<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the calendar year ended December 31, 1998 Commission file no 1-11013
----------------- -------
SPECIALTY CHEMICAL RESOURCES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 34-1366838
------------------------ --------------------------
(State of incorporation) (I.R.S. Employer I.D. No.)
9055 S. Freeway Drive, Macedonia, Ohio 44056
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (330) 468-1380
--------------
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.10 per share.
Securities registered pursuant to Section 12(g) of the Act: None
----
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __x__ No _____
Indicate by checkmark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes _____ No __x___
The aggregate market value of voting stock held by nonaffiliates of the
Registrant as of February 12, 1999 was $643,857.
As of February 12, 1999, 4,257,101 shares of the Registrant's Common Stock
were outstanding.
Documents Incorporated by Reference: The registrant's definitive proxy statement
for its 1999 Annual Meeting of Stockholders, which the registrant intends to
file with the Securities and Exchange Commission within 120 days of the close of
its fiscal year end, December 31, 1998, is incorporated by reference in Part III
of this Annual Report on Form 10-K from the date of filing of such document.
Page 1 of 22
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL. Specialty Chemical Resources was incorporated in Delaware in 1982 for
the purpose of operating family oriented restaurants and entertainment centers.
By 1988, management had concluded that enhanced growth required a change in the
Company's business focus from the operation of the restaurants to the building
of an industrial corporation. As a result, Specialty Chemical Resources, Inc.
acquired Aerosol Systems, Inc. ("ASI"), effective December 31, 1988, for an
aggregate purchase price of approximately $40,000,000, consisting of
approximately $14,750,000 in cash as payment for stock and approximately
$25,250,000 of assumed liabilities. ASI was merged into Specialty Chemical
Resources, Inc. on December 30, 1992.
Specialty Chemical Resources, Inc.'s principal executive offices are
located at 9055 S. Freeway Drive, Macedonia, Ohio 44056; telephone (330)
468-1380. Unless the context otherwise indicates, the terms "Company" and
"Specialty Chemical" refer to Specialty Chemical Resources, Inc.
BUSINESS. 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 Specialty Chemical develops a
formula, it retains the right to sell that formula to any of its 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 its employees. These formulas are not generally patented.
In 1998, Specialty Chemical sold approximately 27 million units.
Approximately 99% of Specialty Chemical's sales are of products manufactured by
Specialty Chemical, and 92% of sales are of products sold under its 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, Specialty Chemical
produces and sells its 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. Specialty Chemical provides 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.
Page 2 of 22
<PAGE> 3
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 its 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. The
Company believes, based on its customer experience and knowledge of the
industry, that it is the only custom packager in its 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. It acquired these assets for a
purchase price of $7,432,000, including expenses relating to the transaction.
Specialty Chemical 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 the indemnification
obligations from Hysan. Specialty Chemical financed this acquisition by
borrowing under its 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.
PRODUCT DEVELOPMENT PROCESS. The product development process typically takes six
to nine months from new product concept origination to completion. Existing
formulations may also serve as the basis for new products, in which case the
product development process may be substantially accelerated.
Specialty Chemical's product development activities typically originate
through the identification by its sales or research and development personnel of
a perceived product need for its customers and its potential customers.
Specialty Chemical also develops products by utilizing technology developed by
third parties. After the product concept is originated, the Company develops the
formula and manufactures samples of the product. Specialty Chemical's sales
staff then demonstrates the product for its customers, who field test the
product through end-users. Concurrently, our research and development personnel
conduct product stability tests in its laboratories. Our research and
development personnel make any necessary adjustments resulting from customer and
end-user comments. These adjustments may include changes in formulation, valve,
spray pattern and propellant chemistry. Then, our graphic arts department, with
customer input, designs the label, both for the aerosol cans and for the carton
in which it is packaged. Specialty Chemical's package and container design
services include artistic design, writing of product instructions, product name
creation and regulatory compliance, if necessary. Alternatively, the product
concept origination may be initiated by the customer with the product
development activity continuing in substantially the same way from that point
forward.
Page 3 of 22
<PAGE> 4
PRODUCTS. Aerosol containers are a convenient, effective and efficient way to
deliver thousands of products. The containers, 3.1 billion of which were sold in
the United States in 1997, are generally made of steel or aluminum and can be
recycled. Since 1978, when the use of chlorofluorocarbons ("CFCs") as a
propellant was discontinued in the United States, Specialty Chemical's aerosol
products generally have used compressed gases, such as carbon dioxide and
nitrogen, and liquified gases, such as propane and butane, as propellants.
Specialty Chemical's aerosol containers generally range from 4 ounces to
24 ounces in capacity. Specialty Chemical combines its chemical formulation, an
appropriate propellant, dip tube, valve, actuator, cap and the aerosol container
to produce the final product.
Products developed by Specialty Chemical for the automotive service and
industrial maintenance markets include cleaners, degreasers, lubricants and
paints. The Company has also developed specialized products for the automotive
service market, such as its patented non-flammable tire inflator, carburetor,
brake and choke cleaners, gasket and trim adhesives, undercoatings, silicones,
belt dressings, and fabric protectors. Specialized products for the industrial
maintenance market include molybdenum lubricants, food-grade lubricants and
cleaners, release agents and protectors for injection and cast molding
applications as well as EPA registered disinfectants and deodorants.
Specialty Chemical has developed a number of products using barrier
packages. In a typical aerosol, the propellant and product are mixed and
released from the can as a foam or spray. In a barrier package, the product is
separated from the propellant by a liner (a can within a can) and only the
product, and not the propellant, is released. This is important with products
that cannot be mixed with a propellant, such as room temperature vulcanizing
silicones (RTVs), or products which are too viscous to be propelled through a
standard aerosol, such as caulking compounds.
Specialty Chemical also produces and sells several products under its own
brand names. The Taylor Made Products or TMP brand, which includes paints,
cleaners, lubricants and degreasers, is sold principally to the automotive
do-it-yourself market through chain store merchandisers. The Aerosol Maintenance
Products or AMP and Hysan brands are sold principally to janitorial and
sanitation supply distributors and include cleaning, deodorizing, and
disinfectant products.
MARKETING AND DISTRIBUTION. A combination of a full time inside sales force and
the use of manufacturer's representative agencies carry out Specialty Chemical's
marketing and sales activities. The inside sales force focuses on the sale of
the Company's custom packaging services while the manufacturer's representatives
primarily sell the Company's own branded products. Specialty Chemical's
customers are distributors of a broad range of products to the automotive
service, industrial maintenance and janitorial/sanitation supplies market.
Specialty Chemical's efforts to obtain sales involve detailed pre-production and
ongoing involvement with a customer. Specialty Chemical seeks to develop
long-term customer relationships. More than 40% of Specialty Chemical's current
sales volume is attributable to customers who have been with the Company for
more than 10 years. Specialty Chemical's active core customers number more than
350, with no single customer accounting for 10% of total Company net sales.
Specialty Chemical's customers are located primarily in the eastern two-thirds
of the United States.
Page 4 of 22
<PAGE> 5
RESEARCH AND DEVELOPMENT. Specialty Chemical's research and development
activities are directed toward aerosol product development and improvement,
product screening and custom applications designed to meet the specific
requirements of its customers. The Company's research and development activities
involve both the formulation of proprietary chemical compounds and the
development of associated aerosol delivery systems. The Company works with its
customers to develop new products and to modify existing products for them. It
also seeks to develop new, proprietary products such as its patented fuel
injection system cleaner, water-carried aerosol products, and patented
non-flammable tire inflators. Technical activities are carried out by a staff of
chemists and laboratory technicians. Specialty Chemical holds several registered
trademarks and patents.
MANUFACTURING. The manufacturing facility contains seven production lines. Each
line has different characteristics, providing Specialty Chemical with
flexibility to accommodate the short production runs required for many
customized products, the longer high speed production runs, and the specialized
barrier packaging production. In addition, Specialty Chemical is able to package
products in one gallon cans, five gallon pails, and fifty-five gallon drums.
In 1998, Specialty Chemical sold approximately 27 million units. The
handling of large volumes of liquid propellants requires that the manufacturing
area be compartmentalized, permitting the isolation of each step in the
production process. Control systems automatically shut down operation if safety
limits are exceeded. Raw materials are stored within the plant, while
propellants and most solvents are stored in above-ground tanks outside the
plant. The raw materials are moved as needed to the mixing area and the product
is piped into a separate filling area where cans are filled. The cans are then
conveyed into propellant charging rooms, where the propellant is loaded and the
cans are crimped (sealed) automatically. After leaving the propellant charging
room, the cans are run through a hot water test tank to test for leaking and
container integrity at elevated temperatures. In cases where the can label has
not been preprinted, a label is applied. The cans are coded, then packed and
palletized for shipment or, in some cases, stored in the warehouse on racks for
order picking.
COMPETITION. The aerosol industry is highly fragmented geographically, along
product lines and by production capacity. Within these areas, the industry is
highly competitive. Although many companies perform some of the individual
operations and services carried out by Specialty Chemical, and some of its
competitors have greater financial and other resources, Specialty Chemical
believes it has few competitors that offer the same type of technical
assistance, product formulation and packaging. Further, the Company's
competitors do not routinely offer to produce as few as 100 cases of product and
to deliver products within four weeks. These services are provided by Specialty
Chemical. Most of Specialty Chemical's customers do not have their own aerosol
research or production facilities. Because of the highly specialized nature of
the business, price, while important, is often not the principal competitive
factor. Specialty Chemical believes that the principal competitive factors in
the industry are quality of product, on-time delivery and the product's ease of
use by its end-user.
Page 5 of 22
<PAGE> 6
EMPLOYEES. As of March 5, 1999, Specialty Chemical employed approximately 144
people on a full-time basis, 52 of whom are salaried and the remainder are
hourly. All hourly employees are represented by one collective bargaining unit
with one collective bargaining agreement. The current collective bargaining
agreement expires in November, 2000. Specialty Chemical considers its
relationship with its employees to be good. There have not been any work
stoppages or slowdowns due to labor related problems.
ENVIRONMENTAL MATTERS. 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. Management believes that
the business, operations and facilities are being operated in substantial
compliance in all material respects with applicable environmental and health and
safety laws and regulations. As a result, expenditures for compliance with
existing federal, state and local environmental laws are not expected to have a
material effect upon the earnings or competitive position of Specialty Chemical.
Capital expenditures for environmental control facilities for the next two
fiscal years (exclusive of expenses that are expected to be substantially
reimbursed) are not expected to be material. See "Legal Proceedings". Such
costs, if any, should comprise a part of normal purchases of new or replacement
equipment or facilities. However, management cannot predict the effect, if any,
of environmental laws that may be enacted in the future.
ITEM 2. PROPERTIES
PROPERTY. Specialty Chemical's Macedonia production facility is leased. Under a
lease amendment dated July 25, 1994, upon completion of certain leasehold
improvements, the term of the Macedonia lease was extended through the year
2005, with four (4) five-year unilateral options to extend the lease through the
year 2025. On October 6, 1995 Specialty Chemical purchased its previously leased
distribution center in Macedonia, Ohio. Specialty Chemical moved its executive
offices in May, 1997 from the leased space adjacent to the Macedonia production
facility to office space which was available at its distribution center which
was purchased in 1995.
ITEM 3. LEGAL PROCEEDINGS
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 Specialty Chemical's acquisition of it in 1988. Aerosol
Systems now operates as a division of Specialty Chemical.
Page 6 of 22
<PAGE> 7
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 Specialty Chemical violates 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 the Company's 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 Specialty Chemical's appeal of this matter before
the Environmental Board of Review. On May 3, 1995, the Ohio EPA issued a
supplemental closure plan approval letter that established certain deadlines
with regard to the implementation of a Groundwater Extraction and Treatment
System, a Soil Vapor Extraction System, and certain other closure plan
requirements which the Company agreed to implement. As of December 31, 1998, the
Company believes 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, the Company believes that necessary remedial activities have been
substantially completed.
Notwithstanding the progress on the closure plan, on October 15, 1997
Specialty Chemical received a letter from the Ohio Attorney General's Office
alleging that it has failed to comply with certain terms of the 1990 consent
order. The State alleges that Specialty Chemical has committed numerous
violations of applicable 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. Specialty Chemical 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 Specialty
Chemical 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 its alleged violations of the
1990 consent order. Such negotiations are currently in progress.
Page 7 of 22
<PAGE> 8
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
it 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, because current permits allow the filling part of each line
to be a separate emissions unit. The Company does not believe that odors from
its Macedonia plant or dust from its parking lot constitute a nuisance as
defined by applicable law. However, the Ohio EPA's request to re-evaluate and
re-submit Specialty Chemical's 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
the Company 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. The Company has 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 Specialty Chemical from a $500,000 post-closing
escrow account for alleged expenses incurred for post-transaction storage of
equipment purchased in the transaction. Specialty Chemical has denied the
material allegations in the arbitration demand and has 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.
Page 8 of 22
<PAGE> 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
EXECUTIVE OFFICERS
Set forth below is certain information concerning the Executive Officers of
Specialty Chemical Resources, Inc. Officers are elected annually by the Board of
Directors of the Company, and serve at the pleasure of the Board of Directors
that elects them.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Edwin M. Roth 71 C.E.O., Chairman of the
Board, and Director
Corey B. Roth 41 President, Chief Operating
Officer, and Director
David F. Spink 48 Vice President, Chief Financial
Officer, Treasurer, and Asst.
Secretary
</TABLE>
Mr. Edwin M. Roth has been a Director and President of the Company and
Chairman of the Board of Directors of the Company since its formation in June
1982. Mr. Roth was Chief Executive Officer of ASI from the time of its
acquisition in December 1988 until its merger into the Company in December 1992.
Mr. Roth is the father of Mr. Corey B. Roth.
Mr. Corey B. Roth has been President of the Company since June 1997, a
Director since October 1984 and Asst. Secretary since June 1992. Mr. Roth served
as Treasurer from November 1987 until January 30, 1990 and from June 1992 to
June 1997. Mr. Roth served as Secretary from October 1984 until June 1992.
Mr. Roth was Vice President of Administration of ASI from April 1989 until
December 1992. Mr. Roth is the son of Mr. Edwin M. Roth.
Mr. David F. Spink joined the Company in 1996. In June 1997 he was elected
Chief Financial Officer and Treasurer. He has been Vice President of the Company
since June 1996. Prior to joining the Company, Mr. Spink worked 17 years at
B.F. Goodrich Company in a progression of financial positions. In 1992 he was
Controller of the Research Division for Goodrich. From 1993 to 1994 Mr. Spink
was Director of Planning and Analysis for that corporation.
Page 9 of 22
<PAGE> 10
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Common Stock is listed on the American Stock Exchange ("AMEX") under
the symbol "CHM".
During 1998, the closing sales prices on the AMEX ranged from $0.19 to
$1.44. During 1997, the closing sales prices on the AMEX ranged from $1.00 to
$2.50. The following table sets forth the high and low sale prices by quarter
for 1998 and 1997.
<TABLE>
<CAPTION>
CALENDAR YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997
---------------- ----------------
QUARTER HIGH LOW HIGH LOW
------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter........ 1.438 1.000 2.500 1.375
Second Quarter....... 1.063 .750 2.188 1.250
Third Quarter........ 1.000 .188 2.000 1.250
Fourth Quarter....... .938 .250 1.500 1.000
</TABLE>
As of February 12, 1999, the closing price for the Common Stock on AMEX was
$0.25. As of February 12, 1999, there were 550 holders of record of Common Stock
and 4,257,101 shares of Common Stock issued and outstanding.
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 of Directors and will depend, among other
factors, on earnings, capital requirements, and the operating and financial
condition of the Company. The terms of Specialty Chemical's outstanding loans
currently prohibit it from paying cash or stock dividends to its stockholders.
Specialty Chemical has been notified by AMEX that its Common Stock may be
delisted from trading on the exchange. If the shares of Common Stock are
delisted from AMEX and the shares are not approved for listing on another
exchange or NASDAQ, stockholders may find it more difficult to dispose of, or to
obtain accurate price quotations of, Specialty Chemical's Common Stock. As a
result, the market price for Specialty Chemical's Common Stock may be adversely
affected.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the fiscal years 1994 through 1998 are
derived from Specialty Chemical's audited financial statements. This information
should be read in conjunction with the Company's Financial Statements and Notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations, each of which is included elsewhere in this Report.
Page 10 of 22
<PAGE> 11
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Net sales $35,557 $ 40,283 $38,914 $43,419 $44,931
Cost of goods sold 29,453 33,628 32,783 39,123 38,066
------- -------- ------- ------- -------
Gross profit 6,104 6,655 6,131 4,296 6,865
Selling, general and
administrative expenses 6,467 6,903 6,067 7,648 6,995
Amortization of intangibles 416 997 907 869 874
Loss on impairment(4) -- 18,501 -- -- --
Restructuring charges -- -- -- -- 954
------- -------- ------- ------- -------
Operating profit (loss) (779) (19,746) (843) (4,221) (1,958)
Other income (expense)
Interest expense (1,656) (1,405) (1,059) (779) (560)
Other -- 66 11 10 39
------- -------- ------- ------- -------
(1,656) (1,339) (1,048) (769) (521)
------- -------- ------- ------- -------
Earnings (loss) before income
taxes and extraordinary item (2,435) (21,085) (1,891) (4,990) (2,479)
Income tax benefits (expense) -- -- 128 2,981 840
------- -------- ------- ------- -------
Earnings (loss) before
extraordinary item (2,435) (21,085) (1,763) (2,009) (1,639)
Extraordinary Item:
Gain (loss) due to fire
(net of income taxes) -- -- -- -- 2,265
------- -------- ------- ------- -------
Net earnings (loss) $(2,435) $(21,085) $(1,763) $(2,009) $ 626
======= ======== ======= ======= =======
SHARE DATA:
Earnings (loss) per common share:
Before extraordinary item $ (0.63) $ (5.43) $ (0.45) $ (0.51) $ (0.42)
Extraordinary Item -- -- -- -- 0.58
------- -------- ------- ------- -------
Net earnings (loss) $ (0.63) $ (5.43) $ (0.45) $ (0.51) $ 0.16
======= ======== ======= ======= =======
Dividends paid -- -- -- --
Weighted average common shares
outstanding 3,882 3,882 3,946 3,939 3,935
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital $ 5,799 $ 6,415 $ 7,550 $ 7,142 $ 6,420
Total assets $25,169 $ 29,518 $43,923 $47,272 $44,558
Long-term debt $16,297(2) $ 15,446(2) $12,246(2) $10,399 $ 4,512
Redeemable preferred stock(3) -- -- -- $ 350 --
Stockholders' equity $ 3,062 $ 5,497(4) $26,562 $28,444 $30,439
</TABLE>
Page 11 of 22
<PAGE> 12
(1) At December 31, 1998, the Company had approximately $13,355,000 of net
operating loss carryforwards available for federal income tax purposes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Income Taxes and Net Operating Loss Carryforwards" regarding
limitations on the usage of these carryforwards.
(2) Includes long-term obligations (less current maturities), and convertible
subordinated debentures, which are convertible at the option of the holder
into shares of the Company's common stock any time after 2001. (See Note D
to Financial Statements).
(3) On October 6, 1995, the Company issued 3,500 shares of convertible preferred
stock to an officer/director at a $100 per share price, which aggregated
$350,000. On October 16, 1996, the Company redeemed all of its 3,500 shares
of convertible preferred stock for $350,000 from the proceeds received in
conjunction with the convertible subordinated debentures. (See Notes D and G
to Financial Statements.)
(4) In accordance with FAS 121, the Company recorded a non-cash charge of
$18,501,000 which is reflected as a reduction in the carrying amount of
goodwill.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL. This discussion should be read in conjunction with the information
contained in the Financial Statements and Notes thereto of Specialty Chemical
Resources, Inc. contained elsewhere in this Report.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of net
sales of certain items included in Specialty Chemical's Statement of Operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Net Sales.............................. 100.0% 100.0% 100.0%
Cost of goods sold................... 82.8% 83.5% 84.2%
----- ----- -----
Gross profit........................... 17.2% 16.5% 15.8%
Selling, general and administrative
expenses............................. 18.2% 17.1% 15.6%
Amortization of intangibles............ 1.2% 2.5% 2.3%
Impairment of long lived assets........ - 45.9% -
----- ----- -----
Operating profit (loss)................ (2.2%) (49.0%) (2.2%)
Interest and expense................... 4.7% 3.5% 2.7%
</TABLE>
Page 12 of 22
<PAGE> 13
FISCAL YEAR ENDED DECEMBER 31, 1998 AS COMPARED TO 1997
Net sales of $35,557,000 for the year ended December 31,1998 were
$4,726,000 below the comparable period in the prior year. The reduction in net
sales in 1998 is entirely due to reduced volume that resulted primarily from
production shortfalls in the last six months of 1997 that caused a loss of
customers and a loss of business from several continuing customers. Reduced
sales to the Company's top ten customers in 1998 compared to 1997 accounted for
approximately 50% of the 1998 sales reduction. Average pricing in 1998 was
essentially unchanged from 1997.
Cost of goods sold for the year ended December 31, 1998 decreased by
$4,176,000 as compared to the cost of goods sold in 1997. Approximately 94% of
the decrease was due to decreased sales volume in 1998. The remainder of the
decrease was due to improved material and labor utilization efficiencies in
1998. Cost of goods sold decreased as a percentage of sales from 83.5% to 82.8%
for the years ended December 31, 1997 and 1998, respectively. All of the
decrease was due to improved material utilization efficiency.
Selling, general and administrative expenses were $6,467,000 for the year
ended December 31, 1998, or 18.2% of net sales. This compares with selling,
general and administrative expenses of $6,904,000, or 17.1% of sales for the
year ended December 31, 1997. Approximately 73% of the decrease in selling,
general and administrative expenses is due to cost reduction programs initiated
throughout 1998. The remaining 27% of the decrease is due to volume related
reductions in shipping costs and commissions.
Amortization of intangibles was $416,000 in 1998 compared to $997,000 for
1997. The reduction is due to lower amortization of goodwill resulting from the
1997 writedown of goodwill. At December 31, 1997, in accordance with FAS 121,
Specialty Chemical determined that an impairment of long-lived assets existed
and based on a fair value measurement, recorded a non-cash charge of $18,501,000
which was reflected as a reduction in the carrying value of goodwill. See
"Fiscal Year Ended December 31, 1997 As Compared to 1996".
On a quarterly basis in 1998 and at December 31, 1998, Specialty Chemical
has applied a consistent method of assessing impairment of long-lived assets in
accordance with FAS 121. These tests of impairment in 1998 and at December 31,
1998 indicated that based on management's best estimates for future cash flows,
no impairment exists and, therefore, no further charges to income have been
recorded in 1998.
Interest expense for the year ended December 31, 1998 was $1,656,000, or
4.7% of net sales. This compares to interest expense for the year ended
December 31, 1997 of $1,407,000, or 3.5% of net sales. The increase in interest
expense is due primarily to a full year of increased borrowings under the senior
credit facility that followed the May 22, 1997 acquisition of the assets of
Hysan Corporation and the addition of an aggregate $1.5 million of subordinated
12% notes on June 15, 1998 for loans made to the Company by Edwin Roth, CEW
Partners and Martin Trust. See "Liquidity and Capital Resources".
Page 13 of 22
<PAGE> 14
Specialty Chemical recorded a net loss for the year ended December 31, 1998
of $2,435,000, or a $0.63 loss per share on weighted average shares outstanding
of 3,882,262. This compared to a net loss of $21,085,000, or a $5.43 loss per
share on weighted average shares outstanding of 3,882,264 for the same period in
1997. In 1997, the charge for impairment of long-lived assets accounted for
$18,501,000 of the loss, or a $4.77 loss per share. Without the impairment
charge, the 1997 net loss would have been $2,584,000, or a $0.67 loss per share.
FISCAL YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO 1996
The Company's results for the fiscal year ended December 31, 1997 include
the results attributable to the Company's acquisition of the Hysan Assets as of
May 22, 1997. Net sales of $40,284,000 for the year ended December 31, 1997 were
$1,370,000, or 3.5%, above the comparable period in fiscal year 1996. $4,867,000
of the fiscal year 1997 net sales were attributed to the acquisition of the
Hysan Assets. Excluding acquisition related sales, net sales for the year ended
December 31, 1997 were $35,417,000, which was $3,497,000, or 9.0%, below the
comparable period in the prior year. This reduction in net sales for the year
was due primarily to production shortfalls caused by the difficulty of
integrating the Hysan operations.
Cost of goods sold for the year ended December 31, 1997 increased by
$845,000 as compared to cost of goods sold for the same period in the prior
year. All of this increase was due to increased sales unit volume during the
year ended December 31, 1997, attributable to the acquisition of Hysan. Cost of
goods sold decreased as a percentage of net sales from 84.2% to 83.4% for the
years ended December 31, 1996 and 1997, respectively. The decrease as a percent
of net sales was due primarily to higher unit pricing in 1997.
Selling, general and administrative expenses were $6,904,000 for the year
ended December 31, 1997, or 17.2% of net sales. Selling, general and
administrative expenses were $6,067,000, or 15.6% of net sales for the year
ended December 31, 1996. The increase in selling, general and administrative
expenses was due primarily to increased shipping costs ($334,000) as a result of
operational disruptions and increased sales salary and commission costs
($185,000) both related to the Hysan acquisition.
At December 31, 1997, in accordance with FAS 121, Specialty Chemical
estimated its undiscounted cash flows from operations, which results indicated
that an impairment of long-lived assets existed and that a write-down to fair
value was required. Specialty Chemical utilized an independent third party
appraiser to determine fair value based upon management's best estimate of
future cash flows from operations discounted at a rate commensurate with the
risks involved. For the projections, management used historical earnings before
interest, tax, depreciation and amortization, adjusted for non-recurring
expenses, and projected 5% annual growth for a forty-year valuation period. The
valuation used a discount rate of 9.1% based on a weighted average cost of
capital. Based upon the valuation performed, Specialty Chemical recorded a
non-cash charge of $18,501,000 which is reflected as a reduction in the carrying
amount of goodwill.
Page 14 of 22
<PAGE> 15
Specialty Chemical has historically applied a consistent method of
assessing impairment of long-lived assets in accordance with FAS 121. The
Company has, on a quarterly and annual basis, computed projected cash flows from
operations, based on management's best estimates, including depreciation,
amortization and interest charges in conjunction with the test for impairment.
The trends in 1997 and factors that were considered in the quarterly cash flow
projections and impairment tests which ultimately led to the adjustment in the
fourth quarter of 1997 are described below.
In the first quarter of 1997 there was reasonably strong cash flow from
operations consistent with projections and the assessment determined that no
impairment existed. In the second quarter of 1997, Specialty Chemical was in the
process of acquiring Hysan Corporation, which Specialty Chemical believed would
enhance its future cash flow projections based upon the synergy of the
acquisition. By the third quarter, Specialty Chemical was starting to experience
difficulty in consolidating the Hysan acquisition, but was still projecting an
increase in cash flow from the synergy of the acquisition. By the fourth
quarter, Specialty Chemical realized that it was now unable to bring about the
cost savings and efficiencies and additional volume that it had anticipated with
the Hysan acquisition. The impairment measurement in the fourth quarter of 1997
was the first quarter where the cash flow from operations, after adding back
interest, depreciation and amortization was no longer showing recoverability of
the long-lived assets. During the fourth quarter, operating results decreased
precipitously with production shortfalls that caused a decrease in sales from a
loss of customers and an increase in selling, general and administrative
expenses. The combination of decreased sales and increased expenses resulted in
increased losses and reduced cash flows in the fourth quarter of 1997. Further,
the loss of customers caused management to reduce its projections for future
sales growth, thereby adversely affecting projections for future cash flows. The
resulting estimates of undiscounted cash flows from operations indicated that an
impairment of long-lived assets existed.
Interest expense for the year ended December 31, 1997 was 3.5% of net sales
versus 2.7% for the comparable period in the prior year. Interest expense was
$1,405,000 for the year ended December 31, 1997, as compared to $1,059,000 for
the year ended December 31, 1996. The increase in interest expense is due to
increased borrowing under the Company's senior credit facility resulting from
the acquisition, as well as a full year accrual of interest on the Company's 6%
convertible subordinated debentures. See "Liquidity and Capital Resources".
The Company recorded a net loss for the year ended December 31, 1997 of
$21,085,000, or $5.43 per share on weighted average shares outstanding of
3,882,264. The charge for impairment of long-lived assets accounted for
$18,501,000 of the loss, or $4.77 per share. This compared to a net loss of
$1,762,713, or $.45 per share on weighted average shares outstanding of
3,945,618 for the same period in the prior year. The decrease in earnings for
the 1997 period is due primary to the non-cash charge incurred with the
impairment of long-lived assets (described above).
Page 15 of 22
<PAGE> 16
INCOME TAXES AND NET OPERATING LOSS CARRYFORWARDS
As of December 31, 1998, the Company had approximately $13,335,000 of net
operating loss carryforwards. However, due to a change in ownership during 1992,
the Company has an annual limitation of approximately $850,000 in the
utilization of its net operating loss carryforwards. In addition, due to losses
in 1998, 1997 and 1996 and the realization in 1994 of built-in gains,
approximately $12,000,000 of the carryforwards may be utilized beyond the
current annual limitation to offset future taxable income. Except as discussed
below, and subject to limitations of the Internal Revenue Code of 1986, as
amended (the "Code"), the NOLs should be available to offset future income of
the Company. Use of the NOLs to reduce future taxable income may subject the
Company to an alternative minimum tax.
Section 382 of the Code limits the amount of a corporation's taxable income
which can be offset by NOLs arising prior to an "ownership change". An ownership
change occurs when the percentage of stock owned by 5 percent shareholders, or a
group of 5 percent shareholders, increases over 50 percent over a three year
period. For example, an ownership change would occur if shares comprising more
than 50 percent of a corporation's stock are sold to new public shareholders. As
a result of the public offering in February 1992 and the ownership change that
occurred in connection therewith, the limitation on the utilization of the NOLs
imposed by Section 382 of the Code will apply. Under the limitation, the amount
of the Company's taxable income that each year can be offset by NOLs
attributable to periods before the ownership change cannot exceed the product of
(i) the fair market value of the stock of the Company immediately prior to the
ownership change and (ii) the long-term tax-exempt rate prescribed by the IRS.
The limitation imposed by the change in ownership may result in the Company
paying income taxes in excess of the amount payable in the absence of a change
in ownership.
The Company had no income tax expense for 1988 and 1997. The income tax
benefit of $127,600 for the year ended December 31, 1996 consists of
approximately $11,000 of current refundable federal income taxes and
approximately $138,600 of deferred tax benefits.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, Specialty Chemical's ratio of current assets to
current liabilities was 2.00 to 1 and the quick ratio (cash and cash
equivalents, and accounts receivable, divided by current liabilities) was .77
to 1. As of December 31, 1997, Specialty Chemical's ratio of current assets to
current liabilities was 1.75 to 1 and the quick ratio (described above) was .66
to 1. The increase in liquidity is due primarily to a $2,995,000 decrease in
accounts payable that corresponds to a $2,424,000 decrease in inventories and a
$962,000 increase in long-term debt.
During the twelve months ended December 31, 1998, Specialty Chemical
incurred $1,656,000 in interest expense, of which $266,000 was accrued to the
carrying value of the 6% Convertible Subordinated Debentures and $103,000 was
accrued to the carrying value of 12% subordinated notes to Edwin Roth, CEW
Partners and Martin Trust. In 1998 Specialty Chemical made interest payments
totaling $1,303,000. Accrued interest at December 31, 1998, was $92,000. Accrued
interest reflected in the carrying value of the 6% Convertible Subordinated
Debentures was $556,000 at December 31, 1998.
Page 16 of 22
<PAGE> 17
On May 22, 1997 the Company, in connection with the acquisition of the
Hysan Assets, executed an amendment to its current agreement (the "Credit
Agreement") with its senior lender Star Bank, N.A. The amended Credit Agreement
provided for a $15,000,000 facility which expired on December 31, 2000,
comprised of a revolving line of credit and three term loans. Borrowings on the
revolving line of credit and two of the term loans bear interest at the prime
rate plus 1.5%, subject to decrease if certain ratios and financial tests are
met. The first of these two term loans for $2,680,000 amortizes in forty-seven
consecutive monthly installments of $55,833 commencing June 1, 1998 with a
forty-eighth and final principal payment of $55,849. The second of these term
loans was paid off in 1997. The third term loan bears interest at the prime rate
plus 4.5%, subject to decrease if certain financial tests are met. This term
loan for $1,000,000 amortizes in seventeen consecutive monthly installments of
$55,555 commencing July 1, 1997 with an eighteenth and final installment of
$55,565.
Under the terms of the Credit Agreement, the Company is required to comply
with various covenants, the most restrictive of which relates to the maintenance
of certain financial ratios, levels of tangible net worth, limits on capital
expenditures and restrictions on distributions from the Company to its
stockholders. On April 14, 1998, the Company and the senior lender executed a
Second Amendment to the Credit Agreement whereby the senior lender revised the
various financial covenants and required that the Company provide an acceptable
plan to the bank to provide additional capital for the Company. On May 20, 1998
the Company and its senior lender executed a Third Amendment to the Credit
Agreement related to the implementation of the Company's recapitalization plan.
