
Specialty Chemical will pay the fees and expenses of National City Bank, as
subscription agent, and has also agreed to indemnify the subscription agent from
any liability which it may incur in connection with the rights offering,
including liabilities under the Securities Act.
Rights holders who desire to purchase new notes in the rights offering are
urged to complete, date and sign the subscription certificate accompanying this
prospectus and return it to the subscription agent on or before March 12, 1999,
together with payment in full of the aggregate subscription price. See "The
Rights Offering -- Exercise of Rights." The rights are nontransferable. See
"Prospectus Summary -- Terms of the Rights -- Nontransferability of Rights." Any
questions concerning the procedure for subscribing for the purchase of new notes
should be directed to the subscription agent.
THE ALLOCATION AGREEMENT AND VOTING AGREEMENT
ALLOCATION AGREEMENT
Edwin Roth, Corey Roth, CEW Partners and Martin Trust entered into the
allocation agreement as of February 1, 1999. The allocation agreement provides
that the aggregate principal amount of new notes received by all parties to the
allocation agreement will be re-allocated. The reallocation will result in each
of (i) CEW Partners, (ii) Martin Trust and (iii) Edwin Roth and Corey Roth
receiving one-third of the total aggregate principal amount of new notes
purchased in the rights offering by all parties to the allocation agreement. See
"Prospectus Summary -- Terms of The Rights -- Allocation and Voting Agreements"
and "Risk Factors -- Concentration of Ownership of Specialty Chemical."
Under the allocation agreement, CEW Partners and Martin Trust will be
entitled to receive a greater principal amount of new notes after the
reallocation than they would otherwise receive as a result of the rights
offering. Edwin Roth and Corey Roth will be able to subscribe for the maximum
principal amount of new notes that they are entitled to through the basic
subscription privilege and the oversubscription privilege with the knowledge
that some portion of those new notes will be reallocated to, and paid for by,
CEW Partners and Martin Trust.
For example, if no other stockholders exercise their rights and the Roths,
CEW Partners and Martin Trust purchase all the principal amount of new notes,
the Roths will receive approximately $565,573 principal amount of new notes, CEW
Partners will receive approximately $397,213 principal amount of new notes and
Martin Trust will receive approximately $397,213 principal amount of new notes.
Under the allocation agreement, CEW Partners and Martin Trust will each receive,
and pay cash or other consideration to the Roths for, $56,120 principal amount
of the new notes received by the Roths. Each party will ultimately own $453,333
principal amount of new notes.
Further, through the voting agreement, as discussed below, Edwin Roth and
Corey Roth are ensured of voting control of the shares of common stock that
those reallocated new notes may be converted into. No other consideration was
given by any party for entering into the allocation agreement.
1999 VOTING AGREEMENT
Edwin Roth, Corey Roth, CEW Partners and Martin Trust entered into the
voting agreement as of February 1, 1999. In the voting agreement, CEW Partners
and Martin Trust have agreed:
(1) to vote their shares of common stock in accordance with the
recommendation of Edwin Roth and Corey Roth or, absent such
recommendation, in accordance with the recommendation of Specialty
Chemical's board of directors;
(2) to vote their shares in favor of the nominees for the board recommended
by Edwin Roth and Corey Roth or, absent such recommendation, for
Specialty Chemical's nominees to the board; and
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<PAGE> 36
(3) not to participate in certain activities which could be related to a
change of control of Specialty Chemical.
As part of the voting agreement, Edwin Roth and Corey Roth have both agreed
to vote their shares of common stock to elect Geoffrey Colvin and Terence
Conklin, as designees of CEW Partners and Martin Trust, to the board, each of
whom have been serving as directors of Specialty Chemical since 1996 pursuant to
the agreement dated August 30, 1996 and described below.
CEW Partners and Martin Trust also agreed not to participate in certain
change of control activities. The prohibited activities are:
(1) conducting, encouraging, soliciting or in any way participating in, any
solicitation of proxies or any election contest with respect to
Specialty Chemical; and
(2) encouraging, soliciting or in any way participating in the formation of
any "person," as defined in Section 13(d)(3) of the Exchange Act, which
owns, or seeks to acquire beneficial ownership of Specialty Chemical's
voting stock. See "Risk Factors -- Control of Specialty Chemical By
Certain Stockholders."
