1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------ EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------ EXCHANGE ACT OF 1934
For the Transition Period From _____ to _____
COMMISSION FILE NO. 0-18797
CHEMI-TROL CHEMICAL CO.
(Exact name of registrant as specified in its charter)
OHIO 34-4439286
(State or other jurisdiction of (IRS employer
incorporation or organization) Identification No.)
2776 CR 69, Gibsonburg, Ohio 43410
(Address of principal executive offices) (Zip Code)
(419) 665-2367
(Registrant's telephone number, including area code)
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
--- --
The registrant has 2,004,930 common shares, no par value, outstanding as
of March 31, 1998.
This document contains 11 pages
2
PART 1. FINANCIAL INFORMATION
Financial Statements
The accompanying condensed balance sheets as of March 31, 1998 and
1997, and related statements of income and retained earnings and statements of
cash flows for the periods ended March 31, 1998 and 1997 are unaudited but
include all adjustments, consisting only of normal recurring accruals, which the
Company considers necessary for a fair presentation of financial position and
operating results. The accompanying condensed balance sheet as of December 31,
1997 has been derived from the audited year end financial statements. These
financial statements presented are for interim periods and do not include all
disclosures normally provided in annual financial statements; they should be
read in conjunction with financial statements and notes thereto appearing in the
Company's 1997 Form 10-K annual report to shareholders. The interim result of
operations are not necessarily indicative of the results for the complete year.
CHEMI-TROL CHEMICAL CO.
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
Three months ended
-----------------------------
March 31, 1998 March 31, 1997
------------ ------------
Revenues:
Net sales $ 7,717,236 $ 10,287,075
Interest and financing income 270,091 227,062
------------ ------------
7,987,327 10,514,137
Costs and expenses:
Costs of sales 6,749,949 8,653,151
Selling expenses 207,918 274,054
General and administrative expenses 517,211 635,504
Interest 56,585 131,695
------------ ------------
7,531,663 9,694,404
------------ ------------
Income from continuing operations before income taxes 455,664 819,733
Provision for income taxes 182,000 327,000
------------ ------------
Income from continuing operations 273,664 492,733
Discontinued operations (Note 4)
Loss from discontinued operations, net of tax credit ---- (123,887)
Gain on disposal of division, net of tax ---- 270,198
------------ ------------
Income from discontinued operations ---- 146,311
------------ ------------
Net income 273,664 639,044
Retained earnings at beginning of period 18,087,156 17,668,471
------------ ------------
Retained earnings at end of period $ 18,360,820 $ 18,307,515
============ ============
Basic and diluted income (loss) per common share
Continuing operations $ .14 $ .25
Discontinued operations (Note 4):
Loss from operations ---- (.06)
Gain on disposal of division ---- .13
------------ ------------
$ .14 $ .32
============ ============
See accompanying notes.
2
3
CHEMI-TROL CHEMICAL CO.
CONDENSED BALANCE SHEETS
(Unaudited)
March 31, December 31, March 31,
1998 1997 1997
----------- ----------- -----------
ASSETS
Current assets:
Cash $ 1,851,993 $ 1,516,078 $ 9,214
Notes and accounts receivable 8,195,700 10,595,213 11,785,645
Net investment in sales-type leases 468,810 450,834 674,782
Inventories (Note 1) 4,380,638 3,104,151 3,462,452
Prepaid expenses and other assets 1,576,225 1,074,763 1,390,681
Current assets of discontinued operations (Note 4) 1,113,126 3,122,103 10,913,598
----------- ----------- -----------
Total current assets 17,586,492 19,863,142 28,236,372
Property, plant and equipment, net 8,337,586 8,527,027 8,906,612
Investments and other assets 6,641,498 6,329,369 5,094,930
Property, plant and equipment of discontinued
operations (Note 4) --- -- 915,887
----------- ----------- -----------
$32,565,576 $34,719,538 $43,153,801
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,876,868 $ 4,428,316 $ 4,458,704
Income taxes 128,661 281,912 367,203
Dividends payable ------ 180,444 --------
Accrued liabilities 1,744,102 1,639,174 1,570,537
Long-term debt due within one year 1,170,221 1,368,915 7,168,751
Current liabilities of discontinued operations 348,702 646,925 2,362,023
----------- ----------- -----------
Total current liabilities 6,268,554 8,545,686 15,927,218
Long-term debt 1,769,728 1,920,222 2,657,965
Other long-term liabilities 1,063,707 1,063,707 794,336
Deferred federal income tax 512,000 512,000 876,000
Shareholders' equity:
Common stock, without par value;
6,000,000 shares authorized
2,004,930 shares issued and
outstanding (Note 3) 4,590,767 4,590,767 4,590,767
Retained earnings 18,360,820 18,087,156 18,307,515
----------- ----------- -----------
Total shareholders' equity 22,951,587 22,677,923 22,898,282
----------- ----------- -----------
$32,565,576 $34,719,538 $43,153,801
=========== =========== ===========
See accompanying notes.