On November 12, 1998, the Company and its senior lender executed a Fourth
Amendment to the Credit Agreement, to allow the Company to issue $1,800,000 of
new Subordinated Convertible Notes pursuant to a rights offering to its
stockholders, to reduce the total credit facility from $15 million to $14
million, to revise repayment schedules for the two continuing term loans and to
revise certain financial covenants. The revised term loan repayment schedule
does not alter the monthly amount of the payments, but restructures the
application of the payments to pay off the higher interest bearing (prime +4.5%)
term loan first and then commence repayment of the lower interest (prime +1.5%)
term loan. On February 15, 1999, Specialty Chemical and its senior lender
executed a Fifth Amendment to the Credit Agreement reducing the amount of the
new Subordinated Convertible Notes from $1,800,000 to $1,360,000 and permitting
the issuance of three unsecured subordinated promissory notes to Edwin Roth,
Martin Trust and CEW Partners in the aggregate amount of $304,800.
Based on 1998 financial performance, the senior lender has revised the
various covenants in a Sixth Amendment to the Credit Agreement. The Company is
currently in compliance with all covenants set by the Sixth Amendment to the
Credit Agreement. Such amendment reduces the total loan facility from $14
million to $12 million and requires Specialty Chemical to obtain an additional
$1 million of cash contributions through either equity or unsecured subordinated
debt by June 30, 1999. Subsequent to Specialty Chemical's receipt of the cash
contribution, the senior lender will establish financial covenants beyond June
30, 1999. On April 14, 1999, Specialty Chemical received a commitment letter
from Edwin Roth, Martin Trust and CEW Partners to guarantee subordinated
indebtedness in the amount of the required cash contribution prior to
June 30, 1999.
Page 17 of 22
<PAGE> 18
As of December 31, 1998, approximately $176,000 was unused and available
under the Credit Agreement.
During January, 1998, the Company refinanced the mortgage on its
distribution center and corporate offices with a $1,125,000 note with a new
bank. The note, which bears interest at 8.75%, requires twelve monthly interest
only payments until February 1, 1999. Commencing on February 1, 1999, the note
requires 167 monthly principal and interest payments of $11,790, the final
payment being due on November 1, 2012. The borrowing is collateralized by a
facility which serves as the Company's distribution center and corporate
offices.
On May 20, 1998, the Company issued three $150,000 principal amount
subordinated promissory notes to Martin Trust, CEW Partners and Edwin M.
Roth, respectively (the "Investors"). Such notes were due June 22, 1998. On
June 15, 1998, the Company issued three $500,000 principal amount 12%
promissory notes subordinated to the bank (the "Subordinated Notes") to
such Investors in part to refinance the original notes issued on May 20,
1998. Such Subordinated Notes were originally due December 15, 1998, but
were extended to March 15, 1999. Interest accrued on the Subordinated Notes
through January 31, 1999 was paid in common stock of the Company on
February 11, 1999. The Investors and the Company agreed at the time these
loans were made that the Subordinated Notes would be refinanced with the
net proceeds of a pro rata rights offering of Company debt to its
stockholders and its holders of Original Notes (as defined below). On March
15, 1999, the Company completed an offering of subscription rights to
purchase an aggregate principal amount of $1,360,000 of 6% Convertible
Subordinated Notes due in ten years (the "New Notes") to stockholders and
holders of the 6% Convertible Subordinated Notes due 2006 (the "Original
Notes"). The net proceeds available to the Company from the rights offering
were approximately $1,160,000. The net proceeds of the rights offering were
used to repay a portion of the loans made to the Company by the Investors.
As agreed to by the Investors and the Company, the Company canceled the
Subordinated Notes as payment of each Investor's subscription price for the
New Notes. After the rights offering, Specialty Chemical issued an
aggregate of $304,800 in new 12% subordinated notes on March 15, 1999, due
January 15, 2001. These new subordinated notes were issued to the Investors
in the amount equal to the principal amount of the Subordinated Notes that
exceeded the subscription price for the New Notes purchased by each
Investor. The principal and accrued interest on the new subordinated notes
will be payable at maturity in cash, or at the holder's option, in 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 notes at any time after the Company has
authorized, unissued and unreserved shares of Common Stock sufficient to
pay, in full, the outstanding principal and interest under all the new
subordinated notes. The fair market value will be the average closing price
of the Common Stock on five consecutive trading days prior to the day
immediately before the date that the stockholders authorize the issuance of
Common Stock sufficient to pay all the outstanding principal and interest
due under the new subordinated notes.
Other than the interest and loan amortization commitments described above,
Specialty Chemical had no other material commitments for capital leases,
interest or fees. (See Note D - Long-Term Debt and Note E - Commitments and
Contingencies)
Page 18 of 22
<PAGE> 19
Net cash provided by operating activities was $32,000 in 1998, versus cash
provided of $4,616,110 for 1997, and net cash used in operating activities of
$537,000 for 1996. Net capital expenditures were $537,000, $932,000 and $156,000
respectively, for the three years ended 1998, 1997, and 1996. The Company
expects to spend approximately $200,000 in capital expenditures for 1999 to be
funded from operating cash flows and borrowings under the senior credit
facility. Under current business conditions, the Company expects no significant
change in its liquidity position during the current fiscal year, and the Company
believes that cash from operations and the senior credit facility will be
adequate to satisfy the Company's liquidity needs during fiscal 1999.
YEAR 2000
Many computer systems and software products will have trouble processing
data related to the Year 2000. Specialty Chemical has reviewed all of its
information technology and non-information technology computer systems, computer
chips and software products for Year 2000 problems and has determined that its
operations 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. Specialty Chemical
recently replaced its vendor for outsourced payroll systems. Specialty Chemical
intends to begin replacing financial computer systems and software products in
April, 1999 and believes that new systems and products will be tested and in
place by June 30, 1999.
During 1998, Specialty Chemical made no expenditures relating to Year 2000
issues and used internal personnel to complete all work on such issues. In 1999,
Specialty Chemical expects to spend approximately $80,000 to complete its Year
2000 compliance efforts, which will be funded from operating cash flows and
borrowings under its credit agreement.
Specialty Chemical has received verbal and written responses from its
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. Specialty Chemical's contingency plan for uninterrupted
material supply sources includes maintaining multiple suppliers for most of its
raw materials and identifying back up suppliers for all key materials. However,
if Specialty Chemical's upgrade and replacement plan is not successful, or its
material suppliers or vendors develop Year 2000 problems, then Specialty
Chemical may suffer significant losses which would have a material adverse
effect on its business.
Page 19 of 22
<PAGE> 20
FORWARD-LOOKING STATEMENTS
Certain statements contained herein 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 thus prospective. Such
forward-looking statements include, without limitation, statements regarding
expected financial performance, the ability to generate necessary capital from
the Investors, ongoing business strategies and possible future action that the
Company intends to pursue in order to achieve strategic objectives. Such
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. Important factors that
could cause actual results to differ materially from the results expressed or
implied by any forward-looking statements ("Cautionary Statements") include
general economic conditions, conditions in the Company's industry, the
uncertainty of availability of net operating loss carryovers, the outcomes of
certain environmental and legal proceedings and the adequacy of Year 2000
compliance measures. All subsequent written and oral forward-looking statements
relating to the matters described herein and attributable to the Company or to
persons acting on behalf of the Company are expressly qualified in their
entirety by the Cautionary Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
Part III
Incorporated by reference to the Company's definitive proxy statement for the
1999 Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS; FINANCIAL STATEMENT SCHEDULES; REPORTS ON FORM 8-K
The Index to Financial Statements and Financial Statement Schedules is listed
below.
Reports on Form 8-K.
1. The Company filed a Form 8-K/A-2 on January 20, 1999, on which it revised
Proforma Financial Information.
Page 20 of 22
<PAGE> 21
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PG NO.
------
<S> <C>
Report of Independent Certified Public Accountants................... F-1
Balance Sheets
December 31, 1998 and 1997........................................ F-2 & F-3
Statements of Operations
December 31, 1998, 1997 and 1996.................................. F-4
Statements of Stockholders' Equity
December 31, 1998, 1997, and 1996................................. F-5
Statements of Cash Flows
December 31, 1998, 1997, and 1996................................. F-6 & F-7
Notes to Financial Statements........................................ F-8 - F-26
Report of Independent Certified Public Accountants on Schedules...... F-27
Schedule II - Valuation and Qualifying Accounts
December 31, 1998, 1997 and 1996....................... F-28
</TABLE>
Page 21 of 22
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized, this 15th
day of April, 1999.
SPECIALTY CHEMICAL RESOURCES, INC.
By:/s/ Edwin M. Roth
-----------------------------------------
Edwin M. Roth
C.E.O. and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K has been signed by the following persons in the capacities,
on the date indicated. This Report may be signed in multiple counterparts, all
of which taken together shall constitute one document.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ Edwin M. Roth C.E.O. and Chairman April 15, 1999
- ---------------------------- of the Board
Edwin M. Roth (Principal Executive Officer)
/s/ Corey B. Roth President, Chief Operating April 15, 1999
- ---------------------------- Officer, and Director
Corey B. Roth
/s/ David F. Spink Vice President, April 15, 1999
- ---------------------------- Chief Financial Officer,
David F. Spink Treasurer, and Asst. Secretary
/s/ George N. Aronoff Director April 15, 1999
- ----------------------------
George N. Aronoff
/s/ Victor Gelb Director April 15, 1999
- -----------------------------
Victor Gelb
/s/ Lionel N. Sterling Director April 15, 1999
- -----------------------------
Lionel N. Sterling
/s/ Geoffrey J. Colvin Director April 15, 1999
- -----------------------------
Geoffrey J. Colvin
/s/ Terence J. Conklin Director April 15, 1999
- -----------------------------
Terence J. Conklin
</TABLE>
Page 22 of 22
<PAGE> 23
INDEPENDENT AUDITORS' REPORT
Stockholders of
SPECIALTY CHEMICAL RESOURCES, INC.
We have audited the accompanying balance sheets of Specialty Chemical Resources,
Inc. as of December 31, 1998 and 1997, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Specialty Chemical Resources,
Inc. as of December 31, 1998 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Cleveland, Ohio
March 4, 1999 (except for Note D as to which the
date is April 14, 1999)
F-1
<PAGE> 24
Specialty Chemical Resources, Inc.
BALANCE SHEETS
December 31
ASSETS
<TABLE>
<CAPTION>
1998 1997
------------ ------------
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 3,100 $ 3,100
Accounts receivable - trade, less allowance for doubtful
accounts of $112,000 and $137,000, respectively (note D) 4,511,220 5,338,168
Receivables - other (note E) 359,747 343,657
Inventories (notes A, C and D) 6,520,852 8,944,905
Prepaid expenses 215,498 360,196
------------ ------------
Total current assets 11,610,417 14,990,026
PROPERTY AND EQUIPMENT - at cost
(notes A and D)
Building 1,337,655 1,293,745
Leasehold improvements 2,865,829 2,798,551
Office equipment and furniture 1,887,853 1,115,738
Machinery and equipment 12,018,015 11,889,611
Construction in-progress 49,203 523,932
------------ ------------
18,158,555 17,621,577
Less accumulated depreciation and amortization 6,666,274 5,536,789
------------ ------------
11,492,281 12,084,788
Land 118,690 118,690
------------ ------------
11,610,971 12,203,478
OTHER ASSETS (note A)
Goodwill (note K) 866,239 894,319
Product formulation 408,638 692,894
Deferred financing costs 461,630 435,117
Other 211,537 302,044
------------ ------------
1,948,044 2,324,374
------------ ------------
$ 25,169,432 $ 29,517,878
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE> 25
Specialty Chemical Resources, Inc.
BALANCE SHEETS
December 31
LIABILITIES
<TABLE>
<CAPTION>
1998 1997
----------- -----------
CURRENT LIABILITIES
<S> <C> <C>
Current portion of long-term debt $ 1,176,503 $ 1,057,497
Accounts payable 3,898,411 6,893,119
Accrued liabilities:
Compensation and payroll taxes 251,431 123,146
Taxes - other 36,768 37,116
Interest 92,340 108,430
Other 355,752 356,067
----------- -----------
736,291 624,759
----------- -----------
Total current liabilities 5,811,205 8,575,375
LONG-TERM DEBT (NOTE D) 16,296,680 15,445,820
DEFERRED INCOME TAXES (NOTES A AND I) - -
COMMITMENTS AND CONTINGENCIES (NOTE E) - -
STOCKHOLDERS' EQUITY (NOTES G AND H)
Preferred stock - $.01 par value; authorized 2,000,000 shares - -
Common stock - $.10 par value; authorized 13,000,000 shares;
issued 3,947,761 and 3,947,762 shares, respectively 394,777 394,777
Additional paid-in capital 41,935,125 41,935,125
Accumulated deficit (39,149,633) (36,714,497)
----------- -----------
3,180,269 5,615,405
Less common stock in treasury, at cost;
65,500 shares each year (118,722) (118,722)
----------- -----------
3,061,547 5,496,683
----------- -----------
$ 25,169,432 $ 29,517,878
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 26
Specialty Chemical Resources, Inc.
STATEMENTS OF OPERATIONS
For the years ended December 31
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 35,557,165 $ 40,283,662 $ 38,914,148
Cost of goods sold 29,452,765 33,628,380 32,783,174
------------ ------------ ------------
Gross profit 6,104,400 6,655,282 6,130,974
Selling, general and administrative expenses 6,466,837 6,903,620 6,066,674
Amortization of intangibles 416,543 996,679 906,846
Impairment of long-lived assets (note K) - 18,501,135 -
------------ ------------ ------------
Operating (loss) (778,980) (19,746,152) (842,546)
Other income (expense)
Interest expense (1,656,156) (1,404,700) (1,059,217)
Other - 66,140 11,450
------------ ------------ ------------
(1,656,156) (1,338,560) (1,047,767)
------------ ------------ ------------
(Loss) before income taxes (2,435,136) (21,084,712) (1,890,313)
Income taxes (benefits) (notes A and I) - - (127,600)
------------ ------------ ------------
NET (LOSS) $ (2,435,136) $(21,084,712) $ (1,762,713)
============ ============ ============
Basic (loss) per common share (note J) $ (0.63) $ (5.43) $ (0.45)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 27
Specialty Chemical Resources, Inc.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
COMMON STOCK OUTSTANDING ADDITIONAL
$.10 PAR VALUE PAID-IN ACCUMULATED UNEARNED
-----------------------
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION
---------- --------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 3,947,769 $ 394,777 $ 41,935,125 $ (13,847,367) $ (38,700)
Retirement of fractional shares received from
prior reverse stock split (5) - - - -
Net loss for the year - - - (1,762,713) -
Dividends on redeemable preferred
stock ($1.875 per share) - - - (19,705) -
Amortization of unearned compensation - - - - 19,350
Purchase of common stock for treasury (65,500) - - - -
--------- --------- ------------ ------------- ---------
BALANCE AT DECEMBER 31, 1996 3,882,264 394,777 41,935,125 (15,629,785) (19,350)
Retirement of fractional shares received from
prior reverse stock split (2) - - - -
Net loss for the year - - - (21,084,712) -
Amortization of unearned compensation - - - - 19,350
--------- --------- ------------ ------------- ---------
BALANCE AT DECEMBER 31, 1997 3,882,262 394,777 41,935,125 (36,714,497) -
Retirement of fractional shares received from
prior reverse stock split (1) - - - -
Net loss for the year - - - (2,435,136) -
--------- --------- ------------ ------------- ---------
BALANCE AT DECEMBER 31, 1998 3,882,261 $ 394,777 $ 41,935,125 $ (39,149,633) $ -
========= ========= ============ ============= =========
<CAPTION>
---------------------------
TREASURY
STOCK TOTAL
----------- ------------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1995 $ - $ 28,443,835
Retirement of fractional shares received from
prior reverse stock split - -
Net loss for the year - (1,762,713)
Dividends on redeemable preferred
stock ($1.875 per share) - (19,705)
Amortization of unearned compensation - 19,350
Purchase of common stock for treasury (118,722) (118,722)
---------- ------------
BALANCE AT DECEMBER 31, 1996 (118,722) 26,562,045
Retirement of fractional shares received from
prior reverse stock split - -
Net loss for the year - (21,084,712)
Amortization of unearned compensation - 19,350
---------- ------------
BALANCE AT DECEMBER 31, 1997 (118,722) 5,496,683
Retirement of fractional shares received from
prior reverse stock split - -
Net loss for the year - (2,435,136)
---------- ------------
BALANCE AT DECEMBER 31, 1998 $ (118,722) $ 3,061,547
========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 28
Specialty Chemical Resources, Inc.
STATEMENTS OF CASH FLOWS
For the years ended December 31
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,435,136) $ (21,084,712) $ (1,762,713)
Adjustment to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 1,129,485 1,084,143 1,025,799
Amortization of intangibles 416,543 996,679 906,846
Impairment of long-lived assets - 18,501,135 -
Deferred income taxes (benefits) - - (138,805)
Stock compensation - 19,350 19,350
Accrued interest on subordinated debentures 369,068 240,000 50,000
Change in assets and liabilities:
Decrease in accounts receivable 826,948 1,490,817 1,270,433
(Increase) decrease in accounts receivable - other (16,090) (85,373) 551,818
(Increase) decrease in inventories 2,424,053 (279,840) 807,863
(Increase) decrease in prepaid expenses 144,698 (54,937) (103,839)
Decrease in refundable income taxes - 1,075,016 59,063
(Increase) decrease in other assets 55,741 (123,557) (7,337)
Increase (decrease) in accounts payable (2,994,708) 2,888,249 (2,690,647)
Increase (decrease) in accrued liabilities 111,532 (50,860) (525,047)
------------ ------------- ------------
Total adjustments 2,467,270 25,700,822 1,225,497
------------ ------------- ------------
Net cash provided by (used in)
operating activities 32,134 4,616,110 (537,216)
</TABLE>
(CONTINUED ON NEXT PAGE)
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 29
Specialty Chemical Resources, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
For the years ended December 31
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------- ------------
<S> <C> <C> <C>
Net cash provided by (used in) operating activities
(brought forward from previous page) $ 32,134 $ 4,616,110 $ (537,216)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Hysan assets (note B) - (7,431,977) -
Expenditures for property and equipment - net (536,978) (932,139) (155,621)
Purchase of product formulations and license agreement - - (400,300)
------------ ------------- ------------
Net cash (used in) investing activities (536,978) (8,364,116) (555,921)
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of redeemable preferred stock - - (350,000)
Dividends paid on redeemable preferred stock - - (19,705)
Payments on long-term obligations (682,217) (538,440) (134,503)
Proceeds from long-term obligations, net of deferred
financing costs 661,178 2,090,000 1,688,368
Proceeds from issuance of short-term debt - 1,500,000 8,500,265
Payments on short-term debt - (1,500,000) (10,121,882)
Proceeds from sale of subordinated debentures,
net of deferred financing costs 1,429,410 - 3,673,373
Purchase of common stock for treasury - - (118,722)
Proceeds on revolver 38,077,591 49,734,451 37,041,248
Payments on revolver (38,981,118) (47,703,546) (38,897,902)
------------ ------------- ------------
Net cash provided by financing activities 504,844 3,582,465 1,260,540
------------ ------------- ------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS - (165,541) 167,403
Cash and cash equivalents at beginning of year 3,100 168,641 1,238
------------ ------------- ------------
Cash and cash equivalents at end of year $ 3,100 $ 3,100 $ 168,641
=========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE> 30
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Specialty Chemical Resources, Inc. (SCR, Inc.) formulates, blends, and
packages pressurized specialty chemical products for sale to marketers,
distributors, and retailers primarily throughout the United States. Its
primary markets are the automotive and industrial maintenance and
janitorial/sanitation markets.
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined by
the last-in, first-out (LIFO) method for raw materials and the first-in,
first-out (FIFO) method for finished goods.
PROPERTY AND EQUIPMENT
Depreciation is provided for in amounts sufficient to relate the costs of
depreciable assets to operations over their estimated service lives. The
straight-line method of depreciation is used for financial reporting
purposes. Accelerated methods are used for tax purposes.
The estimated lives used in determining depreciation and amortization for
financial reporting purposes are as follows:
Building......................................... 20 years
Leasehold improvements........................... 15 years
Office equipment and furniture................... 7-10 years
Machinery and equipment..........................10-16 years
INTANGIBLES
The Company adopted Statement of Financial Accounting Standards No. 121,
Accounting For The Impairment Of Long-Lived Assets and For Long-Lived Assets
To Be Disposed Of (SFAS 121) as of January 1, 1996. This Statement requires
that long-lived assets, including goodwill, held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
F-8
<PAGE> 31
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLES (CONTINUED)
In performing the review for recoverability, the Company estimates its
expected future cash flows (undiscounted and without interest charges) and
compares this amount to the carrying value of its long-lived assets to
determine if an impairment exists. Otherwise, an impairment loss is not
recognized. The projected amounts used in this computation are based upon
management's best estimates utilizing information currently available.
Inherent in these projections are estimates for which the ultimate outcome
cannot be predicted with a high degree of certainty. Therefore, the actual
results could materially differ from the projected amounts (see note K).
Goodwill, resulting from the excess of the purchase price over the fair value
of net assets acquired is being amortized over 40 years (see note K).
Purchased product formulations are being amortized on a straight-line basis
over 10 years. All research and development costs are being expensed as
incurred.
Deferred financing costs are related to the bank debt and the issuance of the
subordinated debentures. These costs are being amortized on a straight-line
basis over the period of the respective debt agreements.
Accumulated amortization for intangibles amounted to approximately $3,024,000
and $2,608,000 for the years ended December 31, 1998 and 1997, respectively.
INCOME TAXES
Income taxes are recorded in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS No. 109).
SFAS 109 utilizes the asset and liability method, under which deferred income
taxes are recognized for the tax consequences of "temporary differences" by
applying currently enacted statutory rates to differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. Under SFAS 109, the effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment date.
REVENUE RECOGNITION
The Company recognizes revenue when the product is shipped.
F-9
<PAGE> 32
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with a maturity of three months or less
to be cash equivalents.
Cash payments for income taxes amounted to $18,000, $38,000 and $75,000 for
the years ended December 31, 1998, 1997 and 1996, respectively. In addition,
the Company received income tax refunds of approximately $15,000 and
$1,080,000 during 1998 and 1997, respectively. Cash payments for interest
amounted to $1,303,000, $1,124,000 and $1,095,000 in the years ended December
31, 1998, 1997 and 1996, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
the fair value of each class of financial instruments for which it is
practicable to estimate fair value.
For cash, receivables and payables, the carrying amounts approximate fair
value because of the short maturity of these instruments. For long-term
obligations, including current maturities, the fair value of the Company's
long-term obligations approximates historically recorded cost since interest
rates approximate market.
RECLASSIFICATION
Certain amounts in previously issued financial statements were reclassified
to conform to the 1998 presentation.
F-10
<PAGE> 33
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEWLY ISSUED ACCOUNTING STANDARDS
In 1997, the FASB issued Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income ("SFAS 130") which is effective for fiscal
years beginning after December 15, 1997. There are no components of
comprehensive income for the Company except reported net income (loss).
Statement of Financial Accounting Standards No. 131, Disclosures About
Segments of an Enterprise and Related Information ("SFAS 131") was issued by
the FASB in 1997, which is effective for fiscal years beginning after
December 15, 1997. SFAS 131 introduces a new segment reporting model called
the "management approach". The management approach is based on the manner in
which management organizes segments within a company for making operating
decisions and assessing performance. The management approach replaces the
notion of industry and geographic segments. Given the similar economic
characteristics and the similarities as to the nature of products, the
Company believes it qualifies for the aggregation rules of the statement and
therefore operates in one reportable segment.
In 1998, the FASB issued SFAS No. 132, Employers' Disclosures About Pensions
and Other Postretirement Benefits which is effective for fiscal years
beginning after December 31, 1997. The disclosures herein are reflective of
the adoption of this statement.
In 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities which is effective for fiscal years beginning after
June 15, 1999. Management does not believe the adoption of this statement
will have a material impact on the Company's financial statements.
Additionally, during 1998, a new Statement of Position (SOP) was issued by
the American Institute of Certified Public Accountants. The SOP, Reporting on
the Costs of Start-up Activities, requires that costs incurred to open a new
facility, introduce a new product, commence a new operation or other similar
activities be expensed as incurred. Management does not believe that this
SOP, which will be adopted for 1999, will have a material impact on the
Company's financial statements.
F-11
<PAGE> 34
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE B - ACQUISITION
On May 22, 1997, Specialty Chemical Resources, Inc. acquired substantially
all of the tangible and intangible non-real estate assets of Hysan
Corporation ("Hysan") pursuant to an Asset Purchase Agreement (the
"Agreement"). The purchase price for the acquired assets was $7,432,000,
including expenses related to the transaction. The Agreement required that
$500,000 of the purchase price be deposited in escrow with a bank as security
for any adjustments to the purchase price that may be necessary to secure
Hysan's indemnification obligations thereunder. The remaining portion of the
purchase price was paid in cash. The acquisition was recorded under the
purchase method of accounting in accordance with Accounting Principles Board
Opinion (APB) No. 16. The purchase price was allocated based upon the fair
value of assets acquired at the date of acquisition. The excess of the
purchase price over the fair value of the assets acquired of approximately
$273,000 was recorded as goodwill. Included in the Company's asset allocation
was $2,522,000 which was allocated to machinery and equipment. As of December
31, 1998, the Company has not yet put into service approximately $2,018,000
of this production equipment and therefore has not commenced recording
depreciation expense on those assets. The Company included the results of
operations of Hysan as of the acquisition date. The following unaudited
proforma information has been prepared assuming Hysan had been acquired as of
the beginning of the periods presented:
<TABLE>
<CAPTION>
============================
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Net sales $ 44,571,000 $ 53,710,000
Net (loss) $(21,382,000) $ (1,582,000)
Basic (loss) per share $ (5.51) $ (0.40)
</TABLE>
NOTE C - INVENTORIES
<TABLE>
<CAPTION>
Inventories consist of the following at:
============================
YEARS ENDED DECEMBER 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Raw materials $ 3,737,239 $ 5,416,048
Finished goods 3,473,217 4,224,414
------------ ------------
7,210,456 9,640,462
Less excess of FIFO over LIFO cost 689,604 695,557
------------ ------------
$ 6,520,852 $ 8,944,905
============ ============
</TABLE>
F-12
<PAGE> 35
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE C - INVENTORIES (CONTINUED)
Had the Company historically followed the FIFO cost method for raw material
inventories, the net loss for the years ended December 31, 1998, 1997 and
1996 would have decreased by approximately $6,000, decreased by approximately
$51,000 and increased by approximately $44,000, respectively.
NOTE D - LONG-TERM DEBT
Long-term debt consists of the following at:
<TABLE>
<CAPTION>
=========================================
DECEMBER 31,
------------------- ---------------------
1998 1997
------------------- ---------------------
<S> <C> <C>
Revolver $ 7,169,106 $ 8,072,634
Term loan A - bank 2,624,167 2,680,000
Term loan B - bank 410,842 666,670
Mortgage loan - bank 1,125,000 794,013
6% Convertible subordinated debentures 4,541,218 4,290,000
12% Subordinated notes 1,602,850 -
------------------- ---------------------
17,473,183 16,503,317
Less current portion 1,176,503 1,057,497
------------------- ---------------------
$16,296,680 $15,445,820
=================== =====================
</TABLE>
F-13
<PAGE> 36
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE D - LONG-TERM DEBT (CONTINUED)
During September 1996, the Company terminated its revolving credit agreement
with a bank and entered into a $12,000,000 financing agreement with a new
bank. During May 1997, the Company entered into a First Amendment to the
financing agreement increasing potential borrowings to $15,000,000. The
amended credit facility is comprised of a Revolving Loan and Term Loan A and
Term Loan B. The maximum borrowings under the credit facility are pursuant to
a formula based upon the amount of the Company's receivables, inventory and
the then outstanding balance under the previous facility. In addition, the
bank can reduce the maximum borrowings under the facility by establishing an
environmental compliance reserve in certain circumstances. No compliance
reserves have been required as of December 31, 1998. Borrowings under this
credit agreement are collateralized by substantially all of the Company's
assets. The Revolving Loan matures on December 31, 2000 and bears interest at
the bank's prime rate (7.75% at December 31, 1998) plus 1-1/2%. The interest
rate charged by the bank can be reduced to the prime rate based upon the
Company meeting certain performance measures. Under the terms of the credit
agreement, the Company is required to comply with various covenants, the most
restrictive of which relate to the maintenance of certain financial ratios,
levels of tangible net worth, limits on capital expenditures and restrictions
on distributions from the Company to its stockholders. Based on 1998
financial performance, the senior lender has revised the various covenants by
amending the credit agreement. The Company is currently in compliance with
all of the covenants. Such amendment reduces the total loan facility to $12
million and requires Specialty Chemical to obtain an additional $1 million of
cash contributions through either equity or unsecured subordinated debt by
June 30, 1999. On April 14, 1999, Specialty Chemical received a commitment
letter from Edwin Roth, Trust Investments and CEW Partners (the "Investors")
whereby the Investors have guaranteed to secure $1,000,000 of indebtedness
from a lender prior to June 30, 1999. The failure to do so would constitute
an event of default under the credit agreement.
As of December 31, 1998, approximately $176,000 is unused and available under
the credit agreement.
The original term loan portion of the credit facility consisted of a
$1,800,000 installment loan payable in sixty monthly installments of $30,000
beginning on October 1, 1996. The amended term loan portion of the credit
facility is comprised of Term Loan A in the amount of $2,624,000 and Term
Loan B in the amount of $411,000. Principal on Term Loan A is payable in one
installment of $34,710 on April 1, 1999; in four consecutive monthly
installments of $111,388 each commencing May 1, 1999, in one installment of
$78,068 on September 1, 1999, and thereafter, in consecutive monthly
installments, on the first day of each month, in the amount of $55,833 each.
Interest is payable monthly at the same rate and terms as the Revolving Loan.
Principal on Term Loan B is payable in three consecutive equal monthly
installments of $111,388 each, commencing on the first day of January 1999,
with the last payment of principal being due and payable on April 1, 1999, in
the amount of $76,678. Interest is payable monthly at the bank's prime rate
plus 4-1/2%. As of April 1, 1999, Term Loan B has been fully repaid.
F-14
<PAGE> 37
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE D - LONG-TERM DEBT (CONTINUED)
In 1997, the bank advanced to the Company $1,500,000 on a short-term basis in
conjunction with the acquisition of Hysan. The advance was fully repaid in
1997.
The mortgage note originally consisted of a $1,075,000 installment note dated
October 15, 1995. Monthly principal payments of approximately $6,000 began on
June 1, 1996, with the balance due on February 1, 1998. As of December 31,
1997, the Company had $794,013 remaining on the note. In January 1998, the
Company refinanced the mortgage with a new $1,125,000 installment note with a
new bank. The note, which bears interest at 8.75%, requires the first twelve
monthly payments to be interest only. Commencing on February 1, 1999, the
note requires 167 monthly principal and interest payments of $11,790, with
final payment on November 1, 2012. The borrowing is collateralized by a
building which serves as the Company's distribution center and corporate
offices.
The 6% convertible subordinated debentures, due October 15, 2006, are
convertible at the option of the holder into shares of the Company's common
stock at a conversion price of $1.50 per share. Each $100 principal amount of
the debentures is convertible into 66.67 shares of common stock at any time
after December 31, 2001, or under certain circumstances, if there is a change
in control of the Company as defined under the debentures. Subsequent to
October 15, 1999, the debentures are redeemable at the option of the Company,
in whole or in part, initially at 110%, and thereafter at prices declining to
100% at October 15, 2004, together with accrued interest. The debentures are
subordinated to all senior debt of the Company. The proceeds, which were
received in 1996, were used to repay a portion of the Company's indebtedness
and to repurchase all of its outstanding redeemable preferred stock from a
major shareholder (see note G). Interest compounds semi-annually and is due
upon maturity of the debentures.
On May 20, 1998, the Company issued three $150,000 principal amount
subordinated promissory notes to the Investors. Such notes were due June 22,
1998. On June 15, 1998, the Company issued three $500,000 principal amount
12% promissory notes subordinated to the bank (the "Subordinated Notes") to
such Investors in part to refinance the original notes issued on May 20,
1998. Such Subordinated Notes were originally due December 15, 1998, but
were extended to March 15, 1999. Interest accrued on the Subordinated Notes
through January 31, 1999 was paid in Common Stock of the Company on February
11, 1999. The Investors and the Company agreed at the time these loans were
made that the Subordinated Notes would be refinanced with the net proceeds
of a pro rata rights offering of Company debt to its stockholders and its
holders of the 6% Convertible Subordinated Notes due October 15, 2006 (the
"Original Notes"). On March 15, 1999, the Company completed an offering of
subscription rights to purchase an aggregate principal amount of $1,360,000
of 6% Convertible Subordinated Notes due in ten years (the "New Notes") to
stockholders and holders of the Original Notes. The net proceeds available
to the Company from the rights offering were approximately $1,160,000. The
net proceeds of the rights offering were used to repay a portion of the
loans made to the Company by the Investors. The Investors canceled a portion
of the indebtedness represented by the Subordinated Notes as payment of the
subscription price for the New Notes.
F-15
<PAGE> 38
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE D - LONG-TERM DEBT (CONTINUED)
After the rights offering, the Company issued an aggregate of $304,800 in
new 12% Subordinated Notes on March 15, 1999, due January 15, 2001. These
new Subordinated Notes were issued to the Investors to represent the
principal amount of the Subordinated Notes that was not canceled as payment
of the subscription price. The principal and accrued interest on the new
Subordinated Notes will be payable at maturity in cash, or at the holder's
option, in shares of Common Stock based upon the fair market value of the
Common Stock. However, the noteholders may demand full payment of principal
and interest on the new Subordinated Notes at any time after the Company has
authorized, unissued and unreserved shares of Common Stock sufficient to
pay, in full, the outstanding principal and interest under all the new
Subordinated Notes. The fair market value will be the average closing price
of the Common Stock on five consecutive trading days prior to the day
immediately before the date that the stockholders authorize the issuance of
Common Stock sufficient to pay all the outstanding principal and interest
due under the new Subordinated Notes.