The voting agreement also restricts the transferability of shares of common
stock or new notes owned by Edwin Roth and Corey Roth, CEW Partners and Martin
Trust. None of the parties to the voting agreement may sell any shares or new
notes owned by them without first offering the other parties an opportunity to
purchase the shares or new notes on the same terms as those being offered by a
third party. In addition, neither CEW Partners nor Martin Trust may sell,
transfer, assign, grant an option with respect to or otherwise dispose of, any
shares or new notes, or enter into any agreement or understanding with respect
to the foregoing, to any person or group (1) which has filed, or intends to
file, a Schedule 13D or 13G with the Commission with respect to any class of
shares of capital stock of Specialty Chemical or (2) is known by either of them
to be accumulating stock on behalf of or acting in concert with any person or
group contemplated by clause (1) above.
However, CEW Partners and Martin Trust may dispose of shares or new notes
through:
(1) a tender or exchange offer by a person other than CEW Partners and
Martin Trust or their respective affiliates if such person has been
approved by Edwin Roth and Corey Roth;
(2) a brokers' transaction meeting certain volume limitations;
(3) a bona fide pledge of shares to a major brokerage firm or financial
institution or an affiliate thereof not affiliated with it for money
borrowed;
(4) a transaction involving Specialty Chemical; or
(5) a transaction involving any one of their affiliates or a tax-exempt
charitable institution, provided that the transferee must agree to be
bound by the terms of the voting agreement.
The voting agreement expires on the earliest of (1) March 31, 2000, (2) the
date Edwin Roth is no longer the Chief Executive Officer, or (3) the mutual
agreement of the parties.
Other than the agreements regarding the voting of shares, the prohibition
of change of control activities and the restrictions on transfer of the shares
and new notes, no other consideration was given by any party for entering into
the voting agreement.
1996 VOTING AGREEMENT
In connection with the offering of the original notes in 1996, Edwin Roth
and Corey Roth, CEW Partners and Martin Trust entered into an agreement dated
August 30, 1996 whereby the parties agreed to
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<PAGE> 37
vote their common stock and any common stock they receive upon conversion of the
original notes in the same manner as described above with respect to the 1999
voting agreement. This agreement also restricts the parties' transfer of common
stock and original notes in the same manner as described above with respect to
the 1999 voting agreement. This agreement contains termination provisions that
are identical to those contained in the 1999 voting agreement. Other than the
agreements and restrictions contained in the 1996 voting agreement, no other
consideration was exchanged by the parties.
LEGAL MATTERS
Certain matters with respect to the validity of the issuance of the new
notes will be passed on for Specialty Chemical by Benesch, Friedlander, Coplan &
Aronoff LLP, counsel for Specialty Chemical. George N. Aronoff, the Secretary
and a Director of Specialty Chemical, is a partner of Benesch, Friedlander,
Coplan & Aronoff LLP. As of February 11, 1999, Mr. Aronoff beneficially owned
18,717 shares of common stock.
EXPERTS
The audited financial statements of Specialty Chemical incorporated by
reference in this prospectus and elsewhere in this registration statement, to
the extent and for the periods indicated in their report, have been examined by
Grant Thornton LLP, independent certified public accountants, and are
incorporated by reference herein in reliance upon the authority of said firm as
experts in auditing and accounting in giving said reports.
The financial statements of Hysan Corporation as of December 31, 1996 and
1995, and for each of the years in the three-year period ended December 31,
1996, have been incorporated by reference in this prospectus and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing.
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NO PERSON, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
SPECIALTY CHEMICAL. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH IT RELATES IN ANY JURISDICTION WHERE, OR TO ANY PERSON WHOM,
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF SPECIALTY CHEMICAL SINCE THE DATE OF THIS
PROSPECTUS OR THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AS OF
ANY TIME AFTER ITS DATE.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 2
Risk Factors........................... 8
Use of Proceeds........................ 13
The Company............................ 14
The Rights Offering.................... 18
Description of Capital Stock........... 24
Description of the New Notes........... 25
Price Range of Common Stock............ 30
Dividend Policy........................ 31
Certain Federal Income Tax
Considerations....................... 31
Plan of Distribution................... 34
The Allocation Agreement and Voting
Agreement.............................. 35
Legal Matters.......................... 37
Experts................................ 37
</TABLE>
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$1,360,000
SPECIALTY CHEMICAL
RESOURCES, INC.
6% CONVERTIBLE SUBORDINATED
NOTES DUE 2009
------------------------
PROSPECTUS
------------------------
FEBRUARY 16, 1999
- ---------------------------------------------------------
- ---------------------------------------------------------