3
4
CHEMI-TROL CHEMICAL CO.
STATEMENT OF CASH FLOWS
(Unaudited)
Three Months Ended March 31
----------------------------
1998 1997
----------- -----------
OPERATING ACTIVITIES:
Income from continuing operations $ 273,664 $ 492,733
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Notes receivable from product sales (1,103,488) (1,969,269)
Notes receivable sold -0- 400,271
Collections from customers on notes receivable 889,523 1,079,520
Proceeds from sales-type leases 121,512 176,415
Addition to net investment in sales-type leases (158,569) (117,872)
Depreciation 257,392 257,484
Gain on sale of property and equipment (12,142) (31,644)
Changes in operating assets and liabilities:
Accounts receivable 2,349,497 464,708
Inventories (1,276,487) 276,242
Prepaid expenses (501,462) (381,768)
Other assets (29,066) (48,886)
Accounts payable (1,551,448) (1,608,677)
Income taxes payable (153,251) 136,718
Accrued liabilities 104,928 26,182
----------- -----------
Cash used in continuing operations (789,397) (847,843)
Cash flow provided by discontinued operations 1,710,754 299,297
----------- -----------
Net cash provided by (used in) operating activities 921,357 (548,546)
INVESTING ACTIVITIES:
Additions to property and equipment (100,809) (458,741)
Proceeds from disposals of property and equipment 45,000 59,792
Proceeds from sale of discontinued operations -0- 4,799,533
Discontinued operations, principally purchases of equipment -0- (6,740)
----------- -----------
Net cash provided by (used in) investing activities (55,809) 4,393,844
FINANCING ACTIVITIES:
Payments of long-term debt (349,189) (803,230)
Net payments under line of credit -0- (2,964,916)
Cash dividend payments (180,444) (180,444)
----------- -----------
Net cash used in financing activities (529,633) (3,948,590)
----------- -----------
Increase (decrease) in cash 335,915 (103,292)
Cash at beginning of period 1,516,078 112,506
----------- -----------
Cash at end of period $ 1,851,993 $ 9,214
=========== ===========
Supplemental cash flow information:
Cash paid for interest $ 47,955 $ 205,617
=========== ===========
Cash paid for income taxes $ 335,251 $ 288,282
=========== ===========
See accompanying notes.
4
5
CHEMI-TROL CHEMICAL CO.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Inventories
-----------
Inventories at March 31, 1998, December 31, 1997 and March 31,
1997 are as follows:
March 31, December 31, March 31,
1998 1997 1997
---------- ---------- ----------
Manufacturing inventories:
Raw material and supplies $2,018,003 $2,039,185 $1,798,169
Work in process 9,047 6,118 26,512
Finished goods 1,594,272 358,913 720,565
Purchased inventory held for resale 302,237 440,039 632,584
Chemicals and other materials used
in contracting 457,079 259,896 284,622
---------- ---------- ----------
$4,380,638 $3,104,151 $3,462,452
========== ========== ==========
2. Sale of Notes With Recourse
---------------------------
The Company at March 31, 1998 has a contingent liability of
$2,043,000 for customers' installment notes sold with recourse to the
Chemi-Trol Chemical Co. Profit Sharing Plan. The credit risk associated
with these notes is minimal as the Company retains a security interest
in the products sold on the installment basis.
3. Basic & Diluted Net Income Per Common Share
------------------------------------- -----
Basic & diluted net income per common share is based on the
weighted average number of shares outstanding of 2,004,930.
Shareholders' rights, which may have a potentially dilutive effect,
have been excluded from the weighted average shares computation as
conditions to the exercisability of such rights have not been
satisfied.
4. Discontinued Operations
------------------------
On March 25, 1997, the Company sold its Cory Orchard and Turf
Division to Terra International, Inc. for approximately $4.8 Million
under an asset purchase agreement. The sale resulted in a net gain of
$270,000 after income taxes of $180,000. The gain also includes the
effects of LIFO quantity liquidation's of $167,000.