The new 6% convertible debentures, due March 15, 2009 are convertible at the
option of the holder into shares of the Company's common stock at a
conversion price of $0.40 per share. Each $100 principal amount of the
debentures is convertible into 250 shares of common stock at any time after
March 15, 2002, or under certain circumstances if there is a change in
control of the Company as defined under the debentures. Subsequent to March
15, 2002, the debentures are redeemable at the option of the Company, in
whole or in part, initially at 110%, and thereafter at prices declining to
100% at March 15, 2007, together with accrued interest. The debentures are
subordinated to all senior debt of the Company. Interest compounds
semi-annually and is due upon maturity of the debentures.
Aggregate maturities of long-term debt at December 31, 1998 are as follows:
<TABLE>
<S> <C> <C>
1999 $1,176,503
2000 7,885,922
2001 721,423
2002 614,542
2003 61,371
Thereafter 7,013,422
----------
$17,473,183
===========
</TABLE>
F-16
<PAGE> 39
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE E - COMMITMENTS AND CONTINGENCIES
Certain operations of the Company are conducted in facilities leased under
noncancellable operating leases which expire at various dates through 2005.
One of the leases which relates to the manufacturing facility can be
extended at the option of the Company to the year 2025. The Company also has
entered into several noncancellable operating leases for various machinery
and equipment which expire at various dates through 2001.
The following table details scheduled minimum rental payments of all
noncancellable operating leases:
<TABLE>
<CAPTION>
RENTAL
YEAR ENDING DECEMBER 31, COMMITMENT
------------------------ ----------
<S> <C> <C>
1999 $ 421,000
2000 412,000
2001 314,000
2002 216,000
2003 216,000
Thereafter 360,000
----------
$1,939,000
==========
</TABLE>
Rent expense for the years ended December 31, 1998, 1997 and 1996 was
approximately $558,000, $518,000 and $407,000, respectively.
The Company is currently involved in litigation and investigations
pertaining to environmental concerns by the State of Ohio in connection with
several potential problems at its Macedonia, Ohio manufacturing plant. In
1990 the Company entered into a Consent Order with the State of Ohio. The
Company was required to submit to the Ohio Environmental Protection Agency
(Ohio EPA), a closure plan to address contamination identified at the
property. The Company submitted the closure plan as required. Ohio EPA also
requested, in the event the remedial measures in the proposed closure plan
are not successful within a two-year period, that at that time the Company
provide supplemental or alternative measures to clean up the remaining
contamination.
F-17
<PAGE> 40
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE E - COMMITMENTS AND CONTINGENCIES (CONTINUED)
On May 17, 1994, the Ohio EPA approved the revised closure plan which
included unilateral modifications as deemed necessary by the Ohio EPA. On
June 17, 1994, the Company appealed the Ohio EPA's action on the grounds
that the unilateral modifications were unreasonable and unlawful. On January
6, 1995, the Company and the State of Ohio entered into a settlement
agreement, which resulted in a termination of the Company's appeal of this
matter before the Environmental Board of Review. On May 3, 1995, the Ohio
EPA issued a supplemental closure plan approval letter that established
certain deadlines with regard to the Company's implementation of a
Groundwater Extraction and Treatment System, a Soil Vapor Extraction System,
and certain other closure plan tasks. As of September 23, 1998, the Company
revised its estimate to address closure costs at the Macedonia facility.
Based on estimates of closure costs received from the Company's
environmental consultant, the revised total closure costs are estimated at a
range of approximately $1,526,000 to $2,000,000. As of December 31, 1998,
$1,475,000 of closure costs were expended, of which $792,000 was received
from both escrow funds and an Ohio EPA Trust Account (the Trust). The escrow
funds and trust funds were deposited by previous owners. During 1996, the
Company received $621,000 from the Trust for reimbursement of expenditures;
in addition the Company has approximately $360,000 of monies due from the
Trust for reimbursement of EPA expenditures and has recorded this amount as
an Account Receivable - Other on the December 31, 1998 balance sheet. The
Company believes that the expenditures for which they are seeking
reimbursement are in accordance with the closure activities contemplated by
the Trust requirements. While the Company is not aware of any reason that it
would not receive reimbursement for these expenditures, the Ohio EPA has
discretion in responding to the Company's request.
If the remediation techniques proposed in the closure plan are not
successful, or if supplemental or alternative technologies are required to
be used, then the Company may incur costs in excess of the $1,526,000
closure cost estimate. The Company believes, based on discussions with its
technical consultants, that the cost of additional testing and operation of
the proposed remedial systems will be approximately $50,000 and that the
costs of the supplemental or alternative cleanup measures, if determined to
be necessary, would not exceed $2,000,000.
On October 15, 1997, the Company received Notices of Violation ("NOV's")
from the Ohio Attorney General's Office alleging that the Company has failed
to comply with the terms of the 1990 Consent Order. The State alleges that
the Company has committed numerous violations of applicable Ohio hazardous
waste laws and regulations. Ohio EPA bases these allegations upon the
results of a number of inspections conducted from 1993 through 1997. The
Company prepared detailed written responses to each NOV and, without
admitting liability, took specific actions in response to the allegations
identified by Ohio EPA. The Ohio EPA has demanded that the Company pay the
State of Ohio the sum of $1,080,000 as stipulated penalties for the alleged
violations. Through the October 15, 1997 letter, the Attorney General
invited the Company to enter negotiations to resolve the disagreement
regarding the Company's alleged violations of the 1990 Consent Order.
F-18
<PAGE> 41
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE E - COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company believes that is has materially complied with the requirements
of the Consent Order and that stipulated penalties due to the State of Ohio
pursuant to the Consent Order, if any, should not have a materially adverse
effect on the financial condition of the Company. The Company is currently
negotiating with the Ohio Attorney General regarding the Company's alleged
violations of the 1990 consent order. However, there can be no assurance
that negotiations with the State of Ohio will be successful and will not
result in extended litigation between the Company and the State of Ohio.
Further, the Company cannot predict whether a court would find the Company
liable for stipulated penalties in excess of the initial demand proposed by
the State of Ohio.
On May 21, 1998, the Company received a letter from the Ohio EPA alleging
that odors from the Macedonia Plan and dust from its unpaved parking lot
constitute a nuisance. Further, the Ohio EPA contends that the Company must
submit revised permit applications for its can filling and gassing lines,
which according to the Ohio EPA have been erroneously granted permits to
allow the filling part of each line to be a separate emissions unit. The
Company does not believe that odors from its Macedonia Plant or dust from
its parking lot constitute a nuisance as defined by applicable law. However,
the Ohio EPA's request for the Company to re-evaluate and re-submit its
existing air permits ultimately may require the addition of supplemental air
pollution control technology at the Macedonia Plant or lead to litigation
regarding such permit issues.
On December 21, 1998, the Ohio Attorney General's Office notified the
Company that it has been asked to initiate a civil enforcement action
against it 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 into settlement negotiations with the Company
regarding these alleged violations. The Company has entered into these
discussions in an attempt to resolve this dispute without litigation.
The Company was also a defendant in two product liability lawsuits. Both of
these suits were defended by the Company's insurance carrier and were
settled by the insurance company within the limits of the insurance
coverage.
NOTE F - EMPLOYEE BENEFIT PLANS
The Company has a defined contribution 401(k) profit-sharing plan (the Plan)
covering certain salaried employees with one year or more of credited
service. The Company's profit-sharing contributions are at the discretion of
the Board of Directors and are credited to each participant's account based
on a percentage of gross compensation subject to a maximum contribution for
each participant. The Company is also required under the 401(k) provisions
to match employee contributions equal to 50% of each such participant's
deferred compensation up to a maximum of 4% of the participant's annual
compensation. Contributions by the Company under the 401(k) provisions for
1998, 1997 and 1996 were approximately $49,500, $50,600 and $48,000,
respectively. The Company did not make any profit-sharing contributions to
the Plan for the years ended December 31, 1998, 1997 and 1996.
F-19
<PAGE> 42
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE F - EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company has a Retirement Savings Trust and Plan covering full-time
hourly employees who have completed six months of service. The Company's
contributions are made on an annual basis and are credited to each
participant's account at an amount equal to 13 cents per hour of
compensation (maximum of 48 hours per week). In addition, qualified
employees are eligible to make voluntary contributions to the Retirement
Savings Trust and Plan which are fully vested and nonforfeitable.
Contributions by the Company for the years ended December 31, 1998, 1997 and
1996 approximated $40,100, $38,900 and $34,500, respectively.
NOTE G - REDEEMABLE PREFERRED STOCK
On October 6, 1995, the Company issued 3,500 shares of cumulative,
convertible preferred stock to an officer/director at a $100 per share
price, which aggregated to $350,000. The cumulative, convertible preferred
stock pays quarterly dividends of $1.875 per share. On October 16, 1996, the
Company redeemed all of its 3,500 shares of redeemable preferred stock for
$350,000 from the proceeds received in conjunction with the convertible
subordinated debentures (see note D).
NOTE H - STOCKHOLDERS' EQUITY
On July 25, 1995, the Company entered into a Restricted Stock Award
Agreement with a key employee for 15,000 shares of common stock. The Company
charged $19,350 to compensation expense and distributed one-third (1/3) of
the shares to the employee annually for 1997, 1996 and 1995. All shares were
distributed on July 25, 1997, at which time the restrictions lapsed.
In December 1996, the Board of Directors authorized the Company to redeem
shares of its common stock at the open market price. On December 20, 1996,
the Company redeemed into treasury, 65,500 common shares at $1.8125 per
share at an aggregate cost of $118,722, including expenses.
On February 11, 1999, the Company used 375,000 shares of common stock,
comprised of 65,500 of treasury shares and 309,500 of newly issued shares,
to pay interest accrued on the 12% subordinated notes through January 31,
1999.
F-20
<PAGE> 43
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE H - STOCKHOLDERS' EQUITY (CONTINUED)
The Company has a Nonqualified and Incentive Stock Option Plan (the Plan)
under which 650,000 shares of common stock have been reserved. The Plan
provides for grants to officers and key employees of the Company of both
nonqualified and incentive stock options. The exercise price for options
granted under the Plan must be at least equal to fair market value of the
shares on the date of grant. The Plan will terminate in January 1999 but
will not affect any outstanding options previously granted. Such options
granted may be exercised after one year from the date of grant for not more
than one-third of the shares originally subject to the option and an
additional one-third for each of the two years thereafter. The options
granted under the Plan expire five years from the date of grant. As of
December 31, 1998, all options granted were under the Nonqualified Option
Plan.
The Company also has an Outside Directors' Stock Option Plan (Directors'
Plan) under which 150,000 shares of common stock have been reserved. Under
the Directors' Plan, each outside director will be granted an option to
purchase 10,000 shares of common stock and an additional option to purchase
5,000 shares of common stock every two years thereafter as long as the
individual remains on the Company's Board of Directors and remains an
"outside" director. The exercise price for options granted shall be the fair
market value of the shares on the date of grant. Directors vest in their
options in 25% annual increments commencing one year after the date of
grant. Options granted, to the extent the director has vested, shall be
exercisable for a term of ten years from the date of grant. In addition, the
Directors' Plan calls for the exercising of options by directors within
seven months after their termination and by their beneficiaries within one
year after their death. The Directors' Plan will terminate in January 1999
but will not affect any outstanding options previously granted.
F-21
<PAGE> 44
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS CONTINUED
December 31, 1998, 1997 and 1996
NOTE H STOCKHOLDERS' EQUITY (Continued)
Transactions for both stock option plans are as follows:
<TABLE>
<CAPTION>
--------------------------- ---------------------------- -------------------------------
1998 1997 1996
-------------------------- ---------------------------- -------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding
beginning of year 644,534 $ 3.27 567,391 $ 5.86 545,428 $ 6.14
Granted 169,500 $ 0.93 252,000 $ 1.75 50,000 $ 1.70
Exercised -- $ -- -- $ -- -- $ --
Cancelled (169,214) $ 3.08 (174,857) $ 9.02 (28,037) $ 3.85
----------- ------------- -------------
OUTSTANDING
END OF YEAR 644,820 $ 2.61 644,534 $ 3.27 567,391 $ 5.86
============ ============== ==============
Exercisable at end of year 325,987 291,545 $ 4.91 347,583 $ 7.48
============ ============== ==============
Available for grant 155,180 155,466 232,609
============ ============== ==============
Weighted average fair value
of options granted
during the year $ 0.61 $ 0.87 $ 1.23
============ ============== ==============
</TABLE>
<TABLE>
<CAPTION>
---------------------------------- --------------------------------------
OUTSTANDING EXERCISABLE
---------------------------------- --------------------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF CONTRACTUAL AVERAGE AVERAGE
EXERCISE PRICES SHARES LIFE EXERCISE PRICE SHARES EXERCISE PRICE
---------------- ------------ ------------ ---------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
$0.5 1.813 413,000 4.32 $ 1.40 94,167 $ 1.67
$3.375 4.5 178,249 1.10 $ 3.73 178,249 $ 3.73
$5.24 6.38 23,571 1.68 $ 5.97 23,571 $ 5.97
$10 10.5 30,000 3.16 $ 10.00 30,000 $ 10.00
------------ -------------
644,820 325,987
============ =============
</TABLE>
F-22
<PAGE> 45
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE H - STOCKHOLDERS' EQUITY (CONTINUED)
Both of the Company's stock option plans are accounted for under APB Opinion
25 and related interpretations. Accordingly, no compensation cost has been
recognized for the plans. Had compensation cost for the plans been
determined based on the fair value of the options at the grant dates
consistent with the method of Statement of Financial Accounting Standards
123, Accounting for Stock-Based Compensation (SFAS 123), the Company's net
loss and loss per share would have been increased each period to the
proforma amounts indicated below.
<TABLE>
<CAPTION>
==============================================================
1998 1997 1996
---------------------- ------------------- -------------------
<S> <C> <C> <C>
Net (loss) As reported $(2,435,136) $(21,084,712) $(1,762,713)
Pro forma $(2,464,536) $(21,244,477) $(1,919,713)
Basic (loss) per share As reported $(0.63) $(5.43) $(0.45)
Pro forma $(0.63) $(5.47) $(0.49)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996: expected volatility of
72, 48 and 61 percent; risk-free interest rates of 5.47, 6.44 and 6.34
percent; expected lives of 6, 5 and 9 years; and no dividend payments.
NOTE I - INCOME TAXES
As of December 31, 1998, the Company had approximately $13,355,000 of net
operating loss carryforwards. However, due to a change in ownership during
1992, the Company has an annual limitation of approximately $850,000 in the
utilization of its net operating loss carryforwards. In addition, due to
losses in 1998, 1997 and 1996 and the realization in 1994 of built-in gains,
approximately $12,000,000 of the carryforwards may be utilized beyond the
current annual limitation to offset future taxable income.
F-23
<PAGE> 46
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE I - INCOME TAXES (CONTINUED)
The net operating loss carryforwards, to the extent unused, will expire as
follows:
<TABLE>
<CAPTION>
- ------------------------------------ ------------------------
YEAR ENDING NET OPERATING
DECEMBER 31, LOSS
- ------------------------------------ ------------------------
<S> <C> <C>
1999 $ 3,060,000
2000 2,477,000
2001 919,000
2002 -
2003 1,000
2004 139,000
2010 1,234,000
2011 1,651,000
2012 1,874,000
2018 2,000,000
============
$13,355,000
============
</TABLE>
The above-mentioned carryforwards gave rise to deferred tax assets of
approximately $5.3 million, $4.5 million and $3.8 million at December 31,
1998, 1997 and 1996, respectively. Due to the uncertainty of the ultimate
realization of the deferred tax asset, a valuation allowance in the amounts
of $3.7 million, $2.7 million and $2 million was recorded by the Company for
the years ended December 31, 1998, 1997 and 1996, respectively. The net
change in the valuation allowances for 1998, 1997 and 1996 was $.8 million,
$.7 million and $.7 million, respectively.
F-24
<PAGE> 47
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE I - INCOME TAXES (CONTINUED)
The asset recognition of the net operating loss carryforward is based
principally on the portion of the carryforwards which are not limited as to
their use and offset the deferred tax credits that are scheduled to reverse
in the carryforward period.
Deferred tax (assets) liabilities are as follows:
<TABLE>
<CAPTION>
==========================================
DECEMBER 31,
------------------------------------------
1998 1997
------------------------------------------
<S> <C> <C>
Depreciation $ 1,383,000 $ 1,404,000
Amortization of product
formulation costs 51,000 155,000
Accounts receivable allowance (45,000) (55,000)
Excess of book inventory over
tax inventory 296,000 324,000
Other (55,000) (69,000)
Net operating loss carryforwards (5,300,000) (4,500,000)
Valuation allowance 3,670,000 2,741,000
------------------------------------------
$ - $ -
==========================================
</TABLE>
The Company had no income tax expense for 1998 and 1997. The income tax
benefit of $127,600 for the year ended December 31, 1996 consists of
approximately $11,000 of current federal income taxes and approximately
$138,600 of deferred tax benefits.
F-25
<PAGE> 48
Specialty Chemical Resources, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1998, 1997 and 1996
NOTE I - INCOME TAXES (CONTINUED)
A reconciliation of differences between the statutory U.S. Federal income
tax rate and the Company's effective tax rate follows:
<TABLE>
<CAPTION>
=======================================
DECEMBER 31
---------------------------------------
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
U.S. Statutory rate (34)% (34%) (34%)
Goodwill amortization 1% 1% 11%
Impairment write-down -- 30% --
Other 2% -- 2%
Effect of net operating loss carryforward
and valuation allowance 31% 3% 14%
---------------------------------------
Effective income tax rate 0% 0% (7%)
=======================================
</TABLE>
NOTE J - LOSS PER SHARE OF COMMON STOCK
The Company adopted SFAS No. 128, Earnings Per Share, effective December 31,
1997 and all loss per share amounts disclosed herein have been calculated
under the provisions of SFAS No. 128. Basic loss per common shares was
computed by dividing net loss by the weighted average number of shares of
common stock outstanding during the reporting period. The weighted average
number of common shares used to compute basic loss per common share was
3,882,262 for 1998, 3,882,264 for 1997 and 3,945,618 for 1996. Diluted loss
per common share which would include common share equivalents for employee
stock options, cumulative convertible preferred stock and convertible
subordinated debentures is not reported because their effect would be
anti-dilutive for the years presented.
NOTE K - IMPAIRMENT OF LONG-LIVED ASSETS
At December 31, 1997, in accordance with SFAS 121, the Company determined
that circumstances related to its recurring operating losses, the reduction
in customer base, and current projections, indicated that the recoverability
of the carrying amount of long-lived assets should be assessed. In making
that assessment, the Company estimated its undiscounted future cash flows
from operations. The results of that computation indicated that an
impairment existed and that a write-down of the carrying value of the
long-lived assets to fair value was required. The Company utilized an
independent third party appraiser to determine fair value based upon
expected future cash flows from operations discounted at a rate commensurate
with the risks involved. Based upon the valuation performed, the Company
recorded a non-cash charge of $18.5 million for 1997 which was reflected as
a reduction in the carrying value of goodwill.
F-26
<PAGE> 49
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON SCHEDULES
Stockholders of
SPECIALTY CHEMICAL RESOURCES, INC.
In connection with our audit of the financial statements of Specialty Chemical
Resources, Inc. referred to in our report dated March 4, 1999, we have also
audited Schedule II for each of the three years in the period ended December 31,
1998. In our opinion, this schedule presents fairly, in all material respects,
the information required to be set forth therein.
GRANT THORNTON LLP
Cleveland, Ohio
March 4, 1999
F-27
<PAGE> 50
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
SPECIALTY CHEMICAL RESOURCES, INC.
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
-----------------------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND CHARGED TO END OF
YEAR DESCRIPTION PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS PERIOD
- ---------- ------------------------ --------------- ------------- ----------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
1996 Allowance for
doubtful accounts $ 345,000 $ 65,000 $ - $ (308,000) $ 102,000
1997 Allowance for
doubtful accounts $ 102,000 $ 73,800 $ - $ (38,800) $ 137,000
1998 Allowance for
doubtful accounts $ 137,000 $ 60,000 $ - $ (85,000) $ 112,000
</TABLE>
F-28
<PAGE> 51
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------
<S> <C>
3.01 The Amended and Restated Bylaws of the Company were filed as
Exhibit 3.03 to the Company's Form S-1 Registration Statement
(Registration No. 2-78134) and are incorporated herein by reference ..
3.02 The Restated Certificate of Incorporation of the Company was filed
as an exhibit to Company's Second Modified Plan of Reorganization
which was filed as Exhibit 2.1 to the Company's Current Report on
Form 8-K dated December 9, 1986, and is incorporated herein by
reference ............................................................
3.03 Amendment, effective December 12, 1991, to the Company's Restated
Certificate of Incorporation was filed as Exhibit 3.03 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1991 and is incorporated herein by reference .........................
3.04 Amendment, effective February 26, 1992, to the Company's Restated
Certificate of Incorporation was filed as Exhibit 3.04 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1991 and is incorporated herein by reference .........................
3.05 The Amended and Restated Bylaws of the Company were filed as
Exhibit 3.01 to the Company's Form 8-K on June 8, 1995 and are
incorporated by reference herein .....................................
4.01 Specimen Stock Certificate of the Company was filed as Exhibit 4.5
to the Company's Registration Statement on Form S-2, File No.
33-43092, and is incorporated herein by reference ....................
4.02 Open ended mortgage note dated October 6, 1995 between the Company
and National City Bank, was filed as Exhibit 4.08 to the Company's
Form 10-K for the year ended December 31, 1995 and is incorporated
by herein by reference ...............................................
4.03 Indenture Agreement between the Company and Bank One, N.A. dated
October 15, 1996 was filed as Exhibit 4.1 to the Company's
Form 10-Q for its quarter ended September 30, 1996 and is
incorporated by reference herein .....................................
4.04 The Credit Agreement between the Company and Star Bank, N.A. dated
September 18, 1996 was filed as an exhibit to the Company's current
Form 8-K, dated September 23, 1996 an is incorporated by reference
herein ...............................................................
4.05 Indemnification Agreement between the Company and Martin Trust and
CEW Partners dated August 30, 1996 was filed as Exhibit 4.5 to the
Company's Registration Statement on Form S-3 (Registration Number
333-09879) and is incorporated by reference herein ...................
10.01 1989 Non-Qualified and Incentive Stock Option Plan of the Company
was filed as Exhibit 10.13 to the Company's Annual Report on
Form 10-K for the year ended January 1, 1989 and is incorporated
herein by reference ..................................................
10.02 Form of option agreement pursuant to 1989 Incentive Stock Option
Plan of the Company was filed as Exhibit 10.14 to the Company's
Annual Report on Form 10-K for the year ended January l, 1989 and
is incorporated herein by reference ..................................
</TABLE>
-EX 1-
<PAGE> 52
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------
<S> <C>
10.03 1989 Outside Directors' Stock Option Plan of the Company was filed
as Exhibit 10.5 to the Company's Registration Statement on
Form S-2, File No. 33-43092 and is incorporated by reference herein ..
10.04 First Amendment to 1989 Non-Qualified and Incentive Stock Option
Plan of the Company, adopted October 3, 1991, was filed as
Exhibit 10.12 to the Company's Registration Statement on Form S-2,
File No. 33-43092 and is incorporated by reference herein ............
10.05 Second Amendment to 1989 Non-Qualified and Incentive Stock Option
Plan of the Company, dated February 26, 1992, was filed as
Exhibit 10.12 to the Company's Registration Statement on Form S-2,
File No. 33-43092 and is incorporated by reference herein ............
10.06 First Amendment to 1989 Outside Directors' Stock Option Plan of the
Company, adopted October 3, 1991, was filed as 10.9 to the Company's
Registration Statement on Form S-2, File No. 33-43092 and is
incorporated by reference herein .....................................
10.07 Second Amendment to the 1989 Outside Directors' Stock Option Plan,
dated February 26, 1992, was filed as Exhibit 10.13 to the Company's
Registration Statement on Form S-2, File No. 33-43092 and is
incorporated by reference herein .....................................
10.08 Agreement between ASI and Teamsters Local Union No. 416, dated
November 17, 1993 and effective as of August 15, 1993 was filed as
exhibit 10.10 on the Company's annual report for the year ended
December 31, 1993 and is incorporated by reference herein ............
10.09 Agreement between ASI and Teamsters Local Union No. 416, dated
January 12, 1992, and effective as of December 23, 1991 was filed as
Exhibit 10.11 to the Company's Registration Statement on Form S-2,
File No. 33-43092 and is incorporated by reference herein ............
10.10 Lease between ASI and Dutton Company, dated October 7, 1987 as
amended May 4, 1989, was filed as Exhibit 10.12 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1990,
File No. 2-78134, and is incorporated herein by reference ............
10.11 Lease amendment between Specialty Chemical Resources, Inc. (assignee
of ASI) and the 9150 Group dated July 25, 1994 was filed as
Exhibit 10.13 on Form 10-K for the year ended December 31, 1994 and
is incorporated by reference .........................................
10.12 Agreement between ASI and Teamsters Union Local No. 416 dated
May 1, 1995 and effective as of December 16, 1994 was filed as
Exhibit 10.14 on the Company's Form 10-Q for the quarter ended
March 31, 1995 and is incorporated by reference herein ...............
10.13 Restricted Stock Award Agreement dated July 25, 1995 between the
Company and John H. Ehlert was filed as Exhibit 10.15 on the
company's Annual Report on Form 10-K for the year ended
December 31, 1995 ....................................................
10.14 Agreement of Settlement and Release, dated as of July 21, 1995, among
the Company, the Directors, the Committee and the individual members
of the Committee was filed as Exhibit 10.01 to the Company's
Form 8-K on July 8, 1995 and is incorporated by reference herein .....
</TABLE>
-EX 2-
<PAGE> 53
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
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<S> <C>
10.15 First Amendment of the Credit Agreement between Specialty Chemical
Resources, Inc. and Star Bank N.A. dated May 22, 1997 was filed as
Exhibit 4.1 on the Company's Form 10-Q for the quarter ended June 30,
1997 and is incorporated by reference ................................
10.16 Promissory Note between Specialty Chemical Resources, Inc. and
Metropolitan Savings Bank dated December 5, 1997 was filed as
Exhibit 10.15 on Form 10-K for the year ended December 31, 1997 and
is incorporated by reference .........................................
10.17 Second Amendment of the Credit Agreement between Specialty Chemical
Resources, Inc. and Star Bank N.A. dated April 14, 1998 was filed as
Exhibit 10.16 on Form 10-K for the year ended December 31, 1997 and
is incorporated by reference .........................................
10.18 Third Amendment of the Credit Agreement between Specialty Chemical
Resources, Inc. and Star Bank N.A. dated May 20, 1998 was filed as
Exhibit 4.1 on Form 10Q for the quarter ended June 30, 1998 and is
incorporated by reference ............................................
10.19 $500,000, 12% Subordinated Promissory Note between the Company and
CEW Partners dated June 15, 1998 was filed as Exhibit 4.2 on
Form 10-Q for the quarter ended June 30, 1998 and is incorporated by
reference ............................................................
10.20 $500,000, 12% Subordinated Promissory Note between the Company and
Edwin M. Roth dated June 15, 1998 was filed as Exhibit 4.3 on
Form 10-Q for the quarter ended June 30, 1998 and is incorporated
by reference .........................................................
10.21 $500,000,12% Subordinated Promissory Note between the Company and
Martin Trust dated June 15, 1998 was filed as Exhibit 4.4 on
Form 10-Q for the quarter ended June 30, 1998 and is incorporated by
reference ............................................................
10.22 Term Sheet pertaining to Proposed Rights Offering dated June 15,
1998 between the Company and CEW Partners, Edwin M. Roth and
Martin Trust was filed as Exhibit 4.5 on Form 10-Q for the quarter
ended June 30, 1998 and is incorporated by reference ................
10.23 Fourth Amendment of the Credit Agreement between Specialty Chemical
Resources, Inc. and Star Bank N.A. dated November 12, 1998 was
filed as Exhibit 4.1 on Form 10-Q for the quarter ended September 30,
1998 and is incorporated by reference ................................
10.24 Fifth Amendment of the Credit Agreement between Specialty Chemical
Resources, Inc. and Star Bank N.A. dated February 15, 1999* ..........
10.25 Indenture between the Company and Bank One, N.A., dated as of
February 1, 1999* ....................................................
10.26 Sixth Amendment of the Credit Agreement between Specialty Chemical
Resources, Inc. and Star Bank N.A. (AKA Firstar Bank) dated
April 14, 1999* ......................................................
10.27 Allocation Agreement dated as of February 1, 1999, among CEW Partners,
Martin Trust, Edwin Roth and Corey Roth was filed as Exhibit 4.4 to
the Company's Registration Statement on Form S-3 (Registration
No. 333-66737) and is incorporated by reference ......................
</TABLE>
-EX 3-
<PAGE> 54
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
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<S> <C>
10.28 Agreement, dated as of February 1, 1999, among CEW Partners, Martin Trust,
Edwin Roth and Corey Roth was filed as Exhibit 99.1 to the Company's
Registration Statement on Form S-3 (Registration No. 333-66737) and is
incorporated by reference ............................................
10.29 $101,600, 12% Subordinated Promissory Note between the Company and CEW
Partners dated March 15, 1998, due June 15, 2001* ....................
10.30 $101,600, 12% Subordinated Promissory Note between the Company and
Edwin M. Roth dated March 15, 1998, due June 15, 2001* ...............
10.31 $101,600, 12% Subordinated Promissory Note between the Company and
Martin Trust dated March 15, 1998, due June 15, 2001* ................
27.00 Financial Data Schedule* .............................................
</TABLE>
* Filed herein
-EX 4-
<PAGE> 1
FIFTH AMENDMENT
TO
FINANCING AGREEMENT
This Fifth Amendment to Financing Agreement (the "Amendment") is made
as of the 12th day of February, 1999 (the "Effective Date"), by and between
SPECIALTY CHEMICAL RESOURCES, INC., a Delaware corporation ("Borrower") and
STAR BANK, NATIONAL ASSOCIATION, a national banking association ("Bank").
WITNESSETH:
WHEREAS, Borrower and Bank have entered into that certain Financing
Agreement, dated as of September 18, 1996, as amended by that First Amendment
to Financing Agreement, dated as of May 22, 1997, as amended by that Second
Amendment to Financing Agreement, dated as of April 14, 1998, as amended by
that Third Amendment to Financing Agreement, dated as of May 20, 1998, and as
amended by that Fourth Amendment to Financing Agreement, dated as of November
12, 1998, (as so amended, the "Financing Agreement"), pursuant to which Bank
has made certain financial accommodations available to Borrower;
WHEREAS, Borrower hereby acknowledges that it has discussed with Bank
Borrower's need for additional capitalization in the form of subordinated debt,
the purpose of which is to repay certain outstanding shareholder indebtedness
and for working capital purposes;
WHEREAS, Borrower has obtained from certain of its shareholders
unsecured loans in the aggregate principal amount of One Million Five Hundred
Thousand Dollars ($1,500,000) and is in the process of issuing its 6%
Convertible Subordinated Notes in the total principal amount of One Million
Three Hundred Sixty Thousand Dollars ($1,360,000), the net proceeds of which
the Borrower will use to repay a portion of the afore-described shareholder
loans; and
WHEREAS, Borrower and Bank desire to amend the Financing Agreement to
provide, among other things, for the above-described subordinated debt, for the
issuance of an aggregate of 375,000 shares of common stock as payment by
Borrower of the pro rata accrued and unpaid interest due under the Shareholder
Notes as of January 31, 1999 to each Edwin M. Roth, Martin Trust and CEW
Partners, and as otherwise hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual promises and agreements
contained herein and other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, Bank and Borrower do hereby agree as
follows:
1
<PAGE> 2
SECTION 1. DEFINED TERMS.
SECTION 1.1. DEFINED TERMS, of the Financing Agreement shall be amended
by modifying existing defined terms as follows:
1.1. The definition of "6% Convertible Subordinated Notes" shall be
deleted in its entirety and the following is substituted in place thereof:
"6% Convertible Subordinated Notes" shall mean those certain Specialty
Chemical Resources, Inc. 6% Convertible Subordinated Notes Due 2009 issued
by Borrower and authenticated by the trustee under the 6% Convertible
Subordinated Note Indenture from time to time, each in substantially the
form attached hereto as Exhibit AL. The term "6% Convertible Subordinated
Notes" shall not include any amendments, supplements or other modifications
made to, or replacements of, such 6% Convertible Subordinated Notes other
than those permitted under this Agreement.
1.2. The definition of "Shareholder Notes" shall be deleted in its
entirety and the following is substituted in place thereof:
"Shareholder Notes" shall mean the three (3) unsecured subordinated
promissory notes, dated June 15, 1998, and due March 15, 1999, each in the
original principal sum of Five Hundred Thousand ($500,000), entered into by and
between the Borrower and Edwin M. Roth, Martin Trust and CEW Partners.
1.3. "New Shareholder Notes" shall mean the three (3) unsecured
subordinated promissory notes, dated no later than March 15, 1999, and due
January 15, 2001, each in the original pro rata principal sum equal to the
difference between (x) the outstanding principal amount and accrued and unpaid
interest of the Shareholder Notes and (y) the amounts received by the holders
of the Shareholder Notes as payment thereof from the proceeds of the 6%
Convertible Subordinated Notes received by the Borrower, to be entered into by
and between the Borrower and Edwin M. Roth, Martin Trust and CEW Partners.
1.4. "Newly Issued Common Stock" shall mean the 375,000 shares of
common stock issued by Borrower as payment, on a pro rata basis, for the
accrued and unpaid interest under the Shareholder Notes as of January 31, 1999,
to each Martin Trust, CEW Partners and Edwin M. Roth.
Each defined term used herein and not otherwise defined herein shall
have the meaning ascribed to such term in the Financing Agreement.
SECTION 2. AMENDMENT TO SECTION 2 OF THE FINANCING AGREEMENT.
2.1. SECTION 9. WARRANTIES, REPRESENTATIONS AND COVENANTS, shall be
amended by deleting Section 9.29 in its entirety and by substituting the
following Section 9.29 in place thereof:
2
<PAGE> 3
9.29 6% Convertible Subordinated Note Documents Security. The 6%
Convertible Subordinated Note Indenture, when executed and delivered by
all parties thereto, shall be in substantially the form of Exhibit AJ
attached hereto. Each 6% Convertible Subordinated Note when issued by
Borrower and authenticated by the trustee under the 6% Convertible
Subordinated Note Indenture shall be in substantially the form attached
hereto as Exhibit AL and shall be due and payable on the tenth
anniversary of the issuance thereof. The Indebtedness under the 6%
Convertible Subordinated Note Indenture and the 6% Convertible
Subordinated Notes is not and shall not be secured by any rights,
liens, mortgages or security interests of any Person in any assets of
the Borrower. The Borrower shall have received One Million Three
Hundred Sixty Thousand Dollars ($1,360,000) as the proceeds of the 6%
Convertible Subordinated Notes no later than March 15, 1999.
SECTION 3. AMENDMENTS TO SECTION 10 OF THE FINANCING AGREEMENT.
SECTION 10, COVENANTS, is hereby amended as follows;
3.1. Section 10.11 Indebtedness; Guaranties, is hereby amended by
deleting clause (vii) thereof and inserting the following in lieu thereof:
(vii) the Shareholder Notes, the 6% Convertible Subordinated Notes, the
New Shareholder Notes, the Newly Issued Common Stock, and other
Indebtedness (in addition to that Indebtedness described in clause (vi)
of this Section 10.11) which is subordinated to the prior payment and
performance of the Obligations pursuant to a subordination agreement in
form and substance satisfactory to Bank, in its sole discretion,
3.2. Section 10.11 Indebtedness; Guaranties, is hereby further amended
by deleting the reference to Exhibit AK wherever the same appears therein and
by substituting in place thereof Exhibit AL.
SECTION 4. MODIFICATIONS OF EXHIBITS AND SCHEDULES.
The following Exhibits to the Financing Agreement shall be added, as
set forth in this SECTION 4 to the Amendment:
4.1. New Exhibit AL, 6% Convertible Subordinated Note, attached hereto
and incorporated by reference herein, shall be added to the Financing Agreement.
SECTION 5. SECTION 10 REPRESENTATIONS AND WARRANTIES.
In order to induce Bank to enter into this Amendment and in addition
to all of the representations, warranties and covenants made by Borrower under
the Financing Agreement and Loan Documents, Borrower hereby represents,
warrants and covenants that, as of the date hereof, any date upon which a Loan
is made hereunder, and until the Obligations are fully paid, performed and
satisfied, the representations, warranties and covenants set forth in the
Financing
3
<PAGE> 4
Agreement and herein are and shall remain true. The Borrower further hereby
represents and warrants to Bank as follows:
5.1. The Amendment. This Amendment has been duly and validly executed
by an authorized executive officer of Borrower and constitutes the legal, valid
and binding obligation of Borrower enforceable against Borrower in accordance
with its terms.
5.2. Financing Agreement. The Financing Agreement, as amended by this
Amendment, remains in full force and effect and remains the valid and binding
obligation of Borrower enforceable against Borrower in accordance with its
terms. Borrower hereby ratifies and confirms the Financing Agreement as amended
by this Amendment.
5.3. Nonwaiver. Except as specifically set forth in this Amendment,
the execution, delivery, performance and effectiveness of this Amendment shall
not operate nor be deemed to be nor construed as a waiver (i) of any right,
power or remedy of Bank under the Financing Agreement, nor (ii) of any term,
provision, representation, warranty or covenant contained in the Financing
Agreement or any other documentation executed in connection therewith. Further,
except as specifically set forth in this Amendment, none of the provisions of
this Amendment shall constitute, be deemed to be or construed as, a waiver of
any Event of Default under the Financing Agreement as amended by this Amendment.
5.4. Reaffirmation of Representations, Warranties and Covenants.
Borrower hereby reaffirms and agrees to be bound by all representations,
warranties and covenants made or entered into by it under the Financing
Agreement and under any and all Loan Documents. Borrower hereby represents and
warrants to Bank that no Default or Event of Default shall exist as of the date
of this Amendment after giving effect to this Amendment and none shall be
caused to exist as a result of the execution, delivery and performance by
Borrower of this Amendment; provided, however, that the foregoing is subject to
the exception that Borrower may currently be in default of certain financial
covenants and that Borrower and Bank have agreed that, if any such default
exists, this Amendment shall not operate as a waiver thereof by Bank.
5.5. Reference to and Effect on the Financing Agreement. Upon the
effectiveness of this Amendment, each reference in the Financing Agreement to
"this Agreement", "hereunder", "hereof", "herein", or words of like import
shall mean and be a reference to the Financing Agreement, as amended hereby,
and each reference to the Financing Agreement in any other document, instrument
or agreement executed and/or delivered in connection with the Financing
Agreement shall mean and be a reference to the Financing Agreement, as amended
hereby.
SECTION 6. CONDITIONS PRECEDENT TO EFFECTIVENESS OF THIS AMENDMENT.
In addition to all of the other conditions and agreements set forth
herein, the effectiveness of this Amendment is subject to each of the following
conditions precedent:
4
<PAGE> 5
6.1. Amendment to Financing Agreement. Bank shall have received an
original counterpart of this Fifth Amendment to Financing Agreement executed and
delivered by a duly authorized officer of Borrower.
6.2. Resolutions. Bank shall have received certified resolutions of
Borrower authorizing Borrower to execute, deliver and perform this Amendment.
6.3. No Material Adverse Change. There shall have occurred no material
and adverse change in the Borrower's assets, liabilities or financial condition
since the date of the last Financials delivered by Borrower to Bank nor shall
there have been any material damage to or loss of any of Borrower's assets or
properties since such date.
SECTION 7. MISCELLANEOUS.
7.1. Governing Law. This Amendment shall be governed by and construed
in accordance with the law of the State of Ohio, without regard to principles of
conflict of law.
7.2. Severability. In the event any provision of this Amendment should
be invalid, the validity of the other provisions hereof and of the Financing
Agreement shall not be affected thereby.
7.3. Counterparts. This Amendment may be executed in one or more
counterparts, each of which, when taken together, shall constitute but one and
the same agreement.
7.4. Confession of Judgment. Borrower hereby irrevocably authorizes
and empowers and attorney-at-law to appear for Borrower in any action upon or in
connection with this Amendment or the Financing Agreement, as amended hereby, at
any time after the Loans and/or other Obligations become due, as herein
provided, in any court in or of the State of Ohio or elsewhere, and waives the
issuance and service or process with respect thereto, and irrevocably authorizes
and empowers any such attorney-at-law to confess judgment in favor of Bank
against Borrower, the amount due thereon or hereon, plus interest as herein
provided, and all costs of collection, and waives and releases all errors in
said proceedings and judgments and all rights of appeal from the judgment
rendered. The Borrower agrees and consents that the attorney confessing judgment
on behalf of the Borrower may also be counsel to Bank or any of Bank's
Affiliates, waives any conflict of interest which might otherwise arise, and
consents to Bank paying such confessing attorney a reasonable legal fee or
allowing such attorney's reasonable fees to be paid from the proceeds of
Collateral, the Premises or any other security for the Loans and the other
Obligations.
5
<PAGE> 6
IN WITNESS WHEREOF, Borrower has caused this Fifth Amendment to
Financing Agreement to be duly executed and delivered by its duly authorized
officer as of the date first above written.
WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT
TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGEMENT MAY BE TAKEN AGAINST YOU
WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT
FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR
RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT,
OR ANY OTHER CAUSE.
Signed in Macedonia, Ohio, on February 15, 1999.
--------- -----------
Signed and acknowledges SPECIALTY CHEMICAL RESOURCES, INC.
in the presence of:
- ----------------------------------
Name: By: /s/ David F. Spink
----------------------------- --------------------------------
Its: Chief Financial Officer
- ---------------------------------- -------------------------------
Name:
-----------------------------
6
<PAGE> 7
STATE OF OHIO )
)ss:
COUNTY OF SUMMIT )
--------
The foregoing instrument was acknowledges before me this 15th day
February, 1999, by David F. Spink, Chief Financial Officer of Specialty
Chemical Resources, Inc., a Delaware corporation, on behalf of the corporation.
/s/ Sandi R. Murphy
--------------------------
Notary Public
Sandi R. Murphy, Attorney at Law
Notary Public - State of Ohio
My commission has no expiration date.
Section 147.03 R.C.
Accepted at Cincinnati, Ohio
as of 15th February, 1999
-------------
STAR BANK, NATIONAL ASSOCIATION
By: /s/ Suzanne E. Geiger
----------------------------
Its: Vice President
---------------------------
7
<PAGE> 1
Exhibit 10.25
================================================================================
SPECIALTY CHEMICAL RESOURCES, INC.
and
BANK ONE, N.A., as TRUSTEE
-----------------
INDENTURE
Dated as of February 1, 1999
----------------
6% Convertible Subordinated Notes Due 2009
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
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ARTICLE ONE DEFINITIONS AND INCORPORATION BY REFERENCE ..............................1
Section 1.01. Definitions .............................................................1
Section 1.02. Incorporation by Reference of Trust Indenture Act .......................6
Section 1.03. Rules of Construction ...................................................6
ARTICLE TWO THE SECURITIES ..........................................................7
Section 2.01. Form and Dating .........................................................7
Section 2.02. Execution and Authentication ............................................7
Section 2.03. Registrar, Paying Agent and Conversion Agent ............................8
Section 2.04. Paying Agent to Hold Money in Trust .....................................8
Section 2.05. Securityholder Lists ....................................................9
Section 2.06. Transfer and Exchange ...................................................9
Section 2.07. Replacement Securities .................................................10
Section 2.08. Outstanding Securities .................................................10
Section 2.09. Treasury Securities ....................................................10
Section 2.10. Temporary Securities ...................................................11
Section 2.11. Cancellation ...........................................................11
ARTICLE THREE REDEMPTION .............................................................11
Section 3.01. Notices to Trustee and Paying Agent ....................................11
Section 3.02. Selection of Securities to be Redeemed .................................11
Section 3.03. Notice of Redemption ...................................................12
Section 3.04. Effect of Notice of Redemption .........................................13
Section 3.05. Deposit of Redemption Price ............................................13
Section 3.06. Securities Redeemed in Part ............................................13
ARTICLE FOUR SUBORDINATION; RELATIONSHIP TO ORIGINAL NOTES ..........................13
Section 4.01. Securities Subordinated to Senior Debt .................................13
Section 4.02. Maturity of Senior Debt ................................................14
Section 4.03. Liquidation, Etc. ......................................................14
Section 4.04. Senior Debt Default ....................................................14
Section 4.05. Company's Obligations Unimpaired .......................................15
Section 4.06. Subrogation ............................................................15
Section 4.07. Subordination Unimpaired ...............................................15
Section 4.08. Standstill; Limitation on Actions ......................................16
Section 4.09. Relationship to Original Notes .........................................16
</TABLE>
(i)
<PAGE> 3
<TABLE>
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ARTICLE FIVE COVENANTS ..............................................................16
Section 5.01. Payment of Securities ..................................................16
Section 5.02. Limitation on Indebtedness for Borrowed Money ..........................17
Section 5.03. Reports by the Company .................................................17
Section 5.04. Corporate Existence ....................................................17
Section 5.05. Notice of Default ......................................................18
Section 5.06. Waiver of Stay, Extension or Usury Laws ................................18
ARTICLE SIX SUCCESSORS .............................................................18
Section 6.01. When Company May Merge, Etc. ...........................................18
Section 6.02. Successor Corporation Substituted ......................................19
ARTICLE SEVEN DEFAULT AND REMEDIES ...................................................19
Section 7.01. Events of Default ......................................................19
Section 7.02. Acceleration ...........................................................21
Section 7.03. Other Remedies .........................................................21
Section 7.04. Waiver of Past Defaults ................................................21
Section 7.05. Control by Majority ....................................................22
Section 7.06. Limitation on Suits ....................................................22
Section 7.07. Rights of Holders to Receive Payment ...................................23
Section 7.08. Collection Suit by Trustee .............................................23
Section 7.09. Trustee May File Proofs of Claim .......................................23
Section 7.10. Priorities .............................................................24
Section 7.11. Undertaking for Costs ..................................................24
ARTICLE EIGHT TRUSTEE ................................................................24
Section 8.01. Duties of Trustee ......................................................24
Section 8.02. Rights of Trustee ......................................................26
Section 8.03. Individual Rights of Trustee ...........................................26
Section 8.04. Disclaimers ............................................................26
Section 8.05. Notice of Defaults .....................................................27
Section 8.06. Reports by Trustee to Holders ..........................................27
Section 8.07. Compensation and Indemnity .............................................27
Section 8.08. Replacement of Trustee .................................................28
Section 8.09. Successor Trustee by Merger, Etc. ......................................29
Section 8.10. Eligibility; Disqualification ..........................................29
Section 8.11. Preferential Collection of Claims Against the Company. .................29
</TABLE>
(ii)
<PAGE> 4
<TABLE>
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ARTICLE NINE DISCHARGE OF INDENTURE .................................................29
Section 9.01. Termination of the Company's Obligation ................................29
Section 9.02. Application of Trust Money .............................................30
Section 9.03. Repayment to the Company ...............................................30
Section 9.04. Reinstatement ..........................................................30
ARTICLE TEN CONVERSION .............................................................31
Section 10.01. Right of Conversion; Conversion Price .................................31
Section 10.02. Procedures for Conversion. ............................................31
Section 10.03. Adjustments to Conversion Price .......................................32
Section 10.04. Covenant to Reserve Shares ............................................33
Section 10.05. Compliance with Legal and Governmental Requirements ...................34
Section 10.06. Payment of Taxes ......................................................34
Section 10.07. Responsibility of Trustee and Conversion Agent ........................34
ARTICLE ELEVEN AMENDMENTS, SUPPLEMENTS AND WAIVERS ...................................35
Section 11.01. Without Consent of Holders ............................................35
Section 11.02. With Consent of Holders ...............................................35
Section 11.03. Revocation and Effect of Consents .....................................36
Section 11.04. Notation on or Exchange of Securities .................................37
Section 11.05. Trustee to Sign Amendments, Etc. ......................................37
ARTICLE TWELVE MISCELLANEOUS .........................................................38
Section 12.01. Notices. ..............................................................38
Section 12.02. Certificate and Opinion as to Conditions Precedent ....................38
Section 12.03. Statements Required in Certificate or Opinion .........................39
Section 12.04. Rules by Trustee, Registrar, Paying Agent and Conversion Agent ........39
Section 12.05. Legal Holidays ........................................................39
Section 12.06. Governing Law .........................................................39
Section 12.07. No Recourse Against Others ............................................39
Section 12.08. No Adverse Interpretation of Other Agreements .........................40
Section 12.09. Successors ............................................................40
Section 12.10. Duplicate Originals ...................................................40
Section 12.11. Separability ..........................................................40
Section 12.12. Table of Contents, Headings and References ............................40
SIGNATURES .....................................................................................41
EXHIBIT A .....................................................................................A-1
</TABLE>
(iii)
<PAGE> 5
INDENTURE
INDENTURE, dated as of February 1, 1999, between SPECIALTY CHEMICAL
RESOURCES, INC., a Delaware corporation (the "Company"), and BANK ONE, N.A., a
national banking association, as trustee (the "Trustee").
Each of the parties hereto agrees as follows for the benefit of the
other party and for the equal and ratable benefit of the Holders (defined below)
of the Company's 6% Convertible Subordinated Notes Due 2009 issued pursuant to
this Indenture.
ARTICLE ONE
DEFINITIONS AND INCORPORATION BY REFERENCE
Section 1.01. Definitions.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise, and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Agent" means any Registrar, Paying Agent or Conversion Agent.
"Bankruptcy Law" means Title 11 of the United States Code, 11 U.S.C.
Sections 101 et seq., or any similar federal or state law for the relief of
debtors.
"Board of Directors" means the Board of Directors of the Company or any
authorized committee of the Board of Directors.
"Board Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted by
the Board of Directors and to be in full force and effect on the date of such
certification and delivered to the Trustee.
"Business Day" means a day that is not a Saturday, Sunday, legal
holiday or other day on which banks and trust companies in the city where the
Trustee is located are not required to be open.
"Capitalized Lease Obligation" means indebtedness represented by
obligations under a lease that is required to be capitalized for financial
reporting purposes in accordance with generally accepted accounting principles,
and the
<PAGE> 6
amount of such indebtedness shall be the capitalized amount of such obligations
determined in accordance with such principles.
"Capital Stock" means any and all shares, interests, participations or
other equivalents (however designated) of corporate stock.
"Change of Control" means the acquisition (or the announcement of an
intent to acquire), directly or indirectly, by any Person or group of Persons
acting together, for a similar purpose, other than the "Stockholders Group," or
any of them or their Affiliates, of beneficial ownership of shares of the
Capital Stock of the Company in such amount that, after giving effect to such
acquisition, such Person or Persons shall be entitled to vote 25% or more of the
shares entitled to vote, as at such date, in the election of directors of the
Company. The "Stockholders Group" means Edwin M. Roth, Corey B. Roth, CEW
Partners, and Martin Trust.
"Common Stock" means all shares now or hereafter authorized of the
common stock, $0.10 par value, of the Company.
"Company" means the party named as such in this Indenture, until a
successor replaces it pursuant to the Indenture, and thereafter means the
successor.
"Company Request" or "Company Order" means a written request or order
signed in the name of the Company by the Chairman or Vice Chairman of the Board
of Directors, the President or any Vice President and by the Treasurer, an
Assistant Treasurer, the Controller, an Assistant Controller, the Secretary or
an Assistant Secretary of the Company and delivered to the Trustee.
"Consolidated Net Worth" means with respect to any Person at any date
the total amount of non-redeemable preferred stock and common shareholders'
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
as at such date prepared in accordance with generally accepted accounting
principles.
"Conversion Agent" means an office or agency where Securities may be
presented for conversion. The term includes any additional conversion agent.
"Conversion Price" initially means $0.40.
"Custodian" means any receiver, trustee, assignee, liquidator or
similar official under any Bankruptcy Law.
"Default" means any event which is, or after notice or passage of time
would be, an Event of Default.
(2)
<PAGE> 7
"Election Contest" means any filing pursuant to Rule 14a-11 under the
Securities Exchange Act of 1934, as amended, by any Person or group of Persons
for the purpose of opposing a solicitation by the Company with respect to the
election of directors of the Company.
"Event of Default" shall have the meaning provided in Section 7.01.
"Fair Market Value of the Common Stock" shall have the meaning provided
in Section 2.04(b).
"Governmental Authority" means any nation or government, any state or
other political subdivision thereof and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government, and any corporation or other entity owned or controlled (through
stock or capital ownership or otherwise) by any of the foregoing.
"Holder," "Securityholder" or "Noteholder" means the Person in whose
name a Security is registered on the Registrar's books.
"Indebtedness" means (a) any indebtedness, obligation or liability
(whether matured or unmatured, liquidated or unliquidated, direct or indirect,
absolute or contingent or joint or several) of any Person (i) for or in respect
of borrowed money, (ii) evidenced by a note, debenture or similar instrument
(including a purchase money obligation) given in connection with the acquisition
of any property or assets, including securities, (iii) for the payment of money
relating to any other transaction (including forward sale or purchase
agreements, Capitalized Lease Obligations (but not operating leases) and
conditional sales agreements) having the commercial effect of a borrowing of
money entered into by such Person to finance its operations or capital
requirements; or (iv) for the maximum fixed repurchase price of any equity
securities of such Person which by their terms or otherwise are required to be
redeemed prior to the maturity of the Securities or at the option of the holder
thereof; (b) any liability of others described in the preceding clause (a) which
the Person has guaranteed or for which it is otherwise legally liable; and (c)
any deferral, renewal, refinancing, extension or refunding of, or amendment,
modification or supplement to, any liability of the types referred to in clauses
(a) and (b) above, but shall not include indebtedness or amounts owed (except to
banks or other financing institutions) for compensation to employees, or for
goods or materials purchased, or services utilized, in the ordinary course of
business of the Person. For purposes hereof, the "maximum fixed repurchase
price" of any equity securities, which price is based upon, or measured by, the
fair market value of such equity securities, means, as of any date, the fair
market value thereof as determined in good faith by the Board of Directors.
(3)
<PAGE> 8
"Indenture" means this Indenture as amended or supplemented from time
to time as provided for herein.
"Maturity Date" means March 15, 2009.
"NASDAQ" means the National Association of Securities Dealers Automated
Quotation System.
"Net Income" of any Person for any period means the net income (loss)
of such Person for such period determined in accordance with generally accepted
accounting principles.
"Officer" means the Chairman or Vice Chairman of the Board of
Directors, the President, any Vice President, the Chief Financial Officer, the
Treasurer, the Secretary or the Controller of the Company.
"Officer's Certificate" means a certificate signed by the Chairman or
Vice Chairman of the Board of Directors, the President or any Vice President and
by any other Officer or an Assistant Treasurer or Assistant Secretary of the
Company.
"Opinion of Counsel" means a written opinion from legal counsel, who
may be an employee of or counsel to the Company or the Trustee and who is
reasonably acceptable to the Trustee.
"Original Notes" means the Company's 6% Convertible Subordinated Notes
Due 2006, or any of them, as amended or supplemented from time to time, that
were issued pursuant to an Indenture dated as of October 15, 1996 between the
Company and Bank One, N.A., as Trustee.
"Paying Agent" means an office or agency where Securities may be
presented for payment, except that for purposes of Article Nine the Paying Agent
shall not be the Company or a Subsidiary. The term includes any additional
paying agent.
"Person" means any individual, corporation, partnership, limited
liability company, joint venture, association, joint-stock company, trust,
unincorporated organization or any Governmental Authority.
"Redemption Date," when used with respect to any Security to be
redeemed, means the date fixed for such redemption by or pursuant to this
Indenture and the Securities.
"Redemption Price," when used with respect to any Security to be
redeemed, means the price fixed for such redemption by or pursuant to this
Indenture and the Securities.
(4)
<PAGE> 9
"Registrar" means an office or agency where Securities may be presented
for registration of transfer or for exchange. The term includes any
co-registrar.
"SEC" means the Securities and Exchange Commission.
"Security" or "Securities" means the Company's 6% Convertible
Subordinated Notes Due 2009, or any of them, as amended or supplemented from
time to time, that are issued pursuant to this Indenture and which shall be
substantially in the form of Exhibit A annexed hereto and constituting a part
hereof for all purposes.
"Senior Debt" means all principal of and interest on, and any other
payment due pursuant to the terms of instruments or agreements creating,
relating to or evidencing Indebtedness of the Company (other than the Securities
and this Indenture and the Original Notes and their indenture), whether
outstanding on the date of this Indenture or thereafter created, incurred,
assumed or guaranteed by the Company for money borrowed from others or in
connection with the acquisition by it or any Subsidiary of any other business or
entity or of any properties or assets, and, in each case, all renewals,
extensions, refinancings or refundings thereof, unless the terms of the
instrument or agreement creating, relating to or evidencing such Indebtedness
expressly provide that such Indebtedness is not superior in right of payment to
the payment of principal and interest on the Securities. Notwithstanding the
foregoing, Senior Debt shall not include (i) any Indebtedness or liability for
compensation to employees, or for goods or materials purchased in the ordinary
course of business or for services, and (ii) any Indebtedness of the Company to
a Subsidiary for money borrowed or advanced from such Subsidiary. Senior Debt
does not include the Original Notes.
"Subsidiary" means (i) a corporation in which the Company owns,
directly or indirectly, a majority of the Capital Stock with voting power, under
ordinary circumstances, to elect directors, (ii) a corporation in which a
Subsidiary of the Company owns, directly or indirectly, a majority of the
Capital Stock with voting power, under ordinary circumstances, to elect
directors, or (iii) a corporation in which the Company and a Subsidiary, or two
or more Subsidiaries, owns directly or indirectly, a majority of the Capital
Stock with voting power, under ordinary circumstances, to elect directors, or
(iv) any other Person (other than a corporation) in which the Company, a
Subsidiary of the Company, or the Company and a Subsidiary, directly or
indirectly, own at the date of determination thereof, at least a majority of the
ownership interests.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sections
77aaa-77bbbb), as in effect on the date of this Indenture.
(5)
<PAGE> 10
"Trustee" means the party named as such in this Indenture, until a
successor replaces it in accordance with the provisions of this Indenture, and
thereafter means the successor.
"Trust Officer" means the Chairman of the Board, the President or any
other officer or assistant officer of the Trustee assigned by the Trustee to
administer its corporate trust matters.
"U.S. Government Obligations" means direct non-callable obligations of,
or noncallable obligations guaranteed by, the United States of America or any
Person or agency controlled or supervised by or acting as an instrumentality of
the United States of America pursuant to authority granted by the Congress of
the United States of America for the payment of which guarantee or obligation
the full faith and credit of the United States of America.
Section 1.02. Incorporation by Reference of Trust Indenture Act.
Whenever this Indenture refers to a provision of the TIA such provision is
incorporated by reference in and made a part of this Indenture, as if this
Indenture were governed by the same. The following TIA terms used in this
Indenture have the following meanings:
(i) "Commission" means the SEC;
(ii) "indenture securities" means the Securities;
(iii) "indenture security holder" means a Holder,
Securityholder or Noteholder;
(iv) "indenture to be qualified" means this Indenture;
(v) "indenture trustee" or "institutional trustee" mean the
Trustee; and
(vi) "obligor" on the indenture securities means the Company
or any other obligor on the Securities.
All other terms used in this Indenture that are defined by the TIA or defined by
reference in the TIA to another statute or defined by SEC rule, and not
otherwise defined herein, shall have the meanings assigned to them in the TIA
such other statute, as if the Indenture were governed by the same, or SEC rule.
Section 1.03. Rules of Construction. Unless the context otherwise
requires:
(i) a capitalized term has the meaning assigned to it in
this Article or in the Section in which it is first used;
(6)
<PAGE> 11
(ii) an accounting term not otherwise defined has the meaning
assigned to it in accordance with generally accepted accounting
principles in effect on the date hereof and any other reference in this
Indenture to "generally accepted accounting principles" refers to
generally accepted accounting principles on the date hereof;
(iii) "or" is not exclusive;
(iv) words in the singular include the plural and words in
the plural include the singular;
(v) "herein," "hereof," "hereto" and other words of similar
import refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision; and
(vi) any term connoting gender shall be deemed to include the
neuter, masculine and feminine gender.
ARTICLE TWO
THE SECURITIES
Section 2.01. Form and Dating. The Securities and the Trustee's
certificate of authentication shall be substantially in the form of Exhibit A
annexed hereto. The Securities may have notations, legends or endorsements
required by law, securities exchange rule or usage. The Company shall approve
the form of the Security and any notation, legend or endorsement thereon. Each
Security shall be dated the date of its authentication. The terms and provisions
contained in the Securities shall constitute, and are hereby expressly made, a
part of this Indenture.
Section 2.02. Execution and Authentication. (a) Two Officers shall sign
the Securities for the Company by manual or facsimile signature. The Company's
corporate seal, if required, shall be impressed, affixed, imprinted or
reproduced on the Securities and may be in facsimile form.
(b) If an Officer whose signature is on a Security no longer holds that
office at the time the Trustee authenticates the Security, the Security shall be
valid nevertheless.
(c) A Security shall not be valid until the Trustee manually signs the
certificate of authentication on the Security. The signature of the Trustee
shall be conclusive evidence that the Security has been authenticated under this
Indenture.
(7)
<PAGE> 12
(d) The Trustee shall authenticate Securities for original issue in the
aggregate principal amount of up to $1,360,000 upon a Company Order. Such
Company Order, and any subsequent Company Order made with respect to the
Securities from time to time, shall specify the amount of Securities to be
authen ticated and the date on which the original issue of Securities is to be
authenticated. The aggregate principal amount of Securities outstanding at any
time may not exceed $1,360,000, except as provided in Section 2.07.
(e) The Trustee may appoint an authenticating agent acceptable to the
Company to authenticate Securities. An authenticating agent may authenticate
Securities whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent. An
authenticating agent has the same rights as an Agent to deal with the Company or
an Affiliate of the Company.
(f) The Securities shall be issuable only in registered form without
coupons and only in denominations of $100 and any integral multiple thereof.
Section 2.03. Registrar, Paying Agent and Conversion Agent. The Company
shall continuously employ a Registrar and a Conversion Agent. The Registrar
shall keep a register of the Securities and of their transfer and exchange. The
Company may have one or more co-registrars, one or more additional paying agents
and one or more additional conversion agents. Except for purposes of Article
Nine, the Company or any Subsidiary may act as Paying Agent.
The Company shall enter into an appropriate agency agreement with any
Agent not a party to this Indenture. The agreement shall implement the
provisions of this Indenture that relate to such Agent. The Company shall notify
the Trustee of the name and address of any such Agent. If the Company fails to
maintain a Registrar, Paying Agent or Conversion Agent or fails to give the
foregoing notice, the Trustee shall act as such.
The Company initially appoints the Trustee as Registrar, Paying Agent
and Conversion Agent. The Trustee also acts as Registrar, Paying Agent and
Conversion Agent with respect to the Original Notes.
Section 2.04. Paying Agent to Hold Money in Trust. (a) On or prior to
the due date of the principal of and interest on any Securities, the Company
shall deposit with the Paying Agent cash or cleared funds in a sum sufficient to
pay such principal and interest so becoming due.
(b) Notwithstanding the foregoing, in the event the Company elects to
pay the accrued interest due to the Securityholders by delivery of Common Stock
in lieu of cash, the Company shall deposit with the Paying Agent, on or prior to
the due date
(8)
<PAGE> 13
of the interest payment, stock certificate(s) in the name of each Securityholder
representing the number of shares of Common Stock such Securityholder is
entitled to receive calculated by dividing the aggregate amount of accrued
interest due to such Securityholder by the Fair Market Value of the Common
Stock. The Fair Market Value of the Common Stock is the average closing sales
price of the Common Stock for the five consecutive trading days prior to the day
immediately before the Maturity Date, conversion payment date or Redemption
Date, as the case may be.
(c) The Paying Agent shall hold in trust for the benefit of
Securityholders or the Trustee all money and/or stock certificates held by the
Paying Agent for the payment of principal of and interest on the Securities and
shall promptly notify the Trustee of any default by the Company in making any
such payment. If the Company or an Affiliate acts as Paying Agent, it shall
segregate the money and hold it as a separate trust fund. The Company at any
time may require a Paying Agent to pay all money held by it to the Trustee and
account for any funds disbursed and to deliver all stock certificates held by
it, if any, to the Trustee. The Trustee may at any time during the continuance
of any payment default, upon written request to a Paying Agent, require such
Paying Agent to pay all money held by it to the Trustee and to account for any
funds disbursed and to deliver all stock certificates held by it, if any, to the
Trustee. Upon doing so, the Paying Agent (if other than the Company) shall have
no further liability for the money or the stock.
Section 2.05. Securityholder Lists. The Trustee shall preserve in as
current a form as is reasonably practicable the most recent list available to it
of the names and addresses of Securityholders. If the Trustee is not the
Registrar, the Company shall furnish to the Trustee at such times as the Trustee
may request in writing, a list in such form and as of such date as the Trustee
may reasonably require of the names and addresses of Securityholders.
Section 2.06. Transfer and Exchange. (a) When Securities are presented
to the Registrar with a request to register the transfer of such Securities or
to exchange such Securities for an equal principal amount of Securities of other
authorized denominations, the Registrar shall register the transfer or make the
exchange as requested; provided that such Securities presented or surrendered
for registration of transfer or exchange shall be duly endorsed or be
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Registrar duly executed by the Holder thereof or his attorney
duly authorized in writing; provided further that the Registrar need not
register the transfer of or exchange any Securities selected for redemption or
register the transfer of or exchange any Securities for a period of 15 days
before a selection of Securities to be redeemed. To permit registrations of
transfers and exchanges, the Company shall execute and the Trustee shall
authenticate Securities at the Registrar's request. The Company may charge a
reasonable fee for any transfer or exchange, and may require payment of a sum
sufficient to cover any transfer tax or other governmental charge that may be
imposed
(9)
<PAGE> 14
in connection therewith (other than any such transfer taxes or similar
governmental charge payable upon exchanges pursuant to Sections 2.10, 3.06 or
10.02).
(b) All Securities presented or surrendered for exchange, registration
of transfer, redemption or payment shall, if so required by the Trustee or the
Company, be accompanied by a written instrument or instruments of transfer and
other required documentation satisfactory in form to the Company and the
Trustee, duly executed by the registered owner or by his attorney duly
authorized in writing.