On November 18, 1997, the Company completed the sale of
certain assets of its Cal-Van Tools Division to Eagle Tools, Inc.
(Eagle), an affiliate of Horizon Tool, Inc. Eagle purchased inventory,
machinery, equipment, fixtures, dies and the Cal-Van Tools name for a
cash payment of $1.5 million and a note of approximately $2.3 million.
The Company retained and is currently collecting accounts receivable of
approximately $4.8 million. Real estate with an approximate cost of
$1.7 million and a carrying value of approximately $900,000 was also
retained by the Company and is being leased to Eagle. The sale resulted
in a net loss of approximately $876,000 after a tax credit of $610,000.
The loss includes income from the liquidation of LIFO quantities
amounting to $259,000.
5
6
CHEMI-TROL CHEMICAL CO.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. Discontinued Operations - (Continued)
Summary operating results of the discontinued Cory Orchard and
Turf and the Cal-Van Tools segments for the three months ended March
31, 1997 are as follows:
Revenues:
Cal-Van Tools $ 3,576,702
Cory Orchard and Turf 911,943
-----------
$ 4,488,645
===========
Loss before income taxes:
Cal-Van Tools $ (137,781)
Cory Orchard and Turf (67,803)
-----------
(205,584)
Income tax credit (81,697)
-----------
Net loss $ (123,887)
===========
Interest on borrowings under the Company's general credit
facilities was allocated to discontinued operations based on the ratio
of net assets of the discontinued Cory Orchard and Turf and the Cal-Van
Tools segments to the total net assets of the Company plus existing
debt under the Company's general credit facilities. Interest expense
allocated to discontinued operations during the three months ended
March 31, 1997 was $73,922.
6
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
The Company is organized on an operational basis into two divisions:
Tank Division, located in Fremont, Ohio and the Chemical Group, located in
Gibsonburg, Ohio. Each division is headed by a General manager who reports
directly to the Company's executive officers in Gibsonburg, Ohio. In addition
the Company has a Leasing and Finance Division for the purpose of offering to
its qualified customers two alternate methods of financing the purchase of it
tank products. In 1998, consistent with the Company's prior practice, income and
expense of the Leasing and Finance Division are recorded either in the Tank
Division or in unallocated corporate income and expense.
AGREEMENT FOR ACQUISITION OF THE COMPANY
On February 20, 1998 the Company and Harsco (NYSE:HSC) executed an
Agreement and Plan of Merger providing for the acquisition of the Company by
Harsco for approximately $46 million or $23.00 per share. Completion of the
transaction is subject to the affirmative vote of holders of at least 66 2/3% of
the outstanding shares of common stock of the Company and the receipt of all
regulatory clearances. The expiration of the applicable waiting period under the
HSR Act expired on March 29, 1998. The Company does not anticipate problems in
obtaining the remaining approvals.
Capsule segment results for the periods ended March 31, 1998 and 1997
are as follows:
Three months ended March 31
1998 1997
------------ ------------
Revenues (unaffiliated customers):
Tank $ 7,160,230 $ 9,617,571
Chemical 755,971 891,703
Corporate interest 71,126 4,863
------------ ------------
Total revenues $ 7,987,327 $ 10,514,137
============ ============
Operating profit (loss):
Tank $ 897,559 $ 1,446,262
Chemical (55,459) (47,586)
------------ ------------
Total operating profit 842,100 1,398,676
General corporate expenses (400,977) (452,111)
Corporate interest income 71,126 4,863
Interest expense (56,585) (131,695)
------------ ------------
Income from continuing operations
before income taxes $ 455,664 $ 819,733
============ ============
7
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
First quarter ended March 31, 1998 vs. first quarter ended March 31, 1997
- -------------------------------------------------------------------------
For the first quarter ended March 31, 1998, the Company reported income
from continuing operations of $273,664, or 14 cents per share, compared to
income from continuing operations of $492,733, or 25 cents per share, a year
earlier. Net income for the first quarter of 1998 totaled $273,664, or 14 cents
per share, compared to year-earlier net income of $639,044, or 32 cents per
share, which included a loss from discontinued operations of 6 cents per share
and a gain on the sale of the Cory Orchard & Turf Division of 13 cents per
share.
A temporary slowdown in demand for its tank products, caused in part by
the mild winter across much of the Midwest, led to a 25.9 percent reduction in
net sales of the Tank Division for its first quarter of 1998 to $6,961,265
versus the record sales of $9,395,372 a year earlier. Sales for the quarter,
however, were 10.8 percent ahead of 1996 first quarter sales indicating the
strength of 1997's first quarter. The reduction in sales coupled with a 10.5
percent reduction in interest and financing income were largely responsible for
operating profit decreasing 37.9 percent to $897,559 from a year earlier's
operating profit of $1,446,262. First quarter selling and general administrative
decreased by 34.3 percent largely as a result of the reduction in sales.