Section 2.07. Replacement Securities. If a mutilated Security is
surrendered to the Trustee, or if the Holder of a Security claims that the
Security has been lost, destroyed or wrongfully taken, and neither the Company
nor the Trustee has received notice that such Security has been acquired by a
bona fide purchaser, the Company shall issue and the Trustee, at the Company's
request, shall authenticate a replacement Security if the Trustee's requirements
are met. If required by the Trustee or the Company, the applicant for a
replacement Security must provide (a) an indemnity bond which must be sufficient
in the judgment of both the Trustee and the Company to protect the Company, the
Trustee or any Agent from any loss which any of them may suffer if a Security is
replaced and (b) evidence to the satisfaction of the Company and the Trustee of
the loss, destruction or theft of such Security and the ownership thereof. The
Company may charge such Holder for its expenses in replacing a Security.
Section 2.08. Outstanding Securities. (a) The Securities outstanding at
any time are all Securities that have been authenticated by the Trustee, except
for those cancelled by it, those delivered to it for cancellation and those
described in this Section 2.08 as not outstanding. Subject to Section 2.09, a
Security does not cease to be outstanding because the Company or one of its
Affiliates holds the Security.
(b) If a Security is replaced pursuant to Section 2.07, it ceases to be
outstanding, until the Trustee receives proof satisfactory to it that the
replaced Security is held by a bona fide purchaser.
(c) If the Paying Agent (other than the Company or an Affiliate of the
Company) holds on a Redemption Date or on the Maturity Date money and/or stock
certificates, sufficient to pay principal of and accrued interest on Securities
payable on that date, then on and after that date such Securities cease to be
outstanding and interest on them ceases to accrue.
Section 2.09. Treasury Securities. In determining whether the Holders
of the required principal amount of Securities have concurred in any notice,
direction, waiver or consent, Securities owned by the Company or any of its
Affiliates shall be disregarded, except that for the purposes of determining
whether the Trustee shall be protected in relying on any such notice, direction,
waiver or consent, only Securities
(10)
<PAGE> 15
which the Trustee knows are so owned shall be so disregarded. Securities so
owned which have been pledged in good faith shall not be disregarded if the
pledgee establishes to the satisfaction of the Trustee that the pledgee has the
right so to act with respect to the Securities and that the pledgee is not the
Company or any of its Affiliates.
Section 2.10. Temporary Securities. Until definitive Securities are
ready for delivery, the Company may prepare and the Trustee shall authenticate
temporary Securities. Temporary Securities shall be substantially in the form of
definitive Securities but may have variations that the Company considers
appropriate for temporary Securities. Without unreasonable delay, the Company
shall prepare and, upon receiving an appropriate Company Order, the Trustee
shall authenticate definitive Securities in exchange for temporary Securities.
Section 2.11. Cancellation. The Company at any time may deliver
Securities to the Trustee for cancellation. The Registrar, Paying Agent and
Conversion Agent shall forward to the Trustee any Securities surrendered to them
for transfer, exchange, payment or conversion. The Trustee and no one else shall
cancel all Securities surrendered for transfer, exchange, payment, conversion or
cancellation and shall destroy canceled Securities and shall deliver a
certificate of such destruction to the Company. Subject to Section 2.07, the
Company may not issue new Securities to replace Securities it has paid or
delivered to the Trustee for cancellation or that any Securityholder has
converted pursuant to Article Ten.
ARTICLE THREE
REDEMPTION
Section 3.01. Notices to Trustee and Paying Agent. (a) If the Company
elects to redeem Securities pursuant to Section 5 of the Securities, it shall
notify the Trustee and the Paying Agent in writing of the Redemption Date and
the principal amount of Securities to be redeemed.
(b) The Company shall give the notice provided for in subsection
3.01(a) at least 45 days before the Redemption Date (unless a shorter notice is
satisfactory to the Trustee).
Section 3.02. Selection of Securities to be Redeemed. If less than all
of the Securities are to be redeemed, the Trustee shall select the Securities to
be redeemed pro rata or by lot or in such other manner as the Trustee shall deem
fair to the Securityholders. The Trustee shall make the selection from the
Securities outstand ing and not previously called for redemption. Securities in
denominations of $100 may be redeemed only in whole. The Trustee may select for
redemption portions (equal to $100 or any integral multiple thereof) of the
principal of securities that have
(11)
<PAGE> 16
denominations larger than $100. The Trustee shall promptly notify the Company in
writing of such Securities selected for redemption and, in the case of any
Security selected for partial redemption, the principal amount to be redeemed.
Provisions of this Indenture that apply to Securities called for redemption also
apply to portions of Securities called for redemption.
Section 3.03. Notice of Redemption. (a) At least 30 days before a
Redemp tion Date, the Company shall mail or cause the mailing of a notice of
redemption by first class mail to each Holder whose Securities are to be
redeemed.
(b) The notice shall identify the Securities to be redeemed and shall
state:
(i) the Redemption Date;
(ii) the Redemption Price;
(iii) the Conversion Price;
(iv) the amount of interest accrued on the Securities called
for redemption up to but not including the Redemption Date and that
interest on such Securities ceases to accrue on and after the
Redemption Date;
(v) the name and address of the Paying Agent and the
Conversion Agent;
(vi) that Securities called for redemption may be converted
at any time before the close of business on the day prior to the
Redemption Date;
(vii) that Holders who want to convert Securities must
satisfy the requirements in Section 7 of the Securities;
(viii) that Securities called for redemption must be
surrendered to the Paying Agent to collect the Redemption Price;
(ix) if any Security is being redeemed in part, the portion
of the principal amount of such Security to be redeemed and that, after
the Redemption Date, upon surrender of such Security, a new Security or
Securities in aggregate principal amount equal to the unredeemed
portion thereof will be issued without charge to the Securityholder;
(x) if the Security is being redeemed based upon the Fair
Market Value of the Common Stock with respect to the payment of accrued
interest in Common Stock, the beginning and end of the five trading
days when the Fair Market Value will be determined.
(12)
<PAGE> 17
(c) At the Company's request, and after receiving a Company Request,
the Trustee shall give the notice of redemption in the Company's name and at the
Company's expense. Any such notice, if given in accordance with this Indenture,
shall be deemed properly given, regardless of whether it is actually received.
Section 3.04. Effect of Notice of Redemption. Once notice of redemption
is mailed, Securities called for redemption become due and payable on the
Redemption Date and at the Redemption Price. Upon surrender to the Paying Agent,
Securities called for redemption shall be paid at the Redemption Price plus
accrued interest to the Redemption Date. Interest on Securities called for
redemption ceases to accrue on and after the Redemption Date unless the Company
fails to pay the Redemption Price. Upon redemption, accrued interest will, at
the Company's option, be payable in cash or in Common Stock of the Company (as
discussed in Section 2.04(b)).
Section 3.05. Deposit of Redemption Price. On or before the Redemption
Date, the Company shall deposit with the Paying Agent (or if the Company is its
own Paying Agent, shall segregate and hold in trust) cash or cleared funds
and/or stock certificates in an amount or number sufficient to pay the
Redemption Price of all Securities or portions thereof to be redeemed on that
date other than Securities or portions thereof called for redemption on that
date which have been delivered by the Company to the Trustee for cancellation.
The Paying Agent shall return to the Company any money or securities previously
deposited but no longer required for that purpose because of conversion of
Securities.
Section 3.06. Securities Redeemed in Part. Upon surrender of a Security
that is redeemed in part, the Company shall execute, and the Trustee shall
authenticate for the Holder, a new Security equal in principal amount to the
unredeemed portion of the Security surrendered.
ARTICLE FOUR
SUBORDINATION; RELATIONSHIP TO ORIGINAL NOTES
Section 4.01. Securities Subordinated to Senior Debt. (a) The Company
agrees, and each Holder of the Securities by his acceptance thereof likewise
agrees, that the payment (i) of the principal and interest on, and any other
amount due in respect of, the Securities, and (ii) to acquire any of the
Securities is subordinated to the extent and in the manner provided in this
Article Four, to the prior payment in full of all Senior Debt and the
termination of all financing arrangements between the Company and the holders of
Senior Debt.
(b) This Article Four shall constitute a continuing offer to all
persons who, in reliance upon such provisions, become holders of, or continue to
hold, Senior
(13)
<PAGE> 18
Debt, and such provisions are made for the benefit of the holders of Senior
Debt, and such holders are made obligees hereunder and any one or more of them
may enforce such provision. Each Holder of a Security, by virtue of his
acceptance thereof, specifically agrees to be bound by the provisions of this
Article Four and the other related provisions of this Indenture.
Section 4.02. Maturity of Senior Debt. Upon maturity of any Senior Debt
by lapse of time, acceleration or otherwise, then all principal of, premium, if
any, and interest on, and any other amount due pursuant to the terms of the
instruments or agreements creating, relating to or evidencing all such matured
Senior Debt shall first be paid in full before any payment on account of
principal, interest, mandatory redemption provisions or any other amount due is
made upon a Security.
Section 4.03. Liquidation, Etc. In the event of any insolvency,
bankruptcy, liquidation, reorganization or other similar proceedings, or any
receivership proceed ings in connection therewith, relative to the Company or
its creditors or its property, and in the event of any proceedings for voluntary
liquidation, dissolution, or other winding up of the Company, whether or not
involving insolvency or bankruptcy proceedings, then all principal, premium, if
any, and interest due on and any other amount due pursuant to the terms of the
instruments or agreements creating, relating to or evidencing Senior Debt shall
first be paid in full before any payment on account of principal or interest or
any other amount due is made upon a Security. Except as may otherwise be ordered
by a court of competent jurisdiction, any payment or distribution of any kind or
character, whether in cash, property, stock, or obligations, which may be
payable or deliverable in respect of a Security in any of the proceedings
referred to in the first sentence of this Section 4.03 shall be paid or
delivered directly to the holders of Senior Debt for application in payment
thereof, unless and until all principal and interest on, and any other amount
due in respect of, Senior Debt shall have been paid in full.
Section 4.04. Senior Debt Default. The Company shall not make any, and
the Holders of the Securities shall not accept or receive, payment of principal
or interest on, or any amounts in respect of, or purchase or acquire for value
(and the Holders of the Securities shall not offer for sale or otherwise cause
the Company to purchase or acquire for value) (including, without limitation, on
account of the mandatory redemption provisions of the Securities) a Security if,
either immediately before or after any such payment is received by a Holder of a
Security, an event of default as defined in any indenture, agreement or
instrument creating or evidencing Senior Debt shall exist or any event which,
with the passage of time or the giving of notice or both, would constitute an
event of default as defined in any indenture, agreement or instrument creating
or evidencing Senior Debt shall exist. The Company shall give prompt written
notice to the Trustee of any default or of any event which, with the passage of
time or the giving of notice or both, would constitute an event of default,
under any Senior Debt or under any agreement
(14)
<PAGE> 19
pursuant to which Senior Debt may have been issued, but failure to give such
notice shall not affect the subordination of the Securities to the Senior Debt
provided in this Article Four. Should any payment or distribution be received by
a Holder of a Security prior to the payment in full of all Senior Debt and
termination of all financing arrangements between the Company and the holders of
the Senior Debt, and such payment violates any provision of this Article Four,
such Holder shall receive and hold the same in trust for the benefit of the
holders of the Senior Debt.
Section 4.05. Company's Obligations Unimpaired. The provisions of this
Article Four are for the purpose of defining the relative rights of the holders
of Senior Debt, on the one hand, and the Holders of the Securities on the other
hand, and, as between the Company and such Holders, nothing herein shall impair
the obligation of the Company, which is unconditional and absolute, to pay the
Holders the principal of and interest on the Securities in accordance with the
terms of the Securities, nor shall anything herein prevent the Holders of the
Securities from exercising all remedies otherwise permitted by applicable law
upon an Event of Default thereunder, subject to the rights, under this Article
Four, of holders of Senior Debt in respect of cash, property, stock or other
securities received upon the exercise of such remedies and subject to the other
provisions of this Indenture relating to the exercise of remedies by the Trustee
and/or the Holders of the Securities.
Section 4.06. Subrogation. Subject to the payment in full of all Senior
Debt, the Holders of the Securities shall be subrogated to the rights of the
holders of Senior Debt to receive payments or distributions of assets of the
Company payable or distributable to the holders of Senior Debt until all of the
Securities shall be paid in full and, as between the Company, its creditors,
other than the holders of Senior Debt, and the Holders of the Securities, no
payments or distributions otherwise payable or deliverable in respect of the
Securities, but, by virtue of the provisions thereof or of this Indenture, paid
or delivered to the holders of Senior Debt, shall be deemed to be a payment by
the Company on account of Senior Debt, and no payments or distributions paid to
the Holders of the Securities, by virtue of the subrogation herein provided for,
shall be deemed to be a payment by the Company on account of the Securities. The
holders of the Senior Debt shall be subrogated to the Holders of the Securities
with respect to their claims against the Company and their rights, liens and
security interests, if any, in any of the Company's assets and the proceeds
thereof until all Senior Debt shall have been paid and all financing
arrangements between the Company and the Holders of the Senior Debt have been
terminated.
Section 4.07. Subordination Unimpaired. No right of any present or
future holder of Senior Debt to enforce subordination as herein provided shall
at any time in any way be prejudiced or impaired by any act or failure to act on
the part of the Company or by any act or failure to act in good faith by any
such holder, or by any noncompliance by the Company with the terms, provisions,
and covenants of any
(15)
<PAGE> 20
agreement relating to Senior Debt, regardless of any knowledge thereof any such
holder may have or be otherwise charged with. Each holder of a Security
authorizes each holder of Senior Debt to (i) change any terms relating to the
Senior Debt or any agreement relating thereto, (ii) make new loans or extend
further credit to the Company, grant renewals, increases or extensions for time
of payment of the Senior Debt, (iii) take or omit to take any action for the
enforcement of, or waive any rights with respect to, any Senior Debt, and (iv)
enter into such agreements as the holders of the Senior Debt may deem proper
affecting any collateral for the Senior Debt, or exchange, sell, release,
surrender or otherwise deal with such collateral, in each such case without
invalidating or impairing the subordination provided for herein.
Section 4.08. Standstill; Limitation on Actions. No Holder of any
Securities may exercise any rights or remedies against the Company to enforce or
collect upon any Security or any amounts due in connection with such Security,
take possession of assets of the Company or foreclose upon any such assets,
whether by judicial action or otherwise, unless and until all of the Senior Debt
shall have been fully and finally paid and satisfied with interest and all
financing arrangements between the Company and the holders of Senior Debt have
been terminated; provided, however, that, subject to the right of the holders of
Senior Debt to receive prior payment in full under the terms hereof, if an Event
of Default under any of Sections 7.01(i), 7.01(iv) or 7.01(v) occurs, then the
Holders of the Securities may exercise any and all rights and remedies in
respect of such Event of Default, but only after expiration of the 179-day
period commencing upon actual receipt by the holder of the Senior Debt of notice
of such an Event of Default.
Section 4.09. Relationship to Original Notes. The Securities are in
pari passu to the Original Notes which were issued in October 1996 in connection
with a rights offering by the Company to its Stockholders. The Trustee also acts
as Trustee, Registrar, Paying Agent and Conversion Agent under the Indenture
dated October 15, 1996 governing the Original Notes.
ARTICLE FIVE
COVENANTS
Section 5.01. Payment of Securities. Subject to the terms of Article
Four hereof, the Company shall pay the principal of and interest on the
Securities on the dates and in the manner provided in the Securities and this
Indenture. No installments of principal or interest are payable until the
Maturity Date. Such principal amount or interest due shall be considered paid on
the date due if the Trustee or Paying Agent (other than the Company or its
Affiliates) holds on that date cash or cleared funds and/or stock certificates
for Common Stock designated for and sufficient to pay such installment. The
Company shall pay interest on overdue principal at a rate per annum equal to the
rate set forth in the title of the Securities;
(16)
<PAGE> 21
it shall pay interest on overdue interest at the same rate of interest to the
extent lawful.
Section 5.02. Limitation on Indebtedness for Borrowed Money. The
Company will not, and will not permit any Subsidiary to, incur any indebtedness
for borrowed money that would rank senior to the Securities, except (i) any such
indebtedness existing on the date hereof or under the Company's existing
revolving credit facility; (ii) any renewals, refinancings, extensions or
refundings under any indebtedness referred to in clause (i) above; (iii) any
indebtedness secured by purchase money security interests; (iv) any other senior
bank or other institutional indebtedness; (v) any indebtedness of a Subsidiary
to another Subsidiary; (vi) any indebtedness of any other entity existing at the
time such entity merged with or into or became a Subsidiary of the Company or of
a Subsidiary, including indebtedness incurred in connection with, or in
contemplation of, such other entity merging with or into or becoming a
Subsidiary of the Company or of a Subsidiary or assumed by the Company or a
Subsidiary in connection with its acquisition of the assets owned by such other
entity; (vii) any indebtedness incurred in connection with a merger with or
into, or the acquisition of the stock or assets of, a Person and (viii) any
indebtedness to holders of the Securities.
Section 5.03. Reports by the Company. (a) The Company shall file with
the Trustee within 15 days after filing with the SEC copies of the annual
reports and the information, documents and other reports (or copies of such
portions of any of the foregoing as the SEC may by rules and regulations
prescribe) which the Company is required to file with the SEC pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, and such
additional information, documents and reports with respect to compliance by the
Company with the conditions and cove nants set forth in this Indenture as the
SEC may by rules and regulations prescribe.
(b) So long as any Security is outstanding, the Company shall cause its
annual report to stockholders and any quarterly or other financial reports
furnished by it to stockholders to be mailed to the Holders at their addresses
appearing in the register of Securities maintained by the Registrar.
(c) The Company shall promptly furnish such additional information
concerning the Company as may be reasonably requested and deemed necessary by
the Trustee in the conduct of its duties hereunder; provided, however, that the
Company shall have no such obligation with respect to information constituting
restricted information under any law or governmental regulation at the time
applicable thereto.
Section 5.04. Corporate Existence. Subject to Article Six, the Company
shall not liquidate or discontinue its normal operations with intention to
liquidate.
(17)
<PAGE> 22
Section 5.05. Notice of Default. (a) In the event that the Company or
any of its Subsidiaries receive written notice from any holder of Indebtedness
that the full amount of such Indebtedness has been declared due and payable
before its maturity because of an acceleration of such Indebtedness or the
occurrence of any default under such Indebtedness, the Company shall promptly
give written notice to the Trustee of such declaration.
(b) The Company shall deliver to the Trustee within 120 days after the
end of each fiscal year an Officer's Certificate stating whether or not there
has been any Default or Event of Default by the Company that occurred during
such fiscal year. If there has been a Default or Event of Default, the
certificate shall describe the Default or Event of Default and its status. The
first certificate to be delivered by the Company pursuant to this Section 5.05
shall be for the first fiscal year beginning after the date of the Indenture.
Section 5.06. Waiver of Stay, Extension or Usury Laws. The Company
covenants (to the extent that it may lawfully do so) that it will not at any
time insist upon, plead, or in any manner whatsoever claim or take the benefit
or advantage of, any stay or extension law or any usury law or other law that
would prohibit or forgive the Company from paying all of any portion of the
principal or interest on overdue principal, if any, of the Securities as
contemplated herein, wherever enacted, now or at any time hereafter in force, or
which may affect the covenants or the performance of this Indenture; and (to the
extent that it may lawfully do so) the Company hereby expressly waives all
benefit or advantage of any such law, and covenants that it will not hinder,
delay or impede the execution of any power herein granted to the Trustee, but
will suffer and permit the execution of every such power as though no such law
had been enacted.
ARTICLE SIX
SUCCESSORS
Section 6.01. When Company May Merge, Etc. (a) The Company shall not
consolidate with or merge into any other corporation or transfer all or
substantially all of its properties and assets as an entirety or substantially
as an entirety to any Person, unless:
(i) either the Company shall be the continuing Person, or
the Person (if other than the Company) formed by such consolidation or
into which the Company is merged, or the Person to which the properties
and assets of the Company as an entirety or substantially as an
entirety are transferred, shall be a Person organized and existing
under the laws of the United States of America, any State thereof or
the District of Columbia and shall expressly assume, by an indenture
supplemental hereto, executed and delivered to the
(18)
<PAGE> 23
Trustee, in form reasonably satisfactory to the Trustee and in
compliance with Article Eleven, all the obligations of the Company
under the Securities and this Indenture;
(ii) immediately after giving effect to such transaction, no
Default or Event of Default shall have occurred and be continuing;
(iii) immediately after giving effect to such transaction the
Person (if other than the Company) formed by such consolidation or into
which the Company is merged or to which the properties and assets of
the Company as an entirety or substantially as an entirety are
transferred shall have a positive Consolidated Net Worth equal to not
less than the Consolidated Net Worth of the Company immediately
preceding such transaction; and
(iv) at least 15 days prior to the consummation of such
transaction, the Holders of Securities have received notice of, and
have been afforded any conversion rights available under Article Ten as
a result of, such consolidation, merger or transfer.
(b) The Company shall deliver to the Trustee, and the Trustee shall be
fully protected in relying upon, an Officer's Certificate and an Opinion of
Counsel, each to the effect that such consolidation, merger or transfer and the
entering into any such supplemental indenture comply with this Indenture and
that all conditions precedent herein provided for relating to such transaction
have been complied with.
Section 6.02. Successor Corporation Substituted. Upon any consolidation
or merger, or any transfer of all or substantially all of the assets of the
Company in accordance with Section 6.01, the successor corporation formed by
such consolida tion or into which the Company is merged or the Person to which
such transfer is made shall succeed to, and be substituted for, and may exercise
every right and power of, the Company under this Indenture with the same effect
as if such successor corporation had been named as the Company herein. When such
a successor assumes all obligations of its predecessor under this Indenture and
the Securities, the predecessor shall be released from such obligations.
ARTICLE SEVEN
DEFAULT AND REMEDIES
Section 7.01. Events of Default. (a) Each of the following shall
constitute an "Event of Default":
(i) the Company defaults in the payment of the principal of
and interest on any Security when the same becomes due and payable at
maturity,
(19)
<PAGE> 24
upon redemption, upon conversion or otherwise, and the default
continues for a period of 10 days;
(ii) the Company fails to observe or perform any of its
other covenants contained in the Securities or this Indenture, or any
material representation of the Company in the Securities or this
Indenture shall prove to be untrue in any material respect on the date
made, and, in any case, such default continues for the period and after
the notice specified below;
(iii) there shall be a default under any Indebtedness of the
Company or any Subsidiary, whether such Indebtedness now exists or
shall hereafter be created, which default shall have resulted in such
Indebtedness becoming or being declared due and payable prior to the
date on which it would otherwise have become due and payable or at
maturity, without such acceleration having been rescinded or annulled
or such Indebtedness having been discharged; provided, however, that no
default under this clause (a)(iii) shall exist if all such defaults
taken as a whole relate to Indebtedness with an aggregate principal
amount of less than $1,000,000;
(iv) the Company pursuant to or within the meaning of any
Bank ruptcy Law (i) commences a voluntary case or proceeding, (ii)
consents to the entry of an order for relief against it in an
involuntary case or proceeding, (iii) consents to the appointment of a
Custodian of it or for all or substantially all of its property or (iv)
makes a general assignment for the benefit of its creditors;
(v) a court of competent jurisdiction enters a decree or
order under any Bankruptcy Law that (i) is for relief against the
Company in an involuntary case or proceeding, (ii) appoints a Custodian
of the Company or for all or substantially all of its property or (iii)
orders the liquidation of the Company; and in each case the decree or
order remains unstayed and in effect for a period of 45 days;
(b) A Default under clause (a)(ii) is not an Event of Default until the
Trustee, with actual knowledge of a Default, notifies the Company or until the
Holders of at least 25% in principal amount of the Securities then outstanding
notify the Company and the Trustee of the Default, and the Company does not cure
the Default within 30 days after receipt of the notice. The notice called for by
this subsection (b) must specify the Default, demand that it be remedied and
state that such notice is a "Notice of Default."
(c) When a Default is cured or waived, it will be deemed never to have
existed.
(20)
<PAGE> 25
Section 7.02. Acceleration. If an Event of Default (other than an Event
of Default specified in clause 7.01(a)(iv) or 7.01(a)(v)) occurs and is
continuing, the Trustee by written notice to the Company, or the Holders of at
least 25% in principal amount of the Securities then outstanding by written
notice to the Company and the Trustee, may declare the principal of and accrued
interest on the Securities then outstanding to be due and payable. Upon such
declaration, the principal and interest shall become due and payable immediately
(but the rights of the holders thereof shall be subject to the terms of Article
Four hereof). If an Event of Default specified in clause 7.01(a)(iv) or
7.01(a)(v) occurs, all unpaid principal of and accrued interest on the
Securities then outstanding shall ipso facto become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
Securityholder (but payment thereof shall be subject to the terms of Article
Four hereof). Upon payment of such principal and interest, all of the Company's
obligations under such Securities and this Indenture, other than its obligations
under Section 8.07, shall terminate. The Holders of a majority in principal
amount of the Securities then outstanding by written notice to the Trustee may
rescind an acceleration with respect to such Security and its consequences if
(a) all existing Events of Default, other than the nonpayment of the principal
of such Securities which has become due solely by such declaration of
acceleration, have been cured or waived, (b) to the extent the payment of such
interest is lawful, interest on overdue principal and interest, which has become
due otherwise than by such declaration of acceleration, has been paid, (c) the
rescission would not conflict with any judgment or decree of a court of
competent jurisdiction, and (d) all payments due to the Trustee and any
predecessor Trustee under Section 8.07 have been made. Anything herein contained
to the contrary notwithstanding, in the event of any acceleration pursuant to
this Section 7.02, the Company shall not be obligated to pay any premium which
it would have had to pay if it had then elected to redeem the Securities
pursuant to the terms of the Securities.
Section 7.03. Other Remedies. If an Event of Default occurs and is
continu ing, the Trustee may, subject to the terms of this Indenture, pursue any
available remedy by proceeding at law or in equity to collect the payment of
principal of or interest on the Securities or to enforce the performance of any
provision of the Securities or this Indenture. The Trustee may maintain a
proceeding even if it does not possess any of the Securities or does not produce
any of them in the proceeding. A delay or omission by the Trustee or any
Securityholder in exercising any right or remedy accruing upon an Event of
Default shall not impair the right or remedy or constitute a waiver of or
acquiescence in the Event of Default. No remedy is exclusive of any other
remedy. All available remedies are cumulative to the extent permitted by law.
Section 7.04. Waiver of Past Defaults. Subject to Sections 7.07 and
11.02, the Holders of a majority in principal amount of the outstanding
Securities by written notice to the Trustee may waive an existing Default or
Event of Default and its
(21)
<PAGE> 26
consequences, except a Default in the payment of principal of or interest on any
Security. When a Default or Event of Default is waived, it is cured and ceases.
Section 7.05. Control by Majority. The Holders of a majority in
principal amount of the outstanding Securities may direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on it. However, the Trustee may refuse
to follow any direction that conflicts with any law or this Indenture that the
Trustee determines may be unduly prejudicial to the rights of another
Securityholder or that may involve the Trustee in personal liability; provided,
that the Trustee may take any other action deemed proper by the Trustee which is
not inconsistent with such direction.
Section 7.06. Limitation on Suits. Notwithstanding anything to the
contrary set forth herein, neither a Holder nor the Trustee may pursue any
remedy with respect to this Indenture or the Securities unless:
(i) the Holder gives to the Trustee and the Company written
notice of a continuing Event of Default;
(ii) the Holders of at least 25% in principal amount of the
outstanding Securities make a written request to the Trustee to pursue
the remedy and a copy thereof is forwarded to the Company;
(iii) such Holder or Holders offer to the Trustee indemnity
and security therefor satisfactory to the Trustee against any loss,
liability or expense;
(iv) the Trustee does not comply with the request within 60
days after receipt of the request and the offer of satisfactory
indemnity and security therefor;
(v) during such 60-day period the Holders of a majority in
principal amount of the outstanding Securities do not give the Trustee
a direction which, in the opinion of the Trustee, is inconsistent with
the request; and
(vi) the provisions of Section 4.08 hereof shall have been
complied with.
Neither a Securityholder nor the Trustee may use this Indenture to prejudice the
rights of another Securityholder or to obtain a preference or priority over such
other Securityholder.
This Section 7.06 shall constitute a continuing offer to all persons who, in
reliance on such section, become holders of, or continue to hold, Senior Debt,
and this section
(22)
<PAGE> 27
is made for the benefit of the holders of Senior Debt, and such holders are made
obligees hereunder and any one or more of them may enforce this section.
Section 7.07. Rights of Holders to Receive Payment. Subject to Article
Four, notwithstanding any other provision of this Indenture, the right of any
Holder to receive payment of principal of and interest on a Security on or after
the respective due dates expressed in the Security, or to bring suit for the
enforcement of any such payment on or after such date, shall not be impaired or
affected without the consent of such Holder. Notwithstanding any other provision
of this Indenture, the right of any Holder of a Security to bring suit for the
enforcement of the right to convert the Security shall not be impaired or
affected without the consent of the Holder.
Section 7.08. Collection Suit by Trustee. If an Event of Default in
payment of interest or principal specified in clause 7.01(a)(i) occurs and is
continuing, subject to the terms of Article 4 hereof and Section 7.06 above, the
Trustee may recover judgment in its own name and as trustee of an express trust
against the Company or any other obligor on the Securities for the whole amount
of unpaid principal and accrued interest remaining unpaid, together with
interest on overdue principal and, to the extent permitted by law, interest on
overdue interest, in each case at a rate per annum equal to the rate set forth
in the title of the Securities, and such further amount as shall be sufficient
to cover the costs and expenses of collection, including the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel and any other amounts due the Trustee pursuant to Section 8.07.
Section 7.09. Trustee May File Proofs of Claim. The Trustee may file
such proofs of claim and other papers or documents as may be necessary or
advisable in order to have the claims of the Trustee (including any claim for
the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel) and the Securityholders allowed in any judicial
proceedings relative to the Company (or any other obligor upon the Securities),
its creditors or its property, and subject to the terms of Article 4 hereof and
Section 7.06 above, shall be entitled and empowered to collect and receive any
monies or other property payable or deliverable on any such claims and to
distribute the same, and any Custodian in any such judicial proceedings is
hereby authorized by each Securityholder to make such payments to the Trustee
and, in the event that the Trustee shall consent to the making of such payments
directly to the Securityholders, to pay to the Trustee any amount due to it for
the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, and any other amounts due the Trustee under
Section 8.07. Nothing herein contained shall be deemed to authorize the Trustee
to authorize or consent to or accept or adopt on behalf of any Securityholder
any plan of reorganization, arrangement, adjustment or composition affecting the
Securities or the rights of any Holder thereof, or to authorize the Trustee to
vote in respect of the claim of any Holder in any such proceeding.
(23)
<PAGE> 28
Section 7.10. Priorities. If the Trustee collects any money pursuant to
this Article Seven, it shall pay out the money in the following order:
First: to the Trustee for amounts due under Section 8.07;
Second: to holders of Senior Debt, to the extent required by
Article Four;
Third: to holders thereof for amounts due and unpaid on the
Securities and on the Original Notes, in pari passu, for principal and
interest or interest on overdue principal, if any, and, to the extent
permitted by law, interest on overdue interest, if any, ratably,
without preference or priority of any kind, according to the amounts
due and payable on the Securities and the Old Notes for principal and
interest, respectively; and
Fourth: to the Company.
The Trustee, upon prior written notice to the Company, may fix a record date and
payment date for any payment to Securityholders pursuant to this Section 7.10.
Section 7.11. Undertaking for Costs. In any suit for the enforcement of
any right or remedy under this Indenture or in any suit against the Trustee for
any action taken or omitted by it as Trustee, a court in its discretion may
require the filing by any party litigant in the suit of an undertaking including
security therefor to pay the costs of the suit, and the court in its discretion
may assess reasonable costs, including reasonable attorneys' fees, against any
party litigant in the suit, having due regard to the merits and good faith of
the claims or defenses made by the party litigant. This Section 7.11 does not
apply to a suit by the Trustee, a suit by a Holder pursuant to Section 7.07 or a
suit by Holders of more than 10% in principal amount of the outstanding
Securities or a suit by any holder of Senior Debt.
ARTICLE EIGHT
TRUSTEE
The Trustee hereby accepts the trust imposed upon it by this Indenture
and covenants and agrees to perform the same, as herein expressed. The Trustee
also acts as Trustee, Registrar, Paying Agent and Conversion Agent under the
Indenture dated October 15, 1996 governing the Original Notes.
Section 8.01. Duties of Trustee. (a) If an Event of Default has
occurred and is continuing, the Trustee shall exercise such of the rights and
powers vested in it by this Indenture and use the same degree of care and skill
in their exercise as a prudent
(24)
<PAGE> 29
person would exercise or use under the circumstances in the conduct of his own
affairs.
(b) Except during the continuance of an Event of Default:
(i) the Trustee need perform only those duties as are
specifically set forth in this Indenture and no others; and
(ii) in the absence of bad faith on its part, the Trustee
may con clusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements of
this Indenture; however, the Trustee shall examine the certificates and
opinions to determine whether or not they conform to the requirements
of this Indenture.
(c) The Trustee may not be relieved from liability for its own gross
negligent action, its own gross negligent failure to act or its own willful
misconduct, except that:
(i) this subsection (c) does not limit the effect of
subsection (b) of this Section 8.01;
(ii) the Trustee shall not be liable for any error of
judgment made in good faith by a Trust Officer, unless it is proved
that the Trustee was negligent in ascertaining the pertinent facts; and
(iii) the Trustee shall not be liable with respect to any
action it takes or omits to take in good faith in accordance with a
direction received by it pursuant to Section 7.05.
(d) No provision of this Indenture shall require the Trustee to expend
or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of any of its
rights or powers if it shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured to it.
(e) Every provision of this Indenture that in any way relates to the
Trustee is subject to subsections (a), (b), (c) and (d) of this Section 8.01
(f) The Trustee shall not be liable for interest on any money received
by it except as the Trustee may agree with the Company in a writing separate
from this Indenture. Money held in trust by the Trustee need not be segregated
from other funds except to the extent required by law.
(25)
<PAGE> 30
Section 8.02. Rights of Trustee. Subject to Section 8.01:
(i) The Trustee may rely on any document believed by it to
be genuine and to have been signed or presented by the proper Person.
The Trustee need not investigate any fact or matter stated in the
document.
(ii) Before the Trustee acts or refrains from acting, it may
require an Officer's Certificate or an Opinion of Counsel, which shall
conform to Section 12.03. The Trustee shall not be liable for any
action it takes or omits to take in good faith in reliance on such
certificate or opinion.
(iii) The Trustee may act through its attorneys and agents
and shall not be responsible for the misconduct or negligence of any
agent appointed with due care.
(iv) The Trustee shall not be liable for any action it takes
or omits to take in good faith which it believes to be authorized or
within its rights or powers.
(v) The Trustee may consult with counsel and the advice or
opinion of such counsel as to matters of law shall be full and complete
authorization and protection in respect of any action taken, omitted or
suffered by it hereunder in good faith and in accordance with the
advice or opinion of such counsel.
(vi) The Trustee shall be under no obligation to exercise
any of the rights or powers vested in it by this Indenture at the
request, order or direction of any of the Securityholders, pursuant to
the provisions of this Indenture, unless such Securityholders shall
have offered, to the satisfaction of the Trustee, security against the
costs, expenses and liabilities which might be incurred by the Trustee
thereby.
Section 8.03. Individual Rights of Trustee. The Trustee in its
individual or any other capacity may become the owner or pledgee of Securities
and may otherwise deal with the Company or its Affiliates with the same rights
it would have if it were not Trustee. Any Agent may do the same with like
rights. However, the Trustee must comply with Sections 8.10 and 8.11.
Section 8.04. Disclaimers. The Trustee makes no representation as to
the validity or adequacy of this Indenture or the Securities, it shall not be
accountable for the Company's use of the proceeds from the Securities or for the
use or application of any money, securities or assets by any Paying Agent (other
than the Trustee) and it shall not be responsible for any statement in the
Securities other than its certificate of authentication.
(26)
<PAGE> 31
Section 8.05. Notice of Defaults. If a Default or an Event of Default
occurs and is continuing and if it is known to the Trustee, the Trustee shall
mail to each Securityholder and the Company notice of the Default or Event of
Default within 90 days after it occurs or becomes known to the Trustee,
whichever is later; provided, however, that except in the case of a Default or
an Event of Default in payment of principal or interest on any Security, the
Trustee may withhold the notice if and so long as a committee of its Trust
Officers in good faith determines that withholding the notice is in the interest
of the Securityholders.
Section 8.06. Reports by Trustee to Holders. Within 60 days after each
May 15 beginning with May 15, 1999, the Trustee shall mail to each
Securityholder a brief report dated as of such May 15 that complies with Section
313(a) of the TIA, as if this Indenture were governed by the same. The Trustee
also shall comply with Section 313(b) and (c) of the TIA, as if this Indenture
were governed by the same. A copy of each such report at the time of its mailing
to Securityholders shall be mailed to the Company and filed with the SEC and
each securities exchange, if any, on which the Securities are listed. The
Company shall notify the Trustee if the Securities become listed on any
securities exchange.
Section 8.07. Compensation and Indemnity. (a) The Company shall pay to
the Trustee such compensation as the Company and the Trustee shall from time to
time agree in writing for its services. The Trustee's compensation shall not be
limited by any law on compensation of a trustee of an express trust. The Company
shall reimburse the Trustee upon request for all reasonable disbursements,
expenses and advances incurred or made by it. Such expenses shall include the
reasonable compensation, disbursements and expenses of the Trustee's agents and
counsel.
(b) The Company shall indemnify the Trustee for, and hold it harmless
against, any loss or liability incurred by it in connection with the
administration of this Indenture and its duties hereunder, including the
reasonable expenses of defending itself against any claim of liability
hereunder. The Trustee shall notify the Company promptly of any claim asserted
against the Trustee for which it may seek indemnity. The Company need not
reimburse any expense or indemnify against any loss or liability incurred by the
Trustee through negligence or bad faith on its part.
(c) To secure the Company's payment obligations in this Section 8.07,
the Trustee shall have a senior lien to which the Securities are hereby made
subordinate on all money or property held or collected by the Trustee, in its
capacity as Trustee, except money or property (including stock certificates)
held in trust to pay principal of and interest on particular Securities.
(d) When the Trustee incurs expenses or renders services after an Event
of Default specified in clause 7.01(a)(iv) or 7.01(a)(v) occurs, the expenses
and the
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compensation for the services are intended to constitute expenses of
administration under any Bankruptcy Law.
Section 8.08. Replacement of Trustee. (a) The Trustee may resign by so
notifying the Company in writing. The Holders of a majority in principal amount
of the outstanding Securities may remove the Trustee by so notifying the Trustee
and the Company in writing and may appoint a successor Trustee with the
Company's written consent. The Company may remove the Trustee if:
(i) the Trustee fails to comply with Section 8.10;
(ii) the Trustee is adjudged a bankrupt or an insolvent;
(iii) a receiver or other public officer takes charge of the
Trustee or its property; or
(iv) the Trustee becomes incapable of acting.
(b) If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, the Company shall promptly appoint a successor
Trustee.
(c) A successor Trustee shall deliver a written acceptance of its
appoint ment to the retiring Trustee and to the Company. Immediately thereafter,
the retiring Trustee shall transfer all property held by it as Trustee to the
successor Trustee, subject to the lien provided in Section 8.07, the resignation
or removal of the retiring Trustee shall become effective, and the successor
Trustee shall have all the rights, powers and duties of the Trustee under this
Indenture. A successor Trustee shall mail notice of its succession to each
Securityholder.
(d) If a successor Trustee does not take office within 60 days after
the retiring or removed Trustee resigns or is removed, the retiring or removed
Trustee, the Company or the Holders of at least a majority in principal amount
of the outstanding Securities may petition any court of competent jurisdiction
for the appointment of a successor Trustee.
(e) If the Trustee fails to comply with Section 8.10, any
Securityholder may petition any court of competent jurisdiction for the removal
of the Trustee and the appointment of a successor Trustee.
(f) Notwithstanding replacement of the Trustee pursuant to this Section
8.08, the Company's obligations under Section 8.07 shall continue for the
benefit of the retiring or removed Trustee.
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Section 8.09. Successor Trustee by Merger, Etc. If the Trustee
consolidates with, merges or converts into, or transfers all or substantially
all of its corporate trust business to, another corporation, the successor,
resulting, surviving or transferee corporation without any further act shall be
the successor Trustee.
Section 8.10. Eligibility; Disqualification. This Indenture shall
always have a Trustee who satisfies the requirements of Section 310(a)(1) of the
TIA, as if this Indenture were governed by the same. The Trustee shall have a
combined capital and surplus of at least $1,000,000, as set forth in its most
recent published annual report of condition. The Trustee shall comply with
Section 310(b) of the TIA, including the optional provision permitted by the
second sentence of Section 310(b)(9) of the TIA, as if this Indenture were
governed by the same; provided, however, that there shall be excluded from the
operation of Section 310(b)(1) of the TIA any indenture or indentures under
which other securities, or certificates of interest or participation in other
securities of the Company are outstanding, if the requirements for such exclu
sion set forth in Section 310(b)(1) of the TIA are met.
Section 8.11. Preferential Collection of Claims Against the Company.
The Trustee shall comply with Section 311(a) of the TIA, excluding any creditor
relationship listed in Section 311(b) of the TIA, as if this Indenture were
governed by the same. A Trustee who has resigned or been removed shall be
subject to Section 311(a) of the TIA to the extent indicated, as if this
Indenture were governed by the same.
ARTICLE NINE
DISCHARGE OF INDENTURE
Section 9.01. Termination of the Company's Obligation. (a) The Company
may terminate its obligations under the Securities and this Indenture if all
such Securities previously authenticated and delivered (other than destroyed,
lost or wrongfully taken Securities which have been replaced or paid or
Securities for whose payment money or securities have theretofore been held in
trust and thereafter repaid to the Company, as provided in Section 9.03) have
been delivered to the Trustee for cancellation and the Company has paid all sums
payable by it hereunder, or if the Company has irrevocably deposited or caused
to be deposited with the Trustee or Paying Agent (if other than the Company),
under the terms of an irrevocable trust agreement in form and substance
reasonably satisfactory to the Trustee and any such Paying Agent, as trust funds
in trust solely for the benefit of the Holders for that purpose, money or U.S.
Government Obligations maturing as to principal and interest in such amounts and
at such times as are sufficient without consideration of any reinvestment of
such interest, to pay principal of and interest on the outstanding Securities to
maturity or redemption and all other sums payable hereunder by the Company, as
the case may be; provided, that the Trustee or such Paying Agent shall
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have been irrevocably instructed to apply such money or the proceeds of such
U.S. Government Obligations to the payment of said principal and interest and
such amounts with respect to the Securities. The Company shall also pay or cause
to be paid all other sums payable hereunder by the Company and shall deliver to
the Trustee an Officer's Certificate stating that all conditions precedent to
the satisfaction and discharge of this Indenture have been complied with and an
Opinion of Counsel to the same effect.
(b) Notwithstanding the foregoing subsection (a), the Company's and
Trustee's obligations under Sections 2.03, 2.04, 2.05, 2.06, 2.07, 5.01, 8.07,
8.08, 9.03 and 9.04 and Article Ten shall survive until such Securities are no
longer outstanding. Thereafter, the Company's and the Trustee's obligations in
Sections 8.07, 9.03 and 9.04 shall survive.
(c) After any such delivery or irrevocable deposit, subject to Section
9.04, the Trustee upon request shall acknowledge in writing the discharge of the
Company's obligations under the Securities and this Indenture except for those
surviving obligations specified above.
Section 9.02. Application of Trust Money. The Trustee or Paying Agent
shall hold in trust money or U.S. Government Obligations deposited with it
pursuant to Section 9.01. It shall apply the deposited money and the money from
U.S. Government Obligations in accordance with this Indenture to the payment of
principal and interest on the Securities. Money and U.S. Government Obligations
so held in trust are not subject to the subordination provisions of Article Four
if such money and U.S. Government Obligations were received in trust prior to
the occur rence of an event of default with respect to any Senior Debt.
Section 9.03. Repayment to the Company. Subject to Section 9.01, the
Trustee and the Paying Agent shall promptly pay to the Company upon request any
excess money or U.S. Government Obligations held by them at any time. The
Trustee and the Paying Agent shall pay or deliver to the Company upon request
any money held by them and/or any stock certificate(s) held by them, for the
payment of principal or interest that remains unclaimed for two years after the
date such payment shall have become due. After payment to the Company,
Securityholders entitled to money must look to the Company for payment as
general creditors unless an applicable abandoned property law designates another
Person, and the Trustee and the Paying Agent shall have no responsibility to the
Securityholders for such money or stock.
Section 9.04. Reinstatement. If the Trustee or Paying Agent is unable
to apply any money or U.S. Government Obligations in accordance with Section
9.01 by reason of any legal proceeding or by reason of any order or judgment of
any court or governmental authority enjoining, restraining or otherwise
prohibiting such
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application, the Company's obligations under this Indenture and the Securities
shall be revived and reinstated as though no deposit had occurred pursuant to
Section 9.01 until such time as the Trustee or Paying Agent is permitted to
apply all such money or U.S. Government Obligations in accordance with Section
9.01; provided, however, that if the Company has made any payment of principal
of or interest on any Securities because of the reinstatement of its
obligations, the Company shall be subrogated to the rights of the Holders of
such Securities to receive such payment from the money or U.S. Government
Obligations held by the Trustee or Paying Agent.
ARTICLE TEN
CONVERSION
Section 10.01. Right of Conversion; Conversion Price. The Holder of a
Security may convert the principal amount of the Security in whole, and, at the
Company's option accrued interest thereon, or, if less than the whole principal
amount, any portion thereof that is in an integral multiple of $100 and, at the
Company's option accrued interest on such portion, into Common Stock at the
Conversion Price: (i) at any time after March 15, 2002 and before the close of
business on the Maturity Date, (ii) in the event of an Election Contest, and
(iii) upon a Change of Control. In addition, if a Security is called for
redemption, the Holder may convert it at any time before the close of business
on the last Business Day prior to the Redemption Date.
Section 10.02. Procedures for Conversion. (a) To convert a Security, a
Holder must (i) complete and sign the conversion notice attached to a Security,
(ii) surrender a Security to the Company or its Conversion Agent, (iii) furnish
required endorsements and transfer documents and (iv) pay any transfer tax or
similar tax if required. A Holder may convert a portion of a Security only if
the portion is $100 or an integral multiple of $100.
(b) As promptly as practicable after the surrender of a Security for
conversion, the Company shall deliver, to or upon the written order of the
Holder, certificates representing the number of fully paid and nonassessable
shares of Common Stock into which the Security may be converted in accordance
with the provisions of the Security and this Indenture. Such conversion shall be
deemed to have been made at the close of business on the date that a Security
shall have been surrendered for conversion with a written notice of conversion
duly executed in satisfactory form for conversion. At such time, the rights of
the Holder of a Security as such a Holder shall cease, and, subject to the
provisions of subsection (c) below, the person or persons entitled to receive
the shares of Common Stock upon conversion of a Security shall be treated for
all purposes as having become the record holder or holders of such shares of
Common Stock at such time. Any such
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conversion shall be at the Conversion Price in effect at such time (except with
respect to interest). Interest on the Security surrendered for conversion will
accrue through the date that such Security has been duly surrendered for
conversion and, at the Company's option, will be paid in cash or will be
converted into Common Stock at the Fair Market Value of the Common Stock at the
same time as the principal amount of the Security being surrendered is converted
at the Conversion Price.
(c) Notwithstanding the above, if the stock transfer books of the
Company shall be closed on the date of such surrender described in subsection
(b) above, such surrender shall be effective at the close of business on the
next succeed ing day on which such stock transfer books are open. As of the
close of business on such succeeding day, the person or persons entitled to
receive such shares of Common Stock shall be deemed the recordholder or holders
thereof for all purposes. Such conversion of principal amounts shall be at the
Conversion Price in effect on the date that a Security shall have been
surrendered for conversion in satisfactory form for conversion, as if the stock
transfer books of the Company had not been closed.
(d) Upon conversion of a Security in part only, the Company shall
execute and deliver to or on the order of the Holder thereof, at the expense of
the Company, a new Security of authorized denomination in principal amount equal
to the unconverted portion of a Security.
(e) If the last day for the exercise of the conversion right shall not
be a Business Day, then such conversion right may be exercised on the next
succeeding Business Day.
Section 10.03. Adjustments to Conversion Price. The number of shares of
Common Stock deliverable upon conversion of a Security shall be subject to
adjust ment from time to time as follows:
(i) Stock Splits, Stock Dividends, etc. If the Company (A)
takes a record of the holders of Common Stock for the purpose of
entitling them to receive a dividend payable in shares of Common Stock,
(B) subdivides its outstanding shares of Common Stock into a greater
number of shares, (C) combines its outstanding shares of Common Stock
into a smaller number of shares, or (D) issues by reclassification of
its Common Stock any shares of the Company of any class or series, the
Holder of a Security shall thereafter be entitled to receive upon the
conversion of a Security the number of shares of Common Stock or other
class or series which he would have owned or have been entitled to
receive had the Security been converted immediately prior to the
happening of such event, such adjustment to become effective
immediately after the opening of business on the day following such
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record date or the day upon which such subdivision, combination or
reclassification becomes effective.
(ii) Dividends of Convertible Securities. If the Company
pays the holders of Common Stock a dividend payable in any security
convertible into Common Stock and the Holder of a Security thereafter
converts the Security, such Holder shall be entitled to receive upon
such conversion, in addition to the shares of Common Stock deliverable
to him in accordance with the provisions hereof, the number of shares
or principal amount of such security convertible into Common Stock as
he would have been entitled to receive if he had converted immediately
prior to the payment of such dividend.
(iii) Consolidation or Merger. If the Company is a party to a
consolidation or merger or a transfer or lease of all or substantially
all of its assets, the right to convert a Security into Common Stock
(to the extent such right has not been previously exercised by the
Holder pursuant to Section 10.01) may be changed into a right to
convert it into securities, cash or other assets of the Company or
another entity.
(iv) De Minimis. No adjustment in the number of shares into
which a Security may be converted shall be required unless such
adjustment would require an increase or decrease of at least one
percent of the number of shares for which the Security may be
converted; provided, however, that any adjustment which by reason
hereof is not required to be made shall be carried forward and taken
into account in any subsequent adjustment.
(v) No Fractional Shares. No fractional shares of Common
Stock shall be issued upon conversion of a Security, but instead, to
the extent that any fraction of a share would otherwise be issuable,
the Company will round such fraction of a share up to the nearest whole
share.
Section 10.04. Covenant to Reserve Shares. The Company covenants that
it will reserve and keep available, free from preemptive rights, out of its
authorized Common Stock, solely for the purpose of issuance upon conversion of
Securities as herein provided, such number of shares of Common Stock as shall
then be issuable with respect to the principal portion of the outstanding
Securities upon the conversion of all outstanding Securities. The Company
covenants that in the event of any election by it to pay the accrued interest
due under the outstanding Securities in Common Stock upon the conversion of all
outstanding Securities or upon the Maturity Date of the Securities, the Company
will, prior to the issuance of such Common Stock, reserve and keep available,
free from preemptive rights, out of Common Stock which has been authorized by
the Company's stockholders, solely for the purpose of issuance upon conversion
of the Securities or upon payment on the Maturity Date as herein provided, such
number of shares of Common Stock as shall
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then be issuable with respect to the accrued interest upon such conversion or
payment on all outstanding Securities. The Company covenants that all shares of
Common Stock which shall be so issuable shall be, when issued, duly and validly
issued and fully paid and nonassessable. For purposes of this Section 10.04, the
number of shares of Common Stock which shall be deliverable upon the conversion
of all outstanding Securities with respect to the principal portion of the
outstanding Securities or upon the conversion or payment at the Redemption Date
or the Maturity Date of all outstanding Securities with respect to the accrued
interest, as the case may be, shall be computed as if at the time of computation
all outstanding Securities were held by a single Holder.
Section 10.05. Compliance with Legal and Governmental Requirements. (a)
Before taking any action which would cause an adjustment reducing the Conversion
Price below the then stated or par value of the shares of Common Stock issuable
upon conversion of the Securities, the Company will take any corporate action
which may, in the opinion of its counsel, be necessary in order that the Company
may validly and legally issue fully paid and nonassessable shares of such Common
Stock at such adjusted Conversion Price.
(b) The Company covenants that if any shares of Common Stock to be
issued upon conversion of Securities hereunder or upon payment of accrued
interest upon the Redemption Date or Maturity Date hereunder, require
registration with or approval of any governmental authority under any federal or
state law, or listing upon any national or regional securities exchange, before
such shares may be issued upon conversion or payment, the Company will in good
faith and as expeditiously as possible endeavor to cause such shares to be duly
registered, approved or listed, as the case may be.
Section 10.06. Payment of Taxes. The issuance of certificates for
shares of Common Stock upon the conversion of the Securities shall be made
without charge to the converting Securityholders for any tax in respect of the
issuance of such certificates, and such certificates shall be issued in the
respective names of, or in any such names as may be directed by, the Holders of
the Securities converted; provided, however that neither the Company nor any
Conversion Agent shall be required to pay any tax which may be payable in
respect of any transfer involved in the issuance and delivery of any such
certificate in a name other than that of the Holder of Securities converted, and
neither the Company nor any Conversion Agent shall be required to issue or
deliver such certificates unless or until the Person or Persons requesting the
issuance thereof shall have paid to the Company or the Conversion Agent the
amount of such tax or shall have established to the satisfaction of the Company
that such tax has been paid.
Section 10.07. Responsibility of Trustee and Conversion Agent. Neither
the Trustee nor any Conversion Agent shall at any time be under any duty or
responsibility
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to any Holder of Securities to determine whether any facts exist which may
require any adjustment of the Conversion Price, or with respect to the nature or
extent of any such adjustment when made, or with respect to the method employed,
herein or in any supplemental indenture provided to be employed, in making the
same. Neither the Trustee nor any Conversion Agent shall be accountable with
respect to the validity or value (or the kind or amount) of any shares of Common
Stock or of any securities or property or cash which may at any time be issued
or delivered upon the conversion of any Security; and neither the Trustee nor
any Conversion Agent makes any representation with respect thereto. Neither the
Trustee nor any Conversion Agent shall be responsible for any failure of the
Company to make any cash payment or to issue, transfer or deliver any shares of
Common Stock or stock certificates or other securities or property upon the
surrender of any Security for the purpose of conversion or for payment of
interest due, or, subject to Section 8.01, to comply with any of the covenants
of the Company contained in this Article Ten.
ARTICLE ELEVEN
AMENDMENTS, SUPPLEMENTS AND WAIVERS
Section 11.01. Without Consent of Holders. The Company, when authorized
by a Board Resolution, and the Trustee may amend or supplement this Indenture or
the Securities without notice to or consent of any Securityholder:
(i) to cure any ambiguity, defect or inconsistency;
(ii) to comply with Article Six;
(iii) to comply with any requirements of the SEC in
connection with the qualification of this Indenture under the TIA, if
required; or
(iv) to make any change that does not adversely affect the
rights of any Securityholders or the holders of the Senior Debt.
Anything to the contrary notwithstanding, the Company may at any time
amend or supplement this Indenture or the Securities without notice to or
consent of any Securityholder to lower the Conversion Price.
Section 11.02. With Consent of Holders. (a) Subject to Section 7.07,
the Company, when authorized by a Board Resolution, and the Trustee may amend or
supplement this Indenture or the Securities without prior notice to any Holder
but with the written consent of the Holders of a majority in principal amount of
the outstanding Securities. Subject to Section 7.07, the Holders of a majority
in principal amount of the Securities then outstanding may waive compliance by
the Company
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with any provision of this Indenture or the Securities without prior notice to
any Holder. However, subject to Section 11.03, without the consent of each
Holder affected thereby, an amendment, supplement or waiver, including a waiver
pursuant to Section 7.04, may not:
(i) reduce the principal amount of Securities whose Holders
must consent to an amendment, supplement or waiver;
(ii) reduce the rate of or extend the time for payment of
interest on any Security;
(iii) reduce the principal of or extend the fixed maturity of
any Security, or alter the redemption or conversion provisions with
respect thereto, in a manner adverse to any Holder;
(iv) waive a Default in the payment of the principal of or
redemption payment with respect to, any Security;
(v) make any changes in Section 7.04, 7.07 or this third
sentence of this Section 11.02; or
(vi) make any Security payable in money or property other
than that stated in the Security.
(b) It shall not be necessary for the consent of the Holders under this
Section 11.02 to approve the particular form of any proposed amendment, supple
ment or waiver, but it shall be sufficient if such consent approves the
substance thereof.
(c) After an amendment, supplement or waiver under this Section 11.02
becomes effective, the Company shall mail to the Holders affected thereby and
the Trustee a notice briefly describing the amendment, supplement or waiver. Any
failure of the Company to mail such notice, or any defect therein, shall not,
however, in any way impair or affect the validity of any such amendment,
supplement or waiver.
Section 11.03. Revocation and Effect of Consents. (a) Until an
amendment, supplement or waiver becomes effective, a consent to it by a Holder
is a continuing consent by the Holder and every subsequent Holder of a Security
or portion of a Security that evidences the same debt as the consenting Holder's
Security, even if notation of the consent is not made on any Security. However,
any such Holder or subsequent Holder may revoke the consent as to his Security
or portion of a Security. Such revocation shall be effective only if the Trustee
receives written notice of revocation before the date the amendment, supplement
or waiver becomes effective.
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(b) The Company may, but shall not be obligated to, fix a record date
for the purpose of determining the Holders entitled to consent to any amendment,
supplement or waiver. If a record date is fixed, then notwithstanding the last
two sentences of the subsection (a) above, those Persons who were Holders on
such record date (or their duly designated proxies), and only those Persons,
shall be entitled to consent to such amendment, supplement or waiver or to
revoke any consent previously given, whether or not such Persons continue to be
Holders after such record date. No such consent shall be valid or effective for
more than 90 days after such record date.
(c) After an amendment, supplement or waiver becomes effective, it
shall bind every Securityholder, unless it makes a change described in any of
clauses (i) through (vi) of subsection 11.02(a). In that case, the amendment,
supplement or waiver shall bind each Holder of a Security who has consented to
it and every subsequent Holder of a Security or portion of a Security that
evidences the same debt as the consenting Holder's Security.
Section 11.04. Notation on or Exchange of Securities. If an amendment,
supplement or waiver changes the terms of a Security, the Trustee may require
the Holder of the Security to deliver it to the Trustee. The Trustee may place
an appropriate notation on the Security describing the changed terms and return
it to the Holder. Alternatively, if the Company or the Trustee so determines,
the Company in exchange for the Security shall issue without cost to the Holder
thereof, and the Trustee shall authenticate, a new Security that reflects the
changed terms.
Section 11.05. Trustee to Sign Amendments, Etc. The Trustee shall sign
any amendment, supplement or waiver authorized pursuant to this Article Eleven
if the amendment, supplement or waiver does not adversely affect the rights,
duties, liabilities or immunities of the Trustee. If it does, the Trustee may,
but need not, sign it. In signing or refusing to sign such amendment, supplement
or waiver, the Trustee shall be entitled to demand and receive and, subject to
Section 8.01, shall be fully protected in relying upon, one or more Officer's
Certificates and/or Opinions of Counsel as conclusive evidence that the
execution of such amendment, supplement or waiver is authorized or permitted by
this Indenture, is not inconsistent herewith and will be valid and binding upon
the Company in accordance with its terms. The Company may not sign an amendment
until the Board of Directors approves it.
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<PAGE> 42
ARTICLE TWELVE
MISCELLANEOUS
Section 12.01. Notices. (a) Any notice or communication shall be given
in writing and delivered in person or mailed by first-class mail addressed as
follows:
if to the Company:
SPECIALTY CHEMICAL RESOURCES, INC.
9055 South Freeway Drive
Macedonia, Ohio 44056
Attention: Corey B. Roth, President
and Chief Operating Officer
if to the Trustee:
BANK ONE, N.A.
100 East Broad Street
Columbus, OH 43271-0181
Attn: Corporate Trust Administration
(b) Such notices or communications shall be effective when received.
The Company or the Trustee by notice to the other may designate additional or
different addresses for subsequent notices or communications.
(c) Any notice or communication mailed to a Securityholder shall be
mailed to such Holder first class mail, postage prepaid, at such Holder's
address as it appears on the registration books of the Registrar and shall be
sufficiently given to such Holder if so mailed within the time prescribed.
(d) Failure to mail a notice or communication to a Securityholder or
any defect in it shall not affect its sufficiency with respect to other
Securityholders. If a notice or communication is mailed in the manner provided
above, it is duly given, whether or not the addressee receives it.
Section 12.02. Certificate and Opinion as to Conditions Precedent. Upon
any request or application by the Company to the Trustee to take or to refrain
from taking any action under this Indenture, the Company shall furnish to the
Trustee at the request of the Trustee:
(i) an Officer's Certificate (which shall include the
statements set forth in Section 12.03) stating that, in the opinion of
the signers, all conditions precedent, if any, provided for in this
Indenture relating to the proposed action have been complied with; and
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(ii) an Opinion of Counsel (which shall include the
statements set forth in Section 12.03) stating that, in the opinion of
such counsel, all such conditions precedent have been complied with.
Section 12.03. Statements Required in Certificate or Opinion. Each
Officer's Certificate or Opinion of Counsel with respect to compliance with a
condition or covenant provided for in this Indenture shall include:
(i) a statement that the person(s) signing such certificate
or opinion has read such covenant or condition;
(ii) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(iii) a statement that, in the opinion of such person, he has
made such examination or investigation as is necessary to enable him to
express an informed opinion as to whether or not such covenant or
condition has been complied with; and
(iv) a statement as to whether or not, in the opinion of
such person, such condition or covenant has been complied with;
provided, however, that with respect to matters of fact an Opinion of
Counsel may rely on one or more Officer's Certificates or certificates
of public officials if the Opinion of Counsel expressly states that
nothing has come to the attention of such Counsel to make it believe
there is not justification to rely thereon.
Section 12.04. Rules by Trustee, Registrar, Paying Agent and Conversion
Agent. The Trustee may make reasonable rules for action by or at a meeting of
Securityholders. The Registrar, Paying Agent or Conversion Agent may make
reasonable rules and set reasonable requirements for its functions.
Section 12.05. Legal Holidays. If a payment date is not a Business Day,
payment may be made on the next succeeding Business Day, and no interest shall
accrue for the intervening period.
Section 12.06. Governing Law. The laws of the State of Ohio shall
govern this Indenture and the Securities without regard to principles of
conflicts of laws.
Section 12.07. No Recourse Against Others. A director, officer,
employee or stockholder, as such, of the Company shall not have any liability
for any obligations of the Company under the Securities or this Indenture or for
any claim based on, in respect of or by reason of such obligations or their
creation. Each Securityholder by accepting a Security waives and releases all
such liability.
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Section 12.08. No Adverse Interpretation of Other Agreements. This
Indenture may not be used to interpret another indenture, loan or debt agreement
of the Company or a Subsidiary. Any such indenture, loan or debt agreement may
not be used to interpret this Indenture.
Section 12.09. Successors. All agreements of the Company in this
Indenture and the Securities shall bind its successors. All agreements of the
Trustee in this Indenture shall bind its successors. All agreements of the
Securityholders in this Indenture and in the Securities shall bind their
respective successors.
Section 12.10. Duplicate Originals. The parties may sign any number of
copies of this Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement.
Section 12.11. Separability. In case any provision in this Indenture or
in the Securities shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby, and a Holder shall have no claim therefor against
any party hereto.
Section 12.12. Table of Contents, Headings and References. The Table of
Contents and headings of Articles and Sections of this Indenture have been
inserted for convenience of reference only, shall not be considered a part
hereof and shall in no way modify or restrict any of the terms or provisions
hereof. All references herein to Articles and Sections are to articles and
sections of this Indenture, unless otherwise indicated.
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SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed, and their respective corporate seals to be hereunto affixed and
attested, all as of the date first above written.
SPECIALTY CHEMICAL
RESOURCES, INC.
By: /s/ David F. Spink
---------------------------------
Name: David F. Spink
-------------------------------
Title: Chief Financial Officer
------------------------------
Attest: /s/ Sandi Murphy
--------------------------
BANK ONE, N.A.
By: /s/ David B. Knox
---------------------------------
Name: David B. Knox
-------------------------------
Title: Authorized Signer
------------------------------
Attest: /s/
--------------------------
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<PAGE> 46
EXHIBIT A
[FACE OF SECURITY]
No._______________ $_____________
SPECIALTY CHEMICAL RESOURCES, INC.
6% CONVERTIBLE SUBORDINATED NOTE DUE 2009
SPECIALTY CHEMICAL RESOURCES, INC., a Delaware corporation, for value
received, hereby promises to pay to _______________________ or registered
assigns the principal sum of __________________________________________ Dollars
($____________) on March 15, 2009.
Interest on this Note shall be paid at maturity.
Additional provisions of this Note are set forth on the reverse side
hereof.
Dated: March 15, 1999 SPECIALTY CHEMICAL
RESOURCES, INC.
By:
---------------------------------
By:
---------------------------------
Certificate of Authentication:
Bank One, N.A., as Trustee
certifies that this is one of the
Securities referred to in the within
mentioned Indenture.
By:
---------------------------------
Authorized Signatory
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[BACK OF SECURITY]
SPECIALTY CHEMICAL RESOURCES, INC.6%
CONVERTIBLE SUBORDINATED NOTE DUE 2009
1. Interest. Specialty Chemical Resources, Inc. ("Company"), a Delaware
corporation, promises to pay interest on the principal amount of this Note at
the rate per annum shown above. The interest on the Notes will accrue and
compound semi-annually on each September 15 and March 15 from the date of this
Note and will be paid along with the principal amount of this Note on March 15,
2009 (the "Maturity Date"). The interest will be payable in cash, or at the
Company's option, in Company common stock, par value $.10 per share ("Common
Stock"), and will be computed on the basis of a 360-day year of twelve 30-day
months. Interest will not be paid until the Maturity Date or until conversion or
redemption of this Note as permitted below.