The Company's Chemical Group first quarter sales decreased by 15.2
percent to $755,971 from $891,703 in the prior year. The Group had an operating
loss in the first quarter of 1998 of $55,459, as compared to an operating loss
of $47,586 in the prior year. The first quarter of the Chemical Group is
normally dominated by start-up costs associated with contracting, and primary
earnings for the segment are generated in the second and third quarters.
For the Company as a whole, net sales from continuing operations
decreased by 25.0 percent while cost of sales decreased at the lesser rate of
22.0 percent and resulted in 40.8 percent decrease in gross profit. Selling
expenses decreased by 24.1 percent to parallel approximately the rate of
decrease in net sales. General and administrative expenses from continuing
operations decreased by 18.6 percent largely as a result of decreased bonus and
profit sharing allocations at the lower profit level coupled with reductions in
the expenses associated with scaleback of general and administrative costs as a
result of the sale of the Cory Orchard & Turf and Cal-Van Tools Divisions.
Interest and financing income increased to $270,091, from $227,062 in the prior
year first quarter, as a result of corporate interest earned on the Eagle Tool
note receivable and the increased cash available for investment which combined
to yield corporate interest income of $71,126 in the first quarter of 1998
compared to $4,863 in 1997. Interest expense from continuing operations
decreased sharply, by 57.0 percent, as average borrowings for working capital
needs continued to decrease during the first quarter of 1998.
8
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Liquidity and Capital Resources
- -------------------------------
Liquidity is the measure of a company's ability to generate adequate
funds to meet its needs. Funds can be generated internally from operations or
externally by borrowing. Primary measures of liquidity include the amount of
working capital, the working capital ratio and the ability to borrow long-term
funds. As shown in the following chart, the Company remains in a strong position
and its ability to borrow funds remains strong as evidenced by the working
capital ratio, unused commitment for term financing and the unpledged notes and
leases at March 31, 1998.
March 31, 1998 March 31, 1997
---------------- ---------------
Working capital $11,317,938 $11,514,818
Working capital ratio 2.8 to 1 1.7 to 1
Unused commitment for term financing
of customer notes and leases 7,000,000 4,780,500
Unpledged notes and leases 6,466,000 1,483,293
During 1998 and 1997 both working capital and the working capital ratio
increased as proceeds from the sale of the Cory Orchard & Turf Division in March
of 1997 and the sale in November 1997 of the Cal-Van Tools Division improved the
Company's overall liquidity. In the first quarter of 1998 cash flow provided by
discontinued operations, primarily collection of Cal-Van accounts receivable,
was $1,710,754 compared to $299,297 in the prior year. Also, in the first
quarter of 1997 the cash proceeds from the sales of discontinued operations
provided $4,799,533 to cash flow.
A substantial amount of the Company's working capital over the past two
years has been provided from operations. The total outstanding amount borrowed
to finance notes receivable was $1,257,000 and to finance sales-type leases was
- -0- at March 31, 1998. The Company has a commitment to provide long-term
financing for tank notes and leases extended to customers for an additional $7
million beyond amounts currently outstanding.
Due to the seasonal nature of the operations of the Company's Chemical
Group and the extended payment terms in the Tank Division, the Company has an
uneven cash flow pattern. Operations of the Chemical Group begin approximately
late-March and run through November. There are substantial start-up expenses for
this division associated with inventory build-up and the purchase of equipment
and supplies. Since the majority of the contracts performed by this division are
for political subdivisions and the contracts stretch over the entire summer
season, a high percentage of the payments are not received until mid-September
and October. As a result it is necessary for the Company to borrow short-term
funds. For this reason, the Company has arranged a short-term borrowing limit of
$15.75 million through local banks. The Company had not borrowed on its line at
March 31, 1998.
The capital expenditure budget for 1998 is $891,000. The Company
intends to make these expenditures with funds provided from operations.
9
10
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
10
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHEMI-TROL CHEMICAL CO.
Dated: May 11, 1998 /S/ KEVIN D. LAUCK
------------------
By: Kevin D. Lauck, Secretary, Treasurer
and Controller (Chief Accounting
Officer and Chief Financial Officer also
signing on behalf of the registrant as duly
authorized officer)
11