2. Method of Payment. The Holder must surrender this Note to a Paying
Agent to collect the principal payment and accrued interest thereon due at
maturity. The Company will pay principal and interest at the offices or the
agencies of the Company maintained for that purpose in such coin or currency of
the United States of America that at the time of payment is legal tender for
payment of public and private debts. The Company, however, may pay principal and
interest by its check or its agent's check payable in such money and may mail
such an interest check to the Holder's registered address. Notwithstanding the
foregoing, in the event the Company elects to pay the accrued interest due to
the Holder, whether at maturity, upon conversion or upon redemption, by delivery
of Common Stock in lieu of cash, the Company will deliver stock certificate(s)
representing the number of shares of Common Stock such Holder is entitled to
receive (calculated by dividing the aggregate amount of accrued interest due
under this Note by the Fair Market Value of the Common Stock) to the Holder's
registered address. The Fair Market Value of the Common Stock is the average
closing sales price of the Common Stock for the five consecutive trading days
prior to the day immediately before the Maturity Date, conversion payment date
or Redemption Date, as the case may be.
3. Registrar and Paying Agent. Initially, Bank One, N.A. ("Trustee")
will act as Registrar, Paying Agent and Conversion Agent. The Company may change
any Registrar, co-registrar, Paying Agent or Conversion Agent without notice to
the Holder of this Note. The Company or any of its Subsidiaries may act as
Paying Agent, Registrar, co-registrar or Conversion Agent, except under certain
circumstances specified in the Indenture.
4. Indenture. The Company issued this Note under an Indenture, dated as
of February 1, 1999 (as the same may be amended, supplemented or otherwise
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modified from time to time, the "Indenture"), between the Company and the
Trustee. The terms of this Note include those stated in the Indenture and those
made part of the Indenture by reference to the Trust Indenture Act of 1939 (15
U.S. Code Section 77aaa- 77bbbb), as in effect on the date of the Indenture (the
"Act"), as if the Indenture were governed by the same. This Note is subject to
all such terms and the holder of this Note is referred to the Indenture and such
Act for a statement of them. The Holder, by virtue of his acceptance of this
Note, agrees to be bound by the terms of this Note and by the terms of the
Indenture. The Notes are unsecured general obligations of the Company limited to
$1,360,000 in original principal amount.
5. Redemption. The Company may redeem this Note at any time, or from
time to time, on or after March 15, 2002 and prior to the Maturity Date, at a
Redemption Price equal to the applicable percentage of the principal amount so
being redeemed determined as set forth below, in each case together with
interest accrued to the Redemption Date (unless such interest is paid in Common
Stock):
Redemption
From To (Inclusive) Price
---- -------------- ----------
March 15, 2002 March 15, 2002 110%
March 15, 2003 March 15, 2003 108%
March 15, 2004 March 15, 2004 106%
March 15, 2005 March 15, 2005 104%
March 15, 2006 March 15, 2006 102%
March 15, 2007 and thereafter 100%
In addition, the Company may offer to redeem all the then outstanding
Notes at a Redemption Price equal to 105% of the principal amount thereof plus
accrued interest (unless paid in Common Stock) if a Change of Control (as
defined below) occurs.
6. Notice of Redemption. Notice of redemption containing the
information prescribed in the Indenture will be mailed at least 30 days before
the Redemption Date to each Holder of a Note to be redeemed at his registered
address. Notes in the denomination of $100 may be redeemed only in whole. Notes
in denominations larger than $100 may be redeemed in part, but only in integral
multiples of $100. On and after the Redemption Date, interest ceases to accrue
on this Note or the portions of this Note called for redemption. Upon
redemption, accrued interest due under this Note will, at the Company's option,
be payable in cash or in Common Stock of the Company (as discussed in Section
2).
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7. Conversion. A Holder of this Note may convert the principal amount
of this Note only in whole if the principal amount is $100, or, if in a
denomination greater than $100, any portion hereof that is an integral multiple
of $100, into Common Stock of the Company at the Conversion Price: (i) at any
time after March 15, 2002 and before the close of business on the Maturity Date,
(ii) in the event of an "Election Contest," or (iii) in the event of a "Change
of Control." In addition, if this Note is called for redemption, the Holder may
convert it at any time before the close of business on the day prior to the
Redemption Date. "Election Contest" means any filing pursuant to Rule 14a-11
under the Securities Exchange Act of 1934, as amended, by any Person or group of
Persons for the purpose of opposing a solicitation by the Company with respect
to the election of directors of the Company. Interest on this Note will accrue
through the date that this Note has been surrendered for conversion and will, at
the Company's option, be payable in cash or be converted into Common Stock of
the Company along with the principal amount of this Note (as discussed in
Section 2). "Change of Control" means the acquisition (or the announcement of an
intent to acquire), directly or indirectly, by any Person (as defined in the
Indenture) or group of Persons acting together, for a similar purpose, other
than the "Stockholders Group," or any of them or the Affiliates (as defined in
the Indenture) of beneficial ownership of shares of the Capital Stock of the
Company in such amount that, after giving effect to such acquisition, such
Person or Persons shall be entitled to vote 25% or more of the shares entitled
to vote, as at such date, in the election of directors of the Company. The
"Stockholders Group" means Edwin M. Roth, Corey B. Roth, CEW Partners, and
Martin Trust.
The initial Conversion Price is $0.40 per share. The Conversion Price
is subject to adjustments as specified in the Indenture. No fractional shares of
Common Stock shall be issued upon conversion, but, instead, to the extent that
any fraction of a share would otherwise be issuable, the Company will round such
fraction of a share up to the nearest whole share.
To convert this Note under this Section 7, a Holder must (i) complete
and sign the conversion notice on the back of this Note, (ii) surrender this
Note to a Conversion Agent, (iii) furnish appropriate endorsements and transfer
documents if required by the Registrar or Conversion Agent and (iv) pay any
transfer tax or similar tax if required.
If the Company is a party to a consolidation or merger or a transfer or
lease of all or substantially all of its assets, the right to convert this Note
into Common Stock (to the extent such right has not been previously exercised by
the Holder upon any Change of Control or otherwise) may be changed into a right
to convert it into securities, cash or other assets of the Company or another.
8. Subordination. The Notes are subordinated in right of payment to all
Senior Debt of the Company. To the extent provided in the Indenture, Senior Debt
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must be paid before the Notes may be paid. Each Holder by accepting a Note
agrees to the subordination and authorizes the Trustee to give it effect. Each
Holder by accepting a Note also agrees to be bound by the provisions of the
Indenture and the limitations contained therein. The Notes are in pari passu to
the Company's 6% Convertible Subordinated Notes due 2006 issued pursuant to an
Indenture dated as of October 15, 1996 between the Company and the Trustee.
9. Denominations; Transfer; Exchange. The Notes are issuable only in
registered form, without coupons, in denominations of $100 and integral
multiples of $100. The Holder may register the transfer of or exchange this Note
in accordance with the Indenture. The Registrar may require the Holder, among
other things, to furnish appropriate endorsements and transfer documents and to
pay any taxes and fees required by law or permitted by the Indenture. The
Registrar need not register the transfer of or exchange any Note selected for
redemption or register the transfer of or exchange any Note for a period of 15
days before a selection of Notes to be redeemed.
10. Persons Deemed Owners. The registered Holder of a Note shall be
treated as the owner of it for all purposes.
11. Unclaimed Money. If money or securities for the payment of
principal or interest on any Note remains unclaimed for two years, the Trustee
and the Paying Agent will pay the money and deliver any stock certificates back
to the Company at its request. After such time, Holders entitled to the money
and/or securities must look to the Company for payment unless a law governing
abandoned property designates another person.
12. Discharge Prior to Redemption or Maturity. The Indenture and Notes
will be discharged and canceled except for certain Sections thereof, subject to
the terms of the Indenture, upon the payment or conversion of all the Notes or
upon the irrevocable deposit with the Trustee or Paying Agent (if other than the
Company) of funds or U.S. Government Obligations sufficient to pay the principal
of and interest accrued on the Notes to the Maturity Date or Redemption Date. In
the case of such a deposit, Holders must look to the deposited money for
payment.
13. Amendment and Waiver. The Indenture permits, with certain excep
tions as therein provided, the amendment thereof and the modification of the
rights and obligations of the Company and the rights of the Holders under the
Indenture at any time by the Company and the Trustee with the consent of the
Holders of at least a majority in aggregate principal amount of the Notes at the
time outstanding. The Indenture also contains provisions permitting the Holders
of a majority in aggregate principal amount of the Notes at the time
outstanding, on behalf of the Holders of all the Notes, to waive compliance by
the Company with certain provisions of the Indenture and certain past defaults
under the Indenture and their consequences.
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Subject to the Indenture, any such consent or waiver by the Holder of this Note
shall be conclusive and binding upon such Holder and upon all future Holders of
this Note and of any Note issued upon the registration of transfer hereof or in
exchange herefore or in lieu hereof, whether or not notation of such consent or
waiver is made upon this Note. Without the consent of any Holder, the Indenture
or the Notes may be amended to cure any ambiguity, defect or inconsistency, to
provide for assumption of Company obligations to Holders or to make any change
that does not adversely affect the rights of any Holder.
14. Successors. When a successor to the Company as a result of a
permitted merger, consolidation or sale of assets assumes all the obligations of
the Company under the Notes and the Indenture, the Company will be released from
those obligations.
15. Defaults and Remedies. If an Event of Default, as defined in the
Indenture, including but not limited to, failure to pay principal or interest
when such payment is due, occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of Notes may declare all the Notes together
with accrued interest thereon to be due and payable immediately in the manner,
with the effect and subject to the limitations provided in the Indenture.
Holders of Notes may not enforce the Indenture or the Notes except as provided
in the Indenture. The Trustee may require indemnity and security therefor
satisfactory to it before it enforces the Indenture or the Notes. Subject to
certain limitations, Holders of a majority in principal amount of the Notes then
outstanding may direct the Trustee in its exercise of any trust or power. The
Trustee may withhold from Holders of Notes notice of any continuing Default
(except a Default in payment of principal or interest) if it determines that
withholding notice is in their interests. The Company is required to file
periodic reports with the Trustee as to the absence of Defaults or Events of
Default.
16. Trustee Dealings with Company. The Trustee under the Indenture, in
its individual or any other capacity, may make loans to, accept deposits from,
and perform services for the Company or its Affiliates, and may otherwise deal
with the Company or its Affiliates, as if it were not Trustee.
17. No Recourse Against Others. A director, officer, employee or
stockholder, as such, of the Company shall not have any liability for any
obligation of the Company under the Notes or the Indenture or for any claim
based on, in respect of or by reason of, such obligations or their creation.
Each Holder of a Note by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for the issue of
the Notes.
18. Authentication. This Note shall not be valid until the Trustee
signs the certificate of authentication on the front side of this Note.
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19. Legal Holidays. If a payment date is not a "Business Day" (i.e., a
day other than a Saturday, Sunday, legal holiday or other day on which banks and
trust companies in the city where the Trustee is located are not required to be
open), then payment may be made on the next succeeding Business Day, and no
interest shall accrue for the intervening period.
20. Definitions. All capitalized terms used in this Note which are
defined in the Indenture and not otherwise defined in this Note shall have the
meanings assigned to them in the Indenture; provided, however, that as used
herein "Note" or "Notes" shall have the same meaning as "Security" or
"Securities" under the Indenture.
21. Abbreviations. Customary abbreviations may be used in the name of a
Holder of a Debenture or an assignee, such as: TEN COM (= tenants in common),
TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of
survivorship and not as tenants in common), CUST (= Custodian) and U/G/M/A
(= Uniform Gifts to Minors Act).
22. Copy of Indenture. The Company will furnish to any Holder upon
written request and without charge a copy of the Indenture which has in it the
text of this Note in larger type. Requests may be made to: Specialty Chemical
Resources, Inc., 9055 South Freeway Drive, Macedonia, Ohio 44056, Attention:
Secretary.
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ASSIGNMENT FORM
If you the Holder want to assign this Note, fill in the form below and have your
signature guaranteed:
I or we assign and transfer this Note to:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print or type name, address and zip code and
social security or tax ID number of assignee)
and irrevocably appoint ___________________________________, agent to transfer
this Note on the books of the Company. The agent may substitute another to act
for him.
Dated: Signature:
---------------------- -----------------------------------
-----------------------------------
(Sign exactly as name appears on
the other side of this Note)
Signature Guarantee:__________________________
(to be signed by a New York commercial bank
or trust company or a member of the New York
Stock Exchange)
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CONVERSION NOTICE
To convert this Note into Common Stock of the Company, check the box. [ ]
To convert only part of this Note in the amount of $100 or integral multiples
thereof, state the amount: $____________________________
If you want the stock certificate made out in another person's name, fill in the
form below and have your signature guaranteed:
- --------------------------------------------------------------------------------
(Insert other persons's social security or tax ID number)
Dated: Signature:
---------------------- -----------------------------------
-----------------------------------
(Sign exactly as name appears on
the other side of this Note)
Signature Guarantee:__________________________
(to be signed by a New York commercial bank
or trust company or a member of the New York
Stock Exchange)
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Exhibit 10.26
SIXTH AMENDMENT
---------------
TO
--
FINANCING AGREEMENT
-------------------
This Sixth Amendment to Financing Agreement (the "Amendment")
is made as of the 14th day of April, 1999 (the "Effective Date"), by and between
SPECIALTY CHEMICAL RESOURCES, INC., a Delaware corporation ("Borrower") and
FIRSTAR BANK, N.A. FKA STAR BANK, NATIONAL ASSOCIATION, a national banking
association ("Bank").
WITNESSETH:
WHEREAS, Borrower and Bank have entered into that certain
Financing Agreement, dated as of September 18, 1996, as amended by that First
Amendment to Financing Agreement, dated as of May 22, 1997 , as amended by that
Second Amendment to Financing Agreement, dated as of April 14, 1998, as amended
by that Third Amendment to Financing Agreement, dated as of May 20, 1998, as
amended by that Fourth Amendment to Financing Agreement, dated as of November
12, 1998, and as amended by that Fifth Amendment to Financing Agreement, dated
as of February 12, 1999 (as so amended, the "Financing Agreement"), pursuant to
which Bank has made certain financial accommodations available to Borrower;
WHEREAS, Borrower hereby acknowledges that it is in default of
certain covenants under the Financing Agreement and has discussed with Bank
Borrower's need for additional capitalization in the form of a cash investment,
the purpose of which is to meet working capital requirements; and
WHEREAS, Borrower and Bank desire to amend the Financing
Agreement to provide, among other things, for the permanent reduction of the
principal amount of the Total Facility from Fourteen Million Dollars
($14,000,000) to Twelve Million Dollars ($12,000,000), for the reestablishment
of certain financial covenants and for the above-described subordinated debt,
and as otherwise hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual promises and
agreements contained herein and other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, Bank and Borrower do
hereby agree as follows:
SECTION 1. DEFINED TERMS.
-------------------------
SECTION 1.1, DEFINED TERMS, of the Financing Agreement shall
be amended by adding the new defined terms, or by modifying existing defined
terms, as applicable, as follows:
<PAGE> 2
1.1. The definition of "REVOLVING LOAN AVAILABILITY" shall be deleted
in its entirety and the following is substituted in place thereof:
"REVOLVING LOAN AVAILABILITY" shall mean, as at any date, an
amount equal to the difference of:
(i) THE LESSER OF (a) the difference of Twelve Million Dollars
($12,000,000) LESS (W) the then aggregate outstanding principal amount of
Term Loan A LESS (X) the then aggregate outstanding principal amount of
Term Loan B LESS (Y) the then aggregate outstanding principal amount of
the Acquisition Special Advance LESS (Z) the Reserve Amount then in
effect, OR (b) an amount equal to the then Borrowing Base;
LESS
(ii) the then aggregate outstanding principal amount of all
Revolving Loans.
Each defined term used herein and not otherwise defined herein shall
have the meaning ascribed to such term in the Financing Agreement.
SECTION 2. AMENDMENT TO SECTION 2 OF THE FINANCING AGREEMENT.
-------------------------------------------------------------
2.1. SECTION 2.1, TOTAL FACILITY, shall be hereby amended by deleting
the words and figure "Fourteen Million Dollars ($14,000,000)" wherever the same
appears in said Section and inserting in its place the words and figure "Twelve
Million Dollars ($12,000,000)".
SECTION 3. MODIFICATIONS OF EXHIBITS AND SCHEDULES.
---------------------------------------------------
The following Exhibit and Schedule to the Financing Agreement shall be
added or amended, as applicable, as set forth in this SECTION 3 to the
Amendment:.
3.1. ADDENDUM TO EXHIBIT L. EXHIBIT L shall be amended by adding
thereto ADDENDUM TO EXHIBIT L, FINANCIAL COVENANTS, attached hereto and
incorporated by reference herein.
SECTION 4. AMENDMENT TO SECTION 10 OF THE FINANCING AGREEMENT.
--------------------------------------------------------------
4.1. SECTION 10. COVENANTS, is hereby amended by:
(a) adding a new section 10.45 as follows:
10.45 ENGAGEMENT OF MANAGEMENT CONSULTANT. Borrower shall have
entered into a written agreement, no later than June 30, 1999, with a
management consultant acceptable to the Bank and to the Board of
Directors of the Borrower, for the purpose of assisting the Borrower with
a review of its operations and implementing a plan to improve the
financial performance of the Borrower.
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<PAGE> 3
(b) adding a new section 10.46 as follows:
10.46 CASH CONTRIBUTION AND ESTABLISHMENT OF FUTURE FINANCIAL
COVENANTS. (i) On or before June 30, 1999, Bank shall have received
notice from Borrower that Borrower has received cash in the minimum
amount of One Million Dollars ($1,000,000) representing either a cash
equity contribution or the proceeds of unsecured indebtedness of Borrower
(the "Cash Contribution"), which Cash Contribution shall be subordinate,
upon terms and conditions satisfactory to Bank in its sole discretion, to
the prior and indefeasible payment in full of all Obligations, (ii) on or
before June 30, 1999, Borrower shall have received no less than One
Million Dollars ($1,000,000) in accordance with the terms described in
section 10.46(i) above, and (iii) upon receipt of no less than One
Million Dollars ($1,000,000) on or before June 30, 1999, in accordance
with the terms described in section 10.46(i) above, Bank, in its sole
discretion, will establish Financial Covenants beyond June 30, 1999
consistent with the projections provided to Bank by Borrower in March of
1999.
(c) adding a new section 10.47 as follows:
10.47 AMENDMENT FEE. Borrower shall pay to Bank an Amendment Fee
in the amount of Fifty Thousand Dollars ($50,000), payable in three (3)
consecutive monthly installments as follows: (i) $16,666.67 to be due and
payable on the date of the execution of the Sixth Amendment to Financing
Agreement, (ii), $16,666.66 to be due and payable on May 1, 1999 and
(iii) $16,666.66 to be due and payable on June 1, 1999.
SECTION 5. SECTION 10 REPRESENTATIONS AND WARRANTIES.
-----------------------------------------------------
In order to induce Bank to enter into this Amendment and in addition to
all of the representations, warranties and covenants made by Borrower under the
Financing Agreement and Loan Documents, Borrower hereby represents, warrants and
covenants that, as of the date hereof, any date upon which a Loan is made
hereunder, and until the Obligations are fully paid, performed and satisfied,
the representations, warranties and covenants set forth in the Financing
Agreement and herein are and shall remain true. The Borrower further hereby
represents and warrants to Bank as follows:
5.1. THE AMENDMENT. This Amendment has been duly and validly executed
by an authorized executive officer of Borrower and constitutes the legal, valid
and binding obligation of Borrower enforceable against Borrower in accordance
with its terms.
5.2. FINANCING AGREEMENT. The Financing Agreement, as amended by this
Amendment, remains in full force and effect and remains the valid and binding
obligation of Borrower enforceable against Borrower in accordance with its
terms. Borrower hereby ratifies and confirms the Financing Agreement as amended
by this Amendment.
5.3. NONWAIVER. Except as specifically set forth in this Amendment, the
execution, delivery, performance and effectiveness of this Amendment shall not
operate nor be deemed to be nor construed as a waiver (i) of any right, power or
remedy of Bank under the Financing Agreement, nor (ii) of any term, provision,
representation, warranty or covenant
3
<PAGE> 4
contained in the Financing Agreement or any other documentation executed in
connection therewith. Further, except as specifically set forth in this
Amendment, none of the provisions of this Amendment shall constitute, be deemed
to be or construed as, a waiver of any Event of Default under the Financing
Agreement as amended by this Amendment.
5.4. REAFFIRMATION OF REPRESENTATIONS, WARRANTIES AND COVENANTS.
Borrower hereby reaffirms and agrees to be bound by all representations,
warranties and covenants made or entered into by it under the Financing
Agreement and under any and all Loan Documents. Borrower hereby represents and
warrants to Bank that no Default or Event of Default shall exist as of the date
of this Amendment after giving effect to this Amendment and none shall be caused
to exist as a result of the execution, delivery and performance by Borrower of
this Amendment; provided, however, that the foregoing is subject to the
exception that Borrower may currently be in default of certain financial
covenants and that Borrower and Bank have agreed that, if any such default
exists, this Amendment shall not operate as a waiver thereof by Bank.
5.5. REFERENCE TO AND EFFECT ON THE FINANCING AGREEMENT. Upon the
effectiveness of this Amendment, each reference in the Financing Agreement to
"this Agreement", "hereunder", "hereof", "herein", or words of like import shall
mean and be a reference to the Financing Agreement, as amended hereby, and each
reference to the Financing Agreement in any other document, instrument or
agreement executed and/or delivered in connection with the Financing Agreement
shall mean and be a reference to the Financing Agreement, as amended hereby.
SECTION 6. CONDITIONS PRECEDENT TO EFFECTIVENESS OF THIS AMENDMENT.
-------------------------------------------------------------------
In addition to all of the other conditions and agreements set forth
herein, the effectiveness of this Amendment is subject to each of the following
conditions precedent:
AMENDMENT TO FINANCING AGREEMENT. Bank shall have received an original
counterpart of this Sixth Amendment to Financing Agreement executed and
delivered by a duly authorized officer of Borrower.
6.1. RESOLUTIONS. Bank shall have received certified resolutions of
Borrower authorizing Borrower to execute, deliver and perform this Amendment.
6.2. NO MATERIAL ADVERSE CHANGE. There shall have occurred no material
and adverse change in the Borrower's assets, liabilities or financial condition
since the date of the last Financials delivered by Borrower to Bank nor shall
there have been any material damage to or loss of any of Borrower's assets or
properties since such date.
6.3. AMENDMENT FEE. Borrower shall pay to Bank the sum of $16,666.67
representing that portion of the Amendment Fee due on the date hereof, and
Borrower shall reimburse Bank for all of the costs and expenses incurred by Bank
in the negotiation and preparation of this Amendment, including, but not limited
to, Attorney's Fees.
4
<PAGE> 5
SECTION 7. MODIFICATIONS OF EXHIBITS AND SCHEDULES.
---------------------------------------------------
The following Exhibits and Schedules to the Financing Agreement shall
be added or amended, as applicable, as set forth in this SECTION 7 to the
Amendment:
7.1. ADDENDUM TO EXHIBIT L, FINANCIAL COVENANTS. ADDENDUM TO EXHIBIT L,
FINANCIAL Covenants shall be amended by deleting the existing Addendum to
Exhibit L in its entirety and replacing it with the ADDENDUM TO EXHIBIT L,
FINANCIAL COVENANTS, attached hereto and incorporated by reference herein.
SECTION 8. MISCELLANEOUS.
-------------------------
8.1. GOVERNING LAW. This Amendment shall be governed by and construed
in accordance with the law of the State of Ohio, without regard to principles of
conflict of law.
8.2. SEVERABILITY. In the event any provision of this Amendment should
be invalid, the validity of the other provisions hereof and of the Financing
Agreement shall not be affected thereby.
8.3. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which, when taken together, shall constitute but one and
the same agreement.
8.4. CONFESSION OF JUDGMENT. Borrower hereby irrevocably authorizes and
empowers any attorney-at-law to appear for Borrower in any action upon or in
connection with this Amendment or the Financing Agreement, as amended hereby, at
any time after the Loans and/or other Obligations become due, as herein
provided, in any court in or of the State of Ohio or elsewhere, and waives the
issuance and service of process with respect thereto, and irrevocably authorizes
and empowers any such attorney-at-law to confess judgment in favor of Bank
against Borrower, the amount due thereon or hereon, plus interest as herein
provided, and all costs of collection, and waives and releases all errors in
said proceedings and judgments and all rights of appeal from the judgment
rendered. The Borrower agrees and consents that the attorney confessing judgment
on behalf of the Borrower may also be counsel to Bank or any of Bank's
Affiliates, waives any conflict of interest which might otherwise arise, and
consents to Bank paying such confessing attorney a reasonable legal fee or
allowing such attorney's reasonable fees to be paid from the proceeds of
Collateral, the Premises or any other security for the Loans and the other
Obligations.
5
<PAGE> 6
IN WITNESS WHEREOF, Borrower has caused this Sixth Amendment to
Financing Agreement to be duly executed and delivered by its duly authorized
officer as of the date first above written.
Signed in Macedonia, Ohio, on April 14, 1999.
--------- --------
WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT
TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU
WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT
FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR
RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT,
OR ANY OTHER CAUSE.
Signed and acknowledged SPECIALTY CHEMICAL RESOURCES, INC.
in the presence of:
/s/ Marge Dvorsack
- -------------------------
Name: /s/ Marge Dvorsack David F. Spink
-------------------- ----------------------------
/s/ Lewis J. Gamiere By: David F. Spink
- ------------------------- Its: Chief Financial Officer
Name: Lewis J. Gamiere
--------------------
STATE OF OHIO )
)ss:
COUNTY OF _________________ )
The foregoing instrument was acknowledged before me this 14th day
----
April, 1999, by David F. Spink, Chief Financial Officer of Specialty Chemical
- -----
Resources, Inc., a Delaware corporation, on behalf of the corporation.
Marilyn A. Howell
------------------
Notary Public
MARILYN A. HOWELL
Accepted at Cincinnati, Ohio NOTARY PUBLIC STATE OF OHIO
as of April 14, 1999. Recorded in Cuyahoga County
My Comm. Expires 11-27-99
FIRSTAR BANK, N.A., fka
STAR BANK, NATIONAL ASSOCIATION
By: Suzanne E. Geiger
Its: Vice President
6
<PAGE> 7
ADDENDUM TO EXHIBIT L
---------------------
Financial Covenants
-------------------
FINANCIAL COVENANTS. Borrower agrees that it shall:
(A) CAPITAL EXPENDITURES. Not make capital expenditures (including, but not
by way of limitation, expenditures for fixed assets or leases
capitalized or required to be capitalized on Borrower's books by
purchase, lease-purchase agreement, option or otherwise) in an
aggregate amount exceeding (i) One Million Dollars ($1,000,000) for the
fiscal year ending December 31, 1997, (ii) Nine Hundred Thousand
Dollars ($900,000) for the fiscal year ending December 31, 1998, (iii)
Twenty Three Thousand Dollars ($23,000) for the period from January 1,
1999 through March 31, 1999, and (iv) One Hundred Fifty Thousand
Dollars ($150,000) for the period from January 1, 1999 through June 30,
1999.
(B) EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION
(EBITDA). Not permit Borrower's Earnings Before Interest, Taxes,
Depreciation, and Amortization ("EBITDA") to be less than the following
amounts for the following periods:
EBITDA Periods
------ -------
$740,000 04/01/98 to 06/30/98
$1,500,000 01/01/98 to 09/30/98
$767,000 01/01/98 to 12/31/98
$460,000 01/01/99 to 03/31/99
$1,113,000 01/01/99 to 06/30/99
(C) FIXED CHARGE COVERAGE RATIO. Not permit Borrower's ratio of EBITDA to
its Fixed Charges ("Fixed Charge Coverage Ratio") (excluding (i) any
amounts previously relent by Bank to Borrower under SECTION 2.5 hereof
and (ii) the Capitalization Cash actually received by Borrower) to be
less than the following:
Fixed Charge Coverage Ratio Period
--------------------------- ------
1.00 to 1.00 04/01/98 to 06/30/98
1.00 to 1.00 01/01/98 to 09/30/98
0.36 to 1.00 01/01/98 to 12/31/98
0.72 to 1.00 01/01/99 to 03/31/99
0.80 to 1.00 01/01/99 to 06/30/99
(D) TANGIBLE NET WORTH. Not permit Borrower's tangible net worth to be less
than the following amounts at any time by and after the following
periods:
<PAGE> 8
Tangible Net Worth Date
------------------ ----
$8,000,000 06/30/98
$8,650,000 09/30/98
$7,250,000 12/31/98
$7,250,000 03/31/99
$7,300,000 06/30/99
(E) RATIO OF TOTAL LIABILITIES TO TANGIBLE NET WORTH. Not permit Borrower's
ratio of Total Liabilities to Tangible Net Worth to exceed the
following ratios on or after the following dates:
Ratio Of Total Liabilities To
-----------------------------
Tangible Net Worth Date
------------------ ----
2.69 to 1.00 06/30/98
2.32 to 1.00 09/30/98
2.28 to 1.00 12/31/98
2.50 to 1.00 03/31/99
2.50 to 1.00 06/30/99
8
<PAGE> 9
II. Definitions to Financial Covenants
--------------------------------------
(A) The term "EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND
AMORTIZATION" or "EBITDA" for purposes of this EXHIBIT L shall mean
Borrower's earnings from operations before income taxes, and interest
or expense, PLUS depreciation, PLUS amortization of all non-cash
charges, all as determined in accordance with generally accepted
accounting principles on a FIFO basis, and shall not include any gains
from the sale of assets outside the normal course of business or any
other gains from extraordinary accounting adjustments or non-recurring
items.
(B) The term "FIXED CHARGE" for purposes of this EXHIBIT L shall mean
Borrower's cash interest expense, scheduled principal payments on debt
(including, but not limited to, the amount of principal payments on (i)
Term Loan A actually deferred for the months of May, June and July 1998
and (ii) Term Loan B actually deferred for the months of May, June and
July 1998), dividends, capitalized lease payments, capital
expenditures, prepayments or redemption of principal on subordinated
debt, preferred stock or common stock, tax, cash taxes paid.
(C) The term "TANGIBLE NET WORTH" for purposes of this EXHIBIT L, shall
mean the total of Borrower's book net worth, as determined in
accordance with generally accepted accounting principles, consistently
applied, PLUS any debt subordinate to Borrower's debt to Bank, PLUS any
preferred stock LESS any assets considered intangible.
(D) The term "TOTAL LIABILITIES" for purposes of this EXHIBIT L, shall
include any contingent liabilities and shall have the meaning and be
determined in accordance with generally accepted accounting principles
consistently applied in accordance with past practice. The portion of
any debt subordinate to Borrower's debt to Bank shall be excluded from
Total Liabilities.
(E) The term "EXCESS CASH FLOW" shall mean EBITDA LESS Fixed Charge.
Upon receipt of fiscal 1999 and 2000 projections as required at SECTION 8.6
hereof, Financial Covenants set forth herein will be established, upon terms
satisfactory to Bank, and upon receipt of no less than One Million Dollars
($1,000,000) on or before June 30, 1999, in accordance with the terms described
in section 10.46(i) above, Bank, in its sole discretion, will establish
Financial Covenants beyond June 30, 1999 consistent with the projections
provided to Bank by Borrower in March of 1999.
9
<PAGE> 10
III. Interest Rate Reduction Tests
- -----------------------------------
<TABLE>
<CAPTION>
Applicable Interest Rate
<S> <C>
1) Fixed Charge Coverage for previous four fiscal quarter period
2) Total Liabilities/Tangible Net Worth
3) Tangible Net Worth
1) 1.30 - 1.59
and P + 1.00%
2) 1.86 - 2.00
and
3) $8,000,000 - $8,499,000
1) 1.60 - 1.79
and P + 0.50%
2) 1.71 - 1.85
and
3) $8,500,000 - $8,999,000
1) 1.80 and greater
and P + 0.00%
2) Less than 1.70
and
3) $9,000,000 and greater
</TABLE>
10
<PAGE> 1
Exhibit 10.29
[CEW Partners]
SUBORDINATED PROMISSORY NOTE
$101,600 March 15, 1999
No. 2 Cleveland, Ohio
FOR VALUE RECEIVED, the undersigned, Specialty Chemical Resources, Inc., a
Delaware corporation ("Maker"), hereby promises to pay to CEW Partners ("Payee")
the principal sum of One Hundred One Thousand Six Hundred Dollars ($101,600) on
January 15, 2001, together with accrued and unpaid interest thereon. All
principal and interest under this Note shall be payable in lawful currency of
the United States of America, in cash or by check, or at Payee's option, in
shares of common stock of Maker based upon the fair market value of the common
stock as of the Stockholder Authorization Date (as discussed below), to Payee at
45 Rockefeller Plaza, Suite 2500, New York, New York 10020. This Note shall bear
interest, commencing on the date hereof and payable at maturity at a rate equal
to twelve percent (12%) per annum, based on a 360 day year.
All or any part of the outstanding principal and interest due under this Note
may be prepaid at any time without penalty or premium.
Notwithstanding the foregoing, Payee may demand full payment of all principal
and accrued interest due under this Note at any time after such date (the
"Stockholder Authorization Date") as Maker has authorized, unissued and
unreserved shares of its common stock sufficient to pay all outstanding
principal and interest in full under all Notes in the Series (defined below).
Upon such demand by Payee, all outstanding principal and accrued and unpaid
interest due under this Note shall be paid to Payee by issuance of shares of
common stock of Maker (as equitably adjusted for any stock dividends,
combinations, subdivisions, splits, reclassifications, exchanges,
recapitalizations, or the like) based upon the fair market value of the common
stock as of the Stockholder Authorization Date. The fair market value as of the
Stockholder Authorization Date will be the average closing price of the common
stock for the five consecutive trading days prior to the Stockholder
Authorization Date. If Maker is a party to a consolidation or merger or a
transfer or lease of all or substantially all of its assets, the right to demand
payment of this Note in common stock (to the extent not previously exercised)
may be changed into a right to demand payment of it in securities, cash or other
assets of Maker or another entity.
Maker hereby waives presentment, demand, notice of dishonor, protest and notice
of nonpayment and protest.
The payment of principal under and interest on this Note is subordinated to the
prior payment in full of all Senior Debt (defined below) and the termination of
all financing arrangements between Maker and the holders of Senior Debt, as
provided herein.
(a) Upon maturity of any Senior Debt by lapse of time, acceleration or
otherwise, then all principal of, premium, if any, and interest on, and
any other amount due pursuant to the terms of the instruments or
agreements creating, relating to or evidencing all such matured Senior
Debt shall
<PAGE> 2
first be paid in full before any payment on account of principal or
interest or any other amount due is made upon this Note.
(b) In the event of any insolvency, bankruptcy, liquidation,
reorganization or other similar proceedings, or any receivership
proceedings in connection therewith, relative to Maker or its creditors
or its property, and in the event of any proceedings for voluntary
liquidation, dissolution, or other winding up of Maker, whether or not
involving insolvency or bankruptcy proceedings, then all principal,
premium, if any, and interest due on and any other amount due pursuant
to the terms of the instruments or agreements creating, relating to or
evidencing Senior Debt shall first be paid in full before any payment
on account of principal or interest or any other amount due is made
upon this Note. Except as may otherwise be ordered by a court of
competent jurisdiction, any payment or distribution of any kind or
character, whether in cash, property, stock, or obligations, which may
be payable or deliverable in respect of this Note in any of the
proceedings referred to in the first sentence hereof shall be paid or
delivered directly to the holders of Senior Debt for application in
payment thereof, unless and until all principal and interest on, and
any other amount due in respect of, Senior Debt shall have been paid in
full.
(c) Maker shall not make any, and the Payee shall not accept or
receive, payment of principal or interest on, or any amounts in respect
of, or purchase or acquire for value (and Payee shall not offer for
sale or otherwise cause Maker to purchase or acquire for value) this
Note if, either immediately before or after any such payment is
received by Payee, an event of default as defined in any indenture,
agreement or instrument creating or evidencing Senior Debt shall exist
or any event which, with the passage of time or the giving of notice or
both, would constitute an event of default as defined in any indenture,
agreement or instrument creating or evidencing Senior Debt shall exist.
Maker shall give prompt written notice to Payee of any default or of
any event which, with the passage of time or the giving of notice or
both, would constitute an event of default, under any Senior Debt or
under any agreement pursuant to which Senior Debt may have been issued,
but failure to give such notice shall not affect the subordination of
this Note to the Senior Debt as provided herein. Should any payment or
distribution be received by Payee prior to the payment in full of all
Senior Debt and termination of all financing arrangements between Maker
and the holders of the Senior Debt, and such payment violates any
provision of this Note, Payee shall receive and hold the same in trust
for the benefit of the holders of the Senior Debt.
(d) The provisions of this Note are for the purpose of defining the
relative rights of the holders of Senior Debt, on the one hand, and
Payee on the other hand, and, as between Maker and Payee, nothing
herein shall impair the obligation of Maker, which is unconditional and
absolute, to pay Payee the principal of and interest on this Note in
accordance with the terms of this Note, nor shall anything herein
prevent Payee from exercising all remedies otherwise permitted by
applicable law upon a default under this Note, subject to the rights
under this Note of holders of Senior Debt in respect of cash, property,
stock or other securities received upon the exercise of such remedies.
(e) Subject to the payment in full of all Senior Debt, Payee shall be
subrogated to the rights of the holders of Senior Debt to receive
payments or distributions of assets of Maker payable or distributable
to the holders of Senior Debt until this Note shall be paid in full
and, as between
2
<PAGE> 3
Maker, its creditors, other than the holders of Senior Debt, and Payee,
no payments or distributions otherwise payable or deliverable in
respect of Payee, but, by virtue of the provisions hereof, paid or
delivered to the holders of Senior Debt, shall be deemed to be a
payment by Maker on account of Senior Debt, and no payments or
distributions paid to Payee, by virtue of the subrogation herein
provided for, shall be deemed to be a payment by Maker on account of
this Note. The holders of the Senior Debt shall be subrogated to Payee
with respect to their claims against Maker and their rights, liens and
security interests, if any, in any of the Maker's assets and the
proceeds thereof until all Senior Debt shall have been paid and all
financing arrangements between Maker and the Holders of the Senior Debt
have been terminated.
(f) No right of any present or future holder of Senior Debt to enforce
subordination as herein provided shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of
Maker or by any act or failure to act in good faith by any such holder,
or by any noncompliance by Maker with the terms, provisions, and
covenants of any agreement relating to Senior Debt, regardless of any
knowledge thereof any such holder may have or be otherwise charged
with. Payee authorizes each holder of Senior Debt to (i) change any
terms relating to the Senior Debt or any agreement relating thereto,
(ii) make new loans or extend further credit to Maker, grant renewals,
increases or extensions for time of payment of the Senior Debt, (iii)
take or omit to take any action for the enforcement of, or waive any
rights with respect to, any Senior Debt, and (iv) enter into such
agreements as the holders of the Senior Debt may deem proper affecting
any collateral for the Senior Debt, or exchange, sell, release,
surrender or otherwise deal with such collateral, in each such case
without invalidating or impairing the subordination provided for
herein.
(g) Payee may not exercise any rights or remedies against Maker to
enforce or collect upon this Note or any amounts due in connection with
this Note, take possession of assets of or foreclose upon any such
assets, whether by judicial action or otherwise, unless and until all
of the Senior Debt shall have been fully and finally paid and satisfied
with interest and all financing arrangements between Maker and the
holders of Senior Debt have been terminated; provided, however, that,
subject to the right of the holders of Senior Debt to receive prior
payment in full under the terms hereof, if Maker defaults under this
Note, then Payee may exercise any and all rights and remedies in
respect of such Event of Default, but only after expiration of the
179-day period commencing upon actual receipt by the holder of the
Senior Debt of notice of such a default.
(h) "Senior Debt" means all principal of and interest on, and any other
payment due pursuant to the terms of instruments or agreements
creating, relating to or evidencing Indebtedness (defined below) of
Maker (other this Note), whether outstanding on the date hereof or
thereafter created, incurred, assumed or guaranteed by Maker for money
borrowed from others or in connection with the acquisition by it or any
subsidiary of any other business or entity or of any properties or
assets, and, in each case, all renewals, extensions, refinancings or
refundings thereof, unless the terms of the instrument or agreement
creating, relating to or evidencing such Indebtedness expressly provide
that such Indebtedness is not superior in right of payment to the
payment of principal and interest on this Note. Notwithstanding the
foregoing, Senior Debt shall not include (i) any Indebtedness or
liability for compensation to employees, or for goods or materials
purchased in the ordinary course of business or for services, and (ii)
any Indebtedness of Maker to a subsidiary, direct or indirect, of Maker
for money borrowed or advanced from such subsidiary.
3
<PAGE> 4
(i) "Indebtedness" means (A) any indebtedness, obligation or liability
(whether matured or unmatured, liquidated or unliquidated, direct or
indirect, absolute or contingent or joint or several) of any person or
entity (i) for or in respect of borrowed money, (ii) evidenced by a
note, debenture or similar instrument (including a purchase money
obligation) given in connection with the acquisition of any property or
assets, including securities, (iii) for the payment of money relating
to any other transaction (including forward sale or purchase
agreements, capitalized lease obligations (but not operating leases)
and conditional sales agreements) having the commercial effect of a
borrowing of money entered into by such person or entity to finance its
operations or capital requirements; or (iv) for the maximum fixed
repurchase price of any equity securities of such person or entity
which by their terms or otherwise are required to be redeemed prior to
the maturity of this Note or at the option of the holder thereof; (B)
any liability of others described in the preceding clause (A) which the
person or entity has guaranteed or for which it is otherwise legally
liable; and (C) any deferral, renewal, refinancing, extension or
refunding of, or amendment, modification or supplement to, any
liability of the types referred to in clauses (A) and (B) above, but
shall not include indebtedness or amounts owed (except to banks or
other financing institutions) for compensation to employees, or for
goods or materials purchased, or services utilized, in the ordinary
course of business of any person or entity. For purposes hereof, the
"maximum fixed repurchase price" of any equity securities, which price
is based upon, or measured by, the fair market value of such equity
securities, means, as of any date, the fair market value thereof as
determined in good faith by the Board of Directors of Maker.
(j) Notwithstanding anything to the contrary contained herein, this
Note may be paid and satisfied in full upon demand by Payee by Maker's
issuance of common stock as payment of all principal and accrued
interest as discussed herein.
This Note is non-transferable prior to its January 15, 2001 maturity date;
provided, however, that the holder hereof may transfer this Note prior to such
date to an affiliate (as defined in the Securities Exchange Act of 1934) of such
holder.
This Note is part of a series of Subordinated Promissory Notes issued by Maker
on the date hereof aggregating Three Hundred Four Thousand Eight Hundred Dollars
($304,800) in principal amount (the "Series"). No payment of principal or
interest on this Note shall be made or accepted unless and until a pro rata
payment of principal or interest is made as to all Notes in the Series.
4
<PAGE> 5
This Note may not be amended or modified unless and until all Notes in the
Series are subject to the same amendment or modification. Any such amendment or
modification requires the written approval of the holder of this Note and all
other Notes in the Series.
This Note shall be governed by and construed in accordance with the laws of the
State of Ohio.
SPECIALTY CHEMICAL RESOURCES, INC.
By: /s/ COREY B. ROTH
-----------------
Name: Corey B. Roth
Title: President
5
<PAGE> 1
Exhibit 10.30
[Roth]
SUBORDINATED PROMISSORY NOTE
$101,600 March 15, 1999
No. 1 Cleveland, Ohio
FOR VALUE RECEIVED, the undersigned, Specialty Chemical Resources, Inc., a
Delaware corporation ("Maker"), hereby promises to pay to Edwin M. Roth
("Payee") the principal sum of One Hundred One Thousand Six Hundred Dollars
($101,600) on January 15, 2001, together with accrued and unpaid interest
thereon. All principal and interest under this Note shall be payable in lawful
currency of the United States of America, in cash or by check, or at Payee's
option, in shares of common stock of Maker based upon the fair market value of
the common stock as of the Stockholder Authorization Date (as discussed below),
to Payee at c/o Specialty Chemical Resources, Inc., 9055 South Freeway Drive,
Macedonia, Ohio 44056. This Note shall bear interest, commencing on the date
hereof and payable at maturity at a rate equal to twelve percent (12%) per
annum, based on a 360 day year.
All or any part of the outstanding principal and interest due under this Note
may be prepaid at any time without penalty or premium.
Notwithstanding the foregoing, Payee may demand full payment of all principal
and accrued interest due under this Note at any time after such date (the
"Stockholder Authorization Date") as Maker has authorized, unissued and
unreserved shares of its common stock sufficient to pay all outstanding
principal and interest in full under all Notes in the Series (defined below).
Upon such demand by Payee, all outstanding principal and accrued and unpaid
interest due under this Note shall be paid to Payee by issuance of shares of
common stock of Maker (as equitably adjusted for any stock dividends,
combinations, subdivisions, splits, reclassifications, exchanges,
recapitalizations or the like) based upon the fair market value of the common
stock as of the Stockholder Authorization Date. The fair market value as of the
Stockholder Authorization Date will be the average closing price of the common
stock for the five consecutive trading days prior to the Stockholder
Authorization Date. If Maker is a party to a consolidation or merger or a
transfer or lease of all or substantially all of its assets, the right to demand
payment of this Note in common stock (to the extent not previously exercised)
may be changed into a right to demand payment of it in securities, cash or other
assets of Maker or another entity.
Maker hereby waives presentment, demand, notice of dishonor, protest and notice
of nonpayment and protest.
The payment of principal under and interest on this Note is subordinated to the
prior payment in full of all Senior Debt (defined below) and the termination of
all financing arrangements between Maker and the holders of Senior Debt, as
provided herein.
(a) Upon maturity of any Senior Debt by lapse of time, acceleration or
otherwise, then all principal of, premium, if any, and interest on, and
any other amount due pursuant to the terms of the instruments or
agreements creating, relating to or evidencing all such matured Senior
Debt shall first be paid in full before any payment on account of
principal or interest or any other amount due is made upon this Note.
<PAGE> 2
(b) In the event of any insolvency, bankruptcy, liquidation,
reorganization or other similar proceedings, or any receivership
proceedings in connection therewith, relative to Maker or its creditors
or its property, and in the event of any proceedings for voluntary
liquidation, dissolution, or other winding up of Maker, whether or not
involving insolvency or bankruptcy proceedings, then all principal,
premium, if any, and interest due on and any other amount due pursuant
to the terms of the instruments or agreements creating, relating to or
evidencing Senior Debt shall first be paid in full before any payment
on account of principal or interest or any other amount due is made
upon this Note. Except as may otherwise be ordered by a court of
competent jurisdiction, any payment or distribution of any kind or
character, whether in cash, property, stock, or obligations, which may
be payable or deliverable in respect of this Note in any of the
proceedings referred to in the first sentence hereof shall be paid or
delivered directly to the holders of Senior Debt for application in
payment thereof, unless and until all principal and interest on, and
any other amount due in respect of, Senior Debt shall have been paid in
full.
(c) Maker shall not make any, and the Payee shall not accept or
receive, payment of principal or interest on, or any amounts in respect
of, or purchase or acquire for value (and Payee shall not offer for
sale or otherwise cause Maker to purchase or acquire for value) this
Note if, either immediately before or after any such payment is
received by Payee, an event of default as defined in any indenture,
agreement or instrument creating or evidencing Senior Debt shall exist
or any event which, with the passage of time or the giving of notice or
both, would constitute an event of default as defined in any indenture,
agreement or instrument creating or evidencing Senior Debt shall exist.
Maker shall give prompt written notice to Payee of any default or of
any event which, with the passage of time or the giving of notice or
both, would constitute an event of default, under any Senior Debt or
under any agreement pursuant to which Senior Debt may have been issued,
but failure to give such notice shall not affect the subordination of
this Note to the Senior Debt as provided herein. Should any payment or
distribution be received by Payee prior to the payment in full of all
Senior Debt and termination of all financing arrangements between Maker
and the holders of the Senior Debt, and such payment violates any
provision of this Note, Payee shall receive and hold the same in trust
for the benefit of the holders of the Senior Debt.
(d) The provisions of this Note are for the purpose of defining the
relative rights of the holders of Senior Debt, on the one hand, and
Payee on the other hand, and, as between Maker and Payee, nothing
herein shall impair the obligation of Maker, which is unconditional and
absolute, to pay Payee the principal of and interest on this Note in
accordance with the terms of this Note, nor shall anything herein
prevent Payee from exercising all remedies otherwise permitted by
applicable law upon a default under this Note, subject to the rights
under this Note of holders of Senior Debt in respect of cash, property,
stock or other securities received upon the exercise of such remedies.
(e) Subject to the payment in full of all Senior Debt, Payee shall be
subrogated to the rights of the holders of Senior Debt to receive
payments or distributions of assets of Maker payable or distributable
to the holders of Senior Debt until this Note shall be paid in full
and, as between Maker, its creditors, other than the holders of Senior
Debt, and Payee, no payments or distributions otherwise payable or
deliverable in respect of Payee, but, by virtue of the provisions
hereof, paid or delivered to the holders of Senior Debt, shall be
deemed to be a payment by Maker on account of
2
<PAGE> 3
Senior Debt, and no payments or distributions paid to Payee, by virtue
of the subrogation herein provided for, shall be deemed to be a payment
by Maker on account of this Note. The holders of the Senior Debt shall
be subrogated to Payee with respect to their claims against Maker and
their rights, liens and security interests, if any, in any of the
Maker's assets and the proceeds thereof until all Senior Debt shall
have been paid and all financing arrangements between Maker and the
Holders of the Senior Debt have been terminated.
(f) No right of any present or future holder of Senior Debt to enforce
subordination as herein provided shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of
Maker or by any act or failure to act in good faith by any such holder,
or by any noncompliance by Maker with the terms, provisions, and
covenants of any agreement relating to Senior Debt, regardless of any
knowledge thereof any such holder may have or be otherwise charged
with. Payee authorizes each holder of Senior Debt to (i) change any
terms relating to the Senior Debt or any agreement relating thereto,
(ii) make new loans or extend further credit to Maker, grant renewals,
increases or extensions for time of payment of the Senior Debt, (iii)
take or omit to take any action for the enforcement of, or waive any
rights with respect to, any Senior Debt, and (iv) enter into such
agreements as the holders of the Senior Debt may deem proper affecting
any collateral for the Senior Debt, or exchange, sell, release,
surrender or otherwise deal with such collateral, in each such case
without invalidating or impairing the subordination provided for
herein.
(g) Payee may not exercise any rights or remedies against Maker to
enforce or collect upon this Note or any amounts due in connection with
this Note, take possession of assets of or foreclose upon any such
assets, whether by judicial action or otherwise, unless and until all
of the Senior Debt shall have been fully and finally paid and satisfied
with interest and all financing arrangements between Maker and the
holders of Senior Debt have been terminated; provided, however, that,
subject to the right of the holders of Senior Debt to receive prior
payment in full under the terms hereof, if Maker defaults under this
Note, then Payee may exercise any and all rights and remedies in
respect of such Event of Default, but only after expiration of the
179-day period commencing upon actual receipt by the holder of the
Senior Debt of notice of such a default.
(h) "Senior Debt" means all principal of and interest on, and any other
payment due pursuant to the terms of instruments or agreements
creating, relating to or evidencing Indebtedness (defined below) of
Maker (other this Note), whether outstanding on the date hereof or
thereafter created, incurred, assumed or guaranteed by Maker for money
borrowed from others or in connection with the acquisition by it or any
subsidiary of any other business or entity or of any properties or
assets, and, in each case, all renewals, extensions, refinancings or
refundings thereof, unless the terms of the instrument or agreement
creating, relating to or evidencing such Indebtedness expressly provide
that such Indebtedness is not superior in right of payment to the
payment of principal and interest on this Note. Notwithstanding the
foregoing, Senior Debt shall not include (i) any Indebtedness or
liability for compensation to employees, or for goods or materials
purchased in the ordinary course of business or for services, and (ii)
any Indebtedness of Maker to a subsidiary, direct or indirect, of Maker
for money borrowed or advanced from such subsidiary.
(i) "Indebtedness" means (A) any indebtedness, obligation or liability
(whether matured or unmatured, liquidated or unliquidated, direct or
indirect, absolute or contingent or joint or several)
3
<PAGE> 4
of any person or entity (i) for or in respect of borrowed money, (ii)
evidenced by a note, debenture or similar instrument (including a
purchase money obligation) given in connection with the acquisition of
any property or assets, including securities, (iii) for the payment of
money relating to any other transaction (including forward sale or
purchase agreements, capitalized lease obligations (but not operating
leases) and conditional sales agreements) having the commercial effect
of a borrowing of money entered into by such person or entity to
finance its operations or capital requirements; or (iv) for the maximum
fixed repurchase price of any equity securities of such person or
entity which by their terms or otherwise are required to be redeemed
prior to the maturity of this Note or at the option of the holder
thereof; (B) any liability of others described in the preceding clause
(A) which the person or entity has guaranteed or for which it is
otherwise legally liable; and (C) any deferral, renewal, refinancing,
extension or refunding of, or amendment, modification or supplement to,
any liability of the types referred to in clauses (A) and (B) above,
but shall not include indebtedness or amounts owed (except to banks or
other financing institutions) for compensation to employees, or for
goods or materials purchased, or services utilized, in the ordinary
course of business of any person or entity. For purposes hereof, the
"maximum fixed repurchase price" of any equity securities, which price
is based upon, or measured by, the fair market value of such equity
securities, means, as of any date, the fair market value thereof as
determined in good faith by the Board of Directors of Maker.
(j) Notwithstanding anything to the contrary contained herein, this
Note may be paid and satisfied in full upon demand by Payee by Maker's
issuance of its common stock as payment of all principal and accrued
interest as discussed herein.
This Note is non-transferable prior to its January 15, 2001 maturity date;
provided, however, that the holder hereof may transfer this Note prior to such
date to an affiliate (as defined in the Securities Exchange Act of 1934) of such
holder.
This Note is part of a series of Subordinated Promissory Notes issued by Maker
on the date hereof aggregating Three Hundred Four Thousand Eight Hundred Dollars
($304,800) in principal amount (the "Series"). No payment of principal or
interest on this Note shall be made or accepted unless and until a pro rata
payment of principal or interest is made as to all Notes in the Series.
This Note may not be amended or modified unless and until all Notes in the
Series are subject to the same amendment or modification. Any such amendment or
modification requires the written approval of the holder of this Note and all
other Notes in the Series.
This Note shall be governed by and construed in accordance with the laws of the
State of Ohio.
SPECIALTY CHEMICAL RESOURCES, INC.
By: /s/ COREY B. ROTH
-----------------
Name: Corey B. Roth
Title: President
4
<PAGE> 1
Exhibit 10.31
[Martin Trust]
SUBORDINATED PROMISSORY NOTE
$101,600 March 15, 1999
No. 3 Cleveland, Ohio
FOR VALUE RECEIVED, the undersigned, Specialty Chemical Resources, Inc., a
Delaware corporation ("Maker"), hereby promises to pay to Martin Trust ("Payee")
the principal sum of One Hundred One Thousand Six Hundred Dollars ($101,600) on
January 15, 2001, together with accrued and unpaid interest thereon. All
principal and interest under this Note shall be payable in lawful currency of
the United States of America, in cash or by check, or at Payee's option, in
shares of common stock of Maker based upon the fair market value of the common
stock as of the Stockholder Authorization Date (as discussed below), to Payee at
c/o Trust Investments, Inc., 52 Stiles Road, Salem, New Hampshire 03079. This
Note shall bear interest, commencing on the date hereof and payable at maturity
at a rate equal to twelve percent (12%) per annum, based on a 360 day year.
All or any part of the outstanding principal and interest due under this Note
may be prepaid at any time without penalty or premium.
Notwithstanding the foregoing, Payee may demand full payment of all principal
and accrued interest due under this Note at any time after such date (the
"Stockholder Authorization Date") as Maker has authorized, unissued and
unreserved shares of its common stock sufficient to pay all outstanding
principal and interest in full under all Notes in the Series (defined below).
Upon such demand by Payee, all outstanding principal and accrued and unpaid
interest due under this Note shall be paid to Payee by issuance of shares of
common stock of Maker (as equitably adjusted for any stock dividends,
combinations, subdivisions, splits, reclassifications, exchanges,
recapitalizations or the like) based upon the fair market value of the common
stock as of the Stockholder Authorization Date. The fair market value as of the
Stockholder Authorization Date will be the average closing price of the common
stock for the five consecutive trading days prior to the Stockholder
Authorization Date. If Maker is a party to a consolidation or merger or a
transfer or lease of all or substantially all of its assets, the right to demand
payment of this Note in common stock (to the extent not previously exercised)
may be changed into a right to demand payment of it in securities, cash or other
assets of Maker or another entity.
Maker hereby waives presentment, demand, notice of dishonor, protest and notice
of nonpayment and protest.
The payment of principal under and interest on this Note is subordinated to the
prior payment in full of all Senior Debt (defined below) and the termination of
all financing arrangements between Maker and the holders of Senior Debt, as
provided herein.
(a) Upon maturity of any Senior Debt by lapse of time, acceleration or
otherwise, then all principal of, premium, if any, and interest on, and
any other amount due pursuant to the terms of the instruments or
agreements creating, relating to or evidencing all such matured Senior
Debt shall
<PAGE> 2
first be paid in full before any payment on account of principal or
interest or any other amount due is made upon this Note.
(b) In the event of any insolvency, bankruptcy, liquidation,
reorganization or other similar proceedings, or any receivership
proceedings in connection therewith, relative to Maker or its creditors
or its property, and in the event of any proceedings for voluntary
liquidation, dissolution, or other winding up of Maker, whether or not
involving insolvency or bankruptcy proceedings, then all principal,
premium, if any, and interest due on and any other amount due pursuant
to the terms of the instruments or agreements creating, relating to or
evidencing Senior Debt shall first be paid in full before any payment
on account of principal or interest or any other amount due is made
upon this Note. Except as may otherwise be ordered by a court of
competent jurisdiction, any payment or distribution of any kind or
character, whether in cash, property, stock, or obligations, which may
be payable or deliverable in respect of this Note in any of the
proceedings referred to in the first sentence hereof shall be paid or
delivered directly to the holders of Senior Debt for application in
payment thereof, unless and until all principal and interest on, and
any other amount due in respect of, Senior Debt shall have been paid in
full.
(c) Maker shall not make any, and the Payee shall not accept or
receive, payment of principal or interest on, or any amounts in respect
of, or purchase or acquire for value (and Payee shall not offer for
sale or otherwise cause Maker to purchase or acquire for value) this
Note if, either immediately before or after any such payment is
received by Payee, an event of default as defined in any indenture,
agreement or instrument creating or evidencing Senior Debt shall exist
or any event which, with the passage of time or the giving of notice or
both, would constitute an event of default as defined in any indenture,
agreement or instrument creating or evidencing Senior Debt shall exist.
Maker shall give prompt written notice to Payee of any default or of
any event which, with the passage of time or the giving of notice or
both, would constitute an event of default, under any Senior Debt or
under any agreement pursuant to which Senior Debt may have been issued,
but failure to give such notice shall not affect the subordination of
this Note to the Senior Debt as provided herein. Should any payment or
distribution be received by Payee prior to the payment in full of all
Senior Debt and termination of all financing arrangements between Maker
and the holders of the Senior Debt, and such payment violates any
provision of this Note, Payee shall receive and hold the same in trust
for the benefit of the holders of the Senior Debt.
(d) The provisions of this Note are for the purpose of defining the
relative rights of the holders of Senior Debt, on the one hand, and
Payee on the other hand, and, as between Maker and Payee, nothing
herein shall impair the obligation of Maker, which is unconditional and
absolute, to pay Payee the principal of and interest on this Note in
accordance with the terms of this Note, nor shall anything herein
prevent Payee from exercising all remedies otherwise permitted by
applicable law upon a default under this Note, subject to the rights
under this Note of holders of Senior Debt in respect of cash, property,
stock or other securities received upon the exercise of such remedies.
(e) Subject to the payment in full of all Senior Debt, Payee shall be
subrogated to the rights of the holders of Senior Debt to receive
payments or distributions of assets of Maker payable or distributable
to the holders of Senior Debt until this Note shall be paid in full
and, as between Maker, its creditors, other than the holders of Senior
Debt, and Payee, no payments or distributions
2
<PAGE> 3
otherwise payable or deliverable in respect of Payee, but, by virtue of
the provisions hereof, paid or delivered to the holders of Senior Debt,
shall be deemed to be a payment by Maker on account of Senior Debt, and
no payments or distributions paid to Payee, by virtue of the
subrogation herein provided for, shall be deemed to be a payment by
Maker on account of this Note. The holders of the Senior Debt shall be
subrogated to Payee with respect to their claims against Maker and
their rights, liens and security interests, if any, in any of the
Maker's assets and the proceeds thereof until all Senior Debt shall
have been paid and all financing arrangements between Maker and the
Holders of the Senior Debt have been terminated.
(f) No right of any present or future holder of Senior Debt to enforce
subordination as herein provided shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of
Maker or by any act or failure to act in good faith by any such holder,
or by any noncompliance by Maker with the terms, provisions, and
covenants of any agreement relating to Senior Debt, regardless of any
knowledge thereof any such holder may have or be otherwise charged
with. Payee authorizes each holder of Senior Debt to (i) change any
terms relating to the Senior Debt or any agreement relating thereto,
(ii) make new loans or extend further credit to Maker, grant renewals,
increases or extensions for time of payment of the Senior Debt, (iii)
take or omit to take any action for the enforcement of, or waive any
rights with respect to, any Senior Debt, and (iv) enter into such
agreements as the holders of the Senior Debt may deem proper affecting
any collateral for the Senior Debt, or exchange, sell, release,
surrender or otherwise deal with such collateral, in each such case
without invalidating or impairing the subordination provided for
herein.
(g) Payee may not exercise any rights or remedies against Maker to
enforce or collect upon this Note or any amounts due in connection with
this Note, take possession of assets of or foreclose upon any such
assets, whether by judicial action or otherwise, unless and until all
of the Senior Debt shall have been fully and finally paid and satisfied
with interest and all financing arrangements between Maker and the
holders of Senior Debt have been terminated; provided, however, that,
subject to the right of the holders of Senior Debt to receive prior
payment in full under the terms hereof, if Maker defaults under this
Note, then Payee may exercise any and all rights and remedies in
respect of such Event of Default, but only after expiration of the
179-day period commencing upon actual receipt by the holder of the
Senior Debt of notice of such a default.
(h) "Senior Debt" means all principal of and interest on, and any other
payment due pursuant to the terms of instruments or agreements
creating, relating to or evidencing Indebtedness (defined below) of
Maker (other this Note), whether outstanding on the date hereof or
thereafter created, incurred, assumed or guaranteed by Maker for money
borrowed from others or in connection with the acquisition by it or any
subsidiary of any other business or entity or of any properties or
assets, and, in each case, all renewals, extensions, refinancings or
refundings thereof, unless the terms of the instrument or agreement
creating, relating to or evidencing such Indebtedness expressly provide
that such Indebtedness is not superior in right of payment to the
payment of principal and interest on this Note. Notwithstanding the
foregoing, Senior Debt shall not include (i) any Indebtedness or
liability for compensation to employees, or for goods or materials
purchased in the ordinary course of business or for services, and (ii)
any Indebtedness of Maker to a subsidiary, direct or indirect, of Maker
for money borrowed or advanced from such subsidiary.
3
<PAGE> 4
(i) "Indebtedness" means (A) any indebtedness, obligation or liability
(whether matured or unmatured, liquidated or unliquidated, direct or
indirect, absolute or contingent or joint or several) of any person or
entity (i) for or in respect of borrowed money, (ii) evidenced by a
note, debenture or similar instrument (including a purchase money
obligation) given in connection with the acquisition of any property or
assets, including securities, (iii) for the payment of money relating
to any other transaction (including forward sale or purchase
agreements, capitalized lease obligations (but not operating leases)
and conditional sales agreements) having the commercial effect of a
borrowing of money entered into by such person or entity to finance its
operations or capital requirements; or (iv) for the maximum fixed
repurchase price of any equity securities of such person or entity
which by their terms or otherwise are required to be redeemed prior to
the maturity of this Note or at the option of the holder thereof; (B)
any liability of others described in the preceding clause (A) which the
person or entity has guaranteed or for which it is otherwise legally
liable; and (C) any deferral, renewal, refinancing, extension or
refunding of, or amendment, modification or supplement to, any
liability of the types referred to in clauses (A) and (B) above, but
shall not include indebtedness or amounts owed (except to banks or
other financing institutions) for compensation to employees, or for
goods or materials purchased, or services utilized, in the ordinary
course of business of any person or entity. For purposes hereof, the
"maximum fixed repurchase price" of any equity securities, which price
is based upon, or measured by, the fair market value of such equity
securities, means, as of any date, the fair market value thereof as
determined in good faith by the Board of Directors of Maker.
(j) Notwithstanding anything to the contrary contained herein, this
Note may be paid and satisfied in full upon demand by Payee by Maker's
issuance of its common stock as payment of all principal and accrued
interest as discussed herein.
This Note is non-transferable prior to its January 15, 2001 maturity date;
provided, however, that the holder hereof may transfer this Note prior to such
date to an affiliate (as defined in the Securities Exchange Act of 1934) of such
holder.
This Note is part of a series of Subordinated Promissory Notes issued by Maker
on the date hereof aggregating Three Hundred Four Thousand Eight Hundred Dollars
($304,800) in principal amount (the "Series"). No payment of principal or
interest on this Note shall be made or accepted unless and until a pro rata
payment of principal or interest is made as to all Notes in the Series.
4
<PAGE> 5
This Note may not be amended or modified unless and until all Notes in the
Series are subject to the same amendment or modification. Any such amendment or
modification requires the written approval of the holder of this Note and all
other Notes in the Series.
This Note shall be governed by and construed in accordance with the laws of the
State of Ohio.
SPECIALTY CHEMICAL RESOURCES, INC.
By: /s/ COREY B. ROTH
-----------------
Name: Corey B. Roth
Title: President
5
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<ARTICLE> 5
<CIK> 0000703645
<NAME> SPECIALTY CHEMICAL RESOURCES, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1.00
<CASH> 3,100
<SECURITIES> 0
<RECEIVABLES> 4,870,967
<ALLOWANCES> 0
<INVENTORY> 6,520,852
<CURRENT-ASSETS> 11,610,417
<PP&E> 18,277,245
<DEPRECIATION> 6,666,274
<TOTAL-ASSETS> 25,169,432
<CURRENT-LIABILITIES> 5,811,205
<BONDS> 16,296,680
0
0
<COMMON> 394,777
<OTHER-SE> 2,666,770
<TOTAL-LIABILITY-AND-EQUITY> 25,169,432
<SALES> 35,557,165
<TOTAL-REVENUES> 35,557,165
<CGS> 29,452,765
<TOTAL-COSTS> 29,452,765
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,656,156
<INCOME-PRETAX> (2,435,136)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,435,136)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,435,136)
<EPS-PRIMARY> (.63)
<EPS-DILUTED> (.63)
</TABLE>
